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Social Security for Ex-Spouses – Swim with Jim Video

In the video cast above I am talking with Jim Ludwick, of Mainstreet Financial Planning, Inc. about benefits from Social Security for ex-spouses. Let me know if you have any questions!

If for some reason the video is not showing up in the article – you can find it on YouTube at

Book Review: Making Social Security Work For You

This book, by my friend and colleague Emily Guy Birken, is a great book for gaining a better understanding of Social Security benefits. I recommend Making Social Security Work for You to anyone looking for answers about Social Security benefits. Birken is also the author of The Five Years Before You Retire, another excellent retirement planning tome.
Birken’s style of writing is easy-to-follow. She has a subtle sense of humor that comes out in her writing. This makes the material enjoyable to read, even for a dry subject like Social Security.

Making Social Security Work for You

I especially like the way author Birken presents the material. Having written a book on the subject, I know full well the challenge she faced when putting this information together. It is difficult to make such a technical subject understandable and engaging. Birken presents the material in a cohesive manner, with a review (Takeaways) at the end of each chapter.

Birken also does an excellent job of explaining the various benefits, timing strategies, and options available to an individual in all sorts of circumstances. There are explanations for the single filer, married couples, and divorced individuals. The information presented includes all of the changes to the rules that came into effect with the Bipartisan Budget Act of 2015. Grandfathered rules are covered as well.

Birken presents excellent examples throughout the text, which help the reader to understand the principles. These are real-world situations that are easily adapted to your own situation as you see fit.

The book rounds out with a list of the Pitfalls and Problems for you to be aware of as you plan your Social Security benefit filing. These are important to know about so that you don’t make mistakes in your filing process.

All in all – I highly recommend Making Social Security Work for You for your education process as you determine the best filing methods for yourself and your family. Emily Guy Birken has done an excellent job with this book, you can learn a lot from it.

How to Take a Frugal Vacation

2016-07-25 20.39.35Vacations don’t have to be expensive. They certainly can be, but there’s no rule that dictates vacations must exceed a certain monetary threshold in order for the individual to enjoy it. Here are some ideas that readers may consider in order to take much needed vacations, but keep expenses from running out of control.

  1. Shop around for the best deals. Some simple research while sitting in front of the TV can pay huge dividends. There are many websites that offer coupons and discounts for stays at various hotel chains, bed and breakfasts, etc. Websites such as Airbnb,, Expedia, etc., offer visitors the ability to search out different homes or condos that individuals have for rent (Airbnb and or prices on the best hotels in the area (Expedia). Many of these sites have reader reviews that can inform the future traveler about the cleanliness, ambiance and overall satisfaction with a particular stay.
  1. Brown bag it. Many individuals spend almost as much if not more on dining out that they do on their other vacation expenses. Add kids to this scenario and eating on vacation can get ridiculously expensive. Instead, try packing a cooler full of your essentials for the stay such as breakfast items, cooking utensils, and other food for the week. Choose a place to stay that has a cooking area and a fridge. Pack snacks for the kids from your home pantry. Often, the expense of groceries for the week will be less than one meal out at a restaurant. If packing is difficult (if you’re flying) find where the nearest grocery store is in the area you’re staying and plan for a few hours of shopping.
  1. Travel when others don’t. Many times you’ll get the best rates when you travel and stay in non-peak times. Generally, this means during the week when others are still working. It also means avoiding the crowds and hassles of packed freeways and airports when everyone else is traveling such as major holidays and weekends. Additionally, prices are usually lower during non-peak travel times. This is true for airfare, hotels, gas, and theme parks.
  1. Plan ahead. Just because you’re on vacation doesn’t mean you have to always fly by the seat of your pants. For example, an inquiry into the pricing of flights to a certain destination showed that airfare was over $300 less if I would have booked 6 months prior. When you’re on your stay, ask around for the best deals. Ask your hotel if they have coupons to various places. Ask locals in the area where the best places are for the best prices. Don’t be afraid to call the place you’re going to stay and bargain. Sometimes directly bargaining with the individual or place will yield better savings than the discount websites. For dining, plan your meals in advance and pack your cooler or shop accordingly.
  1. Invest in experiences. When you’re on your vacation, do your best to invest in experiences. Think about the last time you went on vacation. If you remember anything you purchased that you regret or would not buy again, keep that focus on your next trip. Instead, focus on the experiences your money will buy. This includes precious time with growing kids, maintaining a relationship with a spouse, and creating memories that are priceless. This isn’t to say some souvenirs aren’t warranted, but be smart about it. Often these trinkets are expensive junk. I don’t need a coffee mug telling me the city I stayed.
  1. Stop keeping up with the Jones’s! Your vacation and relaxation is not and should not be dependent on your friends’ or neighbors’ vacations. Who cares where they went and who cares what they did. Of course, be happy for them and listen when they explain their excitement, but don’t be jealous or envious. You don’t know how they paid for it or what circumstances surround it. If your peers’ vacations make you jealous or envious, see a counselor. You’ve got bigger issues.
  1. Don’t finance your vacation with debt! As a financial planner, I’ve seen too many individuals finance their vacations with credit cards. Often, it’s a symptom of keeping up with the Jones’s. And likely, the Jones’s are doing the same thing. Instead of financing your vacation with credit card debt, save up and use that saved money for the trip. If you find yourself with little saved, then plan a less expensive trip. This may mean a small, three or four-day weekend trip instead of a two week stay. The only time credit cards should be used for vacation is to not carry cash on the trip, foreign travel, or to take advantage of discounts offered by the card company for the specific trip. A good rule of thumb, any amount put on the credit card should already be in the account where the credit card bill is paid from – in full! The credit limit doesn’t mean a spending maximum.

A Small Step (and it’s free!)

Quick – can you tell me your net worth?

How about the balance on your credit card (okay, cards)?  Your savings account balance?

by dbking For many folks (okay, face it, most of us) the answer to those questions is only available after a multi-hour session of digging through statements, online accounts, possibly tax returns, and the like.  But it doesn’t have to be that way.  Getting a handle on questions like this doesn’t have to cost a lot of money, when you use free account aggregation tools.

One of the first tenets of sound financial planning involves an understanding of where we are right now.  What is our current financial picture?  What assets do we have?  What liabilities do we owe?  What is coming due soon?  What income can we expect?  Without an understanding of where we are, it’s hard to figure just how we’ll move toward our goal, be it financial independence, comfortable retirement, or a new home.

I have written in other posts about the various ways you can use the internet to help you with your financial records, and so in a way this is just an update.  The difference is that we’re focused primarily on organizing our information here.

One very good free options that I have had experience with is Mint (  This type of site is commonly referred to as an “account aggregator”, meaning you will have all of your account information in one place once you’ve set things up.

Mint provides you with the ability to link all of your accounts – checking, savings, retirement, IRA, credit card, etc. – in one place.  This takes a little while to set up the first time, because you have to go through all of your accounts to set up your aggregation with the passwords, account numbers, and such. Once you’ve gone through this process, you’ve got all of that information available at your fingertips, and this is where the real power of the site comes in…

Now, you can see at a glance what all of your balances are, up-to-date as of the moment you clicked on “update”.  I’ve tested this out, and, while your mileage may vary, Mint has been current on activity that has happened within an hour or two.  I went to the ATM and withdrew some cash, and within an hour or so I went to Mint and updated, and voila!, the account was already current.

In addition to the ability to see your balances, Mint will notify you when a bill is coming due (such as for a credit card), as well as to project your income and bills for the coming month or two.  There are built-in tools that alert the user when spending in a particular category is above the norm. A rudimentary budget can be automatically built for you as well, with alerts sent to you when you spend more in a particular category than the plan, for example.

Granted, Mint is not the only aggregation tool out there, and it will probably not be the only tool you will use to organize your finances.  You could also use the likes of Quicken or other checkbook-type organizers, which include online account aggregation tools as well – but many of these products comes with a price tag, albeit pretty low cost in the scheme of things.

With free tools like Mint available, there is little reason to *not* get your information organized these days.  And for many folks, just getting things organized is the small step that becomes a giant leap for your personal financial situation.  So get going – Aggregate!

Forget Your New Year’s Resolutions?

4931290496_cf1027c38a_mSix months ago I wrote a price regarding New Year’s resolutions. I’d like to follow up to ask whether or not readers have followed through and are making good on the promises they made at the beginning of the year. If you find yourself as one of the individuals that has put together a plan of action and you’re moving forward – good for you! If not, what happened?

Understandably, many individuals renege on their promises made at the beginning of the year. Many factors can be the culprit. From not having enough time, not making goals a priority or simply lacking a plan of action, many folks struggle to make their resolutions a reality. So how do we get back on track? Or better yet, how do we even start?

The good news is that while making good on the resolutions does take work, the plan of action is relatively straight forward.

  1. Write down your goals. This is more than a simple “wish list” or things you aspire to do. Rather, your goals should be detailed, dated, specific and actionable. For example, a wish would be me saying “I want to save money for retirement.” That statement lacks clarity, specificity, and direction. Instead, I can write down “I save $5,500 per year to my Roth IRA. I do this by saving $458.33 monthly with automatic deductions from my checking account.” Here. I’m accomplishing the goal of saving money for retirement and I’ve given myself a specific number, and a way to take action.
  1. Very often I hear the excuse that there’s not enough time in the day to do this or that. The problem is that if we continue to let ourselves believe that thinking, we’ll be right – and our goals won’t be achieved. Instead, why not ask ourselves how can we make the time? By asking ourselves how we can accomplish a task our brains go to work trying to figure out what it will take to succeed. Do you need more time in the day? Try setting your alarm clock one minute earlier each day for a month. Bingo! An extra half-hour of time and little effort to get there. Want more time to start a hobby, spend with your family, etc.? Turn off the TV and social media. Better yet, get rid of your cable package (it’s easier to turn off the TV when you’re not paying for it) and delete your social media account. Again, it comes down to priorities.
  1. Just do it. Nothing happens without action. The best laid plans and goals are worthless unless we take action and make progress. Think of it this way: The Mona Lisa, Sistine Chapel, Mount Rushmore and many other glorious accomplishments all started as ideas with goals. However, they wouldn’t be present today without action. Commit yourself to working on and toward your goals on a daily basis. Every little bit gets you closer and closer to their realization.
  1. Learn, revise, reset. Inevitably, goals will be achieved, missed and changed. It’s important that if you fail to meet a goal that you haven’t failed overall. It may mean you need to take a different approach. Failure is a good thing. It’s how we learn. Perhaps some revisions need to be made, new details added and different action taken. When a goal is achieved, celebrate and then get back to setting more goals. This builds momentum and it’s infectious. It becomes hard to stop your progress and much easier to say no to things that will inhibit your achievement.

2016 isn’t over by a long stretch. Sit down today, now, and write out a few specific goals that you’d like to achieve within the next six months. Then get moving.

Withdrawals from an IRA – death, disability, and 59 1/2

key to ageThree of the most common ways that you can withdraw funds from your IRA without penalty are: 1) reaching age 59½; 2) death; and 3) disability. Below is a brief review of each of these conditions for penalty-free withdrawal:

  1. Reaching Age 59½ When you reach age 59½, you can withdraw any amount from your IRA without penalty, for any reason. The only thing you have to remember is that you must pay ordinary income tax on the amount that you withdraw. This means that, once you have reached the date that is 6 months past your 59th birthday, you are free to make withdrawals from your IRA without penalty. You are not required to take distributions at this age (that happens at age 70½).
  2. Death Upon your death at any age, the beneficiaries of your account or your estate if you have not named a beneficiary, can take distributions from your IRA in any amount for any reason without penalty. In fact, your IRA beneficiaries in most cases must begin withdrawing from the IRA, taking required minimum distributions annually, or taking the entire account balance out within 5 years after the death of the original owner. See the article RMD from an Inherited IRA for more details.These distributions are taxable as ordinary income to the beneficiary, but no penalty is applied.
  3. Disability If you are deemed “totally and permanently disabled” you are also eligible to withdraw IRA assets for any purpose without penalty. Total and permanent disability means that you have been examined by a physician and the disability is such that you cannot work, and the condition is expected to last for at least one year or result in your death.

Check Your Vitals


Whenever you go into the doctor’s office for a check-up what’s the first thing he or she usually does? The doctor checks your vital signs. Generally, this is heartbeat, blood pressure, breathing, reflexes, etc. Sometimes either the doctor or the nurse practitioner will have a questionnaire asking various questions such as number of drinks per day, whether or not you smoke, and any allergies – to name a few.

Most individuals give this information without thinking twice. Most of the time, the answers we give don’t change. So why does the doctor keep asking the same questions every time we have an appointment? The answer is because if one of these answers does change (such as an irregular heartbeat or high blood pressure) this changes the potential diagnoses and outcome.

This is why it’s important in your financial planning to always check your vitals. In other words, even though you think you’re financially “healthy” let the financial professional look at your auto, home, life, health and disability insurance to check coverage and liability limits. Most of the time an individual is going to be ok. However, there are times where someone thinks they’re healthy, yet their coverage is inadequate. For example, maybe the individual has comp and collision deductibles on vehicles that are old. The coverage was necessary 10 or 15 years ago, but not today. This would be the equivalent of being on antibiotics for an illness, but still taking them when the illness is cured – and continuing to pay for the prescription!

Additionally, levels of debt and savings should be checked frequently. Are debt ratios improving or getting worse? Has the savings rate changed or does it need to be changed? Someone saving $50 per pay when they were first hired may need to up that amount as they receive increases in annual salary. If they’re not asked, they can wind up with considerably less in retirement, yet their earnings allowed them to save more.

Individuals may find this hard to keep track of so it’s important that their financial professionals be vigilant in always asking. For the financial professionals, it can be difficult when they become focused on one area of planning – such as gathering assets or selling products. The point is that just like the body’s vitals, financial vitals should be checked every time individuals meet with their financial professionals. Most of the time things don’t change dramatically. But if they do, financial professionals and their clients can be better prepared to move forward with an accurate diagnosis of the situation and the appropriate prescription to remedy the issue.

RMD from an Inherited IRA

inheritanceIf you have inherited an IRA you are required to begin taking distributions from the account according to a set schedule. If you are the sole beneficiary of the IRA, how you handle your distributions is up to you. If there are two or more beneficiaries of the IRA, the process becomes more complicated – see the article at the link for more on multiple beneficiary arrangements.

There are actually two different schedules that you can use, lifetime distributions and a distribution over 5 years.

5-year distribution

The 5-year distribution method is the default period for distribution of an inherited IRA. As the name of the method suggests, in this method the inherited IRA must be completely withdrawn within 5 years of the death of the original owner. There is no specific amount that must be withdrawn in any particular year, as long as the entire account is withdrawn within 5 years.

I mentioned that the 5-year method is the default – this is because if no distributions are taken within the first year following the death of the original owner, it is assumed that the 5-year method is being used. However, if you are using the lifetime distribution method, you would take a specific distribution (or more) during the first year following the year of the death of the original owner.

Lifetime distribution

If using the lifetime distribution method, you are intending to extend the time period of distribution for some length of time in excess of the default 5-year distribution. To accomplish this, there is a specific amount which must be withdrawn each year – and as long as at least that amount is withdrawn annually, the required minimum distribution has been satisfied.

The amount of the withdrawal required each year is determined by the age of the beneficiary upon the death of the original owner. The IRS has a table, known as Table I, that indicates a life expectancy figure for the beneficiary.

So if the beneficiary is, for example, 28 upon inheriting an IRA her life expectancy figure is 55.3. If the inherited IRA is worth $240,000, dividing the value of the IRA by 55.3 results in $4,339.96 – this is the first year’s required distribution. As long as at least that amount is withdrawn during the first year following the year of the death of the original IRA owner, the RMD has been satisfied.

The following year, the original life expectancy figure is decreased by 1 to 54.3. So now, if the IRA is worth $236,000 as of the end of the prior year, dividing that amount by 54.3 results in a RMD of $4,346.22.

The inheritant can take a larger distribution at any time – the only requirement is that at least the prescribed amount is withdrawn every year.

Age 70½ RMD Rules

give-us-this-day-by-mr-krisAs an owner of an IRA or other qualified retirement plan (such as a 401k), when you reach age 70½ you are required to begin taking distributions from the account(s).  There are several important factors about these distributions that could trip you up if you’re not careful.  Listed below are some of the more important rules – but keep in mind that these RMD rules are only for the original owner of the account, not for a beneficiary of an inherited account. There is a different set of rules for inherited IRA RMDs.

Required Minimum Distribution Rules

Calculation of RMD

  1. Determine your account balance from the end of the calendar year prior to the year for which the distribution is being calculated.  Any additions or withdrawals after December 31 of the previous year are not included in this balance, even if an addition is for the previous calendar year.  Also, any “in flight” rollovers or recharacterizations that effectively would impact the end of year balance are included (or excluded) in the balance as applicable.
  2. You must learn your distribution period, which can be found in Table III, using your age at the end of the current year (not the previous year).
  3. Divide the balance determined in #1 by the distribution period found in #2.  This is your RMD for the current year.
  4. For each subsequent year, go back through #1 for a new balance at the end of the prior year, then go to the table from #2 to get a new distribution period, and do the math.

More Than Minimum – for any year in which you withdraw more than the RMD amount you are NOT allowed a credit against future year RMD.  The result is that your balance at the end of the current year would be less, so future RMD would be less as well, but not by the amount of your extra withdrawal.

No Rollovers or Conversions of RMD Amounts – Although you’re allowed to rollover or convert IRA funds after age 70½, you can not rollover or convert the amount attributable to your RMD for the year. This amount (the RMD) must be taken completely out of tax-deferred accounts.

Multiple Accounts – For the purposes of calculating RMD, the IRS considers all traditional IRAs owned by one individual as one aggregate IRA.  This means that you can determine your RMD by adding together the balances of all your trad IRA accounts at the end of the prior year, and then taking your RMD from any one account (or as many accounts as you wish) as long as it totals at least the RMD for that year.  Other qualified retirement plans such as a 401(k) must be treated separately – that is, RMD must be calculated only on that account and distribution received from only that account.

Multiple Payments – For the tax year, you are allowed to take from as little as one to as many payments as you wish from your IRAs, as long as they add up to at least the RMD for the year.

Photo by Mr. Kris

The Value of a Stay-at-Home Parent

2770132690_0b9558b429_m1In earlier posts we’ve discussed the importance of a spousal IRA for a spouse that stays at home taking care of the children in order to still save for retirement even though the “non-working” spouse has technically no “earned” income.

Spousal IRAs aside, I wanted to shed some light on the value of a stay-at-home parent has, even though they might not be getting paid a salary for their work raising the children. The goal is to point out why stay-at-home parents still have a need for risk management and retirement planning as they (in my opinion) work one of the hardest jobs – raising children.

According to the 2016 Mother’s Day Infographic, the value of a stay-at-home mom (parent) is approximately $143,102 annually, accounting for 40 regular hour work and 52 hours of overtime. This “salary” takes into account occupations such as driver, teacher, chef, nurse, and janitor. The site also lets the user input their own information regarding specific circumstances (honey, if you’re reading this it said you were priceless!).

Here’s why this number is so important. There have been plenty of times that I have worked with a married couple and one of the spouses was a stay-at-home parent. Generally, that individual is the wife. What is interesting is that while she is general making close to, if not more than her husband, she is severely lacking in some of the basics of financial planning – insurance and retirement savings.

Unintentionally, I’ve seen the husband with quite a bit of life insurance and various retirement accounts such as a 401k and IRA, while the wife has very little, if any life insurance and has little to nothing saved for retirement.

The question that needs to be considered is how would the family function if the stay-at-home spouse died? How would the working spouse continue working, while also caring for the children if the stay-at-home spouse could not? Even though one spouse is working, are not both spouses going to enjoy retirement? And (sorry, men) since husbands generally die before their wives, will what he’s saved be enough to support her in retirement after his death?

Ok, ok. So maybe your head is spinning. My apologies.

Although this is a lot to think about, surprisingly the remedy isn’t that difficult. After determining the amount of (monetary) value that the stay-at-home spouse provides, consider having that spouse apply for an amount of life insurance related to that amount. A ballpark place to start is ten times that annually amount. From there, determine specific needs or see a competent professional to quantify it using a human life value approach. The working spouse should consider getting spousal life insurance through their group policy at work. Although not very high amounts it’s generally easy to get and the premiums are inexpensive.

For retirement savings, take advantage of the spousal IRA option. This allows a stay-at-home spouse to contribute to an IRA as long as the working spouse has enough earned income to make the contribution. For 2016, this means that for a couple under the age of 50, the working spouse would need to have earned income of at least $11,000 for both spouses to make the maximum contribution of $5,500 each.

Although the earned income is non-existent, it’s still important to make sure plans are in place for the stay-at-home spouse. As you can see the results of not planning could leave a significant gap in a family’s plan.

Early Withdrawal of an IRA – 72t Exceptions

If you have done much studying about IRAs and 401k plans, you probably know that there 72ts1are several exceptions in the Internal Revenue Code that allow an early withdrawal from your IRA or 401k plan without the 10% penalty being imposed. The section of the IRC that deals with quite a few of these exceptions is called Section 72t (referred to as 72t for short), and there are several subsections in this piece of the Code. Each subsection, listed below, has specific circumstances that must be met in order to provide exception to the 10% penalty. Clicking on the link for each subsection will provide you with additional details about that exception.

§72(t)(2)(A)(i) – age 59½ – this is the standard age allowing for penalty-free withdrawals from your IRA or 401k. In some cases there is an exception allowing for penalty-free withdrawals from a 401k at or after age 55; and after age 50 in even more limited cases. See §72(t)(2)(A)(v) below for more details.

§72(t)(2)(A)(ii) – death at any age – upon your death, your heirs as beneficiaries of the IRA or 401k can take penalty-free withdrawals. In fact, in most cases the beneficiaries are required to begin taking withdrawals from the account.

§72(t)(2)(A)(iii) – disability at any age – if you are disabled (per IRS definition) you may take withdrawals from your IRA or 401k without penalty. Disability (per IRS) means that you have been examined by a physician and the disability is such that you cannot work, and the condition is expected to last for at least one year or result in your death.

§72(t)(2)(A)(iv) – series of substantially equal periodic payments (SOSEPP) – this is the classic “72t” exception, allowing for withdrawals from your IRA or 401k in equal payments to last at least five years or until you reach age 59½, whichever is later.

§72(t)(2)(A)(v) – separation from service on or after age 55 (401k only) – this is the section alluded to above, where if you leave the employer during or after the year you will reach age 55, you can take withdrawals from your 401k without penalty. If you are in a public safety job (police, firemen, etc.), then this early withdrawal age is 50.

§72(t)(2)(B) – medical expenses – withdrawals from an IRA or 401k may be penalty-free if used to pay for certain qualified medical expenses.

§72(t)(2)(C) – qualified domestic relations order (QDRO) – upon a divorce settlement, if the 401k has been divided using a QDRO, the withdrawals by the spouse who is receiving the 401k (not the original owner) may be penalty-free. This only applies to 401k plans – IRAs cannot be split with a QDRO.

§72(t)(2)(D) – health insurance premiums – in certain circumstances, health insurance premiums may be paid for with penalty-free IRA withdrawals. This only applies to IRAs, not 401k plans.

§72(t)(2)(E) – higher education expenses – qualified higher education expenses may be paid for with penalty-free withdrawals from an IRA. This does not apply to 401k plans.

§72(t)(2)(F) – first time home purchase – if you have never used this exception, you may be eligible to withdraw up to $10,000 ($20,000 if your spouse qualifies) from your IRA for the purpose of purchasing a first home. This is also only allowed with an IRA; 401k plans do not allow this exception.

5 Options for Your Old 401k

old 401kWhen you move from one job to another, often there is an old 401k plan at the former employer. You have several choices for what you can do with the old 401k plan, and some options are better than others. Some of the options are dependent upon the balance in your old 401k account, as well.

Cash it out. This is typically the worst option. You took advantage of tax-deferral (and company matching) when you contributed the funds to the account. If you simply cash out the old 401k, you’ll have to pay tax on the funds, and if you were under age 55 when you left the employer you will also likely be hit with a 10% penalty for the early withdrawal.

In addition to the tax and penalty, when you take a withdrawal from your 401k plan there is an automatic 20% withholding requirement. You will have credit for this withholding on your tax return, but that could cause a delay of many months before you receive the money.

If your old 401k balance is less than $1,000, your employer has the option to cash out your account without your consent. But all is not lost, you can still complete a rollover into an IRA or a 401k at a new employer – but it must be completed within 60 days (see Indirect Rollover below).

Indirect Rollover. An indirect rollover occurs when you request a distribution of the funds from the old 401k to be given to you in the form of a check made out to you. This is (at the start) the same as cashing out your old 401k – but then you re-deposit the check into an IRA or a new employer’s 401k. If you deposit the entire amount of your old 401k into a new tax-deferred account, there will be no tax ramifications.

This is where the previously-mentioned 20% withholding can cause problems. As mentioned before, when you take a cash-out withdrawal from your 401k there is a mandatory 20% withholding. When you go to re-deposit the funds, in order to avoid taxation you’ll need to come up with the withheld 20% to make the rollover complete.

For example, Laura left her former employer, where she had a 401k plan. This old 401k had a balance of $25,000. Laura wanted to do an indirect rollover – so she asked for a check from the 401k administrator. When she receives her check, the amount is only $20,000. This is because 20% was withheld, as required.

So when Laura completes the indirect rollover, unless she comes up with the missing $5,000 from her savings or some other source, the result will be that she has only rolled over $20,000 – and when she pays taxes for the year, she’ll have an extra $5,000 of income to report. Since Laura was under age 55 when she left the employer, she’ll also have a 10% penalty to pay. Granted, she has the credited $5,000 of withheld tax, but the end result is that her retirement fund is $5,000 less and she had to pay tax and a penalty on the unintended withdrawal.

For this reason alone it’s almost always better to do a Direct Rollover.

Direct Rollover. This is where you direct the old 401k administrator to transfer the funds to either an IRA or a 401k at a new employer. In doing so, the funds have never left the “protection” of a tax-deferred account, so there is no taxation or penalty involved.

In the case of either a direct or indirect rollover into a new employer’s 401k plan, you’ll need to make sure that the new 401k plan allows for this sort of “roll-in” contribution. Most plans do allow this, but some still don’t.

Once you have completed the rollover (either kind) you can then invest the funds in the new account as you wish, and treat the entire account as if it was contributed from your deductible contributions.

Leave it alone. In some cases it can be advantageous to leave the money in the old 401k plan. Typically this is only allowed when your balance is significant, often around $5,000 or more.

You might want to leave the funds at the old employer for a few reasons: first, if you left the employer at or after the age of 55 (but less than 59½), leaving the money with the old 401k provides you the option to utilize the age 55 exception to the 10% penalty. If you transferred the money away from the old 401k you would lose this treatment.

Second, your old 401k may have valuable investment options available that may not otherwise be available to you, such as investments closed to new investors.

Third, if you have highly-appreciated company stock in the old 401k plan, if you don’t stage a rollover properly you might lose valuable tax treatment on the net unrealized appreciation on the stock.

Roth conversion. In addition to the traditional rollovers described above, you can also convert the money to a Roth IRA. Naturally this will cause income tax on the conversion, but depending upon the tax situation this can be a good option to pursue.

You would just transfer the money over to the Roth IRA account and pay tax on the distribution on your tax return for the year. Then you’ll have money in the Roth account that is protected from taxation on qualified withdrawals forever.

How to Really Buy a Car

2016-06-21-14.38.47-1024x576Buying a different car (notice I didn’t say new car) is an event many individuals experience throughout their lifetime. Personally, I have had a number of cars in my lifetime, and I’m sure I’ll have a few more (right now the ol’ mini-van stands at 241,000 miles). My goal is not to spend too much on a depreciating asset, yet make a sensible purchase based on reliability, fuel efficiency and insurance costs. Although some readers may not agree with me, here are some tips on how to really buy a car.

  1. Do your homework. Websites such as Kelly Blue Book ( and have valuable information on used car prices, reliability reports, known recalls, expert and buyer reviews and what to expect at the dealership. In addition, obtaining information from these websites gives you bargaining power when you go to purchase your vehicle at a dealership or from a private party.
  1. Never, ever walk into a dealership and tell them your monthly payment you’re hoping to get. In fact, don’t tell them if they ask you. Instead, negotiate the price of the car first. Many dealerships are more than happy to get you the payment you want, while not helping you consider total cost, interest on financing, etc.
  1. Try to never, ever have a car payment. Think of it this way, you’re making monthly interest and principal payments on a depreciating asset. If you can, hold off on the purchase until you’ve saved enough cash to buy the car outright. This also gives you more negotiating power knowing you can walk away from the deal and buy the same car at a different dealership. And no, you don’t need a new car every five years.
  1. Don’t buy the hype. Just about every dealership offers the same discounts and pricing. The reason is that other than freight charges, most dealerships pay the same for the new vehicles going on their lots.
  1. If you can, avoid buying new car. Consider this; an individual making $100,000 in annual income who purchases a $30,000 new car just spent 30% (nearly a third) of their income on a depreciating asset. There are plenty of reliable, used cars that are in perfect working condition. In fact, take advantage of the fact that the used car has already had much of its depreciation absorbed by the previous owner. Furthermore, I have seen too many individuals buy a new car, finance it, then end up upside down on the car. This means they owe more than the car is worth. To make matter worse, some individuals wreck their cars, have nothing to drive, yet still have to make payments. Ick.
  1. Buy your car before you have I’m not suggesting you buy a car you don’t need. What I am suggesting is that you have the car you want ready to purchase when you need to. That is, if your current vehicle breaks down or is no longer running, you know you can get the vehicle you researched, instead of making a fast, emotional decision that will likely cost you more money.
  1. Avoid leasing. This never made sense to me. Often the rationale is “if you want new car every three years, then leasing is the way to go.” Baloney. Leasing is simply making a car payment on an asset you don’t Save up and buy the car outright. As mentioned earlier, if you don’t need a new car every five years, you certainly don’t need one every three.
  1. The exhilaration of the purchase wears off fast. Buy a car that’s affordable, practical, reliable, and fuel efficient. Forget about what the Joneses have or what they think. Take what you would have paid for the monthly payment and put it toward retirement, college, or saving for a house.
  1. Insurance matters. Especially if you’re young, insurance on vehicles matters. The price of insurance on a used sports car is much more expensive than a used sedan. In addition, lenders will often require that you have insurance to protect their asset (it is theirs since you borrowed their money to buy it) including comprehensive and collision which adds to premium amounts. Generally, the older, less sporty the car, the lower insurance premiums.
  1. Avoid the extended warranties. In most cases, these warranties are not needed. Instead, use the aforementioned sites to research the vehicle’s reliability so you don’t need to purchase the warranty. Finally, should a major repair be necessary, simply use your emergency fund or rainy day fund to pay for the repairs. Also, a major repair doesn’t indicate you need a new vehicle. Quantify the cost of the repair versus a purchasing a different vehicle. Often, the price of the repair will outweigh purchasing a different vehicle altogether. Sometimes, repairs can be made by you. With a little elbow grease and YouTube you’d be surprised at what you can do, and how much you can save.

Net Unrealized Appreciation

beauty unrealized by brew ha haThis widely misunderstood section of the IRS code can be quite a benefit – if it happens to fit your situation. Net Unrealized Appreciation (NUA) refers to the increase in value of your company’s stock held within your 401(k), either due to a company match or your own investment in the company stock within the 401(k). Other company-sponsored deferred accounts can apply here as well, but the primary type of account is the 401(k), so we’ll refer to all company-sponsored tax-deferred accounts as 401(k)’s for the purpose of this discussion.

In order to take advantage of the Net Unrealized Appreciation provision, first of all you must hold your company’s stock in your 401(k), and you must be in a position to roll over the account. That is, either you must have separated from service by leaving employment (voluntarily or involuntarily), or the 401(k) plan is being terminated.

As you consider the rollover of your funds, if the company stock has increased in value, you have net unrealized appreciation. That is, there is a net increase or appreciation in value that has not yet been realized by sale of the stock. The IRS allows for this net unrealized appreciation to be treated as a capital gain, which can result in much lower tax rates on the gain versus ordinary income tax rates.

In order to take advantage of this special NUA treatment, the 401(k) account must be completely rolled over in one tax year. There is one thing that you must do differently from other rollovers, however: The company stock will be rolled over into a taxable (non-IRA) account, while everything else will be rolled over into a traditional IRA.

When you rollover the company stock, this will be considered a distribution. As with any distribution, you will be required to pay the tax on the basis (or cost) of the stock as well as the 10% penalty if you were under age 55 when you left the employer. Your employer or plan administrator will have records on your basis of the stock.

As an example, let’s say Frank has participated in the company’s 401(k) plan for several years and he’s now ready to retire. Part of the 401(k) funds were invested over the years in Frank’s company’s stock, which has cost Frank a total of $10,000 through the years (this is the basis). Frank’s company has done well, and now the stock is worth $150,000 in the market. If Frank rolled over the company stock into an IRA, when he withdraws the money he would pay ordinary income tax on that growth of $140,000 – at whatever his current marginal income tax rate at that time. Instead of going that route, Frank decides to use the NUA provision in the tax law – much to his advantage.

So, Frank sets up an IRA and a taxable account at the custodian of his choice, and he directs the 401(k) administrator to roll over his company stock to the taxable account, and all other funds to the IRA. When Frank rolls over the company stock into the taxable account, he will be taxed at ordinary income tax rates (plus the 10% penalty if he was under age 55) on the basis of the stock – which is $10,000. Now, not only will the growth of the stock ($140,000) have a tax rate of 15% or less as capital gains, Frank also will not have to take required minimum distributions (RMD) from those funds upon reaching age 70½ . Frank can leave the company stock in that taxable account forever if he wishes, and then hand it over to his heirs. (Note: NUA stock doesn’t receive a step-up in basis like other appreciated stock.)

Here’s the math: Frank pays tax at an example rate of 25% on the $10,000 basis of the stock, or $2,500.  Frank is over age 55, so no 10% penalty applies.  Then, as he sells the stock, the total amount of capital gains tax would be 15% at today’s rates of $140,000 (just the growth!) or a total of $21,000. Compare that to the non-NUA treatment, where Frank would be taxed with ordinary income tax rates on the entire $150,000 stock value over time, for a total of $37,500! In this example, Frank has saved a total of $14,000 in taxes! Wow…

Now, NUA treatment doesn’t work for all situations. For example, if your company stock has only grown minimally in value, or has gone down in value, there is little or no benefit to utilizing the NUA option. Also, if the basis of the stock is fairly high relative to the growth, it might make sense to only apply NUA treatment to a portion of your company stock, which is also allowed. One last thing – this NUA treatment only applies to the stock of your employer. No other stock can receive this treatment.

Early Withdrawal of an IRA or 401k – Medical Expenses

medical expensesThere are several ways to get at your IRA funds before age 59½ without having to pay the 10% penalty. In this post we’ll cover the Medical Expenses which allow for a penalty-free distribution.

There are three different Medical reasons that can be used to qualify for an early withdrawal: high unreimbursed medical expenses, paying the cost of medical insurance, and disability. Disability and high unreimbursed medical expenses are also applicable reasons allowing for early withdrawal of 401k funds without penalty. We’ll cover each of these topics separately below.

High Unreimbursed Medical Expenses

If you are faced with high medical expenses for yourself, your spouse, or a qualified dependent, you may be eligible to withdraw some funds from your IRA or 401k penalty-free to pay for those expenses. The amount that you can withdraw is limited to the actual amount of the medical expenses you paid during the calendar year, minus 10% (7.5% if you or your spouse is age 65 or older during 2016) of your Adjusted Gross Income, or AGI.  Your AGI is the amount on your Form 1040, line 38, or Form 1040A line 22.

You can only count medical expenses that are otherwise deductible as medical expenses on Schedule A of Form 1040 – but, you don’t have to itemize your deductions in order to take advantage of this exception to the 10% penalty.

For this exception to apply to withdrawals from a 401k, often you are also required to have left the employer.

Medical Insurance Premiums

You may be able to take a penalty-free distribution from your IRA (but not your 401k) to help pay for medical insurance premiums for yourself, your spouse, and your dependents, as long as the amount you withdraw does not exceed the amount you actually paid for medical insurance premiums, and all of the following apply:

  • You lost your job.
  • You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
  • You receive the distributions during either the year you received the unemployment compensation or the following year.
  • You receive the distributions no later than 60 days after you have been reemployed.

There is no income limitation on this provision.


If you become disabled prior to age 59½, distributions in any amount from your IRA or 401k are not subject to the 10% penalty. Your disability must be considered of a long duration (greater than one year) or expected to result in death. The disability (physical or mental) must be determined by a physician.

Keep in mind, as we mentioned previously, these avenues provide a way to withdraw funds from your IRA penalty-free, but not tax-free. You will still be liable for ordinary income tax on any distributions that you take from your deductible IRA or 401k. In addition, you will need to check with your 401k administrator to find out about the rules and limitations that are specific to your particular plan.

5 Things to Check on Your Homeowners Policy

2016-05-22-17_19_35-1024x576Just because an individual has a homeowners policy or renters insurance doesn’t mean that they are covered for everything. Sometimes individuals assume that because they have insurance, they don’t need to worry about checking into specifics. However, without understanding what may or may not be covered, in the event of a claim, it’s better to know beforehand rather than adding insult to injury and finding out there wasn’t coverage.

  1. Flood coverage. In most cases this is excluded on a homeowners policy. Coverage can be obtained separately through a broker found here. Additionally, many policies exclude water or sewer back-up. Individuals concerned about water/sewer back-up can generally get an endorsement for this coverage added to their policy.
  1. Trampolines and pools. Individuals that have a trampoline or a pool (or recently acquired these items) should notify their insurance carrier immediately. Some carriers will specifically exclude any liability claims resulting from injury or death related to pools or trampolines. Other carriers may deny a claim if they weren’t notified the items existed. Carriers that do allow them generally have rules that include proper fencing, locking gates and safety apparatuses to prevent or reduce the risk of injury or death. Parents should consider whom they let swim or jump. Neighbors can be great friends until one of their kids is hurt. Then all bets are off.
  1. Jewelry, antiques, collections. Generally, most insurance policies provide limited coverage for these items. The good news is that for a few dollars more, these items can be endorsed and have their own coverage amounts and deductibles. If an individual owns expensive jewelry, has firearms, coin collections, or expensive musical instruments (say, a grand piano in the living room) chances are these need to be endorsed on your homeowners policy.
  1. Insurance is for catastrophic loss. If an individual has a low deductible on their home or renters policy they should consider raising it. This is especially true if they rarely, if ever make claims. Consider a deductible of at least $2,500 and up to $5,000. This money should be set aside in the emergency fund.
  1. Many homeowners add to their home, upgrade kitchens, finish basements or make other home improvements. It’s important to notify the insurance company of these changes. Yes, the premium may increase, but in the event of loss, the homeowner will want replacement coverage for the upgraded material, not what was replaced. This is also true if a policyholder starts a business run from the home. Some carriers provide coverage for home businesses with property and liability extending from the personal policy to the business. However, when in doubt, ask your carrier. They will let an individual know if their home policy covers them, or if they need separate business insurance.

Early Withdrawal of an IRA – First Time Homebuyer

Early stage of a developing white-capped mushroom 2When you have money in an IRA, you are allowed to begin taking withdrawals once you’ve reached age 59½. But sometimes you’d like to take your money out earlier… and you’ve probably already discovered that there is a 10% penalty for taking funds out of your IRA early, right? So – is there a way to avoid that penalty? Perhaps as a first time homebuyer.

There are several ways to withdraw IRA funds without penalty, as a matter of fact. There are several sections of the Internal Revenue Code that deal with these early distributions – including 72(t) which includes the first time homebuyer exception. We’ll explain the first time homebuyer exception in this post.

First Time Homebuyer

If you are buying, building, or re-building your first home (defined later), you are allowed to take a distribution of up to $10,000 (or $20,000 for a married couple) from your IRA to fund a portion of your costs, without paying the 10% penalty. There are a few restrictions, though – here is the official wording from the IRS:

  1. It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
  2. It must be used to pay qualified acquisition costs for the main home of a first time homebuyer (defined later) who is any of the following.
    1. Yourself.
    2. Your spouse.
    3. Your or your spouse’s child.
    4. Your or your spouse’s grandchild.
    5. Your or your spouse’s parent or other ancestor.
  3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.

If both you and your spouse are first time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs. Qualified acquisition costs include the following items.

  • Costs of buying, building, or rebuilding a home.
  • Any usual or reasonable settlement, financing, or other closing costs.
First time homebuyer. Generally, you are a first time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. NOTE: If you are married, your spouse must also meet this no-ownership requirement. This provision might cause you to re-think the timing of a purchase of a home if you are about to get married and your soon-to-be spouse has had ownership within the past 2 years.

Date of acquisition. The date of acquisition is the date that:

  • You enter into a binding contract to buy the main home for which the distribution is being used, or
  • The building or rebuilding of the main home for which the distribution is being used begins.

The keys here are to make sure that you qualify as a first time homebuyer (by the IRS’ definition above), that you use the funds in time (before 120 days has passed since the distribution), and that you haven’t taken this option previously (or previous distributions were less than $10,000). For many folks this can be very helpful when buying a home.

Another important point to note is that although you do not have to pay the 10% penalty on the distribution, you WILL be required to pay ordinary income tax on any money taken from your IRA. This can be a surprise to some folks who weren’t expecting it. However, if you have post-tax (non-deductible) contributions in your IRA, these will be non-taxable, but pro rata in this distribution.

Sometimes it’s Not a Good Fit

puzzle-piecesWhether you’re the prospective client working with a financial planner or the planner working with a prospective client, sometimes for whatever reason the relationship doesn’t make sense. The purpose of this post is to help prospective clients and planners in deciding whether or not a client/planner relationship is worth pursuing or maintaining.

First, let me start from the perspective of the client looking for a financial planner. Initially, as the client you’re going to want to look for some of the minimums every financial planner should be doing. The first is the CFP® designation. This means that the planner has at least a minimal amount of financial planning education and had passed a rigorous exam. Next, make sure the planner is a fiduciary. This is not optional. This means that the planner is legally required to act in your best interests always. Additionally, make sure they are fee-only. This means they are compensated only by you the client, not commissions from product sales.

Once those minimums are met, find out if you like them. Personalities sometimes clash and life’s too short to work with a planner you don’t like. In addition, find out what value you’ll be receiving and if you’re currently the planner’s client, what value (or lack thereof) you are receiving. A higher price doesn’t necessarily equate to a good value and vice versa.

If you’re the planner, it’s important to interview your prospective clients as well to see if they will be a good fit. Sometimes, you have to assess your current clientele to see if the relationship still makes sense.

For example, if a prospective client asks a lot of questions about your background, history, beliefs, and firm in general, this is a good thing. They are doing their due diligence. However, pay attention to how they’re asking. If the tone is in an aggressive or condescending manner, they may act this way after they’ve become clients.

In another example, a current client may have come aboard initially agreeing with your firm’s investment approach and philosophy. Let’s say that their portfolio allocation is set up in a way to achieve long term rates of return. Initially, the client may have agreed with this. But, after just a few short years they may be constantly wondering why they haven’t experienced returns like their friends or relatives or the Dow. These folks may need some reassurance or education that their holdings are for the long run. However, if they just aren’t happy with their returns despite the short term thinking and your attempt to educate, they may be better off elsewhere.

Another point to consider is if you work on commissions or fee-only. It becomes much easier to work with people you like when you know your compensation doesn’t depend on selling them something, even if they’re not a good fit.

Lastly, whether current or prospective client, no one has the right to belittle you or be vulgar towards you. Show them the door immediately. Life’s too short.

The hope is that occurrences like these are very few and far between. But it’s good to know that should they arise, clients and advisors have a choice.

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