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A Caregiving Guide for Clients and Advisors

Today’s post has a link to a paper on caregiving. Both clients and financial advisors may find the information beneficial to identify, and manage the stress of caregiving for a loved one needing long-term care. Your comments and feedback are welcome.

Download the paper here – Managing the Stress of Caregiving – BFP

Social Security Terms

social security termsAs you learn about Social Security and your possible benefits, there are several unique Social Security terms that you should understand. Below is a list and brief definitions of the most important of these Social Security terms.

Average Indexed Monthly Earnings (abbreviated as AIME) – this is the average of the highest 35 years of your lifetime earnings, indexed to inflation. Each year’s earnings is indexed based on when you reach age 60, and the highest 35 years are averaged. This average is divided by 12, to result in the monthly average. The AIME is used to determine your PIA. Your AIME can increase after age 62 if you’re continuing to work and earn in excess of some of your earlier indexed earnings amounts.

Bend Points – these two amounts are determined for each individual based upon the year that you will reach age 62. The Bend Points are applied to your AIME to calculate the PIA.

Delayed Retirement Credits (DRCs) – when you delay filing for benefits after your FRA, you accrue credits for the delay, known as a DRCs. You earn DRCs for delaying your filing for Social Security benefits after your FRA up to age 70 at maximum. No DRCs are earned after you reach age 70. Presently this delay credit is equal to 2/3% for each month of delay, or a total of 8% for each year of delay. These credits are accumulative – meaning that if you delay for 3 years your DRCs are 24%.

Full Retirement Age (FRA) – this is the age at which your Social Security benefit is equal to your PIA. The age is 66 for folks born between 1946 and 1954. FRA increases by 2 months for each birth year after 1954, up to a (current) maximum of 67 for those born in 1960 or later. For each month before this age that you file for benefits, your benefit will be reduced from the PIA amount; for each month after this age that you delay filing, your benefit is increased from the PIA amount.

Primary Insurance Amount (PIA) – Using the AIME, three amounts (bound by Bend Points) are applied to the average. The amount of your AIME up to the first Bend Point is multiplied by 90%; the amount of your AIME from the first Bend Point to the second Bend Point is multiplied by 32%; and the amount above the second Bend Point up to your total AIME is multiplied by 15%. These three amounts are added together to result in your PIA.

Social Security Changes for 2018

In 2018, there will be some slight changes to Social Security. For individuals receiving benefits, there will be a cost of living (COLA) increase of 2 percent. While 2 percent may not seem like a lot, it certainly does help. Additionally, it’s better than nothing. That is, Social Security remains one of the few retirement vehicles available with a COLA. Many defined benefit pensions (if an individual is lucky to have one) do not have COLA increases. Their payments remain fixed for the retiree’s lifetime.

Individuals still working will see the wage base subject to the OASDI tax of 6.2 percent increase from $127,200 for 2017 to $128,700 for 2018. As always, the Medicare tax of 1.45 percent remains on an unlimited amount of wages, with an additional .9 percent tax added for those with incomes above $200,000 (single) or $250,000 (MFJ).

For individuals receiving benefits yet continuing to work, the annual income thresholds have increased for the temporary reductions in benefits. For those under full retirement age (FRA) the annual income threshold rises to $17,040 for 2018. This means that while receiving benefits in early retirement, for every $2 of income above this threshold, benefits are reduced $1. The threshold increases in the year an individual reaches FRA to $45,360. These thresholds are annual, but the calculation is done monthly per individual.

It should also be noted that once an individual reaches full retirement age, these temporary reductions stop, and the benefit is recalculated. In other words, once and individual reaches FRA, he or she can earn as much as they want, and not have their benefit reduced. It should also be mentioned that temporary reductions are in addition to permanent reductions that occur when benefits are taken before FRA.

Finally, should it make sense for their situation, individuals may consider delaying their benefits after FRA. This allows an individual to receive a two-thirds of 1 percent monthly increase, or 8 percent annually, on their primary insurance amount (PIA). So not only does Social Security have a COLA, it also allows those who delay a permanent increase in their benefit, up to 8 percent annually (until age 70), with an inflation adjustment.

Social Security Bend Points Explained

i love deep blue by JennyHuangBend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series.  They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA. The points on the graph “bend” as the rate of inclusion changes.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA.  Here, however, we’ll go over how Bend Points are calculated each year.  To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis.  According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2018 bend points is from 2016.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085.  I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago.  At any rate, now that we know these two numbers, we can jump back to 2016’s AWI Series figure, which is $48,664.73.  It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2018’s bend points:

$48,664.73 / $9779.44 = 4.9762

4.9762 * $180 = $895.72, which is rounded up to $896 – the first bend point

4.9762 * $1,085 = $5,399.17, rounded down to $5,399 – the second bend point

And that’s all there is to it.  Hope this helps you understand the bend points a little better.

Photo by JennyHuang


big-cedar-tree-tiny-girl-by-woodleywonderworksFor IRA contributions, the concept is simple:  a certain amount may be contributed to the account each year, dependent upon the type of IRA and your MAGI (Modified Adjusted Gross Income).  But what if you find out that you are ineligible to contribute to a Roth IRA due to the MAGI limitation?  How about if you made contributions to a Trad IRA and, upon filing your taxes found out it would be in your best interest to put those funds in your Roth instead?  Enter the Recharacterizing.

Recharacterization of IRA Contributions

This is a relatively simple process, but, as with most things, the Code makes it seem like rocket surgery.  Essentially, if you make a contribution to one type of IRA and then decide that you’d rather have it in the other type of IRA, you can affect this recharacterization by:

  • notifying both trustees (the original IRA and the second IRA) of the transfer
  • requesting a trustee-to-trustee transfer
  • include in the transfer any net income attributable to the contributions being recharacterized
  • report the recharacterization on your tax return for the year (Form 8606)
  • treat the contribution to the second IRA as if made on the date of the contribution to the first IRA (in other words, as if you had done it the right way the first time)
  • if the first IRA was a Traditional IRA, you are not allowed a deduction for that contribution for the tax year (obviously, since it wasn’t left there)
  • All of this has to happen before the due date of your tax return, plus 6 months – for most calendar-year taxpayers this is October 15. (see Footnote below  for additional info)

Wrinkles with recharacterizing

Now, if you thought that was way too many steps to get something really simple accomplished, look at the following examples of additional confusion to add to the mix:

Conversion by Rollover from Traditional IRA (TIRA) to a Roth IRA (RIRA)… if you’re converting funds from your TIRA to a RIRA and the transfer occurs within two tax years (but still within the allowed 60 days)  you would treat the activity as having been completed before the end of the first tax year if you needed to later recharacterize the conversion.

Rollovers… if you’ve already made a tax-free transfer of the funds, in general those funds are not eligible to be recharacterized.

Recharacterizing Excess Contributions… since excess contributions must be removed prior to filing that tax return for the applicable tax year, any recharacterization of those amounts would have to be accomplished strictly by the due date of the return – no extra 6 months in this case.

Recharacterizing SEP or SIMPLE funds… if you’ve converted funds from a SEP-IRA or a SIMPLE IRA to a Roth IRA and wish to recharacterize those funds, they must go back to the type of IRA that they came from, either a SEP or a SIMPLE, and not a Traditional IRA.  But these can be new accounts if the old account was closed.

Mistaken Rollover to SEP or SIMPLE… if you mistakenly made a rollover transfer of Traditional IRA funds to a SEP or SIMPLE (which is not allowed), you can recharacterize those amounts back into a Traditional IRA.

Employer Contributions… it is not allowed to recharacterize employer contributions to a SEP or SIMPLE plan as contributions to another type of plan.

NOT a Rollover… when considering the “once a year” restriction on rollover transfers, recharacterization is not counted as a rollover, so roll away!

No Reconversions (within limits)… if you converted from a TIRA to a RIRA and the recharacterized the conversion, you cannot then re-convert those funds to the RIRA again in the same tax year, or within 30 days of the recharacterization (if after the end of the tax year).

Decedent… the election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for the decedent’s final tax return.

So as you can see, there are lots of ways to complicate the process, but in general the act of recharacterization is pretty simple, as long as you follow the rules and pay attention to the dates.

Footnote: In this one case, the IRS allows additional time for completing the recharacterization activity even if you have not completed it by the prescribed dates.  There are some specific things that have to be accomplished in order to receive this extra time:

  • your return must have been filed on time
  • you must have done the following within 6 months of your filing date:
    • notify the trustees of the intent to recharacterize
    • provide trustees with all necessary information
    • request the transfer

Once complete, you must amend the return, write “Filed pursuant to section 301.9100-2” on the return, and refile with the recharacterization noted.  File the return at the same address as your original return.

Photo bywoodleywonderworks

Determining Your MAGI

Magi by Brian Whelan

There are income limits for contributing to an IRA (traditional and Roth), and below are links by filing status to illustrate the income limits in the situation where you are or are not covered by an employer-provided retirement plan, given your filing status.  This, along with your filing status and your Modified Adjusted Gross Income (MAGI) is an important factor in setting the limits for TIRAs, as there is the issue of deductibility at stake.

In order to fully understand the limitations, you also need to understand what makes up your Modified AGI (MAGI).  The MAGI is calculated as follows:

  1. Start with your Adjusted Gross Income (line 22, Form 1040A, or line 38, Form 1040).
  2. Add back in your IRA deduction amount (line 17 on Form 1040A or line 32 on Form 1040)
  3. Add back in your student loan interest (line 18 on Form 1040A or line 33 on Form 1040)
  4. Add back in any tuition and fees deductions from (line 19 on Form 1040A or line 34 on Form 1040)
  5. Add any domestic production activities from line 35 on Form 1040 (there is no line for this on 1040A)
  6. Add back any foreign earned income exclusions from line 18 of Form 2555EZ or line 45 of Form 2555.
  7. Add back any foreign housing deduction from line 50 of Form 2555
  8. Add back any excluded qualified savings bond interest shown on line 3, Schedule 1, Form 1040A, or line 3, Schedule B, Form 1040 (from line 14, Form 8815)
  9. Add back in any excluded employer-provided adoption benefits shown on line 30, Form 8839.

The total of these nine items listed above make up your Modified Adjusted Gross Income, or MAGI.

Remember Your RMD

It’s getting close to the end of the year and that means many individuals need to take their required minimum distributions (RMDs). It also means that there will be individuals who must begin taking their required minimum distributions as they will have reached the magic age of 70 ½.

For those already taking RMDs, check with your advisor or asset custodian and find out the amount you need to take and how you can receive payments. In most cases, RMDs can be taken in an annual amount, or monthly via check or direct deposit. The specific RMD amount is based on the account balance as of December 31st the previous year and your age. You can use the RMD calculator found here to get an idea of your RMD amount.

Additionally, be sure to account for any taxes you might owe. For 401k type plans, 20 percent will be withheld for taxes automatically. For IRAs, you must decide how much you want withheld, if any at all. Naturally, taxes don’t apply to qualified Roth 401k or Roth IRA plans.

However, RMDs are still required from Roth 401k, 403b and 457 plans. This is not the case for Roth IRAs – which do not have RMDs at age 70 ½. Many individuals will do a qualified trustee-to-trustee transfer (rollover) from their Roth 401k to their Roth IRA to avoid RMDs.

For those beginning their first RMDs, they have until April 1st the year following the year they turned 70 ½ to take their RMD. While this delay is only allowed in this special circumstance, individuals need to be aware that if they choose to delay until April 1st of the following year, they’ll need to take two RMDs in that year.

For example, Rob turns 70 ½ in March of 2017. Rob can wait until April 1st, 2018 to take his 2017 RMD. However, since Rob waited until 2018 to take his 2017 distribution, he’ll have to take his 2017 and 2018 distributions in the same year – 2018. This can have adverse tax consequences for Rob if he’s taking taxable RMDs. Depending on the amount, it could put Rob in a higher tax bracket, increase his AGI, and lower his chances to qualify for other tax deductions or credits tied to AGI.

Finally, even though you must take an RMD, it doesn’t mean you must spend it. Many individuals will reinvest the money, give to charity, or use the money to fund other opportunities – like college savings for their grandchildren. Just remember, you cannot reinvest your RMD into your 401k, IRA, or any other plan requiring “earned income” for contributions. RMDs are not considered earned income. However, the money can simply be invested in a non-qualified investment account.

Your 401k and IRA in 2018

Recently, the IRS just announced the contribution limits for 401k plans (including 403b and 457 plans) as well as IRAs. Additionally, the IRS also announced changes to the income phase-outs for traditional IRA deductibility and Roth IRA eligibility.

Let’s start with the 401k plans. For 2018, the IRS increased the contribution limits to $18,500, up $500 from $18,000 last year. The catch-up contribution for those age 50 or over remains unchanged at $6,000. $500 may not seem like much, but think of it this way – you get to give yourself a $500 raise!

For those interested in maxing out their 401k plans in 2018, here’s the breakdown depending on whether you’re paid monthly, 24 weeks per year or 26 weeks per year. If you’re paid monthly, the contribution is $1,541.66. This brings you just eight cents under the $18,500 max annually. If you’re paid 24 weeks per year, then the amount per paycheck is $770.83. If paid every 26 weeks, it’s about $711.53. For those over age 50 the breakdown is $2,041.66, $1,020.83, and $942.30 respectively.

Since contribution limits for IRAs remains unchanged, the maximum monthly amount is $458.33 (if saving monthly) and $541.66 for those age 50 and over. Of course, if you can save the $5,500 or $6,500 all at once at the beginning of the year, that’s ideal. If not, just max it out however you can.

Deductible IRA contributions phase-outs have changed as well. For single individuals covered by a workplace retirement plan, the income phase-out is $63,000 to $73,000. Married couples filing jointly, where the IRA contributor is covered by a workplace plan, the income phase-out is $101,000 to $121,000. For married couples filing jointly, here the IRA contributor is not covered by a workplace plan but their spouse is, the income phase-out is $189,000 to $199,000.

Finally, Roth IRA eligibility phase-outs have changed as well. For single (and head of household) individuals, the income phase-out is $120,000 to $135,000. For married filing jointly couples, the income phase-out is $189,000 to $199,000.

Ideally, a single individual (under age 50) with a 401k and IRA could save $24,000 annually if maxing out both. Married couples in the same situation could save $48,000. If over age 50, an individual could save $31,000 and a married couple could save $62,000 by maxing out both their 401k and IRA.

Remember Your RMD

Photo by sraskie

It’s getting close to the end of the year and that means many individuals need to take their required minimum distributions (RMDs). It also means that there will be individuals who must begin taking their required minimum distributions as they will have reached the magic age of 70 ½.

For those already taking RMDs, check with your advisor or asset custodian and find out the amount you need to take and how you can receive payments. In most cases, RMDs can be taken in an annual amount, or monthly via check or direct deposit. The specific RMD amount is based on the account balance as of December 31st the previous year and your age. You can use the RMD calculator found here to get an idea of your RMD amount.

Additionally, be sure to account for any taxes you might owe. For 401k type plans, 20 percent will be withheld for taxes automatically. For IRAs, you must decide how much you want withheld, if any at all. Naturally, taxes don’t apply to qualified Roth 401k or Roth IRA plans.

However, RMDs are still required from Roth 401k, 403b and 457 plans. This is not the case for Roth IRAs – which do not have RMDs at age 70 ½. Many individuals will do a qualified trustee-to-trustee transfer (rollover) from their Roth 401k to their Roth IRA to avoid RMDs.

For those beginning their first RMDs, they have until April 1st the year following the year they turned 70 ½ to take their RMD. While this delay is only allowed in this special circumstance, individuals need to be aware that if they choose to delay until April 1st of the following year, they’ll need to take two RMDs in that year.

For example, Rob turns 70 ½ in March of 2017. Rob can wait until April 1st, 2018 to take his 2017 RMD. However, since Rob waited until 2018 to take his 2017 distribution, he’ll have to take his 2017 and 2018 distributions in the same year – 2018. This can have adverse tax consequences for Rob if he’s taking taxable RMDs. Depending on the amount, it could put Rob in a higher tax bracket, increase his AGI, and lower his chances to qualify for other tax deductions or credits tied to AGI.

Finally, even though you must take an RMD, it doesn’t mean you must spend it. Many individuals will reinvest the money, give to charity, or use the money to fund other opportunities – like college savings for their grandchildren. Just remember, you cannot reinvest your RMD into your 401k, IRA, or any other plan requiring “earned income” for contributions. RMDs are not considered earned income. However, the money can simply be invested in a non-qualified investment account.

IRA Distribution Pro-Rata Rule

rata-tree-by-grahamanddairneIt is important to understand the Pro-Rata rule for IRAs – which comes into play when you have both deductible and after-tax contributions in your Traditional IRA account. As you take distributions from the account, each distribution is treated as partly taxable and partly non-taxable, in proportion of the after-tax contributions related to the overall account balance.

So How Does The Pro-Rata Rule Work?

For an example, let’s say you have a Traditional IRA (TIRA) with a balance of $100,000.  Over the years you made both deductible and after-tax contributions to this account… and your after-tax contributions amount to $25,000.  It’s not necessary to know the amount of the deductible contributions (for this exercise), just the after-tax contributions.

For this tax year, you’ve chosen to take distribution of $10,000 from your TIRA.  When  you prepare your tax return next year, you’ll include $7,500 in ordinary income, excluding the $2,500 which is the proportionate amount of your distribution representing your after-tax contributions.  In this example, one dollar out of every four is considered return of your after-tax contributions.

That’s pretty simple, right?  So why is this deemed worthy of a whole blog post?  Hold your horses, I’m about to tell you…

Why This Is Worthy Of A Whole Blog Post?

This is especially important when planning your Roth IRA conversions, among other distributions.  When you do a conversion, this is essentially a distribution from your TIRA, and as such you are liable for ordinary income tax on the taxable portion of your distribution.

This is one of the reasons that well-meaning financial advisors often recommend that, if you’re going to make non-deductible contributions to a TIRA with the intent to convert the account to a RIRA, you should make them to a completely separate account.  This way, (presumably) the only portion that would be taxable at the distribution (conversion) would the be the growth of the funds, such as capital appreciation and dividends.

Unfortunately, that’s not the way it works. The pro-rata rule takes into account the balance and makeup of ALL of your Traditional IRA accounts, not just the one that you’re taking a distribution from.

For example, Joe has $50,000 in one Traditional IRA account (from only pre-tax contributions). Joe’s income is too high for him to make Roth IRA contributions or deductible Traditional IRA contributions. He’s heard of the “back-door Roth IRA contribution” strategy, and would like to put this into play for his situation. Joe opens a new Traditional IRA and contributes $5,500 to the account. This contribution is non-deductible to Joe.

Now, following the back-door strategy, Joe converts his entire new IRA over to a Roth IRA. He thinks he has done this with no tax. But the problem is in the way the pro-rata rule works. Joe must pay tax on his conversion in proportion to the total of all of his IRA account balances, less the portion that is after-tax.

Adding his two IRAs together, he has a total of $55,500 in IRAs before the conversion. Of this, only 9.9% is after-tax contributions ($5,500 divided by $55,500). So of his converted $5,500, he must pay tax on $4,954.95 (90.1%). Plus, he still has $4,954.95 of non-deductible contributions that he must continue to keep track of as he makes future distributions from the account.

This can cause a lot of headache since there may be many years between the initial contribution and final distribution from the account. For each year that you have non-deductible contributions in your IRAs, you should track these contributions via IRS Form 8606, even if you have not taken any distributions for the year. This will keep your records up-to-date for when you do take distributions later on.

But I want to only convert the after-tax portion!

There is still a way to convert only the after-tax amounts to a Roth IRA, but there are some restrictions as well.

If you have access to a 401(k) plan or other employer-sponsored retirement plan (other than an IRA) that will accept rollover amounts (you’ll have to check this with your plan sponsor, some do not accept rollovers), you may be allowed to rollover the amount from your IRA that represents everything but your after-tax contributions.  Make sure you don’t accidentally rollover the post-tax (nondeductible) contributions, because that’s not allowed and you could get into dutch with the IRS and your 401k administrator if you do. However, if you can rollover everything but the non-deductible contributions, then you can convert the remainder amounts to your Roth IRA without a taxable event.  Pretty cool, huh?

It’s important to note that this only works for 401(k), 403(b) and other employer-sponsored retirement plans. You can’t rollover the excess above the non-deducted contributions to another IRA – you’d still be in the same boat as before.

All of these transactions can carry significant tax penalties if you make a mistake, so you need to be doubly sure that you’re doing it right before you make a move.  There are no “do overs” for these transactions (well, not without jumping through hoops or other places that you don’t want to consider).  Consult your tax advisor to make sure you’re doing it correctly if you’re not sure.

Photo by GrahamAndDairne

Can I Retire Early?

Many individuals at some point in their life and career wonder if they can retire early. First, retiring early is relative to the individual. That is, retiring early for one person may mean retiring at age 55. To another, it may mean retiring at age 30.

When teaching, I’ll ask my students what the “retirement age” is. Answers range from 65 to 70. Inevitably, I will get asked the question, “How much money do you need to retire?” And the answer is the crux of this article.

Whether an individual wants to retire can be based on several factors such as money saved, age, job satisfaction, and health. For example, an individual may never want to “retire” if they love their job, or if they find fulfilment and purpose while at work.

For some individuals, the choice to retire isn’t a choice. They must continue to work to cover expenses, health care, etc. Sometimes these individuals work until they physically cannot do so any longer.  Their only retirement is Social Security.

Back to the crux. The answer I tell my students (and clients) is that how much you need to retire is a function of how much you need to spend in retirement. For example, I have seen clients needing only $38,000 annually to cover expenses and live comfortably in retirement, and half of that amount was covered by Social Security. Meaning, the clients only needed to cover $19,000 of annual expenses themselves. Based on their portfolio, they had more than enough. For other clients, their need hovered around $250,000 annually. And sadly, their portfolio would last less than 10 years.

In other words, some will be comfortable retiring with $500,000 saved, and others may find $5,000,000 will not be enough.

To retire “early” is relative to what early means for the individual and how much money they feel they would need to live on in retirement. For young individuals reading this article, it means saving a lot of money while they’re young, to reap the benefits of not working later, should you choose. For older individuals, it may mean saving much more, and perhaps cutting expenses to achieve their retirement goal. And still for others, it may mean continuing to work, since they love what they do and have no intentions to retire.

The choice is yours.

Paying Down Student Debt Early To Save More Later

When most kids enter college, they never imagined they would be leaving school four or five years later carrying a mountain of debt. They certainly couldn’t know how it would impact their lives, with many struggling, paying down student debt, while living paycheck to paycheck. The average student loan debt for today’s college graduates is $37,000, which will cost them more than $27,000 in interest costs over the life of the loan. That’s $27,000 that won’t be going towards buying a house or starting a family or retirement. You go to college to expand your opportunities, only to have them stunted by ongoing debt payments.

The High Cost of Student Loans

The problem with carrying student loan debt is that the interest costs mount up over the length of the loan, which can run 20 or 25 years depending on the type of loan. Making the minimum payment on loan allows the interest to continue to grow on the balance, much like compounding interest in reverse. If you can lower the interest rate to reduce the monthly interest cost, you could accelerate the principal payments which will reduce your interest costs, allowing you to pay the loan off sooner.

For example, if original balance on your student loans was $37,000 with an average interest rate of 5.5 percent, your monthly payment would be $227 of which $169 is your initial interest cost. Five years into your loan, your balance is $33,000 and your interest cost is around $151 out of your $227 payment and you have 20 years left on the loan.

Slashing Your Interest Costs

If you took your loans to a private lender and refinanced them at a rate of 3.5 percent for 15 years, your monthly payment would increase to $235 but your interest costs are reduced by almost 40 percent. Most of your money would be going towards principal. If you were able to increase your monthly payment to $260 a month, you would pay the loan off almost two years earlier.

The bottom line is you save nearly $18,000 in total interest costs and you have your life back.

How Does Student Loan Refinancing Work?

Refinancing student loans can only be done through private lenders. Borrowers with very good credit can qualify for low rates currently around 3 percent. If you don’t have great credit, you can apply for a loan with a cosigner who does. You will still be the primary borrower responsible for making the payments, but, the cosigner will be on the hook if you don’t.  Some lenders offer a cosigner release once the primary borrower makes 12 to 24 months of on time payments.

Loan terms vary from lender to lender but most offer terms of 10 to 15 years. Most lenders offer variable loan rates, which means your rate can start out really low, but, if interest rates rise, your loan rate can increase. However, an increasing number of lenders are starting to offer fixed rate loans.

Shopping around at banks that offer student loan refinancing as well as alternative, online lenders, is critical for comparing loan rates and finding loans with the lowest costs. The more competitive lenders don’t charge origination or application fees.

What You Need to Know Before Refinancing Your Federal Loans

Before taking the plunge into refinancing your federal loans, there is a downside you should consider. Once you convert your federal student loans into a private student loan, you no longer have access to certain protections. For instance, if you run into a financial hardship and are unable to afford the full payment on your private loan, you won’t be able to turn to one of the income-based repayment options that are available with your federal student loans. Income-based repayment options are great when you run into financial trouble; but, they will also increase your interest costs over the life of the loan. Most private lenders don’t offer any repayment options, though a few offer a temporary, graduated-payment option.

Along with the loss of repayment options, you will also lose the loan forgiveness opportunity that comes with them. Also, most private lenders don’t offer deferment or forbearance in the event of a significant financial hardship.

Should You or Shouldn’t You Refinance Your Student Loans

The thing to consider is, if you think you might need any of those protections sometime in the future, you may not be a candidate for accelerating your loan payoff anyway. If your primary objective is to lower your monthly payment to make it more affordable, you should consider one of the income-based repayment plans. However, if your objective is to lower your interest costs so you could pay down your loan more quickly, you would need to be able to commit to paying the full monthly payment and more if you can afford it.

If you have the certainty of steady employment with regular salary increases, you can and should consider refinancing your student loans. It would be important to make it a part of a long-term strategy to become totally debt free. If you can commit the resources, there is nothing stopping you from paying down student debt in less than 10 years.

By Patty Moore, blogger @WorkMomLife on Twitter!

5 No-No’s for IRA Investing

prohibition-facts-by-sarahdeerIt is generally well-known that in an IRA account you have a wide range of investment choices. These choices are typically only limited by the custodian’s available investment options.  However, there are specific prohibited transactions that cannot be accomplished with IRA funds. Often these prohibited transactions can cause your IRA to be disqualified, which can result in significant tax and penalty, along with loss of the tax-favored status of the funds.

What’s Not Allowed for IRA Accounts?

  1. Self-Dealing.  You are not allowed, within your IRA, to make investments in property which benefits you or another disqualified person.  A disqualified person includes your fiduciary advisor and any member of your family, whether an ancestor, spouse, lineal descendant (child) or spouse of a lineal descendant.  It is important to note that this limit applies to both present and future use of a property. So if you purchased a condo and rented it out exclusively for several years and then decided to convert it to personal use, this act would disqualify the investment and potentially classify it as a distribution, to be taxed and penalized (with interest) retroactively.
  2. Borrowing.  You are not allowed to borrow funds from your IRA account.  Likewise, you are not allowed to put up your IRA account as collateral for a loan.
  3. Selling.  You are not allowed to personally sell property that you own outside of the IRA, to your IRA account.
  4. Collectibles.  The single class of investments that you may not invest in with your IRA account is collectibles.  This includes art, antiques, gems, coins, and alcoholic beverages, among other items.  There is an exception to the coin prohibition, in that you are allowed to invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the United States Treasury Department with your IRA funds (if your custodian allows). You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
  5. Unreasonable Management Costs.  It is prohibited to pay an exorbitant amount to an advisor to manage your account.  This is due to the fact that it IS an allowed transaction to pay your advisor, tax-free, from your IRA specifically for managing the account.  If the amount is deemed unreasonable (e.g., obviously for services above and beyond managing the IRA account), this transaction is prohibited. An example of this is if you have both IRA and non-IRA funds with your advisor, but you pay the advisor’s entire fee strictly from your IRA account. Unless the non-IRA funds are an inconsequential amount, the fee paid from the IRA will be deemed exorbitant to the size of the IRA account.
  6. (bonus!) Life Insurance. You may not purchase life insurance contracts with your IRA account funds. This is a strict prohibition.

Beyond these transactions, IRAs have a pretty wide scope of available investment options. As I indicated before, your options are mostly limited by the custodian’s available investments.  In cases where the IRA funds are to be used for more unique investments, such as individual real estate transactions or gold bullion, a special custodian is often required.  These transactions can be very difficult to complete and manage over time and maintain the tax-qualified status.  If you’re interested in such a transaction, there is more information available in the article Where to Establish Your IRA Account.

How to Navigate the Equifax Hack

If you’re among the 143 million people who may have been compromised by the Equifax hack, you may be wondering what steps you can take to protect yourself in what is now the greatest data breach in history. Below are steps to take to see if you’ve been affected and what you can do to move forward with the (hopefully) least financial impact to you and your credit.

  • Go to and follow the instructions to see if your data may have been part of the compromise. If so, you’re allowed to sign up for free identity theft protection and monitoring for up to one year. Even if you’re one of the lucky ones whose data hasn’t been compromised, you’re still allowed to sign up for the service.
  • Check your credit reports. Go to and request your free credit report from the three major bureaus: TransUnion, Equifax, and Experian. Regardless of the recent hack, you’re allowed (and should) do this annually to monitor your credit and the information being supplied to the bureaus. Additionally, it allows you to see if unauthorized credit inquiries are being made on your credit.
  • Consider a credit freeze. Freezing your credit (often for a fee) locks your credit at each bureau and requires a unique PIN in order to gain access to your file.
  • How to place a credit freeze. According to the Federal Trade Commission, to place a credit freeze you will need to go to the three bureaus and give your name, address, date of birth, Social Security number, along with some other information as directed. You may also be required to pay a small fee for implementation.
  • Direct links to the bureaus and their respective freeze pages can be found by accessing:
  • Consider signing up for identity theft protection through your home insurance carrier. Generally, for a small annual additional charge, you can have this coverage added which will help pay for the costs of fixing an identity theft should it happen to you.
  • Visit the three bureaus and see what additional information or free services they offer.

Equifax –

TransUnion –

Experian –

  • Set up a fraud alert. Contact the three bureaus above and request a fraud alert be put on your account. These last for 90 days but can be renewed.
  • Keep an eye on your tax return. Do your best to file early for your 2017 taxes. Once you get all of your information, try to file your taxes as soon as you can to avoid having a fraudulent return filed on your behalf.
  • Try to relax. As one of the individuals who may have been affected, I keep telling myself that there’s only so much I can do, and this too, shall pass. It’s easier said than done, but at the very least, you can do the best you can to be proactive moving forward.

Comprehensive Financial Planning – Explained

albert-and-the-puzzle-by-emdotFrom time to time, the question is asked of me: What exactly makes up a comprehensive financial planning engagement?  Since you know from reading about my practice that I operate in an hourly, fee-only fashion, you should know that a truly comprehensive financial planning engagement requires 10 to 15 hours of effort (or more) by the financial planner.

What exactly makes up a comprehensive financial planning engagement?

Each individual situation is going to be different, and so your mileage is likely to vary from my explanation.  What I’ll do, as a starting point, is list out the areas that are typically covered in what I’d call a comprehensive plan:

  • goal-setting – spending time understanding the wishes and desires of the client, and quantifying them in terms of time horizon and costs for use in planning; this can include retirement, college, home purchase or remodel, opening a business, parents moving in, and just about any major financial event
  • priority-setting – understanding the relative importance of each goal
  • risk analysis – explaining to the client the concepts of risk, how risk is required for return, and garnering an understanding of the tolerance level for risk given the timelines and current financial condition
  • cash flow – review of financial flows, finding those “unknown” expenditures that can be managed to help meet financial goals; understanding near-term and long-term requirements for cash flow; review of prior tax returns for any issues or overlooked opportunities
  • present financial condition – review of present accounts, allocation, future planned inflows into those accounts; present position with regard to debt, as well as future debt planned and how debt is to be retired
  • projection of future cash flows – modeling the future as it pertains to the goals stated, with regard to the present financial condition and assumptions made about holdings, inflows, taxes, debt, and timelines
  • risk management – review of current insurance coverage(s), especially with regard to life, disability, and long-term care insurance needs, both now and in the future, given results from the future cash flow projections; this often also entails a review of employer-provided benefits and recommendations for participation therein
  • estate planning – review of present accounts, ensuring appropriate titling and beneficiary designation both now and in the future, given results from other components of the planning process
  • strategy development – this can entail anything from tax planning to portfolio development to insurance recommendations, debt reduction plan, distribution planning, as well as opening and funding any new accounts deemed appropriate
  • communication of the results/recommendations – sometimes this takes a couple of hours or more on its own. The point is that the client comes away with a thorough understanding of the recommendations and the reasoning behind them; additionally, the client has an understanding of how to implement the recommendations
  • implementation – not always required, but often is requested. We spend time helping the client open accounts and making allocations if required, implementing any needed additional insurance coverage (reviewing policies and the like), implementing tax strategies, etc. – or sometimes the client turns the implementation completely over to us
  • follow up – plans are reviewed after approximately one year to ensure that circumstances have not changed dramatically (with regard to the information used in the original plan). If the client doesn’t wish to engage in formal follow up review, then the engagement is complete.

The Reality – What Really Is Involved

Now, given the fact that a typical comprehensive financial plan entails at least three meetings with the client, each lasting on average one and a half hours, that leaves five and a half hours (on the low end) or ten and a half hours (on the high end of my estimate) to cover the remainder of the activities I’ve listed. In the case of the lower end of the spectrum, some of the components are either eliminated or reduced in scope. For example, if the client only has a 401(k), no debt other than his mortgage, is single and has no children – then obviously the planning cycle is reduced, due to the reduction in planning factors.

Now, the other thing is that many financial planners (myself included) notoriously under-recover – that is, we often spend more time on the plan than what we bill, due to additional research required, or additional time required for communication of the recommendations, or any of a myriad of activities.

Hope this gives you an idea of what is involved in a typical financial planning engagement.

The Only Thing Permanent is Uncertainty

For the last few months we’ve experienced some uncertain and unnerving events across the US and the globe. Presidential elections, threats of war, terrorism, and political arguing can make weathering your portfolio and financial plan uneasy, if not difficult at times.

Add that to the daily responsibilities of your occupation, family, and finances, and we can potentially lose sight of our long-term goals and be susceptible to short-term thinking that may derail our goals and take us off-track from our financial well-being.

Financial planners, wealth managers, advisors, are not immune to this uncertainty and the impact it has on our thinking as well.

If you find yourself worrying or thinking about the uncertainty, perhaps the next few thoughts can help in your thinking and provide some insight on whether changes are necessary.

  1. Have your goals changed? For example, if your retirement timeline is 20 years away, it’s highly unlikely that you need to worry about how your investments are doing today. If any volatility is stressing you too much, then perhaps your investments aren’t in line with your capacity for the risk.
  2. Has your situation changed? Have you received a promotion and pay increase? Perhaps you could be saving more then? Expecting a child – maybe it’s time to think about college savings, life insurance (for you and your spouse), and getting out of debt (a good idea regardless of kids).
  3. Understand what cannot control. Do you have any control over the market? No. This means that you should not reduce your investing in your IRA or 401k simply because you think the market is high. Conversely, don’t stop contributing if (and when) the market drops. Trying to time the market and trading is hazardous to your wealth – as shown in this paper by Barber and Odean (2000).
  4. Understand what you can control. Getting out of debt, saving and investing more than you spend, educating yourself and family, earning more money, are all examples of things you can control. Make a plan on how to improve and work on the things you can control.
  5. Be grateful. Take a moment and think about all that you have, have been given, and be grateful for it. Understand that for all that there is to worry about, the majority is likely to NOT happen, and there is almost always someone else in a worse situation. Many of us (myself included) are incredibly lucky to have the things we have. Whenever I start to worry, I count my blessings (family, health, freedom) and a unique thing happens – I feel better. I worry less, and feel happier.

Taxpayer Bill of Rights – Do You Know Your Rights?

bill of rightsThere is a set of Rights that are available to all of us as taxpayers – the Taxpayer Bill of Rights. This group of basic rights is available to us so that the government (and specifically the Treasury Department and the IRS) don’t over-step their boundaries when dealing with taxpayers.

It’s important to know your rights, and those set forth in the Taxpayer Bill of Rights can be very helpful if you’re having trouble working with the government. The rights scattered throughout the Internal Revenue Code, but are published in total in IRS Publication 1, readily available on the internet to all taxpayers.

Recently the IRS published their Summertime Tax Tip 2017-21, which outlines the Taxpayer Bill of Rights. The text of the Tip follows below:

Know Your Taxpayer Bill of Rights

Every taxpayer has a set of fundamental rights and the IRS has an obligation to protect them. The “Taxpayer Bill of Rights” groups the taxpayer rights found in the tax code into 10 categories. Know these rights when interacting with the IRS. A good way to learn about them is by reading Publication 1, Your Rights as a Taxpayer.

Below are the descriptions of each right, as listed in Publication 1:

  1. The Right to Be Informed. Taxpayers have the right to know what to do in order to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures on all tax forms, instructions, publications, notices and correspondence. They have the right to know about IRS decisions affecting their accounts and receive clear explanations of the outcomes.
  2. The Right to Quality Service. Taxpayers have the right to receive prompt, courteous and professional assistance in their interactions with the IRS. They also have the right to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
  3. The Right to Pay No More Than the Correct Amount of Tax. Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard. Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions. They also have the right to expect the IRS to consider their timely objections promptly and fairly and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum.Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties and have the right to receive a written response regarding the Office of Appeals’ a decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality. Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position as well as the amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy. Taxpayers have the right to expect that any IRS inquiry, audit or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.
  8. The Right to Confidentiality. Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation. Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
  10. The Right to a Fair and Just Tax System. Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

The IRS will include Publication 1 when sending a taxpayer notices on a range of issues, such as an audit or collection matter. Publication 1 is available in English and Spanish. All IRS facilities will publicly display the rights for taxpayers.

Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.

Additional IRS Resources:

IRS YouTube Videos:

Create Your Own Luck

“Luck is when preparation meets opportunity.”

The other day I was eating lunch with my kids. After lunch was over I gave them a “treat” from the drawer that we normally house goodies of all sorts. I happened to grab a couple of gold-wrapped chocolate coins. These coins were renditions of the JFK half-dollars. My youngest grabbed her coin and said, “heads or tails?” I quickly said “heads” while she flipped the coin in the air.

The coin landed on the floor. Tails. I said, “Well, we both lost.” My daughter quickly exclaimed, “I won daddy.” When I asked her how she won when the coin landed tails she replied to me, “I called both heads and tails.”


Essentially, my daughter had created her own luck. And I immediately thought, “This is excellent fodder for a blog post. So here we are.

The reason why I mention this is to raise the rhetorical question of how do we create our own luck? As the quote at the beginning of the post mentions, I believe luck is when preparation meets opportunity. In other words, it’s possible to create our own luck.

So how do we prepare to meet opportunity?

From a financial planning perspective, there are many ways. Of course, these can be applied to many other facets of life – not just financial.

One way is to create an emergency fund. With a properly funded emergency fund, when an emergency arises, we will have the financial resources to cover the ordeal. In other words, the preparation meets the opportunity. And we’re lucky to have had the money to cover it.

Another way is to save as much as we can for retirement. In preparing for 20, 30, or more years in retirement by saving now, when the opportunity to retire comes, we are prepared to meet it. Again, we are “lucky” to have a stable, financially rewarding retirement.

More examples include continuing to learn and educate ourselves (in preparation for the opportunity for career advancement, income increases, passing our knowledge to others), as well as why we carry auto, home, life, disability and other insurances (in the event of an unlucky situation, we are lucky to have the insurance to cover it).

I hope you see the point.

Finally, don’t be afraid to look for luck. I consider myself pretty good at finding four-leaf clovers. Many times people have asked me how I am able to find so many. My simple reply is that I look for them. So seek opportunities to be lucky.

Later that same day my kids asked if they could get a dog. Both their mother and I agree that now is not the right time. We mentioned all the responsibility that comes with a pet – training, feeding, walking, etc.

My daughters explained that they had done some “research” and found that puppies can be house trained using training pads, and cats can be trained to a litter box. And if we didn’t like the smell, we could put the box in the garage. If we were worried about shedding, we could get a dog that doesn’t shed. Clearly they had done their homework – they had prepared. They were creating their own luck.

My goal is to make the opportunity less available…😊

Divorced with Children? Social Security Benefits for You

divorced with childrenThere are special rules that apply for Social Security benefits when you are divorced with children. While the ex-spouse is living, there is a discriminatory effect on benefits, but after the ex-spouse dies, a surviving ex-spouse with children under age 16 has one advantage over a surviving ex-spouse with no children. (The age of the child is not a factor if the child is permanently disabled and the disability began before age 22.)

During the life of your ex-spouse

Beth and Steve are divorced with children, three kids under age 16. Steve, age 62, started receiving Social Security benefits this year. As we know from this article on children’s benefits, all three of their children are eligible for Social Security benefits based on Steve’s record.

Plus, if they were still married, Beth would be eligible for a parent’s benefit based on Steve’s record as well. But since they’re divorced, a special rule applies to Beth’s situation. Being divorced, Beth is not eligible for the parent’s benefit that is otherwise available to a parent caring for a child (under age 16) of a Social Security recipient.

The parent’s benefit is only available to the current spouse of the Social Security recipient who is under Full Retirement Age. Ex-spouses are not at all eligible for this benefit.

This is the discriminatory effect for divorcees versus married folks. Although everything else is the same, this benefit is not available to Beth since they are divorced.

Once she’s reached age 62 Beth can be eligible for a regular ex-spouse benefit (as long as she and Steve were married for 10 years or more). If at least one of the children is still under age 16 at the point Beth reaches age 62 and she’s still unmarried (and Steve is still alive), Beth can be eligible for an unreduced Spousal Benefit from that point until Full Retirement Age, or when the child reaches age 16, whichever is earlier. Deemed filing will not apply to this situation – in other words, if Beth becomes ineligible (child reaches 16, or she remarries), Social Security benefits cease for her until she applies for another benefit type.

After the ex-spouse has died

Drawing out our example of Steve and Beth a bit further, let’s say Steve dies at the age of 63. As we know, since the kids are all under age 18, they are eligible for survivor benefits based on Steve’s record. Beth’s situation becomes more interesting with this development…

Beth is 49 at the time of Steve’s death. Since at least one of the children (of Steve and Beth) is under age 16, Beth is eligible for a surviving parent’s benefit. The advantage here is that the length of Beth and Steve’s marriage is not a requirement. In other words, for this surviving divorced parent’s benefit, the 10-year marriage length is not a factor.

The youngest child of Beth and Steve’s will reach age 16 when Beth is 60 years of age. Up to that point, Beth can continue to receive the parent’s benefit, regardless of the length of their marriage. However, if Beth remarries during this period, she will become ineligible for the parent’s benefit – it’s only available to her while she’s unmarried.

After the last child reaches age 16, Beth is no longer eligible for this surviving parent’s benefit. At this point, if their marriage did not last at least 10 years, Beth is not eligible for any benefits now or in the future based on Steve’s Social Security record. If the marriage lasted 10 or more years, Beth becomes eligible for a regular surviving ex-spouse benefit at age 60 – as long as she doesn’t remarry before age 60. After age 60, she’s still eligible for the survivor benefit.

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