Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

Safety with an Emergency Fund

Today’s message is about Safety – but not things like “don’t run with scissors” or “wait a half hour after eating to go swimming”. What we’re referring to is the old concept of having an emergency fund. The primary thing that you should take away from this Safety discussion is Peace Of Mind.

An emergency fund is a vital component of your overall financial toolkit. You should have 3 to 6 months’ worth of expenses set aside in a liquid, stable account, such as a bank passbook savings account or a money market account. By “liquid” we mean that the funds are easily valued and withdrawn as necessary. By “stable”, we mean that the funds are not at risk due to market volatility, but also that there is some return in the form of interest to the account, however small.

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A new way to fund your Roth IRA

Nov 12th, 2014

by jblankenship.

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Photo courtesy of lee Scott on unsplash.com

As you plan and save for your retirement, it’s nice to have multiple types of taxation for your income sources. You may have a pension, Social Security, and a traditional IRA, all of which are taxed to some degree or another. Adding to this list you might have a Roth IRA which generally will provide you with tax-free income in retirement. The problem with the Roth IRA is that you have some strict limits on the amounts that you can contribute, and typical Roth Conversion strategies are costly and complicated. With the recent pronouncement from the IRS in Notice 2014-54, there is a brand new, sanctioned method, to fund your Roth IRA.

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Financial Advice to Ignore, Even if it Comes From Your Mother!

Nov 10th, 2014

by jblankenship.

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Listed below are a few time-honored maxims that we’ve all heard. Perhaps we’ve even heard these from very trusted sources – like our Mothers. As you’ll see, it’s not always good advice… In the interest of full disclosure, my own Mother did not give me any of this advice. She tended to stay with the “wait an hour after eating to go swimming” variety of advice. One of my favorites was always given as I was leaving the house during my younger years: “Have fun. Behave!” I once pointed out to her the fallacy involved there but she didn’t see the humor. :-) At any rate, those rules have served me well through the years – thanks, Mom!Keep reading…

Happy 40th Anniversary, IRA!

Nov 5th, 2014

by jblankenship.

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This year marks the 40th anniversary of the Individual Retirement Arrangement (IRA). In 1974 via the ERISA law, Congress made this new type of retirement plan available for employees whose employers who could not provide them with the traditional type of retirement plan. In 1981, the plans were made generally available to all taxpayers. The Tax Reform Act of 1986 limited the deductibility of IRAs by income.

1997 saw the launch of the Roth IRA, as a part of the Taxpayer Relief Act of 1997. This type of IRA came with no deductibility, but earnings (and contributions) would be tax free upon distribution, following the rules associated with the accounts.

With the exception of changes to limits of contributions, income limits, and catch-up provisions, little has changed for these accounts since 1997, with the exception of the introduction of the Roth-IRA-like myRA account that was established in 2014 for the 2015 tax year.

According to information from the Employee Benefit Research Institute, as of the most recent data available (2012), 19.9 million Americans had at least one IRA account, and the total amount of money held in those accounts was approximately $2.09 trillion.

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You’ve still got time to avoid tax surprises

Nov 3rd, 2014

by jblankenship.

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Even though there are only a few more weeks left in the calendar year, there are a few things that you can do to avoid some serious and consequential tax surprises come April next year.

The IRS recently published their Special Edition Tax Tip 2014-21 which details some of the steps you could take now to avoid these surprises.

Still Time to Act to Avoid Surprises at Tax-Time

Even though only a few months remain in 2014, you still have time to act so you aren’t surprised at tax-time next year. You should take steps to avoid owing more taxes or getting a larger refund than you expect. Here are some actions you can take to bring the taxes you pay in advance closer to what you’ll owe when you file your tax return:

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2015 Contribution Limits for Retirement Plans

Oct 27th, 2014

by jblankenship.

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The IRS recently published the new contribution limits for various retirement plans for 2015. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw a few increases for some contribution amounts, and the income limits increased for most types of accounts after virtually no changes to the contribution amounts in 2014.

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The Benefits of Financial Planning

Oct 22nd, 2014

by jblankenship.

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If you’re wondering about whether or not you need to do some financial planning, either on your own, using resources on the internet, or by hiring a financial planner, you might want to know what the benefits of financial planning are.

From my perspective of many years providing financial planning and advice to folks, there are three primary benefits of financial planning: Organization, Efficiency, and Discipline. We’ll talk about each of these in order.

Organization

One of the most important benefits of financial planning is ORGANIZATION. Statistics tell us that fewer than 25% of Americans know their financial net worth. In addition, (prepare to be astounded) the average individual’s credit card debt is over $8,000. Think about that for a moment…

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New For 2014 Taxes: Health Premium Tax Credit

Oct 20th, 2014

by jblankenship.

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We knew when Obamacare went into place that there would be new requirements for income tax filing, and one of the first to deal with is the health premium tax credit. This will require the use of a new form, Form 8962.

Health Premium Tax Credit

For this tax credit you will need to reconcile your advance credits that you have received in the form of reduced subsidized healthcare premiums.

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Understand Deemed Filing to Avoid a Surprise in Your SS Strategy

Oct 15th, 2014

by jblankenship.

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There’s nothing worse than feeling as if you have your Social Security filing strategy all lined out, when a rule like deemed filing rears its ugly head to throw your strategy off track.

Here’s an example: Steve and his wife Edie are ages 66 and 61 respectively. The plan is for Steve to file for his Social Security benefit now (at his Full Retirement Age), and for Edie to file for her own benefit when she reaches age 62. Then Edie will wait until she reaches Full Retirement Age of 66 to file for the Spousal Benefit based on Steve’s record, which will increase her benefit by $500 at that time.

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Yoda Would Suggest a Low-Cost Index

Oct 13th, 2014

by jblankenship.

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“Use the low-cost index, Luke…”

Recently a colleague told me that he’d “give that a try”. I responded (tongue in cheek of course) “Try not. Do or do not. There is no try.” In case you don’t recognize it, that’s a line that Yoda gives to Luke Skywalker in the Star Wars “Empire Strikes Back” movie. Yoda was pointing out to Luke that if he simply “tries” to undertake the action, he will not succeed. I think it shows that Yoda would also suggest a low-cost index mutual fund for investing.

If you think back to the excellent article that Sterling wrote a few weeks ago, “Not All Index Funds are Created Equal”, Sterling used a particular load mutual fund as an example. The objective of the fund (paraphrasing here):

Seeks to match the performance of the benchmark…

Let’s analyze that objective. The “benchmark” in question is an index, in particular the S&P 500 index. And the term “seeks” can be interpreted as “tries”. So the fund tries to match the performance of the S&P 500 index. It is the act of “trying” that causes costs to go up. All that “trying” by the fund manager(s) costs money after all – there are yachts to buy don’t you know?

So anyhow, if our objective as investors is to match the performance of the benchmark, why not invest in the benchmark via a low-cost index fund rather than in a fund that wastes a lot of effort (and money) “trying” to match the benchmark?

I think Yoda would heartily approve.

Ten Essential Tips for a Bright Financial Future

Oct 8th, 2014

by jblankenship.

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See a lawyer and make a Will. If you have a Will make sure it is current and valid in your home state. Make sure that you and your spouse have reviewed each other’s Will – ensuring that both of your wishes will be carried out. Provide for guardianship of minor children, and education and maintenance trusts. If you have divorced and remarried, make sure that your retirement account beneficiary designations are up-to-date reflecting your current situation.
Pay off your credit cards. Forty percent of Americans carry an account balance on their credit cards or other personal credit – this is not good for your financial future. Create a systematic plan to pay down your balances. Don’t fall into the “0% balance transfer game” as it will hurt your FICO score. Credit scores matter not only to credit card companies but to insurance companies and future employers as well; you can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
Buy term life insurance equal to 6-8 times your annual income. This is primarily true for younger folks who have financial obligations to cover with future income. Most consumers don’t need a permanent policy (such as whole life or universal life). Also consider purchasing disability insurance; think of it as “paycheck insurance.” Stay-at-home spouses need life insurance, too! Note: Each family’s needs are different. Some families have a need for other kinds of life insurance, so you should review your situation carefully with an insurance professional (preferably two or more) before making decisions in this area.
Build a 3 to 6 month emergency fund. This helps you to keep from having to charge up your credit cards when life’s emergencies strike. In the interim, before you’ve built up your fund, you can establish a home equity line of credit before you need it – this can take the place of part of your emergency fund.
Don’t count on Social Security too much. Since the projections show that in the future the most that can be paid out for Social Security obligations is around 77%, you should adjust what you expect to receive – especially if you are age 50 or younger. Make up for this by funding your IRA each and every year. If you don’t fund these accounts annually, you lose the opportunity to increase your tax-deferred savings. Fund a Roth IRA over a traditional IRA if you qualify.
If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan. Just the same as with your IRA, if you don’t take advantage of the opportunity to defer funds into these savings vehicles, you lose the opportunity. In addition, if you don’t participate in the plan, you lose the chance to receive the matching funds from your employer.
Use your company’s flex spending plan to leverage tax advantages. If you don’t use your flex plan annually, you lose the opportunity – and the tax advantages – for that year.
Buy a home if you can afford it. Maintain it properly. Build equity in your property. You’ll have much more to show for your money spent than a box full of rental receipts! This is also about more than your financial future – studies show that home ownership adds to peace of mind and improved quality of life.
Use broad market stock index funds to reduce risk and minimize costs. Indexes are a simple way to diversify, and they can have very low costs but you have to pay attention to make sure you’re getting a low-cost index. Diversification reduces risk of single securities (see #10) and reducing costs is one of the best things you can do to improve your overall investment results. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of options.
Don’t over-weight in any one security, especially your employer’s stock. As a rule of thumb, keep exposure to any single stock to less than 5% of your overall portfolio. If you over-expose to a single stock and that company goes bankrupt, you’ve lost a significant portion of your portfolio. It can happen easily, history is littered with good companies that went bad.

IRS Notice 2014-54: Will This Clarify NUA Basis Allocation?

Oct 1st, 2014

by jblankenship.

10 comments

Photo credit: diedoe

Recently the IRS issued a Notice, 2014-54, which details some information regarding the allocation of pre-tax funds from a qualified plan (such as a 401(k) plan) into a Roth IRA. This is a clarification of a question that has been on the minds of folks in the financial services industry for some time, and it’s a good result. Now the question becomes: does this help to clarify NUA basis allocation strategies?

If you’d like additional detail on Notice 2014-54, you can find the actual text of the Notice by clicking this link.

What I find interesting about this Notice is that this is the first time that the IRS has used this interpretation of the rules referenced specifically in IRC Section 402(c)(2), which is the code section I’ve referenced before regarding allocation of basis for Net Unrealized Appreciation (NUA) treatment for employer stock. (See more information in this most recent article NUA Allocation Twist – Not as Easy as it Looks.) The problem (outlined in the article) has been that plan administrators are unwilling to attempt applying the allocation of basis in an NUA transaction because there has never been any guidance from the IRS on such an allocation of basis. Notice 2014-54 may be the first step toward such guidance.

I’ve sent queries to the best minds I know in the retirement plan law universe to get additional insights into this concept – and as yet have not received a confirmation either way. I think this is a step in the right direction, but don’t get too excited yet.

I’ll keep you posted.

File & Suspend and Restricted Application are NOT Equal

Sep 29th, 2014

by jblankenship.

441 comments

Note: with the passage of the Bipartisan Budget Bill of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

We’ve discussed the Social Security filing options of File & Suspend and Restricted Application many times before, but it seems that folks continue to confuse these two options. It’s easy to see why: one (File & Suspend) can be used to enable the other (Restricted Application). Also, neither option is available until the individual is at least at Full Retirement Age (FRA). It’s important to know the difference between File & Suspend and Restricted Application though – primarily because if you confuse the two when talking to the Social Security folks, you’ll have a much different outcome than you expected and hoped for.

Let’s start by defining each option. Keep reading…

Five-Step Reallocation

Sep 22nd, 2014

by jblankenship.

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Since there’s been an appreciable run-up in stocks over the recent past, now may be a good time to reallocate your investment allocations in your retirement plans and other accounts. You’ve probably heard of reallocation before – but what does it really mean?

Reallocating is the process of changing your current mix of investments to a different mix. It could be that you’ve changed your risk assessment and wish to have more stock and fewer bonds, vice versa, or your investments have grown in some categories from your original allocation and you need to get the mix back to where you started.

At any rate, reallocation is a relatively simple operation, and research tells us that it is important to reallocate regularly, such as on an annual basis. Below are five steps that you can use for a simple reallocation in your accounts.

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7 Questions About Divorcee Social Security Benefits

Sep 16th, 2014

by jblankenship.

14 comments

Photo courtesy of Gabriel Santiago on unsplash.com

Included in the myriad of questions that I regularly receive from readers are questions about how a divorced person can collect benefits based upon his or her ex-spouse’s Social Security record.

For a divorcee (as with many married couples) sometimes the ex’s benefits represent the lion’s share of the couple’s SS record. Because of this, many divorcees are very interested in knowing what benefits are available to them, and when.

In addition, even when the divorced spouse in question is not the higher earner there are questions about benefits that can be quite difficult to find answers for.

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