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

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saving and spending (Photo credit: 401(K) 2013)

As savers, we Americans are not doing a good job. We’re improving (according to recent data), but still way behind what we should be saving. But it doesn’t have to be that way – you can take small steps to increase your savings right away, and it doesn’t have to hurt.

The Bureau of Economic Analysis recently reported that we are saving at a rate of around 4.6% of disposable personal income, an increase of 0.1% over the prior month. On a per-person basis, that works out to about $1,831 saved per month, or just short of $22,000 per year. Since we know that very, very few people are exactly average (by definition most people are going to be something above or below the average), what concerns me is that even those who are a bit above the average are still not saving enough. And woe to those who are saving at a rate far below the average.

The math works it out – say for example you’re a bit above average, saving 5% on a disposable income that is a bit above the average, say $60,000 per year (the simple average annual disposable income per person works out to just less than $40,000 per year).

Saving 5% over your working life of 40 years will result in a nest egg of $362,400 (inflation-corrected, earning a rate of 5% annually). Even at the most optimistic of withdrawal rate of 6% per year, this amounts to $21,744 – not exactly the 80% of income most folks hope to have for retirement income.

Given that most likely more than half of all Americans are below the average savings rate, you can see my cause for concern. If we don’t get started increasing our overall savings rates, it’s going to be a bleak existence in retirement (ask anyone who’s still working past age 65 because he or she has to how that feels).

I realize that saving more isn’t easy – after all, we have so many things we have to pay for, and the cost of all these things is increasing all the time. The problem is that we need to make some decisions about what’s critical to pay for: is it really more important to have a membership at the gym that you only go to once a month, or would you like to be able to afford to pay for your accustomed meals when you’re retired? Or do you really need the expanded satellite TV package? If you pay attention to what you’re paying out each month and weigh that against paying for the basics in retirement, it’s not as hard of a decision. If you’ve got other great ideas for reducing expenses and increasing savings, leave a comment below – I’d love to pass them along to everyone else.

Increasing savings just a bit – say 1% – would only result in decreasing the example above average person’s monthly net disposable income by $50. Surely you can find somewhere in your budget to set aside an extra fifty bucks! And the resulting 6% withdrawal could be increased to just over $26,000 – an increase of 18%.

Of course, that’s still a small portion of the current take-home of this above average person, but it’s an improvement! So take that small step – start saving an extra 1% more right now, there’s no time like the present!

Note: the figures I use above for the example are extremely over-simplified, using a simple average per-person income rate for all Americans (estimated at 317 million), and the reported figures from BEA (the Bureau of Economic Analysis) to build my example.

In case you’re wondering, in order to replace 80% of your income at the more sustainable 4% withdrawal rate, you’d need to set aside an average of approximately 17.5% of your disposable income over your 40-year working career. This means every year, not just the later years of your career. So if you’re late getting started, you need to save, save, save, with both hands, in order to catch up and have enough set aside to provide yourself with a retirement income that will keep you going.

Of course, if you have a pension, that will factor into your available funds in retirement, as will Social Security. But neither of these sources should be considered guaranteed, nor should they be your only source of income. In today’s world, you have to fend for yourself!

Best wishes to you – if you have additional ideas on how to find money to put into savings, leave a comment below. We’d love to hear your ideas.

Posted on Nov 4th, 2013

by author: jblankenship.

Posted in: #noTOP, blogger action, contribution limit, IRA, retirement savings, saving.
Tagged: IRA · retirement plans · retirement savings · savings

Life Insurance is Not an Investment

Nov 1st, 2013

by sraskie.

8 comments

Traveling Salesman

Last week I seemed to cause a bit of a kerfuffle when I wrote about which life insurance may or may not be appropriate for the general consumer. For the readers that sent in emails and comments – thank you! It’s much appreciated and we enjoy the feedback.

Twitter was also flitting and chirping with the commotion. In particular, the discussion really narrowed down to, and most of the comments we received were regarding the comment I made on life insurance not being an investment.

And that’s still true. It’s not. Now there are plenty of people that will argue with me that it is an investment for this reason or that. For this writing I am hoping to explain and to clarify what I meant as an investment.

From a pure investment standpoint – meaning saving and investing one’s money for retirement and or college or just saving and investing for capital growth; life insurance is not this type of an investment. Accounting for the actual costs of insurance, policy fees, expense ratios of the underlying funds (as seen in variable life and variable universal life), surrender charges (lack of liquidity) and agent commissions life insurance will almost always underperform an outside, well diversified, low-cost investing strategy like indexing or a passive approach in mutual funds or ETFs.

The reason why is in variable policies, a person has access to the markets as well, but pays a much higher cost for that access.

Another consideration is whether or not a person actually needs life insurance. If there is a life insurance need, term is generally the best bet. If there is no life insurance need – meaning there is no need to protect against a premature death – then no life insurance is needed. None.

Finally, I heard more and more about the “investment” in one’s family and the “investment” in one’s peace of mind. This is usually the dogma of a slick salesperson, trained to use key words and emotional triggers to induce an unknowing client to buy their more expensive product. And yes, one could argue those are excellent investments – but it wasn’t what I meant and I’m certain most readers, if not all understood that.

It would be like me saying food is an investment for my retirement. I need it to live to retirement and to survive throughout retirement. It sounds good, makes sense, but is a complete misuse of the word.

Food is food.

Life insurance is life insurance…

…not an investment.

Posted on Nov 1st, 2013

by author: sraskie.

8 comments already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning, Insurance, investing, investment, life insurance.
Tagged: fiduciary · financial planning · life insurance

NUA Allocation Twist – Not as Easy as it Looks

Oct 30th, 2013

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NUA ALONE (Photo credit: NAPARAZZI)

I’ve written much about the Net Unrealized Appreciation (NUA) treatment for company stock in a 401(k) plan – this is the provision that allows you to pull out company stock as part of a full distribution from the plan and get favorable tax treatment for the gain on the stock. More about NUA can be found in this article about Net Unrealized Appreciation Treatment.

One of the factors in that article speaks to a special way to allocate the basis (original cost) of the stock. Specifically, if handled correctly, the ordinary income tax on the NUA move can be minimized or eliminated, and the capital gains treatment maximized.

However. (As you know, there’s always a however in life!)

The problem with this move is that you absolutely must get the 401(k) administrator to go along with your plan – in order to make sure that the 1099R generated by your distribution correctly describes how you’ve allocated the basis. If not, the strategy depends entirely on your own word and record-keeping, which I personally would not want to have as my only basis if the IRS disagrees with you on the applicability of the law to your actions.

I’ve spoken to quite a few folks who have looked into this, hoping to take advantage of the way I’ve described it and minimize or avoid tax altogether. It seems that, at least among all those I’ve heard about, 401(k) administrators as a group don’t like to take direction from their participants.

Either that or they don’t want to do anything out of the ordinary (this is the more likely reason, in my opinion). I can’t say that I blame them – there’s no benefit in it to them. Even when confronted with the rules and the law that allow this move, I’ve not heard from any that have gone along with it yet. (If you have gone down this path successfully, please let me know – leave a comment below! I’d love to hear of successes with this component of the law.)

So, unfortunately if you’re hoping to use the special allocation of basis option, I’m in your court, but expect to run into some push-back. Although the option seems to be completely valid, don’t count on getting to use it.

Posted on Oct 30th, 2013

by author: jblankenship.

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Posted in: 401 k, IRA, irs, net unrealized appreciation, NUA.
Tagged: IRA · net unrealized appreciation · NUA · qualified retirement plan

What is the Best Life Policy to Buy?

Oct 25th, 2013

by sraskie.

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When researching the appropriate life insurance to buy individuals and couples are faced with a myriad of choices. Term, whole life, universal life, variable universal life are just a few of the policies that may be presented, if not sold, to the person.

So which one is best? Generally, it depends.

If someone is looking for the best bang for their buck and wants to purchase the most insurance for the least amount of money term is going to be the best bet. Term is cheap, builds no cash value, and is generally used if someone or couples have a time frame where they need insurance (30 year term for a 30 year mortgage or 30 year term until retirement age). Generally those that are interested in term know that it will run out, but are hoping to “self-insure” their death at retirement since in theory they’ll have saved enough in assets that if one spouse dies, the other can live off of the assets accumulated. Proponents of term will buy term and invest the difference of what the premium would have been for a permanent policy such as whole life.

Whole life is a permanent product and is generally more expensive than term. For the premium you pay you’ll get permanent coverage for life and the policy will build some cash value as you age and keep paying premiums. Whole life will typically pay either a guaranteed interest rate (often 2-4%) or dividends based on the insurance company’s investment experience. Proponents of whole life will argue that it’s a forced way to save as those that say buy term and invest the difference rarely do.

Polices like universal life and variable universal life offer premium flexibility which says a policyholder can vary the amount of premiums paid any given month. Variable universal life, or VUL, will also let the policy owner direct the investments or cash value of the policy in different subaccounts that invest in stock and bond mutual funds. In a VUL, the cash value can fluctuate and interest is not guaranteed as it will rise and fall according to how the underlying investments do.

So which policy is best? Admittedly, I am biased toward term. As a financial planner I believe in the buy term and invest the difference philosophy. After all, shouldan’t a good planner know where to invest the rest and help the client save the difference? I will also admit that I own whole life – not on me – but on my children. This is to protect their insurability. Should any of them ever fall ill and become uninsurable in the future, they’ll always have their whole life policies.

From a planner standpoint, caveat emptor – buyer beware. Several permanent policies have long, hefty surrender charges. This means that for the first 10 to 15 years of the policy if you surrender it or cancel it, you’ll get less than 100% of your cash value. In addition, permanent policies typically pay much higher commissions – so advisors who sell permanent life insurance may be biased to sell you the permanent policy.

Commissions can be as high as 50% of the annual premium for permanent policies and about 40% for term. Since term is cheaper, the less commission is to be paid. And – life insurance is NEVER an investment. Any advisor who says differently is selling you something. Life insurance is just that – life insurance.

In the end, the life insurance decision should be yours, with any advice given to the client by an objective advisor or agent. Don’t be afraid to ask how much commission they’ll make off of the product and why they’re recommending the product they’re selling. If the advisor or agent is captive (they work for a parent company) ask if they can only offer their company’s policies. This should be disclosed.

Finally, shop around. You may find a good deal online or you may find a good deal asking your current auto and home agent if they offer life insurance. Often companies will offer discounts on all three policies if you keep all your insurance business under one roof.

Posted on Oct 25th, 2013

by author: sraskie.

Posted in: fee-only, fiduciary, life insurance.
Tagged: fiduciary · financial planning

How Adding to Your Earnings Can Increase Your Social Security Benefits

Oct 23rd, 2013

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Given the way that Social Security benefits are calculated, it should come as no surprise that increasing your income over time will make a difference in your eventual Social Security retirement benefits. But how much of a difference does it make when your income is increased?

Of course, this is going to depend upon what your current income is, and how many years you have left before you’ll begin receiving benefits. Keep in mind how your benefits are calculated – see this article for information about Computing Your Social Security Monthly Benefit – it’s based on your average monthly income over your lifetime. Increasing that average will increase your PIA, which will in turn increase your benefit.

It’s definitely not a simple calculation to figure out what difference each increased dollar of income will have on your benefit. Let’s walk through a few examples to see how it plays out.

Example 1

Jane, age 32, has been earning an inflation-adjusted $2,000 per month during her working career, beginning at age 22. If her income only keeps up with inflation between now and age 62, her average indexed monthly earnings (based on today’s dollars) would equal $2,000. Running the numbers to determine her PIA, we use these equations (2013 figures):

90% of the first $791 = $711.90
32% of the next $1,209 = $386.88

Jane’s PIA is the sum of these two numbers, $1,098.78. This is the amount that Jane would receive at Full Retirement Age (of course, adjusted by inflation at that time).

So what would happen if Jane can increase her average income by $100 per month, from now until she’s ready to retire? Since she’s 32 now, she’s had 10 years at the average adjusted rate of $2,000 per month, so this means her income for the coming 30 years will need to be approximately $2,117. Running the numbers on her new average monthly income of $2,100:

90% of the first $791 = $711.90
32% of the next $1,309 = $418.88

That brings Jane’s PIA to a total of $1,130.78, a monthly increase of $32 dollars.

What if the individual has a much lower current average income? Intuitively you’d have to figure that the increase of $100 would have a higher percentage of impact on benefits, right? It depends on where you are on the scale of bend points. Let’s look at two individuals, Ed and Seth.

Example 2

Ed, age 37, has an average income of $1,000 per month over his lifetime. Seth is 42, and has a lower average income – only $500 per month. Ed and Seth are thinking about starting a very small side-business which will bring in $100 a month each. Neither fellow earns any more in his regular job (other than COLA increases) throughout the rest of his life.

As a result, without the side-business, Ed’s PIA at age 62 would be $778.78. If he adds the side-business income, his average over his lifetime would increase, and so would his PIA – to $801.64, for an increase of $22.86 per month. Seth, on the other hand, would have a PIA of $450 without the side-business. Adding the additional $100 per month with the side-business would bring his PIA to $501.42 – an increase of $51!

Seth’s PIA increased by a larger amount for two reasons: first of all, the $100 represents a larger percentage increase versus Ed’s increase. Secondly, since Seth’s average income is below the first bend point ($791) both before and after the increase, a much larger share of his increased average income applies to his PIA. In this case, the $100 increase made a difference for each, just by appreciably different amounts.

What about higher incomes?

Example 3

Anna, age 42, has averaged $6,000 per month over her lifetime. If she continues at that rate for the coming 20 years, her PIA would equate to $2,422.46. If Anna receives an increase in her salary of $100 per month for the coming 20 years, her PIA would increase to $2,431.03. This increase of $8.57 per month is due to the fact that Anna’s average income is above the second bend point, so each dollar of average income increase only has a 15% impact on her PIA.

These examples illustrate how the Social Security benefit calculation benefits lower income folks at a higher rate (proportionally) than folks at higher incomes. One particular career where this can really make a huge difference is in the service industry – particularly waiters and waitresses. Since cash tips are voluntarily reported, waiters and waitresses typically under-report these, to their own detriment, regarding Social Security benefits. Since quite often waiters and waitresses are on the lower end of the wage spectrum, taking credit for the dollars earned in cash tips can have a lasting improvement in future Social Security benefits!

Posted on Oct 23rd, 2013

by author: jblankenship.

Posted in: Social Security, social security credit, social security retirement.
Tagged: Social Security · social security benefits

You’re Running Out of Time If You Want to Use These 13 Tax Provisions

Oct 21st, 2013

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An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Every year we say goodbye to certain things that we’ve come to know and love, and certain provisions of the tax law are not excluded from this treatment. Portions of the tax law are intentionally added with short life-spans, and others are retired from time to time as their intended use has either changed or been eliminated.

Listed below are the tax provisions (according to the Joint Committee on Taxation) that will be expiring at the end of the year – some we’ll be glad to see go, others we’ll wish would stay around a while. Some will be extended by Congress, either at the last moment or on into the new year, as has happened in the past.

Note: This article is aimed toward individual taxpayers rather than businesses, so I’ve only listed those provisions that will have impact on individuals. There are quite a few provisions expiring that will impact businesses and employers as well – see the link above for the complete list.

Tax Provisions Expiring at the End of 2013

Credit for certain nonbusiness energy property – this provision allows individual taxpayers with a credit for the cost of “building envelope components”, which include windows, doors, insulation, some roofing, and heating and air conditioning units. The credit has expired in the past (2011) and was extended.
Credit for two- or three-wheeled plug-in electric vehicles – pretty self-explanatory, a credit that applies to the purchase of these vehicles is also expiring. The four-wheeled variety continues to be in play.
Credit for health insurance costs of eligible individuals – I believe this one is supplanted by the credits available via the Affordable Care Act.
Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings – this is a credit amount that is set annually, presently at 9%, but will change in 2014.
Credit for construction of new energy-efficient homes
Deduction for certain expenses of elementary and secondary school teachers – this credit has been available “above the line” for educators to help reduce the costs of self-provided (out of pocket) materials and supplies for the classroom.
Discharge of indebtedness on principal residence excluded from gross income of individuals – dating from the Great Recession, a qualified cancellation of indebtedness for a taxpayer’s primary home was excluded from income. After the end of 2013, this exclusion from income provision expires.
Commuter credit – extended before, this credit provides train commuters a parity with car commuters, allowing a pre-tax deferral of income to help pay the expense of transit commuting.
Deductibility of mortgage insurance premiums – through the end of 2013, it is allowable to deduct these premiums along with your interest on your primary or secondary qualified residence.
Deduction for state and local general sales tax – This credit is allowed to replace the state and local income tax paid by the individual if the sales taxes are greater. Word is that this one will likely be extended, but who knows?
Charitable contribution of conservation easements or property – for the rest of 2013, if a taxpayer contributes property or easement to a conservation organization, such as a local land trust, special enhanced tax breaks will be available.
Deduction for qualified tuition and related expenses – This credit allows for the reduction in income, above the line, for qualified tuition payments within limits. It has always been coordinated with the other education credits – the Lifetime Learning Credit and the American Opportunity Credit. This one has been extended in the past as well, so maybe it will again?
IRA Qualified Charitable Distributions – for individuals over age 70½ this credit allows for individuals to contribute up to $100,000 directly from an IRA to a qualified charity, and exclude the distribution from income. This one has expired a few times in the past and has limited impact due to limited usage by taxpayers, so it’s hard to predict whether it will be extended again.

Stay tuned as we finish out the tax year, to hear which of these credits may or may not be extended. I for one am going to be on the edge of my seat.

Posted on Oct 21st, 2013

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, income tax credit, irs, PPACA, tax credits.
Tagged: income tax credit · irs · tax credits

A Note About Designations

Oct 18th, 2013

by sraskie.

1 comment

As you begin to seek advice regarding your savings and investments, you may come across professionals that have designations after their names – some might even have a can of alphabet soup! Here are some common designations you’ll encounter when seeking out a professional. Your advisor should have a qualified designation as a minimum requirement before you start working with him or her.

CFP® – CERTIFIED FINANCIAL PLANNER™. This designation is considered the “gold standard” in the financial services industry. Holders of this designation are required to take college-level financial planning courses, have three years’ experience in financial planning, and must pass a rigorous 10 hour, 2 day examination. The designation is owned and awarded by the CFP Board of Standards. www.cfp.net

ChFC® – Chartered Financial Consultant™. This designation is right in line with the CFP® with regards to the knowledge needed and required to earn the designation. Professionals that earn this mark must undertake 9 college courses in financial planning and endure 18 hours of total examination time. The designation is owned and awarded by The American College. www.chfchigheststandard.com

CPA – Certified Public Accountant. This designation is awarded to individuals that pass the rigorous Uniform Certified Public Accountant exam given by the American Institute of Certified Public Accountants. CPAs may be qualified to prepare tax returns and provide auditing services for companies. CPAs may also represent their clients in proceedings before the IRS. www.aicpa.org

CFA® – Chartered Financial Analyst™. This designation is pursued by individuals who have undertaken studies in security analysis, stocks, bonds, investment management and corporate finance. Individuals must endure three levels of examinations before the designation is awarded. Many mutual fund managers, pension fund managers and endowment managers have this credential. www.cfainstitute.org

EA – Enrolled Agent. The enrolled agent designation is awarded to individuals who pass three different IRS exams involving personal taxation, business taxation and general tax principles. Like CPAs, enrolled agents may also represent their clients in in tax proceedings before the IRS. www.irs.gov/Tax-Professionals/Enrolled-Agents

Posted on Oct 18th, 2013

by author: sraskie.

1 comment already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

So, What’s Going on at the IRS During the Shutdown?

Oct 14th, 2013

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English: Anti-United States Internal Revenue S...

(Photo credit: Wikipedia)

While the government is in hiatus, what’s going on at the IRS?

Well, not a lot. As I understand it, none of the phone lines are being manned, so if you call in for any reason you wind up with the automatons handling your questions. The website is still in operation as well (at least partly). So, you may be able to do a few things, but you’re limited.

For example, if you need a transcript of a prior year’s return, I understand that you can request this for yourself – but you can’t ask your accountant or anyone else operating as POA for you to request a transcript. I’ve experienced this myself in attempting to get a transcript for a client – I was shut down. (The same individual had trouble getting a transcript for himself, as the IRS records of his address didn’t match what he was entering into the system – aren’t computers great?)

In addition, even though there’s no one working there, you’re still required to complete your necessary filings on time. For folks that filed an extension of time to file their returns in April, that means by October 15 you need to file your final return, unless you’re in a combat zone or have been affected by the flooding in Colorado (no other exceptions!).

On the other hand, don’t expect for your refund to come right away: refunds are frozen until the funding issues are sorted out. Your payments will be processed right away though, even though the returns themselves will not be processed until later.

Payroll tax deposits and quarterly filings normally due by the end of October must be done on time as well, regardless of whether the government is back in business by that time (let’s hope it is!).

Audits in progress are on hold, but the systems that generate automatic correspondence, such as delinquency notices, are still on-line and churning away. So don’t be surprised if you receive mail from your friends at the IRS.

Posted on Oct 14th, 2013

by author: jblankenship.

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Posted in: #noTOP, 2013 tax year, income tax, irs.
Tagged: income tax · irs

Baby Steps

Oct 11th, 2013

by sraskie.

2 comments

1st Steps

One of my favorite movies has to be What About Bob? starring Richard Dreyfus and Bill Murray. Fans of the film will remember Bob Wiley, a neurotic, compulsive individual who seeks out the advice and care of Dr. Leo Marvin. The title of Dr. Marvin’s book that he gives to Bob is called Baby Steps – with the idea that anything is manageable and possible if you take baby steps.

Baby steps are important in our everyday life. Whether it be pursuing a degree, saving for retirement or even trying to change or break a habit – you need to take it one step at a time in order to achieve the goal. And sometimes, just moving forward even at a snail’s pace is progress.

Take saving money for example. Some people may think it’s tough to save, especially if they fill their budget is tight enough already. But these people can try baby steps. Even starting out very modestly at a dollar a month adds up to $12 per year saved. Granted we’re not looking at buying a second home in retirement with this, but it’s $12 saved they otherwise wouldn’t have.

Need to get up earlier in the day? Try setting your alarm one minute early each day for 30 days. By taking baby steps you’ll have an extra 30 minutes at the end of a month. How about starting to exercise? Try walking around the block for a few weeks, then gradually try jogging around the block, the next couple of blocks and pretty soon you’re running a mile – nonstop.

I think you get the point – start small, but start. If you have an IRA or employer sponsored plan like a 401(k) start saving 1% per paycheck – then gradually increase that over time. Have a bad habit of spending money on lunch and coffee every day? Start small – pack a lunch and bring a thermos one day a week. If you like the extra money in your pocket, you can choose to do it more regularly.

By taking baby steps toward your goals you’ll be able to look back at the leap you’ve made from where you first began.

Posted on Oct 11th, 2013

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning · saving money

Social Security Filing Strategies for Surviving Spouses

Oct 9th, 2013

12 comments

Social Security Poster: old man (Photo credit: Wikipedia)

There are a couple of strategies for Social Security filing that surviving spouses can use to maximize benefits throughout their lifetimes. The important factor to keep in mind for the surviving spouse is that filing for Survivor Benefits (based on your late spouse’s record) has no impact on filing for Social Security benefits based on your own record – other than the fact that you cannot file for both benefits at the same time.

Coordinating these two benefits (Surviving Spouse benefits and your own benefits) can take a couple of different paths: you could file for the Surviving Spouse benefit first, allowing your own benefit to accrue Delay Credits up to as late as age 70; or you could file for your own benefit first, and then later file for the Surviving Spouse benefit.

Sue’s husband Steve passed away when Sue was 61 years of age. Steve had just turned 70 and had just begun receiving his Social Security benefit, which was increased to the maximum amount since he waited until age 70 to begin receiving benefits. His monthly benefit was $3,300, an increase of 32% over his Primary Insurance Amount (PIA) of $2,500.

Sue’s PIA is $1,500 – meaning that if she waits until her own Full Retirement Age (FRA) of 66 to begin receiving benefits, she will receive $1,500 per month based upon her own record. Sue has a couple of strategies available to her:

She could start receiving the Survivor Benefit now at a reduced rate (since she is less than Full Retirement Age but over age 60) – for a total benefit amount of $2,481. This is still much greater than her own benefit, so she would continue with this amount for her lifetime. Annual COLAs would increase this amount when applied.
Sue could start her own retirement benefit when she reaches age 62 (one year from now). At this point her benefit would be reduced from $1,500 to $1,125 per month since she’s filing before she reaches FRA of 66. Then she could wait until she reaches age 66 and file for the Survivor Benefit – which would not be reduced since she’s now at FRA. She would then receive the $3,300 monthly benefit, Steve’s maximized amount, for the rest of her life, increasing by COLAs when applied.

The first option provides Sue with the highest benefit right away, but she is giving up the future increased benefit that could be available if she waits to FRA. The second strategy results in the greater benefit for her as long as she lives more than 10 years beyond her own FRA.

Now, if the amount of benefits were switched and Sue’s PIA was $2,500 while Steve’s was $1,500 – his benefit at age 70 would have been $1,980. At Steve’s passing, Sue has the following options available:

She could start receiving the Survivor Benefit now at the reduced rate of $1,489, and then begin her own benefit at FRA, for the full amount of $2,500 (plus intervening years’ COLAs).
Or, Sue could start the Survivor Benefit now and wait until she reaches age 70, when her own benefit would have increased to $3,300 per month (plus COLAs).
Another option would be for Sue to delay receiving the Survivor Benefit until she reaches age 66 (FRA), at which point the Survivor Benefit would be $1,980 per month plus the COLAs. Then she could wait to age 70 to begin her own benefit, again at the increased $3,300 plus COLAs.
The last sort of option available to Sue is to begin her own benefit at age 62 at a reduced rate of $1,875. Since her own benefit is greater than the reduced Survivor Benefit, there are two ways that she might take the Survivor Benefit: 1) right away now at age 61 at a reduced rate of $1,489; or wait until FRA and take the maximized Survivor Benefit of $1,980.

The last option provides Sue with a relatively level benefit either right now (one year of $1,489 then increased to $1,875 for the rest of her life) or when she reaches age 62 next year ($1,875 for four years and then increased to $1,980 for the rest of her life).

In all cases where Sue intends to delay her own benefit, the Survivor Benefit options should be considered. The key to it all is that either benefit can begin first, followed by the other later if it results in an increase in benefits. Also important to note is that you can’t start Survivor Benefits early, switch to your own, and then switch back to Survivor benefits (or vice versa). Once you’ve switched between the two types of benefits once, you are not allowed to switch again.

There are many other ways that the benefit amounts and ages could be worked out for examples, but hopefully these examples have helped to explain the decision process.

Posted on Oct 9th, 2013

by author: jblankenship.

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Posted in: Social Security, social security benefits, social security survivor benefits, Spousal Benefit, survivor benefits.
Tagged: Social Security · spousal benefit · survivor benefit

How the 3.8% Surtax Could Influence Roth Conversions

Oct 7th, 2013

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Note: This is a dust-off of an article written in April 2010 that dealt with the special two-year taxation of Roth Conversions that was available in that year. An astute reader noted that the original was a bit dusty and not applicable to today’s decision-making (thanks S!). Income tax

One of the provisions of the Affordable Care Act is a new tax – a surtax on investment income over certain amounts. This surtax has come into play this year, for tax returns filed in 2014 on 2013 income. The income amounts are, admittedly, rather high, but nonetheless will likely impact a lot of folks. What you may not realize is that, due to the application of this surtax, Roth IRA conversion strategies that you may have had in play may be impacted. Depending upon your overall income, you may have to pay the surtax on some or all of your conversion amount. On the other hand, by converting, in the future you could avoid surtax, and likely reduce the bracket that you have to pay from for all income.

The New 3.8% Surtax

Here’s how the new 3.8% surtax is applied: a tax will be imposed for each taxable year, equal to 3.8% of the lesser of 1) net investment income; or 2) the excess of Modified Adjusted Gross Income over the threshold amount. So, in order to understand what this means, we need to define a few things.

Net Investment Income – this is the total of all interest, dividends, annuities, rents, royalties, income from passive activities, and net capital gains from disposition of capital property not held in an active trade or business. The IRS has specifically excluded the following from Net Investment Income:

Income (including self-employment income)
Distributions from IRAs or other qualified plans
Gain on the sale of an active interest in an S Corporation or partnership
Items that are otherwise excluded from income, such as interest from tax-exempt bonds

Modified Adjusted Gross Income – for the purpose of the surtax, this is simply your Adjusted Gross Income (Form 1040 line 37) plus the net amount related to the foreign earned income exclusion.

NOTE: THIS IS NOT THE SAME AS THE MAGI THAT YOU USE TO DETERMINE YOUR ELIGIBILITY FOR VARIOUS IRA DEDUCTIONS OR CONTRIBUTIONS. You can find that calculation by reading “Determining Your MAGI”. Don’t confuse the two, as they are completely different calculations – thanks, IRS! To keep the confusion at a minimum, I will explicitly refer to this Modified Adjusted Gross Income as Modified AGI within this surtax context.

Thresholds – the thresholds for applying the surtax are as follows:

$250,000 for filing status of Married Filing Jointly
$125,000 for filing status of Married Filing Separately
$200,000 for filing status of Single or Head of Household (yes, Virginia, it is more tax efficient to be single)

Examples

Now that we know the definitions, let’s look at a couple of examples to see how the surtax would be applied:

Example 1. Joe and Mary, a married couple filing jointly, have net investment income of $50,000 and pension income of $125,000. They are also strategically converting distributions from their IRA to Roth annually in the amount of $100,000, which brings their Modified AGI to $275,000. So in 2013 Joe and Mary will be subject to the surtax on the lesser of their net investment income ($50,000) or the amount of their Modified AGI over the threshold ($275,000 minus $250,000 equals $25,000).

In this case, the amount of the Modified AGI over the threshold is the lesser amount, and so Joe and Mary will have to pay the surtax on $25,000, or $950 in surtax.

Example 2. Les, a single taxpayer, also has net investment income of $50,000, and pension and other income of $155,000. Les also is converting amounts each year from his IRA to Roth, in the amount of $50,000 annually. Les’s Modified AGI, combining of all of this income, is $255,000, which is over the threshold. Applying the calculation, Les will owe the surtax on $50,000 – which is the lesser of his two amounts (Modified AGI of $255,000 minus $200,000 threshold equals $55,000, which is greater than his net investment income of $50,000). The surtax will be $1,900.

How a Roth IRA Conversion Strategy Could Be Impacted

You’ve undoubtedly heard about Roth IRA conversions – where you move money from a traditional IRA or 401(k) plan to a Roth IRA, paying income tax on the pre-tax amount moved. This overall concept should be considered by all folks who have IRAs, especially folks with higher incomes. This is especially true if future (taxable) distributions from traditional IRAs will have an impact on your tax bracket – and potentially cause the surtax to be applied.

When the money is moved to a Roth IRA, there are no future Required Minimum Distributions (RMDs) from the Roth IRA account during your lifetime, whereas if the money is in a traditional IRA when you reach age 70½ you will be forced to withdraw funds (via RMDs) from your IRA and pay tax on it in that year. Plus, any amount that you withdraw from the Roth IRA in the future will not be taxed, and therefore will not impact the calculations for the surtax.

In Example 1 above, the only reason the surtax was applied at all was because of the IRA distribution for conversion. If Joe and Mary had completed the conversion of the $500,000 in IRAs to Roth IRA in prior years, they would have paid tax on the conversion in each year of conversion. This would mean that for 2013 they would not have Modified AGI above the threshold, so they would not owe the surtax.

If they waited until 2013 to do a total conversion, they’d have Modified AGI of $675,000 – with a pretty hefty income tax and surcharge applied. However, if they adjusted their conversion amounts to only $75,000 for 2013 their Modified AGI would be exactly $250,000, so they wouldn’t owe the surtax. Keeping up at the rate of $75,000 per year, they’d have their IRAs converted to Roth within the coming 7 years, eliminating RMDs from their future income – but since they wouldn’t be subject to the surtax from future RMDs, they might opt to discontinue Roth Conversions at this stage and opt to take future RMDs at a much smaller pace. This could result in lower overall taxes for the couple.

In Example 2, Les was already going to be subject to the surtax even without the IRA distribution. If we assume that Les also had $500,000 in his IRA account, converting that amount to a Roth IRA would result in a Modified AGI of $705,000, again with a hefty tax bill and surtax. Unlike the Example 1 couple, Les can’t make an adjustment to his Roth Conversion amounts to eliminate the surtax. But he might want to continue with his conversion activity nonetheless in order to eventually eliminate the additional amounts being withdrawn via RMDs. Like most Roth Conversions, a decision must be made as to whether or not you believe future taxes will be more or less than the current rates.

Conclusion

While the surtax on its own should not be a reason to enact a Roth IRA conversion strategy, one of the tenets that we’ve talked about in the past that can cause the conversion to work in your favor is a future increase in tax rates. If you believe that future taxes are likely to be higher (and let’s face it, who doesn’t believe this?) then any amounts that you can afford to convert should be considered now. The surtax just gives you more reason to consider it.

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Posted on Oct 7th, 2013

by author: jblankenship.

Posted in: #noTOP, Affordable Care Act, IRA, qrp, retirement plan, Roth Conversion, Roth IRA.
Tagged: Affordable Care Act · IRA · roth conversion

There’s No Free Lunch

Oct 4th, 2013

by sraskie.

5 comments

Recently I had the opportunity to review a company’s website and some of their affiliations that they had with particular companies. My natural tendency is to look at what companies the firm recommended when it came to financial advising and investing.

As I was perusing through the list of providers my eyes came across a rather intriguing headline that was given by one of the “preferred” vendors. The headline read, “Free Financial Plan – Over $1,000 Value!” Some of you may be wondering the same thing I was wondering: “Who in their right mind would give away $1,000?” Instantly I knew there was a catch. After doing a bit more research I found out that this “preferred” provider’s strategy was to simply create a “financial plan” that was geared toward having the clients invest and put money in financial products that paid high commissions.

The take away from the article is its title. There’s no free lunch. If something looks too good to be true it usually is. In the glaring example above, who could afford to give away $1,000 of their product or services consistently? Needless to say, this business is doing very well, so you know they’re getting that $1,000 (and more) elsewhere.

A few questions to ask when someone offers a free service or advice, especially when it comes to your finances are these:

What are the long term costs of this investment?
If this service is free, where do you make your money?
Why is this free?
What’s in it for you?
Since it’s free, will I be assured the same value as if I were paying you?
And my favorite: What are you selling?

Granted, not all free services are bad or require this much scrutiny. Routinely, Jim and I will sit down with potential clients during our get acquainted session and use this hour or so as a time for us to get to know our potential clients and for them to get to know us. This is something we don’t charge for. And our clients are grateful that they can get to know us without being charged for it.

Other businesses do the same. Like the free quote for insurance, estimates for repairs, etc. The main point is that professionals don’t exchange their value for free. It doesn’t mean that there can’t be pro bono work done nor does it mean that a product or service can be occasionally provided gratis.

What it does mean is that if someone is willing to give away a product or service of significant value, generally it means that there’s a catch – and you’re the fish.

Posted on Oct 4th, 2013

by author: sraskie.

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Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

How Your Average Indexed Monthly Earnings is Determined

Oct 2nd, 2013

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Image courtesy of nuchylee at FreeDigitalPhotos.net

In order to calculate your Social Security benefit you need to know what your PIA (Primary Insurance Amount) is. In order to calculate the PIA, you need to know what your Average Indexed Monthly Earnings (AIME) factor is. So how is your AIME determined?

During your working career, your Social Security-covered earnings were reported to the Social Security Administration. When you reach age 60, an index factor is applied to each year of your earnings in order to adjust each year’s earnings for inflation. After the index factor is applied, the top 35 years of earnings are totaled and then divided by 420 (the number of months in 35 years). This produces an average… indexed… monthly… earnings… factor.

If you haven’t had a full 35 years of Social Security-covered earnings, the AIME is still calculated using 35 years as the divisor. This can result in a much lower benefit as compared to your average earnings in the years that are in your record. For example, if you earned the “average” wage during at least 35 years of your working life, your AIME would work out to $3,582. However, if you only had 30 years of reported earnings during your working life, having taken time off for college or to raise your family, your AIME would only work out to $3,070.

And this makes a real difference – the PIA that results from the first example (with 35 years of earnings) is $1,605 per month, versus $1,441 per month when you have only 30 years of the exact same earnings. That’s a difference of nearly $2,000 per year.

The index factor that I mentioned earlier is determined in your 60th year, and it’s based on the national average wage during that year, compared with the average wage in prior years. This is known as the Average Wage Index (AWI), and you can learn more about it in detail on the Social Security website.

Posted on Oct 2nd, 2013

by author: jblankenship.

Posted in: primary insurance amount, Social Security, social security benefits.
Tagged: average indexed monthly earnings · PIA · Social Security

Book Review: Winning the Loser’s Game

Sep 30th, 2013

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Timeless Strategies for Successful Investing

Charles D. Ellis, the author of this book (in it’s Sixth Edition), has definitely hit the nail on the head with his subtitle. The strategies outlined in this book are good for any investor in any economic/investing climate.

Time and again throughout the book, Mr. Ellis points out that the real key to investment success has nothing to do with finding the right stock, bond, mutual fund or ETF – and everything to do with developing a sound strategy for investing and sticking to it.

The strategy requires you to develop an understanding of your own personal tolerance for risk and your need for returns. This can be a difficult undertaking, as it requires the investor to answer difficult questions about what kinds of losses he can stomach with his investments, as well as what sort of return you require for your investments over the long term. It takes careful planning to develop this strategy – because you have to be truthful with yourself about your own reactions to market losses. Losing your nerve at the wrong time can derail the process altogether.

Sometimes it is necessary to have help in the process – a financial advisor who is not vested in your investment choices can really help with building the strategy. Look for a fee-only advisor to help with the process.

Another recommendation made throughout the book is to use indexed mutual funds as the basis for your investments. As you’ve heard from me before, indexed mutual funds are really the best, smartest option in the marketplace. Mr. Ellis puts it best with these three bullets, his conclusion to the book:

The number of brilliant, hardworking investment professionals is not going to decrease enough to convert investing back into the winner’s game of the 1950’s and 1960’s.
The proportion of transactions controlled by institutions – and the splendid professionals who lead them – will not decline. Investing, therefore, will stay dangerous for the most gifted amateur.
Maybe some day so many investors will agree to index that the “last stock pickers standing” will have the field all to themselves. Maybe. But that’ll be the day. So, be sure to call me. Meanwhile, I’ve got better things to do – and so do you, where we can play to win with both my time and our money.

If all of this sounds eerily familiar, it’s because this is another author who I agree with completely – and I believe this book provides an excellent guide for the average investor. It’s no wonder that this book has had such a successful run, and this latest edition just carries on the great tradition. Go get it!

Posted on Sep 30th, 2013

by author: jblankenship.

Posted in: Book review, index funds, investing, investment.
Tagged: book review · index funds · investment

Do Advisers Practice What They Preach?

Sep 27th, 2013

by sraskie.

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With a cornucopia of information available to us regarding investing, financial planning and money management making a choice between who’s right and who’s not even in the same area code may come down to what your personal preferences are, and just as important, if the person giving the advice practices what they preach.

In a previous article, I spoke about how advisers get paid and the type of advice or products they may recommend depending on how the advisor gets paid for that advice.

In this article I want to expand a bit further to whether or not the advice you’re getting is really being followed by the person giving it.

Admittedly, there is some advice that may need to be given that may not pertain to the adviser giving it. One area may be debt reduction advice if the adviser doesn’t have any debt (but has practiced good money management principles to avoid it). Another area may be the physician that recommend proper diet and exercise to an overweight individual and yet the doctor may be physically fit.

What I’m talking about is the adviser (or doctor) that doesn’t practice what they preach. For example, an advisor may give advice regarding where a client should invest their Roth IRA. Preferably for the adviser, the client would want to invest their money with him or her and the adviser may only recommend commissioned or load mutual funds while the adviser invests his 401(k) money into index funds.

This is a very common practice especially among bigger firms with many employees as advisers. The firm offers high commissioned products such as annuities and commissioned mutual funds for clients’ IRAs or retirement plans but the firm’s own 401(k) plan holds only index fund options and zero annuities. Yet their advisers will tell their clients that their products are the best for them. If that’s the case, why doesn’t the firm offer their own products in their 401(k)?

Another thing you’ll see is an adviser or broker touting the next hot fund or the stock of the day. A great question to ask is if they own it themselves – and why. Generally you’ll find that they don’t own it and usually the recommendation is trickling down from company headquarters. Another great question is would they recommend it to their own family. Watch their face – it may say more than their words.

You may also want to be careful when it comes to the talking heads on TV. Self-proclaimed financial gurus and big dogs are generally getting paid through endorsements, book deals and from the network they broadcast on. This is how they make their money. In fact, some deeper digging will find some of these people have actually lost A LOT of money investing or becoming heavily debt laden only to file bankruptcy.

An adviser may be recommending sound money management advice while at the same time his credit card is maxed out, he has a high car payment and he’s living paycheck to paycheck. Granted, this adviser would probably never admit this but it doesn’t hurt to ask how they feel about money, debt, etc. How can an adviser manage your money if they have no control over their own?

Finally, trust your gut. If something doesn’t feel right – it usually isn’t. If you go in for budgeting advice and the adviser tries to sell you insurance – this isn’t a good sign. If your adviser hasn’t been around very long, but is in a fancy office and a new car is out front – they may be trying to appear successful, but are struggling to get by.

Ask a lot of questions when you talk with your prospective adviser. Just like you’re a potential client for them, they’re a potential client for you. It works both ways. You can do an internet search on their business, and even verify if they have any industry credentials. There are even websites where you can verify their tenure in the industry and whether or not they’ve received any disciplinary action.

The main thing is that you want an advisor that believes in the advice they’re giving you and most of the time follows their own advice.

Posted on Sep 27th, 2013

by author: sraskie.

Posted in: budgeting, fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

What You Can Do If Your 401(k) Has High Fees

Sep 25th, 2013

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Image courtesy of anankkml at FreeDigitalPhotos.net

Now that we’ve all been receiving 401(k) plan statements that include information about the fees associated with our accounts, what should you do with that information? Some 401(k) plans have fees that are upwards of 2% annually, and these fees can introduce a tremendous drag on your investment returns over a long period of time.

There are two components to the overall cost of your 401(k) plan. The first, and the easiest to find, is the internal expense ratios of the investments in the plan. Recent information shows that, on average, these investment fees are something on the order of 1% to 1.4% or more. The second part of the costs is the part that has recently begun to be disclosed: the plan-level fees. These are the fees that the plan administrator has negotiated with the brokerage or third-party administrator to manage the plan. These fees can average from 1% up to around 1.5%. When added together, these fees can amount to nearly 3% for some smaller 401(k) plans. Larger employers’ plan fees average about 1% less, at approximately 2% per year.

For example, if average investment returns are 8% you should be doubling your investments (on average) every 9 years. However, if there is just a 1% fee deducted from the average investment return (so that now you’re only earning 7% annually) the doubling will take a bit more than 10 years. A 2% fee brings you down to a 6% net average return, and so now your account won’t be doubled until 12 years has passed. If you started our with $10,000 in your account, this would result in a differential of more than $42,000 over the course of 30 years – at 8% your account could grow to $100,627, while at a 6% return would only grow to $57,435.

The information about fees used to be kept pretty much secret, but beginning in 2012 the plan-level fees have begun to be disclosed to participants in the plans. Now you know more about the overall fees that are charged to your plan and thereby reduce your overall investment returns.

What Can You Do?

So, now that you know what your expenses are in your 401(k) account, there are a few things that you might do to improve the situation. While it’s unlikely that you can have an impact on the plan-level fees, you may be able to control some of your exposure to investment fees. Listed below are a few things you can do to reduce your overall expenses in your 401(k) account.

Lobby for lower fees. Talk to your HR representatives and request that your plan has lower-cost options made available. Index funds can be used within a 401(k) plan to produce the same kinds of investment results as the (often) high-cost managed mutual funds, with much lower expense ratios.
Take in-service distributions, if available. If your plan allows for distributions from the plan while you’re still employed, you can rollover some or all of your account to an IRA, and then choose lower-cost investment options at that time. Typically a 401(k) plan may offer this option only to employees who are at least 59½ years of age – but not all plans offer in-service distributions.
Balance the high-fee options with lower-cost options outside the plan. If your 401(k) plan is unusually high-cost, if available do the bulk of your retirement investing in accounts outside the 401(k) plan, such as an IRA or Roth IRA, if you are eligible to make contributions. Review the investment options in your 401(k) plan for the “diamonds in the rough” – such as certain institutional funds with very low expenses – that can be desirable to hold. Then complete your allocations using the open marketplace of your IRA or Roth IRA account.

Don’t forget that there are sometimes very good reasons to leave your money in a 401(k) plan, even if the expenses are high. See the article Not So Fast! 9 Special Considerations Before Rolling Over Your 401(k) for more information on why you wouldn’t want to make a move.

Posted on Sep 25th, 2013

by author: jblankenship.

Posted in: 401k, qrp, qualified retirement plan, retirement accounts.
Tagged: 401k · qrp · qualified retirement plan · retirement accounts

Uncertainty Abounds With ACA Implementation

Sep 24th, 2013

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English: President Barack Obama's signature on...

President Barack Obama’s signature on the health insurance reform bill at the White House, March 23, 2010. The President signed the bill with 22 different pens. (Photo credit: Wikipedia)

Several high-profile companies have recently made known that they will be directing retirees and in some cases employees to the Health Exchanges with the implementation of the Affordable Care Act (aka “Obamacare”). How this will wind up affecting us as taxpayers is uncertain, to say the least (See the article at this link: Workers Nudged to Health Exchanges Seen Costing U.S. Taxpayers).

Since participation in the Exchanges carries the possibility of taxpayer subsidy to those with lower incomes, adding more folks to the rolls of the Exchanges will likely drive up the cost of these subsidies. And of course, that will mean increased taxes to pay for the subsidies.

It makes sense for IBM, Time Warner and others to send the retirees to the Exchanges with a stipend, since the stipend will be less (presumably) than the cost to the company for health coverage in the long run. Many of the retirees will (likely) fit into the subsidized categories since they are in retirement and likely have lower incomes, so a portion of the cost will certainly be subsidized.

What do you think – is this a trend? And what if the Exchanges become the dominant method of health insurance delivery? Would the law of large numbers eventually begin to bring down the overall costs, or will the costs spiral out of control?

Posted on Sep 24th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: #noTOP, 2013 calendar year, Affordable Care Act.

Selling Your Home? Be Aware of These Half-Truths

Sep 23rd, 2013

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Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Since selling a home is one of those events that many folks only do a few times in their lives, there is much uncertainty about what kinds of potential rules and laws may trip you up. Recent data suggests that the average American will buy and sell their primary home something like 10 times in their lifetimes – for many that number will be far less. There is a lot of information about the tax impacts of selling a home out there flying about on the internet, and some of it is mostly bunk. And much of what’s not bunk is limited in applicability.

Below are a few half-truths about home sales that you want to understand before you sell your home, along with the explanation of the facts behind them, including how they may apply to your situation if at all.

1. If I sell my house I need to buy another one with the proceeds or owe tax. Not true, as long as you lived in the home as your primary residence for two of the preceding five years. There is an exemption of the tax on such a residence sale, of up to $250,000 ($500,000 for a married couple) of gain in value over the original purchase price plus improvements to the property. In other words, if you purchased a home for $100,000, updated the kitchen for $10,000, lived in the house for three years and then sold it for $120,000, you’d have a gain of $10,000 on the sale. This sale is exempt from tax since you lived in the home as your primary residence for at least two of the preceding five years.

The truth to this one has roots in the olden days – long ago it used to be the law that when you sold your primary home you needed to purchase a new one with any gains from the sale within two years. This rule expired in 1996, so it doesn’t apply any more. Many folks think it still applies since they haven’t sold a home in a very long time and they recall this rule.

2. Beginning in 2013 if you sell your home you’ll owe an extra 3.8% surtax on the proceeds due to Obamacare. Not true, except in some limited cases. This one has gotten its traction via emails and internet postings, and has enjoyed a rather long life. I’ve written about this specific myth in the past in the article The “Tax on the Sale of Your Home” Email Myth.

Here’s the deal: Following the information presented in #1 above, if you wind up with a non-exempt gain on the sale of your primary home – either because you didn’t live in the home for 2 of the previous 5 years, OR the gain was more than the exempted limit – AND your other income (Modified Adjusted Gross Income) is greater than $200,000 for single folks or $250,000 for marrieds, then you might owe the additional 3.8% surtax on the gain.

3. Loss on the sale of my home can be written off against income. Not true, for a primary or secondary home. You (generally) don’t have to pay capital gains tax on a gain when you sell your home, and likewise you cannot take a capital loss if the sale results in a loss. This is the same for all personal property not held for investment purposes.

If you sold a property that you had held for rental purposes at a loss, this loss would be eligible to be written off against other investment gains, but losses on personal property, including your main home, doesn’t allow this option.

Posted on Sep 23rd, 2013

by author: jblankenship.

Posted in: Affordable Care Act, baby boomers, income tax, Obamacare.
Tagged: Affordable Care Act · income tax · irs · Obamacare

Avoid the Trap

Sep 20th, 2013

by sraskie.

2 comments

English: Venus Fly trap in detail. Taken with ... Eating and dining out all the time can drain our money and potential retirement savings without us even being aware of it. We get asked from friends to go to lunch, coffee or we find ourselves skipping breakfast and getting in the line at the coffee shop for a scone and latte. Before we know it, we’re left asking, “Where did the money go?” Or worse, “I can’t afford to save for retirement.” What’s happened is we’ve fallen into the trap – a habit really, but it can be broken and we can relearn. Here’s how:

The first thing you can do is to pass on that latte or scone all together. Instead, make yourself breakfast at home. Invest in a coffee maker if you don’t have one, and make your own coffee. Then make a nice meal of scrambled eggs and whole wheat toast, a cup of cottage cheese with fruit, or one of my favorites – a thick, mixed berry protein smoothie. It’s quick, easy and cheap – much better than the latte and scone. And trust me, if you work at a sit-down job, the protein in place of the simple carbohydrates will keep your energy level sustained, and your metabolism going fast. That’s very important if you’re stuck in a chair all day long.

Next, pocket the $2-$3 that you would have spent on the latte and scone. Put it in a jar, put it in the bank, put it anywhere you can save it. There’s a great start! Think about it. $2-$3 per day times an average of 30 days is an extra $60-$90 in your pocket every month!

Now, if you eat fast food at lunch or find yourself eating out a lot, make a commitment to pack your lunch. Resist the temptation to go to lunch with your office. If you go to lunch on a daily basis, that will average $5-$10 per lunch, at least. That’s an extra $100-$200 saved! Put them together and you’ve saved $160-$290 – in one month!

I’m not saying never go out to lunch. I have friends of mine that I meet for lunch every now and again. The point being that I don’t make a habit of it. On the other hand, once you have made a habit out of saving this extra money and have learned to discipline yourself to save, then it’s not going to hurt you to go out every once in a while.

Posted on Sep 20th, 2013

by author: sraskie.