Give Your CPA a Heads Up

Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about a little thing that happened to us last year?” is likely to test her or his humor. There are two types of CPAs – historians and advisors. The first may tell you “Yes, you’re hemorrhaging, and here’s your tax bill for 2014.” The other offers “Here are some ways to stop the bleeding.” Use the conversations now as you work on your 2014 tax filings to prepare for the year ahead. It benefits both – your CPA may have the satisfaction of engaging creativity, research and planning skills, you’ll have more focus on exploring the various paths you may take, and ideally, you’re writing the smallest tax check legally required, and minimizing surprises.

Here are some questions to ask your CPA.

Expected impacts of major changes that are likely to occur in 2015? Three areas of change include family, income and significant transactions.

  • Family – Births or adoptions; marriage or splitting the sheets; children advancing in their lives; and death or caregiving. Each may impact filing status, income, expense or asset changes. For example, your child enters or advances in the workplace. Who’s going to file the return, the kid or the CPA? What guidance should be given to them regarding tax withholding, budgeting, saving and investing? Will your tax situation change – dependents, exemptions, credits, kiddie tax, etc.


  •  Income – Can be either significant increases (business income, promotions or bonuses, option exercise, retirement plan distributions, Roth IRA conversions, investment income, etc.) or reductions (business decline or exit, retirement, unemployment, maturity of a note receivable, paying off debt, investment loss, etc.). Let’s take new business income as an example – spouse becomes an independent contractor, director fees, or an expansion of your business. Will a new entity be formed (another tax return) or file a Schedule C? What management decisions are advised including financing, budgeting and planning, staffing, insurance and risk management, employee benefits, and how should you take money out of the business?


  • Significant Transaction – The purchase or sale of house or major asset, business exit or acquisition, inheritance, retirement plan distributions, etc. These too warrant additional planning and engagement of your other trusted advisors. Assume the case of a couple downsizing their home. What’s the likely order of the transactions – sell the current home, take on interim housing, then buy the new place, or take on a temporary two homeownership status until the first home is sold? In the case of the latter, how are you financing the purchase (the current home equity isn’t available until later)? What are the funds required (selling expenses and taxes, move-in costs, down payment)? Will the funds for down payment come from selling investments? A retirement account?

Our estimated 2015 tax bill? Explore opportunities to reduce that bill, and prepare to fund it (adjusting withholdings and quarterly tax payments). Here are three areas to consider for tax reduction.

  • Are you saving enough for the future? How should savings be directed to tax-advantaged retirement plans and after-tax investing? Maxing out your 401k contributions may not be sufficient to fund your retirement lifestyle, nor is it prudent to have all of your retirement income to be taxed as ordinary income. If you are the business owner (plan sponsor), what are your options for design or redesign of your retirement plan to tweak the allocation of contributions or expected benefits?


  • Eligible for a Health Spending Account (HSA)? If you have a qualifying high deductible medical insurance plan, you may be eligible to fund a HSA. Contributions may reduce your taxable income and may grow tax free if withdrawn for qualified medical expenses.


  • High income taxpayers – Don’t forget about the additional 3.8% net investment income tax and 0.9% Medicare surcharge tax (wages and self-employment income) exposures, phase-out of deductions, exemptions, and credits, and utilizing capital loss carryforwards.

Tax planning and financial planning are very intertwined. If I don’t pick up the phone and talk to the client’s CPA of a major potential event, I risk three things: “I didn’t think of that” (another option), client gets a nasty tax surprise come April, or I’ve aggravated the CPA “Why am I hearing about this after-the-fact?” So one last thought… bring a smile and a cup of cheer to your tax accountant. They’re the ones who wrestle with the 74,000 pages of the Tax Code on your behalf. You’re just writing the check.

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5 Financial New Year’s Resolutions

Do you keep your New Year’s resolutions, or take them as folly?

The 6th Allianz Life New Year’s Resolution Survey was released last month. It is a national survey with about one thousand respondents. The respondents said their top areas of focus are fitness, finances and family – in other words, health and wellness, financial security and spending more time with loved ones. Interestingly, two other survey results were (1) only 15% said “financial planning” was part of their NY resolutions, and (2) respondents said they were generally more stressed going into this year than they were last year. Their top worries included data breaches/identity theft, terrorism threatening safety and security, stagnant paychecks, and market uncertainty.

If I were “more stressed,” then shouldn’t I pay more attention to my finances? Is this part of the part of the paradox of rational thinking versus human behavior which is often irrational? Or is it that people don’t put much seriousness into resolutions? I think it’s a little of both, and emphasizes the importance of the financial planning industry.

Inertia is tough to break – if my life’s going “pretty good,” then why mess with things? Perhaps those surveyed had more confidence in their financial affairs and thus discounted the need to revisit their planning – the US economy seems healthier, markets show strength (at least in the US), reports of lower unemployment, and maybe the pains of 2008-09 have been forgotten. However complacency can be dangerous, and ironic it is that we often need a little pain to push us into action – a financial crisis, health scare, etc.

So I offer five New Year’s resolutions to improve financial health.

Have a budget for life – Know where your money goes and make sure you’re well-funded for the future

  • Take a financial snapshot at least annually – Cash flow and net worth.
  • Create a budget (or spending plan) – Some people are more detailed in their budgeting than others, however, both stay within the lines (spend less than they make) and make saving a priority (pay themselves first).
  • Maintain sufficient reserves (money in the bank that’s not at risk). Targeted reserves are equal to 3-6 months’ living expenses (1 – 2 years if retired), plus planned big ticket expenditures (e.g. home repair, college costs, new car, etc.).

Manage your debt – Some abhor debt (“We haven’t paid interest in 32 years!”), and others use it as a tool (home mortgage, or cheaper than investment returns)

  • Understand the difference between what you can vs should borrow.
  • US student loan debt exceeds $1.2 trillion and 7 million borrowers are in default (The Economist, June 2014).
  • Consolidate debt where prudent to make it easier and quicker to pay off. Look for fixed rate terms (interest rates will rise) and avoid extending the payoff date.

Rebalance and optimize portfolios – Avoid making the “Big Investor Mistakes” (e.g. greed vs panic, under or over diversification, speculation, leverage, chasing performance, etc.).

  • Portfolio allocations should be in synch with your required returns, acceptable risk level, and time horizon.
  • Diversify investments and strategies.
  • Minimize expenses, including taxes.
  • Revisit the portfolio and make adjustments to stay on track.

Establish contingency plans – Life’s curly!

  • Review and update your estate plan and beneficiary designations.
  • Insure for those risks you can’t afford to pocket on your own – e.g. health, disability, life, property & casualty, liability, etc.). Review them with your insurance agent for adequate coverage and cost competitiveness.

Have balanced goals“The key to keeping your balance is knowing when you’ve lost it.” (Anonymous)

  • Vistage (an international association of CEOs) taught me this tool to be used as a scorecard.
  • Goals set for 6 categories (professional/financial, personal, well-being, spiritual, relationships, and wild card).
  • You are held accountable for your progress and outcomes.

Some may take New Year’s Resolutions as folly. However, planning for a lifetime of financial success is serious business. May your list of worries be shorter than your New Year’s resolutions. Happy New Year!

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Ordinary People Do Extraordinary Things

The Americans’ goals were huge and the challenges overwhelming. The British expected a swift end to the war. How could a group of squabbling colonies and her untrained army overcome the powerful British Empire? America’s Commander in Chief had his doubts. Washington wrote his cousin “I think the game is pretty nearly up.” But leadership, ingenuity and resolve reemerged – “victory or death” – and the strategists devised a surprise attack. Under Christmas stars, Washington led a scrappy army towards a Hessian garrison in Trenton. Their victory would serve as a lightning bolt and refreshed the Continental Army. Yet, six more grueling years of sacrifice and bloodshed lie ahead.

Victory by the American underdogs was unfathomable to The Empire. Artist Benjamin West was commissioned to capture the signing of the Treaty of Paris on September 3, 1783. The painting pictures the American delegation. However, there is a vacant splotch on the canvas’ right side. The British had great contempt towards the Americans and refused to poise. The “Pale Ghosts of England” didn’t want to be depicted in defeat and the painting was never finished.

The Americans had two main advantages – the British had spread themselves too thin and the Americans were fighting for a grand cause. The war had been won by a ragtag group of men, women and children – common people often overlooked in history books. John Honeyman, a butcher and weaver, served as Washington’s spy and contributed to the victory at Trenton. Peter Francisco, a Portuguese blacksmith, was also known as the Virginia Giant – 6’ 8” and 260 pounds. Elizabeth Burgin led the escape of over 200 American prisoners from the deadly British prison ships where more colonists would die than on the battlefield. And teenager Betty Zane in a daring mission resupplied Ft. Henry’s defenders with gunpowder in one of the final battles of the war. These and many others were ordinary people doing extraordinary things – unsung heroes who knew something bigger.

Retirement planning isn’t the drama of war. However, it has similarities. Success requires clarity of the mission, battling with life’s uncertainties, and there will be victories and defeats. And throughout the journey, you’ll remain steadfast to your battle plan, and have the strength and wisdom to make adjustments along the way.

I often reflect on the many client conversations I have about retirement, and life. So I thought I’d share three common themes. But first a quick story…

“I’ve picked my retirement date and I want to make sure I’ve got my financial affairs in order,” said the lady. “Oh, and I’m inheriting some money. My aunt passed recently, and as her executor and trustee, I’ve been liquidating things. I’m heading out of town for the holidays. I’ll talk to my CPA early next year when I make the distributions to beneficiaries, my sister and I.”

Hold on, let’s review her estate summary. Significant income was going to be taxable, but to whom – beneficiaries or the estate/trust – was unclear. That is a big tax planning issue. Income at the trust level is often taxed at the highest rate. An individual hits the top tax rate with taxable income about $407k (about $458k for a family); however, the trust may hit it at $12,500. The tax bill might be cut in half if that income was “passed through” to her in 2014, rather than the trust incurring the higher tax liability for 2014 and deferring the distribution to 2015.

Life is busy. But why allow big things to fall through the cracks? Her CPA was consulted for his tax advice and actions necessary prior to New Year’s Eve. She might have a nice tax savings in her Christmas stocking when she returns.

Retirement Can Surprise You – It’s not a lifetime of cruise ships, golf, or whatever leisure activity the ads suggest. Mitch Anthony, author of The New Retirementality, discusses the importance of finding and maintaining “purpose in life.” Retirement is a great transition in life. For some, work is their life – so there’s the need to develop other hobbies and interests. And working beyond age 62, or 65, or whatever mythical goal line for “normal” retirement, doesn’t make you a loser. Some continue to work for the paycheck. Others do it for benefits, including the payback from “being engaged.” Anthony writes, and I paraphrase, “If I took up a lifetime of golf, first I’d become bored, and eventually I’d become boring.” So practice retirement before you pull the trigger.

Retirement’s More than Managing Investments and Money – Money is a yardstick for some. For others, it’s a tool. Things it doesn’t buy are time, happiness, love, wisdom, talent, curiosity, or trust. My mentor at Vistage, an international organization of CEO’s, stressed the importance of having “balanced goals” – family and relationships, professional, personal, financial, community, spiritual, etc. What do you want your life to look like? Yes money is a tool to help support that. But knowing the “whys” of your life is a much more relevant and compelling driver to the “hows” – how much you need to save (or can spend), and to invest, insure, tax and estate planning, etc.

Life’s Tough… As is Retirement and Planning – I still chuckle when I think about Erma Bombeck’s book titled If Life’s a Bowl of Cherries, What am I Doing in the Pits? Tony Blair, former British Prime Minister,described the complexities of life and challenges today. No longer can we solve problems sequentially – one at a time; today’s world is multi-dimensional and challenges multi-directional. Often, it’s then prudent to get several heads together, each representing different expertise and perspective, to think things through, and to have shoulders to lean on when times get tough.

Life doesn’t move in a straight line. Life’s curly. I wish you health, prosperity and strength in the years ahead.

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3 Thoughts Before the Holidays

Today we honor we honor many – the men and women who made the ultimate sacrifice on the decks and fields of Oahu, and those who served in the Pacific and European Theaters of WWII. That Day of Infamy ignited a period of suffering, death and destruction, as all wars bring; and ended with the first and hopefully only time that atomic weapons were deployed. Yet, how many teachers, scientists, doctors, artists, and the like, both Japanese and American – great women and men who created great works or have impacted positive change for others – are on this Earth because their fathers avoided an inevitable and devastating land invasion of Japan triggered by the surprise attack on Pearl Harbor seventy-three years ago?

Money is a tool that can bring security, freedom, and opportunities in our lives. It can help preserve and protect life. It can change lives. I’ll share some reflections that hopefully give you some ideas for the many seasons ahead, and waken the sleeping giant inside you.

Trends in Retirement Plans – I’ll share some thoughts expressed from a panel discussion of three retirement industry executives, and my insights.

• Defined contribution plans (e.g. 401k’s) evolved to supplement defined benefit plans (pension plans) and Social Security. Furthermore, the amount you can contribute annually is limited by the IRS, and each year those limits are subject to increase, maybe. For 2015, the limit for 401k contributions increased by $500 or $1,000 (depending if you’re 50 or over), SIMPLE’s up by $500, but IRAs are unchanged.
• Income from retirement plans may be limited due to insufficient contributions, poor investor behavior or investment performance, or the type of retirement plan, if any, offered by your employer.
• These emphasize the need to control the things we can control. It’s about being a model for good investor behavior, and investing the time to develop multiple sources of retirement income, including after-tax investments, business or real estate income, and retirement accounts. And perhaps you need to defer the retirement party, or work part-time in retirement.

Some Solutions
• Ok, you’re “In” unless you “Opt Out” – More employer plans offer automatic enrollment and/or investment option defaults to help increase participation – to help overcome “I’ll do it later” or confusion. And other plans nudge you to up your contribution rate, say in increments of 1% annually, until you hit 10%. These help “force” you to save for the future.
• Play with the big kids – Some investors are fully capable of DIY investing. However, others may benefit from a little help. So retirement plans offer a combination of DIY investing (menu of fund options), and institutional management services (e.g. target date funds, allocation funds, and customized portfolios). Target date funds (TDF) get a lot of attention (e.g. may be a default investment option), and may be appropriate for the average participant or casual investor. However, all TDFs are not created equal. They come in all shapes and sizes, and there are about three dozen TDF fund providers.
• Income guarantees – Drivers tend to put the foot on the brakes when road conditions become dicey. Similar behavior occurs as we near retirement age. We don’t have time to earn it again, can ill-afford to make a “big mistake,” and market calamities scare the bejesus out of us. People like “sure things” and converting a mountain of retirement assets into a steady retirement paycheck is nirvana. However, the problems with “guaranteed income” are two-fold. First, the retirement plan industry isn’t quite there for 401k’s. Second, annuities may provide an alternative solution. However, caveat emptor. Be careful of the annuity mumbo jumbo. Ask about the guarantees for inflation-protected income in retirement. Remember the eternal risk/return tradeoff. says you should plan on a 2% to 5% return with a hybrid or equity-indexed annuity, or an immediate annuity. So if your lifestyle plan requires a higher return or flexibility, consider annuities for a portion, and seek caring and professional help for the rest.

When to Take Social Security
Benefit calculations are complicated by covered earnings, age, and post-retirement earnings. And there are numerous options when to start benefits. One rule of thumb is to defer filing to age 70 for maximum benefits. However, Wei-Yin Hu, a researcher at Financial Engines estimates there are over 8,000 ways a couple can file for retirement benefits. Check your projected benefits at And check the calculators at and I ran a hypothetical on myself assuming my wife and I elected to start drawing at full retirement age 66. Their calculator suggested we’d increase our lifetime benefits by about 12% if my wife filed for earned benefits at 66, I file for spousal benefits at 66 (with restricted application to exclude earned benefits), then at age 70, I file for earned benefits and she files for spousal benefits. The calculator makes numerous assumptions including the exclusion of widowed or disabled benefits, “start and suspend” options, and inflation. Nevertheless it’s interesting to consider options, and suggests one should get help in thinking this one through.

“They want you to say Grace… The blessing!”
The year’s end can be chaotic – tying up loose business ends, managing for travel and “time off” schedules, and boxing the packages to meet Steve the mail guy’s shipping deadlines. However, the conversation between Aunt Bethany and Uncle Lewis warms me with the holiday spirit. It’s a time for friends and family, caring for those in need, and to smile. May you have health, prosperity and strength. Thank you.

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The Monty Hall Paradox & More Nuggets from Denver

You remember Monty Hall and “Let’s Make a Deal” a popular game show in the 60’s and 70’s? He’d present contestants with a common scenario. There are three closed doors – you win the prize behind the door you choose. A shiny new car is behind one door. Two smelly goats are behind the others. However, you don’t know what’s behind door one, two or three. You choose door number one. Monty opens one of the other doors – one which he knows holds a goat – and asks if you want to switch your choice to the unopened door you didn’t choose. Do you switch or stay?

Many people think that once one door is eliminated, then switching does not matter – they think the probability between the remaining two doors is 50-50. But this is incorrect statistically. And psychologists point to the behavioral phenomena behind the dilemma of “choice” – people prefer to stick with the choice they’ve already made. The pain of sticking to your original choice, even if it turns out to be wrong, is a lot less than the risk of switching a winning hand for a loser.

The math says you should switch because the probability of winning is two out of three; and sticking with your first choice remains at one out of three. Suppose you play this game 600 times. You will correctly pick the right door at the outset about 200 times. But 400 times you’d bring home a goat if you didn’t switch. Monty won’t open the door with the car. So in 400 times, the car will be behind the door you didn’t originally pick. This is similar to the street scam of “three-card monte.” What we intuitively think is a 50-50 probability, is not.

Recently I attended a national conference with some 2,000 fellow advisors in Denver. The four day event was rich with half a dozen keynote speakers, a choice of five dozen education sessions, and conversations with peers and service providers. I’ll share two.

Jay Mooreland, a financial planner and host of website, discussed how advisors can help their clients achieve their financial goals by preventing behavioral biases from sabotaging long-term objectives. He opened with “let’s play a game” and presented two questions. How would you answer?

• A bat and ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
• It takes five machines five minutes to make five widgets. How long would it take a hundred machines to make a hundred widgets?

Moreland’s “game” focused on the human temptation to make mental shortcuts when faced with uncertain situations that often result in foolish decisions. Often, we trade intuition for analysis – the later takes time and effort. Behavioral experts expand the human challenge of making rational decisions in an irrational world in books including MIT professor Dan Ariely’s “Predictably Irrational” and Nobel Laureate and Princeton professor Daniel Kahneman’s “Thinking, Fast and Slow.”

The correct answers to the two questions? They’re five cents, and five minutes. The vast majority of people respond quickly and confidently… and are wrong. And education doesn’t necessarily help. More than half of Harvard, Princeton and MIT students routinely answer incorrectly.

International economist Dambisa Moyo warned us of the risks of being blindsided by unaddressed negative trends. You may have heard of Ms. Moyo from her book “Dead Aid, Why Aid is Not Working and How There is Another Way for Africa,” Bill Gates’ criticism, and her fiery response last year. Nevertheless, Ms. Moyo, a Zambian national and former economist for the World Bank, said not to be overly optimistic of some short-term advancements such as US job gains (are they “good” jobs?) and the temporary fixes from quantitative easing. Rather she had a less sanguine view longer term from four trends – technological advancements (putting unskilled out of work), changing demographics (aging populations), income inequality, and resource scarcity.

I share these two nuggets from Denver for a couple of reasons:

• Recognize that we’re human. Emotions and biases can hinder rational decision making.
• Have a process and plan with updated assumptions.
• Stay focused on the things we can control and make adjustments – short term results can be misleading when judging long-term success.
• Life’s a lot more interesting than a simple choice of “Door number one, two or three?”

Good luck!

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Need a nudge, or kick in the pants – Changes to Social Security

Johnny Depp movies romanticize life on the high seas and naval warfare of the 18th century. But war is hell and dangerous duties abound on the square-rigged frigates. One of the jobs was to quickly and efficiently supply the canon gun crews with gun powder. Mere boys, some as young as eight, were “recruited” for their size and agility to make the trip from the ship’s magazine, upstairs to the main deck, and back, as the carnage of another broadside battle continued. Those lads carried the ridiculous title of “powder monkeys,” had one of the most dangerous jobs on board, and many didn’t see their homes again.

I hope your life expectancy is longer than that of a powder monkey. Three decades of retirement deserve careful planning. Here are three planning insights about recent changes in Social Security retirement benefits.

Yay, a 1.7% raise!

Retirees can expect a bump in their monthly SS retirement checks starting in January. The average retired worker will see a $22 cost of living adjustment (COLA) to $1,328, and $36 for the average retired couple to $2,176. The maximum SS for a retiree reaching full retirement (age 66) in 2015 will be $2,663. The “taxable earnings” – workers and employers will each continue to contribute 6.2% of every paycheck – tops out at $118,500. Medicare B premiums remain unchanged ($105 per month). High income seniors will continue to be charged an additional Medicare Part B premium (based on income) and tops out about $231 a month – plus they may be subject to the 0.9% Medicare surcharge tax (under Obamacare) on excess earnings.

Since 1975, the COLA has been linked to the Consumer Price Index for Urban Wage Earners (CPI-W). It is set each October based on the prior 12 months’ data. Some advocates argue the CPI-W understates the rising costs seniors face. Others suggest the COLA should be linked to a lower measure of inflation – “chained CPI.” Nevertheless, the COLA adjustments have averaged about 3.8% annually since 1975 (a high of 14.3% in 1980, and zeros in 2010 and 2011). And they’ve averaged 1.7% for the past five years.

Planning Implications

Fill the gap – Even if you earn the maximum SS retirement benefit, it may only account for half of a $5,000 per month retirement lifestyle – and a lot less if future SS benefits get reduced or “full retirement age” is extended to preserve the sustainability of an entitlement program threatened to go bust. You may have a gap to fill, either by necessity or planning conservatively.

• Current investments (after tax-savings, retirement accounts – IRA, 401k, Thrift Savings, Deferred Comp, etc. – rental real estate, etc.)

• Future savings, business sales proceeds, and windfalls (inheritances, insurance benefits, lottery, etc.)

Protect from the secret menace, inflation – What can you do to put things better in your favor so that the total of all your retirement paychecks (SS, pensions, annuities, account distributions, etc.) keep pace with rising living costs and you don’t run out of money? Inflation is like another tax. Say your retirement income rises 3% annually, but inflation averages 4%… your income will be worth 83% of what it is today in twenty years. And God forbid you’ve locked yourself into a fixed payout – $100 a month, and every month until you leave this Earth. That $100 bill will be worth about half as much as it is today in twenty years if inflation taxes you at 3% a year.

• Heed one of the “Five Rules of Gold” in the George S. Clason classic, The Richest Man in Babylon, which was “don’t kill your slaves.” Don’t spend all your investment returns… reinvest some for the future to multiply (compound).

• Have some “growth” in your portfolios… don’t invest solely for “income” (which is close as a gnat’s bottom to the ground these days, unless you “reach” for riskier investments).

• Downsize your debt, living costs (including taxes), and your house (and your knees might appreciate fewer stairs).

Double check those Social Security Statements – Miss those green statements containing estimated benefit forecasts? They’re back! SSA bowed to public pressure after they stopped mailing them in 2011 in a cost-cutting move. Workers were advised to set up online accounts at, but apparently only 14 million logged on. Watch your mailbox for statements in those milestone years (age 25, 30, 35… to age 60), and register online.

• Check your benefit estimates, descriptions of the Windfall Elimination Provision and Government Offset rules that can reduce benefits for the so-called “double dippers,” and your earnings history.

I read an interesting survey by American Century that asked workers participating in their company’s retirement plan “what intervention, if any, do they want from their employers?” Forty percent wanted “a slight nudge” to encourage them to save for retirement. Another two in five wanted something a bit stronger – “a strong nudge” or a “kick in the pants.” So I suggest “Please sir, may I have another?” and chat with your advisors. Good luck.

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Who Will Benefit from Your Retirement Account?

Good work! You’ve saved hard for retirement and now you’re paying closer attention to an often over-looked area – beneficiary designations.

Who gets the remaining treasure when you die? Are you sure those transfers are going to happen? Not to be cynical, consider this scenario…

You’re married and have three adult kids. You name your beloved spouse as the primary beneficiary. However, you fret over the contingent beneficiary designations. You feel confident with two of your kids – they were raised well and leading productive and responsible lives. You worry about the third – maybe unsettled, still “finding his or her way,” legal issues, or a ne’er-do-well mate – and your intuition suggests that sudden wealth would quickly vanish through their fingers.

Yet you painfully write “my living issue, equally” on the beneficiary form, and hope for the best. But don’t worry. You pass away, your beloved spouse rolls the distribution of your retirement into her IRA. And she’s named her two kids from a prior marriage, or her new partner, as beneficiaries, thereby disinheriting your kin.
Retirement planning is more than budgeting savings and picking aggressive, moderate, or conservative. Most planning issues are multi-dimensional involving financial, tax, legal, family, business, and behavioral issues. We’ll discuss major beneficiary planning considerations.

One of the reasons to rollover your retirement plan account to your IRA is to retain the residual value upon your death. Certainly, you could have elected to receive monthly benefits from your former retirement plan, including continuation of benefits to your spouse. However, upon the surviving spouse’s death, benefits generally cease. Prudent investment of the rollover might leave additional wealth. You can name various beneficiaries of your IRA – your spouse, children, charity, or trust; and each is subject to unique tax ramifications.

However, second marriages – either the current one, or your spouse remarries after your death – can create an interesting dilemma. Assuming your spouse is named as primary beneficiary, he or she can roll the IRA to their IRA and designate their specific beneficiaries. As illustrated in the example above, it didn’t matter that you had named your kids as the contingent beneficiaries.

Three possible solutions

Split your IRA into two or more with different beneficiaries – You might name your spouse as primary beneficiary of one IRA, and your kids as primary beneficiaries of the other. A disadvantage would be that your surviving spouse blows his or her IRA and they then depend upon the generosity of your children.

Modify your life insurance beneficiaries.

Prudently use trusts – Control, management and protection are the potential benefits of using trusts in your estate plan. Some situations to consider naming a trust, not individuals, as IRA beneficiaries:

• Want your kids to inherit wealth upon the surviving spouse’s death;
• One of your beneficiaries has “special needs.” Direct receipt of IRA proceeds may jeopardize qualification for disability or government benefits;
• You have minor aged children, and want to avoid the costs of court appointed/supervised conservators until they reach the age of majority;
• Situations of financially irresponsible beneficiaries and/or their protection is desired.

However, beware the tax hazards of blindly naming any type of trust as IRA beneficiary. Generally, the Tax Code doesn’t recognize a trust as an “individual” for purposes of “stretching” the tax-deferral/distributions of IRAs. Instead, the IRA proceeds may be required to be distributed within 5 years following death of the IRA owner, and the distributions may be taxed at higher rates than an individual.

Trust compliance with specific rules may accomplish two key benefits – “stretching” the IRA and keeping control out of the beneficiary’s hands. Qualifying trusts may include “IRA Look Through” or “Retirement Benefit” trusts. If a group of trust beneficiaries is named (e.g. 75 year old spouse, 50 year old son, and 20 year old granddaughter), then the life expectancy of the eldest beneficiary is used for purposes of calculating future required minimum distributions , and hence, the efficiency (or not) of the “stretch.”

Major conclusions

Find the right balance between “ruling from the grave” and “I don’t care… I’ll be dead.”

Adding sophistication has costs, including tax and legal expense, and potential burdens and strains among family members.

The payoffs can be huge including your successful retirement, tax reduction, strong family relationships and smooth wealth transfers. Get the right chiefs at the fire including your family, estate attorney, CPA, and financial advisors. The issues are complex, require special expertise, and deserve “thinking things through.”

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Some Overlooked Rollover Rules

A recent story in Bloomberg titled “Retirees suffer as $300 billion 401k rollover boom enriches brokers” highlighted the fears of many investors – the potential for conflicts of interest between you and your broker. Are the future pictures on the wall going to be you enjoying a comfortable retirement, living with dignity, and your grandkids graduating from college or vocational school? Or instead, are they going to be those of your broker’s future? Shouldn’t they be both?

What’s in your best interest with your retirement plan when you leave one job for another, or exit the workforce permanently? The issues are numerous, and your situation unique. There’s a big push for the retirement readiness of our nation’s population through financial literacy and saving incentives. Regulators have pushed for greater industry transparency and disclosure. And debates continue over a new fiduciary standard (brokers and advisors to act in the client’s best interests during rollovers).

This is the first of a series of articles intended to help you continue to make smart financial decisions. Future articles will discuss the pros and cons of rollovers (should you do a rollover), and the issue of suitability (how do you invest).

The basic rules on retirement plan distributions are that they’re generally taxable as ordinary income, may trigger early withdrawal penalties, and the potential for tax deferral by rolling the funds over to another eligible retirement account. Here are some of the lesser known rules about rollovers.

Five Options

Say you leave an employer and have $100,000 in their 401k-style retirement plan. Many automatically think of an IRA rollover. However, some don’t consider the other options with those retirement plan dollars.

• IRA rollover
• Leave it in the company plan
• Roll it to the new company plan
• Take a lump sum distribution
• Make a Roth conversion

Inertia can be a tough thing to overcome. Some plans allow you to stay put. Perhaps you’re comfortable with the current plan reporting, expenses and investment options, and you don’t want to do your homework and explore the broader universe. However, other plans may want you out when you end your employment for a host of reasons including administration, cost and liability issues.

Does your new employer’s plan accept rollovers? If the plan’s investment options are best for you, then rollover to that plan can simplify your life (less accounts to manage). However, some plans don’t accept rollovers, largely due to the same reasons your former plan wants you out.

The lump sum distributions and Roth conversions share a common result – you’re going to write a check or two for income taxes. The lump sum option provides you liquidity and bolsters the “after-tax” side of your balance sheet. A risk is you use the funds for a joy ride (especially when you’re switching jobs) and not preserve the funds for what they were intended (retirement). And the Roth conversion provides the benefits of future tax-free withdrawals, and might avoid future required minimum distributions.

Net Unrealized Appreciation (NUA) Strategy

This might be advantageous if your plan includes company stock that has significant gains, you’re in a high income tax bracket, and expect to be in a high bracket throughout retirement. By taking the distribution of employer stock, you might pay taxes as low as 15% (capital gains) rather than doing a rollover (and even repositioning the shares into other investments), and down the road, taking retirement plan distribution as ordinary income. This strategy is complex and you should consult your CPA for the specifics. Generally, taking distribution of the employer stock to a taxable account triggers ordinary income on the cost basis of the shares, but the NUA (difference between market value at distribution and cost basis) isn’t taxable until you later sell the shares (potentially at long-term capital gains rate if held for a year or more from time of distribution). A risk of this strategy, like many transactions focused primarily on tax savings vs economic merit, is you’ve got a dog of a stock.

Don’t put the IRA rollover decision on autopilot. Good luck!

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Easy Money or Bad Idea?

A number one concern of retirees is running out of money in retirement. Say you’re strapped for cash flow, or worried about depleting your retirement savings. What do you do?

Home equity might be your most significant asset and a tempting solution. Early on, I was drilled “Don’t consider your residence as an investment asset. It’s a personal asset – you need a roof over your head. Consider it an ‘idle’ asset. Accessing that equity is via selling the home, or borrowing against it.” The first one – downsizing – may make sense for retirees (less lawn to mow). The second one… well we learned the harsh lessons of using our homes as ATMs. But a third option emerged – reverse mortgages.

Easy money? Perhaps. They offer homeowners the benefits of staying in their home, and, withdrawing some of the equity. But their popularity suggests otherwise. HUD’s reverse mortgages (Home Equity Conversion Mortgages or HECMs) number about 60,000 in the US in late 2013, representing a decline of almost half from their high in 2008-09. Some call reverse mortgages “loans of last resort.”

There are many types of reverse mortgages including those government or agency backed, and proprietary or privately insured. We’ll focus on FHA-insured HECMs.

I’ll summarize what they are, and more importantly, several planning considerations which are relevant to other issues in your personal finances.

They’re a type of home loan where homeowners convert a portion of the equity into cash – a lump sum, line of credit, monthly cash payment, or some combination. But you don’t make payments. There are many requirements, variations and loan calculators which you can read online (e.g. Generally you must be 62 or older, the homeowner, and live in the home. The accessible cash is based on age, interest rates, and property value. Per a hypothetical estimate on, a couple age 65 with a $300,000 home debt free might qualify for a monthly check of about $847 for life, or a principal limit of about $153,000. Homeowner retains title to the property, and the responsibilities of taxes, insurance, utilities and maintenance. Mirroring traditional mortgages, these generally involve rising debt (mortgage balance) and falling equity. The loan generally comes due when you sell the home, move out, or the surviving borrower passes. And mortgage insurance helps protect the borrower.

Planning Considerations

Know the costs – Reverse mortgages are generally more expensive than traditional mortgages – both up front and on-going – primarily due to the cost of mortgage insurance and servicing fees. Read and understand the documents.

Inflation – Two impacts. First, perhaps you’re procrastinating – “We’ll downsize or reverse mortgage later.” Higher inflation implies higher interest rates. If you’re going to downsize and finance part of the purchase, why not make the transition before mortgage rates significantly rise? And, if you’re going to reverse mortgage, higher rates may mean a lower amount of accessible cash. Second, inflation can decimate the value of electing a lifetime of fixed payments. Using the example above, if you reversed today, an $847 monthly check may be sufficient to augment your retirement income today. Will that same $847 check be enough in 20 or 30 years?

Non-borrowing spouse – What if you’ve remarried… the pool boy (or gal) – i.e. you were 62 or older and qualified for the HELC, but not your partner – or your partner wasn’t listed on the title (or didn’t want to sign the loan papers)? And what if you died? He or she likely needs to find another roof, and the reverse monthly checks cease. Spousal protection cases are currently in the courts. What steps should you do today in planning for the future?

A piece of pyrite sits in my office. It’s heavy, multi-faceted and shiny. As “fool’s gold,” it’s a reminder to me that things aren’t always what they appear to be. Talk to your advisors. Get legal counsel. Think things through.

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Going for the Gold

They’re soaring, flying, gliding and scoring. Men and women from across the globe are competing in Sochi for the gold. My athletic glory days may be past, yet I’ll root the youngsters on. However, I’ve got gold to pass on to my heirs.

Baby Boomers are projected to transfer between 12 and 40 trillion in wealth to Gen X and Y. The 40 trillion reflects many pre-2008 Financial Crisis estimates. The 12 trillion reflects potential revisions for lost wealth or joblessness. Nevertheless, two take aways are (a) younger generations stand to be prudent and conservative accumulators of wealth – skeptical of fast and easy money, and (b) it’s still a ton of money.

So what do you do with your inheritance? And on a parallel course, what fine-tuning is appropriate for you Boomers?

Settle the estate. Your parents may have designated you and your siblings to help steer their ship and settle their estate – executor, trustee, and guardian. I remember sitting in my father’s garage as one of the three Loy boys a little over two decades ago. Our father had passed and we had the jobs of settling and distributing his estate. It involved legal and accounting responsibilities, and the personal issues of fairly and equitably slicing the pie. Fortunately, we got along and the jobs were well done. Others aren’t as fortunate. Some say blood’s thicker than water until it comes to money. How well do you work with your brothers and sisters? Will you seek the advice of professional advisors in dotting “I’s” and crossing “T’s?” And how can those third parties help you foster strong family bonds, rather than suffer division?

Outright distribution of assets. Will your inheritance be outright (receipt of assets or a check) or in trust? Some assets transfer outright by the will (e.g. family heirlooms), ownership (e.g. joint banking accounts), or beneficiary designations (e.g. retirement accounts). Are you prepared to take on complex assets (e.g. a business), what if Mom and Dad named sibling #2 as joint owner on all their bank accounts because he or she lived the closest, and do you liquidate your share of your father’s IRA (and pay the taxes) or rollover to an inherited IRA account (tax deferral) and take required minimum distributions over your lifetime? Do you keep the investments “as is” (they were good enough for my folks, or refuse to generate taxable capital gains – remember investment markets are indifferent to your ‘cost basis’… the future performance of an investment, good or bad, is going to be the same whether you own it at $1 or your neighbor at $100 per share), or reposition according to your situation? In lieu of writing a check to your favorite charity, how about gifting an appreciated asset?

Distribution in trust. You may receive car keys and a check, yet the bulk of your inheritance may come in trust. There will be strings attached. Perhaps you’ll receive the income from the trust assets each year, however, the principal might be parsed out periodically (e.g. a third at age 35, half at 40 and the balance 5 years later) or it’s reserved for your future kids. It isn’t necessarily because they don’t trust you, rather they’re concerned what might happen to you – a marriage gone wrong or litigation from a car accident. Situations arise from the definitions of “income” and “reasonable expenses for health, education and welfare” (what’s “reasonable”). Competing interests may arise if there are multiple trust beneficiaries – income beneficiaries want maximum income generation yet the residual beneficiaries say heck with income, we want maximum growth. Fiduciaries (trustees, investment advisors, etc.) negotiate these minefields. Get legal and tax advice from experts.

Bottom line, be a good steward of the treasure you’ve inherited. Likely your folks worked hard and sacrificed for that money. The fire red headed Olympic racer Katie Uhlaender currently stands in skeleton medal contention. Whether or not she stands on the medal podium, she wears her deceased father’s 1972 National League championship ring around her neck. She doesn’t ride alone.

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