Did You Know...Your Financial Health?

The Ten Commandments Of Personal Finance by Fritz

2016-09-08T08:22:00.004-07:00

The Ten Commandments Of Personal Finance Posted on November 18, 2015 by fritz@theretirementmanifesto.com Is it possible that there are some basic principles upon which your personal finance journey should be built? It turns out there are. I’ll warn you in advance – you may not like some of them. Just as THE Ten Commandments guide us away from our personal nature which is sometimes tempted to do things which seem fun at the time, but lead to long term harm, these “Personal Finance Commandments” can guide you away from doing things which will bring harm to your long term financial goals. In full transparency, I didn’t come up with the original list. That honor goes to this article from MoneyStepper, which I just read tonight. I liked the concept and the guidelines presented so much, I’ve decided to build on the original article with original thoughts of my own, including the “10 Commandments” title. In my quest to “Help People Achieve A Great Retirement”, I think there’s a lot of room to share some of the best concepts I come across in my heavy reading on personal finance topics. This one’s a good one, and worth my effort to build upon the concept. Strive to achieve as many of these commandments as you can, and you’ll be well on your way toward financial independence. Break them, and suffer the consequences. The 10 Commandments Of Personal Finance I. Keep Your Housing Costs Under 25% of Your Net Income Personally, I like these “rule of thumb” guidelines to help you decide how much of something you can afford. When you’re shopping with a realtor, or talking to a banker, they often attempt to “stretch” you to a ratio that’s higher than you should really undertake. So, look at your last paycheck. How much went into your bank account? If you rent, your rent should be less than 25% of your monthly NET pay (after taxes). Ditto on your mortgage payment. If you’re spending more than the 25% “commandment”, consider downsizing, or seek out a job with higher pay. II. Keep Your Mortgage Under 2.5 Times Your Annual Salary Interesting that the first two “Commandments” focus on housing costs. Appropriate, given the cost of the roof over your head is the highest expense you’ll incur in your personal finance journey. Manage it carefully, and don’t buy “too much” home. If you’re making $50,000/year, your home should be worth $125k or less. III. Don’t Buy A New Car Unless You’re A Millionaire I LOVE this one. Bottom line: buying a new car is stupid (yes, I said Stupid!). It depreciates immediately, and it’s expensive. It’s one of the worst personal finance decisions you can make. Don’t “Buy New”! After a few months, it’s “just a car”. Within a few years, if you’re like most people, you’re “itching” for another one. AVOID the materialism – focus on the function. My wife and I have bought used cars for years, and paid cash for all but our first one. We bought her last car new (a 2012 Hyundai Sonata for $25k), but I’ve told her she can’t sell it until it has over 200,000 miles on it. Oh the fun we have on this topic. Yes, this one is a HOT button for me. Don’t let Madison Avenue talk you into a mistake. Here’s a challenge for you, which I’ve accomplished with several of my cars: “$1,000 PER YEAR” Depreciation, that is. Make it a personal goal. Think on it. If you buy a $20,000 car and sell it in 3 years, you’d have to sell it for $17,000 to achieve this goal. It can be done, I’ve done it twice (most recently with my 2002 Miata, which I bought for $12,000, and sold it 6 years later for $7,000). It’s really, really hard, but it helps you keep your car expense where it should be – MINIMIZED! IV. Maintain A Savings Rate of 20% or More I know, I know. You have a million reasons…… Get over it. When you get your next pay raise, divert the majority of it to savings. For example, if you get a 3% raise, increase your savings rate by 2% ON THE SAME MONTH that your pay increase hits your paycheck. You’ll never miss it, and within a few short years you’ll be over 20%. With pensions gone the way of the dinosaurs, and Social Security anything but secure, it’s critical you save at the 20% level to have a realistic chance of a “normal” retirement. Or, you can keep making excuses. Don’t say you haven’t been warned when you’re 70 years old and fearing for how you’re going to live on your meager savings. Do it now, while you still have time. You’ve been warned. Again. Getting the hint? V. Earn A Minimum Of 5% On Your Net Worth This is a new one, and my compliments to MoneyStepper for the concept. He argues that you should look at the return on all of your assets (including home value) and strive to achieve a minimum of 5% return. This is necessary to grow your savings into a large enough asset pool to offset inflation and provide the income you’ll need in retirement. The takeaway for me – keep your assets widely diversified, and don’t get in the trap of “too much in cash” beyond your 6 month emergency fund. You must earn a higher return than is possible on fixed income investments to grow your assets at the rate they must grow to reach your objectives. VI. Think Before You Act I’ve modified MoneyStepper’s rule, which read “consider every financial decision carefully via an investment analysis”, to a simplified “Think Before You Act”. Personally, I think the use of “investment analysis” scares people off, and it’s not necessary to make the point of this Commandment. The point here is to realize that your longer term personal finance success is nothing more than a long journey of little steps, every day. Don’t make spontaneous decisions on topics related to money (see Commandment III above), but realize that every decision you make has a long term impact. I’m a big fan of annual Net Worth tracking, as it gives you a nice way to see the results at least once a year from all of the little decisions you made during the year. VII. Pay Off Your Highest Debt First Make getting out of debt a huge focus. One could argue whether it’s best to pay off your “Smallest Debt” first (Dave Ramsey’s “snowball” method) or your “Most Expensive” debt first. Viewed strictly from a financial perspective, you’ll come out further ahead if you tackle the most expensive debt first. From a motivational perspective, the “smallest first” may be more encouraging. The point is: attack debt, and attack it HARD. It’s the fiercest enemy of your longer term financial goals (right up there with Procrastination!). VIII. If It’s Not In The Budget, Don’t Buy It Yes, that means you need to have a budget. A friend and I have had this discussion, and he believes if you’re saving more than 20% of your pay you don’t need a budget (as long as you’re not in debt). His logic – you’re saving 20% and you’re debt free. You don’t need to micro manage as long as you don’t spend more than the 80% remaining after your savings. I’ll give him that. Using the same logic, if you’re NOT saving 20% or more, or you’re in debt, you need a budget. If you’ve never done one, try it for one month. The purpose of the budget is to avoid making mistakes in your discretionary spending, which is exactly the point of this Commandment. IX. Never Go Shopping Without A List We’ve all been there, right? This one works. Make it a habbit, and only buy the items on the list! X. Always Think In Terms Of Hourly Value The MoneyStepper author uses this rule to guide you on what you should hire others to do. If you can make $20/hour working, but instead you spend an hour mowing your yard that you could pay the neighbor kid $10 to complete, pay the kid. I have a bit of a different opion on this one. You should only pay the kid if you WILL work the extra hour making $20 instead of mowing the yard. If it’s a choice between watching TV and mowing the yard yourself, mow it yourself. You just made $10 more by investing your time instead of paying the kid. Also, I think it’s helpful if you think of items you’re considering purchasing in “Hour Terms” instead of “Dollar Terms”. If you think about how much work it took you to pay for something, you may be just a bit more hesitant to open your wallet buying yet another thing you really don’t need. So, there you have it. 10 Commandments For your Personal Finance. See how many you can apply in your own life. The next time you’re facing a money decision that falls within these commandments, stop and think. If you do that, the past 2 hours of my life spent writing this will have been invested wisely. Make me proud.

5 Things Rich People Do With Their Money by Fritz

2016-09-08T08:20:00.002-07:00

5 Things Rich People Do With Their Money Posted on July 19, 2016 by fritz@theretirementmanifesto.com Do you think you can learn something from rich people? How much do you know about them? Have you studied their habits to see what you can learn? Do you think they inherited most of their wealth? (They didn’t. In fact, only 10% inherited their wealth). Did they start on their paths toward financial responsibility earlier than most? (They did, with the average wealthy person starting to save by the age of 14). What are the top 5 things rich people do with their money? Are there common themes which could benefit you if they were applied in your own life? Today, we’ll review some interesting traits of wealthy people. 5 Things Rich People Do With Their Money I read an interesting survey this week from US Trust, which covered 684 high net worth investors, with at least $3 Million in investable assets. There are some very interesting findings in the survey, which is my focus for today’s article. There are, indeed, some very common traits among these folks. All of us could benefit from studying their habits and applying them in our own lives. Rich folks have some common traits regarding their finances. How many can you apply yourself? CLICK TO TWEET Here, then, are the top 5 common traits regarding how rich people manage their money. Think about which ones you already do, and attempt to apply a few that you don’t. 1. They Start Early start early According to the US Trust study, a common trait among the wealthy is the fact that they had parents who instilled a strong sense financial responsibility at an early age. The average wealthy person began saving at Age 14, began working for money at Age 15, started charitable giving (time or money) by the Age of 23, and started investing in the stock market by Age 25. I started working (and saving) when I was 10. In elementary school, I started shoveling driveways in the neighborhood, and got my first “real job” (a paper route) at age 13. I saved diligently, and had several thousand dollars in my savings account by the time I graduated from high school. Clearly, my parents instilled the work/thrift ethic in me, and my wife and I have worked to instill it in our own daughter. 2. They Delay Gratification delay gratification I had a discussion during lunch with a financial planning friend last weekend, where we discussed the single most important attribute required for wealth creation. We both agreed that delaying gratification is likely one of the most important things within our control for creating wealth. (By the way, my friend’s name is Ed Wolpert, and he’s written 3 books on personal finance. Have a look here). Apparently, the wealthy feel the same way about delaying gratification, with 80% of them saying that investing in long-term goals is more important than funding current wants and needs. As I explained to my daughter when she expressed a desire for a motorcyle, if you want to build wealth you need to save the money first and buy things you WANT in cash. It helps you delay your gratification, and insures your money works for you (instead of the other way around). 3. They Focus Their Investments On Buy-And-Hold buy and hold In spite of significant wealth, 85% of high-net worth investors say they made their biggest investment gains through long-term buy and hold strategies. Rather than being savyy day-traders, they automate their savings month in and month out, and gradually watch their net worth grow. They keep their investments simple, with 89% using a traditional buy and hold approach in mostly stocks and bonds. In addition, the wealthy maintain cash reserves, with 54% of them holding at least 10% of their portfolios in cash. They also invest in tangible assets, with roughly half of high net worth investors owing real estate or farmland that produces income and appreciates over time. Compare this to the “average” person, who borrows an average of $30k on a 68 month loan to buy a new car, which depreciates immediately. Smart? Not. 4. They Are Charitable Charity Wealthy folks share a common trait of feeling a deep commitment to give back to society. 74% donate their money, 61% volunteer their time, and 47% serve on boards. They find a way to contribute to others, which is counter to the stereotype so often attributed to the wealthy. As I wrote in “No One Has Ever Become Poor By Giving”, generosity brings unexpected rewards to the giver. The wealthy have discovered that reality, and most do not hoard their wealth. 5. They Manage Their Own Destiny destiny Whether the wealthy gained their riches via private business or corporate roles, they all agree that owning a business is a path to greater wealth than working for someone else. I read a lot, and there are dozens of articles like this one that point to the reality that entrepreneurship is the surest way to real wealth. It can be a difficult path, however, as 70% of the wealthy who are business owners agree that it’s more challenging than just “having a job”. Regardless, 80% still prefer to run their own business, demonstrating their motivation to take control of their own destiny. The wealthy work hard, and often make sacrifices. 71% say work responsibilities take priority over personal needs. Think about what you really want in life before you pursue wealth, there are tradeoffs. Summary Wealthy people share some common themes in how they manage their money. I don’t know whether it’s cause or effect, but the principles outlined above have been proven time and time again to be fundamental building blocks for wealth creation. Yet again, this survey by from US Trust proves these principles are critical, and followed by a majority of people with significant wealth. How about you? How many of the items on the list above are apparent in your life? Are there a few that you can begin applying to your personal situation? Work toward implementing all 5 in your personal finances, and you’ll be well on your way to…

2016-08-19T14:22:00.002-07:00

New College Financial Aid Program Aims to Get Students Jobs, Not Debt Consumer Reports Tue, Aug 16 5:27 PM PDT The Obama administration is tackling two key problems in higher education today: Too many students go into debt to get a college degree, and too few land a job that puts their expensive education to use. Today, the Department of Education announced a pilot program, the Educational Quality Through Innovation Partnerships (EQUIP), that for the first time will give federal financial aid to students enrolled in nontraditional education programs, such as coding boot camps, online courses and corporation-based training initiatives. The aim is to give more students the chance to get trained for in-demand jobs quickly and affordably. In its pilot phase, the financial aid initiative will give up to $17 million in grants and loans to students enrolled in eight programs that have been preselected. The programs are partnerships between public universities and less-traditional education providers. All provide students protections, including refunds if they don’t get jobs after completing their training. Training Future Engineers and Managers EQUIP programs, which are largely focused on providing skills needed for high-tech jobs, include: Colorado State University Global Campus and Guild Education. A one-year certificate program in management and leadership fundamentals aimed at helping students move from low-wage jobs into supervisory roles. Marylhurst University in Oregon and Epicodus. A 27-week certificate program in web and mobile software development for low-income students to get jobs requiring computer software coding skills. Northeastern University and General Electric. An accelerated bachelor’s of science in high-tech manufacturing, initially only open to GE employees who will do their training at a GE jet-engine manufacturing plant. University of Texas Austin and MakerSquare. A 13-week computer-programming course to prepare students for mid-level software engineer jobs. The programs target lower income and nontraditional students who are either older, go to school part-time or want to update their skills mid-career. “In too many cases, low-income students have been unable to get the training they need because they don’t have access to financial aid to pay for them," Under Secretary of Education Ted Mitchell said in a press briefing. The ability of people to get jobs after doing the training is critical, he added. “It’s not enough to measure access and enrollment. We need a laser focus on outcomes.” In the next decade, 11 of the 15 fastest growing occupations will require some kind of post-high school education. New Model of Education Welcome but Not a Cure All Consumer advocates applauded the move. “It's no secret that there are skilled jobs in the U.S. that employers are having a hard time filling—and that online education and training has a role to play more broadly in expanding access to learning opportunities,” said Suzanne Martindale, a staff lawyer at Consumers Union, the policy and mobilization arm of Consumer Reports, who focuses on higher education issues. The financial aid program comes as a growing number of people question the cost of higher education. Today a four-year education at a state school—including tuition, fees, and room and board—costs an average of $78,000; at a private university, it’s more than double that. More than 70 percent of graduates leave school with debt. And it's wreaking financial havoc on their lives. A Consumer Reports nationally representative survey (PDF) of more than 1,500 student loan borrowers found that 44 percent of those who've left college say they have had to cut back on daily living expenses, and 28 percent have had to delay major goals like buying a house, and 37 percent put off saving for retirement. The financial impact is so daunting that 45 percent of borrowers say knowing what they know now, their college experience was not worth the cost. The EQUIP programs aren’t a cure-all, said Martindale. “They won't be the right fit for everyone—not everyone is going to be a software engineer,” she said. It's important that these programs remain affordable, "especially if they recruit from low-income communities, so that if a program doesn't work out for the student she isn't stuck with a ton of debt at the end," she said. The financial aid programs will start rolling out early next year. The institutions are in the process of setting them up and getting final approval from the Department of Education. Mitchell estimates about 1,500 students will enroll in the first year.

2016-08-19T14:21:00.001-07:00

7 degrees, no student loans, and 5 years of savings BY KATHLEEN ELKINS WITH BUSINESS INSIDER Justin Hall and Tina Hanisch, both 29, invested a lot of time in their education. Hall received a bachelor's degree, two associate's degrees, and a master's degree, while Tina earned two bachelor's, an associate's, and is slated to complete her master's in two years, which will up their degree count to eight. Their education came with a hefty price tag of $206,000. They whittled that sum down to $68,000, and paid it without taking out any student loans. What's more, through diligent saving and creative strategies, Hall and Hanisch—who are not married—have saved enough money that they could choose not to work for the next five years. Their impressive savings were an indirect result of living below their means and keeping expenses at a minimum. "Neither of us can sit still, so not working is out of the question," Hall, who works in financial services, tells Business Insider. Hanisch is a registered nurse and works when she's not taking classes or studying. "Being financially responsible is more about the opportunities versus not having to work. We want the ability to take more risk, to try new things, and to experience life in ways you normally couldn't." Here's how they covered $206,000 worth of education and set themselves up for several years of financial independence. 1. They Took Advantage of Company Programs and Scholarships to Cover Tuition. While their education amounted to $206,000 total, they only had to cover $68,000 out-of-pocket. The remaining $138,000 was paid for in scholarships ($65,000) and through company programs offered by their employers ($73,000). "There is so much money available to students who take a proactive approach to finding it," Hanisch tells Business Insider. "Being proactive was one of the key factors to my success. Every night I religiously sifted through online scholarship websites and local college funding programs for opportunities. I also stayed in constant communication with my [undergrad] school adviser, as they have up-to-date information about new or upcoming scholarships that you can apply for." 2. They Made Smart Investments. One of Hall's smartest investments was a home he purchased in 2008 with three partners. They proceeded to flip it later that year and earn a profit. At the time, he was completing his associate's degree from Mesa Community College. While a risky investment, he had the funds to invest in flipping the house because he was working two jobs while in school. "You always have a little fear in the back of your mind about potential risks," he tells us. "But in reality that fear is actually a tool that keeps you on your toes; it helps you stay on budget during renovations and it helps you overcome problems." Another major investment vehicle for Hall is the stock market. "I usually focus on five to 10 stocks for long-term investing. Since I do not trade for a living, I try to manage a smaller portfolio," he explains. "One of the benefits of being young is that you are able take more educated risks and still have time to secure your financial future if you fail," he says. 3. They Didn't Drain Their Savings to Buy a House. In 2011, Hall and Hanisch opted out of buying a new home together, and purchased a $60,000 fixer-upper in Mesa, Arizona instead. They've since put in $20,000 of renovations and completely remodeled the home without hiring a contractor and relying on help from family instead. They estimate they could sell it today for more than double the amount of money they put into it—for roughly a 125% return on their investment, Hall says. They were strategic when it came to buying their home. They bought it at a good time, when prices were still fairly low following the market crash of 2008, and they paid all cash. Not having a mortgage and interest payments provided emotional and financial freedom, Hall says. They were able to spend money on significant renovations to make the home their own, and never felt financially stressed about making payments. 4. They Created a Joint Account and Maximized Credit Card Rewards. Right before buying their fixer-upper, the couple created a shared account and opened a credit card to split joint costs like utilities, food, and other necessities. "All costs are run through our credit card, which gives us 1.5% cash back, so we basically get paid to pay our bills," Hall tells us. One month, he explains, they had to pay several thousand dollars on home and car repairs, but it resulted in about $550 cash back, which they will either put back into their joint account or use towards a vacation. While they set up a joint account for certain costs, Hall and Hanisch also maintained their own accounts, which has allowed them freedom to spend their own money as they please and prevented financial disagreements. They each put 10% of their earnings into the joint account, 10% into their 401(k)s, and 5% towards charitable donations. Hanisch allocates 30% of her earnings for personal expenses and 45% for savings, while Hall puts 20% of his monthly earnings towards personal expenses, 40% towards investments, and 15% towards savings. 5. They Made Sacrifices In Order to Live Below their Means. "Tina and I both lived below our means throughout school," Hall tells us. "There were times when we did not go on vacation, nor go out with friends or family. Instead we worked, studied, and saved. We really took the concept of 'live a few years of your life like most people won't so you can live the rest of your life like most people can't' to heart." Some of the bigger sacrifices included working throughout college and post-grad programs, and living with family until buying their fixer-upper. They're reaping the benefits today, and have exciting opportunities on the horizon. "We have an opportunity now where we can decide where we want to go," Hall explains. It will likely be California, where Hanisch could finish her master's online, but they're still deciding. "And I want to start my own business," Hall says. "With this financial freedom, I’m choosing to go that route." "We're going to take more risk now, step outside of our comfort zone, and travel more," he continues. "We're going to try to experience things differently. Instead of just saving, we're going to invest, experience life, and enjoy it now that we've put in the hard work."

Retirement Plan Changes in 2012 by Robert Powell

2012-01-04T18:30:00.001-08:00

Retirement-Plan Changes Coming in 2012
By Robert Powell | MarketWatch – Tue, Jan 3, 2012 3:08 PM EST
Even though lawmakers may shy away from passing major laws in an election year, 2012 will bring changes to 401(k)s and other retirement plans.

From fee disclosure to lifetime-income options and more, your 401(k) or other workplace plan likely will look different by this time next year.

Still, experts say there won’t be many legal or regulatory changes in 2012 given that it’s an election year. “Given the fiscal situation, there is certain to be a quite long political debate over the question of entitlement reform, which includes Social Security and Medicare,” said Stephen Utkus, a principal with the Vanguard Center for Retirement Research.

“No one really envisions major changes in 2012, given that it is an election year,” Utkus said.

Others agree. “Not much will happen in Washington,” said Stacy Schaus, a senior vice president with PIMCO.

But even absent new laws, your retirement plan may see changes.

Fee disclosure

The year 2012 should largely be about enhanced disclosure, said Lew Minsky, the executive director of the Defined Contribution Institutional Investment Association.

For instance, retirement-plan sponsors will have to disclose to 401(k) participants the fees and expenses associated with the funds in their retirement plan.

That includes new annual notices, quarterly statements, enrollment workbooks and education about fees. Read more: New directions for 401(k)s: A MarketWatch Retirement Adviser Special Report.

“The materials are mandated under new regulations and are intended to make it easier for participants to understand their retirement-plan investment choices by providing information about such things as past performance, benchmarks and fees in a comparative chart,” said Larry Goldbrum, general counsel at the SPARK Institute.

Such fee disclosure may not change participant behavior as intended, however, said Michael Falcon, managing director and head of retirement in the U.S. and Canada for J.P. Morgan Asset Management. Learning that a fund costs 45 basis point is interesting math, but the most important way to change outcomes is to change how much you save. “The savings rate is the most important element of a retirement plan, not the fees,” he said.

Lifetime income options and illustrations

There are those who hope, or expect, that regulators and lawmakers will make progress on other initiatives.

Howard Heller, manager of legislative and regulatory strategy for T. Rowe Price Retirement Plan Services, said he expects the U.S. Labor Department to issue guidance in 2012 on providing lifetime income illustrations on participant benefit statements.

The illustrations would show participants their expected monthly benefit at retirement age given their current account balance and, perhaps, give certain assumptions regarding future contributions and earnings. T. Rowe Price research suggests that plan participants value such information, he said.

Schaus also said she hopes to see the Lifetime Income Disclosure Act or LIDA, which was proposed in 2010, become law. Read LIDA at this website. She also hopes the U.S. Treasury Department will issue guidance on deferred annuities within defined-contribution plans, especially as it pertains to required minimum distributions.

Fiduciary investment advice

Also on the docket: The Labor Department has said it plans to re-propose its rule on the definition of a fiduciary for the purposes of giving investment advice.

“It is very difficult to say what the impact would be on savers at this time without seeing the final rule,” said Terri Hale, a spokeswoman for the Principal Financial Group. “We are hoping any re-proposal is a workable regulation that protects retirement-plan participants, IRA account holders and employers, while ensuring they continue to have access to the much-needed investment information and services they receive today.”

But Heller said the timing of the fiduciary proposal makes it unlikely that it will be finalized by the end of President Obama’s current term, which raises the possibility of the regulation being modified once again should Obama not serve a second term.

“Some have expressed concern with the current proposal in that it would have unintended consequences and limit the ability of plan sponsors to obtain the information and support they have come to expect from their service providers, such as information relating to the investment options on a recordkeeper’s investment platform and information provided to participants regarding their rollover options,” Heller said.

Auto-everything

The Labor Department’s guidance on lifetime-income illustrations will lead to greater focus on outcome-oriented approaches to retirement-plan design and management, some say.

“As such, I expect to see increased use of auto features (particularly auto escalation) to drive increased savings rates,” said Minsky, of the Defined Contribution Institutional Investment Association.

Others agree. “I do think auto-enrollment and auto-escalation will become very common,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.

In these types of plans, new employees are automatically enrolled in the plan, for example at a 3% contribution rate, and that rate is automatically escalated a certain percentage each year until it reaches the maximum, unless employees opt out.

Another point of view

Meanwhile, others say that many of the regulatory and legislative changes that may occur are largely distractions for investors saving for retirement.

“Ultimately investors should keep their eye on the long-term goal of accumulating a large enough nest egg to create sustainable retirement income,” said Josh Cohen, defined-contribution practice leader at Russell Investments.

New in-plan income options

Minsky also expects to see large plan sponsors begin to follow the example set by United Technologies Corp. and look at ways to build lifetime income solutions into the default investment vehicles within their plans. United Technologies recently became the first Fortune 100 company to offer a lifetime income annuity as an investment option inside its 401(k) plan.

Others agreed. “I would expect to see more product options for employers who want to encourage and facilitate life income and a continued focus on the part of mutual funds on retaining dollars after people retire or terminate employment,” said Anna Rappaport, president of Anna Rappaport Consulting and a member of the Society of Actuaries’ Retirement 20/20 Advisory Panel.

Meanwhile, David Wray, the president of the Plan Sponsor Council of America, sees a different trend with 401(k) investment options. Plan sponsors will fewer choices, more target-date funds, and more passive funds in 2012, he said.

New products

Experts say that in 2012 financial-services firms will focus more on selling products more suitable for the times. “There will be an increased interest in strategies that offer lower volatility and guards against market shocks,” said Schaus. And more investment will go to emerging markets and inflation hedging such as commodities and real estate, she said.

Goldbrum said there will be continued focus on lifetime income products. “Lifetime income annuity options and other products and services will continue to be a focus as plan participants, especially baby boomers nearing retirement, employers and the retirement-plan community try to help workers figure out how to construct a reliable retirement income stream,” he said.

“Most of the momentum on this will come from product and service providers but regulators may adopt rules that would require employers to provide lifetime income illustrations or examples on participant statements,” he said.

Wray also suggested that 401(k) plan participants should keep an eye on stable-value funds, one of the more common investment options in a 401(k) plan.

“Eventually these extremely low interest rates could impact its viability,” he said. “Stable value is expensive on its face because you have to include the cost of the guarantee. If interest rates are zero for five-year bonds, that's a problem.”

New strategies

Brimhall suggested you would be wise to consider tax diversification in 2012, “especially in light of uncertainty around future tax rates.” He recommends putting assets in each of the three types of accounts — tax-free, tax-deferred and taxable — so you have the “maximum flexibility to respond if tax rates change.”

Pre-retirees who are quite confident that they will stay in the upper tax brackets, and who believe taxes will continue to rise, may consider putting more of their savings into tax-free accounts, like Roth IRAs,” Brimhall said.

“The higher taxes go, the more valuable tax-free income becomes,” he said.

Couples who don't qualify for a contributory Roth IRA because their income is too high may still consider contributing to a traditional non-deductible IRA and then converting it, Brimhall said. “Since the traditional non-deductible IRA was bought with after-tax dollars, the only thing taxable upon a conversion would be any gain since the IRA was contributed to,” Brimhall said.

Of course, there are some accounting pitfalls to be aware of — the IRS's pro-rata rule among them — so this idea should not be implemented without careful consideration by a tax professional beforehand, he said.

Also, Hale noted that in 2012 the oldest of the baby boomers reach age 66, making them eligible to receive their full Social Security benefit, if they haven’t already elected it.

“Some may want to consider delaying longer if they have the financial resources,” she said. “Every year they delay up to age 70, they will receive a guaranteed 8% boost in the form of delayed credits.”

Entitlement reform on hold

Pat Connor, a spokesman for MetLife, said he agreed that comprehensive tax and entitlement reform most likely will be put off until 2013, though there is a small chance of seeing something in 2012.

“On the retirement front, when tax reform does happen, we will likely see a cap on contributions to plans and/or a consolidation of plan types (401(k), 403(b) and 457 plans),” he said.

Brimhall and others said Congress may reduce spending at some point, and that could affect Medicare beneficiaries. “Medicare part B premiums are now ‘means tested’ and the premium for higher income folks can be three times that of the lower income,” he said.

“If Congress moves forward with entitlement reform, more means testing will probably come into play. Therefore, those in the higher brackets may need to plan on paying a larger and larger share of their premiums and maybe even co-insurance amounts.”

Other trends

Employers and employees both are going to be frustrated because employees at or near retirement age cannot afford to retire, said Rappaport.

“They will want to stay and it may create talent management challenges,” she said.

In addition, she warned that as more people see retirees struggling, “there will be growing awareness of the challenges of retirees.”

10 Tips To Find Your Unclaimed Cash

2011-12-14T14:46:00.000-08:00

The 50 states and the District of Columbia are currently holding at least $32 billion in unclaimed funds, just waiting to be reunited with the rightful owners.

"Good Morning America" has helped thousands of people find money held for them by the states.

There are simple searches you can do in ten minutes or less. Plus we've uncovered more unusual sources of unclaimed cash that few people know about.

"GMA" is here to help with the top 10 tips you can use today to find your unclaimed cash!

1. Miscellaneous Money

If you are searching for things such as forgotten apartment security deposits, uncashed overtime checks, lost insurance refunds or abandoned safe deposit boxes, your first stop is the states. The National Association of Unclaimed Property Administrators (NAUPA) has set up a free website at www.unclaimed.org that will link you to the appropriate department in your state that holds the funds. (IMPORTANT: this is a .ORG website, NOT a .com. If you mistakenly type in .com, you will be taken to a pay site. It is never necessary to pay a fee or a finder to help you find unclaimed money.)

2. Missing Money

If you would like to search several states at once, you can do so at another free, though commercially run site called www.missingmoney.com. When you first search, you are prompted to enter your home state. Be sure to search again and this time choose "all states and provinces" on the drop down menu. One last thing: it's not actually ALL states. On the site's home page you can view a map of which states are and are not included. If you have lived in states that do not participate in this site, be sure to go back to Unclaimed.org and search those sites individually.

3. Unclaimed Savings Bonds

It's easy for savings bonds to go unclaimed because they take 30 to 40 years to mature. That's why the Treasury Department has set up a simple search website, available HERE, where you can find forgotten bonds by typing in your social security number. Certain bonds are not listed online and require a hand search. You can read about them at the same Treasury link.

4. Federal Tax Refunds

Everybody looks forward to getting an income tax refund check, but if yours didn't arrive, what do you do? The IRS now provides a "Where's my Refund?" feature on its website. You can look up your missing check by entering the amount you are owed, plus your social security number.

5. Lost Life Insurance Policies

The proceeds of lost life insurance policies may turn up in your state search. If not, and you suspect you are the beneficiary of a loved one's lost life insurance policy, you can hire a company called MIB Solutions to search for you. MIB is a private company that houses life insurance application information for much of the industry. It costs $75 to search. Go to www.policylocator.com for more information.

6. Failed Accounts In a Bank If you didn't collect your money when your bank went under, chances are your account was insured by the Federal Deposit Insurance Corporation (FDIC). The good news, in that case, is that the FDIC is holding your money, and you can find it HERE.

7. Failed Accounts In a Credit Union

If your money was in a credit union as it failed, visit the National Credit Union Administration (NCUA) HERE to track down your money.

8. Misplaced Pensions

If your company still exists, or has been bought out, you need to approach the company directly. If you are owed a pension from a company that went under, there is a federal agency, the Pension Benefit Guaranty Corporation (PBGC), that safeguards private pensions. You can track down your pension HERE on the PBGC website.

9. Retirement Money

The Employee Benefits Security Administration (EBSA), is the federal agency charged with making sure retirement money is reunited with its rightful owners. The EBSA sometimes even sues to seize retirement money. You can utilize the agency's services by clicking HERE.

10. Lost 401(k)s

Sometimes when people leave a job, they leave behind a 401(k) as well. If the company goes out of business, that only compounds the confusion. Fortunately, companies that administer 401(k) plans have teamed up to create a search engine you can use to track down your 401(k).

.

Dear Editor, The Diaporan Star

2011-05-27T06:52:00.000-07:00

The Editor,

The Diasporan Star

I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.

I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.

ELIGIBILITY

It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.

CONTRIBUTIONS

It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.

VESTING

It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.

A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.

An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.

LOANS / WITHDRAWALS

It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.

While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.

CASHING OUT

Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.

MANDATORY WITHDRAWALS

You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.

An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.

DIASPORAN ANGLE

You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.

Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.

Thanks

Reuel

5 Easy Steps to Becoming a Millioniare

2011-05-20T07:01:00.000-07:00

5 Easy Steps to Becoming a Millionaire
Erin Joyce
Wednesday, May 18, 2011Share
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EmailPrintMore from7 Real-Life Ways to Become a Billionaire
at Investopedia.com
Why You Don’t Want to Be a Millionaire
at Investopedia.com
5 Billionaire Finance Moves You Can't Make
at Investopedia.com
Who wouldn't want to be worth a million dollars? Many of us dream of achieving this goal, more often than not for the sake of the freedom financial stability would bring. So how can we get there? The answers are actually much easier than you might expect. Here are several easy steps to get you into the millionaires' club. (With a little discipline and the help of some powerful savings vehicles, anyone can hit this mark.)

1. Only Marry Once
According to "The Millionaire Next Door" by Thomas J. Stanley, Ph.D and William D. Danko, Ph.D, the average millionaire is married with three children. The wives of these millionaires are good budgeters and most often described as even more frugal than their husbands. Interestingly, according to Stanley and Danko's survey, half of these wives do no work outside the home and of those who do, they are most likely teachers.

One upside of only marrying once is avoiding the costs of divorce and of subsequent weddings. The cost of a divorce depends on many factors including income, attorney fees, court fees, and the assets a couple has and how they are divided. The average wedding cost in the United States in 2010, according to The Wedding Report.com, was $24,070.

2. Live Off One Income
One of the advantages of having a life partner is the potential to pull in two incomes. If you are able, consider structuring your set expenses based on only one income, and save what comes in from the other income. Doing so strengthens your financial position in two ways: In case of an emergency or if one partner loses their job, you will not only have less set expenses to cover, but you will also have built up your net worth as a safety measure.

3. Choose the Right Career
According to The Millionaire Next Door, "self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires." The book goes on to list an average of 45 to 55 hours spent working per week, so by no means is this the self-employed fantasy of playing golf while your business grows.

The idea of the "right" career can encompass a myriad of factors. Ideally, this would be a career you enjoy, otherwise you likely won't be putting in the dedication required to be successful. The right career would also coincide with overall working trends, or at least not work directly against them. For example, starting a career in typewriter manufacturing may be something you are passionate about, but it would likely suffer due to the current technological trends.

4. Put Your Money in Appreciating Assets
According to Stanley and Danko, the millionaires in their survey invested nearly 20% of their realized household income each year. Nearly 20% of the household's wealth is held in "transaction securities such as publicly traded stocks and mutual funds" and the millionaires tended to rarely sell their equities. Only a very small number of the millionaires surveyed had ever leased a car; few even drove the current year model. Half of those surveyed had lived in their homes for more than 20 years, which, as the authors point out, means they have likely enjoyed "significant increases in the value of their homes."

The end result? These people put a financial priority on assets that will make them money, from their homes to their businesses.

5. Don't Live the Millionaire Lifestyle
Warren Buffett's frugal lifestyle (especially relative to his net worth) is the go-to example for this point. The average value of the surveyed millionaires' homes was $320,000. The bottom line is, those who spend their money on non-appreciating assets cannot put that same money in an asset that will net them a return and increase their wealth. If it is important to you to build your financial worth, stop spending it on new cars, toys and clothes. (The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think.)

The Bottom Line
Becoming a millionaire is easier than ever. While this is a dream that will take work and discipline to achieve, it isn't as far out of reach as you might think. Be smart with your money and before you know it, you'll be able to count yourself among the world's wealthier citizens.

This article is part of a series related to being Financially Fit

9 Ways To Build Wealth in 2011

2011-02-26T10:10:00.000-08:00

9 Ways to Build Wealth in 2011
by Dana Dratch
Thursday, February 24, 2011

ShareretweetEmailPrintWant to build some wealth in 2011? Revisit those New Year's resolutions.

You probably haven't thought about your pledges in more than a month. But odds are at least one of them involves getting rid of debt, increasing your income or building some financial security.

More from Bankrate.com:

• 6 Money Habits That Are Illegal

• 7 Ways to Save Money on Groceries

• Marrying For Richer Rather Than Poorer

To help you out, nine experts in the fields of money, debt, real estate and consumer affairs have shared their best wealth-building tips for 2011.

1. Funnel That FICA Cut Into a Retirement Windfall

David Bendix, CPA/PFS, CFP, president of The Bendix Financial Group:

Take the money you won't pay in FICA, or Federal Insurance Contributions Act, taxes this year and redirect it to your 401(k). "It's a great concept that you're taking that 2 percent and using it to fund your retirement," he says. "It's one great technique for the coming year."

[Click here to check savings products and rates in your area.]

Tip for success: For the maximum impact, talk with human resources ASAP and change your deductions, Bendix says. One hopes the habit of saving a little more will stick with you through next year, too, he says.

2. Look For Low-Cost Mutual Funds and Watch Those Fees

Jill Gianola, CFP, owner of Gianola Financial Planning, LLC, and author of "The Young Couple's Guide to Growing Rich Together":

"One of my favorite ways to build wealth is to pay close attention to the cost of investing and stick to low-cost, no-load mutual funds," she says.

One example: "If you invested $10,000 in small-cap, value funds with a commission and higher-than-average operating expenses and earned 7 percent a year for 10 years, your balance would be $16,005 and you would have paid a sales charge of $575 and $1,890 in operating expenses," she says.

"Compare that to investing the same amount for the same time period earning the same return in a no-load, small-cap, value fund with low operating expenses," she says. "Your balance would be $19,128 and you would have paid $408 in operating expenses." The difference: $3,123.

Tip for success: Calculate cost and differences with Bankrate's mutual fund fees calculator.

[How to Ruin a Real Estate Listing]

3. No Shortcuts: Year After Year of Consistent Savings

Ric Edelman, chairman and CEO of Edelman Financial Services LLC, and author of "The Truth About Money":

"The best way to build wealth remains unchanged: Invest as much money as you can (which is usually more than you think you can) into a diversified set of low-cost mutual funds and exchange-traded funds -- and keep doing this for many years, no matter what."

4. Get Rid of High-Interest Card Debt

David Jones, president of the Association of Independent Consumer Credit Counseling Agencies:

"For most people, building wealth is not about what to do with excess disposable income," he says, but "how to keep more of the money that they earn."

"The best way to do that: Reduce the amount of money spent on interest payments -- especially high-interest payments attached to credit card purchases," Jones says. "If a consumer can work to pay off just one high-interest credit card and not overcharge it again, then the money saved after it is paid off can go to a building-wealth plan. This may not be easy, and it may take time, but it's a realistic goal for just about every consumer."

Tip for success: Find a certified credit counselor to help you draft your own personal spending plan for free. To find one, visit either the AICCCA or the National Foundation for Credit Counseling.

"If the consumer sticks to that plan, it will be their best chance to begin a systematic process for building wealth," Jones says. "It may be modest at first, but with diligence, everyone can have a chance to improve their financial circumstances."

5. Buy a Home

Ron Phipps, president of the National Association of Realtors and principal broker for Phipps Realty in Warwick, R.I.:

Want to build wealth in 2011? Buy a home, Phipps says. Mortgage rates are low, selection is great, prices are about one-third lower than five years ago, "and, by the way, you can live in the investment," he says.

Homeownership remains a long-term vehicle to financial independence and wealth, Phipps says.

Tip for success: Even though it sounds "pretty elementary," it's especially vital to "use common sense when buying and selling," Phipps says. "Price at the market to sell. Buy what you need and can afford."

[Ways Your Appearance Helps Your Pay]

6. Balanced, Diversified Portfolio Plus Education

Karen Altfest, CFP, principal adviser and executive vice president of client relations at Altfest Personal Wealth Management, a fee-only financial planning firm based in New York:

"Have a balanced portfolio," Altfest says. "So many people think that as they get older, money will come from interest. The secret is (keeping) a well-balanced, diversified portfolio and learning what it all means."

Too many times, people take the "set it and forget it" approach with their retirement accounts, she says. But you shouldn't "let it get cobwebs because you can't deal with it," Altfest says. "Get help." Your goal for the year: Get educated about what's in your retirement accounts and why.

Tip for success: You don't solely want only fixed-rate instruments such as bonds and CDs, she says, because it takes more than compounding interest to build a retirement fund.

7. If You Have an HSA, Max It Out

Eric Tyson, author of "Investing for Dummies" and "Personal Finance for Dummies":

"I'm a very big fan of (health savings accounts) because they offer better potential tax benefits than a traditional retirement fund," Tyson says. With HSAs, investors receive an upfront tax break, compounding investment earning, and pay no tax on the money that is withdrawn "as long as its use is for health expenses," he says.

But the device might not work for everyone. "Obviously, you have to have a high-deductible health plan," he says.

Before 65, if you pull money from your HSA for nonhealth expenses, you'll pay income tax and a 20 percent penalty on the withdrawal. After 65 (or in cases of death or disability), such withdrawals are taxed as income -- without the 20 percent penalty.

The maximum you can put into an HSA in 2011 is $3,050 for an individual account (plus an extra $1,000 if you're 55 or older), and $6,150 for a family account, he says.

8. Do Your Due Diligence

John Breyault, director of the National Consumer League's Fraud Center:

To build wealth that you can rely on, vet the adviser and the investment thoroughly, Breyault recommends. Some red flags:

• Guaranteed returns. "There's no such thing as a guaranteed return," he says.

• Pressure. "If it's a good investment opportunity today, it will be a good investment opportunity tomorrow."

• Nothing in writing or a reluctance to share information you could present to a third-party. "If it's a significant sum of money, I wouldn't hesitate to run it by an attorney," Breyault says.

• A significant upfront sum. "You shouldn't have to invest more than you're comfortable with," he says.

Also, "you should be able to get your money out easily," Breyault says.

Tip for success: Run investments and their representatives past state protection agencies such as the office of consumer protection and the state attorney general's office, he says. Also check with business sources such as the Chamber of Commerce and the Better Business Bureau.

Check with regulating authorities such as the Financial Industry Regulatory Authority, or FINRA, BrokerCheck, the Federal Communications Commission and the Securities and Exchange Commission. And verify any degrees and accreditations directly with the bodies that offer them.

And run a Google search on the company name, principals and basics of the investment.

9. Start Your Own Side Business

Robert Pagliarini, CFP, president of Pacifica Wealth Advisors and author of "The Other 8 Hours: Maximize Your Free Time to Create New Wealth and Purpose":

"Start a business in your free time," he says. "I'm a big proponent of having a side venture, something you are passionate about that you can work on after your 'day job.'

"I think this is the best advice to give someone now -- especially for those who are unemployed," Pagliarini says. "And starting a business doesn't have to cost much, if any, money."

___

Qualifying Child Versus Qualifying Dependent

2011-02-04T17:36:00.001-08:00

Education is NOT filling a Basket but LIGHTING the Fire.
One must pass the following test in order to meet the Qualifying Child test
1) Relationship Test
2) Abode test
3) Support Test
4) Age Test

In order to meet the requirement of Qualifying Dependent, one must meet the following test
1) Relationship Test (Not a Qualifying Test)
2) Support Test
3) Citizenship Test
4) Joint Filing Test
5) Gross Income Test

Note: Relationship and Support Tests are applicable in both scenarios.

Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your accountant or your attorney for your specific situation. Also laws may vary from state to state

2011 Tax Changes

2011-01-14T09:09:00.001-08:00

Tax Changes for 2011: A Checklist---Courtesy Wall Street Journal
By Tax Report
Friday, January 14, 2011
Provided by

It's customary for this column to start the year with a roundup of what's new for taxpayers. Given last December's theatrics in Congress, some items on our list may seem familiar unless you were out mapping the tributaries of the Amazon.

[Click here to check savings products and rates in your area.]
But keeping tax details straight is tough—even for tax reporters. Our mailbox is full of queries from bewildered readers trying to sort out issues such as which Roth IRA conversion rules expired last year, how the new payroll tax cut works, or at what income level the zero rate on long-term capital gains ends.
The most important point to remember is that last year's 11th-hour tax changes, though favorable for most, are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.
[See 6 Sources for Free Tax Help]
That raises the dreary possibility that in less than two years we will be in a replay of last year's tax debates, but in the middle of a presidential campaign. Once again tax rates on both pay and investment income will be set to spike, especially for those at the bottom, and the estate tax will revert to a $1 million-per-individual exemption and a 55% top rate.
Tax strategists like Robert Gordon of Twenty-First Securities in New York see this year as a lucky reprieve for those who didn't get around to planning for higher taxes earlier, especially on investments with long-term gains and stock options. "It's not a question of whether investment tax rates are going up, but when," he says. He already is meeting with clients who escaped a 2011 increase but are determined to get ready for 2013.
Meanwhile, here are important changes for this year:
Income Taxes
This year's rates carry over from last year, but the brackets are a bit higher than last year's due to inflation adjustments (see table). Expires: end of 2012.
'Stealth' Income Taxes
Affluent taxpayers won't have deductions clipped by the so-called Pease and PEP limitations. The Pease limit cut 3% of itemized deductions and PEP eroded the personal exemption, which is $3,700 for 2011. Expires: end of 2012.

Investment Taxes
Rates continue at historic lows for both long-term capital gains and dividends. For taxpayers in the 15% income tax bracket and below, the rate is zero. For those in the 25% bracket and above, the rate is 15% (see table). Expires: end of 2012.
Estate and Gift Taxes
The system has been overhauled, with a top rate of 35% and one exemption of $5 million per individual for estate, gift and generation-skipping taxes alike. For those who can stand to part with assets, it's now possible to shift large amounts of wealth. Expires: end of 2012.
The annual exclusion for tax-free gifts remains $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as they are to different individuals. Gifts of tuition and payments for medical care also are exempt.
Payroll Taxes
Last year's big surprise was a temporary two-percentage-point cut in the employee's share of Social Security taxes, saving a maximum of $2,136 per worker. There is no phase-out, and each partner of a married couple can get the rebate. Expires: end of 2011.
[See the New Tax Deal: What's in It for You?]
For most workers, this cut will come as an automatic adjustment to withholding. For the self-employed (whose tax rate falls to 10.4% from 12.4%), it will be built into a quarterly withholding worksheet the IRS hopes to release soon, says IRS spokesman Eric Smith.
Alternative Minimum Tax (AMT)
The "patch" enacted by Congress sets the AMT exemption at $47,450 for single filers and $74,450 for married couples, slightly higher than for 2010. Expires: end of 2011.
Roth IRA Conversion
The income limit for conversions has been permanently removed, so this year all taxpayers may still convert ordinary IRAs into Roth IRAs. But taxpayers who convert to Roth IRAs in 2011 no longer have the option of deferring conversion income into later years, as was true for 2010 conversions. Those who converted in 2010 do have until next Oct. 17 to decide whether to use this deferral.
Foreign-Account Reporting
A little-noticed provision enacted last year imposes a new IRS reporting requirement on those with foreign financial assets above $50,000 in 2011. This form is different from the foreign asset report known as the FBAR. It will also apply to some, such as hedge-fund investors, who have been exempt from the FBAR filing, according to Michelle Koroghlanian of the American Institute of CPAs. Details remain unclear, as the IRS hasn't yet issued regulations.
Medical Expenses
Workers with Flexible Spending Accounts (FSAs) may no longer use pretax funds to pay for many over-the-counter medicines—aside from insulin—without a prescription. But FSA funds may still be used for other, nonprescription medical items such as crutches, contact-lens solution or a wig after chemotherapy, if the individual plan allows it, notes Melissa Labant of the AICPA. For a list of what is allowed by law, see IRS Publication 502.
Cost-Basis Reporting by Brokers
As of 2011, brokers must track clients' purchases of stock, real-estate investment trusts and foreign securities, and then report the original cost to the IRS when the asset is sold. This is an effort to improve tax compliance by investors. The rules for investments in mutual funds, bonds, options and many exchange-traded funds don't kick in until after 2011.
Energy Tax Credits for Homeowners
As part of the December changes, lawmakers extended the "25(C)" credit for energy-efficient improvements, but in a way that will be useful to few. The amount of the credit has shrunk to a maximum of $500 per taxpayer per lifetime, so those who took last year's $1,500 credit under this provision don't qualify. The current version expires at the end of 2011, and builders and remodelers may push either to expand it or drop it altogether.
[See 6 Tax Breaks That Anyone Can Claim]
Other Changes
Also renewed at the last minute were the $250 deduction for teacher classroom expenses; a deduction for state sales taxes in lieu of the state income tax deduction; and the tax-free donation of IRA proceeds to charity. They expire at the end of 2011. The American Opportunity Tax Credit of up to $2,500 for education expenses was renewed for 2011 and 2012.
—Email: taxreport@wsj.com

12 Audit Triggers

2010-12-21T16:42:00.000-08:00

Coutesy kiplinger.com

Education is NOT filling a Basket but LIGHTING the Fire

Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.
Ever wonder why some tax returns are audited by the IRS while most are ignored? Well, there's a whole host of reasons to this age-old question. The IRS audits only about 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit. And of course, the only reason filers should worry about an audit is if they are cheating on their taxes.

However, the chances of you being audited or otherwise hearing from the IRS can increase depending upon various factors, including whether you omitted income, the types of deductions or losses claimed, certain credits taken, foreign asset holdings and math errors, just to name a few. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chance of drawing some unwanted attention from the IRS. Here are the 12 most important ones:
1. Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return. The IRS computers are pretty good at matching these forms received with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 for income that isn't yours or the income listed is incorrect, get the issuer to file a corrected form with the IRS.
2. Returns claiming the home-buyer credit. First-time homebuyers and longtime homeowners who claimed the homebuyer credit should be prepared for IRS scrutiny. Make sure you submit proper documentation when taking this credit. First-time homebuyers have to attach a copy of their settlement statement to the return, and longtime homeowners should also attach documents showing prior ownership of a home, including records of property tax and insurance coverage. All claims for this credit are being screened. As of May 2010, more than 260,000 returns had been selected for correspondence audits (examinations done by mail rather than face-to-face) because filers did not attach the necessary documents to their tax returns. And those numbers will continue to grow.
Also, the IRS has ways of policing the recapture of the homebuyer credit. Generally, the credit is required to be recaptured if the home is sold within three years for homes bought in 2009 or 2010 and within 15 years for homes bought before 2009. The IRS is checking public real estate databases for sales of homes in which the credit was taken.

3. Claiming large charitable deductions. This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions. We all know that charitable contributions are a great write-off and help you to feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared to your income, it raises a red flag. That's because the IRS can tell what the average charitable donation is for a person in your tax bracket. Also, if you don't get an appraisal for donations of valuable property or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure you keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.
4. Home office deduction. The IRS is always very interested in this deduction, primarily because it has a pretty high adjustment rate on audit. This is because history has shown that many people who claim a home office don't meet all the requirements for properly taking the deduction, and others may overstate the benefit. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance, and other costs that are properly allocated to the home office. That's a great deal. However, in order to take this write-off, the space must be used exclusively and on a regular basis as your principal place of business. That makes it difficult to claim a guest bedroom or children's playroom as a home office, even if you also use the space to conduct your work. Exclusive use means a specific area of the home is used only for trade or business, not also where the family watches TV at night. Don't be afraid to take the home-office deduction if you're otherwise entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
5. Business meals, travel and entertainment. Schedule C is a treasure trove of tax deductions for self-employed. But it's also a gold mine for IRS agents, who know from past experience that self-employed tend to claim excessive deductions. Most under-reporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships as well as smaller ones.
Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too large for the business. Agents know that many filers slip in personal meals here or fail to satisfy the strict substantiation rules for these expenses. To qualify for meals or entertainment deductions, you must keep detailed records generally documenting the following for each expense: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

6. Claiming 100% business use of vehicle. Another area that is ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use for an automobile on Schedule C is red meat for IRS agents. They know that it's extremely rare that an individual actually uses a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will closely scrutinize your records. Make sure you keep very detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, even if you use the IRS' standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has found filer noncompliance in this area as well and will look for this.
7. Claiming a loss for a hobby activity. Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And, if your Schedule C loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. It's issued guidelines to its agents on how to sniff out those who improperly deduct hobby losses. Large Schedule C losses are audit bait, but reporting losses from activities in which it looks like you might be having a good time is just asking for IRS scrutiny.
Tax laws don't allow you to deduct hobby losses on Schedule C. However, you do have to report any income earned from your hobbies. In order to claim a hobby loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes to the contrary. If audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So, make sure you run your activity in a business-like manner and can provide supporting documents for all expenses.

8. Cash businesses. Small business owners, especially those in cash-intensive businesses -- taxi drivers, car washes, bars, hair salons, restaurants and the like -- are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income. The IRS wants to narrow the tax gap, and history has shown that cash-based businesses are a good source of audit adjustments. It has a new guide for agents to use when auditing cash intensive businesses, telling how to interview owners and noting various indicators of unreported income.
9. Failure to report a foreign bank account. The IRS is intensely interested in people with offshore accounts, especially those in tax havens. U.S. tax authorities have had some recent success in trying to get foreign banks (such as UBS in Switzerland) to disclose information on U.S. account holders. Also, the IRS had a voluntary compliance program where people came in and reported their foreign bank accounts and foreign assets in exchange for lesser penalties than they would have otherwise been subject to. The IRS has learned a lot from these probes.
Failure to report a foreign bank account can lead to pretty severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them when you file your return. Keep in mind, though, that if you have never previously reported the foreign bank account on your return, and you decide to do so for the first time in 2010, that might also look suspicious to the IRS.
10. Engaging in currency transactions. The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts. A recent report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agreed and it will make greater use of these forms in its audit process. So if you are a person who makes large cash purchases or deposits, be prepared for IRS scrutiny. Also, beware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 cash one day and an additional $9,500 cash two days later).
11. Math errors. One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns. If you make an error in your favor, you are going to hear from the tax man, and there is a greater risk of the IRS pulling the whole return for audit. So take time to ensure all your calculations are correct. Even though math errors may not lead to a full-blown audit, it's always best to remain under the radar of IRS computers.
12. Taking higher-than-average deductions. If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination. Screeners then pull the most questionable returns for review. But if you've got the proper documentation for your deduction, don't be scared to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.

LIFE INSURANCE

2010-11-29T19:54:00.001-08:00

LIFE INSURANCE- Education is NOT filling a Basket but LIGHTING the Fire.

Some basic facts you need to know about Life Insurance.

-It is generally recommended that you should have Life Insurance worth at least 10 times your Gross Pay.

-Life Insurance can be used to solve Liquidity issues at your death, maintain the life style of your loved ones or provide income for your loved ones.

-Women and the young will pay premiums that are less than their male or older counterparts.

-If you misstate your Age and Gender on your application, death benefits will be paid based on what the correct payments would have been given the correct information.

-A Suicide Clause in a Life Insurance states that if you commit suicide in the first two years of inception of an Insurance policy, the death benefits will NOT be paid. Instead, your premiums will be returned.

-If your insurance lapses during the grace period usually 30 to 60 days period and death occurs, the Insurance will still pay death benefits but minus the premiums that would have been paid during that time.

-Life Insurance proceeds are usually NOT Taxable with few exceptions

-It is always a good idea NOT to own your Life Insurance policy. Owning it will include its death benefit into your Gross Estate hence incurring Estate Taxes on the benefits except it qualifies for Unlimited Marital deductions.

-First To Die-Provides Death benefits when the first insured dies

-Second To Die-Provides Death benefits when the second or last insured dies

-Your Cash Value Balance with your Insurance Company is protected should the Insurance Company go Bankrupt

A) Term Life

-Protection ceases when the term ends unless it is renewed

-The premium you pay may be Level or increasing on an annual or set period basis

-Generally, there is no cash, savings or investment options

-Its face amount may be Level or decreasing

-You can have the option of converting a term policy without proof of insurability

Who is Term Life Insurance Good For?

-A young person

-People with some amount of money and are willing to spare or budget towards Life Insurance

-People with temporal needs

B) Whole Life

-It provides permanent lifetime protection for as long as premiums are paid

-They have a Savings and Investments options. The Savings and Investments do earn interest too

-The cash value which may be used as loans usually has a minimum guaranteed rate of interest

Recommend Whole Life for?

-People who are willing to accept investment risk

-People who think they can earn a higher than normal return on investment

-People who have a permanent need

-People who are concerned about Estate Taxes

Types of Whole Life

-Ordinary Life-Pay premiums until the age of 100

-Limited Pay Life-Pay premiums to a certain age—Premiums are higher than Ordinary Life

-Variable Life-You are willing to accept Investment Risk

UNIVERSAL LIFE INSURANCE

-Insured may want to adjust Premiums, Face Value and Cash Value

-Insured does not direct the investment portion and may use the cash value to pay premiums

*Universal A—Death Benefit is EITHER Cash Value or Face Value

*Universal B—Death Benefit is BOTH Cash and Face Values

VARIABLE UNIVERSAL LIFE

-Has investment options but no minimum guaranteed rate of return or interest

-The Cash Value is invested in a separate account from the insurer’s general account

-While the cash value is not guaranteed, it is not counted as the asset of the insurance company should the company fail.

WHO SHOULD GET UNIVERSAL LIFE INSURANCE?

-Someone who wants flexibility as to how and when premiums are paid for example a seasonal or commissioned based salesperson

-Someone who does not want to bear the investment risk.

Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.

Feedback

2010-11-04T16:15:00.000-07:00

As you can see, I am not being detailed in my postings. It is a deliberate act on my part. I am a strong believer of a two way communications. By engaging ourselves in a two way communication there is a high possibility that we can learn something new from each other. As such I am encouraging you to feel free to comment on my postings or give me any feedback which should not only be limited to compliments. Pointing out my shortcomings or ineptness will be greatly appreciated. Feedback can only make me a better Blogger!!!!!!!!!!

Bankruptcy

2010-10-29T15:49:00.001-07:00

Chapter 7

You get debt relief through liquidation (Loan forgiveness) or Loan discharged.

1) But the following debts cannot be forgiven or discharged

- Student Loans (unless undue hardship)

- 3 Years of Back Taxes

- Alimony and Child Support

2) The following Assets will be protected

- IRA-exempt up to $1 million

- Alimony and Child Support

- Pensions, Life Insurance and Annuities

Chapter 13

You get relief through adjusting your debts. This can be costly and time consuming as each loan servicer will be out to protect her interest.

Chapter 20

You get debt relief through a combination of both chapter 7 and 13.The Judge determines that. Your debt servicers play a huge role too in determining payment or re-structuring plan.

While Debts that were received through Fraud will not be discharged, those received through Negligence can be discharged. For example, if you took a loan for investment purpose and the business venture failed because you did not do your due diligence, such debt will be discharged.

BONDS

2010-10-20T20:08:00.000-07:00

1) Agency bonds (FNMA Fannie Mae, FHLMC Freddie Mae, SLMA Sallie Mae, FFCB, FICB, FHLB), are MORAL OBLIGATIONS of the US government and are NOT backed by the full faith and credit of the US government with one exception GNMA Ginnie Mae bonds which are backed by the Full Faith and Credit of the US government.

2) There are three types of Municipal Bonds ("munis") namely

A) General Obligation bonds are backed by the full faith, credit and taxing authority of the municipality that issued them

B) Revenue bonds are issued for specific projects. They are backed by the revenue of the specific projects (not backed by the full faith, credit and taxing authority of the entity that issued them)

C) Private Activity bonds are issued to finance projects like the construction of stadiums

3) Municipal bonds can be against Default and the two INS companies that insure municipal bonds are AMBAC and MBIA.

Wills-- I Love You aka Sweetheart Wills

2010-10-18T20:23:00.000-07:00

WILL

A will is a legal document that provides the maker aka the testator the opportunity to control the distribution of his or her property at death thereby avoiding the harsh realities of the state’s intestacy laws. A will is one of the many documents needed for Estate Planning.

A Sweetheart aka I Love You Wills are wills drawn up by two individuals based on mutual understandings which leave all assets to each other upon death of the other. It is reciprocal in nature.

Types of Wills will include

A) Holographic Wills—Handwritten by the maker

B) Nuncupative Wills—Oral, dying declarations that are made before a sufficient number of witnesses

C) Statutory Wills—Drawn up by an attorney with compliance the state laws in which the maker resides.

A Will is said to be Valid when the

1) Maker is of legal age or age of maturity

2) Maker has legal testamentary capacity

3) Maker recognizes and recollects the property being disposed of AND

4) Maker recognizes the relationships of those loved ones that have claims in the will

Common Clauses in a Will

1) Introductory clause

2) Declaration Clause

3) Bequest Clause

4) Residuary clause

5) Guardianship clause

6) Attestation clause

7) Self proving clause

8) Simultaneous clause

9) Survivorship clause

10) Disclaimer clause

11) Contingent Legatee Clause

12) No Contest clause

Dying Intestate means dying without a proper a will or dying with a will which fails to dispose of all your properties. Dying testate means dying with a properly drawn up will.

Loans Amongst Family Members

2010-10-12T08:32:00.001-07:00

1) Intra-Family Loans (aka Loans amongst Family Members)

If a family member loans money to another family member money and charges no interest or a rate below the applicable federal rate, the lender will be deemed to have made a "gift Loan". The lender will have to report the forgone as well as the actual interest for each year the loan is outstanding as ordinary Income. However, no part of the interest actually paid or imputed is deductible by the borrower if the loan is not business related. Reportable amount will be as follows

LOAN AMOUNT	REPORTABLE AMOUNT
$0 to $10000	$0
>$10000 to $100000	The Lesser of Net Investment Income or Int. calculated using AFR Applicable Fed Rate Minus Int. calculated using stated rate of the loan
>$100000	Int. calculated using AFR Applicable Fed Rate Minus Int. calculated using stated rate of the loan

FINANCIAL AID For Education

2010-10-04T07:09:00.001-07:00

FINANCIAL AID: All students should always complete the Free Application For Federal Student Aid FAFSA. Information on the FAFSA is used to calculate the Expected Family Contribution.

A) Students who are independent may be eligible for more aid than children who are considered dependents. Independent students are; over age 23, married, working on Masters of PhD, have legal dependents other than a spouse, orphan or ward of the court until age 18 or veteran of the U.S armed forces

B) You should keep as much as possible out of the student as student assets are deemed to be available for education more than the parent’s assets. Custodial accounts are the only accounts whose assets are deemed to belong to the student.

C) Financial AID programs will include; Pell Grant, Stafford Loan, Plus Loan, Federal Perkins Loans, Federal Work Study, Federal Supplemental Education Opportunity Grant.

D) Tax Advantaged Plans for education will include Qualified State Tuition (Prepaid Tuition and Savings Account—529 plans), Coverdell, Roth IRA, Series EE bond, UGMAs, Lifetime Learning Credits and American Opportunity Tax Credits

How Long It Will Take To Become a Billionaire

2010-10-03T13:17:00.000-07:00

As posted on Yahoo Finance, Thanks to Michael Deane & Pr

COBRA--Consolidated Omnibus Budget Reconciliation Act

2010-10-02T10:46:00.000-07:00

1) COBRA became Law in 1986

2) COBRA gives you the option to choose to keep your Group Health Insurance benefit after

A) Losing your job

B) Reduction in your working hours

C) Quitting your job

3) COBRA must be offered by ALL employers that employ 20 or more.

4) The length of time that you can keep COBRA depends on the qualifying event as listed below;

A) 18 months for reduction in hours or normal termination

B) 36 months for death

C) 36 months for Divorce

D) 36 months for Medicare Eligibility

E) 36 months for Loss of dependency by children of employee

F) Up to 29 months if employee meets Social Security definition of Disability

5) The employee or qualified dependents have 60 days after they get the election notice to choose health insurance coverage for themselves under COBRA.

6) The premium for COBRA coverage is equal to the full cost of your group health coverage plus up to 2% more for administrative costs making a total of 102%

Lost or Stolen Credit and/ or Debit Card

2010-10-02T10:20:00.000-07:00

A consumer’s liability for a lost or stolen Credit or Debit card is limited to

A) $50 OR

B) The actual amount charged on the card

Whichever is less.

The consumer must notify the credit card company within a reasonable time frame after the card is noticed missing and/ or stolen.

FDIC-Federal Deposit InsuranceCorporation

2010-10-02T10:10:00.000-07:00

1) The Federal Deposit Insurance Corporation (FDIC) Promotes and Preserves public confidence in the U.S. financial system.

This is done by

-Insuring deposits in banks for at least $250,000 per depositor, per insured bank, for each account ownership category;

-Identifying, monitoring and addressing risks to the deposit insurance funds; and

-Limiting the effect on the economy and the financial system when a bank fails.

2) There are three types of Account Ownership Namely

A) Individual Account

B) Joint Account

C) Testamentary Account

3) Each depositor of a Joint Account is said to own 50% of total deposit in that account.

Emergency Fund & Debt Ratios

2010-09-29T19:55:00.001-07:00

1) Emergency Fund: You need to maintain or set aside in liquid form at least 3 months (Dual Wage Earner family) or 6 months (single wage earner family) worth of money to cover your Nondiscretionary expenses. Nondiscretionary expenses include only those expenses that do not go away if you lose your job for example debt, utilities, food

2) Your Housing Debt sometimes referred to as Front End Ratio should be less than or equal to 28% of your GROSS income. Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance

3) Your Housing Debt plus other Recurring Debt should be less than or equal to 36% of your GROSS income. Other Recurring debt include Auto, Student Loans, Credit card and all other type of monthly debt while Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance.

4) Your expected time to stay in a house should determine whether or not you should Buy or Lease all other things (finances) being equal. If you intend to stay in a house for a short period (1 to 3 years) your better option is to lease but if you plan on staying there more than three years, Buying will be the better option. Also if your main goal is to “Build Equity”, then buying a house is the better option.

5) Your monthly Consumer debt payments should be less than or equal to 20% of your NET Income.