1. DON’T TAKE ADVANTAGE OF TAX – Taxes are by far the biggest expense we all have, and the problem is likely to get worse. Tax laws are complex matters that change every year. While most people who are self-employed and have a few bank statements and/or brokerage accounts can get away with preparing their own taxes with one of the many tax software packages on the market, those who have complex returns that need to fill out the “Letter Schedules” (Schedules A, B, C, D, E etc.) In depth, or depreciation/amortization items almost always have to use a tax break.
SOLUTION: Have your tax return filed by a tax adviser once every few years, even if this is not necessary. If there’s anything you’ve missed, it could be well worth the one-time outlay if you capitalize the savings over a period of years. For those who regularly receive property tax assessments, do you object if applicable? Here in Allegheny County, where Pittsburgh is located, their assessment method consists of taking a picture of the front of the property and the land area already registered. Recently, a new client’s mother was assessed for a creek that ran through her property. When her son (my client) brought this to the attention of the appeals committee, the tax was simply reduced.
2. NOT HAVING OR CHANGING THE BENEFICIARY INFORMATION ON YOUR LIFE INSURANCE IF APPLICABLE.
John and Mary divorced three years ago. John and Mary can’t stand each other, just mentioning the other’s name sends bile flowing down the other party’s esophagus. Last year, John remarried Linda. John and Linda are very much in love. Today John died in a traffic accident on the highway. Today, thanks to John, Mary is a multi-millionaire and Linda has to pay huge final expenses from the joint bank and investment accounts? Why did this happen? John never bothered to notify his own insurance agent and his HR associate at work of the major change in his life, and fill out the appropriate paperwork to transfer the beneficiary from Mary to Linda.
I know firsthand that this happens not only because I am an insurance professional, but also because I served as vice president of my volunteer fire department for a period of 3 years, and the “veep’s” job included keeping of information on beneficiaries of insurance policies. During my term as VP, a member died of a firefighting-related death. One of the many things the State of PA did when they came down to walk us through the Line of Duty Death trial was to order that the drawer containing the members’ file be sealed until further notice. No new information could be added to or removed from ANYONE’s file in that drawer until I was told otherwise. After re-granting access, several members suddenly remembered the changes that needed to be made. Thank goodness nothing else happened in the meantime
SOLUTION: Regularly check the beneficiary information on your life insurance policies, but no less than every two years or whenever there is a major change in your life such as marriage, divorce, birth of children, etc. Special Note: If you leave money to minors, there will have to be a guardian for the money, as the court system usually does not release hundreds or thousands of dollars for children to use as they see fit. If you don’t appoint someone of your own choosing, the court will appoint a guardian for the money who may or may not be the person you would choose. It may or may not be the person you have chosen to take care of your offspring on a daily basis.
3. NOT HAVING OR CHANGING THE BENEFICIARY INFORMATION ON YOUR IRAS
Insurance policies and IRAs have one very important point in common: they are, in most cases, affected by laws outside of probate and probate. I say most cases because if you have a cash value life insurance policy (permanent insurance rather than term insurance), the value could make you eligible to pay federal estate taxes if your estate is large enough. This is NOT a good thing that happened to you. IRA money can be subject to probate if you name your estate as a beneficiary instead of an individual. While if you die it will cost you nothing by not naming a beneficiary, it could potentially cost your loved ones millions. The reason is that IRAs inherited by an individual can benefit from what is called an “IRA stretch.”
Here’s a Cliff’s Notes version of the Stretch. Let’s say you’re of age to take mandatory minimum benefits (RMDs) at your death, meaning you’re over 70 1/2. Let’s also say you leave your IRA to your 35-year-old son or daughter. After inheriting the IRA, your son or daughter, being wise, will go to Halas Consulting to learn the best way to capitalize on their newfound wealth. The good folks at Halas Consulting would advise your son or daughter to set up a Beneficiary IRA. Basically what happens is that when ownership is properly transferred, your son or daughter should still continue to take RMDs, but they will do so based on their younger age and not your older age. This means less is paid out to be taxed, if the IRA is a traditional IRA and not a Roth IRA that may never be taxed. If they also ask Halas Consulting to manage the money and it’s set up in a good asset allocation model, that money can potentially get really big (we’re talking millions here) on a tax advantage basis with only smaller amounts of money. annually, until your child comes around half a century, to meet the RMD. This is a good thing.
HOWEVER (you just KNEW it was coming), if the IRA is set up or transferred the wrong way, the piece is FOREVER lost. What happens if this happens because of bad advice? In most cases the IRS says “hard beans”, there are many Private Letter Rulings (PLRs) from people who have claimed this and lost in the PLR. You can sue whoever gave the bad advice, but you could still lose and then you will incur legal costs in addition to losing your case. For more in-depth information on this, I recommend reading books written by IRA expert Ed Slott. These can be found at bookstores or possibly at your local library (yes, that place with all the books most haven’t been to since they had to write their thesis or, even worse, their senior year of high school)
THE SOLUTION: Always have a beneficiary named on your IRAs and 401ks. Again, if you want to take maximum advantage of the Stretch and name a minor. Also name an adult you entrust money to to act as guardian of the money until the minor reaches an age where you believe they are responsible.
4. TRANSFER HIGHLY APPRECIATED BUSINESS SHARES FROM YOUR PENSION PLAN TO AN IRA.
While this may seem like a good idea at first glance, it’s actually not. The reason for this is a little known rule called “Net Unrealized Appreciation” or NUA. Here’s a quick summary of how NUA works. Suppose you had 500 company shares that you accumulated during your working years. For simplicity’s sake, let’s say you had the option to buy this stock for $3 a share when the stock was priced at $10 in its heyday in the late 1990s. Now at retirement, these shares are worth $20. If you transfer these shares to a self-directed IRA at retirement, you will owe income tax on these shares when they are distributed from your IRA. Your income tax can be quite high if you have a lot of retirement income.
THE SOLUTION: If you profit from the NUA properly, sell the stock and move the money into a non-qualified (non-IRA) brokerage account. If you do this, you will pay income tax on $7 per share, the amount of the difference between what you paid for the shares ($3) and what the shares were worth when you exercised your call option ($10). The difference between the price of the stock at purchase ($10) and what it is currently worth ($20), or $10 per share, is taxed at the capital gains rate which is currently up to 15% (the highest tax tier can exceed the are double). After the shares are sold and removed from the IRA, transfer the rest to an IRA for maximum flexibility and options. The cash proceeds from the stock you just sold are no longer subject to tax, only the interest and capital gains on this cost basis are taxed if you invest the money that is in the unqualified brokerage account. To manage your taxes efficiently and not be saddled with heavy spending, a well-researched growth stocks ETF would be a good choice here. Just make sure it fits into your asset allocation model.
5. NO WATCH OF YOUR CREDIT
With the recent financial collapse still fresh in people’s minds, credit and debt have become four-letter words. But while credit CAN be bad if used incorrectly, it can also be a life saver and allow you to buy many necessary things that cannot be paid for in cash in advance due to the high cost. Those who are aware of their credit score and research what makes one’s score look better and what the various credit bureaus look for pay less money in interest on cars, homes, home references and credit cards. I don’t want to be boastful, but several months ago when it seemed the doom and gloom would go on forever, I was sitting in my kitchen opening mail and several of the requests were ready to hand me over $50,000 in unsecured money. borrowing because of my good credit, and here were the people on TV who were forced to sell houses where they owed less.
Another area where good credit will help you with lower payments is insurance. ALL insurance companies use something called an “insurance score” when calculating your insurance score. For example, if you buy car insurance, it makes sense for insurance companies to look at your driving and traffic violations, but what the hell does my credit score have to do with what kind of driver I am? Can’t I handle money unwisely but be a model citizen on the road? Well, according to research from the insurance companies, no you can’t. Your insurance score is basically a composite of how you live your life, and those who live responsibly can save some money. One of those components is money and how responsibly you handle it. Likewise, if you have a DUI on your driving record, it can also affect your premiums for your home, health, and life insurance policies, as well as your car insurance.
THE SOLUTION- Get a free credit report from annualcreditreport.com every year and take advantage of it. I would recommend that you spend about $40 every year or every other year and get a consolidated credit report, or a “tri-merge” of all three companies. This consolidated report gives you much more detail than the freebie, and is the one that banks and mortgage brokers use to decide who gets a loan (at least they did until the government stepped in and told them to lend to deadbeats and then whole economy collapsed. But I digress). Go through this report with a fine-tooth comb. A year after mine, I found a credit card account that I had closed years ago and the bank failed to report it to the credit bureaus as closed. This is your “face” and reputation at stake, be clueless what it says.
Well, here are five things you can work on to get you started. If I think of more ways, I’ll write a follow-up to this article. In the meantime, take care of your money, and it will take care of you.