Blog Archives - PFwise.com

What Happens to My Debt When I Die? - Part A What If You Are Broken

3/31/2016

Q. What happens to my debt when I die?

A. When you pass away, your estate (your accumulated assets) is generally responsible for paying any outstanding debts you have. It’s up to the executor of an estate to make sure that debts are paid.

What If My Assets Are Less Than My Debts?
Most debts must be paid back, provided there is enough money in the estate. The types of debts that must be paid back include credit card debt, car loans, private student loans (federal student loans are discharged at death), home equity lines of credit, and mortgages.

However, if your assets are less than debts, those outstanding debts without cosigners will be written off by the creditors. Note that some creditors will hire collection agencies to harass surviving family members about paying debts, this practice is illegal, but it still happens.

What if you owe mortgage when you die? It will be a little complicated, see next blog post discussion.

How to Pay Estimated Taxes When Income Fluctuates - Part C

3/30/2016

In our last blog post, we discussed some of the difficult moving parts in order to get your estimated tax payments right. Now we will show you some of the reliefs -

a. 90% Rule
If you pay taxes on at least 90% of the year's income through estimated tax payments and withholdings, the IRS will spare you with any interest charges.

b. Safe-harbor Rule
Here is a better news - if you pay a certain percentage of your prior year's tax bill over 4 quarters, then no matter what your final tax bill will be for the year, the IRS will accept those estimated tax payments and will not be punitive.

The percentage varies based on your income - if you earn more than $150,000, you need to pay 110% of prior year's tax; if you earn less than $150,000, then you just need to pay at least 100% of prior year's tax bill and you will be fine.

What if your income declines big this year? For example, you sold a rental property last year and had a big gain, but it won't happen again this year? You could still pay 110% of last year's tax bill (if you earn more than $150,000) and get a refund, although this means you are extending a free loan to Uncle Sam!

c. Increase Withholding
There is another way - if you have salaried income and a few quarters later realize you have been underpaying your estimated taxes, you can ask your employer to increase your withholding from your salary for the rest of the year to back-pay the underpaid taxes in previous quarters, this is an accepted practice by IRS, but the risk is you might attract IRS attention for chronic underpayment and an audit.

In Summary
Paying estimated taxes each quarter accurately is a daunting task, but it's doable through a few simple actions. Please consult your tax advisor for specific questions.

How to Pay Estimated Taxes When Income Fluctuates - Part B

3/29/2016

In our last blog post, we discussed the IRS rules on paying estimated taxes each quarter. While the rules themselves are quite simple, there are a few complications in practice:

a. Erratic Income Each Year
If your only source is a fixed wage, this topic is not an issue for you. However, if you have a large bonus coming this year, or your private equity investment has a big distribution, or your rental income jumped this year because you just bought and rented out two big properties, etc. it is going to be very hard to estimate accurately your income.

b. 3 Tax Systems
Set aside the income fluctuations, the taxes systems you are dealing with also are pretty complicated -

First, you need to deal with the 3.8% Medicare tax, the regular income tax, and Alternative Minimum Tax (AMT). Second, you need to look at all of the itemized deductions, phaseouts, credits, etc. in order to determine the estimated tax payments. In short, you better run a complete quarterly return in order to get everything right.

c. Add State Taxes
State taxes don't make the process easier. While some states follow the IRS payment system, for states have their own rules. For example, California requires taxpayers to pay 30% of their estimated taxes in the first quarter, 40% in the second quarter, none in the third quarter, and 30% in the final quarter.

However, don't be scared by the above complications. In our next blog post, we will show some easy ways you could still get the estimated tax problem solved.

How to Pay Estimated Taxes When Income Fluctuates - Part A

3/28/2016

Q. How to avoid tax penalty if my income will be very different this year?

A. This question is mostly for high earners with fluctuating annual incomes. Estimate and pay tax could be a frustrating experience - on the one hand, you don't want to overpay your estimated taxes and give a free loan to the IRS; on the other hand, you don't want to underpay your tax therefore incur interest charges and penalties.

IRS Estimated Tax Payment Rules
The IRS rules are quite simple on the surface - if you earn at least $1,000 a year in self-employment or investment income, rent, gambling winnings, or any income from which taxes are not withheld, you have to pay estimated taxes every quarter for what you think you will owe for the year.

If you don't pay for the quarterly deadline, you will be charged 3% on the amount due, plus a surcharge that is 0.81% at this time, even you overpay your taxes for the year and qualify for a refund in the end!

Unfortunately in reality, it's a lot hard to get the estimated tax amounts right, due to lots of factors, as we will show in our next blog post.

Perspective on Market Moves - March 27 2016

3/27/2016

The Math Behind Risk Control - Part B

3/27/2016

In our last blog post, we showed why risk control is extremely important in a game if you want to play for the long term, even your odds of winning is above 50%.

Now we will show you the optimal betting % you should use, known as Kelly Criterion.

John Kelly was a scientist who worked at Bell Labs. He discovered the optimal betting % one could use when playing in a statistically favorable game -

f* = [P*Rw - (1-P)*R1]/(Rw*R1) or f = P/R1 - (1-P)/Rw

where:

f* is the fraction of the current bankroll to wager, i.e. how much to bet;
p is the probability of winning;
q is the probability of losing, which is 1 − p;
Rw is the net winning %
Rl is the net losing %

In our previous example where a gambler has a 60% chance of winning (p = 0.60, q = 0.40), and Rw=1 and Rl=1, the gambler should bet 20% of his bankroll at each opportunity (f* = 0.20).

If in a game the gambler has zero edge, i.e. p = q, and Rw = Rl, then the Kelly criterion recommends the gambler bets nothing.

With a good understanding of the Kelly Risk Control Strategy, you could apply it to your investment's decision and achieve amazing results.

For example, if you have found a winning strategy in the stock market with 80% of chance of net winning rate of 3%, and 20% of chance of net losing 5%, even with such a high odds of winning, you definitely shouldn't all in, in fact, based on Kelly formula, your optimal betting % each time should be only 9.33%!

In our next blog post, we will derive the investor's expected optimal compound growth rate, based on the Kelly formula.

The Math Behind Risk Control - Part A

3/26/2016

Let me start with this blog series with a crystal clear statement - if you want to be successful in the investment world, day after day, year after year, the most important factor is a strictly enforced risk control strategy.

Why? Let's start with a simple game and you will see the reason.

If there is a game you have more than 60% of chance of doubling your money and 40% of chance completely losing your money, is it a fair game? Of course not to the other party! Just think about casinos, for any game you play, your winning chance is less than 50%! Would you love to participate in this game? Absolutely yes!

Now the practical yet important question - if you start the game with $100, how much would you bet each game, in order to maximize your long term results?

100%? In game one, if you are lucky, you could double your money to $200. Now in game two, since you believe your chance of winning is above 50%, you bet 100% again, and you are right, you win and now you have $400! In game three, are you still all in? Unfortunately this time your bad luck comes, that 40% hits you, and you end up with $0 since you will lose all of your bets!

So not 100%, how about 99%? 90%? 80%? 50%? What's the optimal rate?

Now do you see the importance of Risk Control?

Using mathematical terms, if you face a game with probability p winning and probability q losing, with Rw as your net winning rate and Rl as your net losing rate (in the above game, Rw=1 and Rl=1), what's the optimal % of your principal you should bet in each game in order to maximize your long term payoff?

We will introduce the answer in the next blog post.

What Does a 20-year Term Life Mean?

3/25/2016

Q. What does a 20-year Term Life insurance mean?

A. A 20-year term life insurance means that the policy will stay the same price for 20 years, then either end, or jump in premium, or keep the same premium amount but with lower coverage amount.

Normally, after 20 years of a 20 year term life insurance policy, the insured person must reapply for a new policy at rates appropriate to his or her older age and health at that time. Or else policy owner may be able to convert the 20-year term life policy to a permanent insurance before the 20 year term ends.

The permanent insurance is guaranteed to have the same health rating as the term did, and priced according to the age of the insured at the time of conversion.

Can a Foreign Student on F1 Visa Apply Life Insurance In the U.S.?

3/24/2016

Q. I am a F1 student and want to purchase life insurance. Is it even possible?

A. For insurance companies, application for life insurance from foreign nationals are typically reviewed on a case by case basis. The underwriters typically ask the following questions:

· What country are they a citizen of?
· How long have they been in the US?
· What specific form of VISA are they here on?
· Have they applied for permanent residency?
o If so how far along are they?
· Are they married to a US citizen?
o Or have children, born here in the US?
· Do they own any property or business here in the US?
· Plan to stay here permanently?
· Any foreign travel planned, back home?...or to anywhere else of possible concern?
· Occupation/income?
· Face amount and plan type you’re considering?

We have experience helping foreign students applying for life insurance in the U.S. and know which carrier is more lenient in these cases, please contact us with your specific needs so we can find the best solution for you!

What types of tax forms are needed for my HSA account?

3/23/2016

Q. What types of tax forms are needed for my HSA account?

A. There are primarily 4 Federal tax forms for HSAs:

IRS Form 1099-SA: This form reflects distributions from your HSA. This form will be sent to you and the IRS in January (only if you took distributions in 2015). Use this form to fill out Form 8889 and then keep it for your records.
IRS Form 8889: Use this form to report contributions (including those made on your behalf and employer contributions), figure your HSA deduction, report distributions, and figure amounts you must include in income and additional tax you may owe if you fail to be an eligible individual. Complete the form and file it with your income taxes. Note: You do not need to report pre-tax contributions you make via payroll deduction.
IRS Form 5498-SA: This form reflects your total prior-year contributions, which can be made up until the federal tax-filing deadline (typically April 15). This form will be sent to you and the IRS in May. You will not need this form to file your taxes — just keep it for your records.
W-2: Your employer supplies you with this form. Box 12W shows total contributions made to your HSA through your employer — both your own pre-tax contributions and any your employer makes on your behalf. You'll need the amount shown in Box12W to complete Form 8889.

There are many websites with a lot of common frequently asked questions related to Tax and HSA, for example, check out this page from Wells Fargo HSA.

Should I Prepay My Mortgage?

3/22/2016

Q. I have some extra money each month, should I prepay my mortgage?

A. Prepay your mortgage is not always the best idea.

If you are uncertain how long you will stay at your house, you better hold off any extra payment.

If you are certain you will stay at your house for a long time, you still might want to do the following first before you making any extra mortgage payment:

Save enough emergency fund (at least 6 months fund)
Maximize your retirement savings
Pay off any high rate credit card loans

An Easy Way to Check Out An Investment Advisor

3/21/2016

Q. How to check if an investor advisor is legit?

A. It will be an easy check - visit Investor.gov!

It's an one-step search, you can search for a firm or an individual investment adviser's registration status and background, including any disciplinary actions.

Should You Invest Actively or Passively At Market Turmoil Times?

3/20/2016

Q. When market falls, should I stick to passive investment or turn active investment?

A. The answer depends on your risk tolerance. The key is to build a portfolio with returns and risks that match your tolerance.

There are two schools of thought here -

1) Passive Investment
When market falls, it is not time to stick your neck out and run against the trend, just shadow the benchmarks and wait it out until the way forward becomes clear.

2) Active Investment
When all asset classes' price fall, it creates an opportunity to buy because of mispricing of some asset classes. For example, when oil price falls bringing down the entire market, companies that benefit from lower oil prices might be good buys if their prices also go down with the overall market.

What kind of investor you are or want to be?

A Life Insurance Buyer's Guide From New York Times

3/19/2016

If you wondered what types of insurance you need to buy, how much coverage you need to buy, and from where to buy life insurance, New York Times had a pretty easy to read article on Feb 19, 2016, read it here.

Three quick comments related to the NY Times article -

1. What types of life insurance to buy - Term is a must, if you want supplemental retirement income, permanent life insurance is the one to go.

2. How much life insurance do you need - check out our online tool which considers all of the factors you need to consider.

3. From where to buy life insurance - you will pay the same price to buy online or offline, but if there is any complication in the process (such as not getting the best class from your desired carrier), you will see significant benefits by working with an independent agent like us.

Please contact us if you have any questions.

How Many Americans Do Not Pay Federal Income Tax?

3/18/2016

How many U.S. households do not pay Federal income tax? How many Americans do not pay Federal income tax? Here are some interesting facts based on 2015 tax year data, done by the Tax Policy Center:

45.3% of U.S. households pay no Federal income tax
77.5 million Americans pay no Federal income tax
About half pay no Federal income tax because they have no taxable income
The other half pay no Federal income tax because their tax deductions and credits offset their tax liabilities

What Documents to Keep, Shred and Give Copes to Someone Else?

3/17/2016

Q. What documents I should keep, discard, or give copies to someone else to keep?

A. Below is a table summarizes all of the major documents in one's lifetime and which ones to keep, which ones to discard, and which ones to give someone else to keep for you.

Can I Use HSA to Pay for Life Insurance Premiums?

3/16/2016

Q. Can I use HSA money to pay for life insurance premiums?

A. Unfortunately you cannot use HSA money to pay for life insurance premium, but according to Publication 969 of the IRS, HSA funds can be used for the following insurance premium payments:

Long Term Care insurance premiums;
COBRA health insurance premiums;
Health care premiums paid while receiving unemployment compensation (including premiums for spouse or dependents);
Medicare premium if you are age 65+ (but not premiums for Medicare Supplemental policies).

4 401(k) Account Distribution Options

3/15/2016

Q. What 401(k) account distribution options do I have if I am leaving my current employer?

A. You have 4 options to consider if you leave a job:

Leave money in plan until age 70.5 (RMD will kick in after that)
Roller over to your personal IRA
Roll over to your new employer's qualified retirement plan
Take cash contribution with tax withholding

Maximum Retirement Contribution Limits for 2016

3/14/2016

Q. Is the maximum 401(k) annual contribution $18,000 or $53,000?

A. If your employer's retirement plan allows, there are three types of retirement contributions you can make, here are the annual contribution limits for 2016:

Pretax 401(k) contribution + Roth 401(k) contribution: $18,000

Catch-up contribution limit: $6,000 (for participants age 50 and older)

Pretax 401(k) + Roth 401(k) + After-tax 401(k) contributions combined: $53,000

Saturday Summary For March 12 2016 - Perspective on Market

3/13/2016

A Few Top Quant Sites

3/12/2016

Q. What are the top websites for quants?

A. Here is a short list recommended by Barron's:

iViewMarkets: free, it provides real time market information and tools to rate the prospects of 10,000 U.S.-based stocks and funds.

Chartlabpro: it is a paid site with the same founder as iViewMarkets.

Chaikin Analytics: it has a stock screener that could be used to create a short list of potential trades through use of convention and Chaikin-originated criteria. $1,950 per year service charge.

A Tax Benefit For Foreign Investors Investing in U.S. REITs

3/11/2016

Q. I heard in 2016 there is a tax law change that helps foreign investors investing in U.S. REITs, what is it?

A. The Protecting Americans From Tax Hikes Act approved at the end of 2015 includes a benefit for foreigners investing in U.S. REITs.

Up until now, foreign investors were limited to owning no more than 5% of a REIT without being hit with the FIRPTA withholding tax (a tax put in during the 1980s, when U.S. was worrying about foreign investors buying up real estate). Foreign investors can now own up to 10% of a REIT and still get the FIRPTA exception.

5 Reckless Financial Beliefs

3/10/2016

If you want to ruin your financial life, just pick some or all of the following reckless financial beliefs:

1. I can time the market and make a killing in the stock market!
2. I like expensive and concentrated mutual funds as fees don't matter and speculation pays
3. I will stop contribute to my 401(k) whenever I sense there is a market downturn
4. I will use credit cards when my income is not enough to support my spending
5. I don't bother with tax-advantaged products such as Roth IRA, 529 accounts, and SEP.

6 Benefits of Permanent Life Insurance - 6. Great Leverage

3/9/2016

In our last blog post, we discussed the great control a life insurance holder has over the assets held in a permanent life insurance policy. Now we will turn to the great leverage feature of life insurance.

6. Leverage to Create More Long-term Wealth
Life insurance creates more long-term wealth than any other investment. And because this wealth is income tax-free, it is much more valuable than tax-deferred retirement savings that are at the mercy of future higher tax rates.

It’s the leverage that creates the wealth. Life insurance is the only investment where one dollar can do the work of many and the result is guaranteed and tax-free!

Taking the same funds that were in an IRA and investing them (after-the tax was paid on the IRA distribution) in a permanent life insurance policy, would produce many multiples of that original IRA balance if you have an early death, and it would be tax-free.

In Summary
We have discussed six major benefits of a permanent life insurance, if you want to better understand the power and security of an investment in permanent life insurance, for life and beyond, please contact us.

6 Benefits of Permanent Life Insurance - 5. Greater Control

3/8/2016

In our last blog post, we discussed the lifetime benefits of permanent life insurance. Now we will show a life insurance gives its holder more control over the retirement assets.

5. Greater Control
IRAs and 401(k) are subject to annual required minimum distributions (RMDs) after age 70 ½, whether the money is needed or not (Roth IRAs are exempt from lifetime RMDs). This causes forced distributions and additional taxes, though you might not need or want to withdraw those funds.

These forced withdrawals take control away, while withdrawing from the cash value in a life insurance policy can be done at any time, or not - you have the ultimate control of your retirement savings in a life insurance policy.

In our last blog post of this series, we will discuss the great leverage a life insurance product generates.