Blog Archives - PFwise.com

A New IRS Calculator to Avoid Under-or-Over-withholding Taxes

4/30/2018

Q. With the new tax law becomes effective in 2018, how can I adjust my tax-withholding properly going forward?

A. With the big changes happening in the new federal tax law, ranging from elimination or capping of certain deductions to a higher standard deduction and new tax rates, you could use the new calculator at the IRS site to figure out if you should adjust your withholding or not.

If you do, submit a new IRS form W-4 and/or make estimated tax payments using Form 1040-ES.

The Little-Known 401(k) Trick Can Boost Your Roth IRA Savings Significantly

4/29/2018

Q. I know backdoor conversion is a way to contribute more to Roth IRA, can I contribute more to Roth IRA?

A. While backdoor Roth IRA conversion is an effective way, there is a bigger opportunity to boost your Roth IRA savings!

What's the bigger Roth IRA opportunity?Most people know that employees are generally allowed to contribute up to certain limits from their own pay each year, with the 2018 limit being $18,500. Employers can then provide additional contributions in the form of profit-sharing or an employer match. What usually flies under the radar is that some employer-sponsored plans let employees contribute additional amounts on an after-tax basis up to the total permissible contribution amount for both employees and employers. For 2018, that number is $55,000.

How this strategy works?
In order for the strategy to work, your employer's plan must -

include provisions that allow it to accept after-tax contributions
you're allowed to make in-service distributions from the plan, because the next step of the strategy is to roll over the after-tax portion of your 401(k) to a Roth IRA.

The Caveats
The IRS allows taxpayers to separate out pre-tax and after-tax money, funding a Roth with the after-tax part without any tax impact. But unless you expect to leave your job soon, your 401(k) has to allow distributions while you're still employed, or else you won't be able to use the strategy effectively.

Disability Insurance 101

4/28/2018

Q. My employer asks me to contribute portion of disability insurance premium, what should I do?

A. The advice is - get as much as you can!

Many people have never thought about disability insurance before, we will do a Disability Insurance 101 below.

Who needs disability insurance?
Anyone who works for a living, relies on their paycheck to live, and couldn't cover a six-to-12-month gap in salary with savings should have disability insurance.

What are the main causes of disability?
The chance of disability increases with age, however, the most common ones are due more to illness than injuries. For example, 29% come from musculoskeletal issues (e.g. back pain and arthritis), 15% from cancers, 9% from high blood pressure and heart disease.

How to get disability insurance?
Use the following 3 strategies to get disability insurance -

1. If your employer offers long term disability insurance, take it
About 40 million workers in private sectors have long term coverage through their employer. Many employers pay for these policies, although more and more are asking employees to contribute something. The advice is - get as much as you can!

2. Supplement with private insurance
Even if you have a policy through your employer, there are two good reasons to buy a little more on the private market -

a) Group policies typically replace up to 60% of your pre-disability gross income, not including bonuses. That might not be enough to live on.

b) As you age, you are likely to have more health issues, not fewer. If you lose or leave your job, your employer policy may or may not be portable. Plus, some private policies let you increase your coverage amount without your having to go through another physical.

3. If your employer doesn't offer disability insurance, buy it yourself
However, it's not cheap if you buy disability insurance entiThere is no way to get around it, you need coverage as the chance of disability happens is a lot higher than you think.

You can use a few ways to lower premium, if you want to -

a) Reduce benefit amount. If you can't afford $5,000 a month coverage, reduce it to $2,500 a month.

b) Increase the waiting period. Most long term disability policies start paying after 90 days. But if you have the savings to self-insure for a year, the premium will reduce significantly.

c) Limit your benefit period. Most policies take you up to age 65 or the Social Security full retirement age. However, most disabilities aren't permanent, they last under five years. By reducing the payout period, you can lower the cost.

Can Fixed Indexed Annuities Beat Bonds in Retirement Portfolios?

4/27/2018

Q. Could fixed indexed annuities be used to replace bonds in retirement portfolios?

A. Based on the most recent research from Ibbotson, the answer is Yes.

Conservative investors usually increase their bond holdings to reduce risk in their portfolios, but doing so in the current low-yield environment means risking not having enough income in retirement along with reduced prospects for capital appreciation. Fixed indexed annuities can offset shortcomings of bonds, in addition, earnings grow on a tax-deferred basis, they guarantee a set interest rate and provide exposure to stock market returns, which tend to be higher than bond market returns, according to Ibbotson’s white paper.

If you want to know more details of the comparisons of fixed indexed annuities vs. bonds, ThankAdvisor has an article discusses the various studies Ibbotson conducted.

The Most Comprehensive 2018 Retirement Guide

4/26/2018

The document below is for financial professional only, so please use with caution. It has the most comprehensive guide for all kinds of retirement plans - IRA, Roth IRA, SEP, Simple, Defined Benefits Plan, 401(a), 401(k), 403(b), Life Insurance-based plans.

Restaurant and Retail Freebies at Your Birthday

4/25/2018

Restaurant Freebies by just showing your ID

Denny’s: Score a free Grand Slam breakfast just for showing your ID in what’s become one of the most popular birthday giveaways.

Capital Grille: Show up on your birthday for a complimentary chocolate espresso cake to top off your meal.

The Cheesecake Factory: Let your server know it’s your birthday and receive a bowl of ice cream accompanied by the birthday song!

Cracker Barrel: Tell the server it’s your birthday, and he or she will usually bring you a free dessert.

Iguana Mia: Get a free entrée (up to $18 value), free fried ice cream and a free picture of yourself in a sombrero on their website. Must show ID.

Western Siz zlin: Eat for free on your birthday. Must show ID.

Benihana: With this restaurant, you do have to sign up to become a member of the Chef’s Table. But you get a $30 gift certificate you can use during the whole month of your birthday.

Non-restaurant freebies
When it comes to freebies that have nothing to do with food, most retailers require you to sign up for their rewards card or e-newsletter to get a birthday bonus.

American Eagle Outfitters: Sign up for AERewards and receive 15 percent off during your birthday month.

Anthropologie: Sign up for their customer loyalty program and receive a 15 percent discount during your birth month.

Benefit Cosmetics: Get a free brow arch on your birthday. Contact your local Benefit Brow Bar beauty lounge for information.

The Body Shop: Sign up for email updates and get a $10 reward offer during your birthday month.

Columbia Sportswear: Sign up for the Greater Rewards program and get a 20 percent off coupon for your birthday.

Sephora: Sign up to become a Beauty Insider, and you’ll get a free gift during your birthday month that you can claim online or in a store.

Victoria’s Secret: Sign up for the Angel Card program, and you’ll get a free birthday gift.

CVS: Members of CVS Extra Care Beauty Club receive $3 to spend in the store for their birthday.

Golf courses: Many golf courses will give you a free round of golf the week of your birthday. Just ask!

Ace Hardware: Receive a free $5 off coupon when you join Ace Rewards.

Ulta Beauty: Receive a free gift by signing up for the Ultimate Rewards program.

DSW: Get a $5 gift voucher for shoes and more on your birthday.

Hallmark: Get a coupon for 20 percent off an item.

Famous Footwear: You get a free gift when you sign up for the rewards program.

Tax Advantages of Life Insurance - Tax-Free Inheritance For Family

4/24/2018

Tax-Free Inheritance for Your Families

If the personal tax benefits of permanent life insurance aren’t enough benefits yet, and if your beneficiaries’ tax benefits are your primary concern, be rest assured, your death benefit remains untouched as long as you pay back their loans. There is no income tax on this death benefit, and if you optimize your plan, your beneficiaries can even avoid estate tax.

You can accomplish this by putting their life insurance policy in an irrevocable life insurance trust at least three years before your death; it will no longer be your personal asset, and therefore, no longer part of your estate. The trust becomes a bulletproof vault inside your bunker, safe from depletion by taxation.

Tax Advantages of Life Insurance - Tax-Free Withdrawals and Loans

4/23/2018

Tax-Free Withdrawals and Loans of Life Insurance Policies

A permanent life insurance policy can be a great vehicle for you to compound your saved interest as tax-deferred cash value. It’s from this interest that you could then take out a loan or withdrawal, generally tax-free.

Loans are almost always tax-free, and withdrawals are tax-free up to the basis in the contract. Some permanent life insurance can be extremely flexible which makes the assistance of a financial professional even more important.

If taxes are your main concern, you can use life insurance policies as a tax-deferred savings account that compounds your cash while also providing peace of mind to your beneficiaries. If the transfer of wealth is your concern, there is no more efficient means to doing so than through using life insurance.

Tax Advantages of Life Insurance - Tax-Deferred Cash Value

4/22/2018

Tax-Deferred Cash Value for Life Insurance Policies

Permanent life insurance policies don’t just stash away money for your beneficiaries; they reward you with cash value that grows using the same mortality credits the rest of your retirement plan uses.

Although there will be surrender charges for life insurance policies, they all phase out over time because a permanent life policy is meant for the long haul. Most importantly, the growth of the cash value is tax deferred like a 401(k) or IRA, but money can be withdrawn prior to age 59 ½ without a federal penalty. Then, it can be used for college tuitions, dream vacations, or even more life insurance, tax-free!

Three Tax Advantages of Life Insurance - Overview

4/21/2018

Q. Can you tell me any tax advantages of life insurance policies?

A. Here are three ways a permanent life insurance policy can provide tax advantaged income for policy holders -

1. Tax-Deferred Cash Value Growth

2. Tax-Free Withdrawals and Loans

3. Tax-Free Inheritance for Your Family

What Is Municipal Bond Funds With AMT Exposure?

4/20/2018

Q. What is municipal bond funds with AMT exposure?

A. Interests from tax-free bonds issued to finance privately owned projects, such as assisted living residences and sports stadiums, may be subject to AMT. Although some closed-end municipal funds are named AMT-free and avoid such debt, others maybe subject to AMT.

Those subject to AMT tend to yield more than most tax-exempts because AMT-eligible projects are often unrated and riskier than everyday school, highway, and general obligation bonds.

Unfortunately there is no dollar threshold for the AMT - if your income is low, you generally don't have to worry about it, and it's possible for high income families and still owe no AMT. It all depends on the amount of income and its sources, as well as the types and sizes of deductions you claim (some deductions allowed under the regular income tax rules are forbidden under AMT).

Attractive Retirement Income Funds

4/19/2018

The following retirement income funds have reasonable expenses, solid underlying investments, and strong track records (although relatively short).

1. Vanguard Managed Payout Fund (VPGDX)
It is by far the largest retirement income fund and has the most aggressive asset allocation with about 65% of its assets in stocks. It uses 10 underlying Vanguard funds, aims for a 4% annual payout and requires a minimum investment of $25,000. It avoids sharp falls in monthly payouts by dipping into principal if the income generated by the portfolio falls. Its annual expense is 0.34%.

2. Schwab Monthly Income Funds
It offers 3 different funds, each one offers a different target payout rate, and even that rate will vary depending on the current interest rate environment, and all allocate assets among 5 in-house Schwab funds.

Moderate Payout (SWJRX): strives for an annual payout of up to 3%, with 46% of assets in stocks. Annual expense ratio 0.65%.
Enhanced Payout (SWKRX): strives for an annual payout of up to 4%, with 32% of assets in stocks. Annual expense ratio 0.56%.
Maximum Payout (SWLRX): strives for an annual payout of up to 5%, with 18% of assets in stocks. Annual expense ratio 0.46%.

How to Use Retirement Income Funds?

4/18/2018

After weighing the pros and cons of retirement income funds, if you decide it is for you, how do you start?

First, you need to figure out what your monthly spending needs are likely to be, they include essential spending (e.g. housing, utilities, groceries, insurance, etc.) and discretionary spending (e.g. vacation, restaurant meals, etc.).

Next, you should subtract from that amount the total amount of relatively steady and reliable incomes you are getting from social security, pension, annuities, CD, and US treasuries.

Finally, the amount left is the monthly income you will need to get from the retirement income funds. If this amount is more than 4% of your portfolio to be put into the retirement income fund, you might need to cut back your spending, because as a rule of thumb, 4% is the maximum sustainable annual drawdown from a diversified portfolio of stocks and bonds for a nest egg to have a high probability of lasting 30 days.

In our next blog post, we will show you a few retirement income funds from Vanguard and Charles Schwab.

The Disadvantages of Retirement Income Funds

4/17/2018

Despite the advantages of retirement income funds, they come with two major drawbacks.

1. No Guarantees
There is no guarantee the size or longevity of monthly income payouts, even though it's the retirement income fund's objective to do so. Furthermore, the funds may lose money, especially in a bear market. This means such retirement income funds are best for retirees who have the flexibility to adjust their monthly income needs - in a bad year, cut back the spend.

2. Requires Large Investment
Because these funds will provide your retirement income, it means bulk of your retirement assets will be invested in such funds. Some retirees might find it uncomfortable to cash out their preretirement portfolios and put everything into one fund. But committing a small portion of your retirement assets into such funds defeats its purpose and forces you to have to manage multiple investments.

If you decide retirement income funds are for you, we will discuss how to use it in our next blog post.

The Advantages of Retirement Income Funds

4/16/2018

Most retirement income funds are designed to generate monthly income in similar ways - they invest in a number of underlying mutual funds so that you wind up with a very broad array of asset classes. The income is generated from dividend-paying stocks, bonds, and capital appreciation when the manager sells investments in portfolio.

There are main advantages of Retirement Income Funds:

1. High Liquidity
You can sell your shares at any time if you need emergency cash and to pass on your shares and income payouts to your beneficiaries if you die. This is better than annuities which typically can't be liquidated without paying hefty surrender charges and whose guaranteed payouts can cease if you pass away.

2. Low Expenses
These funds typically charge annual expense ratios as low as 0.34% and require little initial investments to start with. In contrast, a financial advisor might charge you 1% of your managed assets each year to oversee your portfolio and set up an income stream.

In next blog post, we will look at the disadvantages of retirement income funds.

Why the Need for Retirement Income Funds?

4/15/2018

Many investors are surprised to find out that once they retire, investing becomes a lot trickier, because you have to transform the nest egg you have accumulated into a stream of steady, reliable income to live on and still make sure that you never run out of money, and you have to actively manage this for decades.

That's a lot to ask for a portfolio, thus the introduction of Retirement Income Funds.

These funds enable you to choose one that can provide the right amount of annual income for your needs, invest enough of your assets to generate that income, then sit back and collect a regular payment every month without worrying about what investments to buy and sell or how much cash to draw from your portfolio.

In next blogpost, we will look at the advantages of these retirement income funds.

Retirement Income Funds - Pros and Cons

4/14/2018

In next several blog posts, we will discuss various aspects of a new class of mutual funds - retirement income funds.

The Value of A Few Dollars - Guarantee Builder IUL From NA

4/13/2018

Below is a case study from North American for a client at age 40 to contribute about two hundred dollars a month till age 65 and achieve guaranteed death benefit and steady cash value build ups. If you are interested in this product, please contact us.

What Is the Best Financial Planning Software Tool?

4/12/2018

Q. What is the best financial planning software in the market today?

A. There are quite many financial planning tools available today, below is a nice matrix that summarizes some of the best ones. For a more detailed discussion of each of them, please see here.

How to Check 1040 for Opportunities to Get More Money Out Of It?

4/11/2018

Q. I am done tax filing, what's the best way to check if I have left any money on the table?

A. When you are done with your tax return, it's time to check your 1040 form and see if you have left any money on the table for Uncle Sam. Below is a strategy map to guide you through your 1040 form from Lincoln Financial Group -

5 Most Popular Portfolio Rebalancing Softwares Used by Advisors

4/10/2018

Q. Is there a tool I could use to rebalance my portfolio?

A. There are quite a few tools to select from. Below is a list of top 5 portfolio rebalancing softwares used by financial advisors:

All of the five tools have the following standard features:

Automated portfolio rebalancing
- Tolerance bands, trading minimums and thresholds
- Cash management
- Multiple approval levels for trading and compliance oversight
- Ability to consider held-away assets
- Household-level management
- Ability to tag securities for particular client restrictions
Security or Asset Allocation Model management
- Unlimited portfolio models containing equities, mutual funds or ETFs
- Models of models (Composite models)
- Substitute security equivalents (Assigning a non-model security to be equivalent of a model security, so it will not be sold)
Tax management
- Tax loss harvesting
- Avoiding capital gains and wash sales
- Asset location optimization
Flexible user interface for advisors
- Configurable – adding/removing/reordering grid columns, editing global settings

8 Tips About How to Choose a Tax Preparer?

4/9/2018

Q. How to choose a tax preparer?

A. You may have done your tax now, by yourself, and thinking about next year will find a tax preparer to do it for you. How to choose a tax preparer? Below are 8 tips to consider.

Check the person’s qualifications. Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics. New regulations require all paid preparers (including attorneys, CPAs and enrolled agents) to obtain a Preparer Tax Identification Number before preparing any federal tax returns.
Check on the preparer’s history. See if consumers have filed complaints with private watchdog groups. Check for disciplinary actions and valid licenses with the state board of accountancy (for certified public accountants), state bar association (for attorneys) and the IRS Office of Professional Responsibility (for enrolled agents).
Ask about the cost of preparing your return. Avoid preparers whose fee is a percentage of your refund and those who claim they can obtain a larger refund for you than other preparers.
Make sure the preparer is accessible. You want to be able to contact the preparer throughout the year.
Ask the preparer to describe the documents he or she wants to see. Reputable preparers will request to see your records and receipts and will ask you questions to help them prepare your return. Avoid preparers who do not ask for documents and who never ask you questions.
Never sign a blank return. Avoid tax preparers who ask you to sign blank tax forms.
Will the preparer sign your tax return along with you and include his or her PTIN? The law requires paid preparers to sign the return and include their PTIN, even though you remain responsible for the return’s accuracy. The preparer must also give you a copy of your return.
If mistakes are made, will the preparer pay the interest and penalties levied by the IRS? Remember that you’re always legally responsible for the information that appears on your return, even when someone else prepares it. Although you’ll owe the tax, honorable and professional preparers will agree to pay any interest or penalties resulting from their errors. Get their promise in writing and in advance.

If you discover that you’ve become involved with an abusive tax preparer, or if you suspect tax fraud, file Form 14157-A. You can download the form at irs.gov or have one mailed to you by calling 800-TAX-FORM (800-829-3676).

Risk-based or Goal-based Investing, Which is More Appropriate?

4/8/2018

Q. I am considering using an online robo-advisor, is there any concern I should have?

A. Online robo-advisor is a low cost of curated investing, it typically asks you a few questions to determine your risk tolerance level, then recommend the appropriate portfolio allocations for you to invest.

However, there are two ways to investing - risk-based and goal-based, we will illustrate with a travel analog below -

Let's say you are in NY, you want to go to LA. If you use the risk-based approach, you might assess your risk tolerance level - can you take air travel? If you feel that's too risky, you may take train.

With the goal-based approach, you will ask yourself - when do I need to reach LA? If by tomorrow morning, then you have to take air travel, which is the most likely way to achieve your goal, even though the risk might be high for you.

Which investment approach is more appropriate for you? Only you can make the final decision.

Do I Need Individual Disability Insurance If I Have Group Coverage?

4/7/2018

Q. I already have group long term disability insurance, should I get my own individual disability insurance?

A. Group Long-Term Disability (LTD) coverage can provide sufficient income protection for some employees. But for highly-compensated workers, group LTD may have some shortfalls. Individual disability income insurance could help bridge the gap potentially left by employer provided group LTD coverage. Below is a good educational article for anyone interested in purchasing individual disability insurance.

What Underwriting Class Will I Receive If I Have Diabetes?

4/6/2018

Q. I have diabetes, if I apply for life insurance, what underwriting class will I receive?

A. The answer is it varies.

Diabetes is a syndrome characterized by high blood sugar in which there is not enough insulin being produced (Type 1) or the insulin that is produced is ineffective (Type 2).

Symptoms of diabetes include frequent urination, excessive thirst, extreme hunger, unusual weight loss, increased fatigue and blurry vision. The Centers for Disease Control estimate that in the U.S., diabetes affects over 18 million people or over 6% of the population. Of this group, a third are undiagnosed and insurance testing is a primary way of detecting it.

The diagnosis of diabetes is made based on the presence of elevated glucose with suggestive symptoms or an abnormal blood glucose test. Hemoglobin A1c is a test that is very useful in the underwriting of life insurance, and typically a concern once it reaches levels of 6.0 or greater.

The primary questions you should be prepared to answer are:

Age of diagnosis? Prior to age 40 is typically referred to as juvenile onset.
What was the latest A1C reading?
Height and weight?
How is it being treated? Insulin? Oral RX? Diet & exercise alone?
What is the average fasting blood sugar readings?
How often do you test?
Any diabetes complications? (i.e., neuropathy, retinopathy)

Likely underwriting decisions
Underwriting decisions for diabetes are very dependent on age of diagnosis and, of course, the level of control. Quite a few carriers are able to get to a Standard rating in the ideal situation with above readings, good compliance, and regular follow up with the doctor; but a Table 2-4 is typically what you'll be looking at for a starting point, in most instances.

Typically, there are height and weight issues, as well as hypertension concerns, and these will factor into the ratings as well.

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IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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