Blog Archives - PFwise.com

What's the Safest Place to Park Money - Part IV. Credit Angencies

11/30/2015

In our previous blog posts, we discussed the safety of money at three major categories of financial service companies - banks, brokerage houses, and insurance companies.

How do you evaluate the different financial services' credit worthiness? You can use third party credit agencies to do it -

Evaluate Banks
Moody's is the most prominent bank evaluation agency.

Evaluate Brokers
Barron's publishes an annual review of brokers.

Evaluate Insurers
AM Best's insurance company credit evaluation rating is widely used in this area.

What's the Safest Place to Park Money - Part III. Insurance Companies

11/29/2015

In our last blog post, we showed that your money at a broker is protected by SIPC for up to $500,000. How about your money at an insurance company - is it safe?

The insurance business is regulated at the state level. For each insurance company, in order to operate in your state, it has to contribute fund to a State Guarantee Fund which has similar mission like FDIC - if the insurance goes bankrupt, it will step in to cover your loss. Unfortunately, like FDIC or SIPC, there is a limit on such coverage and it varies by state. You can Google your state's limit by yourself.

In real life, if an insurer is bankrupt, the state agency would help it find a buyer first. If not successful, the insurer's assets will be liquidated to pay off any debt, its customers' policies will be transferred to other stable insurers.

In our next blog post, we will discuss how to utilize third party credit agencies' services to evaluate the different financial service companies' safeties.

What's the Safest Place to Park Money - Part II. Brokers

11/28/2015

In our last blog post, we showed that your money at a bank is protected by FDIC at up to $250,000. Now we will take a look at your money at the brokers, is it safe there?

For brokerage houses, there is an institution that is similar to FDIC - Securities Investor Protection Corporation (SIPC). SIPC protects an investor's assets in a broker at up to $500,000 (including up to $100,000 cash).

If your investment account has more than $500,000 a asset, it's best to spread that money at several different brokers. If your broker goes bankrupt and you have more than $500,000 with the broker, the SIPC would first cover your loss, then you will participate the liquidation of the broker's assets.

If you are making investments through an advisor, make sure your advisor only channel your money to a broker that participates the SIPC program. You can find if a broker is a SIPC member or not at SIPC.org.

Next, we will discuss if your money at the insurance company is safe or not.

What's the Safest Place to Park Money - Part I. Banks

11/27/2015

Q. What's the safest place to park my money?

A. We will look at 3 popular places people could park their money and evaluate their safety levels.

Let's start with the banks and credit unions.

Your money in the banks and credit unions are protected by the Federal Deposit Insurance Corporation (FDIC), up to $250,000. Note that this limit is based on per person, not per account. For example, if you have two separate accounts at the same bank, you are only protected at the $250,000 level.

When you go to a bank or a credit union's branch to make a deposit, make sure check the FDIC sign at the counter. If you have more than $250,000, it's best to put no more than $250,000 at the same bank.

Next, we will discuss how safe for your money at a Brokerage House.

Should I Open a MyRA Account?

11/26/2015

Q. Should I open a myRA account?

A. If you qualify, yes!

Income Restriction of myRA
If your annual income is $131,000 or more as a single, or $193,000 or more as married filing jointly, you cannot contribute to myRA.

Annual Contribution Limit of myRA
If you qualify, you can contribute $5,500 or $6,500 per year if you are age 50 or older.

Benefits of myRA
1. No fees. myRA does not charge you anything.

2. No risks. The money you invested in a myRA account is backed by the federal government, and will earn the same interest rate that is available to federal employees in the Thrift Savings Plan Government Securities Fund, which earned 2.31% in 2014 and an average of 3.19% over the past decade.

3. No minimums. You can contribute whatever amount that fits you, as long as it's within the annual contribution limit.

4. No penalty. You can take out your contributions tax-free and without penalty at anytime, just like a Roth IRA.

Limitation of myRA
Low ceiling of $15,000, once you hit the ceiling, you can no longer contribute. This makes myRA a great place to park emergency fund.

3 Tips When Buy and Sell ETFs

11/25/2015

Q. Any tips I should bear in mind when trading ETFs?

A. Here are 3 tips every ETF investors should be aware of:

1. Buy commission-free ETFs
If you trade ETFs frequently, or at least using dollar cost average method to buy ETFs, you might be surprised at how much commission cost could eat into your profit. Fortunately, many large brokerage houses offer a list of ETFs commission-free if you trade them online.

2. Use limit orders
As we have discussed here before, ETF prices could be very volatile and it is always prudent to place your order using limit order (specify your buy or sell price).

3. Pay attention to fair value
ETFs' prices could deviate from their net asset values, when you buy an ETF, you want to avoid paying much more than its NAV, when you sell an ETF, you want to avoid selling at a price that is much lower than its NAV. How to find an ETF's fair value? See our discussion here.

Some Popular New Financial Service Companies

11/24/2015

This is an incomplete list of some popular new financial service companies:

Peer-to-peer Lending intermediaries (target individuals)

Lendingclub
Prosper
SoFi (student loan, mortgage refinance)

Crowd-funding platforms (target small businesses) - no equity involved

Crowd-funding platforms (target small businesses) - equity ownership involved

Online wealth management firms

Give investors access to stocks directly

Loyal3 (buy and sell stocks free)
EquityZen (access to private companies)

Bi-monthly Perspective on Market Movements - Nov 21 2015

11/23/2015

How to Deal With a Mutual Fund's Potential Tax Hit?

11/22/2015

In our last two blog posts, we have discussed what is a fund tax hit and why it happened. Now we will discuss what if you find out you have such a fund tax hit coming, what should you do?

4 Investor Choices
Generally speaking, you have 4 options:

Take the cash distribution
Reinvest the money in the fund
Sell shares before the distribution
Sell the fund and buy back in a tax-deferred account

If you find the tax hit could be pretty big, for example, over 30% of NAV payout, then it's probably time to sell your fund before year end. If you wait till next year, you may find yourself in a very bad situation - you have to pay capital gain tax for 2015, but the loss in 2016 couldn't be used to offset such a gain.

What're the important lessons to learn from such a fund tax hit?

1. For taxable investment accounts, it's best to hold index funds or ETFs which tend to be more tax efficient and have low taxable payouts.

2. For actively managed mutual funds or other investments with large payouts, it's best to hold them in a tax-sheltered account such as a regular IRA, Roth IRA, or 401(k) account.

Why A Mutual Fund's Tax Surprise Happens?

11/21/2015

In our last blog post, we discussed what is a mutual fund's tax surprise to an ordinary investors. Now we will discuss why such a fund tax surprise happens.

There could be a variety of reasons that lead to such a mutual fund tax shock, below are some of the major ones:

1. Fund Managers' Selling Activities
If during a market turmoil, a fund is down. Now some of the fund's investors decided to exit the fund, or due to whatever other reasons, the fund managers have to sell some of the fund's holdings. If some of the holdings sold actually had large gains due to the fact that they were bought long ago with low cost basis, then this fund could end up with a positive capital gain distribution despite an overall loss.

2. Change of Fund's Managers or Strategies
If due to a fund manager's retirement or whatever reason the current fund managers decided to change the fund's investment strategies, then chances are some large selling would happen which could lead to large distribution of capital gains, even though the fund's performance is actually negative.

Most mutual funds would estimate and announce their capital gain payouts around this time of year, you can check your fund's website, or visit capgainsvalet.com.

In our next blog post, we will discuss what to do if you find you have a big gain coming.

What Is A Mutual Fund's Tax Surprise?

11/20/2015

Q. I heard that I could lose money on a mutual fund but still have to pay capital gain tax? How come this happens and what can I do to prevent such a tax hit?

A. If you hold mutual funds in your a taxable account, it is true that you could lose money on your investment on paper, never sold any share, but still have to pay Uncle Sam capital gain tax the following year at tax time.

This happens because by law the each year a mutual fund must pay out to investors nearly all their incomes (e.g. dividends, interests, net realized capital gains, etc.) minus losses to shareholders.

If you hold a mutual fund in a tax sheltered account such as an IRA or 401K account, you are fine. But if you hold a mutual fund in a taxable account (i.e. individual brokerage account), in some extreme cases, you might find the fund you are holding is distributing over 30% or even more of Net Asset Value (NAV).

There is a free website you can do a quick search - capgainsvalet.com - it tracks a list of popular funds with extreme payouts. For example, First Pacific Advisors U.S. Value Fund has distributed over 80% of its NAV in 2015!

In our next two blog posts, we will discuss why some mutual funds have such a high distribution ratio and what an investor could do to prevent such a tax hit.

How Do I Get Estate Planning Started?

11/19/2015

Q. I know I need estate planning. How can I get started?

A. There is no need to make estate planning very complicated. To get started, you just need to get the following 2 documents done:

1. Will
A Will is a documents where you state who will inherit your assets. If you want to know about Wills, read this blog post.

2. Healthcare Directive
The Healthcare Directive includes durable power of attorney and durable medical power of attorney, these documents tell medical personnel how you want to be treated in the event you are incapacitated. For more details, read this blog post.

Revocable Living Trust
If you don't mind spending a little money, like $1,500 - $3,000, consider setting up a revocable living trust. Revocable means you can change your mind later if you think you made a mistake, living trust means it will manage your assets if you cannot Lawyers who do this typically charge a flat price. For more details, read this blog post.

There are many other types of trusts available, but you shouldn't spend time researching them. Just find a good lawyer who charges a reasonable price to help you develop a good strategy.

How to Obtain a Copy of Medical Exam Results - Ohio National

11/18/2015

Q. I just completed my medical exam as the requirement for my Ohio National term life application. How can I obtain a copy of my medical exam results when it's available?

A. As part of your Ohio National life insurance application process, when you meet with the examiner to complete the parameds, the examiner is supposed to provide you with a brochure that contains a barcode number. You can log on to ExamOne's website with the barcode number to view everything online.

Or you can simply following the 3 steps below to do it by yourself:

1. Call 800.677.6726 to retrieve bar code number needed for the website.
2. Go to MyExamOne.com and register with the bar code received in #1.
3. Once registered, log on and view results.

2 Reasons Why You Should Avoid Corporate Bond Funds

11/17/2015

Q. Should I include corporate bond funds with high yields in my portfolio?

A. Below we will show 2 reasons that you should not include corporate bond funds in your portfolio and stop chasing higher yields in corporate bonds.

1. Risk Not Rewarded Much by the Return
We all know that risks and returns go together in the investment world. However, in your portfolio, you should take risks on the equity part, not on the bond part, because in the long term, the market does not reward such risk taking much.

For example, from the start of 1926 to September 30, 2015, long term corporate bonds returned an annualized 6.00% on average, but the much safer U.S. government bonds also enjoyed 5.62% annualized return.

2. Risks Occurred at the Worst Time
Financial risk is not just about the possibility of a loss, it's also about such loss happens at the worst time - when you need the money the most. For example, in 2008, when the stock market crashed, you might hope the more conservative part of your portfolio could give you ammunition to take advantage of the low stock valuations, but corporate bonds showed positive correlation with equities and also down substantially.

For example, in 2008, a Barclays index of high-grade, intermediate-term corporate bonds returned negative 11.6%, a similar index that focuses on below investment grade bonds returned negative 23.7%! Chasing that higher yields could yield you very bad results at the worst time.

The Bottom Line
In your core portfolio, include a portion that is invested in the much safer Treasuries and Money Market funds, this part of your portfolio is not for high yields, it's for safety, so you can sleep at night and bottom fishing when the time comes.

ETF Wash Sale Clarifications - Part C

11/16/2015

In our last blog post, we showed that if we can find two securities that are not "substantially similar", then we can pass IRS' wash sale rules. We will discuss tax loss harvesting strategies using ETFs below:

1. Exchange a Stock with an ETF
If you have a stock, for example, an energy stock, suffered substantial loss in 2015, you can sell it to harvest tax loss, at the same time, you can buy an Energy ETF, for example, iShares US Energy ETF (IYE), to keep energy as part of portfolio in case it turns around after the stock sale.

2. Swap a Mutual Fund with an Index ETF
You can sell an actively managed mutual fund if it's at a loss this year, and buy an index ETF that is similar to the benchmark that the actively managed mutual fund tracks to replace it, as long as the two funds do not have 70% overlap in stock holdings.

3. Sell Index ETFs and Buy Smart-beta ETFs
If you have an index ETF that is at a loss, you can sell it, and buy a smart-beta ETF that is similar in nature. Recall, a smart-beta ETF tries to beat the index by following different rules dictating stock inclusion and weightings, such strategy could prevail in front of IRS as not "substantially identical" to the underlying index.

ETF Wash Sale Clarifications - Part B

11/15/2015

In our last blog post, we discussed what is tax loss harvesting and what are wash sale rules, now we will visit the key term in wash sale rules - substantially identical.

Are Fidelity Spartan 500 Index (FUSEX) and Vanguard S&P 500 ETF (VOO) substantially identical?

One might argue so, because they are offered by two different companies, set up with different legal structures, and have different fees. If this argument holds, it will be great news because an investor can sell one index fund with a loss, and buy another very similar index fund to keep such a core holding in one's investment portfolio.

Unfortunately, the answer is no. Why? While IRS has not clearly defined what is "substantially identical", there is another part of the tax law that clearly stipulates what is "substantially similar" - if two securities have more than a 70% overlap in weighted holdings, then they are substantially similar.

In order to prevail in front of IRS, if you can prove two securities are not substantially similar, then you can successfully argue they are not substantially identical.

With the above understanding, we will discuss a few tax loss harvesting strategies using ETFs in next blog post.

ETF Wash Sale Clarifications - Part A

11/14/2015

Q. How to use ETF to maximize tax losses while avoiding violating wash sale rules?

A. ETFs make maximizing tax losses while avoiding violating wash sale rules a lot easier! Let's take a look what is tax loss harvesting and what is the wash sale rule:

Tax Loss Harvest
If you sell two securities, one with a $10,000 gain and one with a $5,000 loss, you only need to pay tax on the net gain of $5,000. If your tax losses exceed your gains, you can even offset $3,000 of your ordinary income, and carryover the rest losses to future years.

Wash Sale Rule
If you have a tax loss sale, the IRS does not allow you to deduct a loss if you buy a "substantially identical" security within 30 days before or after the sale. If you buy such a security within the window, your cost basis will be adjusted downward to reflect the unclaimed loss.

In our next blog post, we will look at what does "substantially identical" mean.

Where to Get On Demand Repair Services

11/13/2015

Q. Other than Geek Squads, where can I get help to fix my broken laptop and smartphone?

A. There are companies that try to beat the Geek Squads by offering repairs faster and cheaper. Below are some prominent ones:

Fixya.com
It covers over 150 categories of services, you can ask a question and get expert answer.

iCracked.com
It sends a technician to your site to fix your broken smartphones on the spot.

TryTechy.com
It fetches your broken laptop, fixes it, and hand delves back to you.

Otobots.com
Its mobile mechanics will come to you to fix your broken car.

What is Private College 529 Plan?

11/12/2015

Q. What is private college 529 plan, is it worth the cost?

A. If your child is still young and plan to attend a pricier private college later, then you can lock down the college tuition at today's rates by paying it upfront, potentially saving you tens of thousands of dollars in inflation costs.

There is a network of such private colleges, right now about 300 of them. Your child doesn't have to commit to any of them now, but once accepted and enrolled at one of the participating colleges, you will redeem the tuition certificate. You can enjoy all the regular 529 plan's benefits.

A caveat: if you don't use the money for tuition at a participating school, you will be hit with a 10 percent penalty upon withdrawal.

To find a list of colleges in this network, visit privatecollege529.com

Be Careful About Bonds "Yield"

11/11/2015

Q. Is a bond's 4% yield the real yield I will get?

A. Most likely not. Be very careful when your broker or financial advisor recommends a bond with high yield, your actual yield is usually far less than the yield shown. Here is why -

When you purchase a bond, in today's low environment, the price you have to pay is typically higher than the bond's par value, which means you have to pay a premium for the bond with a high yield. When the bond matures, you will only get the par value.

For example, you purchase a bond with par value of $100 and yield 5%, but you have to pay $105 for it. If the bond matures in 1 year, which means you will receive $5 during the next 12 months, but you will only get $100 back after 1 year. So essentially your yield is 0%.

Are Foreign Wills Acceptable in the U.S.?

11/10/2015

Q. Are Wills written in foreign countries acceptable in the U.S.?

A. Foreign wills are generally admissible in the U.S., so if you have a will that was drawn up and executed in another country, unless there is something very unique about it, or you want to make some drastic changes to it, there is generally no need to recreate it in the U.S.

IRA Rollover Once Per Year Rule and Implications

11/9/2015

Q. Can I rollover my IRA money more than once within the same year? Any impact on taxes?

A. Starting from 2015, there is a new IRS rule - you can only make one rollover of one IRA to another in any 12-month period, no matter how many IRAs you own. This limit covers all IRAs, such as SEP IRAs, SIMPLE IRAs, Roth IRAs and Traditional IRAs.

Prior to 2015, you could complete the same number of Internal Revenue Code Section 408(d)(3) transfers as the number of IRAs that you had. For example, if you had 3 IRAs you could complete one rollover for each IRA (for a total of 3) during a 12-month period.

Consequence if Violating the Rule
If you violate this new rule, you may be subject to reporting the rollover as income and a 10% early withdrawal penalty. If the distributed amount stays in the new (or same) IRA, you may be subject to a 6% tax each year.

Exception to the Rule
If the rollover is from one trustee to another trustee (“Trustee-to-Trustee Transfer”), the rollover is exempt from the new rules. This means you can conduct any Trustee-to-Trustee Transfers as you like, there is no limitation.

The Implications
When rolling over your IRA, direct your trustee to make the check payable to the other trustee. Completing a Trustee-to-Trustee Transfer provides you flexibility to make additional rollovers during a 12-month period.

Bi-monthly Perspective on Market Movements - Oct 24 - Nov 7, 2015

11/8/2015

Annuity As a CD Alternative?

11/7/2015

Q. I have about $50,000 that I won't need for at least 5 years. What's the best place to put the money?

A. In today's low interest rate environment, it's hard to find a good safe place with decent return. Bank saving accounts and CDs will earn you very little. Fixed Annuity could be the best alternative out there.

What is a Fixed Rate Annuity?
You can treat it just like a CD, but with a better return (see table below). Like a CD, a fixed annuity product has a minimum period of time during which there is a cost (called surrender charge) if you need to take your money out. After the surrender period, you can withdraw your money, along with interest earned.

One unique benefit of annuity is it has tax-free growth - you have to pay tax each year on the interest earned from your savings account or CD each year, but you don't have to pay tax on the interest you earn from fixed annuity each year until at the time of withdrawal.

The table shows various companies' different fixed annuity products' yields. The secret is - the longer you don't need the money, the higher the amount of money you can put in, the higher the annual yield.

Please contact us if you want to find what fixed annuity fits your situation the best.

myg-by-guarantee-years_oct_21_2015.pdf
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When Should I Take the First RMD?

11/6/2015

Q. When is the first required minimum distribution due, I want to avoid taking two RMDs in the same year.

A. Many people thought the first RMD is due when they turn age 70, wrong!

The first RMD from individual retirement accounts and other retirement accounts starts from the year you turn 70.5, not when you celebrate your 70th birthday!

Furthermore, IRS allows you to take your first RMD until April 1st of the calendar year after the year you reach 70.5. Although after that, the second RMD is due year-end, which means if you delay your first RMD, you might have to take two RMDs at the same year which could push you into a higher tax bracket.