Blog Archives - PFwise.com

Would Roth IRA Income Impact My Child's Financial Aid Eligibility?

11/30/2016

Q. Could the following plan help my child get college financial aid - still save regularly for my child's college expense (but not through 529 plan), then right before my child goes to college, use that money to pay tax by converting traditional IRA to Roth IRA. After that, we retire early and only live off the Roth IRA income for the college years and show virtually no income.

A. It's a nice plan, but unfortunately it won't work -

Because eligibility for need-based financial aid depends on total income, which includes both adjusted gross income (AGI) and untaxed income and benefits. A tax-free return of contributions from a Roth IRA is counted as untaxed income.

3 Key Considerations When Picking a Target Date Fund

11/29/2016

Many investors think a target date fund is a panacea, just determine the target retirement date, then the target date fund will automatically do the rest for them, wrong.

Here are a few key areas anyone considering a target date fund should consider:

Look at the detailed components of the TDF.
In 2008, the three largest TDF 2010 funds lost between 21% to 27% of their value. Can you imagine you are 2 years away from retirement and all of sudden your nest egg lost 20% plus value?

It turns out that many TDFs even with the same target year have very different components. For instance, according to Morningstar, of all the 2030 TDFs, the range or variance of equity ownership is almost 50%. One TDF manager can have 85% equity in their TDF and another 35%. Go figure!

Also, note that TDF managers can and do adjust the holdings from time to time. For example, in summer 2015, right before the August market drop, one of the largest TDF managers increased its domestic equity by 15% on all but two of its TDFs.

Look at the expense of the TDF.
It goes without saying that the lower the expense, the higher the return to the investor. However, expenses are not everything and the lowest expense TDF doesn't necessarily mean the best fit for you. You need to consider what you are getting from the expenses - asset allocation? Asset rebalancing? Access to special investments?

Dynamic TDF is more appropriate.
Most investors who approach retirement time want their portfolios to be shielded from large losses, unfortunately, Index-based TDFs offer little to no protection against large losses, while dynamic TDFs do.

IUL is Best for What Types of People

11/28/2016

Q. IUL is best for what kind of people?

A. Generally, with IUL's attributes, it's the best solution for people with the following objectives:

Seek accumulation and tax-protected gains for retirement income, college funding or other cash needs;
Want to supplement a traditional/Roth 401(k), IRA, or 529 plan;
Have higher income or are affluent with spare money to invest;
Want to accept some market risks, but not the full market risks.

Tax Smart When Donate

11/27/2016

Q. How do I know the nonprofit I want to donate to is a qualified charity by IRS?

A. Year end is the best time to plan your charity donation, here are a few tips to be tax smart when it comes to donation:

1. Donate to the Right Charity
You can search if a nonprofit is a qualified charity or not at the IRS database here. For your donation to be recognized, the recipient must be a 501(c)(3) nonprofit, not 501(c)(4) which is NOT qualified.

2. Donate Appreciated Assets
If you have a stock that has appreciated greatly, you can pass ownership to it directly from your brokerage account to a charity. You will be able to deduct its higher value now, not the cost you bought it.

3. Do Not Take Any Gift
Do not take any gift the charity gives back to you, because you need to deduct such value from your donation value.

Accelerate Next Year's Tax Deduction This Year

11/26/2016

Q. Is it possible to bring next year's tax deduction to this year?

A. Yes, there are some tax deductions that are recognized in the year you pay for them.

For example, if you own a home and is eligible for mortgage interest deduction, you can pay an extra mortgage payment on December 31, in this way, you can claim that additional tax deduction on this year's taxes, instead of waiting an additional 12 months when you do next year's taxes.

3 Tax Breaks Scheduled to Disappear After 2016

11/25/2016

Q. What are the tax breaks that will expire in 2017 so I should take advantage of in 2016?

A. Here are three tax breaks that some families might take advantage in 2016 since all of them are scheduled to expire in 2017 unless Congress renews these provisions.

Energy Saving Credit
You can claim up to $500 in total tax credit credits for eligible new energy-efficient windows or similar energy-saving home improvements. The credit applies to 10% of the purchase cost (excluding installation cost) of certain insulation, windows, doors and skylights.

Private Mortgage Insurance
You can deduct premiums paid for private mortgage insurance in 2016 as long as your mortgage started in or after 2007 and this mortgage is for your primary residence. Please note that if your gross income exceeds $109,000, you are ineligible for this deduction.

Underwater Property
If you have negotiated with your lender to sell your home for less than your owe on the mortgage, as long as your contract is signed before December 31, your forgiven debt is not taxable. The exclusion will apply to mortgage debt forgiven in 2017 if the agreement to discharge the debt is signed in 2016.

IRA Year End Tax Move - Tips for Roth IRA Conversions

11/24/2016

Q. I am considering converting traditional IRA to Roth before year end, what factors should I consider?

A. You need to consider two tax rates - your current tax rate and future tax rate and decide whether it's wise to make any year end Traditional IRA conversion decision.

If you just retired this year, or your income declined significantly this year, it is probably a good idea to convert funds in your traditional IRA account to a Roth IRA account because you will have to pay tax on the converted amount (assume it was made before tax), but all of your future earnings are tax free.

Please note, you need to be at least 59.5 years old and have owned the Roth IRA account for at least five years when you withdraw money from it in order to be tax free.

Also, it's best to pay the conversion related tax using the money outside of traditional IRA so you can maximize your tax free potential.

Stock Market Related Year End Tax Moves

11/23/2016

Q. What are the actions I should consider if I want to minimize tax related to my stock market gains?

A. This is the time of the year to consider taking some stock related moves to lower your 2016 tax bill.

First, harvest loss
If you have stocks or funds in a taxable account that are in a loss, you can sell them and use the losses to offset profits from your winning stocks and funds. These losses could also be used to offset any unexpected distributions from your mutual funds, as every December many funds will pay out dividends and capital gain distributions that they have built up during the year, even if you reinvest them in additional shares.

Second, sell winners
In 2016, if you are married filing jointly with taxable income of up to $75,300, you are eligible for 0% capital gain tax rate. This is probably especially applicable for recent retirees who live off cash reserves. However, make sure the gains don't push your taxable income to exceed $75,300.

Third, make gifts
If you don't qualify for the 0% capital gain tax, but maybe your adult child or an elderly parent does. If this is the case, you can gift the appreciated stocks to that person who could in turn sell the stocks and use the 0% tax rate. You can gift up to $14,000 to as many people as you wish without filing a gift-tax return.

Tax on Life Insurance Dividends When Used to Purchase Paid Up Insurance Additions

11/22/2016

Q. What are the tax results when life insurance dividends are used to purchase paid-up insurance additions?

A. The dividends used to purchase paid-up additions are tax free.

The cash value of paid-up additions accrue tax deferred.

Should I Consider Term Life With Living Benefits?

11/21/2016

Q. Should I consider term life policies with living benefits?

A. Generally you should. Research shows that one-in-five Americans live with disabilities and what’s more, 60% of working Americans report that they would suffer financial hardship if they were unable to work for six months.

While a devastating illness or injury can have serious financial impacts, term life insurance with living benefits is a low cost way to deal with this unfortunate situation.

Living benefits give term life policy holders access to cash when they need it most – to help care for chronic, critical, or terminal illnesses, or to use as a traditional death benefit.

Who needs term life with living benefits?

Young families concerned with protecting their loved ones can benefit from such term life product.
Small business owners looking for cost-effective ways to retain and reward their employees can use the Trendsetter LB as part of an executive bonus.
Insurance applicants with ages 45 and under will see the premium for a term life with living benefits is very affordable.

If you are interested in knowing more term life products with living benefits, please contact us.

A Low Cost Online Trading Platform

11/20/2016

Which broker has the lowest trading cost? Try Just2Trade.

Just2Trade.com is an online broker platform that supports traders across the globe with technologies that connect and share information while controlling trading activities securely from a simple user interface.

What's more, its cost is super low - only $2.5 per trade.

How Long Should I Wait In Order to Get Better Insurance Quote?

11/19/2016

Q. I have a health issue and didn't get my desired underwriting class, how long should I before I reapply?

A. You will have to pay more for life insurance premium if you have various health issues, such as overweight, cholesterol, or blood pressure above certain levels. However, if you recover from any of those issues and reapply, you could potentially get better rate, but the length of waiting is different for different health conditions.

For example, you might qualify for a better rate within a few months of improving your blood pressure or cholesterol level, even if the change is due to taking medications.

If you lose weight, you will more likely have to wait for a year before insurers will drop your rate.

For smokers, generally you have to at least a year to get a standard non-smoker rate and after at least 2 or 3 years to get a Preferred class.

Cancer? You have to wait sometime as long as 10 years without a recurrence to qualify for a better class.

Do I Have to Wait Till Birthday to Make Catch Up 401K Contribution?

11/18/2016

Q. Do I have to wait till my birthday to make catch-up contribution to my IRA and 401(k)?

A. You don't have to wait until your birthday passes, instead, you can make catch-up contributions anytime in the calendar year you turn 50.

In 2016, you can make an extra $1,000 to an IRA and an extra $6,000 to a 401(k).

You can make $1,000 catch-up contribution to your HSA in 2016 anytime in the calendar year you turn 55.

Can A Couple's 401K accounts Be Merged Into One?

11/16/2016

Q. Can I combine my spouse's 401(k) account with mine and manage in one account?

A. No. There are only two ways one can move 401(k) money to another person's account -

1. Death (pass money to the beneficiary)
2. Divorce (give money to ex-spouse)

But your question raises an important topic - when manage a family's portfolio investment, it's important to treat the husband and wife's portfolios as a whole and don't make contradictory decisions.

Can I Take a Charitable Contribution Deduction For the Gift of a Life Insurance Policy?

11/15/2016

Q. May a charitable contribution deduction be taken for the gift of a life insurance policy or premium?

A. A charitable income tax deduction may be taken for cash gifts to a charity to pay the premium where the charity owns a policy on the life of the donor.

A charitable income tax deduction may be taken by a donor for the lesser of the cash value or cost basis of a life insurance policy where ownership has been transferred to the charity.

How Are Life Insurance Policies Valued For Gift Tax Purposes?

11/14/2016

Q. How are life insurance policies valued for gift tax purposes?

A. Generally, the value of a life insurance policy for gift tax purposes is the interpolated terminal reserve plus any unearned premium. A Form 712 Life Insurance Statement should be obtained from the carrier.

When Are Life Insurance Benefits Included in Insured's Gross Estate?

11/13/2016

Q. When are death proceeds of life insurance includable in an insured’s gross estate?

A. The death proceeds of a life insurance policy are includable in the following three situations:

The proceeds are payable to the insured’s estate, or are receivable for the benefit of the insured’s estate;
The proceeds are payable to a beneficiary other than the insured’s estate but the insured possessed one or more incidents of ownership in the policy at the time of the insured’s death, whether exercisable by the insured alone or only in conjunction with another person;
The insured has made a gift of the policy on the insured’s life within three years of his or her death

Is Life Insurance Benefit Taxed Differently If Owner Is Not the Insured?

11/12/2016

Q. How are death proceeds taxed if a life insurance policy is owned by someone other than the insured?

A. The proceeds are taxed in the same manner as if the insured owned the policy. That is, the death benefit is income tax free under IRC Section 101.

How Is Life Insurance Cash Surrender Value Taxed?

11/11/2016

Q. What are the income tax consequences when the owner of a life insurance contract takes the lifetime cash surrender value in a lump sum cash payment?

A. Amounts received on complete surrender, redemption, or maturity of a life insurance contract are taxed under the cost recovery rule. This means that if the maturity proceeds or cash surrender value exceeds the cost basis of the contract, the excess is taxable income in the year of maturity or surrender.

What Should I Do With Trump As the New President?

11/10/2016

Q. What should I do with Trump as the new President?

A. You probably voted for Trump, or you might voted against Trump. But as an investor, when it comes to your investment portfolio, your right strategy is do nothing and let things play out themselves.

Many of the details of President-elect Trump's economic policies are unknown at this time, and his term won't start until January 2017. With so many challenges in front of him - interest rates, inflation, jobs, tax, national debt, ... one thing is certain, the market volatility will be here for a little while.

As an investor, it is important not to let short term volatility affect your long term strategy and decisions. Who knows, the next four years could be the excellent years for your investment.

What Is The Life Insurance Seven Pay Test?

11/9/2016

Q. What is the “seven pay test” and how does it apply to a modified endowment contract (MEC)?

A. The seven pay test is a limit that the Internal Revenue Code places on the amount of premiums that can be put into a life insurance contract.

All cash value policies are subject to this test. It limits the usual FIFO tax benefits of cash value withdrawals. Any policy that fails this test is classified as a Modified Endowment Contract (MEC) where withdrawals are taxed under the LIFO rules.

Tax On Cash Distribution As A Result of Changes in Death Benefit

11/8/2016

Q. How are cash distributions received as a result of changes in the death benefit of a life insurance contract taxed?

A. Cash distributions received as a result of certain changes in the death benefit of a contract may not be taxed under the FIFO cost recovery rule, but could be taxed under the “interest-first” LIFO rule. This means that any change in the death benefits under a life insurance contract that were not reflected in any earlier determination or adjustment will require retesting as to whether the definition of life insurance guidelines of IRC Section 7702 are still satisfied.

How to Claim After a Car Accident?

11/7/2016

Q. How can I claim against the other party after a car accident?

A. First, get a police report. In most cases, when you call the police to the scene of an accident, the investigating officer will complete a report that includes information on all parties involved. Each person's name and address will be included along with the year, make model, VIN and insurance company with policy number.

To file a claim with the other company, you can either pass the report on to your Insurance company who will be happy to help you or locate the company claim information yourself, easily available on line, and contact them directly. The former option is preferred as you should let the professionals represent you to do it.

An Estate Tax Loophole for Foreign Nationals - Part B

11/6/2016

In our last blogpost, we discussed the complicated reality for foreign nationals when it comes to estate tax. Now we will continue the discussion of the loophole that the impacted people could take advantages of.

The Estate Taxation Loophole

The opportunity presented by the "gotcha" we mentioned last time is rather significant: A nonresident alien can personally own life insurance to offset estate taxation without having to go through all the trust planning and annual gifting processes U.S. citizens have to go through.

What this sets up is an incredibly attractive accumulation opportunity with cash values life insurance that can be used as a potential source of supplemental, non-reportable, tax-free income during the foreign national's lifetime and death benefits that can be used to offset future estate tax liability.

The Design of The Policy

How to design a policy to accomplish both goals?

The key elements are fairly straightforward: We will use the following example to illustrate:
Male, age 50, Preferred Nonsmoker, $1MM potential estate tax liability

» Accumulation focused product

» Option 2 Death Benefit during the premium payment years
» Change to level for balance of years
» Funded at Maximum Guideline Premium
» Income is maximized, but only to a point
In this example, the key was preserving a minimum of $1MM of cash value to preserve the death benefit needed for estate tax planning purposes.
The moral of the story: Don't drain the policy of all the available cash value.

International Indices

Another consideration in the policy design is to use international indices in the life insurance policy.

People from outside the U.S. typically have a much higher comfort level with, and appreciation of, foreign stock markets. As a consequence, it is possible to design the life insurance contract with some exposure to foreign markets if the insurance carrier was chosen appropriately.

Of course, in all cases that involve foreign nationals, it's critical to know the individual requirements of each insurance company (which could vary a lot!) and how to properly package the case so that it meets all of the guidelines established by each carrier.

Please contact us as we can do just that.

An Estate Tax Loophole for Foreign Nationals - Part A

11/5/2016

When it comes to the estate tax, the $5MM exemption is pretty good for most middle class families, on one condition - they are US citizens. This means there is a group of people who couldn't enjoy this same benefit: foreign nationals.

Foreign Nationals and Estate Planning
For foreign nationals, the bad news is, they may not receive the Unified Credit or Unlimited Marital Deduction that United States citizens do.

Making matters worse is the convoluted set of rules that determine who is and who is not subject to tax as a foreign national, and which assets are included and the filing requirements associated with it.

Resident Aliens vs. Nonresident Aliens
Essentially, there are two groups of foreign nationals: Resident Aliens and Nonresident Aliens. Each present their own unique challenges, along with a couple of hidden pitfalls.

Resident aliens are subject to U.S. estate tax and do not have the unlimited marital deduction available to them without some trust planning work or a surviving spouse who happens to be a United States citizen.

The hidden pitfall for this group is that a resident alien's worldwide assets may be subject to estate taxation in the U.S., not simply their U.S. assets.

Nonresident aliens are subject to estate tax to the extent they own U.S. assets. The only tool the nonresident aliens have to offset their exposure is a paltry $13K lifetime estate tax exemption.

Nonresident aliens can also qualify for the unlimited marital deduction with some trust planning.

The "gotcha" here may actually work in this group's favor: Life insurance death benefits from a U.S. life insurance company are excluded from their taxable estate even if personally owned.

Keep reading our estate tax loophole for foreigners here.