Blog Archives - PFwise.com

How to Get Rid Of A Credit Card Annual Fee Without Hurting Credit?

12/31/2016

Q. I signed up a credit card with annual fee, how can I get rid of this annual fee without hurting my credit?

A. It's tempting to sign up a credit card with annual fee due to some great signing bonuses. However, cancelling a credit will lower your credit utilization ratio and consequently hurt your credit score.

There is a way to get rid of a credit with annual fee while without hurting your credit, here is what you need to do:

Call the credit card's issuing bank, and ask for an "in program" change.

Most banks issue many different types of credit cards, some with annual fees and some don't. With an "in program" change, you could switch your current card to a card with no annual fee. Most banks will do it for you.

The Best Small Business Accounting Software?

12/30/2016

Q. I plan to start a small business in 2017, which account software is the best for a small business?

A. For small business accounting software, Quickbooks is the golden standard, however, Xero is a newcommer and probably a better one.

First, when do you need an accounting software?

If you need to invoice clients, have a large number of transactions, and have employees or work with independent contractors, you will need an accounting software.

While Quickbooks has existed many years and is the golden standard, Xero as a new product is very easy to learn to use, and a lot cheaper than Quickbooks.

Cash Value Insurance 101 - Part D - A Case Study

12/29/2016

We discussed the importance of cash value insurance policy design in last blog. Now let's see what does a cash value policy looks like and how you might benefit from it.

A Case Study

Let’s assume Jane is a 45-year-old high income earner who has a substantial death benefit need and is interested in purchasing a cash value life insurance policy.

Initial Death Benefits
Jane pays $50,000 of premiums for 20 years. Rates of returns vary and death benefits vary by product. Hypothetically, with the premium Jane intends to contribute and assuming she is in very good health, her planned premium may allow for an initial death benefit of approximately $1,500,000 (remember, our goal is to minimize such initial death benefit so as much as possible of her premium goes towards cash accumulation for later use), such death benefit would be paid to her beneficiaries income tax-free if she dies prematurely.

Cash Accumulation
Jane did not buy this cash value policy only for the need of death benefit, she bought it for the potential of cash accumulation as well. To meet her twin goals, designing the policy the right way is most important. Even though the initial death benefit is $1,500,000, the death benefit increases for 20 years to accommodate the premium contributions without causing the policy to be classified a MEC.

Cash Distribution
Then in year 21, the death benefit no longer increases. With 20 years cash accumulation, the cash value of the policy could be approximately $2 million with a death benefit of close to $3.5M, resulting in a potential $2 million to supplement Jane’s other income. Of course, this is a simplified scenario (actual results will vary) to illustrate how a cash value policy could work for Jane in this strategy.

Cautions
Actual results may vary based on actual returns and individual circumstances, for example, a whole life policy could have more stable returns while an index universal life could have a closer link to stock market performances. It's important for the plan designer and Jane to take care to manage the policies to help achieve the desired results. Additionally, a personalized life insurance illustration should always include assumed rates of return selected by the client, the impact of 0% investment performance, and maximum guaranteed charges.

Conclusion
This case study highlights the flexibility offered by the additional source of retirement income in cash accumulation life insurance. The cash value could be used to help pay off a mortgage, go on a cruise, or help offset unexpected expenses during retirement such as unexpected health care costs. Whether the cash is used for leisure, general outlays or extraordinary expenses, or not used at all, having the cash available is important for someone who desires to have a diversified sources of income during retirement life.

Cash Value Insurance 101 - Part C - The Policy Design

12/28/2016

In last blog post, we discussed the advantages of cash value insurance. Now we will discuss the design of the policy to maximize the benefits from the cash value insurance policies.

The Policy Design

a. Not a MEC
It's important to ensure the cash value policy is not a modified endowment contract (MEC) and it stays in force.

If a policy becomes a MEC, distributions would be subject to Federal income tax to the extent of gain in the policy. In addition, if the insured is under age 59.5, a 10% penalty would apply to taxable distributions, including loans! If a policy lapses, whether it is MEC or not, tax would be applicable to the above menthioned distributions. So it's extremely important to design the policy not a MEC.

b. Minimum Death Benefit
When design the policy, it's important to minimize the death benefit as much as possible, but at the same time without causing the policy to become a MEC. In this way, the policy holder could maximize cash accumulation. This requires the insurance agent to compare different insurance companies' different cash value products and find the best one for a client.

c. Maximum Policy Loan
The goal of a cash value policy holder is to maximize the cash takeout to supplement retirement income, while making sure the policy is not a MEC or lapse. A careful design is needed here to accomplish these multiple goals.

Next, we will discuss a case study and how a cash value life insurance is designed and used.

Cash Value Insurance 101 - Part B - The Advantages

12/27/2016

In last blog post, we discussed the context of why considering cash value life insurance. Now we will show the key advantages of cash value life insurance.

The Advantages

a. Tax Deferral on Cash Accumulation
For people familiar with Term Life policies, the idea of over-funding a cash value life insurance policy might sound counterintuitive, but it is the key advantage of cash value insurance - because the inside cash and its accumulation is YOUR cash, not insurance company's cash, and the cash value policy offers tax deferral on the inside cash accumulation,

b. Tax Free Withdrawals
If the cash value policy is structured properly, you could take tax-free loans from the policy to do whatever you need to. A large family reunion with your kids and grandkids, a large unexpected medical bill, an unexpected but great short term business opportunity that requires a large sum of investment, ...

c. Income Tax Free Death Benefit
Finally, like any life insurance policy, the death benefit of the cash value policy is income tax-free, pursuant to IRC § 101(a).

It's important to structure your cash value policy the right way to maximize these advantages.

Cash Value Insurance 101 - Part A - The Context

12/26/2016

If you are a high income earner at age 30s, 40s and 50s and are seeking additional ways to save and protect your family at the same time, cash value insurance can be an important planning tool. This mini blog series aims to help you better understand cash value insurance.

The Context

Death Benefit and Cash Accumulation Balance
For many years, especially when the estate tax exemption was low, the focus of estate planning strategies with life insurance often shifted to use the minimum premium payment to achieve maximum death benefit. With the 2017 estate tax exemption at $5.49M for individuals and $10.98M for married couples, the planning pendulum has swung back towards a balance between securing the proper amount of death benefit and the opportunity for cash accumulation in permanent life policies.

Conventional Saving Opportunities Maximized Out
For high income earners, the regular saving vehicles, such as Roth IRa, 401(k), and/or other qualified planning tools have been maximized, it's time to consider additional savings vehicles, such as cash value life insurance that offers the potential to accumulate cash value as another source of income to meet retirement needs.

What are the advantages of cash value life insurances?

When Tax Loss Harvesting Is Not A Good Idea?

12/25/2016

Q. Is tax harvesting a good idea for everyone?

A. No. For people in the 10% to 15% income tax brackets, capital gain tax rate is 0%, so tax loss harvesting does not make sense for these people. In fact, at such income level, one should harvest gains, not losses.

However, if you are young and earning less than what you will be in the future, you could get up to $1,500 per year ($3,000 per couple) in losses and deduct that from your income, a tax loss harvesting that results in such amount makes sense.

Will My Son's IRA Account Affect His College Financial Aid?

12/24/2016

Q. If my son open a Roth IRA account for his summer job money, will it affect financial aid for college?

A. No, assets in an IRA, whether held by the student or the parent are excluded from Financial Aid calculation.

However, if your son withdraws money from the IRA, it will be treated as income and included in his Federal Financial Aid calculation form. So do not withdraw money from your child's IRA until after the last tax year that counts for financial aid.

Kiddie Tax Conditions

12/23/2016

Q. My child is in college, if I give him ownership of a stock account, and he sells it, will he get 0% capital gain rate?

A. No. Kiddie tax applies here -

If your child is still a full time student younger than age 24 and doesn't provide more than half of his own support with income from a job, then kiddie tax rule applies - his unearned income (such as dividends, interest, capital gains) over $2,100 will be taxed at the parents' rate. For the first $2,100, he probably could use 0% long term capital gain tax rate.

Best Budgeting Tool Options

12/22/2016

Q. Do you have any good budgeting tool to recommend?

A. Below is a list of the best budgeting tools -

How to Maximize My Social Security Benefits?

12/21/2016

Q. How to maximize my social security benefits?

A. Unfortunately, it's complicated when it comes to social security benefits, for example, how to incorporate your health and family longevity in the claim strategy, when to file the claim, how about sponsal and survivor benefits, ...?

You have several ways to develop the best social security filing strategy -

1. Self Learning
Get a good book and study it by yourself. For example, Get What's Yours: the revised secrets to maxing out your social security, is a very comprehensive book.

2. Hire an Expert
You can work with a financial planner who is experienced in this filed to develop the best plan for your situation.

3. Use a Software
You can subscribe to softwares to run scenarios based on your circumstances and see how different filing strategies affect your total payout over the same time frame. Some software packages are: Maximize My Social Security (starting at $40), Social Security Solutions (starting at $20).

How to Save for Retirement If No 401(k) From Workplace?

12/20/2016

Q. I work for a small business that offers no 401(k), what are my options to save for retirement?

A. If you work for an employer with less than 100 employees, the chance is high that there is no workplace 401(k) plan for employees. If this is the case, there are two typical options to save for retirement:

a. Traditional IRA
If an employer does not offer a retirement plan or pension, you can contribute to a traditional IRA that is tax deductible.

b. Roth IRA
Roth IRA contribution is not tax deductible, but all earnings are tax free.

The only problem for either Traditional IRA or Roth IRA is that they are not as generous as those employer-sponsored retirement plans - annual maximum contribution is only $5,500 in a traditional IRA or Roth IRA in 2017 ($6,500 if you are 50 or older).

Where to Invest in 2017?

12/19/2016

Q. Where to invest in 2017?

A. This time of the year, if you turn to any financial media, it won't be hard for you to see the advice: where to invest in 2017. You will see a list of stocks that include some famous ones and some you have never heard of, one thing is common - they all look to have a great return in 2017 with good reasons.

The reality? It's best to ingore such "where to invest next year" advices, if you want to have a better chance beating the index.

Historical data has proven again and again, returns from such pundits' predictions are not better than the returns you could get easily by just putting your money in an index fund. For example, Barron's 2016 list, Forbest' 2016 list, CNBC's 2016 list all either underperformed or barely met index performances, without considering costs.

Why such a short list of candicates failed to beat the market consistently?

a. Index performance is driven by a small number of stocks (1 in 4), so your chance of a list 10 stocks all fall in that winners group is statistically against you.

b. A short list of stocks is not diversified, so any poor performance among the candidates could easily derail the entire portfolio's performance.

What Class Can I Get If I Am Not a US Citizen or Green Card Holder?

12/18/2016

Q. I am interested in AIG's QoL Flex term life product, but I am still waiting for my greencard, will it impact my underwriting class?

A. AIG's QoL Flex term life product is very unique as it includes 3 free living benefits riders, which are very rare among today's term life products, see detailed description below -

https://www.aigdirect.com/insurance-products/quality-of-life#fv

For foreigners who are neither U.S. citizen nor green card holders, especially for Chinese and Fillipinos, here is a good news - previously the best underwriting class you could get is Standard Plus, but now you could qualify for AIG's Preferred class!

It's not Preferred Best class, but once you get your greencard or becomes a U.S. citizen, you can always request a re-evaluation for possible adjustment to the best class, assume your health condition doesn't change.

For detailed AIG underwriting guideline, especially for Chinese and Fillipinos, see the file below.

What Are the Pitfalls of Using IRA Funds to Invest in Real Estate?

12/17/2016

Q. I heard that I could use IRA money to invest in real estate and avoid paying tax on the gains. What are the downsides?

A. It's true that your IRA might act as a shelter to the income or gain you get from your real estate investment, however, there are some downsides, make sure you think carefully before taking actions:

First, any related tax deductions will be lost, for example, you cannot deduct property taxes or mortgage interest, or take advantage of depreciation.

Second, you have to purchase new properties, and you can't put properties you already own in an IRA.

Third, you won't be able to get a traditional mortgage, and more likely you will have to pay cash.

Fourth, there are various rules around how much you can participate. You can't live or work on the property, and you can't pay for upkeep outside of the IRA.

Fifth, you can's use money outside of IRA to pay for expenses such as repair a roof or replace a dishwasher, otherwise you will jeopardize the tax-deferred status.

What Are the Risks of Not Rebalancing?

12/16/2016

Q. What are the risks of not rebalancing my diversified portfolio?

A. By building a diversified portfolio, you are admitting you can't predict the future, because otherwise you will invest all your money in the asset class with the best potential to appreciate.

Because we don't know which asset class will outperform in the future, it's important to periodically rebalance, so you don't face the risk of outsized loss from the outperforming asset classes, because there is always a time for the asset class to fall, the problem is we don't know when that is going to happen.

In short, rebalancing is the logical way to buy low and sell high. Studies of past stock market data also support this approach (when comparing a diversified portfolio rebalancing once a year versus not rebalancing at all).

11 Reasons IRS Will Accept for Violating 60-day Rollover Deadline

12/15/2016

Q. Is there an exception to the 60-day rollover deadline?

A. IRS imposes harsh penalty and tax on violation of the 60-day rollover deadline, but here are 11 exceptions:

An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
The distribution, having been made in the form of a check, was misplaced and never cashed.
The distribution was deposited into and remains in an account that the taxpayer mistakenly thought was an eligible retirement plan.
The taxpayer's principal residence was severely damaged.
A family member of the taxpayer died.
The taxpayer or a member of the taxpayer's family was seriously ill.
There were restrictions that were imposed by a foreign country.
A postal error occurred.
The distribution was made on account of a levy, and the proceeds of the levy have been returend to the taxpayer.
The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer's reasonable efforts to obtain the information.

How Do I Know If I Need a Financial Planner?

12/14/2016

Q. How do I determine if I need a financial planner or not?

A. You can try to answer the following 3 questions, your answers will help you assess if you need to work with a financial planner or not.

Question 1. How complicated is your current financial situation?
Are just out of college or at the peak of your career? Are you still a single or have a large family with lots of conflicting demands? The simpler your situation is, the less the need to work with a financial planner.

Question 2. What are your financial objectives?
It could be very simple one - save for retirement, or a complicated one such as estate plan. And there are many objectibes
in between - buy a home, maximize investment return, fund for kids' college, ... The simpler your objective, the less the need to work with a financial planner.

Question 3. Can you execute your own plans?
Not everyone is disciplined, regardless how good your plan is. Don't fool yourself, just look at your track record - how frequently you deviated from your plans in the past? The more disciplined you are, the less the need for a financial planner.

College Expense is At Least 20% Higher Than You Expected

12/13/2016

Q. My son is going to attend college next year. Other than the normal expenses I know - tuition, room and board, books, etc, what other expenses should I budget for it?

A. The real cost of college is at least 20% higher than what most parents thought, here are some of the major expenses parents usually forget -

Annual increase of tuition. Plan 1-3% each year.
Mandatory fees. There could be a laundry list of such fees, such as technology fee, activity fee, sports center fee, etc.
Transportation costs. Holiday, spring breaks, etc. the farther your child is away from home, the more expensive this could be.
Study abroad fee. Airfare, housing, food, additional travel, etc. all could add up to a big number.
Smart phone plan. You will find an unlimited plan is the only option to keep the cost in check.
Printing cost. You will face two options: a) buy a printer, and purchase ink catridge, paper continuously; b) spend money frequently at the school's bookstore or libraries' printers.
Eat out costs. Regardless how good the campus food is, students will eat off campus.
Latest computer. Macbook Air Pro? Only the latest version of computer will work.
Summer housing. If your child lives off campus, typically the rental agreement is from August to August, even your child is having a summer intern at another city.
Graduation fee. Cap and gawn, photos, rings, parties, gifts ...
Personal hygiene. This is probably the first time your child is going to face the cost of keeping him/her clean ...

The Most Popular Money Transfer Options

12/12/2016

Q. What is the lowest cost option to transfer money to a non-US country?

A. There are quite a few options, and some of the most well known overseas money transfer options are -

MoneyGram (a partner with Walmart for over 20 years)
Western Union (partners with WeChat and Viber)
TransferWise (caters to SMB too)
Xoom (a Paypal company)
Remitly
OFX

When you compare these options, make sure you consider two factors: for the same amount of US Dollar you send, how much will it cost you as the sender, and how much the recipient will receive in local currency.

2017 Tax Reference Guide

12/11/2016

Free Shipping Day is December 16

12/10/2016

December 16 is Free Shipping Day!

About 1,000 retailers will waive delivery minimums and offer free shipping in the continental U.S., guaranteed by Christmas Eve.

Check out FreeShippingDay.com for coupons and a list of participating retailers.

Cash Life Insurance Rescue Strategies

12/9/2016

Q. What happens if my cash value life insurance has a loan amount that exceeds the cash value?

A. The insurer won't let this happen.

You can take policy loans out of your life insurance if it has enough cash value and insurer would allow you to do it at a favorable interest rate, that's because the insurer is using your cash value as a collateral.

When the insurer sees that your loan, adding interest, will exceed the cash value, it will close your policy. In that case, if your loan amount is larger than your premium contribution, you will have to pay tax.

What to do in such a situation? There are a couple of strategies, as outlined in this great article, its summary is shown in the chart below.

An Alternative to the 4 Percent Rule

12/8/2016

Q. What's the new rule of thumb for retirement planning if 4% no longer works?

A. The 4% rule says that if a retiree takes out only 4% of the retirement portfolio each year, adjusted for inflation, the money could last the retiree's life. But does this apply to people with early retirement?

Probably not. Here is an alternative rule - divide your age by 20. A couple should use the younger partner's age.

This alternative rule will give you the percentage that you can safely spend. For example, if you are age 50, you can take out 2.5% of an one million dollar portfolio, or $25,000 per year.

Deal or No Deal on Amazon?

12/7/2016

Q. Generally, which categories of products are good deals on Amazon.com and which ones are not?

A. The following deal or no deal could give you a general guideline for shopping at Amazon.com:

Toys: Deal. Amazon usually has deals during holiday season.
Tools: No deal. Home Depot and Lowe's typically meet or beat Amazon prices, especially during holiday season.
Books: Deal. It's hard to beat Amazon's book prices.
Name-brand clothing: No deal. You can't find a good deal on Amazon for name brand clothing.
Video-game: Deal.
PCs and Apple products: No deal. The best bargains can be found at Best Buy and Walmart.