All Categories - PFwise.com

Do You Face "Marriage Penalty" Tax?

2/24/2020

Whether you have been married for decades or are just home from your honeymoon, it's important to understand the tax laws and how they affect married people. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly changed the brackets for taxable income, specifically for couples filing jointly. But the biggest red flag that couples should know is that they may be penalized for filing joint taxes. This is sometimes referred to as the "marriage penalty."

Avoiding the "marriage penalty"
One unintended feature of the United States' income tax system is that the combined tax liability of a married couple may be higher than their combined tax burden if they had remained single. The TCJA offers little relief to married joint-filers if their salaries are not similar.

Unequal salaries: If partners earn salaries that put them in different tax brackets, TCJA can possibly bump the lower earner up into a higher tax bracket. This is an old issue, and TCJA doesn't change it.
Equal salaries: Generally, if both partners fall into the same tax bracket, they won't find themselves in a higher bracket if they file jointly. (One exception: earners in the top income bracket, which starts at $500,000 per year, may face a penalty if they file jointly.)

For example, the TCJA 24 percent federal tax bracket tops out at $84,200 for individuals and exactly doubles at $168,400 for married couples filing jointly. That means if each partner in the couple earns $84,000, they will each pay 22 percent when they file jointly. But, if one partner suddenly gets a raise or a bonus and earns $90,000, together they will be over the $168,400 and will both end up paying 24 percent, which is the next bracket, even though one person is still in the 22 percent bracket.

There are clear benefits and drawbacks of filing as a married couple, as a head of household, or as an individual. And when children and mortgage payments come into play, the details can get more complicated.

The Tough Math of Market Losses - Part D

2/23/2020

What's the learning from our discussions in previous blogposts?

There are two key observations in this analysis from which your clients may benefit.

First, the S&P 500 is seldom the correct performance benchmark for most portfolios. If you’ve built a broadly diversified portfolio, it would be most appropriate to use a broadly diversified index.

Second, being invested in a broadly diversified portfolio is relatively boring, but boring doesn’t have to be a negative. Sure, years with performance of 30% or better will seldom, if ever, occur. But diversifying is a steadier approach without the dramatic ups and downs.

And the math of gains and losses will be on your side.

The Tough Math of Market Losses - Part C

2/22/2020

In our last blogpost, we showed you the various asset classes' performances in 2019. Now let's put everything into a 20-year perspective and see if there is any changes.

As shown in “20-year performance” the best-performing index over the past two decades (2000-2019) was real estate (specifically the S&P Global REIT). This REIT index produced an average annualized return of 10.68%, or 462 basis points higher than the S&P 500 return of 6.06%. Interestingly, a broadly diversified 12-index portfolio (equally weighted and annually rebalanced) also outperformed the one-dimensional S&P 500 by 76 basis points.
Not shown in the graph, but worthy of note, is that the 12-index portfolio bested the performance of the S&P 500, and did so with 32% less volatility (as measured by the standard deviation of annual returns).

What's the key learning out of all these discussions? Read 2 learnings here.

The Tough Math of Market Losses - Part B

2/21/2020

In our last blogpost, we showed you S&P 500's past 50 years' performances. Now let's see what if you have a portfolio that broadens diversification across multiple asset classes? It would create a pattern of performance that can minimize the magnitude and frequency of damaging negative returns.

In “2019 performance” you’ll see the performance of 12 key indexes (equity and fixed income) as well as the overall performance of the 12 indexes combined into a portfolio. The indexes are the following: S&P 500, S&P Midcap 400, S&P Small cap 600, MSCI EAFE Index NR, MSCI EM Index GR, S&P Global REIT, S&P North American Natural Resources, DBLQ Optimum Yield Diversified Commodity Index Excess Return, Barclays U.S. Aggregate Bond, Barclays US Treasury US TIPS, Barclays Global Treasury and the 90-day U.S. Treasury bill.

Not surprisingly, the best performing index in 2019 among these 12 was the S&P 500. The lowest return was achieved by the Treasury bills (or cash) at 2.06%. The equal-weighted combination of all 12 indexes produced a return of 16.57%, which was well below that of the S&P 500.

But what if you put this 12-index portfolio into a 20-year trend chart? You can see it in next blogpost.

The Tough Math of Market Losses - Part A

2/20/2020

2019 was a great run for the S&P 500. Its 12-month total return of 31.49% was over three times higher than its 50-year average annualized return of 10.60%.

So how about this year? There are interesting patterns to note.

Shown below is the graph “S&P 500: past 50 years” - it shows the annual returns of the S&P 500 from 1970 through 2019. Highlighted in purple are those years when the calendar-year return eclipsed 30% (shown by the horizontal black line). It’s worth noting that, since 1970, we don’t see two years in a row with a 30% or higher return. In fact, the average return in the year after a 30%-plus return was 13.4%, including two years in which the following year’s return was negative (1981 and 1990).

Performance adjusting to normal levels suggests smaller positive returns, as well as negative returns for an equity index such as the S&P 500. As we can see from the 50-year graph, there have been 10 years over the past 50 in which the S&P 500 produced a negative annual return (shown by red-colored bars in the graph). The average return in those 10 years was -14.08%.

What if you construct a 12-index portfolio, what will its performance be compared with S&P 500's performances? We will discuss this in next blogpost.

Why a Stock / Bond Portfolio Not As Good As a Stock / Index Annuity Portfolio?

2/19/2020

Q. Why a stock/bond portfolio may not perform as well as a stock/index annuity portfolio?

A. In today’s interest rate environment, you may want to consider allocating a portion of your fixed income investments to the Index Annuity, because this powerful accumulation solution has the potential to offer you more growth than traditional fixed income vehicles like CDs and bonds, while guaranteeing your principal against loss in down markets.

Below is a Power 5 Protector Index Annuity brochure from AIG, it shows that a diversified portfolio of 60% stocks and 40% index annuities could have stabilized returns and increased performance by 0.22% for the overall period and by 1.03% in weak bond environments from 1927-2016.

In addition to the above benefits, it also helps for people who need income earlier, as it provides access to your money without a withdrawal charge after 5 years.

Term Life Converting 101 - Part B

2/18/2020

In our last blogpost, we discussed the general benefits of term life policy conversions. Now a case study from American National.

Case Study:

One of American National’s agents, Charles, was kind enough to share his experience with the conversion process at American National. Charles recently had a thirty-year-old client that was recently widowed and raising two small children on her own. She knew the importance of life insurance and wanted to make sure that her parents would have the means to take care of her children if anything were to happen to her. After spending several years as a stay-at-home mom, she was just reentering the workforce. She was working hard to make ends meet, and she scrutinized every dime she spent. However, she knew the peace of mind that obtaining life insurance would give her was worth every penny.

After completing a needs analysis and discussing the difference in premiums between American National’s 20-year level Signature Term and multiple permanent products, the client decided that the term policy was all she could afford right now. She was a little concerned because she wanted to make sure she would not be a burden to her family if she were to pass away in 21-years; however, she was relieved to know she temporarily (for 20-years) had a solution in place to protect her family.

Charles eased her concerns even more when he told her about the conversion opportunities that were available at American National. He let her know that she was making a smart decision to get coverage while she was young and in great health and told her she would have the option to convert to any permanent plan over the next twenty years! Charles also informed her that the conversion options would allow her to change her term policy to a permanent policy without having to go through any more underwriting. He advised her the process was quick and easy and would allow her to get the new policy at the same rate class as her original term policy. He also let her know that if she was able to convert in the next five years, she would even get a premium credit towards her permanent policy! She was so grateful that the term policy with American National would provide the coverage she needed NOW along with the flexibility to get what she really wanted later.

Charles checked in with his client every 6 months to make sure she did not have any additional needs and to review her statements. While meeting with her to review her third annual statement, she mentioned that within the last year she got a huge promotion at work, bought her dream starter home, and was doing better than ever! Happy to hear that she had made huge financial strides in her life, Charles reminded her of the conversion options that she had available on her term policy. Next thing you know, she converted her term policy to the Signature Guaranteed Universal Life, and she now has guaranteed coverage (at a guaranteed premium) until she is 121 years old!

Term Life Converting 101 - Part A

2/17/2020

Do you currently have a term life policy? Are you interested in a permanent product but cannot fit the premium into your budget right now? If you answered “Yes” to either of these questions, then it is time to talk about conversions!

Below is a term life converting 101 from American National, it would work for most of other life insurance carriers too.

American National offers very generous conversion options on our term policies. Clients have the option to convert their term policy to ANY permanent policy available at American National at any time before the end of their level term period or before they turn 65 (whichever comes first). The conversion period will never be less than 5 years! Not only does American National allow the client to convert to ANY permanent policy that best suits their needs, if the policy is converted within the first 5 years, the client will also receive a conversion premium credit!

Converting from a term to a permanent policy is quite simple. The only paperwork that is required is a policy change application, USA PATRIOT Act Form, a signed illustration (or illustration acknowledgement), and a supplemental application. The beauty of a conversion is that if there is no increase in the face amount, the applicant does not go through additional underwriting and will not need to prove additional insurability!

Read out next blogpost for a case study from American National about term life conversion.

How Cash Life Insurance Could Help You Keep More of Your Savings

2/16/2020

Do you want to create a diversified retirement portfolio that balances the limitations and benefits of different financial assets?

Your tax-deferred investment withdrawals, for example, will become taxable income. Add that income to any withdrawals on your stocks, bonds or mutual funds, and you could have a higher-than-anticipated tax bill.

Including tax-advantaged products like cash value life insurance can be key to a smaller tax bill later in life, as the chart below shows.

Tax Documents Check List - Detailed Look

2/15/2020

In last blogpost, we have a quick check list to file your tax return, now let's look at more details of those tax documents:

Information about your income you need to file taxes
No matter if you work for a large company, are self-employed, or run your own business, you have to have the right forms
for your taxes. These can include a W-2 or self-employment paperwork to prove your income.

Here’s a quick guide to which IRS forms and/or personal documentation you’ll need for the most common income situations:

If you have one or more employers
If you work for someone else—meaning, employment, and income taxes are deducted from your paychecks—you will need at least these two forms:

W-2: Your employer(s) will mail these forms to your house no later than January 31st.
1040*: Depending on the complexity of your taxes, there are three 1040 forms to choose from 1040-EZ, 1040A, or the original 1040. (The different types of 1040 forms are explained below).

If you earn any money on your own (from freelancing/self-employment)
If you worked for yourself at all (full-time or on the side), you will need a few more forms to fill out:

1099: You should receive one 1099 from every company or person you earned income from during the year if it’s greater than $600. (Even if it’s not greater than $600, you still have to report the income.) Generally, this will be a 1099-MISC. These will be included as income earned on your Schedule C form.
Schedule C*: This is the form where you’ll determine whether you and/or your business earned a profit or suffered a loss during the year. No matter if you earned a profit or suffered a loss, this will be added or subtracted from your overall income on your 1040 form. If you earned a profit, you’ll need to pay employment taxes (like FICA, Medicare, Social Security, etc.) because an employer was not deducting those taxes from your paychecks…you were your own employer.
Schedule SE*: If you earned a profit, this form will determine the amount of self-employment taxes you’ll need to pay. In general, you can deduct half of this amount from your total income (line 27 on your 1040 form).
1040 Form*

If you were unemployed

1099G: Unemployment compensation is included in your taxable income, so you must include it in your tax return. You’ll generally receive a 1099G form from the state that paid you unemployment compensation.
1040 Form*

If you paid student loan or mortgage interest

1098: Your student loan or mortgage lender(s) will mail you 1098 forms showing how much interest you paid on your loans in the tax year. This interest could potentially be tax deductible.

If you earned interest from bank accounts or investments

1099-INT: Your bank or investment company will send you these forms for any interest paid to you in cash. Interest income must be reported on your return.

*You only need these forms if you plan on doing your own taxes without software. Other documents you need either way.

Other income considerations
Besides earned income from a job, you also need to make sure you have paperwork showing distributions from things like:

IRAs
Dividends from stocks
Social Security
Interest on accounts
Rental property income
Unemployment

Many people make mistakes when gathering this paperwork for their taxes because they don’t realize items such as Social Security and dividends from stocks all need to be reported and will fall under the “income” category.

Each type of income you have to report will require a different form, too.

Adjustments to your income
It’s also important to have any documents on hand that can reduce how much of your income is taxed. This can either lower the amount you owe (when you need to pay taxes) or increase your tax refund. This is why you need to pay attention and gather these documents.

If you’re a student you can use forms 1098-T and 1098-E to show how much you paid for tuition and how much of your student loan interest you paid, respectively. Teachers can provide canceled checks or copies of receipts that show they paid for classroom supplies, which can help to offset their income.

Other examples of items under this category that can help adjust your income include:

Records of any contributions you made to your IRA
Proof of improving your home with energy-efficient appliances or windows
Records of contributing to a Medical Savings Account

Also keep track of expenses such as:

Moving expenses you incurred
Any alimony you paid to a spouse
Information on self-employed health insurance
Self-employed pension plans

These can be used to adjust your income and help you get a more substantial return.

Explanation of the different 1040 forms

Here’s how to decide which form to use:

1040EZ form
If you’re just starting out, try to use this form if you can. It makes filing your taxes very simple. Here are some of the requirements:

Taxable income less than $100,000
No dependents
Less than 65 years of age
Single or Married Filing Jointly status
Interest income less than $1,500

1040A form
This becomes a popular form for many recent college graduates because this form allows you to deduct student loan interest. If your taxes are still fairly simple but you need to deduct student loan interest (or education expenses, IRA contributions, or higher education expenses), you might be able to use this form.

Additionally, if you own a home, you probably will not be able to use this form since you cannot itemize (e.g. deduct mortgage interest expenses) when using this form.

Taxable income less than $100,000
You take the standard deduction (do not itemize)
Only certain tax credits are allowed

1040 form
If all else fails, you’ll need to file a 1040 Form. The older you get, the more likely you are to file a 1040 Form instead of the A or EZ versions.

From this quick checklist, you think you may qualify for the A or EZ you can check out every detail of qualifying on the IRS website. Even if you qualify for the A or EZ versions of the form, you can still use the regular 1040 if that’s what you feel comfortable with.

Deductions and credits
It’s a great idea to itemize deductions if you want to lower how much taxable income you have. This does take more time and effort than just using standard deductions, but if you’re prepared for the extra work, you can enjoy the benefits.

Here are some quick examples of common deductions and credits that you’ll need documentation for:

Child care credits. If you have children and have to pay for them to receive care while you’re working, you can take this expense off of your taxes. But you need to have information about the provider. Have the provider name, their address, their tax ID, and the amount you paid for the year.
Education expenses. Any education expenses and adoption costs can also be listed here if you have the right forms to document the expenditures.
Adoption. If you want to itemize your adoption costs, then you need to have the social security number of your child and records of all medical, legal, and transportation costs.
Mortgage costs. You can list mortgage interest, points you paid for your mortgage, and private mortgage insurance (PMI).
Rental property. If you have rental property or work from home, then you will want to consider itemizing income/expenses from your rental property and any information regarding home business expenses.

Other itemized expenses you can include here are dental and medical costs, charitable donations, investment interest expense, and insurance reimbursements and amount of damage for theft and casualty losses.

Taxes you’ve paid
It’s also essential to keep track of all taxes you have paid during the year, as you will need to list them on your taxes in April. Unlike some of the other categories of information you need to gather for your taxes, this list is relatively short and should be easy for you to keep track of.

Keep information on your real estate taxes, personal property taxes, the state and local income taxes you’ve paid. You’ll even want to keep the vehicle license fees you have to pay. These will depend on the value of your vehicle so that they will go down each year, but still essential to have this information come tax time.

Health insurance
While you don’t need to prove you have health care coverage, having this information on hand is helpful so you can easily verify coverage if necessary. This can include your insurance cards, statements from your insurer, explanation of benefits, and even a W-2 that shows your deductions for health insurance.

If you get Form 1095-A, then you need to wait to file your taxes until you have it in hand. This form is the Health Insurance Marketplace Statement. Remember that most employers need not provide you with information to prove that you have health care coverage, so you need to show this information on your own if it becomes necessary.

Life changes
It’s crucial that you know all significant life changes that can affect your taxes. Especially if you’ve done your taxes for years, or if you’ve had the same person complete them for you. Making sure that you list all significant life changes you have been through will ensure that your taxes are completed correctly.

Home sale
If you sell a home, you need to report this on your taxes. Single taxpayers can exclude a profit of up to $250,000, and married taxpayers who file joint returns can exclude a profit of up to $500,000. You can use this exclusion more than once in your lifetime as long as you haven’t taken the exclusion within the past two years for another house.

For most people, the sale of a home won’t impact their taxes. But if you are someone who’s affected, you need to report this.

Catastrophic loss
If you’ve unfortunately suffered a catastrophic loss, you need to claim this on your taxes. The IRS will help you by allowing you to itemize casualty losses, which are commonly related to natural disasters.

Marriage or divorce
If you got married or divorced, you need to have this information ready to report to the IRS. While not always required, I’d recommend having at least your marriage certificate handy.

Additional information you need to file taxes
There are a few other key pieces of information you may need when filing your taxes. So I recommend making sure you have this information on hand. They aren’t necessary for everyone but are part of this tax document checklist to ensure everyone gets the help they need.

Self-employed
The first piece of additional information you may need to have is if you are self-employed. You’ll need to have information regarding your estimated tax payments you made throughout the year. This is important to have so you can prove not only that you paid your quarterly taxes, but how much you paid.

Prior year refunds
If you had a refund in the prior year and wanted it applied to your year, then you need that information. Have all the information regarding how much was paid along with your extension to file.

Foreign bank accounts
People with foreign bank accounts need to disclose this information on their taxes. The information includes the name and location of the bank where your accounts are held, the account number, and even the peak value of your account throughout the year.

Not everyone has to report their foreign bank account information, but if your account exceeds certain thresholds, then you need to make sure that you report this information on your taxes. Because there are, according to the IRS, several exceptions and procedures you have to follow, you may be better off getting professional help if you find yourself in this situation.

Make retroactive savings contributions
Finally, one last thing I recommend you do before you finalize and file your taxes is to get all your paperwork together and make any retroactive contributions you can for the last tax year. This is a great way to take advantage of your college savings or retirement account, and smart to make sure you have all your tax information prepared beforehand.

If you didn’t max out either your retirement account or your college savings account, then now is the time to max them out, even though it is technically a new year. You can easily retroactively contribute to several accounts, including your HSA, IRA, 401K, Roth IRA, Coverdell Education Savings Account, and 529 if you claim the contribution for the prior tax year.

You also need to make sure that your payment is received before tax day or you won’t be able to apply it to the preceding year’s taxes and must claim it on this year’s.

Tax Documents Check List - Quick Check

2/14/2020

Here’s a quick tax documents checklist to get your tax filing started:

W-2 – Report of wage and salary information
1040 – U.S. individual income tax return
1099 – Self-employed income report
Schedule C – Used to report income or (loss) from a business
Schedule SE – Used to figure the tax due on net earnings from self-employment
1098 – Tells you how much you paid in mortgage interest
Record of any taxes paid throughout the year (estimated quarterly taxes, etc.)
Prior year tax return
Any info about foreign bank accounts

In our next blogpost, we will have a more detailed discussion of each of the tax documents.

How to Create a Tax Efficient Retirement

2/13/2020

What should you do today to help protect your retirement income?

This document from Lincoln Financial below gives you some good ideas if you haven't thought about this topic before -

2020 Tax Commentary From Lincoln Financial Group

2/12/2020

Last year will go down as one of the quietest years regarding tax developments. The underfunded Internal Revenue Service (IRS) has dramatically reduced the amount of tax changes and is trying fewer tax cases than ever before. Congress has been deadlocked so barely any legislation has passed. For now, all is quiet on the tax front.

For more 2020 tax commentaries, please see the document prepared by Lincoln Financial below, it covers all of the important tax topics you need to be aware of -

7 Best Salary Information Websites

2/11/2020

7 Best salary information websites

1. Salary.com
The most popular salary-specific job site, Salary.com lists every position in a field with free salary info. Their collection of data includes cost-of-living calculators, comparison tools, and lists of benefits, as well as negotiation tips.

Salary.com doubles as a career site, providing job listings and advice for those on the lookout. Overall, this is probably the best site for salary info.

2. Glassdoor
Glassdoor is known for its extensive company reviews and employee feedback. A salary search provides data for specific jobs at specific companies, rather than a general estimation.

Employees share info on salaries, benefits, interview questions, and more—a great insider resource if you’re starting out at a new company.

3. PayScale
A good resource for new grads, PayScale offers a free salary report based on experience, education, and other factors. Students should check out its College Salary Report for the lowdown on what various majors can expect to earn (and some negotiation tips). The career research section includes a Career Goal Tracker with salary data for the jobs you want.

4. Indeed
The well-known job site aggregator has a salary search tool. Indeed lets you use keywords to search, in addition to job titles. Since Indeed users can access over 50 million job postings from unique sources, there’s a ton of salary data here.

5. SalaryList
All the data on SalaryList comes from official reporting by companies or the United States Department of Labor, so you know you’re getting accurate information. The site provides salary data records for existing jobs by title, company, and state.

6. Salary Expert
With data updated daily, Salary Expert offers not only free salary reports but cost of living analysis and career salary potential. You can also search for jobs by salary, if you’re thinking about switching fields.

7. Bureau of Labor Statistics
The most recent Occupational Outlook handbook from the Bureau of Labor Statistics (available online or in print) provides salary data for thousands of jobs, searchable by field.

It’s also a good idea to investigate any sites specific to your field or career for salary data. These sites may have more info on industry norms, particularly if your field’s a rarer one.

What factors should you consider?

Sites will often allow you to search based on job title, education and experience level, and location. But how does each factor affect the compensation you should ask for?

1. Job title
Titles reflect responsibility and experience. While some companies allow you a little latitude in naming your job, others won’t be so flexible. Make sure you’re clear on the responsibilities of the title offered (or the title you want).

2. Career field
Depending on the profit ratio of your industry, the same title can come with a different salary. Sales representatives, for instance, can work in multiple fields. But sales reps in high-demand fields, like pharmaceuticals, may be able to ask for more than those in other industries.

3. Location
If you live in a location where housing, transit, food and other essentials cost more than the national average—like a large city, a coastal city, or a tourist destination—you should earn more. A Cost of Living Analysis (COLA) comparison, offered on many of the sites above, lets you know what to expect in your region.

4. Experience
Work experience in your field can increase your value and your salary. Internships may count in your favor, depending on your responsibilities there.

5. Education
Having a degree, period—an associate’s, a bachelor’s, or an advanced degree—should boost your salary expectations. Having a degree in your field is even better.

6. Where you went to college can sometimes make a difference, too.
PayScale has a College ROI (Return on Investment) report that analyzes how degrees from different colleges can affect your salary.

If you didn’t go to the Ivy League or a “top” school, don’t count yourself out! Education’s one of many factors that employers consider when setting compensation, and the more experience you get, the less it typically matters.

7. Special skills
Whether it’s a software program, a type of design, or a foreign language, special skills can be lucrative in the job market. Try doing a keyword search for a unique skill, and see which employers are willing to pay more for it.

The key is supply and demand. Workers in more in-demand fields, like nursing or computer science, tend to have more negotiating room. But, as you can see, there are plenty of factors that determine the “right” compensation for your job. And there are variables you can’t control. Racial and gender wage gaps, for instance, still persist. Industries in decline, or going through a temporary financial slump, may not have as much money to offer.

Tips for the salary negotiation

Have a range in mind, rather than a number. This gives you and the company more flexibility, and you’re likely to end up within the middle to high end of the range.
At the same time, know the lowest salary number you can live with. It’s better to have a floor than a ceiling.
Requesting benefit—such as employer-paid health insurance, retirement contributions, and achievement-based bonuses—if your company’s less willing to negotiate on salary. Benefits may end up saving you more in the long run.

Yield Curve 101

2/10/2020

Q. What is Yield Curve?

A. Basically, the yield curve is a visualization of the interest rates you get from bonds of different durations, from one month up to 30 years.

If everything always worked out logically, the longer-term bonds would yield way more than the shorter-term bonds. After all, you're tying up your money for longer, so you'd expect to earn a higher rate to help offset any risks that may develop while your money is in that bond.

Well, just like stocks, a bond's yield is a function of both the payout and the price -- which fluctuates in the open market. So, in a volatile market, weird things can happen to the yield curve.

Below you'll see a more normal Treasury yield curve from May 2018 (the gray line), in which yields gradually get larger for longer-term vs. shorter-term Treasury bonds.

However, in the current yield curve (red line), the short-term bonds actually yield MORE than some of the longer-term bonds, including the 10-year:

What's the implication of an inverted yield curve?
If short-term yields are higher, it's because bond investors fled from short-term to long-term Treasuries -- so they must not be feeling too confident near term.

Also, the banks don't love this scenario. Remember, a bank works by paying interest on your deposits and collecting interest on your loans. Those loans are based on bonds with longer durations -- so when the yield curve inverts, it hurts the big banks' profitability.

Add it all up and, economists say, it's a bad omen.

Impact of State Estate and Inheritance Taxes on Estate Plans

2/9/2020

There are 19 states that currently impose an estate tax or inheritance tax, these taxes usually have lower threshold for you to qualify which pose a significant challenge for your estate plans.

The article from Prudential below has a very good discussion of this topic and includes a case study as well.

Where to Find the Best Air Travel Deals?

2/8/2020

The 3 websites below could help you find great values on airfares and hotels -

Scott's Cheap Flights
It will send out international deals to subscribers for free

Airfare Watch Dog
It will send out daily emails with a long list of fares from airports you choose. The emails will flag sales, including from Southwest which is normally absent from daily newsletters.

Secret Flying
It provides instant alerts on flight deals that depart from cities across the U.S. to subscribers who download its app.

QLAC 101 - Which Carriers Have the Best QLACs?

2/7/2020

In our last blogpost, we discussed factors to consider when purchasing QLAC. Now the question - which carriers have the best QLAC products?

We recommend products from AIG, Lincoln, and Principal.

Below is up-to-date information about AIG's QLAC product, including producer and consumer guides, sales ideas, fact sheets, and more. If you are interested in the other carriers' QLAC products, please contact us.

QLAC 101 - Factors to Consider Before Purchasing QLAC

2/6/2020

In our previous blogposts, we discussed what is QLAC and showed an example of QLAC. Now we will discuss what factors to consider before purchasing QLAC.

The decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it.

Specifically, the following QLAC related decisions should be considers.

Single or joint life?
If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Include a cash refund death benefit?
When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs.

When to start income?
A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Need to change the income start date?
For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

In our next blogpost, we will show you some of the best QLAC providers.

QLAC 101 - How to Use QLAC?

2/5/2020

In our last blogpost, we discussed what is QLAC, now we will show how to use QLAC to create steady later in life income streams.

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

An Example
Let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85.

During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

In our next blogpost, we will discuss what factors to consider if you should purchase QLAC or not.

QLAC 101 - What Is QLAC?

2/4/2020

Q. What is QLAC?

A. A QLAC is a Deferred Income Annuity (DIA) that can be funded only with assets from a traditional IRA or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b).

The US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 72.

At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations. QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings.

Why Purchase QLAC?
There are two main reasons.

First, you can delay required minimum distributions (RMDs) on the money in your QLAC. Without a QLAC, you would be forced to start taking distributions based on the total value of that retirement account at age 72 (formerly 70 ½) - and paying income tax on those distributions. Many people don’t need distributions at that age, and don’t want to pay tax on that money yet. With a QLAC, you won’t have any RMDs on premiums paid until age 85.

Second, longevity. If you are worried about outliving your funds, a QLAC solves the problem. It provides guaranteed monthly income as long as you live. Plus, you get the amount you were promised at purchase, no matter what’s happened to the stock market or interest rate in the interim. You're effectively transferring that risk to the insurer.

In our next blogpost, we will show you a few QLAC examples about how it works.

A Comparison of Robo Advisors

2/3/2020

The best robo-advisors offer an affordable alternative to picking stocks or mutual funds on your own or shelling over a lot of money to a wealth manager to invest your money for you. They’re a responsible way to take hold of your financial situation without needing to understand the ins and outs of stocks, bonds, ETFs, and more.

Here is a comparison of some of the most popular robo advisors and what they are best for:

Acorns: good for beginner savers and investors
Ally Invest: easy application process
Betterment: simple platform, competitive pricing
FutureAdvisor: free investing resources
M1 Finance: automated and/or hands-on investing
Personal Capital: good for high net-worth, access to human advisors
Vanguard: good for mutual fund investors
Wealthfront: strong financial planning component

5 Years Count Down Plan to Your Retirement

2/2/2020

Below is a Barron's article that lays out a 5-year plan for anyone whose retirement is 5 years away -

Five years out
Start building cash reserves, if you haven't already, to tap during market downturns in retirement. Experts suggest savings at least equivalent to a year of expenses.

Take advantage of post-tax savings opportunities in qualified retirement plans.

Beyond those 2020 contribution levels, post-tax contributions are possible. The Internal Revenue Service allows for a total of $57,000 in contributions between the employee and employer, which bumps up to $63,500 for people over age 50. A survey by the Plan Sponsor Council of America shows 17% of 401(k) plans offer the option of making contributions on an after-tax basis.

Why put post-tax money in a 401(k)? It's another way to fund a Roth IRA, he says, which allows tax-free growth if the money is rolled over. However, making a post-tax 401(k) contributions can be complex, so people should both work with their financial advisor and read through the plan summary or other documents to confirm what their plans allow.

Three years out
Make major purchases while still employed.
It sounds counterintuitive, but look to repair or replace expensive goods with long lifespans such roofs or cars ahead of retirement.

For those who might want to work part-time in retirement or turn hobbies into businesses, look into certification programs or other training now.

Pay off loans from 401(k)s and other qualified plans to avoid carrying debt into retirement and creating a taxable event that qualifies as ordinary income. Loans from 401(k)s need to be repaid within 60 days of leaving an employer. Whatever isn't repaid is considered a retirement distribution and creates a taxable event and if you're not 59½, a penalty, too.

Two years out
Review estate planning if not up to date, including updating wills, reviewing power of attorney, health-care proxies, and beneficiaries.

Decide whether to pay off the mortgage and review other debts. For people who have debt, plan to stay in their homes, and aren't concerned about leaving a financial legacy, consider refinancing to a lower interest rate.

Meet with a financial planner to review tax strategies and firm up retirement cash flow projections.

Some retirement experts, including Nobel Laureate William Sharpe, say professional advice can be worth the cost even for do-it-yourself types. “When you retire and make your initial decision on buying annuities, investing, and adopting some sort of spending plan, I would think that it would make sense to sit down at least once, at the outset, with a financial advisor,” he told Barron’s.

One year out
Confirm all financial resources—pensions, profit sharing, Social Security, and other income.

Pre-retirees should call previous employers to see if they have left behind retirement benefits, says Jackie Cooper, a financial fitness coach.

For 401(k)s or other qualified plans subject to Employee Retirement Income Security Act of 1974 rules that may have been terminated when the company dissolved, search the U.S. Department of Labor’s Employee Benefits Security Administration; the EBSA maintains a searchable “Abandoned Plan Database”. Pre-retirees may find the name and contact information of the Qualified Termination Administrator, who can be contacted for information on the retiree’s account.
Lastly, check with the state treasurer's office for any unclaimed property.

Do a retirement lifestyle dry run.
Even while earning a paycheck, experts suggest pre-retirees start living on their retirement income to get comfortable with that cash flow. Save any excess cash in liquid assets to build those emergency reserves as needed in a high-yield money-market account or fund, certificates of deposit, or short-term Treasuries.

Begin conversations with human resources for formal transition plans if necessary.

Three months out
Gather copies of all plan documents including qualified plans, health savings accounts, medical plans, and other information before leaving. Those documents are easier to access while still employed.

Confirm with human resources final financial compensation.
That includes getting current information about 401(k), profit sharing and any vested or unvested balances in those plans.

Confirm total vacation and sick leave balance and check the company's employment policy to see what unused leave may be cashed in at retirement. Check state laws about a company's requirement to pay these balances.

Ask about the final paycheck: what pay period does it cover, how much will it be, when will vacation and medical leave balances be paid. Pre-retirees who are moving should give human resources their final mailing address to receive W2 statements and other correspondence.

Pre-retirees with employer stock in their qualified plans should consider taking advantage of net unrealized appreciation planning to reduce taxes.

Rather than rolling over the entire qualified plan balance into a traditional IRA, first take a lump-sum distribution of the employer stock, and then roll the balance of the qualified plan to an IRA. To take advantage of net unrealized appreciation planning, a retiree doesn't have to roll the remaining 401(k) balance into an IRA. However, at retirement, an IRA may offer greater investment selection options and planning flexibility that may not be available with a 401(k).

You would pay ordinary income tax on the cost basis of the employer stock distributed out of the qualified plan. However, you then can sell the employer stock outside of the qualified plan and enjoy long-term capital gain treatment on the gain in the employer stock that exceeds the cost basis.

PFwise.com Newsletter - February 2020

2/1/2020

For archived newsletters, please visit here.

5 Financial Things to Review Annually

1/31/2020

An annual financial checkup can take place at any time during the year and can help you better understand the "big picture" of your overall financial planning efforts. You can stop and think about your family's financial goals, such as saving for retirement, a house, or a child's education. You can consider reducing taxes on your investments, protecting your income, or building a financial cushion.

Here are 5 questions to ask when you do an annual financial review.

1. Is my investment strategy on track?
You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your situation has changed, make adjustments as necessary. At least once a year, check your target asset mix to ensure that it continues to meet your time frame, risk tolerance, needs, and preferences, and to perform any rebalancing that might be necessary in light of the past year's market performance.

2. Am I saving tax-efficiently?
Beyond applying diversification strategies broadly to your overall portfolio, what approaches are you exploring to help defer, reduce, or more efficiently manage taxes on your investments? Basic rule of thumb: Consider putting certain investments which generate taxable income—for example taxable bonds and real estate investment trusts—in tax-deferred accounts like 401(k)s and IRAs. For those investments which are more "tax-efficient"—like stocks and ETFs held for more than a year—place them in taxable accounts.

3. Am I protecting my income?
You've worked hard and want to protect your income. So it's wise to evaluate your family's total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan. Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones.

4. Am I preserving my assets?
Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.

5. How does my financial plan affect my family?
It's not just your retirement or financial future that you are planning for, especially as you age. You are likely researching and cultivating strategies to provide financial assistance to a number of people that you care deeply for, including parents, children, or even grandchildren. Beyond college, a lot of parents are helping to launch their millennial children into the world of fully independent living. Meanwhile, many have aging parents who can no longer live on their own or manage their own financial and personal affairs. Will caring for others affect your financial goals, priorities, and outcomes?

Copyright © 2013 - 2018 PFWise.com, All Rights Reserved.
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.

About Us | Contact Us
中文