Jun 26

Overturning DOMA

By Chris Chen CFP | Divorce Planning , Financial Planning

Some financial impact from overturning DOMA for same-sex couples 

Overturning DOMAToday, the Supreme Court struck down the Defense of Marriage Act (DOMA), the 1996 federal law prohibiting married same-sex couples from receiving federal benefits.   According to Justice Kennedy who wrote the majority opinion “DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”

For states such as Massachusetts where same-sex marriage is legal, federal benefits that were previously unavailable can now be accessed by married same-sex couples.  Many of  the benefits are financial or have a financial impact.  For instance, with DOMA overturned, same-sex couples will now have the ability to file taxes jointly, or to qualify for social security benefits. In addition, same-sex couples can now simplify their legacy planning, since they will be subject to the same rules as opposite-sex couples.

Same-sex couples who divorce  will now be able to get the same benefits as opposite-sex couples.  For example, same-sex divorced couples can now divide property without incurring gift taxes.  When alimony is paid, the payor may now deduct the payments from taxable income.

Divorced same-sex couples may need to revisit their separation agreements.  For those people who have an alimony arrangement, as the alimony amount can now be deducted from the payor, it will also become  taxable to the payee.  Hence the amounts may need to be recalculated to take that new fact into account.   People who have had to pay gift taxes as a result of a property division pursuant to divorce may be able to reclaim those taxes.

These are exciting times for same-sex couples.  Life without DOMA will be easy to settle day to day.  For financial issues, such as financial planning and tax planning it may take a little more adjustment.  Make sure to contact your CFP and CPA for more details.

 

Jun 25

What Is Your Legacy Plan?

By Chris Chen CFP | Financial Planning

What Is Your Legacy Plan?

While it may not be pleasant to think of one’s own passing, having your affairs in order can help ease the burden on friends and family, when the time comes, and can contribute to your own peace of mind knowing you have done all you can to prepare. There are many factors that should be considered when trying to create an effective and comprehensive legacy plan. Some considerations include:

  • Instructions on your own care in sickness
  • Guardians for your minor children should both parents pass
  • Protection from creditors
  • Charitable contributions
  • Continuation of a family business
  • Reducing or eliminating tax
  • Maintaining family harmony
  • Legacy creation and support of future generations

In addition, all these factors should integrate appropriately with your retirement income planning and your investment decisions.

Even if you already have a legacy plan in place, you may want to conduct a review. Decisions made years ago may not accurately reflect your current wishes. Legacy plans are not for the significantly wealthy alone. If you have children in your care or a business you wish to leave to future generations, it is important that protections and guidance are put in place now and are not put off until your retirement years. It is always a possibility that you may not have the luxury to last throughout the entire life expectancy table.

A poorly executed legacy plan, or the lack of one at all, could leave those you most care about to suffer needlessly in your absence. Be sure to work with a CFP™ professional or another experienced professional to gain control of your estate plan.

 

The preceding content was originally published on the Financial Planning Association © Web site, www.FPAnet.org

 


Jun 17

Start an Emergency Fund

By Chris Chen CFP | Divorce Planning , Financial Planning

Start an Emergency Fund

This week I wrote the following short piece for the Boston Globe:

 

Many people have trouble putting together an emergency fund. After all, there is always something else to spend money on! These are often small items, small fees and small purchases that go unnoticed. However, they add up. What if you could limit your purchasing of these small items, and put your extra cash into a rainy day fund instead?

Here are some ideas:

1. Consider giving up your daily Dunkin’ Donuts or Starbucks habit. At $3.05, a cappuccino may not seem like a lot, but one every 251 working days in the year adds to $765. What small expenses do you incur every day that adds up?

2. AT&T and Verizon will charge you $199.99 for the new iPhone5 or the newer Samsung Galaxy 4 with a two year contract. The truth is most of us want the new hot phones and their fancy features. How long will these phones stay “hot”?

3. Pack your lunch: a sandwich or a salad at Panera will set you back $9 a day, or $2,259 a year.

4. Carpooling is great. Biking to work is better: It will not just save you gas, it will make you healthy too. Have you tried Boston Bikes yet?

 

http://www.boston.com/business/personal-finance/2013/06/14/raining-pouring-how-start-saving/0h0ktD2nYBSVEZ6ILO6nxM/story.html?pg=2

Simon Abrams on Unsplash.com
Jun 13

Working into Retirement

By Chris Chen CFP | Financial Planning , Retirement Planning

Working into Retirement

The Great Recession has many older Americans considering the prospects of going back to work after retirement or staying in the workforce past their normal retirement age. But working after retirement age is not a new necessity. According to the Social Security Administration, more than 30% of individuals between the ages of 70 and 74 reported income from earnings in 2010, the latest year data are available. Among a younger age group, those between 65 and 69, nearly 49% had income from a job.

Some remain employed for personal reasons, such as a desire for stimulation and social contact; others still want a regular paycheck. Whatever the reason, the decision to continue working into your senior years could potentially have a positive impact on your financial future.

Working later in life may permit you to continue adding to your retirement savings and delay making withdrawals. For example, if you earn enough to forgo Social Security benefits until after your full retirement age, your eventual benefit will increase by between 5.5% and 8% per year for each year that you wait, depending on the year of your birth. Although you can continue working after age 70, you cannot delay social security benefits past age 70. You can determine your full retirement age at the Social Security Web site (www.ssa.gov) or by calling the Social Security Administration at 1-800-772-1213.

Adding to Your Nest Egg

Depending on the circumstances of your career, working could also enable you to continue adding to your retirement nest egg. If you have access to an employer-sponsored retirement plan, you may be able to make contributions and continue building retirement assets. If not, consider whether you can fund an IRA. Just remember that after age 70 1/2, you will be required to make withdrawals, known as required minimum distributions (RMDs), from traditional 401(k)s and traditional IRAs. RMDs are not required from Roth IRAs and Roth 401(k)s.

Even if you do not have access to a retirement account, continuing to earn income may help you to delay tapping your personal assets for living expenses, which could help your portfolio last longer in the years to come. Whatever your decision, be sure to apply for Medicare at age 65. In certain circumstances, medical insurance might cost more if you delay your application.

Work doesn’t have to be a chore. You may find opportunities to work part time, on a seasonal basis, or capitalize on a personal interest that you didn’t have time to pursue earlier in life.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Steve Johnson on Unsplash.com
Jun 03

What Fees Are Associated With Your Retirement Plan?

By Chris Chen CFP | Financial Planning , Investment Planning , Retirement Planning

What Fees Are Associated With Your Retirement Plan?

There’s a little secret associated with your workplace -sponsored retirement plan.  Usually that is a 401k. However, it can also be a 403b, a 457, or a SIMPLE IRA. Most participants think their plan is free – That it doesn’t cost them anything to join, contribute, and invest.  Unfortunately, that’s not entirely true.

While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.

Here’s a summary of the information you should receive.

  1. Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.
  2. Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.
  3. Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.
  4. General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.

These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.

While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.

Expense ratio

Initial investment Annual return Balance after 20 years

Expenses paid to the fund

Fund A

0.99% $100,000 7% $317,462 $37,244
Fund B 1.34% $100,000 7% $296,001

$48,405

Over this 20-year time period, Fund B was $11,161 more expensive than Fund A. You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.

If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or your financial professional.

 

Note:   Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.

 

May 20

Have you received a tax refund this year?

By Chris Chen CFP | Financial Planning

Have You Received a Tax Refund This Year?

If you have received a tax refund this year, especially a big one, you may look at it as a form of forced savings. If the money is automatically withheld, you cannot spend it, right? Maybe so. Another way to look at it is that you have lent money to Uncle Sam, and now you got it back interest-free.

There are better way to save than making an interest-free loan to our government. For instance, consider setting an automatic transfer from your checking to a savings, or money market account. The money will be available and you might get some interest. When interest rates go back up, it may add up to a nice little bonus.

If you prefer not to have the money available, consider setting an automatic deposit to an IRA or another investment account (be mindful of the contribution limits). This gets your money working for you right away, and may fit well with your long term planning.

Alternatively, you could pay down credit card debt. Your return would be equal to the rate of interest that the credit card charges you.

Leave a comment if you have other ideas!

May 12

Marriage and Building Wealth: Finding a Happy Balance

By Chris Chen CFP | Financial Planning , Retirement Planning

Marriage and Building Wealth: Finding a Happy Balance

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. Here are some considerations to keep in mind if you are thinking of getting married or have just tied the knot.

Building wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans, your joint contributions are double the individual maximums ($17,500 for 2013). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax planning

When filing federal income taxes, filing jointly typically results in lower tax payments when compared with filing separately.

Debt management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved.

 

Apr 29

Beware of the Mortgage Tax Deduction

By Chris Chen CFP | Financial Planning

Beware of the Mortgage Tax Deduction

Last week I wrote this short piece for the Boston Globe’s website series on tax planning for 2013 (it’s never too early!):

“For many of us, the mortgage tax deduction provides the single largest reduction in taxable income.

With mortgage interest rates continuing to be very attractive, it makes sense to consider refinancing your mortgage, if you have not already done so.

A mortgage refinance has the potential of reducing your payments, and improving your cash flow. It will also reduce reduce your mortgage tax deduction, and therefore increase your taxes due. Make sure to adjust your tax withholding so that you won’t owe taxes (and interest and penalties) as a result of refinancing.

http://www.boston.com/business/2013/04/22/bdc-minimize-uncle-sams-take-gallery/z4za5wNwPJlpIVjoZVAQkJ/story.html?pg=5

Apr 22

High-Yield Bonds: Income Potential at a Price

By Chris Chen CFP | Financial Planning , Retirement Planning

High-Yield Bonds: Income Potential at a Price

High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks.(1)  High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.

These bonds — sometimes referred to as “junk” bonds — are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely — from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.

As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.

These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.

The Risk-Return Equation

In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here are some of the most common risks.

  • Credit risk: A high-yield bond’s above-average credit risk is reflected in its low credit ratings. This risk — that the bond’s issuer will default on its financial obligations to investors — means you may lose some or all of the principal amount invested, as well as any outstanding income due.
  • Interest rate risk: High-yield bonds often react more dramatically than other types of debt securities to interest rate risk, or the risk that a bond’s price will drop when general interest rates rise, and vice versa.
  • Liquidity risk: This is the risk that buyers will be few if and when a bond must be sold. This type of risk is exceptionally strong in the high-yield market. There’s usually a narrow market for these issues, partly because some institutional investors (such as big pension funds and life insurance companies) normally can’t place more than 5% of their assets in bonds that are below investment grade.
  • Economic risk: High-yield bonds tend to react strongly to changes in the economy. In a recession, bond defaults often rise and credit quality drops, pushing down total returns on high-yield bonds. This economic sensitivity, combined with other risk factors, can trigger dramatic market upsets. For example, in 2008, the well-publicized downfall of Lehman Brothers squeezed the high-yield market’s tight liquidity even more, driving prices down and yields up.

The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.

Note (1): Diversification does not ensure a profit or protect against a loss in a declining market.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Apr 09

Health Insurance Issues Post Divorce

By Chris Chen CFP | Divorce Planning

Health Insurance Issues Post Divorce

With children and income issues on top of the list of critical concerns, health insurance is often overlooked by divorcing individuals, their divorce mediators and divorce lawyers . Everyone agrees that health insurance is important, but expects or hopes that a solution will find itself.
In the case when one of the divorcing parties has employer provided health insurance, it is assumed that this will continue for the divorcing spouse, as mandated by Massachusetts law. In addition,, people usually don’t think of the tax consequences of continuing employer based health insurance for a divorcing spouse . That is because employer based health insurance is considered a non-taxable fringe benefit for the employee and his or her family under IRS rules. Yet that does not necessarily imply a tax free benefit for an ex-spouse.

Health Insurance, Divorce and the IRS

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee. Hence the employee must pay federal income tax on his ex-spouse’s health insurance. In turn that imputed income could be deducted as alimony by the taxed employee. That would create additional taxable income for the ex-spouse.

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee

To make matters worse, employers are just waking up to the issue. Starting in 2013, employers have started to apportion the value of fringe benefits on employees’ W2 forms. This will greatly facilitate including an ex-spouse’s share of health care insurance on the employee’s W2 form in January 2014, and, thus increase the employee’s taxable income.  In turn, should the employee deduct the insurance as alimony, the ex-spouse must add the amount to his or her own taxable income, or face the consequences of under-reporting income.

Dealing with Health Insurance in a Divorce

In a divorce negotiation where the amount of alimony and the sharing of tax benefits are vigorously negotiated between the parties, to add health insurance choices and their consequences to the menu may not be welcome. It would be hardly better, for the parties find out the consequences after the fact.
As financial planners with a divorce specialty, we recommend that the ex-spouse should get his or her own insurance as soon as possible. That is not always feasible in the short run. As an alternative, we recommend to choose the best option available with all eyes open to the consequences.
If you would like to learn more, ask for the white paper that I co-authored with Justin Kelsey, Esq., or call one of the authors for a consultation.