Life is Short

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I recently lost my step-brother the day before his 42nd birthday. His passing was a stark reminder that life is unpredictable and sometimes far too short.

Premature death seems unlikely but almost all of us know someone who passed too soon. According to data from the Center for Disease Control, 0.2% of 35-44 year olds died in the United States in 2007 (the most recent year reported). The death rate rose to 0.4% for those 45-54 and 0.9% for ages 55-64. These percentages may seem low but actually add up to hundreds of thousands of lives each year.

How can you prepare your finances for the possibility of premature death?

  1. Buy enough life insurance. Level-premium term life insurance is all most people need. Have enough life insurance to meet your financial goals (e.g. college for kids, retirement for spouse/partner, pay off debt) without your future work income. The group life insurance offered through your employer may not be enough. You can use this calculator to estimate the amount of life insurance you need.
  2. Create an inventory of your accounts, assets, and digital-assets with instructions on how to find and access them. Include a list of your usernames and passwords or use an application such 1Password to manage them.
  3. Execute a Will and, if appropriate, a Trust.
  4. Check that your beneficiary designations on your retirement accounts and life insurance are accurate and up-to-date.
  5. Title non-retirement accounts (e.g. savings, brokerage accounts) as Joint or Transfer on Death accounts.

Take care of these tasks now so you can rest assured that your loved ones will only have to worry about missing you if you die prematurely.

Life can be short. Plan for it.

Numbers to Know for 2011

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Happy 2011! Below is a list of the essential numbers and phaseout ranges for this year.

  • Maximum contribution to a Traditional or Roth IRA: $5,000 + $1,000 catch-up if age 50 or over (no change).
  • Maximum contribution to a 401(k) or 403(b) plan: $16,500 + $5,500 catch-up if age 50 or over (no change).
  • Income (modified adjusted gross income) phase out range for deductible Traditional IRA contribution, married filing jointly and covered by employer sponsored retirement plans: $90,000-$110,000.
  • Income phase out range for deductible Traditional IRA contribution, married filing jointly and spouse covered by employer sponsored retirement plan: $169,000-$179,000.
  • Phase out range for deductible Traditional IRA contribution, filing single and covered by employer sponsored retirement plan: $56,000-$66,000 (no change).
  • Phase out range for deductible Traditional IRA contribution, filing single and not covered by employer sponsored retirement plan: no limit.
  • Phase out range for Roth IRA contribution, married filing jointly: $169,000-$179,000.
  • Phase out range for Roth IRA contribution, filing single: $107,000-$122,000.
  • Social Security Cost of Living Adjustment: 0%.
  • Annual gift tax exclusion amount: $13,000 (no change).
  • Marginal income tax rates.
  • Tax changes passed in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
  • Maximum deductible contribution to the Michigan Education Savings Program for Michigan residents: $5,000 single, $10,000 married (no change).

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Year End Planning Tips

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With the end of 2010 right around the corner, I offer the following year-end financial planning tips:
  • Contribute to your state’s 529 Plan by the end of the year. Many states, such as Michigan, offer a state income tax deduction if you make contributions to the plan that the state sponsors.
  • Convert your Traditional IRA to a Roth IRA by year end. The IRS created a special election for conversions made in 2010 that will allow you to spread the income from the conversion over 2011 and 2012. You can learn about Roth conversions at Vanguard and use its Roth IRA Conversion Calculator to decide if conversion is right for you.
  • Lock-in capital gains and pay at current capital gains rates. Long-term capital gains rates are scheduled to increase in 2011 unless new laws are enacted. If you have unrealized capital gains in a taxable investment account, consider selling your long-term winners and pay at the 15% rate (or 0% if you are in the 10% or 15% ordinary income tax brackets). You can even sell and immediately re-buy the same security to reset its cost basis. The wash sale rule does not apply to gains. You can learn more about this strategy and whether it is in your best interest by reading this article at Fairmark.com.
  • Avoid buying mutual funds in a taxable account late in the year. Mutual funds are required to distributed realized gains each year, and you should avoid paying taxes on distributions when you were not around to participate in the gain. Many fund companies report their expected distributions prior to year-end. Check for planned distributions before you buy or wait until the new year.
  • Take Required Minimum Distributions (RMD) from your IRAs or employer-sponsored retirement plans if you have reached age 70 1/2. Failure to take a required withdrawal can result in a 50% penalty on the amount not withdrawn.
  • Make annual exclusion gifts before year-end. You can give $13,000 in 2010 to an unlimited number of individuals free of gift tax. You cannot carry over unused exclusions from one year to the next.

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Ideas and Links from the NAPFA Conference

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I attended the national conference for the National Association of Personal Financial Advisors (NAPFA) in Chicago this week. NAPFA is a professional organization for financial advisors who are committed to Fee-Only and comprehensive financial planning. Below are some of the new ideas and time-tested reminders that I took away from the conference.

Estate Planning

  • If you are the parent of a minor and you do not have a Will, a court will determine his or her guardian. Please prioritize putting a Will in place if you are in this boat.
  • You may need to appoint a short-term guardian in your Will if the primary guardian for your minor child does not live nearby. This will prevent your child from ending up in the care of an agency until your primary guardian arrives.
  • A presenter recommended the book Who Gets Grandma’s Yellow Pie Plate for help in determining how to divide assets in your estate plan.
  • Use an attorney who specializes in estate planning to draft your estate planning documents. You wouldn’t let your general practitioner perform brain surgery on you, so don’t let your real estate attorney draft your estate planning documents.
  • Visit www.martindale.com and www.actec.org to find attorneys in your area who specialize in estate planning.
  • Use this checklist provided by the American Bar Association to think through decisions you will need to make in your medical directives.

Property Division in Divorce

Debt Management

Healthcare Reform

College Education Savings

  • A speaker, Jean Chatzky, recommended paying for college education in thirds: 1/3 from savings, 1/3 from cash flow while your child is in college, and 1/3 from student loans taken by the student. She feels that this approach allows the student to have some skin in the game. Research has shown that students who pay for part of their tuition take college more seriously.
  • In 2011, all colleges that participate in Title IV student financial aid programs will required to have net price calculators on their websites.

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Numbers to Know for 2010

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With 2010 just around the corner, it’s time to get familiar with the key numbers that may affect your financial planning in the coming year. Below is a list of the essential numbers and phaseout ranges for 2010.

  • Maximum contribution to a Traditional or Roth IRA: $5,000 + $1,000 catch-up if age 50 or over (no change.)
  • Maximum contribution to a 401(k) or 403(b) plan: $16,500 + $5,500 catch-up if age 50 or over (no change.)
  • Maximum income to convert a Traditional IRA to a Roth IRA: No longer applicable. See my post on converting.
  • Income (modified adjusted gross income) phase out range for deductible Traditional IRA contribution, married filing jointly and covered by employer sponsored retirement plans: $89,000-$109,000 (no change.)
  • Income phase out range for deductible Traditional IRA contribution, married filing jointly and spouse covered by employer sponsored retirement plan: $167,000-$177,000.
  • Phase out range for deductible Traditional IRA contribution, filing single and covered by employer sponsored retirement plan: $56,000-$66,000 (no change.)
  • Phase out range for Roth IRA contribution, married filing jointly: $167,000-$177,000.
  • Phase out range for Roth IRA contribution, filing single: $105,000-$120,000 (no change.)
  • Social Security Cost of Living Adjustment: 0%
  • Annual gift tax exclusion: $13,000 (no change.)
  • Marginal income tax rates

Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Year-end Financial Planning Tips

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Even though the end of the year is rapidly approaching, there is still time for you to take advantage of these year-end financial planning tips:

  • Use up any balances in your Medical Flexible Spending Account. Remember that you will lose any balances that you do not use. Check with your plan provider for eligible expenses and for any grace period into the new year.
  • Schedule medical appointments and procedures before year-end if you have already met your health care plan’s out-of-pocket deductible.
  • Offset capital gains and losses in your taxable investment accounts.
  • Avoid buying any mutual funds that are planning a year-end capital gains distribution. Most mutual fund families will publish a list of estimated year-end distributions like this one from American Funds.
  • If you are over age 70½ and have an IRA or other pre-tax account, be sure to take your required minimum distribution for 2009 or opt out this year. You also have until the end of the year to make a tax-free charitable rollover to a qualified non-profit organization.
  • Maximize your annual gift tax exclusion. If you’re fortunate enough to be able to gift money to your loved ones, you can give each individual up to $13,000 this year with no gift tax ramifications. If you’re married, you and your spouse can each give $13,000 to anyone you want. But you need to do so by year-end.
  • Fund your 529 plan to maximize your state’s tax deduction. For example, a married couple who are Michigan residents can deduct up to $10,000 of contributions to the State’s MESP 529 Plan made during 2009 from their 2009 Michigan income tax return.
  • Create a 2009 tax file if you haven’t already so you have a one place for all of your tax documents to land when they start arriving in the mail.

If you have other year-end tips you would like to share, feel free to e-mail

me at [email protected].

Please keep in mind that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Converting to a Roth IRA in 2010

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If you are like many of my clients, you may be wondering if you should convert your Traditional IRA or old 401(k) to Roth IRA next year in 2010. As you may know, the income limitations for conversion are repealed in 2010, and you can choose to pay the taxes owed on a 2010 conversion over two years in 2011 and 2012. On the surface, it seems like a pretty sweet deal. And for many it is. However, it’s not in everyone’s best interest. How are you to know if it makes sense for you to convert? Here are some considerations.

  • If your income tax bracket is likely to be higher in retirement than it is today, you may be a good candidate for conversion.
  • If you think tax rates are on the rise, you are nearing or in retirement, and you do not expect your tax bracket to drop significantly, conversion may make sense for you.
  • When you convert, you have to report the converted amount as income and the additional income may push you into a higher tax bracket. Consider a partial conversion if this is the case.
  • You will need cash to pay taxes on the additional income if you convert. A good rule of thumb is to not convert if you don’t have the cash on hand from another source to pay the taxes owed from the conversion.

Generally speaking, I think it’s a good idea to be diversified from a tax perspective by holding both pre-tax (401k, Traditional IRA) and after-tax (Roth IRA, Roth 401k) retirement assets. It’s a way to hedge your bet, since no one truly knows what tax rates will be in the future.

However, taxes should not be your only consideration if you are thinking about converting. What you eventually plan to do with the money is also important. For example, if you plan to leave the money to your kids when you die, converting would allow you to grow the account throughout your life since Roth IRAs do not have required minimum distributions as do Traditional IRAs.

If you would like to more details on this subject, I suggest a FundAdvice.com article . If you would like to learn if converting to a Roth IRA makes sense for you, you are welcome to schedule an appointment.

Please keep in mind that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.