New Rule for IRA Rollovers

 At some point in your life, you’ll most likely have to complete what’s known as an “IRA rollover”.  It’s a pretty straightforward concept.  If you have a 401k with an old employer or an IRA with a firm and you want to move what you saved to different management, you complete a rollover.  Paperwork is completed and funds are moved over to the new IRA.  Simple enough, right?  Usually.  Rollovers are usually simple to complete, but if the ball is dropped, it can result in substantial taxes and penalties that can lead to a less-than-pleasant situation. Recently, the plot has thickened due to an IRS ruling now limiting the frequency of IRA rollovers.

Trustee-to-Trustee Transfer 

To keep things simple, most rollovers are completed by way of “trustee-to-trustee” transfers.  Meaning funds are sent from one institution to another, without the investor ever “touching” the money.  This may happen electronically or a check might be issued to the investor, made payable to the new financial institution, not the individual.  You are able to complete an unlimited amount of these types of transfers during the year. 

60-Day Redeposit

The other type of rollover allows funds to be sent directly to you in your own name or electronically to a checking or savings account, but you must deposit the money into an IRA or eligible 401(k) within 60 days.  If the funds are not deposited within the 60-day window, the distribution will be deemed as a taxable event, which could cost investors a significant amount in taxes and penalties.  This type of rollover is only permitted once a year. 

Rollover Short-term Loan

As my colleague, Tim Wyman, explained in a recent blog, this 60-day rollover rule could also be used for a short-term loan.  So, if you were closing on a new home and needed some cash because your current home wasn’t sold yet, you could take a distribution from your IRA and, as long as you put the money back into the IRA within 60 days, there would be no tax consequences – essentially, a short-term bridge loan.  Previously, the 60-day rollover was permitted once every 365 days for each IRA you own. 

Stopping the Rollover Merry-Go-Round

Think about this:  If you had multiple IRAs, you could feasibly take a distribution from IRA #1 and use funds from IRA #2 to pay back the first distribution within 60 days.  The 60-day clock would then start over with IRA #2.  If you did this every sixty days, you would only need six different IRA accounts to do the 60-day rollover “merry-go-round” and give yourself an ongoing tax-free loan from your IRA.  However, the US Tax Court recently ruled that you are now only allowed one 60-day rollover every 365 days as an aggregate for ALL of your IRAs.  Meaning no matter how many IRAs you have, only ONE 60 day rollover is permitted in a 365 day time period. 

It seems as if our tax laws change faster than Michigan weather.  There is always something new and it’s important to work with an advisor who is up to speed on the ever changing landscape in financial planning.  If you ever have questions about your personal situation, don’t hesitate to contact us. We are here to help!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-013208

Real Estate Rebound: Time to Buy a Home?

As the real estate market starts to climb out of the doldrums and consumer demand begins to increase, you may be thinking of buying. Before you start a house hunt, let’s take a look at some general financial planning rules with regards to what could be the biggest purchase of your life.

Picking Your Price Point

Probably the most important rule to keep in mind when you are deciding which house is right for you is determining what you can afford.   The general rule of thumb is that your principal, interest, taxes, and insurance (commonly referred to as PITI) should not exceed 28% of your gross income.  So to put that into perspective, if your total household income is $100,000 ($8,333/month), you should try to keep the PITI to no greater then $2,333 (28% of $8,333).   Please keep in mind this is a general rule and not an absolute truth.  To make a truly responsible financial decision, you should have a good understanding of your monthly cash flow and determine how much of that $2,333 you can take on without being “house poor”. 

Unless It’s Long Term, Rent

Length of time you plan to be in the home is also a big consideration.  In fact, if you plan on being in the home less then 5 years it’s probably better just to rent. The reason for this is in the first 5 years of a typical amortization schedule, you hardly pay down the principal.  The majority of your monthly payment is going to interest and, unless there is substantial appreciation in the real estate market over that 5-year period, you probably won’t have much equity in the home when you try to sell it.

Prepare for PMI

If you aren’t putting 20% down, then you’re probably going to be subject to private mortgage insurance (PMI), which will increase your monthly payment.  Once you have 20% equity in the home, and a period of two years has passed since the initial purchase date, you can apply to have PMI removed from the loan.  Until that time, you need to be prepared for the additional burden on cash flow.

Moving isn’t cheap! 

The average moving company charges between $1,000 and $5,000 for transporting all your precious possessions from one house to the next so plan on setting aside a little cash for this expense.

Most Common Questions

Purchasing a new home can be fun, but it can also be very stressful. Some common questions that we get a lot from our clients at The Center are:

• Where do I take the money from for the down payment?

• Should I do a 15 or 30-year loan?

• How much should I put down on this house?

Whether this is your first house or your tenth, take a deep breath and be sure to consult with trusted advisors. When you talk through all of these issues, it’s easier to decide if it really is your time to start shopping for a new home sweet home.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-009197

Where Do I Take Cash From Next? The 72(t) Option

A longtime client, we will call her “Joan”, called last month needing to set aside money for her 2014 income needs. She had nothing left in the bank.  She had been through a life transition recently, out of work for over a year, and helping family with some health concerns.  Nearing retirement but not quite at the point at which she could access her retirement moneys without penalty (she was in her late 50’s, but not quite 59 1/2), she was concerned because her only choices were a Roth IRA and a traditional IRA.  So her normal reaction was to go for the Roth because it had fewer penalties or tax (she had established the Roth over 5 years ago and could access her contributed portion without penalty; she would likely experience a penalty if drawing on earnings portion). 

Penalty-free IRA Withdrawals

I offered a rarely used suggestion to establish a section 72(t) distribution (as authorized under the IRS tax code). This rule allows for penalty-free withdrawals from an IRA account. The rule requires that, in order for the IRA owner to take penalty-free early withdrawals, he or she must take at least five "substantially equal periodic payments" (SEPPs). The amount depends on the IRA owner's life expectancy calculated with various IRS-approved methods.

Rule 72(t) allows you to take advantage of your retirement savings before the age of 59 1/2, when there is otherwise a 10% penalty on early withdrawal. The withdrawals, however, are still taxed at your income rate.

How to Use Rule 72(t)

The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011.

This works well for Joan because she did not have any earned income in 2013 so we actually started her distribution in December for the 1st of 5 distributions.  We plan to take the next one immediately in January of 2014 and this should fulfill her income requirements needed for 2014.  She also does not plan on finding work in 2014 so the taxes on these dollars will be small since she had no other income.   The Roth arguably would also have fewer tax implications, but we suggested taking from the Roth IRA after this if additional income was needed in the year as she climbs the tax bracket wall.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. A 72(t) distribution may not be right for everyone. Investors should take into consideration the possibility of depleting their retirement account before the end of their life expectancy. In addition, any withdraws are taxed at the investor’s income rate and may raise their tax bracket. Please discuss any tax or financial matters with the appropriate professional before making a decision. #C14-001634

Health Savings Account Basics

With the Affordable Care Act becoming effective in 2014, healthcare seems to be top of mind with a lot of people.  But there are still many kinks to be worked out and many questions left unanswered.  In a world of uncertainty, why not consider utilizing a savings vehicle to help with medical costs that you can control? 

Using an HSA

A Health Savings Account, or HSA, is a fairly new type of account that is available to those who are enrolled in a high deductible health care plan.  Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake!  A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, something a Flex Spending Account does not offer – it is a “use it or lose it” plan. 

What an HSA Can Cover

Many employers who offer high deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match.  Dollars contributed to the account are pre-tax and earnings accumulate tax deferred.  Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.  The list of qualified medical expenses can be found at irs.gov, however, just to give you an idea, a few include:  expenses to cover your deductible (not premiums), co-payments, prescription drugs, various dental and vision care expenses, etc.  As always, consult with your financial advisor, tax advisor and health savings account institution to verify what expenses are considered qualified.  If you make a withdrawal that is considered “non-qualified”, you will be subject to taxes and a 20% penalty on the withdrawal amount. 

Here are the details for 2014:

Individuals

• Must have a plan with a minimum deductible of $1,250

• $3,300 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $6,350

Family

• Must have a plan with a minimum deductible of $2,500

• $6,550 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $12,700

Withdrawing from an HSA

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA.  However, once you are 65, funds can be withdrawn for any purpose, medical related or not, and you will no longer be subject to the 20% penalty.  However, the withdrawal will be included in taxable income, like an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money but have already maximized their 401k plans or IRAs for the year.  Although you have to wait 5 ½ years longer to access the funds from a HSA than a traditional retirement plan (age 59 ½) to avoid penalty, this is just another investment vehicle that could reduce taxable income in the year contributions were made while earnings have the opportunity to grow tax-deferred and tax free.  

As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high deductible health plan.  No one likes medical expenses; this can be a vehicle that can potentially soften of medical expenses. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional. #C13-002464

Three Steps to Curing a Holiday Spending Hangover

 You enjoyed your holiday season to the fullest – great gifts for everyone, parties and evenings out with family and friends.  But now the credit card bills are arriving, and you are feeling the pain and misery of your holiday spending hangover.  

3 steps to help you recover and get yourself back on track:

1. Take a Break:  From the plastic, that is.  No need to abstain from all spending, but moving to a “pay cash” system and avoiding the use of credit cards, at least until the holiday bills are paid in full, will help to get your responsible spending back on track.
2. Replenish:  With a traditional party hangover, it is important to replenish your body with water and healthy foods.  Similarly, with a spending hangover, it is important to replenish your bank account.  Rebuild your savings to get your New Year off to a solid start.
3. Exercise:  Set a spending plan and stick to it to get your finances off to a healthy start.  Map out your monthly spending and monitor.  Just like a healthy exercise plan, tracking is the best way to ensure success.

Enjoying the holidays and special times with family and friends is important to your overall enjoyment of life.  If you occasionally go a little bit overboard, simply follow these steps to get yourself back on track and on your way to fulfilling your longer-term financial goals.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James. #C13-002512

This New Year Take Our Resolution Challenge

 The beginning of a new year gives us a clean slate to get on the right track.  Then it happens … we all do it.  With the best intentions we make those dreaded New Year resolutions that very rarely get accomplished. Then we find ourselves in the same boat as we were the year before.  Have you ever noticed how busy the gym is in January and how it magically goes back to normal capacity within a few months?  I’m just as guilty as the next person with failed resolutions. However, this year I’m going to make a challenge to our fine clients at The Center.   Make a New Year resolution to sit down for just an hour in January and make a game plan for your finances in 2014.  It’s not a challenge to save “X” amount for retirement or to rollover that 401k plan to an IRA that has been with an ex-employer for a few years. These are individual goals that you can work into your plan.  My challenge is rather to open up the discussion, take a close look at your own personal financial scenario, and set some goals that you would like to achieve in 2014. 

Think of the approach in terms of the famous Fitzhugh Dodson quote: “Without goals, and plans to reach them, you are like a ship that has set sail with no destination.”  As your trusted advisors, we are here to help you identify these goals and work with you to navigate through them until they are accomplished.  We look forward to working with you in this New Year and wish our clients and their families and friends nothing but the best for 2014 and beyond!

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  C13-001740.

How I Set My Own Financial New Year’s Resolutions

 If you are like me, each year you make a list of New Year’s resolutions that don’t end up making it to spring time, much less the entire year… i.e. going to the gym, eating healthy, etc. Well, this year I plan to not only stick to my goals, but also add goals for my financial well-being to the list. Make improving your financial well-being part of your annual resolution procedure … and stick to it! In hopes of getting you going, here are mine:

I will make a budget, and use it to improve my spending habits

 This doesn’t have to be as gruesome as you think. Consider using a tool such as Mint.com that automates, aggregates, and updates for you. Track your progress monthly with their charts and see what areas you can cut back (like the Jimmy John’s sandwich that is oh so convenient to have delivered for lunch multiple times per week).  

I will spend less, and thus save more

• Take advantage of coupons, Groupons, or any other deals out there. I’m not saying become an extreme couponer like you see on TV (unless you have the time and energy for that), but there are easy potential ways to save on your expected purchases. Try a quick Google search for sales or price comparisons before you head out to make that buy.
• Don’t pay for pricey added features that you don’t use, just because you get a deal for bundling (i.e. cable, cell phones, internet). If you lead a busy life and don’t have the time to watch TV very often, consider a streaming option such as Netflix, Hulu, or Roku instead of paying for pricey cable.
• If you get an end-of-year bonus, put it into savings (or at least majority of it) instead of going on a shopping spree and spending it all in one day. For your job well done, treat yourself to something satisfying yet small in expense (maybe that Biggby specialty coffee you hardly ever buy because it’s expensive), then transfer the rest to savings. 

I will plan for future retirement

Take advantage of employer matching 401(k)s. If you get a raise for the upcoming year, consider increasing your 401(k) contribution as well. Then your increased income goes directly into your retirement savings instead of into your checking account, where it will be tempting to spend.

I will create a long term vision and strive to make it my future reality

Start an emergency fund (the Center recommends 3-6 months of expenses). This may take some time, depending on if you have one started. Once your emergency fund is sufficient, consider compartmentalizing your incoming savings for your long-term visions (click here for recent post about compartmentalizing).

The little things add up before you realize it, so strive to break the constant bad spending habits (the daily Jimmy John’s or Biggby coffee); but have fun treating yourself sometimes as well. Finding enjoyment while staying within your means will help you stick to your resolutions long term and may improve your financial well-being.

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Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. C13-001741.

Is Too Much Success a Penalty at Tax Time?

Many investors have been so successful they may face a potentially hefty tax bill for 2013.  This bull market we are experiencing in the U.S. has had such strong legs for a long period of time many investors have few, if any, capital losses to harvest to help offset the gains they have accumulated in their equity investments. In some ways this is a great problem to have. 

Tax Increases

This year there were a couple of noteworthy tax increases to keep in mind.  The maximum tax rate on capital gains has increased from 15% to 20%.  Taxpayers with taxable income north of $400,000 ($450,000 for couples) will be affected by this increase.  There is also the new Medicare investment income “surtax” affecting taxpayers with modified adjusted gross income over $200,000 ($250,000 for couples).  This tax is an additional 3.8% on investment income (interest, capital gains, dividends etc.).

Look for Bond Losses

Some taxpayers may still have tax losses from 2008-2009 to help offset gains, but for many these have run out during the successful run the markets have enjoyed for the past 4 ½ years.  One place to look for some losses this year may be in the bond portion of your portfolio (if applicable).  There may be an opportunity to swap to a similar investment for a short period of time, at least 31 days, to harvest those losses to help offset other gains you may have. 

Harvesting Losses

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Bond losses were at their peak during late summer and into the fall, but if you wait until December to harvest those losses, they could be much diminished from what they were.  The end of the year is rarely the best time of the year to harvest tax losses.  Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor today to prepare for the risk of higher taxes in your future.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

Compartmentalize Your Finances

 Love Starbucks? A lot of us do, but try answering this question I recently heard posed by a behavioral finance professor:  “Would you be more inclined to order a latte that was advertised as 95% fat free, or one labeled 5% fat?”  The two $5 drinks are the exact same, however, I would venture to say 99.9% of people (including me) would choose the drink that was advertised as 95% fat free.  Perception is as powerful force in the coffee world as it is in the investment world. Perception can work against you when it comes to savings or it can fuel you. Much of that depends on how you compartmentalize.

The Behavioral Finance of Compartmentalizing

So what does it mean to compartmentalize?  Simply put it is separating two or more things from each other.  In personal finance, separating certain accounts to have individual goals can have a tremendous effect on the likelihood of savings and overall success of the individual’s financial plan.  For instance, one of the most important pieces of a financial plan is maintaining an adequate emergency fund for the dreaded unknowns – such as job loss, unexpected home improvements, medical expenses, etc. (The Center team usually recommends that clients maintain 3 – 12 months of living expenses in a cash account that is not subject to market risk). 

Establish Separate Accounts

If you find yourself constantly transferring funds from your savings to your checking account each month because they are at the same institution and the ease of the transfer is just to easy to resist, consider making a change!  Why not open a savings account at a completely different financial institution and maintain your emergency fund there, knowing this money cannot be touched except for an emergency. 

Give it a Label

Many banks now allow you to name an account and personalize it.  So instead of seeing your account being titled as “Savings” each time you log in, it would read “Emergency fund – don’t touch!”  Adding that “name” or “purpose” to the account has been proven to dramatically increase savings levels and decrease the likelihood of spending out of the account. 

Keep it Simple

Separating accounts for each individual goal in retirement, however, is pretty unrealistic.  Who wants to have 20 different IRA accounts?  At The Center, we like to keep things simple to stay organized and on track.  However, our advisors do encourage clients to compartmentalize in their minds when looking at their overall stock/bond/cash allocation to stay focused and not lose track of the purpose of each type of asset that is held within the portfolio.  Each “bucket” of funds has a purpose and impact on the total portfolio and it is The Center’s job as your trusted advisor team to help you fill each one and utilize them to their maximum potential.  

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Vacation Homes: Dreams or Nightmares?

Each year in August, and again in January, after trips to a warm destinations for summer or winter fabulous summer vacations, we get calls from clients who have found their dream “home away from home”.  The dream is usually a condo located at a favorite vacation spot and a place where they can drive up, find a warm bed waiting, and the next day the beach beckons for a relaxing walk.

But hold on just a minute.  When you open those doors you might also find a leaky toilet or a few critters who also like your home.  It is then you begin to discover there are many good things about a second home but also lots to think about before signing on the dotted line. Here are a few checklist items for your consideration:

Location and Use

• How often will it be used? 

• Is it easy to get to or is the expense of getting there a consideration?

• Are you close to attractive features? 

• Is it a desirable property in case you wish to sell?

Maintenance

• Older condos may be ready for big outside assessments and lots of inside updates as well. Ongoing maintenance is a necessity when you own property regardless of age.   It is also the biggest complaint of owners.  If the property is rented, both the need for maintenance and complaints triple. Who is going to take care of maintenance and what is the cost?

• If the renters are family members how are increased utility bills going to be handled---yes they can be substantial.

Amenities 

• You may have fallen in love with the swimming pool but are you going to use the tennis courts, golf course and clubhouse? You will be paying for them.

Costs   

• The purchase cost is just the beginning.  The monthly association dues rarely go down.  Periodic assessments for parking lots and landscaping can be substantial. 

• You also need to know about insurance costs and added on fees for particular activities or uses.

• Furniture is also a consideration.

If you find the monthly costs are going to strain your budget, you might want to rethink the decision to buy.  One couple had a sound practice of not financing a second home until the first one was paid in full. If you are relying on rentals to cover most of the costs, it is best to have a contingency plan since renters may be scarce in poor economic times.

A second home can be a wonderful place for the family to gather and for you to have a relaxing respite from daily demands.  Like most things in life, make sure it will bring you satisfaction that you can afford.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.