Wednesday, May 15, 2013

11 Smartest Things Heard at the National Association of Personal Financial Advisors Spring Conference

 PAULA VASAN AND CHARLES PAIKERT for Financial-Planning.com write: How will you scale your practice? What's the secret to retaining Gen Y employees? What's the best way to network? For three days, advisors and industry experts descended on Las Vegas for the semi-annual National Association of Personal Financial Advisors conference to discuss these topics and many others. Check out some of the best things we heard. 
1. How to Turn $100,000 Into $1 Million
If a medium-sized RIA firm makes a $100,00 investment in technology, they can boost the net value of their business by $1 million, according to James Dario, TD Ameritrade Institutional managing director for product management and strategy.
2. New Platform Worth Watching
Dario cited inStream as an example of an “innovate new platform” advisors should be looking at. The product integrates alerts into a clients’ financial plan, letting advisors know, for instance, when a client has experienced a life event, triggering the need to roll over a 401(k) plan.


3. Network With Peers
Independent advisors should network with peers to provide support for one another in times of hardship, according to Annie McQuilken, a registered investment advisor. She’s part of an RIA group called the Money Women, in which each member formally agrees to provide coverage for each advisor of the organization should a certain member become temporarily disabled or permanently incapacitated. In other words, as "solo advisors", each running a relatively small firm, the group aims to serve as a type of succession plan and cushion for one another should a health-related disaster strike.

4. Plan for Health Care
Advisors are not doing a good enough job planning for health care costs, according to Carolyn McClanahan, a financial planner and physician. When addressing health care with clients, include the following subjects into the discussion:
  • Cash flow: What is your cash flow to pay for serious illnesses? Do you want to tap into your retirement plan or access life insurance benefits?
  • Tax planning: Understand all co-pays and out of pocket expenses. Track these during serious illnesses for more effective tax planning.
  • Family deductibles: If you know your clients have hit greater than 10% of adjusted gross income for deductibles, make sure everyone in the family gets their health needs taken care. All of those expenses are deductible.

5. Retain Gen Y Employees
Financial advisory firms must engage and retain Gen Y employees if they want to expand their roster of Gen Y clients, says David Grant of Vantage Financial Partners (and a Financial Planning columnist). Personnel development is key to making firms successful. The risk of not putting in the effort to develop employees is having potential successors walking out the door. "Why would you not want your newest employees to be superstars?" Grant says.
Some specific tips:
  • Have a good-looking, useful website
  • Assess work/life balance
  • Have a clear career path for employees
  • Address compensation regularly
  • Provide education and conference assistance

6. How to Handle Alternative Investments
Financial advisors are far from a consensus when it comes to the value of alternative investing. While some advisors embrace the sector, others view it with skepticism and distrust. "I don't recommend alternatives for any of my clients," said Joseph Hollen of Reno, Nev., based Hollen Financial Planning Ltd. "Fees are often too high. Private equity firms have a strong sales pitch," he says. In addition, the highly illiquid nature of alternatives make the asset class far from desirable. "Life events happen. Your clients need to buy a house, send their kids to college -- it's dangerous to have money locked up for so long, especially within the 30-50 age range when such events are most prevalent." 

7. Medicare Opportunity
Financial planners and advisors have a “huge opportunity” to enhance their practice by becoming knowledgeable about the latest rules and regulations impacting Medicare, according to Paula Muschler, Medicare advisor for Allsup, a St. Louis-based firm which provides Medicare services to individuals and employers. Only 28% of clients discuss Medicare issues with their financial advisors, Muschler says.

8. Don’t Worry Too Much About Older Clients Making Decisions
The vast majority of boomers do not get brain diseases like Alzheimer’s and are able to make financial decisions “thoughtfully and carefully,” says Laura Carstensen, professor of psychology and head of Stanford University’s Center on Longevity. The brain’s processing capacity declines after age 50, Carstensen explains, but older people’s expertise remains intact, as does their ability to learn.

9. An Aging Population
By 2030, an estimated 22% of the U.S. population will be over 65, according to Carstensen, a 9% increase from current levels. And according to one recent estimate, a majority of children born after 2000 will live to be 100.

10. Investors Are More Risk Averse
Risk aversion goes up as cognitive ability declines, according to a study cited by Michael Finke, professor of personal financial planning and Ph.D. coordinator at Texas Tech University.

11. Lead Generator
For $295 annually, the website www.feeonlynetwork.com is a “great resource” to connect with prospects looking for a fee-only planner, says Kristina Bolhouse, vice president and principal for The Arkansas Financial Group.
Posted on 6:38 AM | Categories:

Layering Tax Efficient Investment Tools: Part 1

Jonathan Clark for the Lakewood Observer writes: Part 1 of 2: Layering Tax Efficient Investment Toolsmight be a valuable strategy for portions of your wealth as we look into the future. There are a variety of tools that can lead to some sort of tax efficiency such as: IRAs, Roth IRAs, Roth Conversions, Tax-Free Municipal Bonds, Annuities, and Life Insurance. There is not a tax crystal ball to tell advisors and CPAs what the income tax structure will look like 10 years, 5 years, or even two years from now. What we do know is that we are currently at historically low tax rates and government debt continues to increase. A case can be made that potential tax increases in the future are a strong possibility. With that thought in mind, here are some strategies that in some cases can create tax flexibility in the future.

IRA’s, Pro: During your working years you might be in a position to set some excess money away for retirement. IRA’s as well as other retirement plans offered through your employer allow you to set that excess money in a place where you won’t pay tax on the contribution until you take it out. Although the initial tax deferral is a nice benefit, the real power comes from the compounding effect on the growth of the IRA. By compounding effect I mean the interest on the principal plus interest on the tax deferred growth. 
Con: Retirement accounts can grow to be quite substantial in size. At age 70 ½, the government requires that retirees start to take a minimum distribution from the total of their IRAs. At times that distribution may not be wanted because it could cause up to 85% of social security payments to be taxed. The other risk posed by IRA’s tax deferral is the possibility of tax rates increasing in the future.
Roth IRA’s, Pro:  Like the IRA, Roth IRA’s are contributed to during your working years. The choice here is the decision to pay income taxes on the contribution during the year it was earned. In exchange for paying income taxes now the Roth IRA will grow income tax free as long as certain rules are followed. This means that most distributions after age 59 ½ will be income tax free. Roth IRA’s do not have a Required Minimum Distribution like the IRA. That is a crucial benefit during retirement. At your passing, heirs will have the option to keep the account as a Roth IRA. 
Con:  Finding a con for the Roth IRA is challenging. One difficulty is having the cash flow to contribute to the Roth and pay income taxes. Also, if you have a higher income you will be phased out or not be permitted to contribute. Another thought, if the investment choice for the Roth IRA decreases in value, it is possible that you could end up paying taxes on money that you never get to spend. 
Roth Conversion, Pro: This was the hot topic a few years back. Roth Conversion is the ability to take all or a portion of an existing IRA, pay the taxes now and convert it to a Roth IRA. Example: In 2012, you had an IRA worth $100,000 you decide to wave the wand and covert it to a Roth IRA. When filing your income taxes for 2012 you will need to add $100,000 to your income taxes for the year. Wait 5 years before taking a distribution and you will have a tax-free Roth IRA. There are no Required Minimum Distributions once converted. If the $100,000 grows to $200,000 it is all tax-free.   
 Con:  In the example above, you would add $100,000 to your 2012 income tax return…..ouch. There are ways to soften some of the tax burden, but that maybe the biggest mental roadblock when deciding to convert or not. Investment choice once converted is an important factor. Imagine paying taxes on $100k in 2012 and then having that 100k worth only 70k in 2014 because of a market downturn.
IRA’s, Roth IRA’s, and Roth Conversions are three tools if used correctly may add tax flexibility to your wealth. Age, current and future income, health, family, and account values collectively create a profile to guide you through the pros and cons of these tools. I do believe moving forward that some individuals and families that position parts of their wealth in tax efficient vehicles will find they will have more choices down the road when funds are needed for retirement. These strategies would likely work best with the help of a tax professional.
Part 2 of this article will address Municipal Bonds, Annuities, and Life Insurance as tax efficient alternatives.
Posted on 6:38 AM | Categories:

Turbocharge Your Savings With This Little-Known Tax Shelter

Michael Vodicka for Investing Answers writes: There are few places investors can turn to for a guaranteed return. The very idea of a no-risk return sounds almost mythical in this era of volatility and uncertainty.

Stocks and bonds carry no such distinction. Neither do commodities or currencies. One of the few vehicles that comes to mind is a money-market account, carrying a paltry yield as low as 0.25% that doesn't even keep pace with record-low levels of inflation.


That's why I am such a big fan of tax shelters. Even though most people don't think of tax strategies as an investment, that's what they are. And there is one little-known retirement account that blows the usual tax shelters out of the water.
What is it? I'll tell you in a minute.

Whether discussing an individual, small business or large corporationtaxes are frequently the No. 1 expense.

That means any investment in a tax-deferred entity and advanced tax strategies can have a huge impact on taxable income and thebottom line. And in an age when taxes continue to creep higher while interest rates remain at a record low, maximizing the benefit of tax-deferred accounts has never been more important.

But while the IRA (individual retirements account) and 401(k) are great vehicles for many investors, there is a little-known alternative that blows both of them away.

The current-year contribution limit for an IRA is $6,000 while the limit on a 401(k) is $17,500. But this super-charged IRA I am about to reveal leaves both in the dust with a whopping contribution limit of $49,000, or 25% of taxable income. What is it? It's called a SEP IRA.
A SEP IRA is a type of traditional IRA for self-employed individuals and small-business owners. (SEP stands for Simplified Employee Pension.)  Any business owner with one or more employees, or anyone with freelance income can open a SEP IRA for themselves or on behalf of their employees.

Tax-deductible contributions from the business on behalf of the participants are deposited into a SEP IRA and held in the employee's name. Employees of the business are not allowed to contribute -- that is the responsibility of the employer. Employees are eligible if they are at least 21 years old, have worked for the company in three of the last five years and received at least $550 in compensation during the year.

As an employer, a company is not required to make a contribution every year. But when an employer does decide to make a contribution, they are required to fund the SEP IRA of every eligible employee.  Each individual SEP IRA contribution is then capped at $49,000 annually, or 25% of total annual income.

The value of this super-charged IRA account cannot be overstated.

At the highest level, it is a huge tax shelter and amazing retirement vehicle for the owner of a company and the employees. The robust contribution limits of the SEP IRA far exceed those of the regular IRA and the small-business 401(k), which is usually loaded with hidden fees that make them extremely expensive.

That means the robust contribution limits for the SEP IRA can have a huge impact on taxes at the end of the year. In an environment of record-low interest rates where the 10-year Treasury note is yielding 1.6%, reducing your tax bill is no different than putting huge, no-risk returns in your pocket. And with robust contributions limits, the SEP IRA is an unparalleled vehicle for reducing taxes to put moneyback into your pocket.

For the standard corporate tax rate of 35%, a company with a $100,000 profit would pay $35,000 intaxes. But with a 25% contribution to a SEP IRA, the company's taxable profit falls to just $75,000, creating a total tax bill of just $26,000 and creating $9,000 in tax savings.

That is an immediate, no-risk return for any company, owner or employees taking advantage of the robust contribution limits of the SEP IRA.

In addition to significantly reducing taxable profits, a contribution to a SEP IRA can provide added savings by pushing companies and participants into lower tax brackets. Although regular C corporations pay a flat 35% federal tax, flow-through entities like an S-Corp and LLC have business owners paying corporate taxes at the personal-income level, creating an opportunity for small-business owners to fall into a lower tax bracket with a robust SEP IRA contribution.

Another great benefit of the SEP IRA is its wide offering of investment options. Unlike the 401(k), where plan participants are forced to choose from a narrow list of investment options that usually includes 15-20 mutual and target-date funds, SEP IRA investors can choose from a long list of individual stocks, commodities, currencies and ETFs (exchange traded funds).

Withdrawal limits on the SEP IRA look a lot like a 401(k) and regular IRA. Plan participants become eligible for regular distributions at the age of 59 ½. Minimum required distributions begin at age 70. Qualified distributions from the SEP IRA would be handled the same way as a regular IRA as taxable income.

The Investing Answer: Setting up a SEP IRA could hardly be any easier. After SEP IRA participants have selected a brokerage firm that provides the right mix of support and service, opening a new account usually takes less than 15 minutes and can be done electronically without any in-person meetings. Then the SEP IRA account holder has a huge universe of individual stocks, ETFs, commodities and currencies to choose from while picking up huge tax savings in this little known retirement account.
Posted on 6:37 AM | Categories:

Roth IRAs vs. 529s: A College-Savings Smackdown / Using a retirement account to save for college invites many potential pitfalls.

Adam Zoll for Morningstar writes: Question: Rather than use a 529 college-savings plan to provide for college expenses in the future, I plan to use a Roth IRA and invest the money in a target-date fund based on when my child will enter college. Any problems with this plan?

Answer: Using a Roth IRA to save for college can be an intriguing idea. One reason is that Roth IRA contributions can be withdrawn tax-free for any purpose. And while you'll typically face taxes and a 10% early-withdrawal penalty if you take out investment earnings from your Roth before age 59 1/2, the 10% penalty usually assessed for early withdrawals from an IRA is waived if funds are used to pay for college tuition, books, fees, and other qualified expenses.


Advantages of Using a Roth
Like a 529, a Roth IRA allows for tax-free growth of money invested in the account, and distributions are tax-free, assuming one meets certain requirements. In the case of tax-free 529 withdrawals, the requirement is that you use the money for qualified college expenses; in the case of Roth IRAs, you must be age 59 1/2 to withdraw your whole balance (contributions plus investment earnings) without taxes or penalties.



One clear advantage of using a Roth IRA to save for college is that the variety of investment options is far broader. Rather than being limited to funds available in a given 529 plan, a Roth IRA account holder can choose whatever mutual funds he or she likes, along with using individual stocks, bonds, certificates of deposit, and other investments. Traditional mutual funds also tend to have lower fees than those available in 529 plans, as discussed in this video. And the fact that Roth IRA contributions can be withdrawn at any time without taxes or penalties means they can be used for other purposes--for example, in an emergency. Contrarily, 529 funds that are not used for college-related expenses may incur taxes plus a penalty.


In most cases, parents would likely consider using their own Roth IRAs to help pay for college. But some parents might consider opening a Roth IRA for their child with the expectation that any funds not used for college remain in the account to give the child a head start on saving for retirement. The only caveat to this strategy is that each year the beneficiary must have earned income at least equal to the amount contributed to the IRA. So a child who only works a low-paying summer job, for example, may not make enough to invest the maximum $5,500 per year allowable for a Roth (or traditional) IRA.


Why a 529 Often Is a Better Choice
So now that you know how you can use a Roth IRA to save for college, should you do it? Before answering, consider some of the disadvantages to this strategy:



Diverts retirement resources: If you are depending on the Roth IRA to help fund your retirement you may be depriving yourself of years of tax-free growth and distributions by removing funds from the account to pay for college. By draining tens of thousands of dollars from a Roth you are giving up potentially even larger amounts, held in a tax-free account, when you retire. Remember: Your child can get loans to help pay for college, but no one will loan you money to live on during your golden years. Also, for many people without Roth 401(k) options, the Roth IRA is their sole chance to get retirement assets into the tax-free withdrawal column, and from that standpoint it's very valuable.


Lower contribution limits: Annual contributions to a Roth IRA are limited to $5,500, or $6,500 if the account holder is 50 or older. With a 529, contributions are limited only by the gift tax exclusion, which currently is $14,000 per year for gifts from one individual to another (individuals who don't think they'll ever be subject to the gift tax could potentially contribute even more). That means a married couple could contribute up to $28,000 per year with no gift tax consequences. And for 529s there's an accelerated gifting provision that allows an individual to use up to five years' worth of the exclusion in a single year as long as no more is given in the subsequent four years. That means a parent could contribute up to $70,000 to a child's 529 in a single year (or $140,000 if coming from a couple). Read more about this strategy in this article. For higher-income college savers thinking of sending their child to a pricey private school, or who simply want to maximize their tax-advantaged college savings, this higher limit is a clear point in favor of 529s.


No state income tax deduction: More than 30 states offer a tax deduction or tax credit for contributing to a 529 plan (usually this only applies to contributions to in-state plans). Contributions to a Roth IRA are not deductible on your state or federal tax return.


Glide paths may not suit college savers: You mentioned the idea of funding a Roth IRA with a target-date fund that has the target year set for when your child will enter college. This would basically mimic how the age-based portfolios available in many 529 plans work. Both target-date funds and age-based 529s slowly tilt their allocations away from equities and toward safer investment classes as the target event approaches, but one is not a substitute for the other. That's because the rate at which this rebalancing occurs--referred to as the glide path--differs greatly between age-based 529s and target-date funds.


In the case of a 529 the target event--starting college--usually has a very definite time frame and a short duration. It's likely that the student will need the money in a specific year and that it will need to last for three years (or four or five) after that. But retirement is often far less predictable. Many people who plan to work until age 65 find themselves retiring earlier because of health problems, or working longer because they haven't saved enough or simply because they enjoy it. Most significantly, a 529's glide path is designed for a four-year (or so) drawdown period. Because target-date funds often are used for retirement accounts, their glide paths are designed for a drawdown period that lasts for decades. As a result, 529 glide paths often feature much lower allocations to equities at the time the account is tapped than target-date funds do.


The chart below illustrates this difference. It shows the average 529 age-adjusted portfolio's glide path and the average glide path for "to" and "through" target-date funds. "To" target-date glide paths provide a changing allocation only up to the date of retirement, whereas "through" target-date glide paths continue changing the allocation well into retirement. The average 529 glide path currently has an allocation to equities of just 14% at its target event--when the beneficiary reaches age 18 and is most likely to start college. For the typical target-date fund, the allocation to equities is much higher at the target event. The average "to" target-date fund's glide path has an equity allocation of 35% at that point while the average "through" target-date glide path is 48%. Again, this is because the money in a target-date fund usually has to last through decades of retirement but also because new retirees have more time to ride out market volatility.



Using a target-date fund to save for college means that you risk being overallocated to equities just when the money is needed, with little time to recover should a major market sell-off occur. As a result, managing a college-savings portfolio inside a Roth IRA requires a far more hands-on approach compared with using an age-based 529 account, which wins points for its ease of use.




Financial aid implications: One final problem with using a Roth IRA to help pay for college involves financial aid. Although retirement accounts are not counted as assets in need-based financial aid calculations, distributions from them--even if taken from Roth contributions only--are counted as income the year after they are taken. (This is true whether the Roth is held in the parent's name or the student's.) So unless taking a distribution during the student's final year in school, when financial aid the following year is no longer an issue, this strategy could hurt financial aid eligibility. Assets in 529 plans also count against financial aid; however, they are counted as assets, which have a lower impact on financial aid than income does. 


Saving for college through a Roth IRA might make sense in some cases. But generally you're best off using the account for what it is intended for--saving for retirement. Should you need the money to help pay for college expenses at some point, it's nice to know it's available. But as a primary college-savings vehicle, it clearly has its drawbacks.
Posted on 6:36 AM | Categories:

Travel Reimbursement Policies: What you need to know! (Free IRS Sponsored Phone Forum to explain tax compliance & travel expenses)

In keeping with the IRS mission of providing America’s taxpayers with quality service by helping you understand and meet your tax responsibilities, the office of Federal, State and Local Governments will host a phone forum on May 28th to assist you in determining the proper tax treatment of various allowances and reimbursement payments.
To learn more, you are cordially invited  to attend the “Travel Reimbursement Policies: What you need to know!” Phone Forum.  This forum is tailored for federal, state and local government board members and employers, payroll and benefits administrators.
During this 60-minute presentation we will cover:
  • Accountable plan rules
  • Payment not covered under an accountable plan
  • Board member payments or stipends
  • Car allowance payment policy
  • Meal allowances
  • Fringes benefits
You can register at Travel Reimbursement Policies Phone Forum. Please register as soon as possible because space is limited. 
If you have any travel reimbursement or allowance payments questions, please e-mail them to:te.ge.fslg.outreach@irs.gov by May 21, 2013, and they will try to answer them during the phone forum. Please use the subject line: Travel Reimbursement Policies.
Posted on 6:36 AM | Categories:

IRA Financial Group Presents FREE Webinar on Retirement Tax Planning Opportunities for 2013 & Beyond on Wednesday, May 22, 2013 at 7:00PM EST

IRA Financial Group, the leading facilitator of Self-Directed IRA LLC and Solo 401(k) Plans, announces a new free webinar as part of its educational series on the area of tax planning opportunities available for individuals and small business owners with retirement funds. The free webinar will be aimed at offering investors an extensive array of facts and information involving using Self-Direted retirement plans to maximize retirement and tax benefits. 

“The free webinar is designed to provide investors with a detailed overview of the Self-Directed retirement plan topic being discussed,” stated Adam Bergman, a tax attorney with the IRA Financial Group. “The Retirement Tax Planning Opportunities for 2013 & Beyond webinar is designed to provide investors with the tools necessary to understand the tax rules involved in Self-Directed IRA and Solo 401(k) retirement plans and how they can maximize their 2013 tax return,” stated Mr. Bergman.

With a new Medicare tax and uncertainty over tax rates for high-income individuals starting in 2013, learn what planning opportunities may apply to you. The Webinar will focus on a number of tax planning opportunities available for individuals and small business owners with retirement funds for 2013 and beyond.

The Webinar will be given by Adam Bergman, Esq, a tax attorney with the IRA Financial Group. The webinar will focus on the following topics:

·    The current environment – uncertainty rules 

·    Impact of the Medicare taxes as well as Congress’ actions with respect to the Bush-era tax cuts 

·    Deferring income in the age of increasing tax rates

·    How your IRA or Solo 401(k) Plan can help you minimize tax on your 2013 tax return 

·    Combating higher tax rates with a Roth IRA or Roth Solo 401(k) Plan 

·    In light of higher income taxes - should I consider a Roth conversion? 

·    Tapping into your retirement funds without tax or penalty 

·    Retirement savings is the best answer to higher income tax rates

To sign up for the free webinar, please click on the link below:
Posted on 6:36 AM | Categories:

Your Next IRS Political Audit / The tax agency is getting vast new power in health care.

The Wall St. Journal writes: Even as the politicized tax enforcement scandal expands, the Internal Revenue Service continues to expand its political powers thanks to the Affordable Care Act. A larger government always creates more openings for abuse, as Americans will learn when the IRS starts auditing their health care in addition to their 1040 next year.
Over the last decade or so the tax agency has stretched its portfolio and become an enforcer and decision-maker for government benefits and programs. Three years ago, National Taxpayer Advocate Nina Olson, who operates within the IRS, presciently noted that ObamaCare is "the most extensive social benefit program the IRS has been asked to implement in recent history."
This March the IRS Inspector General reiterated that ObamaCare's 47 major changes to the revenue code "represent the largest set of tax law changes the IRS has had to implement in more than 20 years." Thus the IRS is playing Thelma to the Health and Human Service Department's Louise. The tax agency has requested funding for 1,954 full-time equivalent employees for its Affordable Care Act office in 2014.
Instead of going after tax cheats, these bureaucrats will write and enforce tax regulations for parts of the economy in which they have no core competence. For example, do ski instructors or public school teachers count as seasonal workers? How long is a "full time" work week? Is it 40 hours, or 30?
The IRS will also dispense ObamaCare's insurance subsidies since technically they're "advanceable" tax credits, i.e., transfer payments made prior to filing a tax return. The IRS will also police the individual mandate-tax to buy health insurance, as well as the business penalties for not offering Washington-approved coverage to employees.
To monitor compliance with these rules, the IRS and HHS are now building the largest personal information database the government has ever attempted. Known as the Federal Data Services Hub, the project is taking the IRS's own records (for income and employment status) and centralizing them with information from Social Security (identity), Homeland Security (citizenship), Justice (criminal history), HHS (enrollment in entitlement programs and certain medical claims data) and state governments (residency).

The data hub will be used as the verification system for ObamaCare's complex subsidy formula. All insurers, self-insured businesses and government health programs must submit reports to the IRS about the individuals they cover, which the IRS will cross-check against tax returns.
Good luck in advance to anyone who gets caught in this system's gears, assuming it even works. Centralizing so much personal information in one place is another invitation for the IRS wigglers in some regional office—or maybe higher up—to make political decisions about enforcement.
A small harbinger: The original 61-page application for ObamaCare subsidies (since junked) asked about voter registration and invited beneficiaries to sign up then and there. What does that have to do with affordable health care?

Or take the recent HHS disclosure that Secretary Kathleen Sebelius has been beseeching the industries she regulates like insurers, hospitals and drug makers for "independent" donations. Ms. Sebelius will then take this money and give it to third-party groups—many affiliated with the Obama Administration—that will encourage people to sign up for ObamaCare.
The distinction between soliciting and demanding is especially vague when the IRS is the bad cop, with millions of dollars on corporate balance sheets potentially at risk. For instance, the IRS is supposed to apportion the annual $8 billion tax on health insurers according to market share—but that depends on how the IRS defines market share. Giving in advance to Ms. Sebelius can quickly begin to look like protection money to avoid corporate tax retribution.
Putting the IRS in charge of a political program inevitably makes the IRS more political. Since the Affordable Care Act converts every health question into a political question, maybe there's a better candidate?


Posted on 6:35 AM | Categories:

Using Intrafamily Loans / how an intrafamily mortgage loan can work.

Emily Boothroyd for the Wall St. Journal writes: A lot of wealthy clients have trouble figuring out the best way to support their children financially, while still teaching them .
Often the first big lesson in financial responsibility for a client's child is buying a first home. This a great moment for parents to step in and assist children, but it's also an opportunity to pass along some of their financial wisdom.
One way to do that is through an intrafamily mortgage loan. These loans tend to have much lower interest rates then the equivalent market rates--around 3% for loans amortized at least nine years or longer, which gives children enough time to pay back the loan without generating a lot of unnecessary interest costs.
Here's an example of how an intrafamily mortgage loan can work.
The daughter of one of my wealthy clients wanted to buy a $1 million home for her and her boyfriend. The father didn't want to expose his daughter to the market rate for mortgages, but he also didn't want to just gift the money outright--even though he had the means to do so.
So I suggested he lend his daughter the money through an intrafamily loan instead. We amortized the loan for 30 years at 3%, which amounted to only about $3,000 a month in interest payments. She opted for a balloon payment structure, which means she pays only interest at first; making flexible principal payments as she chooses overtime until the 30 year term is over.
The financial risk and burden to the daughter was much less than if she'd gone to a bank, but she still had the responsibility of paying for her home. In this case the loan was a safe bet because the daughter was earning $125,000 a year on her own, and she had access to a $1.5 million trust fund, which provides her with $5,000 every month. If she chooses to pay the assets off all at once down the road, she'll have that option.
There are downsides to making this type of loan. When you make a loan to a family member to buy property, you do not have a mortgage. In other words, you don't have the ability to foreclose on the property like a mortgage lender could. You have a promissory note that you can sue to enforce, but you don't have a secured interest in the property itself--although you can create one with the assistance of an attorney.
Thinking of forgiving the interest payments from your children each year as part of your annual exclusion gifting? Think again. This will cause the entire loan to become a gift in the eyes of the IRS and you could end up unintentionally eating away at your lifetime gift exemption.
While you don't have to be extremely wealthy to make a loan to your children, I always adhere to the oxygen mask example with my clients: Provide for your safety and well-being first, and then attend to theirs. Consult with your planner to confirm that the low interest rate loan won't adversely impact your cash flow.
Posted on 6:35 AM | Categories:

Taking a Closer Look at a Proposal to Limit Tax-Deferred Savings

Paul Sullivan for the Wall St. Journal writes:  IN his 2014 budget, President Obama proposed limiting how much money a person could put into a retirement account on a tax-deferred basis.


The limit would be the amount needed to buy an annuity that pays a retiree the maximum allowed under a defined benefit plan. That is now $205,000 a year, which would translate to a balance limit of $3.4 million for someone who is 62, according to the administration. The formula would factor in not just defined-contribution plans, like 401(k) and individual retirement accounts, but also defined-benefit plans, or pensions.
The $3.4 million threshold seems to be a fairly large number that would affect few people. It would also raise relatively little money in taxes, about $9 billion over 10 years. But it has caused consternation in the $17.9 trillionretirement world, in part because that limit may not be as high as it initially seemed and could end up affecting a lot more people.
Looking at the initial White House numbers, the Employee Benefit Research Institute said that extrapolating from its database of 24 million people with 401(k) accounts from 60,000 plans and 20.6 million I.R.A.’s, just 0.1 percent of those 60 or older at the end of 2011 had balances exceeding $3 million. (What is difficult is saying how many people are affected, because some have multiple retirement accounts.)
Those numbers rose when the institute projected the percentage of young workers, now between 26 and 35, who would be affected by age 65. Making assumptions about returns, inflation and job stability, up to 1.5 percent of workers would eventually hit the limit if it were $3 million calculated at 65.
When more realistic interest rates were used, those in late 2006, for example, it would have taken only $2.2 million to buy an annuity that would pay out $205,000 a year in retirement. This would increase the number of current 401(k) accounts affected to nearly 3 percent. For younger workers, at the 2006 interest rates, 5.2 percent would be affected by age 65. That is higher but still not an overwhelming number of people.
But the number potentially affected grew considerably when the institute looked at the fine print of the White House budget proposal, popularly known as the Green Book. There the Treasury Department said the amount needed to buy that annuity worth $205,000 a year at 62 would be calculated at the end of each year and apply to everyone’s contributions for the next year, regardless of age.
“For a taxpayer who is under age 62, the accumulated account balance would be converted to an annuity payable at 62, in the form of a 100 percent joint and survivor benefit using the actuarial assumptions that apply to converting between annuities and lump sums under defined benefit plans,” it said.
Translation, according to the institute: If you’re young and don’t have anywhere near millions socked away for retirement, you still could be hurt by the limit, and right away. Jack VanDerhei, research director at the institute, said the proposed limits could affect a lot more people because, simply put, the younger you are, the less money it takes to buy an annuity that would pay out $205,000 a year starting at age 62.
At current rates of 4 percent, which are historically low, a 31-year-old with $1 million in his retirement accounts would bump against the cap to buy that annuity. However, if the assumed rates (used to calculate the future value of an account today) were 6 percent, then a 33-year-old with $500,000 in her retirement accounts would hit the cap, meaning no more tax-deferred savings that year.
In an extreme case, a rate of 8 percent would mean a 25-year-old with $131,806 in a retirement account would hit the cap, though not many 25-year-olds have that kind of nest egg.
Under these assumptions, Mr. VanDerhei said that from 11.3 percent of accounts under current rates to 20.1 percent at an 8 percent rate could be affected. If defined-benefit plans were factored in, he said, the percentage affected would go even higher.
The picture that Mr. VanDerhei’s calculations paint from the Treasury explanations are far bleaker than the White House proposal made them seem. But who should be worried about these proposals and why?
First, it is important to note that these proposals probably will face stiff opposition. Any discussion of retirement savings that suggests “taking away tax-advantaged investing and capping investment amounts is detrimental to the system and society as a whole,” said Robert L. Reynolds, president and chief executive of Putnam Investments and one of the people considered responsible for popularizing the 401(k) plan.
“Right now elderly poverty is at an all-time high,” Mr. Reynolds said. “If that tells government anything, it’s we should do more to encourage saving for retirement.”
Those who support the cap on the tax deferral say that large retirement plans function like tax shelters, and they cite Mitt Romney’s multimillion-dollar retirement plan. Jared Bernstein, former economic adviser to Vice President Joseph R. Biden Jr., made the argument on his blog that without the tax deferral the wealthiest Americans would still save, so giving them a tax break was a wasted expenditure. But most Americans should be worried about not having enough money to retire comfortably, not a limit on the tax deductibility of their contributions.
According to a report published early this month by Deloitte Consulting, 401(k) balances hit a record high in 2012, with an average amount of $85,000. The report added that only 12 percent of the companies that sponsored 401(k) plans said they believed that their employees were financially ready for retirement.
BrightScope, a company that rates 401(k) plans, put the average balance lower, at $60,000. Brooks Herman, the company’s head of research, said that of the 58 million Americans with 401(k) plans he could only find a couple of hundred with balances over $3 million.
For small-business owners and their employees, the limit on retirement plans would present another concern. “If you’re a small-business owner and you have the ability to save but you know you’re going to be capped, are you going to provide the same benefit to all your employees?” Mr. Reynolds asked. “That may cause small-business owners to say, ‘I can’t do enough savings so I’m not going to have a plan.’ ”
To make matters more confusing, employees and their employers could contribute one year and then not for several years depending on many factors, like how the portfolio performed, the I.R.S.’s rate or cost of living adjustments. Mr. VanDerhei said he could imagine large companies and many medium-size ones having the human resource departments to figure this out, but he said many small businesses might be tempted to forgo setting up or continuing 401(k) plans.
Even if this proposal never comes to pass, many advisers were worried about the signal it was sending. Richard Scarpelli, co-head of advanced planning at UBS, said he had initially dismissed the proposal as irrelevant given its unlikelihood of passage until he saw how angry it made people, including his wife, a certified public accountant. Mr. Scarpelli said he was concerned that it was sending the wrong message about saving for retirement, particularly to a majority of people for whom the cap will never come into play.
Just floating a proposal like this is damaging to investors psychologically and a distraction from the bigger issues concerning retirement, said Tim Steffen, director of financial planning at Baird, a wealth management firm.
“Let’s be clear, $205,000 a year is a lot of money, and most people are not going to have it in retirement,” Mr. Steffen said. “But they’re asking, ‘Why is the government telling me what is the right amount I should have saved for retirement?’ ”
One fear is that this proposal is just the first step in changing the tax treatment of retirement savings across the board. Mark Luscombe, principal federal tax analyst at CCH, a publisher of research and software for tax lawyers and accountants, pointed to the Tax Reform Act of 1986, which instituted an excise tax of 15 percent on withdrawals that exceeded $112,500 a year. The tax was repealed in 1997, with lawmakers concluding it was unnecessary “and may also deter individuals from saving.”
Much the same argument is being made today.
Posted on 6:35 AM | Categories:

Roth-style investing in TSP continues to grow

Eric Yoder for the Washington Post writes: Federal employees are increasingly taking to Roth-style investing in their retirement savings program, although Thrift Savings Plan accounts remain heavily weighted toward traditional investments, according to the TSP.
The TSP says that in the year since Roth investing became available, both the number of participants using that option and the amount on investment have grown every month, to 188,000 accounts and $355 million through April.
“We are pleased that our participants have evaluated their options and taken advantage of this opportunity,” TSP Executive Director Greg Long said in an e-mailed statement. “The Roth TSP option is an important tool for TSP participants. They can manage their retirement income by providing greater choice in the tax treatment of contributions now and in the future.”
The TSP, a 401(k)-style plan for federal employees and uniformed personnel, started accepting Roth-style investments last May. However, many participants could not make such investments until months later because their payroll providers weren’t ready. By year-end 2012, 101,000 participants had $130 million in Roth investments.
In Roth-type investing, money is invested on an after-tax basis and is tax-free on withdrawal, as are its associated earnings so long as certain conditions are met. Traditional investments are made with pre-tax money that is taxable along with its earnings on withdrawal. Participants can make new investments into one or the other type of balance or both, but existing funds in one cannot be converted to the other.
Agency contributions for employees under the Federal Employees Retirement System are made in the traditional form regardless of whether how individual invests.
There are about 4.6 million TSP accounts, including federal employees and uniformed personnel and those who separated for retirement or other reasons but left their accounts in place. Through April, they had a combined $352 billion on investment, meaning that Roth balances accounted for about 1 percent.
The TSP says that about 40 to 50 percent of similar employer-sponsored retirement savings plans offer Roth-style investing and that in those plans, about 6-10 percent of participants make that type of investment. The TSP’s Roth participation rate is 4 percent after the first year, a time in which it has added Roth information and online calculators to its site, www.tsp.gov.
The TSP said in the statement: “The TSP will continue to provide participants and agencies with educational materials to help them understand their TSP options but, as with all tax matters, participants should seek the advice of their qualified tax or financial advisers for answers to questions pertaining to their specific tax situation. Contributing to Roth TSP may not be an appropriate choice for everyone’s financial situation.”

Posted on 6:34 AM | Categories:

Expensify takes on Freshbooks & Bill.com with invoicing & billing features

Sean Ludwig for VentureBeat writes: Popular expense report startup Expensify has introduced invoicing and billing clients from inside its cloud-based dashboard, the company said today.  Expensify was founded in May 2008 with the promise of offering “expense reports that don’t suck.” It’s main mission is to make the expense report and reimbursement process easier for companies with relatively simple web, iOS, and Android apps. The company has attracted 1.4 million users from more than 200,000 companies to date.

Expensify CEO David Barrett told VentureBeat that this is a “major milestone” for the company because it is the first time it has launched a feature not directly related to expense reporting.

The new feature will compete directly with Freshbooks and Bill.com, two companies known for cloud-based billing. What makes the new feature so handy is that Expensify users can now take expense reports you have created or been submitted to you and can re-bill them as an invoice to clients.

If clients already use Expensify, payment options for invoices and bills are the same as the ones offered for expense reports, including ACH Direct Deposit, PayPal, and even Bitcoin.

“Expensify’s addition of invoicing and bill processing might seem odd to an outsider,” Barrett said via email. “But inside the industry, we’re all jockeying for advantage in a bigger long-term game: becoming the next Intuit.”  San Francisco-based Expensify has raised $6.7 million in funding from investors including Hillsven Capital, Baseline Ventures, SV Angel, and Travis Kalanick. 
Posted on 6:34 AM | Categories:

Estate Planning Strategies After ATRA 2012 / Practice suggestions you can conveniently find on the internet

Donald Kelley for Wealth Management writes: The internet provides a rich source of discussions and suggestions relative to future of the estate planning.  It particularly makes available a number of constructive discussions as to the direction of estate planning practices after the enactment of The American Taxpayer Relief Act of 2012 (ATRA).
As stated by Marty Shenkman in “Heckerling ... It's a Wrap” (Wealth Management.com, Jan. 24, 2013) planners need “…to service moderate wealth clients in light of the new reality of estate planning (that is, estate planning sans the tax “driver”), while still being able to serve the wealthier clients in need of more traditional planning to minimize the estate tax they continue to face.”

Tax planning areas still needing attention
In moderate sized estates, the domination of estate planning by instinctive reaction to the federal estate tax should give way after 2012 to a renewed emphasis on the intra-family disposition of property and its effect on family relationships and needs.  The fundamental core issues of estate planning remain those of assuring solid family relationships and business continuity. 
From the estate tax standpoint, value freezing arrangements designed to avoid estate values increasing into the taxable area and conventional marital deduction/credit trust arrangements to assure availability of the applicable exclusions of both spouses should be prudently applied. The deceased spouse’s unused exemption amount was extended by ATRA for years after 2012, but clients should not merely rely on portability and neglect appropriate estate planning.
Given the reduction of impact of the federal estate tax after 2012 on many previously taxable estates, the planner may need to shift focus to other tax issues.  Planning for achieving the maximum step-up in basis of family assets at death will become an area of importance.  Business entities that were designed to result in value adjustments that mitigate the impact of the federal estate tax may no longer be necessary and, in some family circumstances, should be eliminated.  Such entities reduce the step-up in basis at death because of discounted values of the decedent’s interests in them and provide only a step-up in the basis of the entity interests, rather than a step-up in the basis of individual assets.  In the case of depreciable property, such individual asset step-ups in basis result in immediate income tax benefits. 
Other income tax issues, such as the effect of the higher income tax rates set by ATRA, will need to be addressed by the planner.  For suggestions as to income tax planning opportunities, see Keebler’s “Tax Planning for 2013 Under the New Laws” (The Ultimate Estate Planner 2013).  As stated by Bob Keebler in the introduction to his Teleconference of April 24, 2013(Ultimate Estate Planning):
Clients (and prospects) just aren't as motivated to do estate tax planning these days. But with income tax rates up, deductions being phased out and, on top of all this, now a 3.8 percent surtax, people are very motivated to reduce their income taxes!
And, as an estate planning professional, you've got lots of overlooked income tax reduction weapons in your arsenal (that you previously used to reduce client's estate taxes)—like trusts, partnerships, LLCs and other entities.
Another planning change will be that life insurance purchased with the purpose of funding estate tax may require reassessment from an income tax planning standpoint.  “Five Insurance Planning Insights from Heckerling,” AALU Washington Report, Bull. No. 13-06 (Feb. 6, 2013) discusses life insurance planning in the higher estate tax applicable exclusion environment after ATRA, the utility of life insurance in higher value estates and likely future federal tax legislation targeting life insurance planning techniques.  See Charles Ratner & Lawrence Brody’s “Life Insurance After ATRA,”in the April 2013 issue of Trusts & Estates, which addresses the opportunities and increased flexibility resulting from ATRA.  Also see Shenkman’s “Insurance as the Key Ingredient in the ‘New’ Estate Planning” (The Ultimate Estate Planner 2013) for a discussion of life insurance techniques as planning opportunities after ATRA.

The estate tax isn’t everything–“real” planning for property and business succession
Jeff Scroggin & the Future of Estate Planning” (NAEPC, Leimberg Information ServicesJuly 2010), although written before the passage of ATRA, provides interesting insights on sustaining an estate planning practice in spite of increasing exemptions.  The author stresses that estate planning is not fundamentally about taxes, but about the people involved in the clients’ estates and sorting out their relationships as successors.  Scroggin points out that on the plus side of the estate planning practice are the explosion of wealth, the elder boom and client mobility.  As he says:  “Clients need the practical, insightful advice of seasoned professionals who understand  not only the legal and tax complexities of estate planning – but perhaps even more, the personal (and often subliminal) undertones that underlay so much of what we do for our clients.”
As it happens, most of the commonly applied estate tax control techniques and devices have been consistent with these goals, which will help transitional planning.  Families should be conscious of the need for continued planning, even though they don’t perceive a threat from the federal estate tax. 
Jacobs’ “Morphing Into the New Age of Estate Planning” (Forbes 1/15/2013) discusses the effect of ATRA on the estate planning practice, including elder law issues and “real” estate planning for non-taxable estates. 
Gage’s “Estate Planning as a Family: A Collaborative Approach”(BMC Associates, fromPassages, a publication of the National Center for Family Philanthropy, 2005) as summarized and discussed in “Collaborative Estate Planning”(BMC Associates 2013) stresses the need for family collaboration in addressing intergenerational succession of family property and the importance of whole family planning for property transition.  As the estate planning emphasis moves from death tax planning to the nuances of succession planning, such an approach may become more necessary than ever.  See, “Collaborative estate planning”–Havens Technology-Probate 27 Probate & Property 56 (March/April 2013 – for ABA members)
PDI Global 2013 estate planning guides, from ThomsonReuters, as updated for ATRA, are available in a choice of electronic and print formats.  These guides for client education stress the non-tax issues of estate and succession planning and the need for families to address them. 

Observations on estate planning after 2012
Martin Shenkman’s “2013 Tax Act Impact on Estate Planning -- Taxpayer Relief Act of 2013, Fiscal Cliff and Estate Planning, Steps to Take to Secure your 2012 Gift Planning”(LawEasy.com) stresses the things that still need to be done, even though the client’s initial reaction to ATRA may be that it eliminates further planning.  The author stresses that all taxpayers still need to undertake planning for business succession, income tax and asset protection.  The author also includes suggestions for both moderate wealth and high-net-worth taxpayers and stresses the continuing need for follow-up and the implementation of previous planning. 
Post-2012 planning has been and will further be addressed (including letters to clients) in Marty Shenkman’s newsletter available fromshenkman@shenkmanlaw.com. A model update letter to clients is the 2013 Tax Update Letter from Hopkins & Carley.
Steve Akers’ “Musings on Heckerling 2013” from ACTEC include “The Estate Planner’s ‘Playbook’ for 2013 and Going Forward Under the Post-ATRA ‘New Normal’ of Permanent Large Exemptions and Portability.”  Akers touches upon basis adjustment strategies, gift planning issues and strategies, GRAT strategies, installment sales to trusts, partnerships and LLCs, high-net-worth estates and many other topics for the planner in the post-ATRA world. 
CPA Practice Advisor, “Estate Planning After the Fiscal Cliff: Top 10 Steps”(McManus & Associates, Jan. 31, 2013) discusses the remaining planning issues under federal estate tax law and the possibility of increasing state death and gift taxes.
Megan Leonhardt’s “Taking the Reins from ‘Big Law’” (Wealthmanagement.com, Feb. 28, 2013) looks at the effect on law firms of the continuing need for estate planning and the resistance of clients to the large hourly rates generated by other fields of practice, especially when there’s no imminent estate tax impact.  The author suggests that smaller firms and boutique shops will have an advantage in the future.

The potential for future estate tax changes
It’s axiomatic that, as long as Congress meets, the “permanent” applicable exclusion and estate tax rate fixed by ATRA are subject to revision, as discussed in Ron Aucutt’s, Capital Letter No. 33, “The Administration’s Fiscal Budget Proposals.”  The Budget Proposals as reflected in the Treasury Department’s “Greenbook,” formally known as the General Explanation of the Administration’s Fiscal Year 2014 Revenue Proposals, which calls for the applicable exclusion to be returned to the 2009 levels of $3,500,000 for estate and generation-skipping-transfer taxes and $1,000,000 for gift taxes beginning in the year 2018, with no indexing for inflation and a tax rate of 40 percent.  Clients should always be cautioned that the world of politics is uncertain, action of this type by a future Congress is possible and basic estate tax planning should continue to be part of the clients’ estate plans.  Specific continuing administration proposals for fine- tuning the federal estate tax are reviewed in Clarfield’s“Estate Planning Moves BEFORE Sequestration is Resolved”(Forbes 3/08/2013), which discusses proposals relating to grantor trusts, grantor retained annuity trusts and entity discounts.  See the ThomsonReuters Checkpoint Special Report on the President’s Fiscal Year 2014 Budget individual and business tax provisions.
Posted on 6:34 AM | Categories: