Financial Symmetry News & Views

Archive for June, 2009

The following article is written by Financial Symmetry’s Will Holt, CPA.

Distributions from your retirement accounts are not required by the IRS for 2009 but does that mean that they aren’t necessary?  Congress determined that the 2009 waiver of Required Minimum Distributions was a way for retirees to shore up their retirement savings by keeping them invested rather than liquidating at depressed prices.  This makes sense except for a few minor details like making sure that bills are paid and having food on the table.  Many folks simply are not in the position to afford doing without their distributions from pre-tax retirement accounts.  For those who have other sources of cash flow, this waiver does present opportunities for tax planning purposes.

One of the things we tend to focus on during the tax planning process is the marginal tax rate; or, the rate at which the last and next dollar of taxable income will be taxed.  A common example of how the marginal rate can be especially severe for retirees is in the area of Social Security benefits.  The tax code allows that below certain income limits Social Security benefits are not subject to income tax.  However, once those limits are exceeded a percentage of Social Security benefits must be added to the taxable calculation.  This inclusion of Social Security benefits can effectively create a hidden, higher marginal tax rate.  An opportunity that the waiver of RMD presents is in managing the amount of income so that the addition of Social Security benefits is mitigated.

Tax planning often requires looking at multiple tax years in order to reduce the overall tax effect.  Care must be taken so that the efforts related to an earlier tax year are not undone by future cash flow needs that push subsequent tax years into unintended marginal tax rates.  If, for instance, a large expenditure (i.e. new car, medical costs, etc.) is looming on the horizon it may make sense to take a 2009 IRA distribution – even though it is not required – if it allows you to stay away from a higher tax bracket in 2010.  There can be many complicating variables involved in the multi-year analysis, including itemized deductions and the alternative minimum tax to name just a few.  However, the cumulative tax savings can certainly make it a worthwhile exercise.

Required Minimum Distributions are not eligible for Roth conversions so the 2009 RMD waiver provides an opportunity for those taxpayers whose adjusted gross income (not counting the amount converted) does not exceed $100,000.  The benefit of a Roth is that its earnings grow tax-free and the assets of the account will not be subject to required minimum distributions during your lifetime.  There will be taxes due on the amount that is converted, however, so it is important to pay close attention to the projected marginal tax rate during the tax planning process.

Tax planning is an often overlooked and underutilized part of the annual cycle of tax compliance.  Too often folks miss out by waiting until after December 31 to start looking at their tax situation.  By then it’s often too late.  The RMD waiver is another opportunity for some taxpayers to get it right.

Please contact us with questions regarding your investment accounts and to ask what the new RMD wavier means for your personal situation.

Article published on FiLife.com by Financial Symmetry’s Chad Smith, CFP.

If you haven’t noticed, budgeting is hip these days. This is thanks to the economic uncertainty caused by the stock market’s second worst bear market in the last 100 years. People’s fear of losing their jobs and significant losses in their investment accounts has shifted the importance of financial planning and knowing how to budget back into the spotlight. But there are still people resistant to both of these ideas.

Here are some common excuses, and why they can hurt your savings:

• Not Good With Numbers. It doesn’t take a mathematician to implement a budget. You just need an understanding of how much money is coming in and which directions it is flowing out. You could use an online tool or scribble down your monthly income minus your fixed bills every month to get an idea of what’s left for discretionary spending. When creating a budget worksheet, it’s important to consider 12 months of expenses in your budget, as there is often a lot of variance month to month. Using a year of spending targets also provides the framework to make corrections when you have a few months go over your budgeted amounts.
• Don’t Have Time To Budget. If you have 15 minutes every two weeks you can manage a budget. Most banks now allow you to download your spending data into budgeting software in a matter of minutes. If you can limit your spending to two accounts (checking and credit card) you will also cut down on time. Spend a few more minutes on categorization and you’ll be able to tell if you need to tighten up for the second half of the month or if you are on track with your targeted spending patterns. Conducting regular monthly reviews will go a long way in helping you to have a successful household budget.
• Buy Now. Save Later. Sound familiar? Spending now instead of later is a major roadblock to implementing a budget. This behavior will eat completely through any shell of a budget discipline you attempt to create. The danger with the “buy it now” mentality hangs on the standard of living concept. Most of us become comfortable with a certain level of spending and it’s a lot harder to lower that standard once established than it is to increase it. Don’t let bad spending habits dictate your budget decision-making.
• We Only Live Once. While this is a true statement, it amounts to a hill of beans when you actually need to access savings. As the latest economic crisis has clearly proven, a job loss can wreak financial havoc when you don’t have an emergency fund. Spending like there is no tomorrow will leave you ill-prepared if you find yourself unemployed. This is why it is imperative when setting up your spending categories to carefully consider how much will go towards your savings accounts. Setting up a monthly draft from your primary checking account is a good way to build your emergency fund while also providing a natural discipline for your spending.
• Spending Is More Fun! There is no doubt the instant gratification you get from purchasing an expensive meal out, a new big screen TV or a trip to Europe is very satisfying. But making those purchases within the parameters of a budget doesn’t drain all the fun. Budgeting tools simply help you to take control of your overspending habits. The power of budgeting comes from knowing where you stand and recognizing the next steps you should take to achieve your targets. When setting your targets, make sure you carve out the extraordinary and the semi-regular expenses that could ruin your motivation as well. Remember, delayed gratification is a budget’s best friend!

Article published on FiLife.com by Financial Symmetry’s Allison Berger, CFP.

Naturally parents want to provide the best for their children. For many parents today this means paying for them to earn a college degree. This is an admirable goal, and one that their children will greatly appreciate when they graduate free from student loan debt. But what does saving for the ever-rising cost of college tuition mean for their other lifestyle goals?

529 plans have become the gold standard of saving for college. They are a great choice because they do not have an annual contribution limit or income threshold. They also allow tax-deferred earnings and tax-free withdrawals for qualified education expenses. While these features are beneficial, 529s also have some negative aspects. The biggest drawback is that the funds must be used for college. Therefore if your child receives a scholarship, decides not to go to college, or you have excess money left over in the 529 after they graduate, your earnings will be subject to federal and state income taxes in addition to a 10% penalty. This emphasizes the importance of not over-funding 529 plans.

While the 10% penalty is enough to discourage over-funding, parents should also consider how they are planning for their own future. Too often retirement planning is put on the back burner until children are off the family payroll. However, student loan options are abundant; retirement savings loans…not so much. Another variable is that parents may have enough income by the time their children go to college that they can pay their expenses out of cash flow.

For these reasons I encourage parents to consider maxing out contributions to their own retirement accounts before funding 529 plans or other education savings accounts. If you are eligible, the Roth IRA is a tool that can work toward both goals. Roth IRAs are funded with after-tax dollars and provide for tax-free withdrawals in retirement. While this is a retirement account, a feature often overlooked is that you can always withdraw your contributions from a Roth IRA tax and penalty free. This makes it a great tool for college planning as well because you can plan to max out contributions every year and withdraw those contributions for use toward college expenses if necessary. In the event you earn enough income that you don’t need to make any withdrawals or your child receives a scholarship, you can leave that money to grow for your own retirement.

The goals and resources of every family are unique. To develop a savings plan most appropriate for your personal situation, seek the guidance of your financial adviser.

Summary written by Financial Symmetry’s Bill Ramsay.

Hyman Minsky was an economist who developed a theory about financial markets that seems to nearly perfectly describe the path of this crisis. In fact he wrote extensively about it in 1986, right before Greenspan became our Fed chairman. It is too bad that Greenspan apparently hadn’t read Minsky or didn’t put enough weight on his teachings or the problem might not have become so large.

Currently there are countless descriptions, speculations and rantings about the causes of the financial crisis and what should or should not be done. Many are good. Many more are bad, often due to ideological beliefs and/or lack of understanding money and financial systems.

The following article is perhaps the best I have read so far. It comes from Paul McCulley of PIMCO. In it he describes how Minsky’s hypothesis applies to the current crisis.