How to Invest for Education Expenses

May 25, 2017

Today, I conclude my investing series with how to invest in an education savings account. The first question is whether you even should at all. Before investing for education, make sure you have adequate emergency savings, no high interest debt, and are on track for retirement. This may sound selfish but there’s no financial aid for your retirement. If you’re ready to save and invest for education, here are some things to consider:

How good is your state’s 529 plan?

529 plans are state-based education savings plans in which the earnings can be used tax-free for post-secondary education expenses (but otherwise subject to taxes and possibly a 10% penalty) and you’re not limited to the state in which you live or the state in which your child goes to school. There are a couple of things to consider in deciding whether to use your state’s plan. The first is whether your state offers a state income tax deduction or lower expenses for residents contributing to the plan. The second is the fees charged by the mutual funds in the plan.

One good resource to consider is financial expert Clark Howard’s guide to 529 plans. The site has an “Honor Roll” of plans to contribute to if you live in one of those states and a “Dean’s List” of the overall best plans if you don’t. It also includes some suggestions on which specific investments in the plan are low cost, including “age-based portfolios” that are like target date retirement funds in that they are fully-diversified and automatically become more conservative as your child approaches college age.

Want more flexibility?

If your state isn’t on the “Honor Roll,” you may also want to consider contributing the first $2k per year (the contribution limit) to a Coverdell Education Savings Account (ESA), which also allows tax-free earnings for education (and otherwise subject to taxes and a 10% penalty as well) but gives you more flexibility in how the money is invested and used tax and penalty-free (includes private K-12 and other expenses like books and even a computer). Here is a list of low-cost Coverdell ESA providers. (Coverdell ESAs have income limits on the contributors but you can easily avoid this by gifting the money to your child and having them contribute it to the account.)

Another option is to open a custodial account in your child’s name. This allows you to invest it in anything and use the money in any way penalty-free for the child’s benefit (not just qualified education expenses). The first $1,050 of earnings each year would be nontaxable and the next $1,050 would be taxed at your child’s rate. Be aware that any earnings over that would be taxed at your rate though. Money in your child’s name can also reduce their financial aid eligibility more than other savings and they can legally use it for any purpose once they reach your state’s age of majority.

How soon is your child going to school?

If your state offers a state income tax deduction and your child is going to school soon, you may want to contribute to a 529 even if your state isn’t on the “Honor Roll.” That’s because the value of the tax deduction can outweigh the higher fund fees in the short term. In fact, you can even contribute to the plan to get the state tax deduction and then immediately use the money for education expenses. In that case, you won’t even be investing the money at all.

If you’re still not sure which option is best for you, you might want to consult with an unbiased financial planner. See if your employer offers a financial wellness program or consider hiring a fee-only advisor. Whether in time or money, the first education you invest in might be your own.

How Should You Invest in an HSA?

May 18, 2017

I’ve written about how to invest in a Roth IRA, your employer’s retirement plan, and a taxable account, but a new type of tax-sheltered account that’s growing in popularity is a health savings account or HSA. (If the new health care bill passes, HSAs could become even more important as the contribution limits would be doubled.) Like a health care FSA, HSA contributions are tax-free and can be used tax-free for qualified health care expenses, but unlike FSAs, you can leave the money in the account to be used for future health care expenses (and for any purpose without penalty after age 65). For this reason, many plans allow you to invest money in the account. Before investing your HSA, here are some things to consider:

When might you use the money?

Anything you might spend in the next few years shouldn’t be invested at all. That’s because a downturn in the market could force you to sell investments at a loss and even leave you without enough money in the account to cover your health care costs. If you use the account for current expenses, you might want to leave at least enough in cash to cover your deductible for the next year or two. On the other hand, if you plan to cover any current health care costs with other savings and not touch the HSA, you can invest as much as the plan will allow you (many require you to keep a minimum amount in cash) to grow as much as possible tax-free for future medical expenses.

How should you invest it?

You can either look at your HSA as a standalone account or as part of your overall retirement portfolio. In the former case, you can invest it in a fully diversified asset allocation fund or a balanced portfolio based on your risk tolerance and time frame. In the latter case, you can use it for investments that may not be available in your employer’s retirement plan.

Where should you have your HSA?

Unlike with your employer’s retirement plan, you don’t have to wait until you leave or turn age 59 ½ to transfer your HSA to a different provider. If you want to invest in something not available from your current provider, you may want to consider other options. Just be aware that your contributions from your payroll and your employer will likely continue being deposited in your current HSA so you’ll have to keep transferring the balance periodically.

Not sure what to do? Consider consulting with an unbiased financial planner to discuss your options in more detail. In the meantime, don’t let analysis paralysis stop you from contributing to an HSA at all. You can always leave it in cash until you make your decision.

How to Invest in a Taxable Account

May 11, 2017

I recently wrote about how to invest in a Roth IRA and in your employer’s retirement plan. But what about a plain old taxable account? Here are some options to consider:

Use it for short term goals. One of the advantages of a taxable account is that you don’t need to worry about any tax penalties on withdrawals. For that reason, it probably makes the most sense to use a taxable account for goals other than retirement and education like an emergency fund, a vacation, or a down payment on a car or home. In that case, you don’t want to take risk so cash is king. To maximize the interest you earn, you can search for high-yielding rewards checking accounts, online savings accounts, and CDs on sites like Deposit Accounts and Bankrate.

Keep it simple for retirement. Just like in a 401(k) or IRA, you can simplify your retirement investing as much as possible with a target date fund that’s fully diversified and automatically becomes more conservative as you get closer to the target retirement date. There are a couple of differences in a taxable account though. The bad news is that you’ll be paying taxes on it each year so you want a fund that doesn’t trade as often. The good news is that you’re not limited to the options in an employer’s plan so you can choose target date funds with low turnover (how often the fund trades and hence generates taxes) like ones composed of passive index funds.

Invest more conservatively for early retirement. If you plan to retire early, a taxable account can be used for income until you’re no longer subject to penalties in your other retirement accounts or to generate less taxable income so you can qualify for bigger subsidies if you plan to purchase health insurance through the Affordable Care Act before qualifying for Medicare at age 65. In either case, you’ll want to invest more conservatively than with your other investments since this money will be used first and possibly depleted over a relatively short period of time. Consider a conservative balanced fund or make your own conservative mix using US savings bonds (which are tax-deferred and don’t fluctuate in value like other bonds do) or tax-free municipal bonds instead of taxable bonds if you’re in a high tax bracket.

Make your overall retirement portfolio more tax-efficient. You can also use a taxable account to complement your other retirement accounts by holding those investments that are most tax-efficient, meaning they lose the least percentage of earnings to taxes. Your best bets here are stocks and stock funds since the dividends and gains are taxed at a capital gains rate that’s lower than your ordinary income tax rate as long as you hold them for more than a year. In addition, the volatility of stocks can also be your friend since you can use losses to offset other taxes (as long as you don’t repurchase the same or an identical investment 30 days before or after you sell it). When you pass away, there’s also no tax on the stocks’ gain over your lifetime when your heirs sell them.

In particular, consider individual stocks (which give you the most control over taxes) and stock funds with low turnover like index funds and tax-managed funds. Foreign stocks and funds in taxable accounts are also eligible for a foreign tax credit for any taxes paid to foreign governments. That’s not available when they’re in tax-sheltered accounts so you may want to prioritize them in taxable accounts over US stocks.

For retirement, you’ll probably want to max out any tax-advantaged accounts you’re eligible for first. But if you’re fortunate enough to still have extra savings, there are ways to make the best use of a taxable account. Like all financial decisions, it all depends on your individual situation and goals.

What to Do If You Missed the Tax Deadline

May 04, 2017

April what? I’ve written before about why not to procrastinate filing your taxes, but sometimes life just gets in the way. We recently received a question about what to do if you missed the tax filing deadline. Here are some steps to take:

Don’t panic. Assuming you’re not found guilty of egregious tax fraud, you’re not going to jail. In fact, if you don’t owe anything, you won’t even have a penalty. I once filed late one year and my only punishment was having my refund delayed.

Decide whether to do your taxes yourself or use a professional tax preparer. Here are some things to consider. Keep in mind that if your income is below $64k, you may now qualify to use name-brand tax software for free. (If your income is above $64k, you can still use the IRS’s fillable forms for free, but they don’t offer any real guidance so I wouldn’t recommend this unless your taxes are really simple and/or you really know a lot about tax preparation, in which case you probably wouldn’t be reading this.) The good news is that if you decide to hire a tax preparer, you may have an easier time finding one now that the busy tax season is over.

Get your taxes done ASAP. If you do owe taxes, you’ll want to get the payment made as soon as possible to minimize interest and penalties. (Here are some things you can do if you can’t afford the payment.) If you’re owed a refund, my guess is that you can think of better uses of the money than continuing to loan it to federal government tax-free (although they could really use the money right now). Either way, you’ll be relieved to get it off your mind.

Prepare for next time. Check out these tips to prepare for the next tax season. If you think you’ll need extra time, you can file for an automatic extension until October. However, you’ll still owe interest and penalties for any payments made past the filing deadline. To be on the safe side, you may want to adjust your W-4 to have more money withheld from your paychecks so that you don’t owe next year.

Don’t worry. You’re not the first person in America to miss the filing deadline. That being said, next time the consequences could be worse so try not to make the same mistake again.

How to Invest in Your Employer’s Retirement Plan

April 27, 2017

Last week, I wrote about how to invest in a Roth IRA but how about your employer’s retirement plan like a 401(k) or 403(b)? After all, that’s where most people have the bulk of their retirement savings. Here are some options:

Keep it simple…real simple. If you have a target date retirement fund in your plan, this is the simplest option. In fact, it’s probably the default so you may not need to do anything at all.

The idea is to pick the fund with the target date closes to when you think you’ll retire. Each fund is fully-diversified to be a one-stop shop that automatically becomes more conservative as you get closer to retirement so you can set it and forget it. It doesn’t get much easier than that.

There are a couple of downsides though. First, you may not even have this option in your plan. Second, your plan’s target date funds may have high fees. Finally, you don’t have the ability to customize the mix of investments to match your particular risk tolerance (although you can pick an earlier date if you want to be more conservative or a later date if you want to be more aggressive) or to complement any outside investments you may have.

Target a particular risk level. If you don’t have a target date fund or want something more tailored to your particular risk tolerance, see if your plan has a target risk fund or an advice program. A target risk fund is fully diversified to be a one-stop shop, but it stays at a particular risk level so you may want to switch to something more conservative as you get closer to retirement.

An online advice program can recommend a particular mix of investments based on your risk tolerance. Many programs will even use the lowest cost options in your plan and/or factor in any outside assets you may have. For example, if you have a lot of stocks in a Roth IRA, the program may reduce your stock holdings in your plan accordingly. However, it will need to be periodically updated as your situation changes and some programs charge additional fees.

Create your own mix. If the above options aren’t available to you or if you prefer to have more control, you may have to create your own mix of investments. You can take a risk tolerance quiz like this one and use the suggested allocations as guidelines.

Just be sure to look for low cost fund options to implement your portfolio. You may want to use your plan for those assets in which you have low cost fund options and use outside accounts for the rest. (That’s why I invest mine all in a low cost S&P 500 index fund.) Don’t forget that taxes are another cost. If you have investments in taxable accounts, you may want to prioritize the most tax-inefficient investments like taxable bonds, commodities, real estate investment trusts, and funds with high dividends and turnover for your tax-sheltered retirement account since more of their earnings will otherwise be lost to Uncle Sam.

Consider a small amount in company stock. If company stock is an option, you might want to keep a small amount there to benefit from potentially lower taxes on the gains when you eventually withdraw it from the plan. Just don’t have more than 10-15% there because having too much in any one stock is too risky, no matter how great the company is. This is especially true with employer stock because if something happens to your company, you could be out of a job at the same time as your portfolio is decimated.

Not sure what to do? Don’t let analysis paralysis prevent you from investing at all. You can start with a simple option like a target date or target risk fund for now and adjust later. You don’t want to make the perfect investment plan the enemy of the good.

Why You Should Love Investing

April 13, 2017

When a lot of people think of financial planning, they think of investing…with dread. It sounds complicated, time consuming, and risky. But for me, investing is actually my favorite part of financial planning. Let me tell you why…

In most areas of life, we generally get what we put in, whether that’s in terms of the price we pay or the amount of time and hard work we expend. In other words, you get what you pay for. However, investing is the one area of life where you get rewarded for being both cheap and lazy.

Let’s start with the first step, which is diversification. As you’ve probably heard, you don’t want to put all your eggs in one basket, but you still have to decide how many of your “eggs” or money to put in each “basket” or asset class: stocks, bonds, cash, and real assets. What makes this confusing is that there’s a ton of conflicting views on this so investment expert Meb Faber decided to compare 9 of the top recommended asset allocation strategies by various other investment experts and see how they performed since the 1970s. What he found is that the difference between the best and the worst performing strategy was only 1.6% and if you removed the worst performing portfolio (which is an outlier since it only has 25% in stocks), the difference was only 1%. When he compared the models of the major financial institutions, he found that the difference was only about half a percent.

However, just because they ended up in similar places doesn’t mean that they performed similarly from year to year. Each of the models had many years in which they outperformed and many in which they under-performed. If you chose a model based on which was the top performing over the previous decade, you would actually have done much worse. Whether you use a one-stop shop asset allocation fund, a robo-advisor, one of the model portfolios listed in one of Faber’s blog posts above, or a financial advisor’s recommendation, which portfolio you pick is less important than that you pick one (to make sure you’re reasonably diversified) and stick with it through thick and thin. (Everyone, even Warren Buffett, has periods of under-performance.)

There’s one other way you can sabotage your returns: costs. It’s been estimated that the average mutual fund costs .9% a year in expenses and 1.44% a year in transaction costs. (This doesn’t even include any loads or commissions you may pay to purchase the fund.) That 2.34% would be enough to turn the best performing strategy into the worst.

It’s not like you’re getting anything for those costs either. In fact, a recent Morningstar study called low fund fees “the most proven predictor of future fund returns.” Warren Buffett has said the same thing. So as you choose which funds to use in your portfolio, look for ones with low fees (called the expense ratio) and low turnover (which leads to lower transaction costs). If index funds are available, they tend to have the lowest costs and hence tend to outperform more expensive actively managed funds over long periods of time.

The moral of the story is that investment success boils down to three simple rules:

Be diversified. Pick a reasonably diversified portfolio. Don’t be a greedy pig (bet on individual stocks) or a fearful chicken (keep all your money in bonds and cash). After all, both pigs and chickens get slaughtered.
Be cheap. Use low cost funds to implement your asset allocation strategy. In this case, you get what you don’t pay for.
Be lazy. Once you have your portfolio, stick with it. Don’t try to time the market or otherwise, mess with it other than to rebalance it periodically back to the original allocation or to switch to lower cost funds as they become available.

Think about it. Where else are you most rewarded for being both cheap and lazy? Now do you love investing? If so, the first step is to save so you have something to invest, but that’s another story…

Which Retirement Plan Benefits Are You Missing Out On?

April 06, 2017

This week, we’re recognizing Employee Benefits Day on April 3^rd by writing about ways to appreciate and “benefit from your benefits.” One of the most common benefits that is often underappreciated and underutilized is your employer’s retirement plan. In particular, here are some features that you may not be taking full advantage of if you’re fortunate enough to have them in your plan:

Employer’s match. According to our research, 92% of employees are contributing to their plan but almost a quarter aren’t contributing enough to get the full match from their employer. At the very least, make sure you’re contributing enough to not leaving any of this free money on the table.

Contribution rate escalator. If you can’t afford to save enough to hit your goal, try slowly increasing your contributions by one percentage point each year. This tends to be less than cost of living adjustments so people generally don’t even notice the difference in their paychecks, but after just a few years, they may be saving more than they ever thought they could. A contribution rate escalator can do this for you automatically.

Roth contributions. Unlike pre-tax contributions, you get no tax benefit now, but Roth contributions can grow to be tax-free after 5 years and age 59 ½. This is especially useful if you’re worried about paying higher tax rates in retirement or if you’re planning to retire early since tax-free Roth distributions won’t count against you in calculating the subsidies you would be eligible for if you purchase health insurance through the Affordable Care Act (assuming the subsides are still in place) before becoming eligible for Medicare at age 65. Roth contributions are also more valuable if you max out your contributions since $18k tax-free is more valuable than $18k that’s taxable. (Yes, you could technically invest the tax savings from making pre-tax contributions, but then you’d still have to pay a tax on those earnings too.)

After-tax contributions. If you max out your normal pre-tax and/or Roth contributions, you may be able to make additional after-tax contributions. These aren’t as advantageous since the money goes in after-tax and the earnings are taxed at distribution, but you can convert them into a Roth account to grow tax-free, either while you’re still at your job if the plan allows it or by rolling it into a Roth IRA after you leave. You can also generally withdraw after-tax money while still working at your job (subject to taxes and a 10% penalty on earnings before age 59 1/2).

Asset allocation funds. To simplify your investing, retirement plans will often provide you with fully-diversified asset allocation funds that can be a one-stop shop. Some, called target date funds, even automatically become more conservative as you get closer to the target date so you can simply “set it and forget it.”

Online retirement and investing advice. Some plans provide access to a free online retirement planning and investment tool that can tell you whether you’re on track for retirement and make specific investment recommendations based on your particular risk tolerance and time frame, typically using the lowest cost funds in your plan.

Brokerage window. If you’re looking for an investment not otherwise available in your plan, see if you have a brokerage option that will give you access to thousands of other funds and in some cases, even individual stocks.

Employer stock. While you don’t want to put too much in any one stock (no more than 10-15% of your overall), especially your employer’s, there can be a tax benefit for doing so when you eventually cash out the account. If you transfer the employer stock directly to a brokerage firm in-kind, you can pay a lower capital gains tax on the growth instead of the higher ordinary income tax rate that you would normally owe on distributions.

Retirement plan loans. If you need a loan, borrowing from your retirement plan doesn’t require a credit check and the interest goes back into your own account. However, you miss out on any earnings that money would have received and if you leave your employer, you may owe taxes plus possibly a 10% penalty (if you’re under age 59 ½) on any outstanding balance after 60 days. (Some plans do allow you to continue making loan payments though.) Also, be aware that retirement plan loans are paid back from your paycheck so there’s no possibility of default and you can’t discharge them through bankruptcy.

Financial wellness. Some plans offer free, unbiased financial wellness coaching to help you plan, save and invest for your retirement. This is an important benefit since it can help you take advantage of all the others.

Which of those benefits are you not taking advantage of? See which ones are offered by your plan and start utilizing them. Your future self will thank you.

5 Common Myths About Gifts

March 30, 2017

Whether I’m facilitating workshops and webcasts or talking to people individually, one of the areas that I’ve found the most confusion around is a topic that we all (hopefully) have some experience in and that’s gifts. Some of the misconceptions are harmless, while others can result in significant financial losses or missed opportunities. Here are some of the most common myths about gifts I hear:

To be a gift, you have to completely give something away. That’s how we generally think about a gift, but it’s not how the law looks at it. For example, if you add someone’s name to an account or a property deed, that’s considered a gift and subject to everything else in this blog post even though you yourself retain control over that asset. Assigning someone certain rights in a trust can be considered a gift as well.

Gifts are taxable to the recipient. Intuitively, this makes some sense. However, the income tax doesn’t consider gifts taxable income unless it’s a “gift” from your employer that could be considered part of your compensation. Also, the gift tax is actually a tax on the giver, which brings us to…

Being subject to the gift tax means you owe money to the IRS. First of all, let’s define “subject to the gift tax.” Gifts to charities and gifts in the form of payments directly to medical or educational institutions on behalf of someone else are not subject to the gift tax. The same is true for gifts of up to $14,000 per person per year. That means if you and your spouse have 5 kids, you can each give each of them $14,000 for a total of $140,000 in 2017 without filing a gift tax return.

What if you give more than that? The good news is that you still likely won’t owe the IRS anything. That’s because any taxable gift reduces the total amount you can give tax-free over your life and death, which is currently $5.49 million. If Warren Buffett’s only taxable gift were to give $1,000,000 to you (above the $14,000 exemption), his $5.49 million exemption would be reduced to $4.49 million. Only after he’s given away another $5.49 million in taxable gifts would he have to pay the IRS.

A gift can save money from being spent down to qualify for Medicaid coverage of long term care. There is some truth to this one because giving away assets can indeed reduce the amount you have to spend down before being eligible for Medicaid. However, any gifts made within the last 5 years (formerly 3 years) still have to be spent down so you have to give the assets at least 5 years in advance. One option is to buy a 5 year long term care insurance policy so you can give assets away if you need care and then qualify for Medicaid after the insurance policy (and the 5 year time period) expires.

Giving assets away is more tax-advantageous than passing them on. If you give an asset away and the recipient sells it, they have to pay a capital gains tax on all the gain since you purchased it. However, if they inherit it, they only have to pay taxes on any gain from when they receive it. All the gain during your lifetime goes untaxed. That’s a pretty good reason/excuse to let your heirs inherit an asset rather than giving it to them now.

Hopefully, this will help you give and receive gifts with more confidence. For more complex questions, you might want to consult with a qualified tax professional. If you’d like to practice your new gifting skills but aren’t sure who to give assets to, feel free to send them my way…

Should You Follow Senator Elizabeth Warren’s Investment Advice?

March 23, 2017

Last week, I wrote about some of her money management tips as described in an article titled “You, Too, Can Invest Like Elizabeth Warren!” Overall, I found them a bit too simplistic. Now let’s take a look at the investing side:

1. Visualize. Specifically, “take a moment to savor your dream.” It’s hard to argue with this. If visualizing your retirement or other goals helps motivate you to save and invest, go for it. Just remember that the dream probably won’t become reality unless you wake up and take action, which brings us to…

2. Create a retirement fund. Warren suggests contributing 10% of your income to a 401(k) or IRA. This isn’t a bad idea on its face but lacks detail. Why just 10%? The consensus seems to be that the average American household needs to save about 15% of their income for retirement so 10% is probably too low.

Even better, you should run a retirement calculator to get a more personalized number. That’s because the percentage you should be saving depends on your age, your current retirement savings, how aggressively you invest, when you want to retire, how much retirement income you need, and how much you can expect to get from Social Security and other income sources. In other words, you may need to save a lot more or a lot less, depending on your particular goals and situation.

It also matters whether you choose a 401(k) or an IRA. While they can have similar tax benefits, you’ll want to contribute at least enough to your 401(k) to get your employer’s full match. After that, your choice depends on a variety of factors like the investment options in each account and whether you prefer the convenience and simplicity of having everything in your 401(k) or the freedom and flexibility of an IRA. Don’t forget that you can also do both.

3. Invest prudently in the stock market. Warren also recommends investing another 5% (or 10% if you’ve paid off your mortgage) in an indexed mutual fund. Her own non-retirement account portfolio is largely invested in fixed and variable annuities with some money in stock, real estate, and bond funds.

Again, why 5%? The amount you save should depend on how much you’re willing to put away to reach your goals. If your goal is retirement, you’ll probably want to max out your 401(k) and IRA before investing in a taxable account. If your goal is education funding, consider tax-advantaged education accounts like a Coverdell account or 529 plan.

The index fund recommendation makes sense since compared to actively managed funds, they generally have lower costs, outperform over the long run, and generate less in taxes since they don’t trade as much. However, Warren seems to be using deferred annuities instead to shield her personal money from taxes. There are a couple of downsides to this strategy. One is that variable annuities tend to have high fees. Another is that the earnings are withdrawn first and are taxed at ordinary income tax rates.

In addition, her heirs will also have to pay taxes on the earnings they inherit after she passes away. In contrast, long term (over one year) capital gains on stocks and funds are taxed at lower tax rates and won’t be taxed at all when passed on to heirs. Her real estate and bond funds also generate a lot of taxes.

A better strategy for Warren would be to prioritize the bonds and real estate investments in her 401(k) and IRA and use the taxable accounts for the remaining stock funds. This is because stocks are more tax-efficient and their higher volatility would allow her to use losses to offset other taxes. By sticking to index funds, she could save even more in taxes and other costs.

4. Oh, and avoid investing in these: gold, prepaid funerals, and collectibles. I’m not sure I’d call prepaid funerals an investment at all, but collectibles can be a fun way for someone to speculate as long as they’re not counting on them for anything. A small amount in gold is used by many investors as a hedge against rising inflation and other types of instability and can help diversify a portfolio since it typically moves differently than stocks and bonds.

As with her money management advice, you could do a lot worse than funding a retirement account, investing in an index fund, and avoiding speculative investments. But Warren’s investment advice is a bit too oversimplified as well. Instead, find out what retirement and investing strategy makes the most sense for your particular needs or work with an unbiased financial planner who can help you. After all, we don’t all have a senator’s pension to bail us out of any mistakes.

Are You Facing a Problem With a Creditor?

March 21, 2017

From 2008-2011, I volunteered my time to work at various community events to help people navigate the Great Recession. It didn’t take long before I started to hear story after story of people feeling trapped by various financial products, such as loans with questionable terms and credit cards with due dates that were like moving targets, one miss and your interest rates jumped. At that time, the best I could offer was complaining to the creditor or better business bureau. Today, when people feel that a creditor has treated them unfairly, they can turn to the Consumer Financial Protection Bureau for help.

The Consumer Financial Protection Bureau (CFPB) was birthed from the financial crisis in 2008 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFPB is unique in that it is the first government agency exclusively focused on protecting you from unfair and unlawful financial practices. One of the major features of the CFPB is the ability to get a third party involved in a dispute you may have with a creditor. If you have an issue with a creditor and feel like you are hitting a brick wall, you can take the following steps.

1. Submit Your Story: If you are angry but do not feel your issue warrants a formal complaint, consider submitting your story. Your story is published but does not include any sensitive information. This can serve as a warning to others that are thinking of using the same financial product and/or service.

2. Submit a Complaint: If you have an issue and feel like you are getting nowhere, consider filing a complaint. Once your complaint is submitted, you get an email along with updates as to the status of your complaint. Your complaint is then forwarded to the creditor in question and the creditor has 15 days to reply. You will be able to review the company’s response and you will have 60 days to provide feedback to the CPFB.

The CPFB has handled over 1 million complaints with 97% of the complaints getting a timely response. The CPFB enforcement has resulted in billions of dollars in compensation for consumers. So if you are facing a problem with a creditor, you now have an advocate that can help you.

Should You Follow Elizabeth Warren’s Money Management Advice?

March 16, 2017

While much of the country is discussing the president’s tax return, I stumbled upon an interesting article from a few years ago about the finances of one of the president’s possible opponents in 2020, Senator Elizabeth Warren. The article is titled “You, Too, Can Invest Like Elizabeth Warren” and is based on the information she submitted in a financial disclosure report along with tips from a financial planning book she wrote called All Your Worth: The Ultimate Lifetime Money Plan. Regardless of what you think of her politics, should you follow her financial recommendations? Before we get into the investing side next week, let’s take a look at the first set of recommendations called ”First Things First:”

1. Get debt free. Warren recommends that you “Drain your savings account, empty your checking account, and sell any stocks or bonds” to pay off all your debt. Warren herself has no debt except for a $15k student loan at 0% interest. In some ways, her advice makes a lot of sense. If you’re paying 18% interest on a credit card, paying it down is like earning a guaranteed tax-free 18% on your money and will also improve your credit score.

However, there are a couple of reasons why you might not want to “drain your savings account” to become debt-free. What if you suddenly find yourself in between jobs? You generally can’t put those mortgage or car payments on a credit card so now you risk losing your car and home. You can’t always rely on lines of credit either since they can be cancelled, especially if you’re unemployed or if the economy is weak. That’s why it’s always important to have some emergency savings (ideally enough cash to cover at least 3-6 months worth of necessary expenses) even before paying down high-interest debt.

Second, you might not want to pay off any debt balances early that have interest rates below 4-6% like many mortgages and student loans. That’s because you’re likely to earn more by investing that money instead. Perhaps that’s why Warren hasn’t paid off that 0% loan yet. This is especially true if you’re not contributing enough to your employer’s retirement plan to get the full match and leaving that free money on the table.

2. Don’t buy a sailboat if you work at Wendy’s (or are a journalist). What Warren really means is that 50% of your income should go to needs, 30% to wants, and 20% to savings. But how can you really separate “needs” and “wants?” Is your home a “need” because you “need” somewhere to live or a “want” because you’re paying extra for a really nice place you “want” in a great location? The same goes for everything from the car you drive to the food you eat.

This also seems like too much of a one-size fits all approach to me. Your spending and saving should be based on how you decide to balance your various personal goals and priorities. For example, I personally save a lot more than 20% of my income because achieving financial independence is a high priority of mine and I’m willing to live in a small studio apartment and not have a car to do it. If you work at Wendy’s and are willing to live with your parents and not spend much money so you can achieve your dream of buying a sailboat, go for it. As long as you understand and are willing to accept the trade-offs, do what makes YOU happy.

3. Pay off your mortgage if you have one. Mortgages tend to be low-interest and we already addressed the downside of paying off low-interest debt early, but mortgages have an additional benefit in that the interest is also tax-deductible. That means if you’re in the 25% tax bracket, a 4% mortgage costs you only 3% after-taxes so that’s the number you should consider when deciding whether to make extra payments. (You can calculate your mortgage tax savings here.) In fact, considering the low mortgage rates and the tax breaks, there’s even an argument for NEVER paying your mortgage off.

Of course, there’s much worse things you can do than getting debt-free, creating a money management plan, and paying off your mortgage. I just think her advice is overly simplistic. Next week, we’ll take a look at Warren’s investment advice…

Would You Be a Winner or a Loser Under the Proposed Health Care Law?

March 09, 2017

Regardless of what you think of the newly proposed Republican health care plan to replace the Affordable Care Act, one thing is for certain. As with all new laws, there will be both winners and losers. Here will be some of the individual winners and losers if the bill’s provisions become law:

WINNERS:

High Income Taxpayers: The bill would eliminate the Medicare payroll tax and the net investment income tax on individuals with MAGI over $200k a year and married couples with MAGI over $250k a year.

Tanning Salon Patrons: The bill would also eliminate the 10% excise tax on indoor tanning salons. This should make indoor tanning both cheaper and more available since the tanning industry claimed that nearly half of the nation’s tanning salons closed after the excise tax took effect. (However, it’s debatable whether they’re really “winners” given the health risks of indoor tanning.)

The Voluntarily Uninsured: Those who choose not to purchase health insurance would no longer be subject to a tax penalty. In fact, the law would be retroactive to 2016 so if you were subject to a penalty last year, you could file an amended return and get your money back.

Higher Income People Who Purchase Insurance Through the Exchanges: The ACA income-based premium subsidies would be replaced with new tax credits based on age for those who purchase insurance through the exchanges. The higher income you are, the likelier you are to benefit more from the tax credit. You can calculate the current subsidies here and see a comparison with the proposed tax credits here.

Younger People Purchasing Insurance Through the Exchanges: The law would allow insurance companies to discriminate more on age, which could mean lower premiums for younger people.

People Who Want to Contribute More to HSAs: The HSA contribution limits would nearly double to $6,500 for individuals and $13,000 for families and spouses over age 50 would be able to make additional catch-up contributions. You would also be able to use the HSA for certain medical expenses before the HSA was opened.

LOSERS:

Some Medicaid Beneficiaries: The law would cut funding to the states for Medicaid expansion.

Lottery Winners: Lottery winners would not be able to enroll in Medicaid.

Patrons of Planned Parenthood and Other Abortion Providers: Organizations that provide abortions would be de-funded.

The Involuntarily Uninsured: You would be subject to higher premiums if you neglect to purchase health insurance and later decide to enroll.

Lower Income People Who Purchase Insurance Through the Exchanges: The income-based premiums subsidies would be replaced by age-based tax credits that will be lower for most low income people. You can calculate the current subsidies here and a comparison with the proposed tax credits here.

Older People Purchasing Insurance Through the Exchanges: The law would allow insurance companies to discriminate more on age, which could mean higher premiums for older people.

Of course, no one knows what the final bill will look like after negotiations and whether it will even be passed into law. In fact, it doesn’t look too popular right now. Still, it could be useful to be aware of how the proposed provisions could affect you if any of them do become law. (Incidentally, I would currently be a “winner” under the bill since the only impact I can see on me is being able to contribute more to my beloved HSA.)

How to Maximize the Benefits of Incentive Stock Options

March 02, 2017

If your employer is providing you incentive stock options (or ISOs) as part of your compensation, they’re giving you a stake in the success of the company (or at least the stock price). ISOs can be complicated though. To make sure you’re taking full advantage of the opportunity they offer, here are some questions to ask yourself:

Are you subject to AMT (the alternative minimum tax)? When you are granted the options and when they vest, there’s generally no tax (assuming they’re priced at the current fair market value of your employer’s stock). When you exercise the option, there’s also generally no tax (unlike with nonqualified stock options, which are subject to income and employment taxes when exercised).

However, there’s an exception that your gain when the option is exercised is considered income for purposes of calculating the AMT. For this reason, you may want to wait to exercise the option until a year when you’re not subject to the AMT. If you’re not sure when that might be, consult a tax professional for guidance.

How long has it been since you’ve been granted the option and exercised it? In order to qualify to pay a lower capital gains rate on all the gain, you need to wait at least 2 years from when the option was granted and one year since you exercised the option before selling the stock. If you sell the stock before then, you’ll have to pay ordinary income tax on the difference between the value of the stock when you bought it and the fair market value of the stock at that time.

It pays to wait, but not too long. Options (or the employer stock after you exercise the option) are risky because your money is tied up in just one stock. That’s why you may want to exercise your options and sell the stock to diversify the money as soon as you’re eligible to do so at the lower capital gains rate.

How much of your net worth do the options represent? If it’s more than 10-15% and you need to hold on to them for tax purposes, you may want to talk to a financial advisor about what options (no pun intended) you have to hedge against the risk of a falling stock price. Otherwise, you may see a significant decline in your net worth should something happen to the stock price.

Incentive stock options can be a great opportunity to participate in the success of your company. However, there are many pitfalls to avoid. Just make sure you understand all the ramifications before making any decisions and consult with qualified financial or tax professionals as needed.

Why Uber May Not Always Be Your Best Ridesharing Choice

February 23, 2017

It’s been a few years since I wrote about my first ridesharing experience. The industry has exploded since then, but many people still just think of Uber when it comes to ridesharing. That’s unfortunate because if you live in a major city, there may be better options available to you. Here are my pros and cons for the Uber alternatives I’ve experienced:

Via

Pros: This service tends to offer the low cost rides so it’s usually my first choice.

Cons: It’s limited to NYC, Chicago, and DC and you may have to share your ride with other people going in the same general direction.

Lyft Line

Pros: Like Via, Lyft Line is a shared ride with other passengers, which lower the cost. It tends to be about the same price as Uber Pool, with the lower price depending on your location and whether one or the other is charging surge prices at the time. However, Lyft has stricter standards for drivers than Uber and they might be more motivated to provide superior customer service by the prospect of tips.

Cons: While it’s in quite a number of large cities, there are still places where it’s not available like my current home city of White Plains.

Gett

Pros: Gett tends to be the lowest cost option for a single ride so I tend to use it for those times when I’m in a rush and don’t have time to share with other passengers. They also don’t do surge pricing, which is when Uber and Lyft charge higher prices during particularly busy times.

Cons: While it’s a global company in cities worldwide, the only US service area is NYC right now and cars may not always be available (especially during said busy times).

Juno

Pros: This is a new company that’s still in Beta mode in New York so they’re offering a 30% discount to new users. Costs are otherwise similar to Uber but with no surge prices. Their claim to fame is being better for drivers so they may be able to attract more, which means more availability for riders.

Cons: They’re limited to NYC right now and tend to be a little more pricey than Gett.

Lyft

If you don’t want to share a ride and Gett and Juno aren’t available, I compare regular Lyft and Uber prices on Google Maps. The pros and cons are the same as with Lyft Line above except that the rides aren’t shared so the prices are a bit higher.

As you can see, things have come a long way from my first Lyft ride 4 years ago. Depending on where you live, you may not have all these options now (except when you travel) but that’s likely to change as ride sharing continues to grow in popularity. Sticking to Uber may soon be as quaint as sticking to traditional taxis.

Where Should You Have Your HSA?

February 16, 2017

Do you have a health savings account (HSA)? If so, you probably got it through your employer and have it at an administrator chosen by them. What you may not realize is that you can choose to transfer your account to a different provider.

This recently came to my attention when Financial Finesse changed HSA providers. Rather than transfer my account into the new administrator, I decided to consider my other options. If you’re shopping around for a new home for your HSA, here are some things to consider:

What do you want to invest the account in? If you’re looking to use it to cover immediate expenses, you’ll want to keep your HSA someplace safe like a savings account. In that case, you can just compare the interest rates they’re paying.

On the other hand, if you’re planning to invest the account to grow for the future as I am, you’ll want to see what the investment options are. Many providers don’t even let you invest outside of a cash account at all. Others give you a limited number of choices (including sometimes funds that may be difficult to access otherwise). Some allow you to invest in thousands of mutual funds and even individual stocks through a brokerage account. To maximize my investment options, I focused my search on the latter.

Do you need to keep a certain amount in a cash account? For someone planning to invest most or all of their account, having to keep money in cash can be a drag on returns. In fact, my main motivation for switching providers was that my current HSA administrator requires me to keep $5k in the cash account or be charged a $3 monthly fee that can’t be deducted from the brokerage account, forcing me to leave money in the cash account to cover the fees. It may not sound like much, but if that extra $5k was invested and earned a 10% average annualized return (I invest my HSA pretty aggressively) over the next 30 years, it would end up becoming an additional $82k that I could use tax-free for future medical expenses. That’s not a bad payoff for a few minutes of paperwork.

What are the fees? Fees are another thing that can eat into your returns, especially if you have a small balance. Make sure to include any additional costs that you may be charged for using the investment option, including both administrative and transaction fees. However, keep in mind that extra investment earnings can more than compensate for an additional fee. For example, it’s worth me investing that $5k in my current HSA because the investments would have to earn just .72% more than the cash account to make up for the $36 in additional fees each year.

You don’t hear much about HSA transfers, probably because HSAs are still relatively new and haven’t acquired enough assets to make providers aggressively compete for them yet. But as these accounts continue to become more common, I expect this will be a growing area of interest. For now, at least be aware that you have a choice and depending on how you plan to use your HSA, it could be a consequential one.

Should You Be In an Asset Allocation Fund?

February 09, 2017

One of the most common questions we get on the Financial Helpline is how to choose investments in your employer’s retirement plan. Investing can be complex and intimidating so it doesn’t surprise me that people are looking for help with their decision. What does surprise me is how few of them understand and use an option that was created to help simplify their decision.

Depending on your plan, you may have a target date or a target risk fund available to you. Both are “asset allocation funds” that are designed to be fully-diversified “one stop shops.” All you need to do is pick one fund that most closely matches your target retirement date or your risk level. (Target date funds can also be “set it and forget it” because the funds automatically become more conservative as you get closer to the target retirement date.)

If you think of investing as getting you from point A to point B, asset allocation funds are like the commercial jets of investing. They’re much cheaper than a private jet (a financial advisor) and much simpler than piloting your own plane (picking your own investments). That’s why when I first heard about these funds early in my financial career, I assumed they would take over much of the mutual fund industry and even replace the need for a lot of financial advisors. While they have seen a meteoric rise, especially as the default option in retirement plans, they still aren’t utilized as much as I thought they would be. I think there are 3 main myths responsible for this:

1. Putting everything in one asset allocation fund is having all my eggs in one basket. What you don’t see is that an asset allocation fund is actually a basket of baskets. Each fund is composed of several other funds. In fact, one asset allocation fund is usually more diversified then the typical mix of funds that I see people in.

So why not have other funds in addition to it? Isn’t that making your portfolio even more diversified? The problem here is that these funds were professionally designed to hold a certain proportion of investments so adding others will throw the balance off. It’s like adding extra ingredients to a chef-prepared meal. Only do it if you really know what you’re doing (in which case, you probably don’t need an asset allocation fund anyway).

2. I can probably do better on my own. Remember that these funds were put together by professional money managers who’ve been trained in investment management and do this for a living. What’s the chance that you’ll create a better portfolio? One study of 401(k) participants showed that investors who chose their own funds did worse on average than those who just went with a target date fund.

Part of that is due to lack of knowledge. However, a lot is also likely due to the temptation to buy investments that are performing well and then sell them when they eventually underperform, which is a recipe for buying high and selling low. If nothing else, asset allocation funds provide discipline… assuming you don’t trade these funds too of course.

3. Asset allocation funds are always more expensive. You would think that this professional management would come at a steep price. After all, paying for investment management typically costs .5-1% of your portfolio. However, asset allocation funds are generally only slightly more expensive than other funds and if they’re composed of index funds, they can actually cost much less than most actively managed funds. Check the fund’s expense ratio before making assumptions as to their cost.

That all being said, there are reasons not to use an asset allocation fund. You may not have one available in your plan or the one you have may be too expensive. Sophisticated investors or those with an advisor may want to create a more personalized portfolio that better matches their risk level or complements outside investments to maximize tax-efficiency. But if those situations don’t apply to you, consider an asset allocation fund. Flying commercial may not be a perfect experience, but it’s better than the alternatives for most people.

Don’t Spend $25k on a $10k Vacation

February 02, 2017

The winter months get many of us dreaming about our next vacation to a warm place. But would you spend $25k for a $10k vacation? My colleague, Steve White, recently wrote about how this could happen:

Everybody likes a vacation. If you could take a $10,000 vacation where would it be – Vegas, Miami, the beach, LA? If you could choose between spending $10,000 or $25,000 for the same Vegas vacation (same airfare, same hotel, same restaurants, same clubs, same blackjack losses), which would you choose? The $10,000 dollar one, right?

Let me tell you how you can spend $25,000 on that Vegas trip. Book that $10,000 trip using a credit card and make the minimum payments on it. The minimum payments would be about $175 a month and it would take you 12 years to pay if off at that rate.

$175 a month times 12 years is $25,200. Think about it. You could have taken 2 1/2 trips to Vegas for what you spent on 1 trip.

So how can you avoid this fate? One option is to simply not take vacations, but if you value your emotional and ultimately physical health and productivity, that’s probably not a good idea. In fact, spending money on experiences like a vacation generally gives a much bigger “happiness bang” for your buck.

Instead, set a goal for your vacation and estimate how much it will cost. You can even use this tool to find a trip based on your goals and budget. Once you’ve set a target, subtract any savings you’ve managed to set aside for that trip and divide the remainder by the number of months between now and when you want to take your vacation to determine how much you need to save each month. But where will you come up with that money? Steve suggests starting with a spending plan:

A spending plan allows you to focus your money on what is important to you – like a vacation. The best way to do this is to set a 30 minute weekly appointment with yourself to review your finances. I recommend scheduling this when your energy level is high and you’re able to concentrate. I am a morning person so mine is Saturday morning.

Whether you use our Easy Spending Plan, our Expense Tracker, Mint, or any other system for your spending plan doesn’t matter. What matters is that you have a spending plan. Personalize it and continually ask yourself, “I see where I am spending my money. Is this really where I want to spend it?” If the answer is no, find one area to adjust and make that the topic of the next week’s money meeting.

This isn’t about anyone lecturing you on what to spend money on but about you taking control over your own finances. Ask yourself if each expense is more important to you than your vacation. (Remember that you generally buy more happiness with experiences than with things.) If not, pay yourself first by reducing that expense and have the savings automatically transferred each month into a separate designated savings account for your vacation. Now you have a savings plan to complement your spending plan.

What if you can’t reduce your expenses enough to fund your vacation? In that case, you’ll have to adjust your goal either by postponing it or by choosing a lower cost trip. Financial planning is all about trade-offs. There’s no one right answer as long as you’re making an educated and conscious decision.

Finally, you might want to use a rewards credit card to pay for your trip. This way you can earn cash or points towards your next trip and actually come out ahead…as long as you pay the balance off in full from your savings. Do this often enough and maybe you can eventually spend $10k on a $25k vacation!

How to Avoid Borrowing From Your Retirement Plan

January 26, 2017

Have you ever borrowed from your employer’s retirement plan? When you need cash in a hurry, it can be tempting. After all, you don’t have to worry about a credit check and the interest just goes back into your own account.

However, there are a couple of reasons why this may not be the best idea. First, you lose any gains your money would have earned. Keep in mind that the stock market averages a 7-10% return per year, including many years with double digit returns so you could be losing out on real money.

Second, if you leave your job before paying off your loan, the outstanding balance could be considered a withdrawal and subject to taxes plus a possible 10% penalty if you’re under age 59 ½. These losses could end up jeopardizing your retirement. Here are some ways to avoid having to raid your retirement nest egg in the future:

Don’t think of your retirement account as a giant ATM. Even if your plan allows it for any reason, retirement plan loans should only be for dire emergencies and no, wanting the latest tech gadget or a vacation doesn’t qualify. Instead, calculate how much you need to save each month and have that amount automatically transferred to a separate savings account until you have enough to purchase what you want. Don’t have enough to save? Ask yourself what expenses you’re willing to cut back on to make your goal happen.

Have an emergency fund. Even if you do have an emergency, a retirement plan loan shouldn’t be your first resort. If your investments are down in value, you may not even have enough to borrow. Instead, build up enough savings to cover 3-6 months’ worth of necessary expenses and keep that money someplace safe like a savings account or money market fund. If you can’t stand the idea of all that cash just sitting there earning less than 1%, here are some ideas to put it to work harder for you.

Consider other options. For example, the average home equity interest rate is about 5%. Don’t forget that it’s tax-deductible too. If you’re in the 25% tax bracket, that loan may only cost you 3.75% after taxes, which is less than your investments will probably earn. Just be aware that your home is on the line if you can’t make the payments so this is probably not be a good idea if you’re facing severe financial hardship.

One final point is that people sometimes use a retirement plan loan to pay down credit card debt. Given how high credit card interest rates can be, this might be a smart move if it’s part of a larger plan to become free of high-interest debt. However, if you end up filing for bankruptcy, you’ll still have the retirement plan loan. In that case, you would have been better off using the bankruptcy to wipe out the credit card debt and leave your retirement account alone. (It’s generally a protected asset in bankruptcy.)

Retirement plan loans have a place, but be aware of the downsides. If you’re not sure what to do, consider consulting with a qualified financial planner. As with any financial decision, you want to make an informed one.

My Favorite Credit Cards

January 19, 2017

Do you find yourself stuck with big credit card bills after the holidays? One way to make credit cards work for you instead of against you is by maximizing the points you earn on stuff you buy throughout the year. In fact, I generally enough in points to more than cover my holiday spending.

Don’t forget that this only works if you pay the balance off each month. Late payment fees and interest charges can more than erase the value of points you earn. With that being said, here are the cards I use for each of my major spending categories:

Regular bills: For things like my cable, cell phone bill, insurance premiums, and subscriptions, I use the Chase Ink Cash Mastercard. It pays 5% cash back on the first $25k per year you spend on office supply stores, cellular and landline phone service, and Internet and cable TV services, 2% cash back on up to $25k per year spent on gas stations and restaurants, and 1% cash back on everything else. I keep this card at home so I don’t have to worry about losing it and having to update all my autopays.

Business travel: I use the new Chase Sapphire Reserve, which offers primary rental car coverage and 3 points per dollar spent on travel and restaurants. Those points can then be combined with the Chase Ink points above and redeemed for 50% more in Chase’s Ultimate Rewards portal or exchanged for points 1:1 with one of Chase’s 11 travel partners. There’s a pretty steep $450 annual fee but also a $300 travel credit and a $100 Global Entry fee credit so you can still come out ahead if you travel enough. Finally, it offers a 100,000 point sign-up bonus if you apply by March 12 at one of Chase’s bank branches and spend $4,000 in the first 3 months.

Amazon purchases: I’m an Amazon Prime member and do most of my big ticket spending on Amazon so the Amazon Prime Rewards Visa Signature Card makes sense. It offers 5% cash back on Amazon purchases (for Prime members), 2% back on restaurants, gas stations, and drug stores, and 1% back on everything else along with purchase and extended warranty protections. Not only is there no annual fee, you also get a $70 Amazon gift card for signing up.

Target purchases: I have a Target a couple blocks from my home so I tend to do most of my in-person shopping there. The Target REDcard provides a 5% discount and an additional 30 days for returns. I signed up for the debit card since it provides the same benefits without having yet another credit card on my credit report.

Other purchases: I use the Consumers Credit Union Visa Signature Cash Rebate card. It gives me 3% cash back on grocery stores, 2% on gas, and 1% on everything else. That doesn’t sound that great, but if I spend $500 in a month, I can get a 3.59% interest rate on up to $15k in my Consumers Credit Union rewards checking account and if I spend $1,000 in a month, I get a 4.59% rate on up to $20k in that account. That 4.59% interest rate can easily dwarf the value of other cards’ rewards, especially if you’re more of a saver than a spender like me.

Once I hit $1,000 in a month on my Consumers Credit Union Visa, I use the Citi Double Cash Mastercard. It offers a simple 1% cash back on every purchase and then another 1% cash back when you pay it off for a total of 2% cash back on all purchases. This is a good card to have in addition to any cards you may choose for more specialized spending categories.

Keep in mind that just because I chose these credit cards doesn’t mean they’re the best for you. Think about how you use credit cards and what you spend them on to see which card(s) offer you the most value. (For some, the simplicity of having only one card may be their best value.) Finally, I’m always up for suggestions. If you know a card that might be better for my spending, send me an email at [email protected].

What To Do After a Spouse Passes Away

January 12, 2017

One of the most difficult experiences to live through is the death of your spouse. In addition to dealing with grief, there are a host of financial and legal matters to attend to. To help relieve the stress during an already difficult time, here is a checklist of items to take care of:

Get an inventory of assets, debts, insurance policies and bills. This is particularly important (and challenging) if your spouse primarily handled financial affairs. You can use this Financial Organizer to record the information.

Request a copy of your spouse’s credit reports from each bureau so you can see all the debts owed. (You can get free credit reports every 12 months at annualcreditreport.com.) Don’t forget to contact their former employers for accrued but unpaid salary, bonuses, and vacation/sick pay, pension survivor benefits, and life insurance policies. You should also see if they had any life insurance through their credit cards any any lost policies here. Finally, you’ll want to ask the funeral director for at least one copy of the death certificate for each account, life insurance policy, any real estate property with their name on it.

Close or re-title accounts. Here is a breakdown of how to deal with various types of assets:

Annuities and life insurance policies: After presenting the insurance company with a death certificate, the death benefits (which may be different from the cash values) will be paid out to the designated beneficiaries.
Assets solely in the spouse’s name: These will have to go through the probate process and will pass on to the person designated in the will or if it’s not in a will, according to state law.
Assets jointly owned with rights of survivorship: These assets will pass to the joint owner(s) when you present the bank, investment company, or county records office and mortgage company (in the case of real estate) with a death certificate. If there’s a mortgage on the real estate, you may want to wait until the other affairs are settled since there’s a risk of the mortgage being called.
Assets with a beneficiary (living trust accounts, qualified retirement plans, 529 plans, HSAs, bank accounts with “payable on death” registrations, investment accounts and vehicles with “transfer on death” registrations, and real estate with beneficiary deeds): After presenting the financial institution holding the account, the DMV (in the case of vehicles), or the county records office and mortgage company (in the case of real estate) with a death certificate (and trust documentation or notarized trust certification in the case of a living trust), the asset will pass on to the beneficiary. An IRA can stay in the name of your spouse as an inherited IRA and the beneficiaries would only need to take required minimum distributions according to their life expectancy. Other qualified plans may need to be paid out to the beneficiaries over 5 years but the beneficiaries can avoid this by rolling the accounts into inherited IRAs, which can be stretched over their lifetime. Finally, as the spouse, you have the unique option to roll any inherited retirement accounts into your own IRA to defer the taxes as long as possible.

Make sure the bills are paid on time. Otherwise, you can get hit with late charges and a lower credit rating for late payments on any bills with your name on them. If you do get assessed late fees, ask to see if you can have them waived due to the circumstances. Cancel any services or subscriptions that are no longer needed (you may be able to get refunds) and put the rest in your name. Don’t forget that your spouse will still owe income taxes and while the federal estate tax return is due 9 months after their death, state estate tax return deadlines can be earlier.

Apply for benefits. If you or your children were receiving health insurance through your spouse’s employer, you may be able to qualify to continue it under COBRA. You may also be able to qualify for Social Security survivor benefits if you’re taking care of a minor child or are at least 60 years old and for VA benefits if your spouse served in the military. If you have a child in college, contact their financial aid office to see if you can qualify for additional aid. Finally, you may receive benefits from any unions your spouse was a member of.

Review and update your financial and estate plans. Re-assess your new income and expenses and make any adjustments that may be necessary. You might also want to run a new retirement calculation and consult with an estate planning attorney to see if you need to update any of your estate planning documents like an advance health care directive, will, durable power of attorney, and living trust. If your spouse owned a business, you’ll also want to consult with the business’ attorney on next steps.

Nothing here can ever make the loss of a spouse easy. Hopefully, it can make it a little less difficult though. Sometimes, that’s the best we can hope for.