Category Archives: Retirement Planning

Have a Plan, Not Just a Stock Portfolio

Diversification still matters. One day, this bull market will end.

Provided by Dane A. Wilson, Wealth Management Advisor

bull1In the first quarter of 2017, the bull market seemed unstoppable. The Dow Jones Industrial Average soared past 20,000 and closed at all-time highs on 12 consecutive trading days. The Nasdaq Composite gained almost 10% in three months. (1)

An eight-year-old bull market is rare. This current bull is the second longest since the end of World War II; only the 1990-2000 bull run surpasses it. Since 1945, the average bull market has lasted 57 months. (2)

Everyone knows this bull market will someday end – but who wants to acknowledge that fact when equities have performed so well?

Overly exuberant investors might want to pay attention to the words of Sam Stovall, a longtime, bullish investment strategist and market analyst. Stovall, who used to work for Standard & Poor’s and now works for CFRA, has seen bull and bear markets come and go. As he recently noted to Fortune, epic bull markets usually end “with a bang and not a whimper. Like an incandescent light bulb, they tend to glow brightest just before they go out.” (2)

History is riddled with examples. Think of the dot-com bust of 2000, the credit crisis of 2008, and the skyrocketing inflation of 1974. These developments wiped out bull markets; this bull market could potentially end as dramatically as those three did. (3)

A 20% correction would take the Dow down into the 16,000s. Emotionally, that would feel like a much more significant market drop – after all, the last time the blue chips fell 4,000 points was during the 2007-09 bear market. (4)

Investors must prepare for the worst, even as they celebrate the best. A stock portfolio is not a retirement plan. A diversified investment mix of equity and fixed-income vehicles, augmented by a strong cash position, is wise in any market climate. Those entering retirement should have realistic assessments of the annual income they can withdraw from their savings and the potential returns from their invested assets.

Now is not the time to be greedy. With the markets near historic peaks, diversification still matters, and it can potentially provide a degree of financial insulation when stocks fall. Many investors are tempted to chase the return right now, but their real mission should be chasing their retirement objectives in line with the strategy defined in their retirement plans. In a sense, this record-setting bull market amounts to a distraction – a distraction worth celebrating, but a distraction, nonetheless.

Dane A. Wilson, C&P Wealth Management, may be reached at 216-831-7171 or dwilson@cp-advisors.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities offered through 1st Global Capital Corp., Member FINRA/SIPC

Investment returns fluctuate and there is no assurance that a single rate of return will be sustained over an extended period of time. Investments are subject to market risks including the potential loss of principal invested.

Citations.
1 – money.cnn.com/2017/03/31/investing/trump-rally-first-quarter-wall-street/index.html [3/31/17]
2 – fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
3 – kiplinger.com/article/investing/T052-C008-S002-5-reasons-bull-markets-end.html [4/3/14]
4 – thebalance.com/stock-market-crash-of-2008-3305535 [4/3/17]

 

2016 IRA Contributions — It’s Not Too Late!

Yes, there’s still time to make 2016 contributions to your IRA.

IRA piggieThe deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction
Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options
The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

  1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.
  2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
  3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact Tony Constantine, CPA, Partner at Ciuni & Panichi, Inc. at 216.831.7171 or tconstantine@cp-advisors.com.

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Safe Harbor Deduction

Elderly Parent as a Tax Deduction
© 2017

Safe Harbor Deduction

safe harborTangible property safe harbors help maximize deductions

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”
Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?
In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

Two safe harbors
Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

  1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.
  2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

Need more information?  Contact James Komos, CPA, CFP at Ciuni & Panichi, Inc. 216.831.7171 or jkomos@cp-advisors.com.

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Sales Tax and Your Return

Donating Appreciated Stock
© 2017

October Is National Financial Planning Month

Saving is a great start, but planning to reach your financial goals is even better.

Provided by Dane A. Wilson, Wealth Management Advisor

401(k) 403(b) audit SSAEAre you saving for retirement? Great. Are you planning for retirement? That is even better. Planning for your retirement and other long-range financial goals is an essential step – one that could make achieving those goals easier.

Saving without investing isn’t enough. Since interest rates are so low today, money in a typical savings account barely grows. It may not even grow enough to keep up with inflation, leaving the saver at a long-term financial disadvantage.

Very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time.

Investing without planning usually isn’t enough. Most people invest with a general idea of building wealth, particularly for retirement. The problem is that too many of them invest without a plan. They are guessing how much money they will need once they leave work, and that guess may be way off. Some have no idea at all.

Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk and defer or reduce taxes. A good financial plan – created with the assistance of an experienced financial professional – addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives.

With a plan, you can set short-term and long-term goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can plot a way to wind down your business or exit your career with confidence. You can also get a good look at your present financial situation – where you stand in terms of your assets and liabilities, the distance between where you are financially and where you would like to be.

Last year, a Gallup poll found that just 38% of investors had a written financial plan. Gallup asked those with no written financial strategy why they lacked one. The top two reasons? They just hadn’t taken the time (29%) or they simply hadn’t thought about it (27%).1

October is National Financial Planning Month – an ideal time to plan your financial future. The end of the year is approaching and a new one will soon begin, so this is the right time to think about what you have done in 2016 and what you could do in 2017. You might want to do something new; you may want to do some things differently. Your financial future is in your hands, so be proactive and plan.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
  
Securities offered through 1st Global Capital Corp., Member FINRA/SIPC

Investment returns fluctuate and there is no assurance that a single rate of return will be sustained over an extended period of time. Investments are subject to market risks including the potential loss of principal invested
 
Citations.
1 – gallup.com/poll/184421/nonretired-investors-written-financial-plan.aspx [7/31/15]

 

The Brexit Shakes Global Markets

 A worldwide selloff occurs after the United Kingdom votes to leave the European Union.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2A wave of anxiety hit Wall Street Friday morning. Thursday night, the United Kingdom elected to become the first nation state to leave the European Union. The “Brexit” can potentially be finalized as soon as the summer of 2018.(1)

Voters in England, Scotland, Wales, and Northern Ireland were posed a simple question: “Should the United Kingdom remain a member of the European Union or leave the European Union?” Seventy-two percent of the U.K. electorate went to the polls to answer the question, and in the final tally, Leave beat Remain 51.9% to 48.1%.(2,3)

The vote shocked investors worldwide. The threat of a Brexit was supposed to have decreased. As late as Thursday, key opinion surveys showed the Remain camp ahead of the Leave camp – but at 10:40pm EST Thursday, the BBC called the outcome and projected Leave would win.(4)

Why did Leave triumph? The leaders of the Leave campaign hammered home that E.U. membership was a drag on the U.K. economy. They criticized E.U. regulations that impeded business growth. They felt that the U.K. should no longer contribute billions of pounds per year to the E.U. budget. They had concerns over E.U. immigration laws, which permit free movement of people among E.U. nations without visas.(1)

Financial markets were immediately impacted. The pound fell almost 11% Thursday night to a 31-year low, and the benchmark U.K. equities exchange, the FTSE 100, slipped 5% after initially diving about 8%. Germany’s DAX exchange and France’s CAC-40 exchange respectively incurred losses of 7% and 9%. In Tokyo, the Nikkei 225 closed nearly 8% lower, taking its largest one-day slide since 2008.(5)

Stateside, S&P 500 and Nasdaq Composite futures declined more than 5% overnight; that triggered the Chicago Mercantile Exchange’s circuit breaker, briefly interrupting trading. The Chicago Board Options Exchange Volatility Index, or CBOE VIX, approached 24 after midnight. The price of WTI crude fell more than $2 in the pre-dawn hours.(5,6)

At the opening bell Friday, the Dow Jones Industrial Average was down 408 points. The Nasdaq shed 186 points at the open; the S&P, 37 points.(7)

Fortunately, the first trading day after the Brexit referendum was a Friday, giving Wall Street a pause to absorb the news further over the weekend.

How could the Brexit impact investors & markets going forward? Consider its near-term ripple effect, which could be substantial.

The Brexit could deal a devastating blow to both the United Kingdom and the European Union. Depending on which measurements you use, the E.U. collectively represents either the first or third largest economy in the world. In terms of international trade, its import and export activity surpasses that of China (and that of the United States).(2)

An analysis by the U.K.’s Treasury argued that the country would be left “permanently poorer” by the Brexit, with less tax revenue and lower per-capita GDP and productivity. The Brexit certainly hurt the U.K.’s major trading partners, which include China, India, Japan, and the United States. Some Chinese and American companies have established operations in the U.K. specifically to take advantage of its E.U. membership and the free trade corridors it opens. With the U.K. exiting the E.U., the profits of those firms may be reduced – and the U.K. will have to quickly negotiate new trade deals with other nations. The most recently available European Commission data shows that in 2014, U.S. direct investment in the E.U. topped €1.8 trillion (roughly $2 trillion), with a slightly greater amount flowing back to the U.S.(2)

You could also see a sustained flight to the franc, the yen, and the dollar in the coming weeks. The stronger the dollar becomes, the weaker the demand for American exports.

Investors should hang on through the turbulence. The Brexit is a historic and unsettling moment, but losses on Wall Street should be less severe than those happening overseas. Retirement savers should not mistake this disruption of market equilibrium for the state of the market going forward. A year, a month, or even a week from now, Wall Street may gain back all that was lost in the Brexit vote’s aftermath. It has recovered from many events more dramatic than this.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.Citations.
1 – bbc.com/news/uk-politics-32810887 [6/23/16]
2 – cnbc.com/2016/06/21/uk-brexit-what-you-need-to-need-to-know.html [6/24/16]
3 – bbc.com/news/politics/E.U._referendum/results [6/23/16]
4 – bbc.com/news/live/uk-politics-36570120 [6/23/16]
5 ¬- nytimes.com/aponline/2016/06/24/world/asia/ap-financial-markets.html [6/24/16]
6 – rE.U.ters.com/article/us-usa-stocks-idUSKCN0Z918E [6/24/16]
7 – marketwatch.com/story/us-stocks-open-sharply-lower-joining-global-post-brexit-selloff-2016-06-24 [6/24/16]

Don’t Neglect Your Own Financial Plan

Financial Planning Takes Work

7_istock_000005830377large_seedlingIf you’re responsible for the financial health of a company, it’s easy to neglect your personal wealth management goals. Finding the time to create a personal financial plan, however, is critical. A good plan documents your current financial picture and enables you to make the best spending, saving and investing decisions going forward.

In and out
Financial planning is the process of selecting and applying specific strategies to reach your goals. So if you haven’t already, identify what’s important to you. Do you hope to retire early and sail around the world? Establish a charitable trust? Ensure your grandchildren’s financial security?

You won’t know if any of this is possible until you assess your current income, assets and expenses, including:

  • Income from all sources,
  • Investments and other assets,
  • Basic, recurring expenses,
  • Major, periodic expenses,
  • Funds available for nonessentials, and
  • Expectations about future income and expenses.

A personal financial snapshot can make it easier to see whether you’re on track or need to revisit your current spending habits. For example, you may decide to cut back on luxury vacations to devote more money to your retirement plan or forgo a new car to send your child to a private school.

Big picture
Financial planning isn’t only about cash flow. It’s a “big picture” plan that also accounts for factors that affect net worth, such as insurance coverage and tax obligations. If your home or a vacation property isn’t adequately insured, a fire could ruin an otherwise well-crafted financial plan. And overpaying federal or state income tax will leave you with less capital to invest.
For this reason, estate planning goes hand in hand with financial planning — particularly for business owners. It’s never too early to start thinking about what you want to leave your heirs, including how you’ll transfer your business to the next generation.

A crystal ball
Keep in mind that financial planning is a process. You’ll need to review and update your plan at least annually to reflect new life events and changes in your income. A financial advisor can help you design your plan and conduct periodic reviews to track your progress and make necessary adjustments.

Need more information?  Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert financial assistance.

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March Tax Tips

February Tax Tips

When Will Stocks Stabilize?

How deep will this correction ultimately be?

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2January may prove to be the worst month for stocks in eight years. The S&P 500 just corrected for the second time in five months, and some investors think the bull market may be ending.(1,2)

Bull markets do end, and the current one is nearly seven years old, the third longest in history. If a bear market is truly on the horizon, it may not last very long – the 12 bear markets recorded since the end of World War II have averaged 367 days in duration.(2)

How far would stocks have to fall for a bear market to begin? Should the S&P close at 1,708 or below, you would have an “official” bear market on Wall Street – a 20% fall of that index from its most recent peak. Right now, the S&P is above 1,800.(2,3)

While the S&P, Dow Jones Industrial Average, and Nasdaq Composite have all corrected this month, the damage to the small caps has been worse. The Russell 2000 is now in a bear market, off more than 20% from its June 2015 high. On January 20, the MSCI All-Country World index went bear, joining the Nikkei 225, TSX Composite, Hang Seng, and Shanghai Composite.(2,4)

Where is the bottom? We may not be there just yet. For the market to stabilize or rebound, institutional investors must accept (or at least distract themselves from) three realities that have been hard for them to stomach…

Oil prices may remain under $50 all year. Earlier this month, the Wall Street Journal asked 12 investment banks to project the average crude oil price across 2016. Their consensus? West Texas Intermediate crude will average $48 in 2016; Brent crude will average $50. Oil price forecasts are frequently off the mark, however – and if the oil glut persists, prices may take months to regain those levels. Saudi Arabia and Russia are not cutting back output, as they want to retain market share. With embargoes being lifted, Iran is set to export more oil. U.S. daily oil output has fallen by only 500,000 barrels since April.(5)

China’s manufacturing sector may never again grow as it once did. Its leaders are overseeing a gradual shift from a robust, manufacturing-centered economy to a still-booming economy built on services and personal consumption expenditures. The nation’s growth rate has vacillated between 4%-15% since 1980, but for most of that time it has topped 8%. In 2015, the Chinese economy grew only 6.9% by official estimates (which some observers question). The International Monetary Fund forecasts growth of just 6.3% for China in 2016 and 6.0% in 2017. Stock and commodity markets react quickly to any sputtering of China’s economic engine.(6)

The Q4 earnings season looks to be soft. A strong dollar, the slumping commodities sector, and the pullback in U.S. stocks have all hurt expectations. A note from Morgan Stanley struck a reasonably positive chord at mid-month, however, stating that “a lowered bar for earnings should be cleared” and that decent Q4 results could act as “a catalyst to calm fears.”(7)

What developments could help turn things around this quarter? OPEC could cut oil output, Chinese indicators could beat forecasts, and corporate earnings could surprise to the upside. If these seem like longshots to you, they also do to economists. Still, other factors could emerge.

Central banks could take further action. Since China’s 6.9% 2015 GDP came in below projections, its leaders could authorize a stimulus. The European Central Bank could increase the scope of its bond buying, and the Federal Reserve could hold off on tightening further in the first half of the year. If this month’s Fed policy statement notes that Fed officials are taking extra scrutiny in light of recent events, it could be reassuring. Any statement that could be taken as “second thoughts” about raising interest rates would not be reassuring.(6)

U.S. GDP could prove better than expected. The Atlanta Fed thinks the economy grew 0.6% in Q4 and Barclays believes Q4 GDP will come in at 0.3%; if the number approaches 1%, it could mean something for investors. Moving forward, if the economy expands at least 2.5% in Q1 and Q2 (which it very well might), it would say something about our resilience and markets could take the cue. Other domestic indicators could also affirm our comparative economic health.(8)

While the drama on Wall Street is high right now, investors would do well not to fall prey to emotion. As Jack Bogle told CNBC on January 20, “In the short run, listen to the economy; don’t listen to the stock market. These moves in the market are like a tale told by an idiot: full of sound and fury, signaling nothing.”(9)

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – bostonherald.com/business/business_markets/2016/01/ market_analyst_believes_stocks_will_rebound_after_correction [1/14/16]
2 – jillonmoney.com/will-stock-correction-lead-to-bear-market/ [1/16/16]
3 – foxbusiness.com/markets.html [1/20/16]
4 – cnbc.com/2016/01/20/msci-global-stock-market-index-hits-bear-market.html [1/20/16]
5 – tinyurl.com/h6ry47n [1/12/16]
6 – bbc.com/news/business-35349576 [1/19/16]
7 – usnews.com/news/articles/2016-01-14/will-corporate-earnings-be-the-stock-markets-savior [1/14/16]
8 – money.cnn.com/2016/01/19/news/economy/global-fears-federal-reserve-rate-hike/ [1/19/16]
9 – cnbc.com/2016/01/20/investing-legend-jack-bogle-stay-the-course.html [1/20/16]

The Pros & Cons of Roth IRA Conversions

What are the potential benefits? What are the drawbacks?

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have owned a Roth IRA for five years (i.e., once five full years have passed since the conversion), withdrawals from the IRA are tax-free.(1)

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and you can contribute to a Roth IRA as long as you live, unless you lack earned income or make too much money to do so.(2,3)

For 2016, the contribution limits are $132,000 for single filers and $194,000 for joint filers and qualifying widow(er)s, with phase-outs respectively kicking in at $117,000 and $184,000. (These numbers represent modified adjusted gross income.)(4)

While you may make too much to contribute to a Roth IRA, anyone may convert a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow IRS rules). Imagine the possibility of those assets passing tax-free to your heirs. Sounds great, right? It certainly does – but the question is, can you handle the taxes that would result from a Roth conversion?

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.

A Roth IRA conversion is a taxable event. When you convert a traditional IRA (which is funded with pre-tax dollars) into a Roth IRA (which is funded with after-tax dollars), all the pretax contributions and earnings for the former traditional IRA become taxable. When you add the taxable income from the conversion into your total for a given year, you could find yourself in a higher tax bracket.(2)

If you are nearing retirement age, going Roth may not be worth it. If you convert a sizable traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

However, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a partial conversion. Is your traditional IRA sizable? You could make multiple partial Roth conversions through the years. This could be a good idea if you are in one of the lower tax brackets and like to itemize deductions.(2)

You could even undo the conversion. It is possible to “re-characterize” (that is, reverse) Roth IRA conversions. If a newly minted Roth IRA loses value due to poor market performance, you may want to do it. The IRS gives you until October 15 of the year following the initial conversion to “reconvert’’ the Roth back into a traditional IRA and avoid the related tax liability.(5)

You could “have it both ways”. As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. (You may have heard of the “stretch IRA” strategy, which can theoretically keep IRA assets growing for generations.) If the rules are followed, Roth IRA heirs can end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.(2)

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – bankrate.com/finance/retirement/roth-ira-conversion-subject-to-5-year-rule.aspx [10/30/14]
2 – kiplinger.com/article/investing/T046-C000-S002-reap-the-rewards-of-a-roth-ira.html [12/15]
3 – irs.gov/Retirement-Plans/Roth-IRAs [10/23/15]
4 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016 [10/23/15]
5 – thestreet.com/story/13321349/1/roth-recharacterization-how-to-maneuver-your-ira-before-oct-15.html [10/13/15]

 

Social Security Update: The End of File and Suspend

A great claiming strategy to try and optimize Social Security benefits disappears.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2Congress just changed the Social Security benefit rules. On October 30, Capitol Hill lawmakers approved a two-year federal budget deal. As part of that agreement, they authorized the most significant change to Social Security policy seen in this century, disallowing two popular strategies people have used to try and maximize retirement benefits.(1)

The file-and-suspend claiming strategy will soon be eliminated for married couples. It will be phased out within six months after the budget bill is signed into law by President Obama. The restricted application claiming tactic that has been so useful for divorcees will also sunset.(2)

This is aggravating news for people who have structured their retirement plans – and the very timing of their retirements – around these strategies.

Until the phase-out period ends, couples can still file and suspend. The bottom line here is simply stated: if you have reached full retirement age (FRA) or will reach FRA in the next six months, your chance to file and suspend for full spousal benefits disappears in Spring of 2016.(3)

Spouses and children who currently get Social Security benefits based on the work record of a husband, wife, or parent who filed-and-suspended will still be able to receive those benefits.(3)

How exactly did the new federal budget deal get rid of these two claiming strategies? It made substantial revisions to Social Security’s rulebook.

One, “deemed filing” will only be allowed after an individual’s full retirement age. Previously, it only applied before a person reached FRA. That effectively removes the restricted application claiming strategy, in which an individual could file for spousal benefits only at FRA while their own retirement benefit kept increasing.(2)

The restricted application claiming strategy will not disappear for everyone, however, because the language of the budget bill allows some seniors grandfather rights. Individuals who will be 62 or older as of December 31, 2015 will still have the option to file a restricted application for spousal benefits when they reach Full Retirement Age (FRA) during the next four years.(2)

Widows and widowers can breathe a sigh of relief here, because deemed filing has no bearing on Social Security survivor benefits. A widowed person may still file a restricted application for survivor benefits while their own benefit accumulates delayed retirement credits.(2)

Two, the file-and-suspend option will soon only apply for individuals. A person will still be allowed to file for Social Security benefits and voluntarily suspend them to amass delayed retirement credits until age 70. This was actually the original definition of file-and-suspend.(2)

Married couples commonly use the file-and-suspend approach like so: the higher-earning spouse files for Social Security benefits at FRA, then suspends them, allowing the lower-earning spouse to take spousal benefits at his or her FRA while the higher-earning spouse stays in the workforce until 70. When the higher-earning spouse turns 70, he/she claims Social Security benefits made larger by delayed retirement credits while the other spouse trades spousal benefits for his/her own retirement benefits.(4)

No more. The new law says that beginning six months from now, no one may receive benefits based on anyone else’s work history while their own benefits are suspended. In addition, no one may “unsuspend” their suspended Social Security benefits to get a lump sum payment.(2)

To some lawmakers, file-and-suspend amounted to exploiting a loophole. Retirees disagreed, and a kind of cottage industry evolved around the strategy with articles, books, and seminars showing seniors how to generate larger retirement benefits. It was too good to last, perhaps. The White House has wanted to end the file-and-suspend option since 2014, when even Alicia Munnell, the director of the Center for Retirement Research at Boston College, wrote that “eliminating this option is an easy call … when to claim Social Security shouldn’t be a question of gamesmanship for those with the resources to figure out clever claiming strategies.”(4)

Gamesmanship or not, the employment of those strategies could make a significant financial difference for spouses. Lawrence Kotlikoff, the economist and PBS NewsHour columnist who has been a huge advocate of file-and-suspend, estimates that their absence could cause a middle-class retired couple to leave as much as $70,000 in Social Security income on the table.(3)

What should you do now? If you have been counting on using file-and-suspend or a restricted application strategy, it is time to review and maybe even reassess your retirement plan. Talk with a financial professional to discern how this affects your retirement planning picture.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – thehill.com/blogs/floor-action/senate/258629-senate-approves-budget-deal-in-overnight-vote [10/30/15]
2 – marketwatch.com/story/key-social-security-strategies-hit-by-budget-deal-2015-10-30 [11/2/15]
3 – pbs.org/newshour/making-sense/column-congress-pulling-rug-peoples-retirement-decisions/ [11/1/15]
4 – slate.com/articles/double_x/doublex/2015/10/budget_deal_closed_social_ security_loophole_known_as_file_and_suspend.html [10/30/15]

 

Is Your Company’s 401(k) Plan as Good as It Could Be?

DaneWilson-01 smaller2In light of a recent SCOTUS ruling, this is a good time to double-check.

Provided by Dane A. Wilson, Wealth Management Advisor

How often do plan sponsors check up on 401(k)s? Not as often as they should, perhaps. A recent legal development seems to call for greater supervision of these plans from employers – a degree of supervision many have not routinely provided.

A major lawsuit has been resolved concerning investment selection & fees. In May, the Supreme Court decided Tibble v. Edison International, No. 13-550. It ruled that under ERISA, a plaintiff may timely initiate a claim for violation of fiduciary duty by a plan sponsor within six years of the breach of an ongoing duty of prudence in investment selection.¹

Specifically, some beneficiaries of the Edison 401(k) Savings Plan took Edison International to court, seeking damages for losses and equitable relief. Twice, the plaintiffs argued, the plan sponsor had added higher-priced funds to the plan’s investment selection when near-identical, lower-priced equivalents were available.¹

Justice Stephen Breyer, stating the opinion of the unanimous Court, wrote that retirement plan fiduciaries have a “continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor, and remove imprudent, trust investments.”¹ ²

Do you see more lawsuits emerging as a consequence of this ruling? It does seem to invite them. The above language implies that the investment committee created by a plan sponsor shoulders nearly as much responsibility for monitoring investments and fees as a third-party adviser. Most small businesses are not prepared to benchmark processes and continuously look for and reject unacceptable investments.

Do you have high-quality investment choices in your plan? While larger plan sponsors have more “pull” with plan providers, this does not relegate a small company sponsoring a 401(k) to a substandard investment selection. Employees are smart and will ask questions sooner or later.

Are your plan’s investment fees reasonable? Employees can deduce this without checking up on the Form 5500 you file – there are websites that offer some general information as to what is and what is not acceptable. Most retirement savers read up on this with time, and most know (or will know) that a plan with administrative fees pushing 1% is less than ideal.

Are you using institutional share classes in your 401(k)? This was the key issue brought to light by the miffed plan participants in the Tibble v. Edison International case. When Edison International added a collection of mutual funds to its 401(k) plan in 1999, it chose to offer plan participants retail shares in six of those funds rather than institutional shares.³

Edison International saved about $8 million in administrative expenses with that move – but there was a cost for that savings, and it was passed on to plan participants. They ended up paying higher fees on those investments, for retail shares have markedly higher fees than institutional shares. It is not unusual for the difference to exceed a tenth of a percent. This may not seem like much to quibble about in the present, but the impact on retirement savings over time can be significant.³

When was the last time you reviewed your 401(k) fund selection & share class? Was it a few years ago? Has it been longer than that? Why not review this today? It is part of your fiduciary duty to your employees to do so.

You certainly do not want a lawsuit brought against your company charging that you neglected a core responsibility of sponsoring a 401(k) plan. The Supreme Court decision on Tibble v. Edison International may inspire similar legal action from disgruntled plan participants. Do your best to avoid it – call in a financial professional to help you review your plan’s investment offering and investment fees.

Dane A. Wilson,  Wealth Management Advisor, for C&P Wealth Management may be reached at 216-831-7171 or dwilson@cp-advisors.com.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – faegrebd.com/23003 [5/18/15]
2 – ebn.benefitnews.com/news/retirement/scotus-decision-opens-door-to-more-401k-lawsuits-2746418-1.html [5/18/15]
3 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/03/31/how-the-supreme-court-could-stop-the-401-k-rip-off [3/31/14]

 

 

Protecting Yourself Against Email and Internet Fraud?

cyber crimeDo more to prevent fraud.

Internet fraud is one of the most popular and widespread forms of cybercrime, with the Internet used increasingly to steal the identities and financial information of unsuspecting users.  Fraudsters use unsolicited email messages, as well as websites, social networks, chat rooms and message boards, in order to get access to the information they need.

Today, it is easy for criminals to create websites that look professional and generate emails that appear to be from legitimate sources.  These websites and emails may try to get you to provide private information that could be used to steal your identity, or trick you into paying them money.

There are definite patterns to watch out for, and armed with technical advice and common sense, it’s possible to prevent internet fraud from happening to you.  The following are a few ways you can protect yourself against email and internet scams:

  1. Check your bank statements: It’s easier than ever for fraudsters to go after bank details thanks to online banking; but, it’s also easier for users to check bank statements now that every detail is available at the touch of a button.
  2. Be careful when opening attachments: Think carefully before opening email attachments, especially when these come from senders that you don’t know.
  3. Keep your operating system (OS) and software up-to-date: This doesn’t just apply to your Internet protection software though; most software manufacturers, including your OS provider, regularly release security patches that make it more difficult for fraudsters to get hold of your details.
  4. Use a strong password: Choosing a strong password for all services you use (preferably a different password for each service) will make it harder for thieves to gain access to your details.
  5. Read the website’s privacy policy: If you are asked to enter any confidential or personal data, take a look at the site’s policy. If you do not trust the site, do not enter any details.
  6. Don’t give away your PIN code: Your bank will never ask you for your PIN code – over the phone, via email, or on the website.
  7. Open websites in new browser windows before entering personal details: Don’t enter any personal information if you’ve arrived on a website from an external link or pop-up ad, even on a real site.
  8. Use encrypted sites where possible: If the site is preceded by “https,” this is an indication that it has been independently verified and is a secure site.  A padlock symbol will also be displayed in the address bar, which means that any log-in or payment processes on the site are secure.
  9. Check for company email addresses: Banks do not correspond with their customers from email addresses provided by gmail.com, yahoo, etc. – it’s safer to avoid sending personal details via email at all if you can avoid it.
  10. Destroy financial data when throwing it away: Ensure that you destroy any personal information before throwing it away by shredding bank statements and expired cards.

Reggie Novak is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected he can investigate and present his findings and recommendations.  Contact Reggie Novak at 216.831.7171 or rnovak@cp-advisors.com for more information.

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Donations and Tax Deductions
© 2015

Pay Professional Fees Now and Reduce Your Tax Bill

Want to Pay Fewer Taxes?

At Ciuni & Panichi, Inc. our tax professionals are always looking for ways to help you reduce your tax burden.  Here is another idea you can implement today.

Expenses that may qualify as miscellaneous itemized deductions are deductible for regular tax purposes only if they exceed (in aggregate) two percent of your adjusted gross income (AGI).  Paying these expenses ahead of time may allow you to exceed this percentage and deduct more of these costs than you thought possible.

fsNow is a good time to add up your potential deductions to date.  If they’re getting close to, or they already exceed, the two percent floor, consider incurring and paying additional expenses by December 31, such as:

• Deductible investment expenses, including advisory fees, custodial
fees, and publications
• Professional fees, such as tax planning and preparation, accounting, and certain legal fees
• Unreimbursed employee business expenses, including travel, meals, entertainment, and vehicle costs

But, keep in mind that these expenses aren’t deductible for alternative minimum tax (AMT) purposes. So, don’t bunch them if you might be subject to the AMT.  Also, if your AGI will exceed certain levels ($254,200 for single and $305,050 for married filing jointly), be aware that your itemized deductions will be reduced.

Want help planning?  Ciuni & Panichi, Inc. can get you more information on miscellaneous itemized deductions, the AMT, or the itemized deduction limit.  Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com.

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Changing Jobs: What About My Old Retirement Plan?

rollover retirement planWhat do you do with your old retirement plan when you change jobs?  First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan.  It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty.

3 Alternatives to Cashing Out Your Old Retirement Plan:

1. Stay Put: Leave Your Old Retirement Plan in Place

You may be able to leave your money in your old plan.  But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult.  Also consider how well the old plan’s investment options meet your needs.

2. Roll Over to Your New Employer’s Plan

This may be beneficial if it leaves you with only one retirement plan to keep track of.  But evaluate the new plan’s investment options.

3. Roll Your Old Retirement Plan Over to an IRA.

If you participate in a new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices. There are additional issues to consider when deciding what to do with your old retirement plan.

Our C&P Wealth Management Team can help you make an informed decision and avoid potential tax traps. Contact James Komos, CPA, CFP, MAcc at 216-831-7171,  jkomos@cp-advisors.com, or submit an inquiry on the contact us page of our website for more information.

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Retirement Planning: When to Increase Contributions

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New Job – Don’t Forget Your Retirement Plan

What to do with your old retirement plan when you change jobs.

iraFirst and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan.  It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty.  That’s a big chunk.  Read on for some ideas that might work out better and save you money.

Here are three alternatives:

  1. Stay put.  You may be able to leave your money in your old plan.  But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult.  Also consider how well the old plan’s investment options meet your needs.
  2. Roll over to your new employer’s plan.  This may be beneficial if it leaves you with only one retirement plan to keep track of.  But evaluate the new plan’s investment options.
  3. Roll over to an IRA.  If you participate in a new employer’s plan, this will require keeping track of two plans.  But it may be the best alternative because IRAs offer nearly unlimited investment choices.

There are additional issues to consider when deciding what to do with your old retirement plan.  The tax professionals at Ciuni & Panichi, Inc. can help you make an informed decision and avoid potential tax traps.  Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com for more information and assistance with all your tax questions.
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© 2014

Retirement Planning: When to Increase Contributions

Should you Increase your Retirement Plan Contributions in 2014?

Retirement PlanningIt’s time to start thinking about 2014 retirement plan contributions. Contributing the maximum you’re allowed into an employer-sponsored defined contribution plan is likely a smart move.

Retirement Planning: Contributing the Maximum

When planning for retirement, you can reap major benefits from maximum contributions for these reasons:

1. Retirement plan contributions are typically pretax.
2. Retirement plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
3. Your employer may match some, or all, of your contributions pretax.

Also, consider contributing to a traditional IRA. If you participate in an employer-sponsored retirement plan, your IRA deduction may be reduced or eliminated, depending on your income. But you can still benefit from tax-deferred growth.

Consider your Roth options as well. Contributions aren’t pretax, but qualified distributions are tax-free.

Retirement plan contribution limits generally aren’t going up in 2014, but consider contributing more this year if you’re not already making the maximum contribution. And, if you are already maxing out your contributions, but you’ll turn age 50 in 2014, you can put away more this year by making “catch- up” contributions.

Type of contribution 2014 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $17,500
Contributions to SIMPLEs $12,000
Contributions to IRAs $5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $5,500
Catch-up contributions to SIMPLEs $2,500
Catch-up contributions to IRAs $1,000

For more retirement planning ideas on making the most of tax-advantaged retirement-savings options, contact Jim Komos at 216-831-7171 or via email at jkomos@cp-advisors.com. You can also submit an inquiry at our contact us page.

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Deadline Coming Up to Report Foreign Account Holdings

FSA Foreign Accounts BankThe deadline is approaching for US taxpayers to report accounts they hold in foreign banks and other financial institutions (foreign account holdings).

You also may be required to report foreign account holdings over which you have signature authority, such as an account that you maintain on behalf of a relative or employer — or if you have power of attorney over an elderly parent’s foreign account holdings, even if you never exercise that authority.

By June 30, 2014, citizens and residents of the United States, as well as domestic partnerships, corporations, estates, and trusts, must generally file a Report of Foreign Bank and Financial Accounts (FBAR) form electronically with FinCEN if:

  1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts; and
  2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to: certain foreign corporations (Form 5471); foreign partnerships (Form 8865); foreign disregarded entities (Form 8858); or transactions with foreign trusts and receipt of certain foreign gifts (Form 3520).

Some individuals are exempt.

Exceptions to the Foreign Account Holdings Reporting Requirement

There are FBAR filing exceptions for the following United States persons or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses;
  • United States persons included in a consolidated FBAR;
  • Correspondent/nostro accounts;
  • Foreign financial accounts owned by a governmental entity;
  • Foreign financial accounts owned by an international financial institution;
  • IRA owners and beneficiaries;
  • Participants in and beneficiaries of tax-qualified retirement plans; and
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account.

To determine eligibility for an exception, consult with your tax adviser.

Increased Scrutiny, Stiffer Penalties for Noncompliance

Take the FBAR requirement seriously. Several legislative changes, as well as a clarification of the IRS’s interpretation of the “willful standard,” have led to increased enforcement and stiffer penalties for noncompliance of foreign account reporting requirements.

The IRS states that the form “is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.”

Failing to File an FBAR Can Result in the Following Penalties:

  • A civil penalty of as much as $10,000, if the failure was not willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of 50 percent of the account or $100,000, if the failure to report was willful.
  • Criminal penalties and time in prison.

Consult with your Ciuni & Panichi international tax adviser if you have an interest in — or authority over — a foreign account. Your tax adviser can ensure you meet the FBAR reporting requirements and remain in compliance with the law.

Other posts relating to personal finance:

Changing Jobs: What About My Old Retirement Plan?

Retirement Planning: When to Increase Contributions

Watch Out for These Personal Finance Strategies

 

Watch Out for These Personal Financial Strategies

The Top Three Personal Financial Pitfalls to Avoid

Finance Strategy FSA 401(k)There are three financial strategies that seem to make good financial sense at first glance, but have the potential for abuse.

Here are the potentially appealing strategies and their dangers:

1. Purchasing the Largest Home You Can Afford.

Many individuals calculate the maximum amount they can borrow and then purchase a home based on that amount. Then, they find their budgets strained, with little money left over for other expenses. It’s a better personal finance strategy to do an in-depth review of all your expenses, deciding how much you’re comfortable devoting to a mortgage payment. You want to make sure there will be money left over for other financial goals and that unforeseen problems won’t prevent you from making your mortgage payment.

2. Paying off Your Credit Card Debt with a Home-Equity Loan.

Credit card and other consumer debt typically carry high interest rates that are not tax deductible. Home-equity loans, on the other hand, typically have lower interest rates and the interest is tax deductible as long as the balance is less than $100,000. Thus, using a home-equity loan to pay off consumer debt replaces higher interest, nondeductible debt with lower interest, tax-deductible debt. This is not necessarily a bad strategy, but the danger is you will run up credit card balances again. In that case, you reduced your home’s equity without improving your financial situation.

3. Get a Loan From Your 401(k) Plan.

Most 401(k) plans allow participants to borrow against their balances, believing it will increase employee participation by allowing access to funds before retirement age. The loan is not considered a distribution, so it is not subject to income taxes or the 10 percent early withdrawal penalty. Typically, interest rates are reasonable and the loan is fairly easy to obtain. Any interest paid on the loan is going back into your 401(k) plan.

The danger is that most people will have trouble saving enough for retirement without regularly dipping into their 401(k) plans. Also, some of your investments are sold to provide the loan proceeds. Even though your original contributions to the plan were made with pre-tax dollars, the money used to repay the loan is made with after-tax money.

Another danger exists if you leave your job before the loan is paid off, since you must then repay the entire balance in a short time or the balance will be considered a taxable distribution, subject to income taxes and possibly the 10 percent federal income tax penalty if you are under 59 1/2 years of age. For more information and assistance with related questions please contact us at 800-606-2292 or leave us your contact information here.

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Audit Your Retirement Plan Before the Government Does

Retirement Plan Audit Maintenance

It is a good idea for employers to self-audit their retirement plans by hiring an experienced professional to determine if there are any problems – before they hear from federal examiners.  Here are six common operational faults found by the IRS and the U.S. Department of Labor:

1. Late Deposit of Deferrals.  Many employers do not realize that employee salary deferrals must be deposited as soon as reasonably possible into the retirement plan after a pay date.
2. ERISA Violations.  Section 404(c) of ERISA permits retirement plans to transfer the responsibility and liability for selecting investment options to participants if certain requirements are met.  Many employers believe they will be afforded protection for participants’ investment decisions under this provision.  However, many plans do not comply with the requirements of Section 404(c).
3. Employee versus Independent Contractor.  There are strict rules to determine whether a worker is an employee or independent contractor for tax purposes.  The IRS looks at many factors in making a determination.  If you hire an independent contractor and the IRS later reclassifies the person as an employee, you can be hit with a tax bill for unpaid taxes, interest, and penalties.  You also might be liable for state taxes, unemployment taxes, and employee benefits – such as retirement plan contributions.
4. Services Performed Through a Professional Employer Organization.  Hiring employees through a PEO for long periods of time may not eliminate your obligation to make retirement plan contributions for these workers.
5. Improper Correction Method.  Employers can correct certain compliance problems in retirement plans without requesting advance IRS approval.  However, the proper correction method must be used pursuant to IRS guidelines.
6. Default Account.  Retirement plans often specify a money market account or a GIC (guaranteed investment contract) as the plan’s default account.  But plan fiduciaries must prudently invest nondirected participants’ accounts, even if the plan document provides for a “default” account.

Our Employee Benefits Plan Group can perform a compliance review of your retirement plan to help you avoid costly penalties and time-consuming government investigations.  We can work with you to define the scope of the compliance review so it conforms to your budget.

For more information, please contact Jeff Spencer at jspencer@cp-advisors.com or 216-831-7171.