Actionable New Year’s Financial To Dos

Yes, it’s time to turn the page on 2011 and start anew!  There’s nothing like a fresh calendar to begin making plans for your envisioned future.  Last week, we provided you with some of our Center best ideas for creating financial planning based resolutions.  Here, we provide you with some very specific and actionable steps you can take now to get a start on improving your financial health: 

  1. Take score: review your net worth as compared to one year ago
  2. Review your cash flow: how much came in last year and how much went out (hint: it is better to have less go out than came in). 
  3. Be intentional with your 2012 spending: also known as the dreaded budget – so think “spending plan” instead.
  4. Review and update beneficiaries on IRA’s, 401k’s and life insurance: raise your hand if you want your ex spouse to receive your 401k
  5. Review the titling of your non retirement accounts: consider a “transfer on death” designation, living trust, or joint ownership to avoid probate.
  6. Revisit your portfolio’s asset allocation:
  7. Review your Social Security Statement: if not yet retired you will need to go online – everyone’s trying to save a buck on printing and mailing costs
  8. Check to see if your retirement plan is on track: plan your income need in retirement, review your expected sources of income, and plan for any shortfall.
  9. Set up a regular review schedule with your advisor: an objective third party is best – but at a minimum set aside time on your own, with your spouse, or trusted friend to plan on improving your financial health.

So, after you promise to exercise more and eat less, get started on tackling your financial checklist!

In subsequent posts, we will elaborate on a few of these suggestions. Wishing you a prosperous New Year!

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Why Age Matters with Michigan's New Pension Tax

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Michigan held out...they protected people collecting pensions for as long as possible. But the tax breaks are over, as Michigan follows suit with many other states in the nation by taxing pensions. It all begins January 1, 2012. Not all retirees with pension income are affected. However, if your pension income is subject to Michigan tax, under the new rules, you will need to withhold Michigan tax in the amount of 4.35%.

Here’s how the new law may affect you --

1.  IF YOU WERE BORN BEFORE 1946

The new State of Michigan income tax doesn’t apply to your pension.

What will happen:  No Michigan tax is withheld from pension payments unless you request it. 

2.   IF YOU WERE BORN BETWEEN 1946 AND 1952

Some of your pension income may be subject to Michigan income tax. 

  • Up to $20,000 in pension income for single filers
  • Up to $40,000 in pension income for joint filers

Once you turn 67, the subtraction allowance applies to all forms of income 

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

TAXPAYER EXAMPLE:

Tom and Nancy Jones are a married couple.  Tom was born in 1947, is retired and collects social security and a pension.  Nancy was born in 1951, and is still working.

Tom’s Pension = $30,000

Tom’s Social Security = $20,000

Nancy’s wages = $40,000 

Will the Jones' be subject to pension tax in this scenario? 

Not under current tax law. 

  • Pension subtraction = $30,000
  • No withholding necessary on pension
  • Social security is exempt.   

3.  IF YOU WERE BORN AFTER 1952

Your pension will be subject to Michigan income tax until you reach age 67.  After you reach age 67, if the total income of all people in your household is less than $75,000 for single filers or $150,000 for joint filers, you can subtract the following pension amounts from taxable income on your Michigan income tax forms:

  • Up to $20,000 in pension income for single filers
  • Up to $40,000 in pension income for joint filers 

What will happen:  Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax. 

As always, work with your professional advisors if you have any questions about the tax law changes and your pension income.  

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

 

Source:  www.michigan.gov

Don’t Leave Free Money on the 401(k) Table

In this economy (or in any economy, for that matter!), none of us can afford to leave “free” money on the table.  So why -- and how -- are so many Americans giving away free money?

According to an article in the November 2011 edition of Financial Planning magazine, FINRA recently issued an investor alert urging approximately 30% of American workers who are not contributing enough to their 401(k) plans to receive their full employer match.  Failing to take advantage of this match compromises these workers’ ability to step-up their contributions and to potentially increase their eventually retirement savings.  One of the most common employer 401(k) matches is a dollar-for-dollar match of up to 3% of an employee’s salary.

While most of us will need to save much more than the 3% that may be matched to fund a successful retirement, it makes sense for all of us to do at least the minimum amount needed to get the “free” matching funds.   

Make sure your 401(k) contributions are set-up for 2012!!  Once you’ve taken the first step to start saving (and getting a no cost boost from your employer), meet with a financial advisor to form a strategy for saving additional funds to meet your future retirement goals.

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Pay Now or Pay Later?

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As if you didn’t have enough to do around the holiday, add this to your list … start thinking about contributing to your retirement plan, if you haven’t already. You have until April 15th to make a contribution for 2011, but first you need to figure out what kind of IRA to fund … a traditional or a Roth. Do you take the tax hit now with a Roth or do you pay later with a traditional IRA? First things first -- consider that most people will have somewhat less annual income later in life, when they are done working.  If working years are typically our high income years, then why choose a Roth or convert savings to a Roth when we are working? Why pay a higher tax on retirement dollars now than you will later? 

It may come as a surprise, but there are some situations when it makes sense to go ahead and bite the tax bullet now. If you happen to have a special situation where your income is considerably lower now (or during a working year), then consider a Roth or Roth conversion. Maybe you have excessive business expenses or losses that can be deducted in a year, or perhaps you've had a very low income year due to the slow economy or due to a job loss. Maybe you or your spouse went back to school or stayed home with a baby and the household income has been cut in half … all are good reasons to go with a Roth. 

There is another important consideration. If you believe that the tax brackets and/or tax system will be changed on us, your decision could be much different depending on your expectation. For example, if you feel that tax rates on your retirement dollars will be increased substantially between now and retirement, you might want to hedge your bets and implement a larger Roth allocation into your overall tax strategy. Even if it means you pay some unwanted taxes now, obviously this could help you from paying an even larger tax later. 

It's important to consider a diversified tax strategy as you would a diversified portfolio and to treat each year as a new decision for contributions and/or conversions.  It’s never a one-time solution.

 

Withdrawals on a traditional IRA are subject to income taxes and, if withdrawn prior to age 59 1/2, may also be subject to a 10% federal penalty.  Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors.  In a Roth IR, contributions are made after-tax.  The account grows tax-deferred and qualified distributions are tax-free.  Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. 

In a Roth IRA conversion, each converted amount may be subject to its own five-year holding period.  Converting a traditional IRA into a Roth IRA has tax implications.  You should discuss any tax or legal matters with the appropriate professional.

Laurie Renchik Honored to Share The Center's Wellness Efforts

The Center’s health and wellness initiatives were recently recognized by both the American Heart Association and Blue Care Network for building a culture of health and wellness in the workplace. 

A key factor in the program’s continued success since 2008 has been the positive power of wellness champions within the firm creating grassroots commitment within the firm.  

 

Accolades from Blue Care Network’s Healthy Blue Living program resulted in an invitation to sit on a wellness panel at a BCN’s recent five year anniversary event in Southfield.  

Planner Laurie Renchik represented the Center wellness initiative on the panel, sharing stories about activities and healthy practices adopted at the Center.

 

Sandy Adams Quoted in the Wall Street Journal – On Help for the Elderly

Sandy Adams, CFP

Voices: Sandy Adams, On Help for the Elderly 

Clients often don’t want to discuss elder care planning issues until something happens in their life that forces them to take action. But both older clients and middle-aged clients need to be proactive. 

For instance, a middle-aged client might suddenly realize that their parent can’t live alone anymore. If they haven’t developed a strategy for dealing with the cost of live-in care, then they have to find a way to manage the problem on an immediate basis. Elder care planning ends up becoming crisis planning.

One way advisers can help clients better prepare for elder care is by….Read More. 

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Hold the Check, Please

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Many of us will never need to worry about deferring compensation. In fact, the idea of waiting to get paid for work we do now until a year or more in the future would seem ludicrous. But if you're in a position where you're being offered a Nonqualified Deferred Compensation Plan, first count yourself lucky because you're likely a high-paid executive, then take a close look at your options. 

Simply put, deferred compensation is an agreement between an employer and an employee to hold back a portion of earnings for work performed today for payment in the future. Deferred compensation plans are a benefit most commonly offered in executive pay packages. Because the planning and tax implications associated with deferred comp are complex we recommend consulting with your financial advisor before making the decision to sign on. But the following points will help give you a basic understanding.  

Key takeaways from a tax and financial planning perspective: 

  • Participation will reduce current taxable income
  • Earnings grow tax deferred until distribution
  • Consider maxing out 401k savings first; then NQDC, since this will provide the opportunity to save more, potentially filling the gap that can arise between income needed in retirement and income received from 401 (k) plans, pensions and Social Security
  • Consider flexible distribution options - either during employment or in retirement. To qualify for a tax advantage, the IRS requires a written agreement stating the specified period of deferral of income.  An election to defer income must be irrevocable and must be made prior to performing the service for which income deferral is sought (Ex: An election to participate for 2012 must be filed in December 2011).            

A big challenge when it comes to saving for retirement is creating alignment between current income needs and saving for the future. If you are eligible to participate in a Nonqualified Deferred Compensation Plan then the next step is to see how this type of retirement savings fits into your overall plan for wealth accumulation and financial independence. 

The good news is that the decision is up to you and there is a great deal of flexibility. Plus, the impact of working now and getting paid later can be invaluable.  Talk with your financial advisor to see if it makes sense for you. 

 

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

Live YOUR Plan™

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