Example of per stirpes inheritance (Photo credit: Wikipedia)

When working with your estate planning (even if you don’t realize you are) you may run across the terms per stirpes and per capita.  Choose one type over the other and you could have a significant impact on who eventually receives your estate.  So what do these two terms mean?

Dictionary.com defines the two terms as follows:

per stirpes – noun; pertaining to or noting a method of dividing an estate in which the descendants of a deceased person share as a group in the portion of the estate to which the deceased would have been entitled.

per capita – noun; noting or pertaining to a method of dividing an estate by which all those equally related to the decedent take equal shares individually without regard to the number of lines of descent.

This probably seems like just so much gunk to you, so let’s look at an example.

Joe has four children, Anna, Benny, Björn, and Agnetha.  Anna and Benny have no children.  Björn has three boys: Neil, Alex and Geddy; while Agnetha has two boys: Peter and Eric.  Joe is planning his estate and he wants to split his assets evenly among his four kids when he dies, and if the any of the kids dies before he does, he wants the grandkids to receive the share of the child that died.

Joe designates each child as an equal beneficiary of his estate, identifying each by name.  He then indicates that he wishes for the grandchildren to receive a share in the event that their parent dies before Joe.  He’s stuck deciding whether or not to choose per stirpes or per capita for the distribution.  Typically the verbiage would be “I leave my assets to my then living descendants, per capita” or “I leave my assets to my then living descendants, per stirpes”.

Let’s look at what will happen if he chooses one type of distribution over the other.

If Joe Chooses Per Stirpes…

… and Anna (with no children) dies before Joe, then Benny, Björn and Agnetha will each receive 1/3 of the estate, and a share would not be created for Anna.  The same would be true if Benny dies before Joe – in fact, if both Anna and Benny predecease Joe, Björn and Agnetha will receive 50% shares in the estate, and no shares would be created for Anna or Benny.

On the other hand, if Björn died before Joe, then Anna, Benny and Agnetha would each receive a 25% share, and Björn’s children, Neil, Alex and Geddy would rush to receive 8 1/3% of the estate, or Björn’s 25% share divided into thirds.

If Agnetha died before Joe, her children Peter and Eric could humbly and blindly accept 12 1/2% each, which is Agnetha’s 25% share split in two.

If any of the children of Agnetha or Björn had also predeceased Joe, the division would only be among the living grandchildren, with no provision for the deceased child.  That is, unless the deceased child had children of his own, which would be Joe’s great-grandchildren, in which case the great-grandchildren would receive the share of the deceased grandchild.  This would continue for all living heirs until the estate is completely distributed.

If Joe Chooses Per Capita…

… and all of the children and grandchildren survive him, each of them would receive 1/9 share.  This is because per capita designates that all living descendants, by headcount, split the estate equally.

If any (or several) of the descendants of Joe have predeceased him, the shares would adjust for the remaining number of heirs.  For example, if Björn died before Joe, then Anna, Benny, Agnetha, Neil, Alex, Geddy, Peter and Eric would each receive 12 1/2% of the estate.  The shares would adjust for any others that predeceased Joe, or for any additional grandchildren or great-grandchildren that may have been born prior to Joe’s death.

Common usage

As you can see, per stirpes results in what most folks consider to be the most fair distribution among heirs.  The inequity that comes up when these designations are used is when an heir predeceases the decedent in question (Joe from our example above), he or she would receive no share of the decedent’s estate, not even via his or her own estate.  This can be rectified by naming the primary beneficiaries (Anna, Benny, Björn and Agnetha in our example), and then indicating that contingent shares could be designated to their estates if no living heirs, or to their living heirs, per stirpes.

Per capita is not used often, and it can cause some problems.  Notwithstanding the fact that your children are penalized if they don’t happen to reproduce while their siblings did, when assets are transferred more than one generation away from the decedent, there can be an additional generation skipping transfer tax (GSTT) applied to the distribution.  Sometimes per capita is used by generation, which can result in an even distribution among a particular generation, if that’s your intent.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Taking a departure from my regular topics of taxes, retirement accounts, and Social Security, today I’m reviewing a book dedicated to the topic of blogging.  This is another of the books that McGraw-Hill has provided for me to review (see note below). 

This book, by Mark W. Schaefer and Stanford A. Smith, provides a quick-read overview of the activity of writing a blog successfully.  As with any venture, it’s important at the start to have a goal for the activity, and for many folks it’s simply to get a message out there about a product or service.  For others, the goal is to be a source of information; others yet look to showcase collections of graphics, photos, audio and/or video.  And many hope to gain an audience that will somehow pay off for them – either from sales of products, services or subscriptions, or from ad revenue from third-parties who pay the owner of the blog to advertise on the site.

Schaefer and Smith take you through this entire process, step-by-step.  The perspective of an independent blogger is discussed as well as that of a corporate marketing effort.  With the tools discussed in this text, virtually anyone can start up a successful blog, on virtually any topic.

I particularly liked the early sections on the types of bloggers based on how they produce content – and there are several.  Storytellers write about their own or others’ experiences; dreamers write about things they’d like to change or see changed; persuaders attempt to get the reader to undertake their point of view (often politically, economically, or religiously); teachers provide lessons on topics that are of interest to their readers; and curators collect things – quotes, photos, audio, video, etc..

If you are just starting out on your mission to produce a blog, an excellent place to start is to pick up this little book.  It’s a short read (165 pages, good for a long flight or an afternoon or two on the beach), and the writing is straightforward, understandable and complete.  I would recommend this book to anyone starting off with a blog, or anyone who has already been blogging and is beginning to have difficulties getting the results you’d hoped for.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest?

Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are.  Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review.

Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them.  For example, regarding market timing: “Our favorite holding period is forever.”  Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact that the only time most individual investors want to sell is at exactly the wrong time, when markets are tanking.  After developing a sound investment strategy, using low-cost index mutual funds as the foundation, it’s best to stick to your strategy through thick and thin.

Another example is offered in these words of wisdom from Buffett:  “The most important quality for an investor is temperament, not intellect.”  This comment is particularly useful when considering whether or not you should pay attention to the likes of CNBC, Investor’s Business Daily, or other “noise” going on in the media.  Instead, having a sound investment policy that you stick to, maintaining your temperament (don’t let your emotions drive your decisions, in other words), is the way to success in investing.

Throughout the book, Mr. Swedroe provides additional tools and insights that can easily be put into play immediately.  There is an example of a personal Investment Policy Statement (the guide you’ll need to help you through the “tough times”), as well as a basic strategy for developing an investment allocation plan that is diversified, low-cost, and will provide you with stable investment returns throughout your life.  In addition, Mr. Swedroe covers the topic of how and why you might choose to hire a financial advisor, along with advice on the type of advisor you should choose (and here’s a clue, Dave Ramsey fans: it’s not commissioned advisors, it’s fee-only advisors) because it’s not always about finding the lowest up-front cost, it’s more about finding someone who will work in your best interests.

In addition to investing, Mr. Swedroe takes time to point out that the “activity” of investing should not be a focus for the individual investor – that the time spent on researching, managing, and monitoring any type of investment aside from the index-type of investments that he recommends, is lost time.  Think about it: if you spent two hours a day on these investment activities (which is nowhere near enough time, in my opinion) in addition to your “regular” job, that’s 730 hours a year that you could be coaching your kid’s soccer team, re-connecting with your spouse, or spending time with your aging parents.  Implementing the simple strategies in this book will cut down your time involved in investing activities to something like an hour a quarter – yes, only four hours a year!

The last section of the book provides Mr. Swedroe’s “30 Rules of Prudent Investing” – which, on its own provides a fantastic foundation of insight for the individual investor to follow for success.  I highly recommend this book for anyone who has searched high and low for the “silver bullet” to investing success.  As you may know, there’s no such thing as a real “get rich quick” scheme in the investing world – the real “silver bullet” is this simple, boring, use of index funds and dogged sticktoitiveness.  Do yourself a favor and read this book, shut off CNBC, and get back to enjoying life.  You’ll do wonders for yourself and your life.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation.

Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income.

If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the federal and state level. So in this case the money going into the Roth IRA has been “hit twice” with federal and state taxes.

One possible way to avoid this double whammy (going by current Illinois law) is to contribute to your employer’s plan and then at retirement or whenever you leave your job, convert that money to a Roth IRA. In this case the money from your paycheck is already deferred from state taxation and then when it’s converted to a Roth IRA, avoids state income taxation again – since it’s income from a retirement plan and considered retirement income – which Illinois does not tax. This is evidenced by the 1099-R you’ll receive at the time of conversion.

Another way to avoid this is if your employer’s plan allows, convert your 401(k) to a Roth 401(k) while you’re still employed. Again, you’ll pay federal income tax but avoid the state taxation if your state excludes retirement income for tax purposes. If you’re in a higher tax bracket, you may consider staging your conversions up to the point where you maintain low tax costs (converting small amounts over many years). Or you may just want to wait to convert the whole amount when you know you’ll be in a lower tax bracket.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

I recently once again was honored to be interviewed on the radio by Mr. Jim Ludwick.  Jim is a CERTIFIED FINANCIAL PLANNER^TM professional, and his practice is based in Odenton, Maryland with additional offices in Washington, DC, Santa Barbara, California, San Mateo, California, and New York City.  Jim also is a fellow member of the Garrett Planning Network.

We discussed the recent new edition of my book, A Social Security Owner’s Manual, 2013 Edition, and the new information that has been provided there.  We also reviewed some of the reasons that the Social Security benefits calculation process is so complex, as well as the concept that, in many cases, it can be more efficient to use IRA resources to help you get by until your Social Security benefits can be maximized.

I reviewed a case like this recently in an article at credit.com, entitled My Smartest Money Move: Taking More From My IRA.  In that case, a retiree saved a boatload in interest and taxes by using his IRA in the early years, maximizing the amount of future income he’ll receive in Social Security benefits.

You can follow Jim’s radio program on BlogTalkRadio; his channel is Swim With Jim.  The specific recent episode where I was interview is called Social Security Answer Man.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Quite often, for many different reasons (often known only to the deceased original owner), the original owner of an IRA designates a beneficiary that the survivors don’t necessarily agree with. It might be that only one of several children is designated, or perhaps additional beneficiaries are designated along with a spouse.  In cases like these, there are ways to make changes to the outcome of the inheritance.  In this article we specifically deal with the case where only one of four children was designated as the primary beneficiary of the IRA.

To resolve the situation, let’s consider the following IRA: John, the decedent, designated April (his daughter) as the primary beneficiary of his IRA.  It isn’t known why John only designated April as the beneficiary, as he has three other children – Bill, Chuck, and Dale – and John had only his IRA as an asset to pass along to the children.  April could choose to take the entire IRA as her own and receive payments over her lifetime using the stretch rules, but she sees the inherent lack of fairness in the situation, so she wants to make the IRA available to her brothers as well.

One way to accomplish this would be for April to withdraw 75% of the IRA and split that amount with her brothers.  She would then be able to stretch out the payments on the remaining 25% over her lifetime.  Mission accomplished, right?

The problem with this option is that April would have to pay tax on the 75% distribution – and since the IRA is sizeable, this is a significant cost.  Naturally she could just pass along this tax cost to her brothers in the form of a reduced payment, but this isn’t a very efficient way to distribute the money.

On the other hand, April could maintain the account in her name and stretch out payments over her lifetime, splitting each payment (after tax) among herself and her brothers.  Again, this accomplishes what she had set out to do, but she’s still paying tax on the entire amount and since our tax system works on a graduated scale, the tax on 100% received by one person is likely to be much higher than the tax would be for four persons each receiving 25% from the account.  In addition, the three brothers would be required to wait until April decides to take a distribution before they would have access to the account.  Bill for example, would prefer to withdraw a large sum right away as he’s building a home and could use the funds for the construction.  This would be very inefficient (tax-wise) if April had to make the withdrawal for him and pay the tax at her higher rate.

So – what else could be done?  It would be great if there was a way for April to re-write the beneficiary designation so that all four children were considered to be the beneficiaries, but that’s not possible.  What is possible is to re-direct a portion of the inheritance, by way of a method called disclaiming.

It’s important to know how to properly disclaim the inheritance of an IRA.  The person disclaiming all or a portion of an IRA must not be an eventual beneficiary as a result of the disclaimer.   Plus, the person disclaiming must not be in a position to direct who are the new beneficiaries; the natural course of the law must be followed.  If either of these rules is broken, the disclaimer is considered to be nonqualified, and any distribution would be considered to have been done by April.  Any amount transferred to her brothers would be considered a gift, subject to gift taxes.

So, if April disclaims the entire IRA, the new beneficiary would be John’s estate.  Since John’s will dictates that the four children will split all of his assets equally, this would accomplish the desired result, right?  No, not really.

The problem is that, when April disclaims the entire IRA, she is still an eventual beneficiary of the IRA since the estate becomes the de facto beneficiary, breaking the first rule above.  In addition, since the estate isn’t a “person”, the stretch rules can’t be used for this IRA at all.  When there is no real person as a beneficiary of an IRA, the entire account must be paid out within five years, rather than stretched out over a beneficiary’s lifetime.

What April should do is to disclaim 75% of the IRA, and also disclaim rights to the IRA portion of the estate that results from her first disclaimer.  This gives her 25% of the original IRA with the stretch benefits still intact.  In addition, since she’s disclaimed her right to the estate portion of the IRA asset, her brothers each have right to 25% of the IRA – 1/3 each of the 75% that April disclaimed.  This portion passes through the estate to the brothers.

The brothers will not be allowed to stretch out their payments from the account for more than five years – this is one unfortunate circumstance that can’t be avoided.  But otherwise, the eventual distribution is much more “fair” – even if it’s not what John had planned.  And each brother has control over his portion of the funds, at least for distribution purposes.  Bill can take the large distribution right away, and Chuck and Dale can delay up to five years before taking a distribution.  And each of the four siblings will only pay tax on the distribution that he or she takes.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Author Richard A. D’Aveni has written a very compelling book with Strategic Capitalism, a book that provides some very important information for Americans to review and consider due to the coming economic cold war between the United States and China.  Mr. D’Aveni asserts that the United States’ traditional version of capitalism must be adapted in order to compete with China’s conglomeration of various types of capitalism.

The beginning of the book details the many different pure types of capitalism – Laissez-Faire, social-market, managed, and philanthropic – and how these have been used over the years in many different economies.  Mr. D’Aveni points out that rarely is a single pure type of capitalism ever the only type of capitalism in use in an economic system, but rather that many different forms of capitalism are blended together to work in the economic and political interests of the country or union in question.

The US has primarily used laissez-faire capitalism with specific components of managed capitalism to meet certain needs of the era.  China (of late) has been using managed capitalism aggressively to both protect and promote the mostly state-run companies there, as they seek to dominate across the globe.  This protection and promotion has not followed the same rules that the US has established and most western businesses adhere to.  Due to the fact that the type of capitalism used by China is thwarting the “old rules” of business, in order to continue to compete in this new world, the US must adapt the form(s) of capitalism that are used.

The second part of the book goes into great detail about the types of changes that the US must make – and admittedly, D’Aveni points out that these are mere suggestions intended to start the dialog.  Among the radical changes that the author suggests are: dropping out of the World Trade Organization (China is thwarting the rules and there is no mechanism to force compliance), dropping out of NATO (not enough economic or military support from most members to make up for the cost to the US), and dropping out of the United Nations (similar reason to NATO).

At the same time, the US should consider creating several new alliances that can be used to control the economic sphere that the US is to dominate, while at the same time limiting the areas that China can control.  D’Aveni also advocates using tactics of Sun Tzu (how apropos!) to eliminate China’s advantages indirectly rather than directly.  But first, the US needs to get its national economy in order, another topic that the author covers as well.

One area that can be resolved somewhat readily is with our extensive social programs, specifically Social Security, Medicare and the coming Obama-care. True means testing could be put into place for all programs, as benefits are being wasted on folks who don’t really need them, where the programs were designed to provide a safety net for the truly needy. Social Security taxation could be applied to all income levels as well, just like Medicare tax. Health and retirement benefits could be handled in large part by causing compulsive savings programs to be put into place for all workers. Health benefits would then be mostly covered (except for catastrophic costs) by the individuals’ own savings plans, which would likely reduce the over-use of the system and cause folks to make better health-care decisions, since the cost is borne by the individual, rather than “magically” by a faceless insurance company.

In terms of a very good primer on the capitalism environment in the world today, Mr. D’Aveni has written an excellent book.  In addition, the suggestions he has made are very well-developed, and even though it’s not likely that his suggestions would be implemented completely, they provide a good basis for discussion.  This book should be required reading by all policy makers in the western world, as I believe (at least in the US) that too many of our economic policies are designed for short-term solutions to situations that will garner votes, rather than longer-term solutions to our global economic position.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

You’ve heard the saying before that there are a few guarantees in life: death and taxes. I’d also like to add another: guaranteeing yourself a rate of return. I get asked this question frequently, usually by someone who’s a conservative investor or someone looking for a “sure thing”. This is what I tell them and I am telling you. Call this your money back guarantee. For the majority of readers, this will come into play as most of you have debt in some form or another. Whether it’s your mortgage, automobile, boat, credit cards, college, many Americans have different amounts of debt all at different interest rates. Typically, your consumer debt (credit cards) is going to have the highest interest rates.

Here’s how to guarantee yourself a rate of return: PAY DOWN YOUR DEBT. By paying down your debt you will be guaranteeing yourself the rate of return equal to the interest rate you’re paying on the debt. For example, let’s say you have credit card debt of 15% on a balance of $10,000. Want to guarantee yourself a rate of return of 15%? Pay off your credit card. And fast. Do me a favor. Go on the Internet and search for a minimum payment calculator for credit cards. Many cards are now showing this in the fine print on their statements. For my example, I put in $10,000 debt at 15% interest and a minimum payment of $200. After 30 years, yes 30 years, the total payments made on that $10,000 of debt are $25,573 – and I still owe! An easy way to look at this is let’s say you paid off the card right away with $10,000. Right off the bat, you’ll have saved over $15,000 by not making minimum payments.

If you’re starting anew and this whole paying off debt thing is alien to you, try upping your payments (baby steps) or even getting rid of “luxury” items you don’t need until your debt is paid off, like cable TV, dining out, etc. and put that monthly cable TV, dining out money, etc., toward the debt you owe.

My suggestion would be to start on the highest interest rate debt you have first and then pay down from there. Once you’ve paid down that debt, move to the next highest interest rate and so on. Some people are in favor of starting on the smallest amount of debt first and going from there. The reasoning being that you can build momentum by getting at least something paid off quickly. From a strictly monetary standpoint, you’ll save more money paying down higher debt first, but feel free to use whichever method you prefer. Just do something!

Another idea when you start paying down your debt is to tack on an additional 10% or more on what you’re currently paying and keep increasing that percentage monthly or annually until you can pay it off in full. It’s exactly the same as the 10% toward saving more money, just used to pay down debt quicker.

One debt that you can consider just paying the regular monthly payments on is your mortgage. Nothing wrong with paying it down early – do it if you can. Given today’s interest rates being at historic lows (as of January of 2013) it’s not as big of a deal as 15% in credit card interest rates is. Plus, you can deduct the interest on your mortgage. In addition, with mortgage rates so low, a better investment return may be achieved elsewhere in the market, however, that extra return is not guaranteed. That being said over 15 years or 30 years as most mortgages are, you’re there’s a high likelihood of better returns.

One final caveat to consider is this: once you’d paid off a debt, act as though you still have to make the payment only this time (you guess it) pay yourself first. Continue to pay that “bill” only now direct it to your savings, IRA, college fund, etc.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

As of this writing there are about 7 states that have left issuing paper income tax refund checks in favor of plastic debit card. Those states include Georgia, South Carolina, Oklahoma, Virginia, Connecticut, Louisiana, and New York (New York still offers the choice of paper or plastic).

The main reasoning behind this new refund system has been to eliminate the costs associated with issuing paper checks, with the cost of printing and issuing cards now passed to the credit and debit card companies.

But the costs saved by the state may end up costing those issued the debit cards. Here’s how:

Most cards will allow a one-time withdrawal of cash free of charge. Those that want their entire refund in cash simply need to go to a participating bank (one that works with one of the major card companies) and request the withdrawal. After the one-time freebie, then fees can be from $2 to $10 per withdrawal.

There’s also a fee should you not use your card for a while. Go 6 months without using it and it could cost you $3 per month. Need a replacement card? That’ll be $10-$15 please.

Admittedly, these cards can be convenient for those that intend on spending the money, but should you want to save or resist the temptation, you can always make the free, one-time withdrawal, or simply set up a checking or savings account at your local bank and have your refund direct deposited. Another option is to consider having your refund issued in US Savings Bonds.

In my opinion, the issuing of cards could end up hurting the people who don’t have savings or checking accounts and are the ones that need them the most, and would be most adversely affected by the fees involved with the debit cards.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

As you begin your search for a financial professional it’s going to be important to know how the particular professional you choose will get paid. It will also be important to ask questions not only in regards to their compensation, but who actually pays the adviser.  There are generally three ways in which financial advisers and planners get paid.

Commission:  An adviser that’s paid on commission generally gets paid based on the underlying product they sell. Commission rates vary depending on the product sold – anywhere from 5% to 50%. Term Life insurance for example, will have roughly a 40% commission rate on the annual premium for the first year. Whole Life insurance is generally 50% the first year. The difference being Term Life may have an annual premium of $1,000 where Whole Life may have an annual premium of $5,000. It can be difficult to be objective when an adviser can make $2,500 versus $400 in commissions. Other commissioned products include load mutual funds that charge a load or commission on the initial purchase (i.e. a $1,000 investment with a 5% load means your net investment is $950), annuity products and individual stocks and bonds purchased through a broker.

Fee-Based: Fee-based is essentially a combination of commissions and fees. Generally speaking a fee-based adviser will get paid on commissions on certain products, and will get paid a fee on different products. For example, an adviser that sells life insurance and annuities as well as investment management can get paid commissions for the life and annuity products, and can choose to be paid a flat fee or percentage of the assets in the investment management account. Some products are fee-based, but pay the adviser a commission to sell them. For example, you invest in an asset management account where the annual fee is 2% to have your money “professionally managed”. You may only see a 2% charge for your fee, but the adviser that sold you the program, may receive a commission. This is generally seen in proprietary asset management programs of various companies and brokers. In both circumstances, the adviser is compensated by the product sold.

Fee-Only: Fee-only means that your adviser or planner gets paid directly by you. Therefore, fee-only advisers and planners are compensated for their advice, not on a product they sell. Fee-only advisers get paid a few different ways. The first way is strictly on an hourly basis, similar to how an attorney gets paid. Generally they will give you an estimate that will show you a range of what your fee will be such as $500-$950 for a financial plan. Another way that advisers get paid is via a flat fee for any assets (investments) of yours that they manage for you. This can range from .25% to 2% depending on the amounts invested. Some planners have minimums (i.e. you need $50,000 of assets to work with them) and some do not. Most will have a graduated fee schedule where the more money you invest, the lower your fees get based on certain thresholds.

Many fee-only advisers will take you “off the clock” meaning that once you become an AUM client (assets under management); they will no longer charge you by the hour for advice and questions. Be careful of advisers that “double dip” by charging fees for both managing your money and by the hour for other questions and planning. Make sure their advice is worth the extra money.

Finally, fee-only is very transparent, meaning that you see exactly what you’re paying either from your checkbook or from your quarterly statement.

Of the three, fee-only is arguably considered to be the most objective, yet not 100% perfect. Think of it this way, it can become extremely difficult (although not impossible) for a commissioned adviser to be truly objective when they only way they are compensated is if they sell you something. It becomes even more difficult if their job is on the line, they have a quota to meet, or an incentive such as a company trip dangling in front of them. That being said, all three ways have their advantages and disadvantages. It all comes down to what you’re comfortable with, and whom you’re comfortable with. Do your homework, ask lots of questions. Above all, any adviser no matter how they get paid should put your interests first – above all else. Consider an adviser or planner that is a fiduciary. This means that they are legally obligated to put your interests first.

Lastly, an advisers commissions and fees are not inclusive of the expense ratios and fees of the products they put you in. For example, you could pay a 1% fee to a fee-only adviser  but they have you in a mutual fund that charges 1.5% in expenses. Or a commissioned adviser could sell you an annuity that had fund fees of 1.5% and policy charges of another 1.25%. This is another 2.75% of charges annually in addition to the commissions paid! Read the fine print and know all of what you’re being charged. Good professionals deserve to get paid, but their goal should be to have more of your money working for you, not the other way around.

The latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link, or you can get the Kindle version at this Kindle version link.
Post from: Getting Your Financial Ducks In A Row

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).