Roth IRA or Not? Listen in on the new Roth IRA Rules

Awesome New Ebooks to Help you be Wealthy

I have 4 ebooks on Amazon that have been published.  I know that these ebooks will give you information that you can take to the bank. In fact, I am so sure -that I am going to reward you for telling the world what you got from the ebook and how it helped you.

Here’s the deal – You purchase the ebook and write an honest review on Amazon of  what you got out of it and then send me an email or make a comment below that you have done so.

In return, I will spend 15 minutes on the phone with you about any personal finance dilemma you may have. Each review earns you 15 minutes with me so you can get a whole hour of time with me, a Certified Financial Planner for over 26 years experience,  for only 4 reviews.

The 401K First Aid Kit: Stop Your Portfolio Losses and Get Back to Financial Health

The 7 Secrets of the Wealthy

The Top 7 Tax Saving Tips

The 7 Worst Pieces of Financial Advice

What’s the catch? You must be a newsletter subscriber. It’s free and spam free, and you can unsubscribe at any time- so put your name and email address in the upper right box on the home page and you will qualify immediately.

I look forward to talking to you soon!

-Fern

Review Your Federal Tax Return to Build Wealth

Many people don’t bother reviewing their federal tax return after it has been prepared. That’s a big mistake. As a Financial Advisor, I always insisted on reviewing the federal income tax forms with the client. I can find out a lot about the accounts and the investments of a person through a review of these forms. There are many valuable insights that you can get from an income tax review that can build wealth and help with financial decisions during the year. Here are just a few:

1. When you get your refund or a statement of what you owe, many people mistakenly think that amount is what they paid in tax. That is not true. Go to line 61 of the Federal Form 1040 and see what you paid in tax.  If that is a high percentage of  line 22 which is your total taxable income, then that is a sign you may need more tax deductions.
2. Line 8a Taxable interest and 9a Ordinary dividends are the earnings that you are paying tax on. Those earnings usually come from bank saving accounts and money market accounts. If this is a high amount, then it may be time to look at putting some of that money into a long term growth investment like a mutual fund.
3. Line 13 and 14 are capital gains from your investments. If this number is high, then I would look into the investments you have that are creating such high amounts of capital gains. It may also mean that you sold some investments that had a gain and I would want to know why.
4. Line 15a and 16a have to do with distributions from your retirement plans. If a rollover was done properly, it should show 0. If it wasn’t, I would ask what happened and see if that can be reversed. Believe it or not, I have had this happen. Also, I make sure that IRA distributions weren’t taken out before age 59 ½ because then a penalty would show on Line 58. I would advise the client to look for other ways to get income other than paying income tax and penalty tax on an IRA distribution.
5. Line 20b is the dreaded taxable amount of your social security. Yes, social security is non-taxable but only to those who have income under a certain amount otherwise there is a pro-rata tax on your social security.
6. Anything entered on Lines 23-37 would tell me if the client had deductions against their income. The most popular is line 33 which is student loan interest deduction. If that was a high amount, I would work with the client to get their student loans modified or get the interest lowered.
7. Line 40 is the total of your itemized deductions. Most people who have a loan against their home will have an entry here because of the mortgage interest expense. A tell tale sign that a client should look into buying a home is when the total tax amount is a high percentage of the total income amount.
8. Compare Line 7, total wages with Line 61, total tax. If I see that the client is paying too much in tax compared to their wages, I will ask if they are maximizing their 401K, or 403b, or other deferred compensation plans. Usually I get a no. If they would maximize their retirement plans they would pay less in tax and more towards their retirement security.
9. Line 62 is the total tax withheld from your paycheck. If it wasn’t enough to pay the tax on line 61, then you didn’t have enough withheld. But don’t panic! That’s a good thing. It’s okay to have to pay some tax at the end of the year (but not a large amount that would trigger a penalty). In fact, that’s ideal. That means that you got a higher amount in your paycheck than someone who got a huge refund. Those that get a huge refund are giving the government an interest free loan with their money. Some people who are not financially disciplined use this technique as a forced savings account so they can spend it on a car or vacation. You, however, are the smarty pants that took the extra money each month and invested it and got even more money so now you have to pay a little bit of tax. It was well worth it since you came out ahead.

As you can see an income tax review is a great way to build wealth. I consider the federal tax return a snapshot of a person’s whole financial picture. You can use the federal income tax forms as a guide to answer questions such as whether to contribute more to deferred compensation plans, buy a home, or change your investments, and more.

A Sad Tale of Good Estate Planning Advice Gone Wrong

I just got back from a memorial service for a good friend of mine that I had known since high school. Unfortunately he left behind an estate planning nightmare. I gave my friend many financial planning tips over the years and he did everything I suggested so he could to make sure his business, and finances would be in order in case something happened to him.

So- what went wrong if he did everything right?

Our culture supports us working with family and friends and those that we trust when we are put in positions of having to make important decisions about things that we don’t know anything about.  We have our cousin help us buy a car (since he works at the dealership) or the aunt that does our taxes (since she works at an accounting firm) or our brother-in-law that will refinance our home at a good rate (since he is a mortgage broker).

In this case, a family friend who is a retired attorney had set up the estate plan.  There was just a will and nothing else. Now the estate has to go through probate and the heirs are watching their inheritance go down the drain since they are helpless to keep his business running until it could be sold. No one has the power to pay the bills on his home and no one can pay his employees. Everything freezes until the estate settles.

Can you imagine the shock and grief that his adult children are going through? Not just mourning a death but watching a man’s legacy go down in value right before their eyes and there is nothing they can do.

Now the attorney is a good man and has had a good legal career; but if you look at his credentials, he did very few estate plans and was mainly a personal injury attorney. He gave my friend a “good deal” on the estate plan just like many of your family friends will give you a “good deal” but sometimes it is better to pay full price with a stranger who has the expertise that you need. It will cost you a lot less in the long run.

Treat your well meaning family and friends like you would when you are scrutinizing other professionals. Check out their background and credentials to see if they really have the expertise to help you with your particular problem.  It is a complex world out there and everyone cannot know everything so you really need someone with a particular skill set that suits your needs.

I remember when I needed a skin graft and I asked my orthopedic surgeon who saved my life and with whom I trusted, to do the surgery. He replied, “Well, Fern, I can do it, but I haven’t  done one since med school. I think you would be better off with a surgeon that does a lot of these types of surgeries.” Enough said. I got it, and you should too.

Get your estate plan done right by an estate planning attorney who specializes in estate and elder law.

Love and Investments

I’ve always talked about the problem of falling in love with your investments and I’ve seen it all over the 20 plus years in my office – tears, marital fights, family arguments, etc. As a Wealth Coach it is my job to be objective and impartial. I’m the number cruncher who can show you the decisions that need to be made and explain the consequences. I can even make a list of the non-financial pros and cons of whether to buy or sell.

However, I now find myself facing the same dilemma as I oversee a team of professional cleaners – cleaning what was once my home in San Francisco. A hasty move happened due to a lengthy hospital stay. As my husband and I try to make sense of whether we should sell or rent it, I feel my objectiveness go out the window. I crunch spreadsheets to no obvious answer. I resort to a simple list of pros and cons which brings me to 50% sell /50% rent.

It occurs to me that no number can make you unravel the college fund of a deceased son, or sell the family summer cottage, or as in my case, sell my former home that I now stand in after a long medical journey. There’s a lot more there than numbers in personal finance and I feel like that’s why I so eagerly embraced the coaching profession. When people think of a coach, they think of a coach of an athletic team. But a professional life coach is not like that. Unlike my Financial Advisor career, I don’t try to “fix” the client but rather work with what they have and where they are at. I also do a lot more listening – deep listening, since most of my clients I have never met in person. All of my coaching sessions are over the phone. The coaching conversation model has the client talking most of the time and it generally follows these 5 components:

1. Focus the conversation on what the ideal outcome would be like
2. Discover the possibilities
3. Plan the action
4. Remove the barriers, and identify support and resources.
5. Review and set the stage for next steps

More well known companies (Google, Kaiser, Dell, and Motorola) are embracing the coaching experience for their executives and the general public is catching the wave, too. The cleaners are gone now. I think I will call my Coach.

5 Reasons Why You Are Not Wealthy

One of the first things I learned when I had a coaching client was that the client had to be coachable. I didn’t really understand that since everyone wants to make money, and who wouldn’t want a professional to help them understand how to save and invest?

But over the years, I realized that my mentors were right. When you are “ready” to receive the information that you need to create wealth, then the wealth building starts. What does it mean to be ready? Follow these characteristics and see if they apply to you:

1)      You are not healthy so you spend a lot of mental time worrying about your physical self that you have no time to think about how to arrange your money to support your lifestyle.

2)      You are so obsessed with work that relationships and taking care of yourself are not a priority and so your wealth building strategies become last on your to-do list.

3)      You want someone else to do it for you but you don’t have a clue on what to tell them to do. You think that by outsourcing all of your financial affairs, it will get taken care of and also make your wealthy.

4)      You blame your work, family, friends, and spouse for your lack of wealth. If only you weren’t married to a spender or if only you didn’t have kids, or if only your husband didn’t leave you, then you would be wealthy.

5)       You blame the economy, the president, the tax code, etc., for preventing you from achieving great wealth.

When you stop blaming anything and anyone on how you got into your situation and start to rouse your inner energy to make things happen, then wealth will start to happen for you. But you really have to let go of the past and the future and say, “How can I start right now to make a real difference in my financial picture?  How can I make the money I earn make money to support me?”

When you are ready to say that, then you are ready to work with me, Wealth Coach Fern CFP. I will be here- waiting for you. Because I believe in you and I can help you build a financial infrastructure to support the lifestyle that you want. The sky is the limit but the limitations are inward not outward. Are you ready? I am waiting for your call or your email.

Why You Need a Mortgage

You need a mortgage. Sounds crazy right? Isn’t sound financial planning and wealth building strategies all about saving and investing? Not necessarily. It is about saving and invest and keeping more of what you earn. That means keeping a careful eye on taxes. One of the biggest tax deductions (other than your retirement plans like a 401K) you can take is the mortgage interest deduction. When you take out a mortgage most of your payment is interest and all of that interest is deductable. If you have a mortgage, take a look at your Schedule A Itemized deductions federal tax form.  Under interest deductions, you will see how much you wrote off of the total amount of yearly mortgage payments. Why so much? Because almost all mortgages are fully amortized, this means that each payment is part interest and part principal.  In the early years you will see that almost all of your payments are interest. You can get a mortgage amortization schedule of your mortgage on an online calculator if you really want to get exact.

Most people focus on the payments that they make on their mortgage. There wealth building strategy is to get a lower payment. That can be a really bad strategy in some situations. Let’s look at two in particular:

1. John is getting ready to retire. His wealth building strategy is to pay off his mortgage so he has less debt. He will live on his social security, income from his 401K, and some part-time job income. What John doesn’t realize is that by paying off his mortgage, he may be paying more taxes than when he was working. Why? The income from his 401K and his part-time job is taxable. He doesn’t have any mortgage interest deductions to reduce that taxable income so his taxes are higher and part of his social security is taxed too. John is not happy about the choices he made.

1. Sue bought a house 15 years ago. She has just come into an inheritance. She wants to refinance and use her inheritance to pay off most of the mortgage. She figures she will be able to work part-time if she doesn’t have a big mortgage. Sue refinances at a lower rate and uses all of her inheritance to pay off most of the mortgage. Sue now finds that she can’t live on her part-time income even with a lower mortgage. Her taxes on the lesser income are much higher and her take home pay is a lot lower than she expected. She will have to go back to full time work. She is not happy about the choices she made.

In both examples, there was good intention to do the right thing but not a holistic approach to the problem. You need to carefully consider tax planning with your Financial Advisor or Wealth Coach in any wealth building strategy that you choose but in particular with a mortgage or a refinance.

Home or Investment?

After 8 months of looking, and being outbid twice (yes, Bay Area real estate is still hot in certain areas), I finally found a home to buy. Every time I think that prices cannot go any higher – they go higher… and higher. What does this mean for all of us?

For people trying to get into their first home, it can be very hard.  They have to save faster than their rent will go up and faster than what the prices of homes will appreciate. There are options for them such as condos and TICs (tenants-in-common) properties which are similar in structure to the co-ops that are on the east coast.  These people will need a structured savings and cash flow plan to get into their first home.

Obviously buying and being tied down to a home is not desirable for all. In that case, you need to be prepared to pay the escalating rents that will happen to compensate landlords that are building equity in their property. Most renters I know are paying more than what my mortgage is for a much smaller space. But I am tied down to a locale and a mortgage and they are not. Pros and cons to each so it is an individual choice.

For those already in a home, you are building up quite a bit of equity. Now the problem begins if you should tap that equity or not. Depression era people believed in being debt free. The idea was to pay off their mortgage and live debt free and with high cash flow in their retirement. That sounds great — if it actually worked. What really happens is that the mortgage gets paid off and so goes the biggest tax write off they have and the high cash flow never happens.  Think you won’t need a write-off by the time you retire? Think again. Most retirement plan withdrawals will be taxable. On top of that, if you make a certain amount of income at retirement, your social security will be taxable too. You may end up paying more tax on less income at retirement if you don’t structure your investments properly.

What about that higher cash flow? Well, if you aren’t working at all then you can’t take any risk so your investments will probably provide a fixed income for the rest of your life. That sounds good unless a high inflationary economy starts. And what are the chances of that? With humans living longer than ever before, I would say most retirees will see another high inflation period that will eat away at their cash flow.  Does anyone remember the eighties?

Attracted to those reverse mortgages on the television?  Lenders are chomping at the bit to give seniors cash out of their homes — at exorbitant fees and rates. That’s because you won’t be able to qualify for much on a fixed income and the reverse mortgage will be your only option to get cash out while you are alive.

I don’t like to think of the place where I live as an investment. After all we all need someplace to live, but when your home has substantial equity in it; equity that you can use for retirement income or other purposes, it may be in your best interests to review your options with a Financial Advisor or Wealth Coach before you are retired.

I have experienced too many people living in multi-million dollar homes and can’t afford the heat or maintenance of their property because they didn’t plan ahead.

Coaching Question for you – what does your ideal home look like when you are retired or working part-time?

Black Death of a Financial Plan

Many baby boomers are finding themselves in the uncomfortable position of becoming parent to their parents. Research shows that caregivers caught off guard by an ailing parent may suffer almost as much vocationally and emotionally as they do financially. If you planned to withdraw 5% a year to support your lifestyle when you retire, and then have to increase that to care for an ailing parent, there goes your retirement plan.

What can you do?

• Plan far ahead by having proactive family discussions. Invariably, one child takes on the bulk of the care giving responsibilities. This can cause tension and resentment that can be avoided by discussion.

• Target specific scenarios so that it is easy to discuss difficult subjects such as when Dad can no longer drive.

• Consider Late-in-life care such as long term care insurance and in-home care insurance. Children can end up writing a check for the premiums or sharing costs with parents.

Joe Birkofer tackles the issue of negative inheritance in the Rice University financial planning class that he teaches. He asks a simple question: “What’s the Black Death for a financial plan?”

The answer: “it’s your parents“.

Coaching Question – How do you plan on taking care of your parents?

The 7 Steps to Build Wealth in 2012

I have been a big fan of these 7 steps to build wealth since I have been a Certified Financial Planner for over 26 years and have used them successfully with clients. You won’t find any get rich quick to make up your losses fast schemes here. You will find common sense, everyday action items that you can take to make a wealth building strategy for yourself and your family. Remember, it isn’t how much you earn but how much you keep. These steps will start with strong foundations which are steps 1 though step 3. Ignore these and you risk messing up the rest of your efforts. Like building a house, you need a strong financial foundation that will lay the groundwork for attracting and building wealth over a lifetime. Here are the 7 steps:

1. Get an estate plan. Okay you may be single with no family and you say you don’t need an estate plan. Not true. Make a holographic will and just give everything to your favorite charity. Do you have kids and an extended family? This is all the more reason to have a good estate plan. The basics would be a will, power of attorney for health care (or medical directive), and a power of attorney for financial care. Have a large estate? Then you can add things like a revocable living trust, charitable trusts, etc.

Don’t get an estate plan and then don’t be surprised when the ex-wife inherits everything because your spouse didn’t change the beneficiary designations or the will. I have seen it happen too many times.

2. Manage Your Cash Flow. I don’t care if it is just a checkbook. You need to know how much is coming in and how much is going out before you can save or even think about investing. Pretending you know or just ball parking numbers doesn’t work. You can add and subtract -so figure it out. Why? Because you can’t save, invest for your future, or try to reduce your taxes if you don’t know where your money is going. With all the great tools out there such as Mint, and Quicken, there is no excuse not to be tracking your cash flow.

3. Risk Management. This means that as you grow your net worth, you also manage the risks that can destroy it along the way.  That means health, life, auto, home insurance and so on. Think you can’t afford it? Think again. What would happen if you got cancer and didn’t have health insurance?  It wouldn’t be pretty when all that you have worked hard for is wiped out because you didn’t want to pay health insurance premiums.

Of course, we all can’t afford to insure against everything so you pick and choose your battles. This means managing your risks with a combination of self insuring (no insurance and high risk), or partial insuring (small amount of insurance and high deductible), or being fully insured (100% coverage by insurance). Pick a plan that is suited to you, what risk you are willing to take and what you can afford.

Now that you have the top 3 covered, it’s time for the fun stuff.

4. Financial Goals. That’s right you need a goal. Without one you are shooting in the dark and that is scary in these economic times. Remember that these goals are just a starting point. They aren’t set in stone. It could be to retire at 50 or to fund the kids’ college education or to make that trip around the world. Whatever it is, make sure it is SMART- specific, measurable, attainable, realistic, and timely. Setting up goals like to quit work at 55 when you are 40 and only have $100,000 saved would not make the cut.

5. Invest. For those who want to invest but aren’t willing to budget, I say take the first 20% of all of your income and invest it before it hits your checking account. That is an easy and painless way to pay yourself  first which is the first tenet of building wealth. After you make this leap, you won’t even notice that money. Meanwhile it wasn’t spent on stuff, it was spent on you- and that’s a good investment. Investing isn’t about trading in and out of mutual funds or real estate. It is about sticking with an investment over a full market cycle of ups and downs. If you panic easy when the markets goes down, then fine, just stuff your money into cash and cash equivalents, like treasury bills and bonds and such. But it will take you a lot longer to meet your goals than a good mix of cash, bonds, and equities (stocks, mutual funds, etc.)

6. Retirement. So you are never going to retire? Don’t bet on it. Even if you wanted to, your mind and body will one day say no more.  When that time comes, what will replace your paycheck? It isn’t going to fall from the sky. You have to have a bankroll to replace a minimum of 25% of your salary to survive. Remember, social security wasn’t meant to be your sole source of retirement income. It was meant to be supplemental to your own savings account. Don’t say that time will never come, because it does and you better be ready or it won’t be pretty. Have you known someone whose sole source of income is a social security check?  Enough said.

7. Tax Plan. Tax planning is all about keeping more of what you earn. It is an easy way to keep your cash flow up. It means taking all the legal deductions that are due you. But you can’t do that if you keep sloppy records or refuse to manage your cash flow as in number one. It pays big time to keep good records not just in getting a bigger tax refund or more monthly cash but in having more to invest for your future. Tax preparation is not an easy task for anyone even if you own the software. I have had people pay me my full fee just to review their entries into the tax preparation software. That’s not a wise use of your money.  Get a good tax preparer and keep good records.

Make these 7 steps to build wealth your new year’s resolution.  Check in with a fee-only Financial Advisor or a Wealth Coach to review what you have done.  Then you will have a wealth building strategy that you can refer to every year.