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5 Stupid Ways to Lose Money to Those You Dislike and Simple Solutions to Stop it From Happening
1. NOT TAKING ADVANTAGE OF TAX ADVERTISING – Taxes are by far the biggest expense of any of us, and the problem is more than likely going to get worse. Tax laws are complex things that change every year. While most people who are employed and have several bank statements and/or brokerage accounts can get away with preparing their own taxes with the help of one of the many tax software packages on the market, those with complex returns must complete “Letter Detailed Schedules” (Schedules A, B, C, D, E etc.) or depreciation items should almost always use a tax professional.
THE SOLUTION: Have a tax professional do your return once every few years, even if you don’t need it. If there’s something you’ve been missing, it might be worth the one-time cost when you capitalize on the savings over the years. For those who receive regular property tax assessments, do you file appeals when applicable? Here in Allegheny County, where Pittsburgh is located, their appraisal method involves photographing the front of the property and walking around the land that has already been recorded. Recently, a new client’s mother was evaluated for a creek that ran through her property. When her son (my client) brought this to the attention of the appeals board, the tax was undoubtedly reduced.
2. DO NOT HAVE OR CHANGE USER INFORMATION IN YOUR LIFE INSURANCE POLICIES WHEN APPLICABLE.
John and Mary divorced three years ago. John and Mary can’t stand each other, and the mere mention of the other’s name causes bile to flow into the other’s gullet. Last year John remarried Linda. John and Linda are very much in love. Today, John died in a car accident on the highway. Today, Mary is now a multi-millionaire thanks to John, and Linda is stuck paying huge closing costs from joint bank and investment accounts? Why did this happen? John never bothered to notify his insurance agent and his human resources person at work of the big change in his life and fill out the proper paperwork transferring the beneficiary from Mary to Linda.
I know firsthand that this happens, not only because I’m an insurance professional, but because I served as vice president of my volunteer fire company for 3 years, and the “veep’s” job involved maintaining information on insurance customers. During my tenure as Vice President, a member died in a fire, and one of the many things the State PA did when they came to guide us through the death-in-duty process was to order that the member’s file drawer be sealed until further. No new information could be added or subtracted from ANY file in that drawer until I was told otherwise. After access was granted again, several members suddenly remembered the changes that needed to be made. Thank God, nothing happened in the meantime
SOLUTION: Check the beneficiary details on your life insurance policies regularly, but no less than every two years or when there are major life changes including marriage, divorce, birth of children, etc. Special Note: If you leave money to minors, there will need to be a custodian of the money there because the court system does not usually give hundreds or thousands of dollars for children to use as they see fit. If you do not name someone of your choice, the court will appoint a guardian for the money who may or may not be the person you would have chosen. This may or may not be the person you have chosen for the day-to-day care of your offspring.
3. NOT TO HAVE OR CHANGE USER INFORMATION ON YOUR IRAS
Insurance policies and IRAs have a very important point in common, they are affected by laws outside of estate law and probate processes in most cases. I say in most cases because if you have cash value life insurance (permanent as opposed to term), its value could make you eligible to pay federal estate taxes if your estate is large enough. This is NOT a good thing that happened to you. IRA money could be subject to estate law if you list your estate as a beneficiary instead of an individual. Although it won’t cost you anything if you die if you don’t name a beneficiary, it could potentially cost your loved ones millions. The reason is that IRAs inherited by an individual can benefit from what is called an “IRA stretch.”
Here’s the Cliff’s Notes version of Stretch. Let’s say you’re at the age where you have to take Required Minimum Distributions (RMD), which means you’re over age 70 1/2. Let’s say you leave your IRA to your 35-year-old son or daughter. After inheriting an IRA, your son or daughter, being wise, go to Halas Consulting to learn how to best prevent your new wealth. The good folks at Halas Consulting would advise your son or daughter to set up a beneficiary IRA. Basically, what happens is that when ownership is properly transferred, your son or daughter must still take RMDs, but they do so based on their younger age, not your older age. This means that less is distributed to be taxed if the IRA is a traditional IRA rather than a Roth IRA which may never be taxed. If they also ask Halas Consulting to manage the money and it is placed in an appropriate asset allocation model, that money can potentially grow very large (we’re talking millions here) on a tax-advantaged basis with only smaller amounts of money. take out every year, until your child reaches about half a century, to satisfy the RMD. This is a good thing.
HOWEVER (you just KNEW it was coming), if the IRA is set up or rolled over incorrectly, the stock is FOREVER lost. What happens if this is due to bad advice? In most cases the IRS says “tough beans”, there are many Private Letter Rulings (PLRs) by people who have claimed just that and lost in a PLR. You could sue the person who gave the bad advice, but you could still lose, and then you’d get the legal costs in addition to losing the case. For more detailed information on this, I recommend reading the books written by IRA expert Ed Slott. These can be found in bookstores or maybe your local library (yes, that place with all the books that most haven’t been to since they had to write a college thesis or worse, senior year of high school)
SOLUTION: Always have a beneficiary name on your IRAs and 401ks. Again, if you want to make the most of the stretch and name a minor. Please also name an adult to whom you entrust the money to be the custodian of the money until the minor reaches the age for which you feel they would be responsible.
4. TRANSFER OF HIGHLY APPRECIATED COMPANY SHARES FROM YOUR PENSION PLAN TO IRA.
While this may seem like a good idea on the surface, it really isn’t. The reason for this is a little known rule called “Net Unrealized Appreciation” or NUA. Here’s a quick summary of how NUA works. Let’s say you had 500 shares of a company that you accumulated over your working years. For simplicity’s sake, let’s say you had an option to buy this stock at $3 a share when the stock price was 10 during its heyday in the late 1990s. Now at retirement these shares are worth $20. If you roll these stocks over to a self-directed IRA after retirement, you’ll owe income tax on those stocks whenever they’re distributed from your IRA. Your income taxes can be quite high if you have a large retirement income.
SOLUTION: If you take advantage of the NUA properly, you will sell the stock and move the money into a non-qualified (non-IRA) brokerage account. After that, you will pay income tax of $7 per share, which is the amount of the difference between what you paid for the share ($3) and the value of the stock at the time you exercised your call option ($10). The difference between the price of the share when purchased ($10) and what it is currently worth ($20), i.e. $10 per share, will be taxed at the capital gains rate which is currently 15% max (the highest level of income tax could be double ). After the stocks are sold and removed from the IRA, roll the remainder into an IRA for maximum flexibility and options. The cash proceeds from the shares you just sold are no longer subject to taxes, only the interest and capital gains on this basis will be taxed if you invest the money you have in a non-qualified brokerage account. To manage your taxes effectively and not be burdened with high costs, a well-researched stock ETF would be a good choice here. Just make sure it fits your asset allocation model.
5. DON’T CHECK YOUR CREDIT
With the recent financial collapse still fresh in people’s minds, credit and debt have become four-letter words. But while credit CAN be bad if used improperly, it can also be a life saver and allow you to buy many essentials that cannot be paid for in advance with cash because of their cost. Those who take care of their credit score and research what makes one’s score look better and what the various credit agencies are looking for pay less money in interest on cars, houses, house bills and credit cards. Not to brag, but a few months ago when it seemed like the doom and gloom would last forever, I was sitting in my kitchen opening the mail and some of the applications were ready to loan me over $50,000 in unsecured money because of my good credit ability, and here are people on TV getting foreclosures on homes where they owed less than that.
Another area where good credit will help you with lower payments is insurance. ALL insurance companies use something called an “insurance score” when determining your insurance score. For example, when shopping for auto insurance, it makes sense for insurance companies to look at your record for driving and moving violations, but what the heck does my credit score have to do with what kind of driver am I? Can I not be foolish with money but a model citizen on the road? Well, according to research conducted by insurance companies, no, you can’t. Your insurance score is basically a combination of how you live your life, and those who live a responsible life can save some money. One of those components is money and how responsible you are with it. Likewise, having a DUI on your driving record could also affect your premiums for home insurance, health and life insurance, and car insurance.
SOLUTION- Get a free credit report every year from annualcreditreport.com and use it. I would recommend that every year or every other year you spend about $40 and get a consolidated credit report, or “tri-merge” all three companies. This consolidated report will give you a lot more detail than the free one, and it’s the one that banks and mortgage brokers use to decide who gets a loan (at least they did until the government stepped in and told them they had to borrow ad infinitum, and then the whole economy fell. But I’m digressing). Go through this report with a fine-toothed comb. A year ago I found a credit card account on mine that I closed years ago and the bank didn’t report it to the credit agencies as closed. This is your “face” and reputation on the line, DO NOT be ignorant of what it says.
So here are five things you can work on to get you started, if I think of more ways I’ll write a sequel to this article. In the meantime, take care of your money, and it will take care of you.
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