RMR Wealth Management Blog

Don't Overlook These Tax Deductions - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Monday, February 03, 2014
2013 was a great year for many investors, but there's a downside. All those market gains may have left you with a lot more income to report.

Successful investing isn't exactly a problem, but it does mean that it's especially important not to overlook useful tax deductions when you prepare your paperwork for the IRS.

One of the most important things to do when calculating your possible deductions is to go over your major life changes in the past year. Many families go through events—divorce, a college graduate moving back home—that can make them eligible for important tax deductions.

"Dependents are probably my number one overlooked deduction," said Mark Steber, chief tax officer at Jackson Hewitt. "We live in a modern world with modern family rules. Dependents, whether they are your children or a spouse's parent or a foster child or an ex-spouse's child—make sure your tax expert understands both the rules and your situation."

A natural disaster can also leave you with a deduction. If you suffered a loss from an event that becomes a federally declared disaster, you can deduct the loss. Be careful, though: Any compensation from an insurer or someone else for the loss will reduce or eliminate your deduction.

"It's sheer speculation on my part, but I think a lot of taxpayers may accidentally deduct things that they don't realize are going to be paid by insurers," said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "They truly are trying to do the right thing, but they may not know that insurance is going to cover it."

If you donate goods in the course of a year, you can take deductions equal to their value. Just be careful not to be too generous in your valuations: The IRS and others publish guidelines on how much to deduct for clothing, household items and other goods you give away.

Self employed workers, whose ranks have been swelling, have additional opportunities for deductions. For example, medical, dental, or long term care insurance costs may all be deductible.

"I'm not sure people realize how good that is," said Cathy Curtis, president of Curtis Financial Planning. "Now it's 100 percent of your premium. It's a fantastic benefit." You may also be able to deduct health insurance for an adult child under age 27.

Many of us have elderly parents to care for, and the government makes that just a little easier with a tax deduction. Taxpayers can claim a credit equal to a percentage of the work-related expenses—the payments that enable the taxpayer to work or continue working—for the caregiver. This credit can be as high as $3,000, according to Curtis. "I"m sure that is a biggie for a lot of people now," she said.

Investors also have some nice tax deductions available. There are a number of small ones, like a tax preparer's fee or the cost of renting a safe deposit box. But investors can also take a deduction for investment advisor fees on taxable accounts, provided they have miscellaneous deductions that are greater than 2 percent of their adjusted gross income.

Mortgage interest is deductible, of course, but it is also possible to deduct points on a mortgage in the year you take it out.

If you refinanced a mortgage in 2013 and paid points, you can deduct those points as well, provided you do it in equal amounts every year over the life of the loan.

"I've seen clients try and take them all at once, or not take them at all," Curtis said.

Congress allowed several tax deductions to expire at the end of 2013, but financial planners are holding out hope that at least some of them will be reinstated. One such deduction is for state sales taxes. Until the end of 2013, if you paid more in sales taxes than in state income taxes, you could deduct those instead. Sales tax calculations can take time, but if you made some big purchases in the last year, or live in a state with high sales taxes or no state income taxes, it's possible to uncover a bigger deduction.

Another expired deduction was particularly popular with affluent retirees. It allowed them to take their required minimum distribution from an IRA, donate up to $100,000 of it to charity, and exclude the donated amount from income.

"I've got some people who want to take their required minimum distribution early in the year, but they want to take advantage" of the deduction if it is reinstated, Curtis said. "I'm telling them to wait. It's a paperwork mess."

Tallying deductions can be time consuming, no doubt about it. But after the year we had in the markets, it's a chore not to avoid.

Here' s What You Need To Know About MyRA, Obama's New Retirement Program - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, January 29, 2014
In last night's State of the Union Address, President Obama announced a new retirement saving program called MyRA, which he plans to launch without any new legislation. But he didn't say a lot about what it is.

Now, we have additional info on the program from the White House. Basically, it's a program of starter retirement accounts aimed at people who don't have a lot of savings. Here are some key details:

MyRA would be a program of small Roth IRAs with access to a special, safe investment that pays a little better than Treasury bills. Remember, a Roth IRA is a retirement account where you contribute after-tax earnings, and can then withdraw money in retirement without ever paying tax on your investment returns.

Employers wouldn't run or fund the accounts, but they'd participate by letting employees fund them through payroll deductions, which could be as small as $5 per pay period.
Almost any employee of a participating employer could join. You just have to make less than $191,000.

Accountholders could accrue balances of up to $15,000, at which point they'd have to roll the balance over into a regular, private Roth IRA. Voluntary rollover and withdrawal would be availalble anytime, and it looks like normal Roth IRA withdrawal penalty rules would apply.

The accounts would be invested in a security similar to the "G Fund" available to federal employees participating in the Thrift Savings Plan. This fund has all the advantages of short-term Treasury bills (no credit risk or interest rate risk) but pays an interest rate based on the average of outstanding long-term Treasury bond rates. That's a nice little interest rate bonus. The value of the difference varies over time; this chart from TSP Folio shows how the G Fund generally outperformed T-Bills by a percentage point or two from 1987 to 2010. In 2012, with 3-month Treasury rates effectively at zero, the G Fund returned 1.47%.

Basically, the idea is to get retirement accounts to people who normally wouldn't have them, by making them available at little cost to either employer or employee, and offering the inducement of a little extra yield.

This program will have a modest cost to taxpayers: Essentially, instead of issuing short-term Treasury bills at almost no cost, the federal government will do a little bit of its borrowing through this G Fund-like security, paying an extra point or two of interest in the process. If you imagine a program at scale with 50 million accounts averaging $5,000 in balances, the cost to taxpayers would be $2.5 billion per year for every point of interest rate premium.

Mazimizing 529 College Savings Plan Tax Breaks - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, January 21, 2014

(originally written by Ashlea Ebeling)


Almost a third of contributions to 529 college savings plans are made in the fourth quarter, but there are good reasons to contribute in the beginning of the New Year. The earlier you get the money in, the longer it has to grow tax-free. Also, some states will let you take a 2013 state tax deduction for contributions made up until April 15, 2014. And tax season—when you’re preparing your taxes–is a good time to look at how 529 plans fit into your overall tax planning strategy.

Tax savings is one of the main drivers of 529 plan growth. You can get a triple, or even quadruple, tax break. The money you contribute grows federal and state tax-free and comes out federal and state tax-free if used to pay college expenses. By contributing to a plan you get money out of your estate, potentially saving on state and federal estate taxes.  And depending where you live and which plan you pick, state tax breaks are available.

Stretching out tax-deferral. While the minimum contribution to open an account is typically $250, many high-net-worth families stash away tens of thousands of dollars. Grandparents who are forced to take required minimum distributions from retirement accounts but don’t need the money to live on move the money from one tax-deferred account to another by setting up plans for their grandkids, says Kevin Farrell, divisional manager for RIA sales at SSgA (the investment manager for Nevada’s 529 plan).

Side-stepping estate tax levies. Another strategy Farrell sees advisors implementing on behalf of wealthy grandparents and parents is accelerated gifting.  You can give five years worth of $14,000 annual exclusion gifts at once—that’s the amount the Internal Revenue Service allows as a tax-free gift from one individual to another. So grandma and grandpa could fund an account for a grandchild with $140,000 (multiply that times the number of your grandchildren), and it’s out of their estate. A bonus: “You still have control over the assets until they’re distributed,” Farrell says.

The state tax breaks keep getting better. In 33 states and Washington, D.C. you can get a tax break for contributions to 529 plans, usually a state income tax deduction. North Carolina eliminated its deduction as part of a tax reform package last year. But the trend is still for states to make their deductions more generous, say Joseph Hurley, founder of Savingforcollege.com, which has state-by-state details here.

Arizona made its deduction permanent in 2012 and in 2013 increased it from $750 to $2,000 a year for individual tax filers and from $1,500 to $4,000 a year for joint filers. Nebraska increased its deduction from $5,000 to $10,000 for single filers and married couples filing jointly and from $2,500 to $5,000 for a married individual filing separately, beginning in 2014. Ohio and Wisconsin are considering improvements to their deductions, Hurley says.

Get a deduction for contributing to an out-of-state plan. Six states (Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania) let you take a deduction for contributions to other states’ plans. That’s important because although your state’s direct-sold plan might be the best, it pays to shop around on fees (look at the total for administrative fees and investment fees) and investment choices. Farrell says Nevada’s plan is unusual in that it’s an institutionally-managed portfolio of exchange-traded funds, which keeps the costs down. Basing your decision just on the tax breaks can be a mistake.

Timing your contribution and deduction. Most states match the tax year you get to take the deduction with the year you make the contribution. So if you make a contribution in 2014, you’ll get the break on your 2014 taxes when you file in the spring of 2015. But a few states have an April 15 deadline—so there’s still time in 2014 before you file your 2013 tax return to make a contribution and get a 2013 deduction. The April 15 deadline states are Georgia, Mississippi, Oklahoma, Oregon and South Carolina.


E-gifting programs make funneling gifts from family and friends easier. TIAA-CREF launched e-gifting in California and Connecticut in 2012 and now offers it in all 11 states where it administers plans. Once you have an account, you can email your daughter’s aunt a link where she can enter her banking information and make a direct contribution to the account. There is no administrative fee for the TIAA-CREF e-gifting service (watch out for fees at some third party 529 gift conduit services). Note: If Aunt Sally makes the contribution directly to the 529 account, she gets the potential tax break, allowing her to essentially give more.

One Easy Way to Cut Your Life Insurance Premiums - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, January 08, 2014

(originally written by Robert Schmansky)

Many individuals sign up for group and spousal coverage through their employer’s benefit provider for the convenience, not often weighing their options or speaking to an advisor about their options.

And while group life insurance is a simple way to pay for coverage, and often the easiest way to guarantee it, it may not be the most cost effective way to obtain needed insurance coverage.

During a recent review for a healthy 50 year old male, currently paying ~$3,200 annually for approximately $1,000,000 of life insurance through a work group plan, we found a term life insurance policy that would cover him for 15 years (through the end of his employment) would cost approximately $750. Not only is the savings on the current year nearly $2,500, but the cost of the personal policy is locked in as opposed to the workplace policy, and it is guaranteed whether he works for the same employer or not over that 15 year period.

Why is group life insurance an expensive way to obtain life insurance? Mark Maurer of Low Load Insurance Services in Tampa provided the following answers:

Pricing negligence. Employer group policies start out very cheap at younger ages. By starting low and maintaining a low rate over a number of years, the power of complacency sets in with many buyers. Employees may know the price has risen, but likely has their coverage need, and they don’t often do the work to compare the cost to a personal plan.

Increasing claims. Group coverage is based on the health of the group, or actuarial data on the age bands that comprise the group. We all know as we age there are more deaths, and so the amount will increase over time.

Anti-selection. As we age, a higher percentage of people also develop health problems or continue with dangerous habits that place them in higher risk categories that may not allow them to purchase individual health policies. Since these individuals are more likely to stay with the more expensive group coverage, the cost of the group life insurance reflects the inclusion of these individuals with higher premiums.
The underwriting process when applying for individual insurance outside of your employer gives the insurer data to properly price your individual policy. According to Maurer, “At ages 40 and older everyone should evaluate the costs – healthier clients not only can pay less right away, but over 10, 15, or 30 years individual coverage can provide thousands of dollars in savings by going through underwriting.”

Even if you are young, you may benefit from locking in personal coverage since rates will rise eventually. Personal insurance policies, as well as those for spouses, will be there whether or not you’re at the same employer (or employed), or if you no longer qualify for coverage. Keep that in mind before signing up for additional coverage through your employer.

12 Smart Money Moves to Make Before The End of 2013 - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, December 18, 2013

(originally written by Deborah L. Jacobs)


Many people, rushing to make holiday plans, would like to take a vacation from thinking about money. Not so fast. In the process you could whiz by some crucial financial deadlines on Dec. 31. Miss them and you might get hit with substantial penalties or lose the opportunity to take advantage of some smart money-saving moves. Here are strategies to consider in the countdown to 2014.
1. Fund employer-sponsored retirement plans. For 2013, you can contribute up to $17,500 to a 401(k) plan, or $23,000 if you’re 50 or older. These dollars can be put in a pretax 401(k), cutting your current tax bill. Or if your employer offers the option and you believe tax rates will rise, put some of those dollars in a Roth 401(k). The money goes into a Roth after taxes, saving you nothing now. But the Roth grows tax free. You can withdraw from it tax free when you retire or before that if you leave the company, have had the account for at least five years and are 59 ½ or older.

Think it’s too late to top up your 2013 contributions? Maybe not. Ask your employer to withhold extra dollars from your last couple of paychecks.

Self-employed? Set up a one-person 401(k). So long as you create it by Dec. 31 you can make contributions for 2013 until the due date of your 1040 with extensions – as late as Oct. 15, 2014.

2. Buy business equipment. Here’s another tax goodie if you’re a business owner or moonlighter. Instead of recovering the cost of new equipment by depreciating it over a period of years, you’re allowed to deduct the entire cost of most new business property in the year you acquire it. Currently, the limit is a generous $500,000, which comes in handy if you’re in the market for computer equipment, furniture, or a car, for example, but it’s scheduled to drop to $25,000 Jan. 1. For the current rules on this Section 179 Deduction, check IRS Publication 946, which downloads here as a PDF.

3. Accelerate income tax deductions. The most obvious examples are property taxes and state and local income tax. That’s assuming, however, you’re not paying (or in danger of paying) the fiendishly complicated alternative minimum tax, which can turn that traditional advice on its head. For example, since state and local taxes aren’t deductible in AMT, you might delay the payment of your fourth-quarter state taxes until 2014 – if you’re stuck in AMT this year but likely won’t be for 2014.

4. Take required distributions from your own IRA. You are considered the owner of an IRA that you set up and funded – either through annual contributions or the rollover of a 401(k). Unless the account is a Roth, you must take yearly minimum distributions starting at age 70 ½. You have until April 1 of the year after you turn 70 ½ to take the first one. After that, you must take distributions by Dec. 31 of each year.

The payout is based on the account balance on Dec. 31 of the previous year divided by your expectancy, as listed in one of three different IRS tables (really) contained in Appendix C of IRS Publication 590, “Individual Retirement Arrangements (IRAs),” downloadable as a PDF here. After doing the calculation the mandatory withdrawal is expressed as a dollar value. You are required to pay income tax on this amount.

5. Take required distributions from an inherited IRA. Generally, non-spousal IRA heirs must withdraw a minimum amount each year, starting by Dec. 31 of the year after the IRA owner died. Note: This is true whether it’s a traditional IRA or a Roth (a common misconception).

To calculate this distribution, you take the balance on Dec. 31 of the previous year and divide it by the individual’s life expectancy, as listed in the IRS’ “Single Life Expectancy” table (see p. 88 of IRS Publication 590. Unless the account is a Roth, there is income tax on this required payout.

Don’t make the mistake, as some people do, of using the number from the table to figure a percentage. In subsequent years, you simply take the number you used in the first year and reduce it by one before doing the division.

6. Split inherited IRAs that have more than one beneficiary. Co-beneficiaries must take distributions over the life expectancy of the oldest beneficiary. It’s better to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer payout period for the younger heirs. But you must take this step before Dec. 31 of the year following the year of the IRA owner’s death. If you don’t, the payout schedule will continue to be based on the life expectancy of the oldest beneficiary.

7. Make yearly tax-free gifts. You can give anyone (and everyone) $14,000 annually without eating into your lifetime exemption from gift or estate tax. (That exemption is currently $5.25 million and goes up to $5.34 million in 2014.) Couples can combine this annual exclusion to jointly give $28,000. Just make sure 2013 gifts are complete (received and, in the case of a check, either deposited or cashed) by Dec. 31.

8. Fund 529 state college savings plans. A popular use of the annual exclusion is to fund these plans. The main appeal of a 529 is income tax savings: You put money in one of these plans and you don’t have to pay federal or state income tax on the earnings, provided the cash is withdrawn to pay for college or graduate school tuition, fees, room and board, or books. In some cases you also get a state income tax deduction for your contribution. To take advantage of that tax break your contribution checks must be postmarked by Dec. 31; if you contribute by electronic bank transfer, your online request must be submitted before 11:59 p.m. on Dec. 31.

When it comes to 529s, there’s a special twist with annual exclusion gifts: You can make a lump-sum deposit of as much as $70,000 ($140,000 for a couple) and treat it as five years’ worth of annual $14,000 gifts. To do this you must file a gift tax return, and if you die before the five years is up a pro rata part of the gift goes back into your estate. Still, it’s a good way to get a large lump of college money into a 529, where it can grow tax free.

9. Harvest capital gains and losses. A popular way to reduce the tax on investment gains is to take capital losses to offset them. Should you go this route, beware of the “wash-sale” rule of the Internal Revenue Code. It prohibits deduction of losses if you either buy back the property you just sold or buy “substantially identical” securities 30 days before or after the trade. If you violate the rule, you can’t deduct the loss until you sell the new shares.

10. Pay estimated taxes. This is relevant to people who are self-employed, have a business on the side, or have taxable investment income. To avoid underpayment penalties for the 2013 tax year, you must prepay on a quarterly basis 100% of what you owed in 2012 or 110% if your adjusted gross income in 2012 was more than $150,000.

11. Make charitable donations. Publicly traded appreciated securities – assuming you have any – are by far the most tax-efficient asset to donate to charity. You can deduct their full fair market value at the time of your gift (offsetting up to 30% of your AGI), yet you don’t have to recognize the appreciation as income. If you want a 2013 deduction but don’t yet have a charitable recipient in mind, transfer those securities to a donor-advised fund. You can claim your deduction now, then recommend grants to your favorite causes later. (Fidelity, Vanguard and Schwab all have affiliated charitable funds.)

If you’re 70 ½ or older and still need to take a 2013 required minimum distribution from your IRA, consider transferring the payout (or part of it) directly to your favorite charity (it can’t be a donor advised fund). You won’t get a charitable deduction, but you also won’t have to recognize this “charitable rollover” as ¬≠income, which has other benefits. For example, it might hold down the amount of extra income-based Medicare ¬≠premiums you must pay in 2013.

Even if you’ve already taken your RMD, you can do a charitable rollover for up to $100,000 – before Dec. 31. This provision expires at the end of 2013. For details about how to do this, and pitfalls to avoid, see “The Dollars And Sense Of Giving IRA Assets To Charity.”

12. Schedule checkups and stock up on meds. All the more so if you have met your deductible for 2013. In that case prescription refills that cost you nothing now may add up to considerably more starting Jan. 1 until you have met your deductible for 2014. Likewise, if you need surgery and have a choice about whether to schedule it this year or early next year, you might be better off financially having the operation this year.

A similar strategy applies if you have incurred enough unreimbursed medical expenses this year for them to be deductible on your federal income tax return. Medical expenses are generally deductible if they exceed 10% of your adjusted gross income – 7.5% if you or your spouse is 65 or older.

Got Employer Stock? What You Need To Know - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, November 08, 2013

(originally written by Liz Davidson)


Do you have stock options or shares of your employer’s stock? If you’re like many of the employees we help, you may not know what to do with them or even what the alphabet soup of incentive stock plans are (SARs, RSUs, etc). Used the right way, incentive stock plans can be a great addition to your compensation and retirement portfolio. They’re often a “hidden” asset that employees can use to build an emergency fund, pay down debt, or contribute to an IRA. But used incorrectly, they can also increase your risk or expose you to a nasty surprise come tax time.  Here are some guidelines to consider:

Do you...

have an emergency fund?
If you don’t have enough cash reserves to cover at least 3-6 months’ worth of necessary expenses, this should be your priority. If something were to happen to your company, you could find yourself out of a job at the same time that your employer stock and options could be worthless. If you have vested stock options, consider exercising them. If you have shares of employer stock that you can sell, consider doing so. Use the proceeds to build up your emergency fund.

have high interest debt?

If the interest on your debt exceeds what you’re likely to earn from your employer stock (5-7% is a reasonable estimate), you may want to sell the shares and put the proceeds towards the debt.

match the max in your 401(k)?

It’s unlikely that your employer stock purchase discount is as valuable as your match so contribute at least enough to your retirement plan to max that match before purchasing employer stock.

have too much in company stock?

As a general rule, no stock should be more than 10-15% of your portfolio.This is especially true of your employer’s stock since your job is already tied to that company. You’ll also want to include it as part of the stock allocation of your overall portfolio. In either case, sell at least enough shares or exercise enough options to bring your exposure to a reasonable level and reinvest the money in something more diversified.

have access to an employee stock purchase plan?

As long as you’ve got the last four bases covered, you may want to take advantage of any discounts offered on purchasing company stock. You can always sell the stock later and reinvest the proceeds or use it to fund IRA contributions.

own shares that have gone down in value?

By selling the shares, you may be eligible to use the losses to offset gains and other income, including up to $3k in ordinary income.  (Net losses in excess of $3k can be carried forward indefinitely).

own appreciated stock that you’ve had for less than a year?

If so, you may want to hold onto them until that one year mark before selling them. That’s because you can then qualify for a lower capital gains tax rate on the gains. Otherwise, you’ll end up having to pay higher ordinary income tax rates.

want to pay taxes on the proceeds now or later?

Before exercising options or selling shares, it’s important to understand how they’re taxed. For example, when you exercise stock appreciation rights (SARs), you’re essentially getting a cash payout based on how much the stock has appreciated over a given time period, and like other cash payments from your employer, you have to pay ordinary income taxes on the proceeds. Likewise, when you exercise non-qualified stock options, which give you the right to purchase shares at a given “strike price,” you have to pay ordinary income taxes on the spread between the fair market value of the stock and the option’s strike price. If this will push you into a higher tax bracket, you may want to exercise them over more than one year. If you expect your tax bracket to be lower next year, you may also want to wait and exercise them then.

While exercising incentive stock options (ISOs) does not create an immediate tax liability, the spread between the fair market value of the stock and the option’s strike price could be included as income under the Alternative Minimum Tax (AMT). (You can learn more about how ISOs are taxed here.) If this could make you subject to the ATM or increase your AMT liability, you may want to wait until a future year to exercise them.

have appreciated company stock in your employer’s retirement plan?

When you leave the company, you can roll the shares out of your retirement plan and pay a lower capital gains tax rate on the gain (assuming you’ve held the shares for at least 12 months). However, you lose that benefit if you sell the shares within the retirement account or roll them into an IRA. That could be a reason to delay selling the stock if you’re getting close to leaving the company.

As with most financial planning, the first step in taking advantage of your incentive stock plans is to start with your goals and how they might help you achieve them. Then whether you decide to exercise your options and sell your stock or purchase more shares through an employer stock purchase plan, you need to know how they fit into your investment portfolio and how they can be managed to minimize taxes. After all, knowing is half the battle.

IRS Raises Limit on Tax-Free Lifetime Gifts - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Monday, November 04, 2013

(originally written by Deborah L. Jacobs)


As many estate planners anticipated, the Internal Revenue Service has raised the limit on tax-free transfers during life or at death. Starting in 2014 that amount, known as the basic exclusion, will go up to $5.34 million per person, from $5.25 million this year. Today’s announcement, in Revenue Procedure 2013-35, indicates that there will be no change in the annual exclusion, which allows you to give $14,000 in cash or other assets each year to each of as many individuals as you want without dipping into the basic exclusion.

The lifetime gift tax exclusion (also called the lifetime exemption) and the estate tax exclusion are expressed as a total amount and it is possible to use this basic exclusion (sometimes called the “unified credit”) to transfer assets at either stage or a combination of the two. If you exceed the limit, you (or your heirs) will owe tax of up to 40%.

The IRS expects you to keep a running tally and report these gifts so it will know how much has already been used up when you die. For example, if you have used $1 million of the exclusion to make taxable lifetime gifts, the unused exclusion if you die in 2014 will be $4.34 million, rather than $5.34 million.

Married couples get a special break: they can share the basic exclusion during life (this process is called gift-splitting) and give more to the kids now, tax-free. But of course this reduces how much of the tax-free amount will be available when they die. Widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.68 million tax-free. Tax geeks call this portability.

Still, portability is not automatic. The executor handling the estate of the spouse who died will need to transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is owed. This return is due nine months after death with a six-month extension allowed. If the executor doesn’t file the return or misses the deadline, the spouse loses the right to portability. Spouses should file it even if they’re not wealthy today, because who knows what the future holds?

A common source of misunderstandings is how the lifetime exemption amount relates to the annual exclusion. Here’s what you need to know: We can each give another person $14,000 per year without it counting against the lifetime exemption. Spouses can combine this annual exclusion to double the size of the gift. Don’t confuse it with the basic exclusion – that $5.34 million discussed above.

Without using either the annual exclusion or dipping into your lifetime gift-tax exemption, you can pay for tuition, dental and medical expenses of anyone you want. Note that you must make the payments directly to the providers of those services – you can’t just reimburse the person whom you want to benefit.

Why 401(k) Savers Don't Have Enough To Retire - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, October 30, 2013

(originally written by Sharon Epperson)


American workers stash over $300 billion a year into 401(k) accounts and other employer-sponsored retirement plans, if you include employers' matching contributions. This may sound like a lot of money, but it still may not be enough for many Americans to be able to retire.

Many workers say they would like to put more money into their 401(k) plans but simply don't have enough left after paying everyday expenses to do it.

That's the new reality. Most Americans with 401(k) and other defined contribution plans are accumulating debt faster than they're saving for retirement, according to a new report from the financial services website HelloWallet.

The amount that retirement plan participants spent to pay down debts has risen nearly 70 percent in the last 20 years, the study found. Many workers say they are unable to contribute as much as they would like to their 401(k) plan because they have more expenses and less income than they had in the past.

The problem is most pronounced for those closest to retirement. Half of retirement plan savers 50 to 65 are accruing debt faster than they're building up their savings, according to the HelloWallet study. They're spending an average of 22 percent of their income paying down debt.

"It's remarkable," says HelloWallet CEO Matt Fellowes. "You'd expect most people at that point to be deleveraging: paying off their mortgage, paying back their student loans or have already paid off their student loans, and not having difficulty paying off credit card debt. But in fact those are the households that are most likely to be building up debt faster than retirement savings."

The result is that these older workers have only about two years of retirement income saved. Yet Americans are living longer and will typically need about 17 years worth of retirement income after age 65.

(Read more: For 401(k)s, staying the course pays off in crises)

So what are some debt-busting strategies to ensure you can retire and won't outlive your money?

Increasing your retirement plan contributions is certainly an important step in building assets. Putting an additional 1 percent of pay into your 401(k) or employer-sponsored retirement account every year can make a big difference. At least contribute enough to receive the employer's matching contribution. You can put up to $17,500 in a 401(k), 403(b) and most 457 plans this year, and an additional $5,500 if you're 50 or older.

Stash the maximum amount into your IRA, too—up to $5,500 in 2013 or $6,500 for those 50 and over. If you reach the contribution limits on these accounts and are still behind in your savings, financial advisors suggest putting money in taxable accounts earmarked for retirement as well.

Even if you're maxing out your retirement plan contributions, it may not be enough. Advisors say it's crucial to pay attention to other side of the ledger.

"Take a look not only at your savings rate for retirement but at your net worth statement, your balance sheet," says Sheryl Garrett, a certified financial planner in Eureka Springs, Ark., and a member of the CNBC Digital Financial Advisor Council.

An important question to always ask: "How much do you owe versus how much you own?" Make sure the answer is always heading you in the right direction, says Garrett, founder of Garrett Planning Network, a national network of over 300 of hourly-based, fee-only financial planners.

Fellowes says about 85 percent of Americans don't adhere to a regular budget. Free online tools at Mint.com, BudgetTracker.com and Budgetpulse.com can help you, so you can start paring debt. But you don't necessarily need financial services software or mobile apps to manage your money.

"It can be as simple as pencil to paper," Garrett said. "The main thing is to focus on making contributions [to savings] as well as how much money is going out."

Finally, as you focus on managing your cash flow, consider taxes, savings, rent and mortgage, and other committed expenses, including debt obligations. And take a hard look at your lifestyle, Garrett said. You may need to reduce many expenses now to ultimately reach your retirement goal.

How Much Of Your Company's Stock Is Too Much? - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, October 23, 2013

(orignally written by Maggie McGrath)


On October 18, Google‘s stock price hit $1,000 per share for the first time in its history, a milestone that surely put smiles on the faces of investors and employees. For some of its 46,000-plus employees who fit both criteria the news probably sounded synonymous with “early retirement.”

Google employees reeled in $3.3 billion in stock-based compensation for the first nine months of 2013, and their holdings keep growing in value with shares up nearly 15% since Sept. 30

While the jump in Google’s value is a nice boost to shareholder employees’ net worth, financial planners warn that holding too much of any one equity – especially when that equity is your employer – can be a very dangerous thing.

“Nobody ever puts their money in a company because they think something bad will happen,” says Stuart Ritter, vice president of investment services at T. Rowe Price. “Every year, unexpectedly bad events happen to a firm.”

While most investors know this on an intellectual level, experts say that it can be easy to mindlessly accumulate stock options without fully realizing their value.

“It’s easy for the holdings of the employee to grow dramatically over time if they keep buying and never sell,” says Jim Cody, director of estates and trusts with wealth-planning firm CTC Consulting. “Employee stock purchase plans will allow employees to buy stock on a regular basis. You can accumulate a lot more stock than you originally intended to hold. I think it’s a good idea to look at those holdings in relation to your net worth, and not allow the holdings to take a disproportionate amount.”

What is a “disproportionate amount?” Cody says it depends on the individual and the amount of wealth they keep outside of the market, but in general, keeping 10% to 15% of your wealth in your employer’s stock is where the danger zone begins. Other financial planners have even stricter rules.

“We advise them [to] cut it back so it’s not more than 10% of their total portfolio,” says Mike Piershale, a chartered financial consultant and founder of the Piershale Financial Group in Crystal Lake, IL. What’s more, Piershale says, if the company isn’t “good” (not performing well in the market or, worse, constantly in the news because of cash flow issues), he advises his clients to “get rid of it,” or at least cut their stake to well under 10%.

Ritter has an even stricter standard: he says no more than 5- to 10% of your portfolio’s value should be in your employer’s stock.

As for why it’s so important to avoid too much exposure to your own company’s stock, Cody, Ritter and Piershale all say to look no further than the now-defunct Enron, Lehman, and even Kodak.

“If you’re dependent upon the company for a paycheck, health insurance and other benefits, you lose those because the company has a reversal,” Cody says. “And if you have most of your savings in that company you’re going to lose those savings, too.”

The good news is that employees are slowly learning their lesson: according to a recent Employee Benefits Research Institute (EBRI) study, the share of 401k accounts invested in company stock has been cut in half since 1999, down to just eight percent in recent years. It’s a trend that Piershale has noticed in his own clients: he says that three out of four clients don’t have any stock in their employer, and holding company stock is becoming rarer than it once was. However, he also wants employees to know that there can be reasons to hold stock in the company for which they work.

“Sometimes the company will make you do that to get a match. They’ll say, ‘oh we’ll match five or 10% of contributions. You put in five percent, we’ll put in five percent, but we’ll only put it in via company stock,’” he explains. “We tell people if it’s a reasonably good company – some of this does depend on a person’s risk tolerance – we do like to see them get those matches. That’s one reason to buy company stock.”

Piershale also says that taking advantage of net unrealized appreciation – an investing rule that allows company stock appreciations to be taxed at a lower rate as capital gains, not as ordinary income tax – can be a good reason to invest a portion of your assets in your own company.

There’s also the passion aspect: investing in your own company because you really believe in its mission (or fantastic stock performance history). This is not always the worst financial decision you can make, but it all comes back to how much of your net worth you expose to that one stock.

“You preserve that wealth by diversifying into multiple investments going forward. You can still have exposure to [your company], you just have less exposure to total net worth,” Cody says, noting that investors should look at stocks, bonds, mutual funds, index funds that will broadly diversify your holdings across many different asset classes and sectors.

Besides, Ritter adds, your performance at work – or belief in your company’s mission – likely won’t be evaluated based on your financial holdings.

“There are a lot of ways you can show loyalty to your company,” he says. “Putting your finances at risk is probably not one of the better ways.”

Apply Buyback Lets Exxon Reclaim Crown Of Biggest Dividend Player - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, October 08, 2013

(originally written by Samantha Sharf)


In late September, Campbell Soup increased its divided 7.6% from 29 cents a share to 32 cents. Earlier in the month month Microsoft MSFT raised its quarterly payout 22% to 28 cents per share from 23 cents. And just last week Kraft Foods Group KRFT announced a 5% increase from 50 cents to 52 cents.

Net dividend payout was up $11.9 billion in the third quarter of 2013 according to a report from Howard Silverblatt, S&P Dow Jones Indices’ senior index analyst. The quarter saw a record 475 companies increase dividend payouts and 44 decrease. During the same period last year there were 439 increases and 53 decreases for a net payout hike of $8.8 billion.

“Overall companies are doing much better than they were before,” says Silverblatt. “They’ve passed the recovery point from the recession and they are not spending as much.” Earning set all-time highs in the first and second quarters of this year, and estimates put the third quarter slightly ahead as well.

Traditionally, large established companies have paid dividends in order to return excess cash flow above their capital needs to investors. With 83.9% of S&P 500 companies and the entire Dow Jones industrial average paying , old favorites clearly still pay (only 47.3% of non-S&P stocks do), but they also keep plenty of financial firepower in reserve.

“While they are paying out record amounts they are not being generous,” Silverblatt explains. Looking back to 1936, companies have historically paid out 52% of what they make in earnings, he says. Currently that figure is closer to 36%.

While the payout ratio may be below historical norms, there have been other shifts as well. Investors gravitating toward dividend payers for income generation in a low  interest rate environment have also seen a number of technology companies join the group and become some of the market’s biggest payers. Tech, with big payout on a dollar basis from firms like IBM IBM, Apple AAPL and Microsoft, has become the largest payer of any sector.

The yield is lighter in tech though, with the average among dividend payers just 2.4%. Compare that with the yield-leading sectors like utilities (4.1%) and telecommunications (5.3%).

Apple and Exxon Mobil XOM have volleyed for the title of the biggest dividend payer on an absolute basis this year. Exxon took the edge in July when Apple announced a record $16 billion share buyback, reducing share count, but the two are neck and neck:. Exxon’s dividend annualized will pay $11.09 billion, Apple’s $11.08 billion.
Apple’s kept its dividend steady in July, after a 15% hike to $3.05 quarterly in April. That increase was part of a larger plan to increase capital returned to shareholders that also includes $60 billion worth of share buybacks by the end of 2015. Critics of pure dividend investing say such buybacks should be weighed as least as heavily as dividends.
Microsoft, which “brought tech companies into the dividend game” when it launched its payout in 2003, Silverblatt says, and currently has an annualized outlay of $9.3 billion. Even though Apple has joined the ranks of payers with Microsoft, Intel INTC +0.09% and Cisco Systems CSCO -0.61%, there are plenty of younger tech companies who believe they have better uses for their cash than doling it out to shareholders. One, Google GOOG -0.79%, is among the biggest companies in the S&P 500 to not pay a dividend.

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