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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 BREAKS – Taxes are by far the highest expense we have, and the problem is more than likely going to get worse. Tax laws are complex things that change every year. While most people who work and have a few bank statements and/or brokerage accounts can prepare their own taxes with one of the many tax software packages on the market, those who have complex returns to fill out the “Schedule” (Schedules A, B, C, D, E, etc.) in depth, or the depreciation/amortization items should almost always be used by a tax professional.
SOLUTION: Have a tax professional do your return once every few years, even if you don’t need to. If there’s anything you missed, it could be worth the one-time expense when you capitalize the savings over a period of years. For those who receive property tax assessments on a regular basis, do you appeal when appropriate? Here in Allegheny County, where Pittsburgh is located, their assessment method includes taking a photo of the front of the property and going through the land area already registered. Recently, a new client’s mother was assessed for a creek running through her property. When his son (my client) brought this to the attention of the appeals board, the tax was lowered without question.
2. FAILURE TO HAVE OR FAIL TO CHANGE THE BENEFICIARY INFORMATION ON YOUR LIFE INSURANCE POLICIES WHEN APPLICABLE.
John and Mary divorced three years ago. John and Mary can’t stand each other, just the mere mention of each other’s name causing bile to flow down the other party’s esophagus. Last year John remarried Linda. John and Linda are very much in love. Today, John died in a traffic accident on the highway. Mary is a multi-millionaire today thanks to John, and Linda is stuck paying huge final fees on joint bank and investment accounts? Why did this happen? John never bothered to inform his own insurance agent and his HR person at work of the major change in his life, and fill out the applicable paperwork to change the beneficiary from Mary to Linda.
I know firsthand that this happens, not only because I am an insurance professional, but also because I served as vice president of my volunteer fire company for a period of 3 years, and the “veep” job included keeping the information of the beneficiaries of the insurance. During my tenure as Vice President, a member died in a fire related death, one of the many things the State of PA did when they came down to walk us through the death of the service line was to order the drawer with the members’ file. be sealed until further notice. No new information could be added or subtracted from ANYONE’s file in that drawer until I was told otherwise. After allowing access again, several members suddenly remembered the changes that needed to be made. Thank God nothing else happened in the meantime
SOLUTION: Check the beneficiary information on your life insurance policies periodically but no less than every two years or when there is a major life change such as marriage, divorce, birth of children, etc. Special Note: If you leave money to minors, you will need to be the guardian of the money, as the court system does not usually release hundreds or thousands of dollars for children to use at their discretion. If you do not appoint someone of your own choosing, the court will appoint a guardian for the money who may or may not be the person of your choice. He may or may not be the person you have chosen for the day-to-day care of your offspring.
3. NOT TO HAVE OR NOT TO CHANGE THE BENEFICIARY INFORMATION IN YOUR IRAS
Insurance policies and IRAs have one very important thing in common, in most cases they are affected by laws outside of estate law and probate processes. I say most cases because if you have cash value life insurance (permanent insurance rather than term insurance), its value could make you eligible to pay the federal estate tax if your estate is big enough This is NOT a good thing that happened to you. IRA money could be subject to estate law if you name your estate as a beneficiary instead of an individual. While not naming a beneficiary will cost you nothing if you die, it could 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 a Cliff’s Notes version of the Stretch. Let’s say you’re at the required minimum distribution (RMD) age when you die, which means you’re over 70 1/2 years old. Let’s also assume you leave your IRA to your 35-year-old son or daughter. When your son or daughter inherits the IRA, because they are wise, turn to Halas Consulting to learn how best to handle their 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 the property is properly transferred, your son or daughter still has to continue taking RMDs, but they do so based on their younger age and not their older age. This means that less is distributed to be taxed, if the IRA is a traditional IRA and not a Roth IRA that will never be taxed. If they also ask Halas Consulting to manage the money and set up in a proper asset allocation model, that money can grow very large (we’re talking millions here) with tax advantages with only smaller amounts of money. annually, until your child reaches around half-century, to satisfy the RMD. This is a good thing.
However (you just KNEW it was coming), if the IRA is set up or transferred incorrectly, the installment is lost FOREVER. What if the reason this happens is because of bad advice? In most cases, the IRS says “tough beans”, there are many private letter rulings (PLRs) of people who have claimed the same thing and lost in the PLR. You could sue the person who gave the bad advice, but you could still lose, and in addition to losing your case, you’ll be down on legal fees. For more detailed information on this, I recommend reading books written by IRA expert Ed Slott. They can be found in bookstores or possibly your local library (yes, that place with all the books most of you haven’t visited since they had to write their college thesis or worse, their senior year of high school)
THE SOLUTION: Always have a named beneficiary on your IRAs and 401ks. Again, if you want to take full advantage of the Stretch and nominate a minor. Please also name an adult whom you trust with money to act as guardian of the money until the child reaches an age you feel would be responsible.
4. TRANSFER OF HIGHLY LIKED COMPANY SHARES FROM YOUR RETIREMENT PLAN TO AN IRA.
While on the surface this may seem like a good idea, it really isn’t. The reason is a little-known rule called “Net Unrealized Appreciation” or NUA. Here is a brief synopsis of how NUA works. Let’s say you had 500 shares of company stock that you accumulated over your working years. For simplicity, let’s say you had the option to buy this stock for $3 a share when the stock was priced at 10 in its heyday in the late 1990s. Now, in retirement, those shares are worth $20. If you roll those shares into a self-directed IRA after retirement, you’ll owe income taxes on those shares whenever they’re distributed from your IRA. Your income taxes could be quite high if you have a lot of retirement income.
THE SOLUTION: If you take advantage of the NUA correctly, you will sell the stock and move the money into a non-qualified brokerage account (not an IRA). By doing so, you will pay income tax of $7 per share, which is the amount of the difference between what you paid for the stock ($3) and what the stock was worth at the time you exercise your call option ($10). The difference between the price of the stock at purchase ($10) and what it is currently worth ($20), or $10 per share, will be taxed at the capital gains rate which is currently a maximum of 15% ( the top level of income tax could be more than double). After the shares are sold and removed from the IRA, roll the rest into an IRA for maximum flexibility and options. The cash proceeds from the stock you just sold are no longer taxable, only the interest and capital gains on that cost basis will be taxed if you invest the money you have in the non-qualified brokerage account. To manage your taxes efficiently and not get saddled with high expenses, a well-researched growth stock ETF would be a good choice here. Just make sure it fits your asset allocation model.
5. YOUR CREDIT IS NOT IMPORTANT
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 incorrectly, it can also be a life saver and allow you to buy many necessary things that can’t be paid for in cash up front because of their cost. Those who pay attention to their credit score and research what makes one’s score look better and what the different credit bureaus look for pay less money in interest on cars, homes, home repairs and credit cards. Not to be a braggart, 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 requests were ready to lend me more than $50,000 in unsecured money. because of my good credit, and here were the TV people who had foreclosed on houses 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” to determine your insurance score. For example, when you buy car insurance, it makes sense that insurance companies look at your record of driving and moving violations, but what the heck does my credit score have to do, what kind of driver am I? Can I not be reckless with money but a model citizen on the road? Well, according to research done by insurance companies, no, you can’t. Your insurance score is basically a composite of how you live your life, and those who lead responsible lives can save money. One of those components is money and the responsibility you are with it. Likewise, if you have a DUI on your driving record, it could also affect your home, health, and life insurance premiums, as well as your auto insurance.
THE SOLUTION: Get a free credit report every year from annualcreditreport.com, take advantage of it. I would recommend that every year or every two years you spend about $40 and get a consolidated or “tri-merged” credit report from all three companies. This consolidated report will give you much more detail than the gift, and it’s what 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 loan to deadbeats and then the whole economy crashed. But I digress). Go through this report with a fine-toothed comb. One year in mine I found a credit card account that I closed years ago and the bank didn’t report it to the credit bureaus as closed. This is your “face” and your reputation on the line, have NO idea what it says.
Well, 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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