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Welcome to the February edition of The Wealth Chronicle.
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Take Advantage Of These "Loopholes" Before They Are Gone
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If you want to know what areas you should be aiming to take advantage of with your finances look no further than the "loopholes" that are included to be closed or slashed in proposed budget deals or by presidential candidates on the campaign trail.
Two of the "loopholes" we are going to look at in this newsletter are the Backdoor Roth IRA and the Stretch IRA. These two strategies were on the chopping block of President Obama's recent budget proposal.
Backdoor Roth IRA
Very few things in personal finance can have as positive benefit as the Roth IRA. With a Roth IRA you contribute money to your IRA and never have to pay tax on that money again. As the money grows each year you do not pay tax on the gains or income the account generates, nor do you pay tax when you withdraw money from the account. A triple benefit is since the IRS is not collecting tax on the withdrawals there is no such thing as Required Minimum Distributions (RMDs) on a Roth as there are on a traditional IRA. Also, unlike the Traditional IRA, you can also take out your contributions from the Roth at anytime without penalty. It can be a retirement, education saving, and emergency fund tool all wrapped in to one. Unfortunately the Roth IRA does have income limits on contributions into it. If you earn over $176,000 in 2015 as a married couple you are not allowed to contribute to a Roth. Don't fear though, even if your income is over the limit you can still get money into a Roth IRA by using the "backdoor" strategy.
How to take advantage of the Backdoor Roth IRA.
Utilizing a backdoor Roth IRA is simple and straightforward. First you create and add a contribution to a non-deductible IRA. Soon after the funds hit the non-deductible IRA you would convert it into a Roth IRA. No tax is owed and your money is in the Roth where it can grow and you can take distributions tax free.
Stretch IRA
The Stretch IRA is a wealth transfer method that allows you the potential to "stretch" your IRA over several future generations. Under current rules, as a beneficiary when you inherit an IRA you can space out the distributions over the course of your life. The tax benefit is that the IRA can stay in tact for a longer amount of time growing tax-deferred.
If the provision in the new budget deal is passed, almost any non-spouse beneficiary would be forced to withdraw all of their inherited retirement accounts by the end of the fifth year after the account owner has died, effectively killing the tax benefits that come with the stretch IRA.
How to take advantage of the Stretch IRA
IRA accounts at death of the owner pass by beneficiary designation. It is typical practice for most IRA owners to name their spouse as the primary IRA beneficiary and their children as the contingent beneficiaries. While there is nothing wrong with this strategy, it might require the spouse to take more taxable income from the IRA than what he/she really needs when he/she inherits the IRA. If income needs are not an issue for the spouse and children-, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over generations. This is possible because grandchildren are younger and their required minimum distribution (RMD) figure will be much less at a younger age.
Mistakes to avoid with inherited IRA's by Ed Slott
The backdoor Roth and the Stretch IRA are not the only items included in the budget proposal. The table below is from Financial Blogger, Michael Kitces and describes all of the potentially impacting changes.
The good news is that we are in an election year and there is little likelihood that any of the President's substantive tax changes will actually come to pass. Although it does give an indication of what is on the radar screen of potential crackdowns and loophole closers that could appear in future legislation. The crackdown on Social Security file and suspend and restricted application claiming strategies last year was an example of this.
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Do You Have To Pay Your Income Taxes?
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A lot of people dream of not paying their taxes. Larry Williams scoured the fine print of IRS code, talked to lawyers, put a plan together, then just stopped paying taxes.
Listen to the Larry's story, how it started on a fateful camping trip, it winds through a jail cell in Australia and a courtroom in California, and it ends up in the US Virgin Islands. As you can imagine it doesn't end well for Larry.
- If you are W-2 wage earner, the government can garnish your wages with a 30-day warning, and it doesn't need a lawsuit to do so. - If a borrower doesn't work, but collects Social Security, the federal government can garnish that money. - Employees who file tax returns normally look forward to getting their refunds back in the spring. But if you've defaulted on your federal student loan, don't expect to get your refund, according to Cohen. The federal government will use the return amount to pay down the principal and interest on student loans in default. - If you're not a W-2 wage earner, don't receive Social Security, and aren't due back a tax refund, the government's last option for collecting on a student loan is to sue the borrower. It's the situation most self-employed individuals find themselves in.
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The One-Page Financial Plan
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The One-Page Financial Plan: A Simple Way to Be Smart About Your Money by Carl Richards. This is the second book I've read from Carl Richards. The first being The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Money.
In both of his books Richards tries to push the fact that it's critical to take simplistic steps to managing your money. So many people fear doing the wrong thing with their money that they do nothing. Their 401k and bank statements pile up, unexamined or maybe even unopened.
Like he does in his previous book, Richards tries to use simple sketches and diagrams to explain complex topics. The book is organized into four parts.
Discovery - Get clear about where you are and where you want to be. Richards considers the most important money question you should ask yourself is: Why is money important to you? It's a simple question, but before you plan you have to know why you are planning. Once you answer that question you can use it to identify and prioritize goals and balance trade-offs.
Spending and Saving - After you have some financial goals and gained some clarity about your current location, it's time to narrow the gap between where you are now and where you want to be. You can have the best investing strategy in the world, but if you don't have any money to invest, it won't help you. Richards and I both agree that no matter how rich or poor you are budgeting is a great tool for awareness.
Investing - Richards suggest that instead of thinking about the prospects of a particular stock or sector, they should think about whether the particular investment fits into their plan. When you commit to a plan, you are less likely to fall victim to the desire for instant gratification.
Strategies for Avoiding the Big Mistake - Even if you create a great plan, the temptation to stray from it at times will be strong. Even though Richards preaches simplicity with your finances, he recommends getting a real financial advisor to navigate through the complexities of making the right financial decisions. Working with an objective third party can help you increase your chances of sticking to the right plan.
His final pieces of advice include setting up the guardrails that make it difficult to "misbehave" with your finances. - Have a plan and stick with it.
- Automate good decisions.
- Remember, remember, remember - We may not be able to fix what we've done in the past, but we can remember how we felt and whether fear or greed caused us to make bad decisions.
- Leave it alone - When done correctly investing should look like growing a giant oak tree. It's boring, but you are often rewarded for being lazy.
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David Bowie, an innovator in finance and music. With the passing of David Bowie last month  it reminds us that David Bowie was not just an innovator in music, he also was a trailblazer in the finance world as the first instance of a catalog-tied financial instrument on Wall Street is tied to him. Bowie sold a stake in his catalog of music. Instead of outright selling his songwriting, performance, and licensing rights to his many successful songs, in 1997 David Pullman, an investment banker helped Bowie create "Bowie Bonds." These allowed Bowie to sell - for $55 million - a 10-year investment, which operated like an annuity, providing a fixed-rate of return of 7.9%. The payouts where secured by all of his royalties and copyrights from the music. Unfortunately, like a lot of wall street's products it looks like it was lucrative for Bowie, but not for investors.
 Big Bird the Venture Capitalist. Sesame Street has created Sesame Ventures where they
plan to invest in companies focused on education, media, family development, social and cultural development, food, health, and wellness.
How much tech companies make every 10 seconds
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Please contact me regarding any of the articles above, or if you would like to discuss your personal or business finances
Sincerely,
Marc Bautis
Bautis Financial
201-842-7655
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