Evaluation Of Cost To Benefit For Improving School Funding Formulas 5 Stupid Ways to Lose Money to Those You Dislike and Simple Solutions to Stop it From Happening

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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 the biggest expense for any of us, and the problem is likely to get worse. Tax laws are complex things that change every year. While most people who are employed and have a few bank statements and/or brokerage accounts can get away with preparing their own taxes with one of the many tax software packages on the market, there are complex returns that must be filled out “letters.” Schedule” (Schedule A, B, C, D, E etc.) in depth, or depreciation/amortization items should almost always be used by a tax pro.

Solution: Have a tax professional do your returns once every several years, even if you don’t need to. If there’s anything you’re missing out on it might be worth the one-time expense while you capitalize on the savings over the course of the year. For those who regularly receive property tax assessments, do you appeal when applicable? Here in Allegheny County, where Pittsburgh is located, their appraisal method involves taking a picture of the front of the property and going through the land area already on record. 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 Board of Appeals, the tax was abated without question.

2. Not maintaining or changing beneficiary information on your life insurance policies when applicable.

John and Mary divorced three years ago. John and Mary can’t stand each other, the mere mention of the other’s name brings bile down opposite esophaguses. Last year John remarried Linda. John and Linda are very much in love. Today, John was killed in a traffic accident on the freeway. Today Mary is now a millionaire thanks to John, and Linda is stuck paying huge final expenses from joint bank and investment accounts? Why did this happen? John never bothered to inform his insurance agent and his human resources person at work about the big change in his life and fill out the applicable paperwork changing the beneficiary from Mary to Linda.

I know this happens, not only from being an insurance professional, but also because I served as vice president of my volunteer fire company for a 3-year term and the “veep’s” job involved maintaining insurance beneficiary information. During my tenure as VP, a member died in a firefighting related death, one of the many things the State of PA did when they came down to guide us through the line of duty death process was to order the drawer to be filed with the member. Sealed until further notice. No new information can be added or subtracted from anyone’s file in that drawer unless I tell them otherwise. After access was allowed again, many 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 regularly but every two years or when there is a major life change including marriage, divorce, birth of children etc. Special Note: If you leave money to minors, there must be a guardian for the money because the court system generally does not release hundreds or thousands of dollars to children to use at their own discretion. If you do not appoint someone of your choice, the court will appoint a guardian for the money who may or may not be the person you choose. This may or may not be the person you choose for the day-to-day care of your child.

3. Don’t leave or change the beneficiary information in your IRAS

Insurance policies and IRAs have one very important point in common, they are affected by laws outside of estate law and, in most cases, probate proceedings. I say most cases because if you have cash value life insurance (permanent as opposed to term insurance) if your assets are large enough, its value may qualify you to pay federal estate taxes. It’s not a good thing you have. IRA money may be subject to estate laws if you name your estate as a beneficiary instead of an individual. Although not naming a beneficiary will cost you nothing if you die, it could potentially cost your loved ones millions. The reason is that inherited IRAs can be benefited by an individual called “IRA Stretch.”

Here’s Cliff’s Notes version of the stretch. Let’s say you’re old enough to take required minimum distributions (RMDs) when you die, meaning you’re over age 70 1/2. Let’s also say you leave your IRA to your 35-year-old son or daughter. If your son or daughter inherits an IRA, because they are wise, go to Halas Consulting to learn the best way to handle their new assets. The good folks at Halas Consulting will advise your son or daughter on setting up a Beneficiary IRA. Basically what happens is when ownership is properly transferred, your son or daughter still has to take RMDs, but they do so based on their age and not your old age. This means that if the IRA is a traditional IRA and not a Roth IRA it can never be taxed. If they also ask Halas Consulting to manage the money and it’s set up in a proper asset allocation model, that money could potentially be huge (we’re talking millions here) with little money coming in based on tax benefits. To satisfy the RMD, withdraw annually until your child reaches the half-century mark. This is a good thing.

However (you knew this was coming), the stretch is lost forever if the IRA is set up or transferred incorrectly. What if this happens because of bad advice? In most cases, what the IRS calls “tough beans,” there are many Private Letter Rulers (PLRs) who have claimed this and lost in the PLR. You can sue the person who gave you bad advice but you may still lose and then you will end up with less legal fees on top of losing your case. For more in-depth information on this, I recommend reading the books written by IRA expert Ed Slott. These can be found in bookstores or possibly your local library (yes, the place with all those books they need to write their college thesis or worse, their senior year of high school).

Solution: Always name a beneficiary on your IRAs and 401ks. Again, if you want to make the most of the stretch and name the minor. Please also name an adult you trust with the money to act as guardian of the money until the minors are old enough to be responsible.

4. Transferring highly appreciated company stock 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 summary of how NUA works. Let’s say you own 500 shares of company stock that you have accumulated over your working years. For simplicity, let’s say you had an option to buy this stock at $3 per share when the stock price was $10 in the late 1990s. Now at retirement these shares are worth $20. If you transfer these shares to a self-directed IRA after retirement, you will pay income tax on these shares when they are distributed from your IRA. If you have a lot of retirement income, your income tax may be much higher.

Solution: If you take advantage of NUA correctly, you sell the stock and move the money into a non-qualified (non-IRA) brokerage account. After doing this you will pay income tax on $7 per share, which is the difference between what you paid for the stock ($3) and what the stock was worth when you exercised the option to buy ($10). The difference between the price of the stock at purchase ($10), and the current price ($20), or $10 per share, will be taxed at the capital gains rate which is the current maximum of 15% (the top income tax bracket may be double that). After stocks are sold and withdrawn from the IRA, transfer the remainder to an IRA for maximum flexibility and options. While the cash proceeds of the stock you just sold are no longer subject to tax, only interest and capital gains on this cost basis will be taxed if you invest the money held in a non-qualified brokerage account. To manage your taxes efficiently and not get hammered 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. Don’t worry about your credit

With the recent financial collapse still fresh in people’s minds, debt and debt have become four-letter words. 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 cash because of their cost. Those who are aware of their credit score and research that one’s score looks good and the various credit agencies look to pay less money in interest on cars, houses, home refinances, and credit cards. Not to brag, but several months ago when it seemed like the doom and gloom would last forever, I was sitting in my kitchen opening the mail and some requests were ready to lend me upwards of $50k in unsecured money. Because of my good credit, and here were people on TV going into foreclosure on homes where they owed less than that.

Another area where good credit can help you with lower payments is insurance. All insurance companies use something called an “Insurance Score” when figuring out your insurance score. For example, when buying auto insurance, insurance companies understand your record of driving and moving violations, but what does my credit score do to determine what kind of driver I am? Can I not be fooled by money but a model citizen on the street? 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 live responsibly can save some money. One of those components is money and how responsible you are with it. Similarly, if you have a DUI on your driving record, it can also affect your premiums on your home, health, and life insurance, as well as your auto insurance.

Solution- Take advantage of the fact that you get a free credit report every year from AnnualCreditReport.com. I recommend that every year or every other year you spend $40 and get a consolidated credit report, or a “tri-merge” of all three companies. This consolidated report will give you much more detail than a freebie, and is the one banks and mortgage brokers use to decide who gets loans (at least until the government stepped in and told them they had to lend at deadbeats. The whole economy collapsed. But I digress). Go through this report with a fine-toothed comb. In one of my years I discovered a credit card account that I had closed years ago and the bank failed to report as closed to the credit agencies. It’s your “face” and reputation at stake, don’t be ignorant of what it says.

Well here are five things you can do to get started, if I think of more ways I will 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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