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Financial Planning

How do I determine my long-term financial goals?

Together with your spouse or other family members, decide – realistically – what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

What questions should I ask before making any investment?

Have this list of questions with you the next time you talk to your broker. Write down the answers you get and the action you decide to take. Your notes may come in handy later if there is a dispute or a problem. A good broker will be happy to answer your questions, and will be impressed with your seriousness and professionalism.

  • Is this investment registered with the SEC and a state securities agency?
  • Does the investment match my investment goals?
  • How will the investment make money for me (dividends, interest, capital gains)?
  • What set of circumstances have to occur for the value of the investment to go up? To go down? (e.g., must interest rates rise?)
  • What fees do I have to pay to buy, maintain, and sell the investment? After fees, how much does the value have to increase by before I make a profit?
  • How easy is it for me to unload this investment in a hurry, should I need the money?
  • What risks does the investment carry-i.e., how much of your investment could you lose? What are the specific risks, e.g., the risk that rising interest rates will devalue your investment, or the risk that an economic recession could decrease its value.
  • Is the company experienced at what it is doing? How long has it been in business? What is their track record? Who are their competitors?
  • Can I get more information: a prospectus, the latest SEC filings, or the latest annual report?

What types of risks are involved in investing?

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

  1. The higher the expected rate of return, the greater the risk; depending on market developments, you could lose some or all of your initial investment, or a greater amount.
  2. Some investments cannot easily be sold or converted to cash. Check to see if there is any penalty or charge if you must sell an investment quickly or before its maturity date.
  3. Investments in securities issued by a company with little or no operating history or published information may involve greater risk.
  4. Securities investments, including mutual funds, are not federally insured against a loss in market value.
  5. Securities you own may be subject to tender offers, mergers, reorganizations, or third party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.
  6. The past success of a particular investment is no guarantee of future performance.

How can I save taxes on college savings?

If you decide to invest in your child’s name, here are some tax strategies to consider:

  • You can shift just enough assets to create $1,900 in 2009 ($1,800 in 2008) taxable income to an under-19 child.
  • You can buy U.S. Savings Bonds (in the child’s name) scheduled to mature after your child reaches age 18.
  • You can invest in equities that pay small dividends but have a lot of potential for appreciation. The dividend income earned when your child is under 19 will be minimal with tax relief, and the growth in the stocks will occur over the long term.
  • If you own a family business, you can employ your child in the business. Earned income is not subject to the “kiddie-tax,” and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is under 19, then he or she will not pay social security taxes on the income.

How can I minimize or eliminate tax on inherited retirement assets?

You can minimize or eliminate tax on inherited retirement assets by using the following methods:

  1. Leave them to your spouse-saves estate tax and helps postpone withdrawals subject to income tax.
  2. Leave them to charity-saves income and estate tax (though with no financial benefit to the family).
  3. Leave them to family for life, remainder to charity (a charitable remainder trust)-reduces estate tax with some benefit to family.
  4. Provide life insurance to pay estate tax on retirement assets-provides estate liquidity, avoiding taxable distributions to pay estate tax.

How should I take distributions from my retirement plan?

If your assets are in a tax-favored retirement fund such as a company or Keogh pension or profit-sharing plan (including thrift and savings plans), 401(k), IRA or stock bonus plan, your likeliest options are:

  • Everything in a lump sum
  • An annuity
  • A partial withdrawal (leaving the balance for withdrawal later)
  • A rollover
  • Some combination of the above

Some plans tilt more than others towards certain withdrawal options. Annuities are commonest with pension plans. The other types of plan favor the other options. But in many plans, all or most options are available, and combinations may be available.
You may want to preserve the tax shelter as long as possible, by withdrawing no more than you need.
In some plans, your retirement assets will be distributed in kind-as employer stock, or an annuity or insurance contract.
Timing your withdrawal can be a factor, too. Withdrawals before age 59 risk a tax penalty. And withdrawal is generally required to start at age 70 1/2, reinforced with a tax penalty and other rules, except for Roth IRAs, and plan permitting for non-owner-employees still working beyond that age.

Can creditors get at my retirement assets?

Generally not for employer plans. For IRAs, there’s bankruptcy protection for amounts rolled over from company plans, plus up to $1 million (and possibly more).

Can moving to another state when I retire save me state taxes on my retirement plan?

Money from retirement plans, including 401(k)s, IRAs, company pensions and other plans, is taxed according to your residence when you receive it.
If you move from a state with a high income tax, such as New York, to one with little or no income tax (Texas, Nevada and Florida have none), you will indeed save money on state income tax.
However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.

Are Social Security disability benefits taxable?

Some people who get Social Security have to pay taxes on their benefits. The rules are the same regardless as to whether Social Security benefits are received due to retirement or disability. You will be affected only if you have substantial income in addition to your Social Security benefits. If you are married and file a separate return, you probably will pay taxes on your benefits.

Can I just make a handwritten will if I don’t have much property?

Handwritten wills, called “holographic” wills, are legal in about 25 states. To be valid, a holographic will must be written, dated and signed in the handwriting of the person making the will. Some states allow will writers to use a fill-in-the-blanks form if the rest of the will is handwritten and the will is properly dated and signed.
If you have very little property, and you want to make just a few specific bequests, a holographic will is better than nothing if it’s valid in your state. But generally, we don’t recommend them. Unlike regular wills, holographic wills are not usually witnessed, so if your will goes before a probate court, the court may be unusually strict when examining it to be sure it’s legitimate. It’s better to take a little extra time to write a will that will easily pass muster when the time comes.

Tax, Accounting, Consulting - Emil Estafanous, CPA, CFF, CGMA