Biggest Single Factor Why People Struggle Financially

DebtWhat do you think is the biggest single reason people struggle financially? They don’t make enough money, they don’t save enough, they don’t know how to take advantage of the stock market, maybe a combination of all of these?


By far the biggest single factor is the debt people carry, especially on credit cards and student loans. This problem has become more acute in recent years as investment returns have been almost flat and wages have become stagnate. In 2015 the average American household carried over $15,000 in credit card debt. Making the “minimum monthly payment” is a slow death march to your financial well-being.

Think about it, bank accounts and money market funds are paying you less than 1% on your money, US 10 Year Treasury’s pay under 2%! It is just difficult to make a normal return of 6-8% most people need to fund their retirement. Yet you will go out and purchase stuff on a credit card and pay 12 – 20% interest. Now, I’m not talking about the disciplined people who automatically pay-off their entire credit card balance each month. I would say these people might actually be pretty smart if they have credit cards that pay them 2% “cash back” on their purchases, they are “beating” the system.

The consumers I’m referring to carry a stack of cards in their wallets/purses and know which ones are already maxed out. If your money is worth 1 – 2%, your wages only increase 2-4% a year you just can’t afford to pay 18% interest on a credit card, it’s a financial downward spiral, there is no recovery.

So, if you are in that situation, what can you do? The answer is simple, pay off all credit cards ASAP. Then only use your card for future purchases if you can pay the entire balance at the end of the month.

There are some ways you might be able to do this without inflicting excessive pain. For example, I would suspend my 401K retirement contributions at work and make sure every penny of this money goes to credit card debt reduction. Figure out the highest rate card you carry and pay that one off first. Another possibility, is to swap debt, if you have a house take out a “home equity line of credit” completely earmarked for credit card debt reduction. Yes, you’ll have to pay back the HELOC but it will be at a much lower rate and spread out over time.

Don’t get me wrong, all of us have used credit cards and made payments. They helped us handle unexpected emergencies, and we may not have had the cash at the time. As you get older and start to plan the purchase of your first house, college education for your kids or plan your retirement you’ll want to closely examine the use of all types of credit, even home mortgages. The conventional wisdom is to plan so that you retire with a paid-off house. However, you might also develop a strategy to carry a very low interest mortgage 4% or less, while investing in returns of 6% or higher while maintaining access to a much higher level of cash.

In all cases paying the “minimum monthly payment” will haunt you for a lifetime.



New Permanent Tax Breaks for Your 2015 Returns


US taxpayers no longer have to worry each December if Congress will extend certain tax benefit items for the taxes we begin filing just one month later. Last month the Protecting Americans from Tax Hikes Act of 2015 was signed into law. Here is a complete copy of the Act …..Actual Act from

So how does it affect you and your 2015 tax filing?

  1. For us Florida residents we have the ability to elect a deduction for state and local sales taxes instead of state and local income taxes, since we have none. This is now a permanent.
  2. The American Opportunity Credit is also made permanent. (It was previously scheduled to expire at the end of 2017.) The American Opportunity Credit is a credit of up to $2,500 per year for paying qualified higher education expenses for yourself, your spouse, or your dependent. Many people miss this simple credit, it is more valuable than a “deduction” for other “educational expenses” items.
  3. For those of us in retirement, with a qualified charitable distribution, a taxpayer over age 70.5 has his or her RMD for the year distributed directly to a qualified charitable organization. This distribution satisfies the annual RMD requirement while being excluded from gross income. The benefit is that this is an exclusion from gross income rather than an itemized deduction (which is what you would ordinarily get for a charitable donation). This is important because it means that this income will not be included in your adjusted gross income, which then determines many things such as how much of your Social Security benefits will be taxable and whether you qualify for other credits/deductions). Furthermore, you can take advantage of this tax break even if you use the standard deduction.
  4. School teachers can now deduct certain expenses from income, on a permanent basis.
  5. Enhancements were made to the CTC, Child tax Credit and the EIC, Earned Income Credit. These two credits are very valuable in assisting low income taxpayers or even middle income taxpayers with large families to not just lower their taxes, but get money back even if they pay no taxes whatsoever.

The bottom line is that beginning with our current 2015 tax returns we can count on these items and more to be a permanent part of our tax planning strategy.

By the way your 2015 tax filing is not due until April 18th this year.

Tip to Save Taxes on a RMD – Transfer “In Kind” Stock

StocksWe are all faced with the dilemma of taking Required Minimum Distribution from our IRA accounts when we turn 70 years old. If you have accumulated large IRA’s (including transferred 401K accounts), this can be a problem:

  • You may not need the approx. 4% annual amount
  • The RMD when added to your pension and Social Security might put you in a much higher tax bracket, Social Security might be taxed at a higher rate
  • You have to pay income tax on the RMD as “ordinary income”, not getting any preferred tax rate break

There are a few ways to help minimize taxes with your RMD. For example, you can use an actual “in kind” stock transfer. This works really well when you have good quality stocks held in your IRA that are currently depressed. Instead of taking the RMD in cash (or selling stocks for cash), just transfer the actual stock “in kind” to your taxable account. You will still pay tax as ordinary income on the RMD stock value, no way around that. However, the appreciation of that stock in your taxable account will be under the Capital Gains tax rate, today 15%.

Here is an example:

A 71-year-old man in the 30% tax bracket takes an in-kind RMD of a stock position worth $50,000 at the time of the distribution. He’d owe $15,000 in taxes on the distribution. His cost basis on that stock in the taxable account would be $50,000. If the stock goes up to say $80,000 in the next three years and he decides to sell, his tax bill would be $4,500–his $30,000 gain multiplied by the 15% capital gains rate.

However, let’s say that same person keeps the depressed stock in the IRA and takes a distribution of $50,000 in cash from the IRA instead. His tax bill on the RMD would be the same–$15,000. But if he were to then sell the same stock 3 years later from the IRA at a market value of $80,000, his tax bill on that distribution would be $24,000.

The tax savings would be substantial, a $19,500 tax savings.

Beware of Issues with Your Will and IRA/Stock Market Account

191rsejjt85zljpgIt should be really simple, a loved one dies and the heirs would like to get access to the loved ones account. But wait, there is a growing trend with some brokerage firms that make it much slower and harder to get any information. A story in the Wall Street Journal indicated a qualified beneficiary waited almost one year to get access to funds they were entitled to. These firms have tight federal guidelines that may keep them from even providing statements or summary of holdings.

So what can you do to improve this situation?

  1. The most important step is to make sure beneficiary information on all taxable, IRA, Roth IRA and 401K accounts is completely up to date. Keep in mind that if the will beneficiary is different than the one shown on the account, the account rules NOT THE WILL!
  2. Tell your beneficiaries ahead of time that are named, no need to give them all the amounts or % details, just that they are listed.
  3. You might want to just put the brokerage account into a trust, therefore a trustee can just deal with it without the hassle and delays of probate.
  4. It is also helpful to put somewhat recent copies of all account statements in files along with other important papers.

Last but not least, make sure you have an “In Case of Emergency” documents as I outlined in my January 2, 2015 posting.

Beware Congress may “kill – off” the “Stretch IRA” for your Heirs

Stretch IRAIn my last post I discussed Understanding Death and Taxes – Your Taxable Account . I also mentioned there was a big difference between investments inherited in a taxable account vs. an IRA or 401K account.

Currently if you bequeath investments held in a traditional IRA or 401K account your heirs will have to pay tax on the account(s). Currently the holdings are drawn down over a lengthy period of time and taxes areas this occurred, hence the term “Stretch IRA”.

If Congress kills the Stretch provision, your heirs would have to draw down the investments over 5 years and probably get hit by very large tax bills (drawdown plus their normal income). The Whitehouse tried to eliminate the Stretch in 2013 and again this year. Sooner or later this may get eliminated.

What might you do to anticipate leaving your heirs with a huge tax burden?

  1. Consider withdrawing money from your IRA to live on instead of the conventional wisdom of withdrawing from a taxable account. Maybe calculate out the amount that will still say keep you in the 25% tax bracket.
  2. Consider converting some of the IRA to a ROTH IRA (which is never taxed). Yes you again will pay taxes on the conversion but your heirs will pay less.
  3. Consider purchasing life insurance so that your heirs can use the proceeds to pay tax bills.



Understanding Death and Taxes – Your Taxable Account


The current “death tax” threshold is $5.43 million; many people therefore feel they don’t need to worry about a death tax. Of course there is no such thing as a “death tax”, it is actually called the Federal Estate Tax. Not to be confused with complex State Estate Taxes.

Here is what you need to know.

When you die and leave stock in a taxable account to someone the “cost basis” value of that investment is reset to the current market value upon your death. This can be a huge advantage for your loved ones. For example, if you bought 500 Apple (APPL) at $100/share years ago and then it split 7:1 and is now trading at $127. Your “cost basis” is $50,000, the current value is $444,500. If you sold it you would be paying a huge capital gains tax on the $394,500 gain. However if you die and leave the stock (not cash) to say family members, the “cost basis” becomes $444.500. Therefore, If the person(s) inheriting the stock immediately sold it there would be NO TAX. This is called a “step-up in cost basis”. You can use this information in your overall estate planning.

Beware of the “stretch IRA” law change! Notice I mentioned taxable account, it is completely different in a retirement account, either IRA or 401K. I’ll explain this in my next blog posting.

The Problem with Beneficiaries in Your Will

willYou think that you have your love ones protected, you have a Will. Well maybe not! Many people who have a Will believe that their assets will be passed say to a spouse or other family members. And while this is true there are some things that you should be concerned about.

  1. Beware that your beneficiaries listed on your life insurance, 401K, IRA and even your brokerage account ARE AHEAD of your beneficiaries shown in your will. These assets will pass to the beneficiaries BEFORE the Will even goes to probate.
  2. In general, all Wills go through the probate process and distributions can take months or even years. In addition you’ll need an attorney. Suggestion – check to see if a revocable trust better meets your needs, the trustee can directly distribute your assets without probate.
  3. Beware of naming an “Estate” as a beneficiary in your life insurance, 401K, IRA and brokerage account. This may have unintended consequences and should only be done with the help of an estate planning attorney.

Do not delay whatsoever in clarifying your beneficiaries. You may find that the beneficiaries that you set up years ago in your employer 401K plan no longer represent your wishes.

Beware of High Dividend Foreign Stocks or Funds in Your IRA/401K

Foreign TaxDo you know how the Foreign Tax Credit works, you should, it can cost you a lot of money.

Here is another tax tip for those investors who are looking for dividends and have foreign dividend paying investments in a tax deferred account. When you own a stock in a company based in a foreign country you may have to pay a foreign tax on a dividend or capital gain. These tax rates are all based on US treaties.  Whether you know it or not these foreign taxes are automatically deducted from your dividend payment before you even receive it in your account.

The good news is that the IRS will give you a tax credit for all Foreign Tax paid, it actually goes on 1040 Line 48. However, this ONLY works if you hold these investments in a taxable account. if you have these investments in a tax deferred account, you will still pay the foreign tax, but not get the Foreign Tax Credit. 

Here are some examples of foreign withholdings on Dividends:

Australia – 30%

Brazil – 15%

Canada – 15%

Chile – 35%

Chine – 10%

France – 25%

Germany – 26%

Ireland – 20%

Japan – 10%

South Korea – 27.5%

UK – REITS only – 20%

Keep in mind that this is a Tax Credit, it reduces your actual taxes not just reduces your income.

Be careful under what account you invest in foreign company’s that pay dividends.

Get a Free 12 Month Government Loan at 0% Interest for $15-$25,000 – Really!


If you are over 66 (and under 70) and not yet getting Social Security you can easily get a $15 – $25,000 loan from Social Security. It’s actually very easy to do and there is no penalty whatsoever. You just have to completely pay it back within exactly 12 months and no longer. It is best done at the very start of the year so that your 1099-SA (Social Security tax form) will show a full repayment in the same year. Just file form SSA-521.  

I actually did this in 2014. I filed and received my Social Security benefits effective January 2014 and stopped my benefits, repaying it all in December 2014. Each month I received my $2,600 benefit (the maximum payment allowed in 2014). Separately I paid my $104/mo Medicare payment and did not have any Federal Tax withheld. The net effect was that this money was invested in the market, I didn’t calculate exactly how much I made off of this loan but my overall investments were up double digits for the year. This was probably the easiest $2,000 or so I ever made.  

Unfortunately you can only do this one time!  

As you probably know from reading my other articles, I have no intentions of taking my Social Security benefits until I’m 70 years old since they grow tax free at 8%/year plus a cost of living increase compounded.


The Tax Shock for Widowhood (or Widowerhood)



The lost of a spouse in retirement can result in the following tax shock:

  1. No longer able to file as Married Filing Jointly, may have to file as Single, the highest tax bracket.
  2. Loose 50% of the Personal Exemptions.
  3. Loose 50% of the Standard Deduction.
  4. Loose 33% of dual Social Security benefits.
  5. Possible loss of spouse’s private pension, depending on plan.
  6. Higher tax bracket may raise the marginal tax rate.

As you get older and are either retired or are planning your retirement you will undoubtly work out a retirement plan that should also include a tax plan. Bad tax planning is almost as bad a bad retirement planning. There are major tax filing issues for those who become a widow(er), the loss of both a personal exemption and a 50% less standard deduction. After a death, you can bet that the survivors’ marginal tax rate will increase and you need to plan for this in your calculations.

First let’s look at what happens in the tax years after a spouse passes away;

  • In the tax year of the passing, if you did not remarry by December 31st, you can claim Married Filing Jointly, and your normal 2 exemptions. You may only do this one time.
  • After the initial tax year, if you have a dependent child living in your house and your spouse died in one of the past two years you may qualify as a Qualified Widow(er).
  • With the above dependent child or any qualified other dependant, after the 2nd year , may qualify to file as Head of Household.
  • With no dependent child, you immediately become Single status for tax purposes, the most expensive tax bracket there is.

Here is how it affects the Standard Deductions in 2014:

Filing Status

Single $6,200

Married Filing Jointly $12,400

Married Filing Separately $6,200

Head of Household $9,100

In addition for tax year 2014, the personal exemption amount is $3,950 per person, losing a spouse provides ½ the former exemption. Let’s also assume that both husband and wife were collecting Social Security, the passing of a spouse typically reduces the total annual Social Security amount by 33%.

When you do your retirement planning make sure you also look at tax planning for a surviving spouse and leave instructions behind on how best to deal with this issue.