Personal Finance

What is This Tax Form Arriving in May?

What is this tax form arriving in May? You just gathered all your forms two months ago and now a new one arrives after the deadline. What gives? Do you have to call your accountant again? Hold the calls. You may remember reporting to your accountant (or TurboTax) that you made some contributions to a Health Savings Account (HSA) or Individual Retirement Account (IRA). Perhaps you made them last year, or perhaps you made them before this year's deadline and had them count for last year. Or, you took money out of these accounts, or are getting ready to start your required minimum distributions (RMDs). These are reasons why you are receiving Form 5498. What's Form 5498 for? One purpose of the Form 5498 is for the financial institution that holds your account (called a “custodian”) to verify to the IRS that you did indeed make the contribution that you claim you did on your tax return. Since everyone usually has until the tax filing deadline to make contributions, the IRS gives custodians until May 31 to send Form 5498 to account holders. 2. Another is to verify distributions. If you are over the age for required minimum distributions (RMDs), Form 5498 also tells the IRS what your RMD will be for the current year. The RMD is determined by the account balance on December 31 of the previous year. What you need to do: Check that what's reported on the form matches up with what actually happened and also with what you actually reported on your return. Check Form 5498 For Errors Seriously, make sure it’s correct. Mistakes are common. In 2018, my husband and I both received erroneous 5498’s for our Health Savings Accounts (HSAs). Mine showed $0 contributions for 2017 and his showed 2 years’ worth. What the....? So we called the bank, got the records straight, and had them send corrected 5498s to the IRS. Why go to the trouble? If your 5498 contribution or distribution differs from what you reported on your 1040, at some point it could get noticed. One fantastic sunny day after skipping down to your mailbox, you may find inside a skinny white envelope with “Internal Revenue Service” in the return address. Fantastic day ruined. More than likely, all the letter will say is, “Hey, we noticed your 5498 doesn’t match your 1040. Whassup?” But still. It will be in IRS-Speak and look and sound and feel serious, with a deadline for giving them an answer. Save yourself the trouble of having to answer (or pay your accountant to answer for you) and do a quick check now. It only takes a few minutes. Does your contribution amount for last year look correct? Did you take any HSA or IRA distributions, and if so, do those look correct? (If not, make sure the distributions say $0.) Does the reported year-end account balance look accurate? Is your SSN correct? How about your name, including your middle initial? If anything looks amiss, contact…

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Graduation Gift Idea: Legal Documents

Graduation gift idea: legal documents. What's the best graduation gift idea for an 18-year-old? Legal documents! They're not quite as bad as coal in a Christmas stocking. But not quite as much fun as a MacBook Air, either. Think about it - an 18-year-old is a legal adult.   “What this means to each of us is the only individuals that can make financial or health care decisions for us are the individuals we legally appoint.  Mommy and Daddy are no longer the legal guardians,” says Clearwater, Florida attorney Linda Chamberlain in her own blog post on the topic: The Best Gift for the Graduate. But They Don't Own Anything! You might say, "But my 18-year-old doesn't own anything. Why do they need a will?" Other documents become important upon reaching adulthood. For 18-year-olds who don't own anything, they still have rights, such as: to private medical records, to make their own health care decisions, to sign their own lease or to open, close or pay bills on a bank account. If the young adult is incapacitated, parents can no longer legally do those things for them. One worst-case scenario is an accident where the young adult is hospitalized. This is when documents like: a HIPAA designation (allows consent to share medical records), Health Care Surrogate (consents to have health care decisions made), Durable Power of Attorney (for managing money and accounts), and Living Will could be crucial. A financial planning colleague in California shared a wild example: A couple's son attended college in Arizona. The son was in an accident with his girlfriend. The girlfriend was ok but the son was in serious condition. In the time it took for the parents to get to Arizona, the son gave the hospital staff permission to share his medical information with the girlfriend, but did not name (or was not asked about) the parents. He went into surgery and when the parents arrived, the staff would not immediately share information about his condition with them, but would do so with the girlfriend. So the parents had to ask the girlfriend for information about the condition of their own son. Ask Your Own Attorney In Florida, most estate planning attorneys will provide a set of documents for a young adult for a small flat fee, especially for children of their established clients. If it's about time to get your own set of documents reviewed (every 3 - 5 years is good), ask your attorney about preparing a simple set of documents for your adult child. Or, check your local estate planning council directory, or ask your professional advisors for referrals. What other financial concerns might you have for someone becoming a newly-minted adult? Comment below or schedule a call with the online calendar button at our page: Contact.

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New Year: What’s In Your Notebook?

It's a new year: what's in your notebook? You know, that one with all of your passwords, account numbers, doctor names, and that very important song that must be played at your funeral. Yeah, that notebook. Where is it? It might reside digitally on your computer or in the cloud, or it might be a pile of papers in a file cabinet, or it might be in an old-fashioned 3-ring binder. The new year is a good time to ask: how easily can someone who needs it find it? Who Might Need the Notebook and When? Everyone needs a someone in mind for the notebook. Your someone (Kate Hufnagel, the Digital Wrangler, calls this "Your Person") is who will step in for you and help to handle things when you can't. If an immediate someone does not spring to mind, consider asking a professional to be that someone - an attorney, accountant, or professional fiduciary, for example. When will someone step in? At a time when you need the notebook, but can't get to it. We can imagine all kinds of accidents and tragedies that might bring about a need for the notebook. Rather than dwell on those, let's imagine that you are suddenly swept away on an all-expenses paid trip out of the country to a remote island with spotty cell coverage. While you are whale-watching and snorkeling the reefs for an indefinite period, things still need to be handled back home. Bills to be paid. Taxes to be filed. Gifts to be given. People to be notified of your absence and introduced to Your Person who is handling things. What Goes in the Notebook? In essence, the Notebook is a central place you keep information that Your Person will need in case something happens to you. Common and essential items in the Notebook include: Your five basic estate planning documents: original will (drafted by an attorney in the state where you reside), living will, health care power of attorney, durable power of attorney, and HIPAA designations. Advanced estate planning documents: trusts, partnership agreements, business buy/sell agreements, shareholder agreements, etc. Insurance policies. ALL of them: life, long term care, health, property, car, boat, liability, and any others. Contact information for professional advisers: attorneys, bankers, accountants, investment advisers, insurance agents, and (of course) your CERTIFIED FINANCIAL PLANNER™. Also, if your advisor has an assistant or paraprofessional who knows you and your situation, write down their contact information and a little note to that effect. (“Sharon is the assistant and she runs the whole place.”). All of your health care providers – doctors, dentist, optometrist, veterinarian (who is going to take care of Fluffy?) Put similar information by each one – what they helped you with and if any office or nursing staff know you and your history. Important to remember also, anything handled online: digital password manager, online user ids and passwords, bank statements, investment accounts, real estate deeds and mortgages. So much of our financial lives nowadays keys off…

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Graduation Gift? How About Legal Documents?

Graduation gift - How about legal documents? Arguments have been made that a set of legal documents are the best gift for a high school graduate. Now that's not quite as bad as coal in a Christmas stocking. But not quite as much fun as a MacBook Air, either. . Think about it - an 18-year-old is a legal adult.   “What this means to each of us is the only individuals that can make financial or health care decisions for us are the individuals we legally appoint.  Mommy and Daddy are no longer the legal guardians,” says Clearwater, Florida attorney Linda Chamberlain in her own blog post on the topic: The Best Gift for the Graduate But They Don't Own Anything! You might say, "But my 18-year-old doesn't own anything. Why do they need a will?" There are other documents that become important upon reaching adulthood. For 18-year-olds who don't own anything, they still have rights, such as: to private medical records, to make their own health care decisions, to sign their own lease or to open, close or pay bills on a bank account. If the young adult is incapacitated, parents can no longer legally do those things for them. The most common worst-case scenario described is an accident where the young adult is hospitalized. This is when documents like: a HIPAA designation (allows consent to share medical records), Health Care Surrogate (consents to have health care decisions made), Durable Power of Attorney (for managing money and accounts), and Living Will could be crucial. In Florida, most estate planning attorneys will provide a set of documents for a small flat fee, especially for children of their established clients. Ask your attorney, check your local estate planning council directory, or ask your professional advisors for referrals. Contact us if you need referrals for Tampa Bay area attorneys or if you have other financial concerns for someone becoming a newly-minted adult. Schedule a call with the online calendar button at our page: Contact.

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New Year: What’s In Your Notebook?

It's a new year: what's in your notebook? You know, that one with all of your passwords, account numbers, doctor names, and that very important song that must be played at your funeral. Yeah, that notebook. Where is it? It might reside digitally on your computer or in the cloud, or it might be a pile of papers in a file cabinet, or it might be in an old-fashioned 3-ring binder. The new year is a good time to ask: how easily can someone who needs it find it? Who Might Need the Notebook and When? Everyone needs a someone in mind for the notebook. Your someone (Kate Hufnagel, the Digital Wrangler, calls this Your Person) is who will step in for you and help to handle things when you can't. If an immediate someone does not spring to mind, consider asking a professional to be that someone - an attorney, accountant, or professional fiduciary, for example. When will someone step in? At a time when you need the notebook, but can't get to it. We can imagine all kinds of accidents and tragedies that might bring about a need for the notebook. Rather than dwell on those, let's imagine that you are suddenly swept away on an all-expenses paid trip out of the country to a remote island with spotty cell coverage. While you are whale-watching and snorkeling the reefs for an indefinite period, things still need to be handled back home. Bills to be paid. Taxes to be filed. Gifts to be given. People to be notified of your absence and introduced to Your Person who is handling things. What Goes in the Notebook? In essence, the Notebook is a central place you keep information that your someone will need in case something happens to you. Common and essential items in the Notebook include: Your five basic estate planning documents: original will (drafted by an attorney in the state where you reside), living will, health care power of attorney, durable power of attorney, and HIPAA designations. Advanced estate planning documents: trusts, partnership agreements, business buy/sell agreements, shareholder agreements, etc. Insurance policies. ALL of them: life, long term care, health, property, car, boat, liability, and any others. Contact information for professional advisers: attorneys, bankers, accountants, investment advisers, insurance agents, and (of course) your CERTIFIED FINANCIAL PLANNER™. Also, if your adviser has an assistant or paraprofessional who knows you and your situation, write down their contact information and a little note to that effect. (“Sharon is the assistant and she runs the whole place.”). All of your health care providers – doctors, dentist, optometrist, veterinarian (who is going to take care of Fluffy?). Put similar information by each one – what they helped you with and if any office or nursing staff know you and your history. Important to remember also, anything handled online: digital password manager, online user ids and passwords, bank statements, investment accounts, real estate deeds and mortgages. So much of our financial lives nowadays keys off…

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Challenges and CoastFire: My Story

My story: The following is an updated excerpt from the introduction to my book, The Mindful Money Mentality: How To Find Balance in Your Financial Future (Porchview Publishing, $20). As a behavioral economist (in a field that studies the psychology of personal economic decisions), I have a keen interest in our relationships with money. I care about maximizing its usefulness as a tool rather than elevating its status as an end. But for much of my life, I had those two reversed. I did my own financial planning backwards. I put the pursuit of money first, life second, and myself last. In other words, I floated in a fog about my attachment to money, swept along by society’s encouragement and my own beliefs. My money mentality was not aware, awake, or intentional. It was unconscious. It was anything but mindful.  Ironically, I was one of those successful savers. Starting when I was a teenager, I kept track of every penny I spent. I could not wait until my 21st birthday so I could start contributing to the 401(k) at work.  Money as the Main Goal In my 20s and 30s, I focused on money as an end, determined to define my success as a person by the amount of money I made. As a result, I made some choices that caused me, and those around me, to suffer unnecessarily. I fretted over how much essential things cost. It hurt me to spend on myself for anything nice, much less on anybody else. I now realize that having money was a way to feel good about myself. In my mind, my earnings defined my success as a person. This is the area where I was most imbalanced, and I regret some of the decisions I made then.  After college, I joined a Miami bank training program. I saw that most of the trainees chose to live in a new suburban complex requiring a Metro commute. I chose to live in cheaper North Miami, only ten minutes from downtown, proud that I was saving on rent, gas, and Metro fares. The building was newly renovated but occupied mostly by taxi drivers who kept odd hours, and the crime rate was higher in my neighborhood. My car was broken into in the parking garage. I did not get much exercise because, as a 5-foot-3-inch 20-year-old, I didn’t feel safe going outside.  Further, while my coworkers were discussing the fun evenings they had had at south Miami neighborhood restaurants, I thought, “Bah, humbug!” I was proud not to “waste” my money on frivolities. I ate mostly sauteed vegetables and microwave popcorn in my apartment. Over the seven-month training program, I not only did not exercise enough, I unconsciously distanced myself from the camaraderie of the other trainees. While I eventually fixed the exercise deficiency later in life, the friendships I might have made and enjoyed today are absent.  A Vicious Cycle It was not easy for me to accept that what you have is…

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Roth: To Convert Or Not To Convert

Roth: to convert or not to convert. Converting to a Roth IRA might be worth consideration if you have been saving for retirement in a traditional IRA (TIRA) As you may know, when it's time to take the money out of your TIRA, you will owe tax on the amount you withdraw (called a "distribution"). So when you think of the balance in your TIRAs, give that number a haircut of 10% - 40% (using current tax rates) that will be sent to Uncle Sam. Further, when you reach age 73 or 75 (depending on your birth year) whether you need money or not, you will be required to take an IRS-calculated required minimum distribution (RMD). The RMD income can push you into the next tax bracket or, more commonly, into a higher bracket for Medicare premium surcharges. Surcharges mean you could pay up to several hundred dollars more per month for Medicare. Finally, if you are married and leave TIRAs to your spouse, he or she must eventually take RMDs. When they start filing as single the year after you die, there is a greater likelihood the RMD will push them into the higher income tax or Medicare surcharge brackets. Review of Roth Advantages Roth's have several advantages over traditional retirement accounts (TRAs). 1) When you think of the balance in a Roth IRA, there is no tax haircut. Money in a Roth grows tax-free forever. That's a bigger balance to spend on world cruises, grandchildren, or a Winnebago. 2) Your heirs will have to withdraw the Roth money if you don't, but they won't owe tax then, either. 3) Roths have no RMDs. So that might save you from Medicare surcharges and other additional taxes such as the Net Investment Income tax (NIIT). 4) If you are married and die before your spouse, your spouse will not have to take RMDs from them. 5) If you have a trust, it may be much more beneficial to leave a Roth to the trust than a TIRA. Ask your CPA or tax attorney about this one. What's the Catch with Roths? What's the catch? The amount of TIRA that you convert to a Roth gets taxed in the year you make the conversion. If you convert $100,000 this year, that's $100,000 added to your income. So if you are still working, and you convert some or all of your retirement money to a Roth, you will be paying tax on the converted amount at today's tax rates, hoping/betting that the growth in the Roth will make the extra tax bite today worthwhile later. For the hope/bet to have the best chance to work, a few things help: - You expect to be in a the same or higher tax bracket after you quit working. Otherwise you could wait and pay less tax on the conversion at a lower tax bracket later. - You don't expect to need the money in the Roth for many years. To reap the biggest benefit,…

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Read more about the article Using A Retirement Income Buckets Approach

Using A Retirement Income Buckets Approach

Using a retirement income buckets approach: One of the most common questions financial planners receive from soon-to-be-retirees is, "What's the safest way to give myself a paycheck once I quit working?" The question often stems from the knowledge that needing to withdraw funds in a down market can be both ill-advised and scary. Those who have been around long enough probably know someone who retired close to a particularly bad market year, like 2001, 2007, 2008, or now 2022. Because that someone had to, or chose to, sell some investments at that terrible time, they ended up living off of much less than they originally thought. This can be a scary thing to watch. It makes one wonder, "How do I make sure that doesn't happen to me?" A Buckets Approach Enter a buckets approach to retirement income. Below is a link to a video excerpt from the online course, "Retirement Readiness," outlining the approach in more detail. (A link to the course can be found at the bottom of this article and here.) A description for each of the buckets follows below. https://youtu.be/mkeqzgJfeFc Bucket 1 - Cash and Money Market Accounts The first bucket will provide your paycheck. Here is how it works. Calculate any retirement income you will have (pension, Social Security, dividends, interest, rental property, for examples); Figure your annual recurring expenses (do not include one-time expenses such as replacing a car, roof, or paying for a special trip or wedding); Subtract 2 from 1 to come up with the difference; and Keep 1 to 2 years of that difference in Bucket 1. For example, Justine retires at 65. She expects to live past age 82 so she is waiting until 70 to claim Social Security. She has a pension of $800/month ($9600/year). Her recurring expenses are $70,000 annually. The annual difference is $70,000 - $9,600 = $60,400. To start retirement, she decides to keep 1.5 years of the difference in Bucket 1 so $60,400 x 1.5 = $90,600. She puts that in a high-yield money market account and sets up an automatic transfer of $5833.33 monthly to her checking account. Voila - she has a new paycheck. When she turns 70, she will collect $45,000 in Social Security. At that time the annual difference will fall to $70,000 - ($9,600 + $45,000) = $15,400. She decides to keep 2 years of the new difference in Bucket 1, so $15,400 x 2 = $30,800. She reduces the monthly transfer from the money market to $1283.33 per month. Bucket 2 - Bonds, CDs, and Bond Funds The second bucket replenishes Bucket 1. As the paychecks come out, the principal in the money market account will naturally decrease. Eventually it will decrease to a level that makes you say, "Yikes! I only have xx in my checking and money market." Everyone has a different level of "Yikes." When the balance approaches your unique Yikes level, a transfer is made from Bucket 2 into Bucket 1. Bucket 2 is comprised…

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When She’s Better Off Than He Is

When she's better off than he is: Some couples find finances difficult to discuss when she makes or has more money than he does. In the July/August 2019 issue of Psychology Today, Esther Perel, a New York psychotherapist, said that women’s liberation has freed them from dependence on men. “But it hasn’t prepared women for men’s dependence on them. Women often have a lot of resentment when they find themselves responsible in the way men have for generations.” In his blog post, “Why Wealthy Divorced Women Don’t Remarry and Men Do” dating coach Evan Marc Katz wondered whether women might rethink their expectations for the man’s financial contribution to the relationship. This makes sense especially when all other aspects of the relationship are equal. After all, many wealthy men remarry to women who are not as financially well off, and why? Companionship, compatibility, and physical attraction. If a wealthy man is happy to pick up the tab for trips and dinners, why aren’t wealthy women? Case Studies Where She's Better Off Here are a couple of cases to illustrate the dynamic. I asked Licensed Mental Health Counselor Ken Donaldson for his thoughts on some fictional case studies. Alan and Donna: Donna is a 53-year-old professor who became disabled after an accident. Her disability is not evident to most people, but at any moment she could be hospitalized. She received a large settlement from the accident. She is making a new life for herself and wants to live well while she can. Alan, her 55-year-old boyfriend, is a painter. He is handsome, romantic and kind to her. Alan does not know Donna’s financial situation. He does know he cannot always afford the restaurants where Donna wants to eat, though. Much of the time she picks up the tab. They both feel awkward about it. Janet and Harold: Janet is a 52-year-old retired author. Her books have sold enough copies that she can live comfortably without working. Her boyfriend, 58-year-old Harold, had an IT career before he was downsized. Since then he has not found a new job or career that seems to be a good fit. Janet loves Harold’s athleticism, his sense of humor and tenderness. They connect on many levels. The problem is, she wants to travel with him to places like Australia, Alaska, and Europe. Neither Harold nor Janet like the idea of Janet paying for the whole trip. Harold does not know Janet’s financial situation, but he does know she is better off than he is. Q & A With Relationship Counselor Ken Donaldson, LMHC Q: How does avoidance of the activities that both couples want to do affect their relationship? A: This would only add to distance in the relationships. Although both people will benefit from doing separate activities that they enjoy, there is much to be lost by leaving the other out when it is motivated by fear and/or avoidance. Q: How could each couple stay together in a healthy way? A: Every healthy, harmonious and lasting relationship…

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