31
Dec 10

What’s Your Risk Tolerance?

What’s Your Risk Tolerance?

Going into a New Year with hopefully better economic and market prospects, it’s a good time to start researching investments. With that, it’s also a good time to review how much risk you’re willing to take on when making those critical decisions. It’s reasonable to assume your risk tolerance has changed in recent years.

Assessing one’s risk tolerance goes beyond your instinctive willingness to say “yes” or “no” on a particular financial move. It goes beyond one’s instincts.  It means re-examining the realities of what you need in life and how you’re going to serve those who depend on you. It also means taking into account the economic turmoil of the past few years to determine what an effect those pressures have had on you.

There’s been plenty of theoretical work done on risk tolerance and what kind of people choose various investments or simply choose not to participate at all. In 2008, TransAmerica released its CURE retirement study (CURE standing for Change, Uncertainty, Risk and Expectations) in which it revealed four basic investing personalities:

  • Venturers take a “nothing ventured, nothing gained” attitude with their money, but their potential pitfall is that they’re overconfident in their level of preparedness.
  • Anchored individuals always “stay on the safe side,” but extreme risk aversion might leave them unprepared.
  • Pursuers will “try anything once” but their continual efforts to grab at new directions might leave them without a clear plan.
  • Adapters take investment situations “as they come” but may not be realizing their full potential as investors.

Whether one of those personalities resonates with you or not, the best way to start planning your finances or to revisit your current financial plan is to meet with a qualified financial expert. If you’ve never worked with a financial planner before, one of the first steps in the process will be reviewing or filling out a risk analysis questionnaire.

Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.

Here are some of the questions you might be asked as a formal starting point with a planner:

  1. What’s important about money?
  2. What do you do with your money?
  3. If money was absolutely not an issue, what would you do with your life?
  4. Has the way you’ve made your money – through work, marriage or inheritance – affected the way you think about it in a particular way?
  5. How much debt do you have and how do you feel about it?
  6. Are you more concerned about maintaining the value of your initial investment or making a profit from it?
  7. Are you willing to give up that stability for the chance at long-term growth?
  8. What are you most likely to enjoy spending money on?
  9. How would you feel if the value of your investment dropped for several months?
  10. How would you feel if the value of your investment dropped for several years?
  11. If you had to list three things you really wanted to do with your money, what would they be?
  12. What does retirement mean to you? Does it mean quitting work entirely and doing whatever you want to do or working in a new career full- or part-time?
  13. Do you want kids? Do you understand the financial commitment?
  14. If you have kids, do you expect them to pay their own way through college or will you pay all or part of it? What kind of shape are you in to afford their college education?
  15. How does your spouse, fiancé or future partner feel about money and how do those views echo or differ from your own?
  16. Are there other people in your life who might become financially dependent on you? If so, what might their needs be?
  17. How’s your overall health and your health insurance coverage?
  18. What kind of physical and financial shape are your parents in?

Risk tolerance is not so much about dreams and whim as it is about how all the day-to-day lifestyle and money issues affect your perceptions. Some of us need a reality check more than others. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you.

However, a planner can help you do much more than control risk on the investment side. You can also work to develop an emergency fund that will support you in case you lose a job or go through a protracted leave of absence due to health or caregiving issues – a significant way to manage risk.

A planner can also make sure you have a disaster plan in place in case you’re disabled or your home is hit by a natural disaster. Financial risk can take many forms, and a planner can help you work through those issues key to your lifestyle.

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December 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Ronald J VanSurksum, CFP® , a local member of FPA.

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28
Dec 10

Washington Hotline - December - Week 4 - 2010

CRS Charitable Rollover Fact Sheet
The Congressional Research Service (CRS) periodically issues fact sheets that are helpful to taxpayers. On December 20th the CRS published a fact sheet on IRA Charitable Rollovers.

The rollover was first passed in the Pension Protection Act of 2006. On December 17, 2010, the President signed H.R. 4853 and the IRA Charitable Rollover is effective for all of 2010 and 2011.

There are seven major features of the IRA Charitable Rollover. Under the bill, the rollover is called a Qualified Charitable Distribution (QCD). To be a QCD, it must meet seven specific requirements.

  1. Regular or Roth IRA – The distribution must be made by an IRA owner from his or her account. It may not be made from other types of qualified retirement plans, but those plans may be rolled over into an IRA and then qualify for the distribution.
  2. Age – The IRA owner must be over age 70½ when the QCD is made. A QCD for the year the individual turns 70½ is permitted, but must be made after that age.
  3. Charities – The recipient must be a public charity qualified to receive tax-deductible contributions.
  4. Maximum – While there is no minimum QCD amount, the maximum per year is $100,000.
  5. Taxable Income – The QCD is not reported in your taxable income. This means that it does not affect your other charitable gifts, which may be as much as 50% of your adjusted gross income in one year.
  6. IRS Custodian – The transfer must be directly from your IRA custodian or trustee to the charitable organization.
  7. Taxable Income – The QCD is normally made from an IRA that is potential taxable income. If you have an IRA with both taxable and non-taxed contributions, the IRA withdrawal will be first from the taxable portion of your IRA. Because it is not included in taxable income and it is distributed to charity, there will be no taxable income to you from a QCD.

Editor's Note: The bill signed by the President on December 17th has a very important provision. Because it is very late in the year, many individuals will find it difficult to complete their 2010 QCD this year. Therefore, the bill allows you to make your 2010 QCD in January of 2011. For some friends of charities, they can make two QCDs in 2011 -- one in January and the normal 2011 QCD during the balance of the year.

2011 Tax Rates Published

In Rev. Proc. 2011-12, 2011-2 IRB 1 (21 Dec 2010), Treasury published Tax Rate Tables for 2011.

TABLE 1 - Section 1(a) – Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:   The Tax Is:
Not over $17,000   10% of the taxable income
Over $17,000 but
not over $69,000		   $1,700 plus 15% of
the excess over $17,000
Over $69,000 but
not over $139,350		   $9,500 plus 25% of
the excess over $69,000
Over $139,350 but
not over $212,300		   $27,087.50 plus 28% of
the excess over $139,350
Over $212,300 but
not over $379,150		   $47,513.50 plus 33% of
the excess over $212,300
Over $379,150
 		   $102,574 plus 35% of
the excess over $379,150

TABLE 2 - Section 1(b) – Heads of Households

If Taxable Income Is:   The Tax Is:
Not over $12,150   10% of the taxable income
Over $12,150 but
not over $46,250		   $1,215 plus 15% of
the excess over $12,150
Over $46,250 but
not over $119,400		   $6,330 plus 25% of
the excess over $46,250
Over $119,400 but
not over $193,350		   $24,617.50 plus 28% of
the excess over $119,400
Over $193,350 but
not over $379,150		   $45,323.50 plus 33% of
the excess over $193,350
Over $379,150
 		   $106,637.50 plus 35% of
the excess over $379,150

TABLE 3 - Section 1(c) – Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is:   The Tax Is:
Not over $8,500   10% of the taxable income
Over $8,500 but
not over $34,500		   $850 plus 15% of
the excess over $8,500
Over $34,500 but
not over $83,600		   $4,750 plus 25% of
the excess over $34,500
Over $83,600 but
not over $174,400		   $17,025 plus 28% of
the excess over $83,600
Over $174,400 but
not over $379,150		   $42,449 plus 33% of
the excess over $174,400
Over $379,150
 		   $110,016.50 plus 35% of
the excess over $379,150

TABLE 4 - Section 1(d) – Married Individuals Filing Separate Returns

If Taxable Income Is:   The Tax Is:
Not over $8,500   10% of the taxable income
Over $8,500 but
not over $34,500		   $850 plus 15% of
the excess over $8,500
Over $34,500 but
not over $69,675		   $4,750 plus 25% of
the excess over $34,500
Over $69,675 but
not over $106,150		   $13,543.75 plus 28% of
the excess over $69,675
Over $106,150 but
not over $189,575		   $23,756.75 plus 33% of
the excess over $106,150
Over $189,575
 		   $51,287 plus 35% of
the excess over $189,575

TABLE 5 - Section 1(e) – Estates and Trusts

If Taxable Income Is:   The Tax Is:
Not over $2,300   15% of the taxable income
Over $2,300 but
not over $5,450		   $345 plus 25% of
the excess over $2,300
Over $5,450 but
not over $8,300		   $1,132.50 plus 28% of
the excess over $5,450
Over $8,300 but
not over $11,350		   $1,930.50 plus 33% of
the excess over $8,300
Over $11,350
 		   $2,937 plus 35% of
the excess over $11,350

 Standard Deduction – For a married couple, the standard deduction is $11,600. Single persons have a standard deduction of $5,800.
 Aged or Blind – The additional deduction for an aged or blind person is $1,150. It is $1,450 for a single person who is not a surviving spouse.
 Personal Exemptions – The personal exemption in 2011 will be $3,700.

Loan on Lapsed Policy Taxable

In John Morgan Sanders v. Commissioner; T.C. Memo. 2010-279; No. 3395-09 (19 Dec 2010), the Tax Court determined that the loan on a lapsed insurance policy produced taxable income.

John Sanders purchased a $25,000 whole life policy from New York Life Insurance Co. (New York Life) in 1979. He paid $31 per month from 1979 until March of 2006.

Under the terms of the policy, he was permitted to borrow the cash value from the policy at an 8% accrued interest rate. Mr. Sanders borrowed $7,136 from the policy between 1990 and 2004.

On February 9, 2006, New York Life indicated by letter to Mr. Sanders that the loan balance was $17,203 for the principal and accrued income. This amount exceeded the cash value by $517 and the policy would be cancelled unless Mr. Sanders remitted that amount. He did not and New York Life terminated the policy on March 10, 2006.

After terminating the policy, New York Life sent a Form 1099R to report a distribution of $17,292. The amount was divided into the premium of $10,117 and a taxable distribution of $7,175. The IRS required Mr. Sanders to recognize $7,175 of taxable income as a result of the distribution.

At trial, Mr. Sanders claimed that the $7,175 constituted "draws" that were not taxable. However, the court noted that the general principle is that amounts received from an insurance policy constitute gross income to the extent they exceed the investment in the contract. Sec. 72(e)(1)(A). Therefore, the termination of the policy resulted in a construction distribution to Mr. Sanders. This distribution is taxable income.

Editor's Note: Loans are permitted against many types of permanent insurance. Some policy owners take loans with no intention of repaying the loan. Interest on these loans often accrues and the loan balance increases. It is prudent to make certain that there is a reasonable reserve level in the policy. If there is a loan against the policy and the individual survives to a very senior age, it is quite possible that the loan will exceed cash value and the policy will be terminated. As Mr. Sanders discovered, termination of that policy will lead to a large income tax bill with no cash distribution.

Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2011-2; 2011-2 IRB 1 (21 Dec 2010)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2011. The AFR under Section 7520 for the month of January will be 1.8%. The rates for December of 1.8% or November of 2.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.

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23
Dec 10

Getting Ready to Sell Your House

Getting Ready to Sell Your House

While most experts see little good news in 2011’s housing market, economic downturn is no reason to neglect maintenance on a home or lose sight of future plans to relocate.

The critical issue is planning intelligently for what spending you do now to make sure it’s worth your money later. And even if your plan to sell your property is more than a year away, it’s not a bad idea to get your finances in order as well. In the coming months, you’ll be addressing tax issues, so it’s a good time to look at your overall financial picture with a qualified financial planner as well as a trained tax expert.

The October MacroMarkets Home Price Expectations Survey doesn’t see a meaningful increase in home prices until 2012, though appreciation is expected to go up on average more than 14 percent through 2014.

As you wait for your opportunity, here are some ideas to incorporate in your planning:

Check your credit report and score: If you plan to finance a new property once you sell, it makes ample sense to lower your debt and clean up any discrepancies in your credit data well in advance of any move into the market. Remember, you are entitled to one free copy of each of the major credit reports in any given year, and you can obtain them from one resource – www.annualcreditreport.com. Avoid all the services with expensive TV commercials calling themselves “free” – if they ask for a credit card number, you are not getting a free report. Also, so you can spot discrepancies and keep a watchful eye on the possibility of ID theft throughout the year, stagger your receipt of your reports from Equifax, Experian and TransUnion (the major credit ratings agencies) at different points during the year.

Get a home inspection: Go through local channels – lenders, friends, real estate professionals you trust – to find a licensed home inspector who can look over your property and help you develop a list of potential repairs and upgrades that you can do economically given that you’ll have months before you put the property up for sale. Checking your home’s structure – roof, foundation, windows, etc., as well as its mechanical parts – heating/AC, installed appliances, plumbing – can give you an early warning system for expensive repairs that a prospective buyer’s inspector would find anyway. Try now to make sure there are no problems that will kill a deal later.

Ask a trusted broker for advice: Structural experts can determine whether your home is working properly – real estate brokers may or may not be equally expert at spotting these flaws. But generally, they can be trusted on matters of appearance – whether the grounds around the home are well maintained as well as whether the home’s interior is inviting to the eye of potential buyers.

Don’t overinvest in improvements: In the 1990s, spending $40,000 on a kitchen in many neighborhoods could recover that amount of money and more in the final sales price. In today’s market, those payoffs are a distant memory. Experienced brokers generally do a good job steering you away from overpaying for improvements, but there are other resources to doublecheck the spending you’re planning to do. Remodeling Magazine’s latest Cost vs. Value report provides estimates on specific projects by region, including projections on cost recoupment.

Appeal your property taxes: If you’ve never appealed your property taxes before or have not done so in many years, do so when your appeals period is open. Lowering your taxes as much as possible may help make your property more salable.

Declutter and don’t re-clutter: Start making a list of items you might donate – furniture, clothing, household items, etc. Make sure they’re in good condition and if you’re having trouble setting a value, check on eBay or other auction sites to see if you’re being fair to yourself while not drawing the attention of the taxman.

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December 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Ronald J VanSurksum, CFP® , a local member of FPA.

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