Category Archives: Wealth Management

Required Minimum Distributions

June 20, 2017

What are Required Minimum Distributions (RMDs)?

Required Minimum distributions, often referred to as RMDs, are amounts the IRS requires you to withdraw annually from your Traditional IRA or employer sponsored retirement plan (401(k), 403(b), 457, TSP, etc.) after you reach age 70 ½. You can always withdraw more than the minimum amount from your account in any year but if you withdraw less than the required minimum, you will be subject to a Federal tax penalty of 50%.

The RMD rules are calculated to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. In that case, the IRS is delayed in getting the tax income from them. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime. Taxable income to you means tax income for the IRS.

When Must RMDs be taken?

Your first required distribution from an IRA or retirement plan is for the year you reach age 70½. However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 70½, or you can delay it until April 1 of the following year. However, after the first year, RMDs must be taken no later than December 31 of each calendar year until you die. That means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year–your first year’s required distribution and your second year’s distribution as well.

Exception

There is one situation in which your required beginning date can be later than described above. If you continue working past age 70½ and are still participating in your employer’s retirement plan, your required beginning date under the plan of your current employer can be as late as April 1 following the calendar year in which you retire. Again, subsequent distributions must be taken no later than December 31st.

How much do I need to take?

RMDs are calculated based on your age and the value as of December 31st of the prior year. See the IRS website for the Uniform Lifetime Table which provides the life expectancy factor used to make the calculation. If your spouse is more than ten years younger than you, there is an alternate table that can be used.

What if I don’t need the money?

Whether you need the income or not, you must take the distribution. Some financial institutions will allow you to reinvest the funds automatically into a non-retirement account which would allow the funds to remain invested. However, it would not avoid the tax liability on the distribution

At Kramer Wealth Managers, we can help you navigate your retirement income strategy around RMDs and help you make a decision on how to utilize them once you turn 70 ½. Contact us today to discuss your WealthPath.

End of Life Decisions- Advance Directives

June 7, 2017

End of Life Decisions- Advance Directives

No matter how much control we exert over our day-to-day lives, there may come a time in each of our futures when we are no longer able to make decisions for ourselves. When and if that happens, we need to have procedures in place that establish our preferences for certain treatment measures and appoint a trusted individual as a healthcare advocate.

Healthcare Proxy and Advance Directives

Generally, healthcare proxy appointments are taken care of through a legal document called a Durable Power of Attorney (POA) for healthcare. The POA document designates a representative to make healthcare decisions when the patient is either permanently or temporarily unable to make these decisions him- or herself. The decisions the proxy can make include withholding treatment, ending treatment or prolonging treatment of any medical condition that leaves the signor unable to make decisions. Some advance directives may include precise instructions to be followed in the event of specified medical incidents, with decisions for unspecified incidents left up to the healthcare proxy.

Advance Directives, often called a “Living Will”, on the other hand, sets out the patient’s declarations for medical treatment while he or she is in a terminal condition. That is, medical doctors have determined that there is no chance for survival and any measures taken would only prolong life and not ultimately save it. This can include the wish to be kept alive on life support or to not be resuscitated. Often, the living will is incorporated into the Healthcare POA but it can also be a separate document.

Both the POA for healthcare and the Advance Directives are legal documents but are not medical orders.

POLST/MOLST Forms

While the Health Care POA and Advance Directives are legal documents executed through an attorney, you can also fill out medical forms with your doctors called a POLST or MOLST form, depending on in which state you live. These stand for Physician Order for Life Sustaining Treatment (POLST) or Medical Orders for Life Sustaining Treatment (MOLST) form. This form is written by a physician and spells out instructions to medical personnel about the patient’s direct intentions for his or her treatment of a specific condition. It can include orders for end-of-life treatment, medical intervention, and orders to forgo treatment in certain circumstances. Like the living will, POLST/MOLST forms offer instructions for very specified situations and can be used by the whole medical community—including first responders, police and nursing home staff.

It’s important to have both advance directives and a POLST/MOLST form because while advance directives deal with hypothetical situations, POLST/MOLST forms give instructions for actual conditions that the patient has. Covering both ends of the spectrum is vital to ensuring the right treatment is offered.

Keep in mind that emergency medical staff will not wait to conduct CPR while your family member locates your legal or medical documents. If you already have an end-stage condition and know that you don’t want to be resuscitated in the event of an emergency, you may also want to consider a DNR bracelet.

At Kramer Wealth Managers, we can help you work with an attorney to help develop a plan for both financial and healthcare management decisions in the event you are incapacitated. To get started, contact us today.

This material is intended for informational purposes only and should only be relied upon when coordinated with individual professional advice. Neither FSC Securities Corporation, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Options when Inheriting an IRA

November 2, 2016

Some assets, such as cash, are simple to pass on to heirs. Other assets, such as IRAs, have certain rules and conditions that change depending on the distribution method chosen and the relationship of the beneficiary.

There are two main categories of IRA beneficiary: spousal and non-spousal. Today, let’s review the choices for each.

Non-Spousal Options

Lump sum distribution: With a lump-sum distribution, all the assets in the deceased individual’s IRA are immediately dispersed to the beneficiary. The beneficiary is left with no further IRA assets and will be taxed on the full amount of the distribution. The amount of the full distribution is added to all of their other income for that year and will be taxed according to their federal and state tax bracket.

Transfer to an inherited IRA: With an inherited IRA, the beneficiary moves assets into a new account that allows them to take penalty-free distributions. The beneficiary must begin taking distributions called Required Minimum Distributions (RMD) based on their age and life expectancy. The IRS has a formula for calculating the amount. This allows the beneficiary to spread the tax liability out over their lifetime as they are only taxed on the amount they withdraw each year, and not on the remaining balance. An inherited IRA account must be established and distributions must start by December 31st of the year following the deceased owner’s date of death. If it is not established within this time frame, the account must be distributed fully within five years.

5-year rule: If RMD distributions have not been established by December 31st of the year following the date of death, then the entire account balance must be distributed by the fifth anniversary of the date of death. Discretionary withdrawals can be taken at any point within the first five years, but any balance remaining on the fifth anniversary will be distributed to the beneficiary and fully taxable.

No money can be added to an Inherited IRA or decedent’s IRA, nor can it be commingled with other IRAs owned by the beneficiary.

Spousal options

Spouses can choose from all the options above, but they also have one additional choice. They can treat the IRA as their own with a spousal transfer. This moves the inherited IRA assets over to the IRA of the spouse and it means that the penalties for early withdrawal will apply if the surviving spouse is under age 59½. They do not have to take RMDs until they reach 70½.

At Kramer Wealth Managers, we can help review all your options and determine which one makes the most tax- and income-efficient choice. Contact us today to get started.

While the tax or legal information provided is based on our understanding of current laws, this information is not intended as tax or legal advice. Federal tax laws are complex and subject to change. Neither FSC Securities Corporation nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

The Tax Implications of Selling Your Primary Residence

September 2, 2016

Whenever you’re selling property or investments that have appreciated in value, taxes are a big consideration in the timing of the sale. Selling at the wrong time can lead to a higher tax bill, whereas waiting for the right time can ease your tax burden significantly. This is especially true when it comes to the sale of your primary residence.

Calculating the gain

The first step in determining the taxability of the sale of your home is to determine how much of the sale is capital gain. To determine this, you must subtract the cost of the house from the sales price. Keep in mind that the total cost of your house includes not only how much you originally paid for it but also costs for any additions or improvements, as well as some of the fees associated with its purchase and sale. In addition, some things can reduce the cost basis in your home such as deprecation if you used part of your home for business or rental purposes or reimbursements from homeowners insurance for repairing damage. Consult with a tax adviser to discuss what costs are included and which are not. Once the total cost basis is calculated, this amount is deducted from the sales proceeds to calculate the capital gain to report to the IRS.

Example:

$60,000 home purchase in 1965

$25,000 addition added in 2010

$85,000 cost basis

.

$400,000 Sales price in 2016

– $30,000 Selling costs including real estate commissions and some closing fees

$370,000 sale proceeds

.

$370,000 sales proceeds

– $85,000 cost basis

$285,000 capital gain

.

Note that if you inherited the property from someone after they died, your cost basis becomes the value of the property as of the decedent’s date of death. If you were given the property while someone was still alive, you take over the original cost basis of the person that gave it to you. See our blog “Gifting Away Tax Benefits” for more details.

Tax Exemption Up for Grabs

When you sell your primary residence you can actually qualify for significant tax exclusions. Each owner may be able to exclude as much as $250,000 in gains, which means joint owners may be able to exclude as much as $500,000 ($250,000 per person). In the example above, a single person would have only had to pay tax on $35,000 after the $250,000 exemption but a couple jointly owning the home would not have to pay any tax at all since they can exempt a total of $500,000.

Qualifying for the Tax Exemption

The IRS only allows these exclusions if you sell a home that you owned and lived in as a primary residence for at least two years out of the last five before the sale. This means you could still qualify for the exclusion if you sell the house within three years of moving out of it because you will have lived in it the first two years of the last five years.

If you have a disability and are unable to independently care for yourself, this requirement is shortened to 1 year out of the last 5.

At Kramer Wealth Managers, we know the importance of finding all the tax breaks you can take in order to preserve and grow your savings and stay on the right track to your WealthPath. Contact us today to find out how we can help you.

While the tax or legal information provided is based on our understanding of current laws, this information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Federal tax laws are complex and subject to change. Neither FSC Securities Corporation, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Is Gold a Good Investment?

August 12, 2016

Gold is sometimes referred to as “The currency of fear” because it is often sold in late-night infomercials touted as a hedge against a future where your dollars or other investments are worthless. The truth is, while these “gold bugs” may tout gold as being a “safe” investment, historically gold has actually been quite volatile- sometimes fluctuating wildly within short periods of time. It has also been known to languish for long periods of time. That’s what makes this question difficult to answer; who knows what’s going to happen next?

Gold is a commodity whose value tends to surge when the economy is in a shaky spot. We saw this between 1978 and 1980 when the average price of gold surged from $193.40 to a peak of $850 per ounce in 1980. But after that, the Feds raised interest rates to curb inflation, and the price barely moved for two decades. It took 28 years, until 2008, for the price of gold to creep over $850 per ounce again. Then during the Great Recession of 2008, gold had a run again until September 2011, when it hit a high of $1921 per ounce. It dropped again for the next four years straight but has recently seen a slight uptick in value amidst the volatility experienced in the stock markets in the first part of 2016.

But looking at the current value of gold isn’t the best way to decide whether it has a place in your portfolio. Instead, you have to consider your personal timeline, objectives, risk tolerance, and tax bracket, to decide whether it’s the right commodity for you.

It is important to keep in mind that gold does not produce anything. It does not produce earnings or dividends or income of any kind. So if your objective is income, gold might not be the right investment for you. Even if you do end up making a profit off of it, gold is taxed as a collectible and not an investment. Capital gains on collectibles are taxed at 28% for long term and 35% for short term, rather than the 15% long term capital gains rates that most investors experience on other types of investments such as stocks and bonds.

At Kramer Wealth Managers, we look at all the various components of a portfolio when we’re helping you to design your WealthPath. We consider your timeline, your risk tolerance, the current market, and your personal retirement goals. Then, we help you develop the right mix of assets to realize your goals and prepare for the unexpected. Contact us today to schedule a meeting to discuss which kind of investments might be a good fit for your WealthPath.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

Understanding the Three Basic Types of Life Insurance: Term, Universal and Whole Life


February 26, 2016

While there are many different aspects of life insurance policy design that you’ll want to understand before you take out a policy, the most fundamental thing to know is the difference between term insurance, universal insurance and whole life insurance.

Term Insurance

Term life insurance provides a death benefit if the insured passes away during a certain time frame specified within the policy. While the policy may have some added benefits attached (such as spouse or child coverage riders) there is no cash value associated with the policy, so there is no surrender value if it is terminated.

Because term life insurance covers a specified time period and has no cash value accumulation, it’s less expensive than other types of life insurance. Most people use this type of life insurance to cover a specific period of time such as to cover the 30-year term on their mortgage or to cover the period of time while their children are still dependents.

Whole Life Insurance

While a term policy only pays a death benefit if death occurs in a specified time period, a whole life policy will provide a death benefit for life—as long as premium payments are made on time. Additionally, the policy has level premiums and will accrue cash values, which grow tax-deferred at a guaranteed rate. Once the cash values reach the same value as the death benefit (usually around age 100) the policy will mature (or endow) and the value will be paid out to the owner.

Universal Life

Much like a whole life policy, a universal life policy is meant to provide death benefit protection for the insured’s entire life. The major difference between the two is that universal life policies offer some flexibility in death benefit and premium. Cash values for universal policies grow tax-deferred based either on prevailing interest rates or their growth may be tied to the performance of a chosen index. With underwriter approval, you can increase the death benefit of the policy so that it includes the cash value portion. You can also reduce your premiums over time—even stop paying them altogether—if your cash values grow sufficiently. Because interest rates can rise and fall, it’s important to continually monitor the cash value performance to ensure that future plans to stop paying premiums can be supported.

There are now many other types of life insurance policies as well such as those linked to investments, those that provide long term care benefits, UL policies with no-lapse guarantee riders, or other hybrid products. At Kramer Wealth Managers we can help you sort through the many options and design the best life insurance policy for your needs and expectations. Contact us today to make an appointment.

How Your Financial Assets Impact Financial Aid Eligibility

February 11, 2016

The amount of financial aid your children qualify for is heavily dependent on both your assets and theirs. All students interested in financial aid for college must fill out a FAFSA form (Free Application for Federal Student Aid). Let’s take a look at the formula FAFSA uses to determine financial need and the part your family assets play in it.

Parental Assets

FAFSA expects parents to contribute toward their child’s cost of college. The amount they expect the family to contribute is called the Expected Family Contribution (EFC). If the cost of college is more than the EFC, the difference is the amount of the student’s financial need.

EFC is determined by assigning a percentage of the parental assets and student assets toward payment of annual college costs. Of course, they don’t expect parents to spend their entire life savings on college so parents are given an emergency reserve allowance that’s subtracted from their total asset value. After they factor in the emergency reserve allowance, the remainder is called the available asset value. From that amount, they can expect to see 5.6% assigned as family contribution each year.

Also included is the income of both parents (except certain family-owned business income). After allowances, 22 to 47 percent of their income is included in the total asset value, from which the before mentioned 5.6% would be assigned as the expected family contribution.

Certain parental assets are not counted by the FAFSA, including home equity, retirement assets, life insurance cash values, and non-qualified annuities.

Student Assets

All custodial accounts are considered the student’s personal assets when it comes to determining financial aid eligibility. The FAFSA formula attributes 20 to 25 percent of these assets to the EFC each year. Because of this, it may be a good idea to consider transferring UGMA/UTMA assets into a college plan owned by the parent so they can be treated like parental assets and only 5.64 percent is attributed to EFC.

A student’s income also counts toward their expected contribution. Generally, 50 percent of their net income (minus certain allowances) is included. Any savings they have is also included at 20 to 25 percent.

Students with Disabilities

Some students with disabilities find additional financial resources through their state’s Department of Vocational Rehab (VR) agency. While rules vary by state, some VR funds may be available based solely on the student’s resources without consideration for the parental resources. However, the parental resources must still be reported on the FAFSA form, even when the student expects VR financial support.

Even with all of these assets considered, a student may still qualify for financial aid, subsidized loans, and scholarships. That’s why it’s important to complete the FAFSA and look for other supplemental funding opportunities, even if you think your assets might push you over the limit.

This information is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed, and the accuracy of the information should be independently verified.

How Financial Advisors Get Paid

January 15, 2015

We are often asked by clients and prospective clients how we are paid. In general, there are two different payment structures an advisor will have: fee-only and commission-based. Some advisors use just one method while others—such as Kramer Wealth—use a combination of the two for various services offered. Let’s take a look at each of these payment models in detail.

• Fee-Only Payment: When financial advisors work on a fee-only basis, they generally get paid for the plans they make for their clients, regardless of whether the client actually executes any of the suggestions on the plan. Clients may be charged an hourly fee or a flat fee for the service and it is paid directly by the client out of their pocket. Some fee-based planners may also get an annual management fee, which is a percentage of the assets managed and is generally deducted from the account balance.

• Commission-Based Payment: The second method of payment for financial advisors is a commission paid for the purchase or sale of certain insurance or investment products. Commissions are paid to the financial advisor directly by the investment or insurance company but come from the client’s account in one form or another. Some commissions may be deducted up front at the time of purchase in the form of a sales load or they may be deducted from the proceeds of a sell transaction. Still other commissions may be paid through the internal expenses built in to an investment or insurance product.

In some instances, you may find an advisor who gets paid salary and bonuses, such as wire-house brokers who are employees of the company they work for. Examples of these types of firms are Merrill Lynch, Morgan Stanley Smith Barney, UBS, and Wells Fargo. However, commission- and fee-based earnings are more common in the industry.

It’s always a good idea to understand how your advisor is getting paid so that you can be aware of any added interest they may have in the decisions you make. A good advisor will always point you toward investments and products that are right for your risk tolerance, goals and timeline. When you work with Kramer Wealth Managers to create your WealthPath, we make sure to focus on investments and products that will be best suited for you, regardless of the payment involved.

*The discussion of advisor fees should also state that investors should be aware that the deductions of fees will impact their overall account returns.

Bank IRA versus Investment IRA

December 17, 2015

When you open an individual retirement account, more commonly known as an IRA, you need to choose a custodian to hold the account and its underlying assets. Two choices you have for custodians include banks and brokerage firms. It may seem like it doesn’t matter which custodian you choose but in fact, choosing the wrong custodian could mean the difference between having an IRA that lasts throughout your retirement and one that’s depleted before you’re ready.

The Restrictions of a Bank IRA

If your bank doesn’t offer extended brokerage services then you may not be able to invest your IRA contributions in stocks, exchange traded funds, or other market instruments. Instead, you may be limited to bank CDs, money market funds and savings accounts.

While it might seem safer to get a bank IRA and put your contributions into fixed investments, this may actually be a far riskier move than you’d expect. If you rely on a variety of fixed products in your IRA rather than a truly diversified mix of assets then you are likely to have a very low return that doesn’t keep up with inflation or taxes, much less grow to enough that you can support yourself through retirement. (See our other VLOG called “Inflation’s Devastating Effect on Returns”)

A general rule of thumb to help retirees preserve their savings while still using it for postretirement income is to take 4 percent withdrawals per year. With a truly diversified and well-managed IRA, this will often mean leaving your principal completely untouched and simply living off of the growth of your assets. But in a bank IRA where CDs rarely earn more than 1.5 percent and money markets don’t generally exceed 1 percent, even using the conservative 4 percent rule means you’ll be withdrawing from principal each year, leaving you less money to grow and forcing you to quickly deplete your savings.

Retirement planning is a complex task requiring in-depth information about your goals, objectives, risk tolerance, and time frame. It’s a personalized process that requires a tailored approach to account design. At Kramer Wealth Managers, we’re here to help get you on the right path to help you feel comfortable about securing your retirement for the rest of your life. Contact us today to make an appointment.

*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. This material is intended for informational purposes only and is not intended to be a substitute for specific individualized individualized investment planning advice.

The Dangers of Robo-Advisors

Automation using technology can be a great thing. In manufacturing, packaging and even in our daily lives, automation decreases the time we have to spend completing tasks and often increases both accuracy and uniformity. ATMs save us the time of having to go into the bank to withdraw money. Emails allow us to send messages immediately instead of waiting for the post office to deliver it. And soon, we won’t even have to drive our cars ourselves!

But not every activity or service should be automated. In the past few years, many companies have started offering automated financial advice to clients through systems often referred to as robo-advisors. While the marketing campaigns of these robo-advisor companies let you know about the convenience of automation in your financial life, they fall short at warning you of the potential dangers.

How Robo-Advisors Work

When you open an account with a robo-advisor firm, you’ll be given an electronic assessment that helps identify your financial goals and needs. From this data, the company’s software determines an appropriate asset allocation model. Over the years, the robo-advisor will generally suggest rebalancing based on shifts within the market and your portfolio.

The Robo-Advisor Drawback

Investors who are drawn to a DIY approach to investing, but who don’t want to research various investments themselves, often think the robo-advisor route is ideal. But investing and financial planning are complex tasks that require more than a simple electronic questionnaire to get right. Only a human can figure out all the right questions to ask during a meeting in order to discover your essential goals, ideals and potential financial limitations. Without this person-to-person interaction, you could easily end up in the wrong investments for your needs, risk tolerance and timeline. A human advisor can get to the heart of who you are and how your vision for your future should affect your financial decisions.

Another reason robo-advisors can be dangerous is that no robot is able to handle the intricate decision of whether you should buy, sell or hold an individual position in your portfolio. They would need to consider too many variables, such as whether a stock is at a temporary low due to some recent bad news, whether a purchase could make you run afoul of wash-sale rules, and how a transaction may affect your tax situation.

Most importantly, the robo-advisor lacks the human touch that can help investors get through difficult situations. They aren’t there to hold your hand when the market takes a dive and keep you from panicking and selling your shares when prices are low. They aren’t there to tell you what steps you need to take when preparing for huge life changes such as marriage, divorce, or a new child. Or to help walk you through the overwhelming burden of losing a spouse.

There is no replacement for the understanding and analytical powers of another human being. When you’re making financial plans, let a human advisor from Kramer Wealth Managers help get you on your WealthPath and help to keep you there.