Archive for November, 2009

What does one do with their 401(k) when they leave their job? There was a fantastic article on CNN Money.com that explained all the different options and provided the material for this blog. There are several options to consider: cash it out, leave it in the 401(k), or roll it over to an IRA. Unless one wants to possibly face a 10% penalty and regular income taxes, the first option is probably the least favorable. Leaving the 401(k) in the original account is recommended if one is over age 55 and no longer working for the employer. This is one of the exceptions to the 10% early withdrawal penalty. If the account holder is planning on working in a short time, it would be easier to rollover the 401(k) into the next one. This is easier than rolling it into an IRA and then the new 401(k). The final reason to leave the 401(k) with the employer is if investment vehicle holding the account is just too good to be true. Rolling the 401(k) into an IRA or a Roth IRA is a common option. In order to avoid a 20% withholding penalty, the transfer must go directly into the new IRA. If the 401(k) is rolled into a Roth IRA, the account will face ordinary income taxes. Before the rollover takes place, it is important to note that the account loses ERISA protection, 10-year forward averaging, NUA, and pre-1974 capital gain treatment. A financial professional can help an employee make the appropriate decision when faced with a potential roll-over.

Christmas shopping is just around the corner, and for many savvy shoppers, it’s probably already commenced. For some, it might be the favorite time of year, and for others the task of finding the perfect present makes them want to hibernate until New Years. As long as I can remember, gift cards have been the go-to choice when you’re out of options. It’s easy and very stress free. I’m surprised Santa hasn’t gotten the memo. But how do you know if person even likes the particular store? Wouldn’t it be easier to give the person cash instead? But then one has to worry that the gift recipient thinks you’re lazy. There’s the Seinfeld episode where Jerry gives Elaine $100 for her birthday. She says, “What are you, my uncle?” Aside from Seinfeld, one may want to reconsider giving gift cards this holiday season. The Credit Card Accountability Responsibility and Disclosure Act of 2009 placed restrictions on expiration dates and require companies to disclose fees. However, these rules do not take effect until next August. A few companies such as American Xpress are reportedly discontinuing their gift cards due to the new restrictions. However, it appears they will be around for the holidays. Before gift cards are purchased for the holiday season, it may be beneficial to look up the terms and conditions on the websites.

When it comes to planning for one’s estate, there are many issues that have to be considered. In the day’s of I Love Lucy and Leave it to Beaver it was probably an easy task for Ricky and Ward to figure out who would get what. Today, it’s not so simple. With the divorce rate around 50% and many getting remarried, more characters are introduced and have to be considered. Lets use The Brady Bunch as an example for today’s estate planning topic. Suppose Mike and Carol did not have the perfect second marriage where everyone came together and took happy trips to the Grand Canyon. Mike wants to make sure that his beloved wife is taken care of once he passes away; however, he has no intention of supporting his floozy step-daughters. Mr. Brady can rest assured that with the help of an Estate Attorney, he can accomplish his wishes. A Qualified Terminable Interest Property Trust (QTIP) is an option. A QTIP is designed to allow the grantor to set aside property for a spouse and determine the remainder beneficiaries. The property set aside for the spouse qualifies for the unlimited marital deduction, if specific rules are met. Mike can state that upon his death, Carol receives distributions from the trust. Mike has specified that after her death, the remaining balance will transfer to the beneficiaries of his choice. There are many estate planning tactics that can be accomplished with the establishment of a QTIP. However, with the expected changes to the estate tax and specific rules regarding a QTIP, it would be best for Mike to seek professional help.

The cost of education increases 8.7% each year according to the Department of Labor. That can make the ability of paying for education a dizzying task. Of course, scholarships, student loans, and long-term savings can ease the shock of paying for the tuition. If one is lucky enough, they may receive support from another party, such as a parent, grandparent or a family friend. In order to properly pay for a child’s education, the other party has to pay the institution directly, rather than gifting the money to the child. This is referred to a qualified transfer. A qualified transfer can be used for medical expenses as well. By paying an institution directly, the transfer does not trigger the gift tax or apply towards the annual exclusion. This is an excellent estate tax opportunity. One can effectively reduce the size of their estate by directly donating the cost of tuition or medical bills to the institution. This is an excellent opportunity for those who are burdened by the thought of gifting the annual exclusion to everyone they can think of in order to reduce their estate without incurring a gift tax.

During the past year, the cash flows of many households were shortened due to the economy. One of the first resources that was used to supplement the short-fall was a retirement account. This may seem like an easy decision considering the difficulty of making ends meet. However, before the first loan or withdrawal is taken from the account, there are a few figures to consider. In order to encourage saving for retirement, the government imposes a 10% early withdrawal penalty on distributions taken from a Roth or traditional IRA and 401(k) before age 59 1/2. The government waives the penalty if the money is withdrawn to pay for specific expenses. These specific expenses are best explained by a financial professional who can ensure the proper measures are taken before withdrawing funds. A 401(k) offers another option: plans loans can be taken from a 401(k) if the plan document permits the loan. The amount of the loan depends on the specific vested accrued benefit and previous loans. Due to the specific parameters of the plan loan amount, seek professional advice. However, an important thing to consider is the repayment of the loan. A typical loan must be repaid within 5 years; it may be extended if the loan was used for a first time home purchase. If employment with the company terminates before the loan has been entirely repaid, the loan balance may face the income tax and the 10% early withdrawal penalty. Typically, when on leaves employment, the account balance of a retirement plan is rolled over to new plan. The outstanding loan balance must be deposited into the new account within a certain time period. Each plan is different when it comes to loans; therefore, read over the plan document to see what would happen in this event. Careful consideration should be used before one decides to use their retirement account during times of financial distress.

BT Wealth Management Third Quarter Outlook and Review

Quarterly Review and Outlook
http://www.btcpa.net/Portals/6/pdf/newsletter/BTWealth.Q3.2009.pdf

BT Wealth Brochure
http://www.btcpa.net/Portals/6/BT-WealthManagement.pdf

The Alternative Minimum Tax was created in 1986 to create a tax planning obstacle for wealthy tax payers. There are many issues that need to be considered when one faces the AMT. For today, I will discuss the effect of an ISO and NQSO when determining the AMT. An ISO receives favorable tax treatment when it meets the long-term gain holding requirements. However, the IRS does include the beneficial return in the AMT calculation. When the stock is exercised, the difference between the exercise price and the fair market value of the stock is included in the AMT calculation. Exercising a large amount of ISO’s in one year, may require the employee to pay the AMT. If the ISO is exercised as a disqualifying disposition, the taxpayer will not face the AMT. The NQSO does not trigger the AMT because the employee pays ordinary income tax on the NQSO, as a disqualifying disposition. The AMT is a very complicated issue that should be review with a tax professional.

Friday, I discussed the ISO and the possible taxable benefits. A Nonqualified Stock Option does not have the holding restrictions of an ISO; however the taxable benefits are lost. The NQSO is a great option for an employee who is more risk averse. As the ISO, the grant date of the NQSO does not create taxation, as long as the exercise price is equal to or greater than the stock’s fair market value. When the employee exercise’s his NQSO, he will have W-2 income equal to the appreciation of the stock’s fair market value over the exercise price. This income is subject to withholding taxes. The fair market value of the stock on this date, becomes the employee’s adjusted basis. When the stock is sold for a greater value than the adjusted basis, and it is held for longer than a year from the exercise price, it will be treated as a long-term capital gain. If it is held for less than a year, it is a short-term capital gain. If the sale price is lower than the adjusted basis, the employee will recognize a loss. It is important to seek the help of a professional when one is offered a ISO and NQSO due to the complicated taxation.