Answers from Alden

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.

A common way to pay employees and encourage retention, is with an Incentive Stock Option. When a company provides an ISO, the common stock is offered to an employee at a particular price and time. The stock option allows the employee to decide when to purchase the stock and when to sell. An ISO must be exercisable within 10 years from the date it is offered and the employee’s price must not be less than the fair market value on the day it’s issued. The ISO offers an excellent tax opportunity for an employee in a high tax bracket. If it is carried out properly, the proceeds from the stock’s sale will be taxed as long-term capital gain. The stock is first valued on the date it is offered to the employee, or the grant date. On the grant date, the exercise price is determined; this is the employee’s set price for the stock. Once the employee decides to exercise his right to purchase stock, the employee will have an adjusted basis for future taxation. After two years from the grant date, and one year from the exercise date, the employee may sell the stock and receive long-term capital gain treatment. If the employee does not meet the holding requirements, a disqualifying disposition is used to determine the taxation. When the stock is sold at a loss, the employee will recognize the proceeds as ordinary income. A disqualifying disposition sold at a gain is taxed as a ordinary income and short-term capital gain. The ordinary income is the difference between the exercise price and the fair market value of the stock on the exercise date. Any gain over the ordinary income is taxed as short-term capital gain. The ordinary income is included on the W-2; however, payroll and federal income tax withholding do not apply. A cashless exercise option is available to employee’s that do not have the funds to purchase the ISO. When the employee decides to exercise his ISO, a third party lender will loan the money to purchase the stock at the exercise price. A cashless exercise requires the stock to be sold immediately. The lender is repaid and the employee recognizes ordinary income equal to the difference between the proceeds and the repayment.

There is a fantastic Frank Capra movie entitled You Can’t Take It With You. Lionel Barrymore plays the free spirited Grandfather, who owns a large block in Manhattan, and doesn’t believe in taxes or worrying about money. Hopefully this carefree Grandfather has taken the appropriate steps to ensure that the majority of his assets are well protected by a will, or the government may end up receiving a larger chunk than he intended. By properly protecting one’s assets with a will and other estate planning issues, the Grandfather could be even more carefree because he wouldn’t have to worry about the tribulations of state intestacy laws. In 2007, it was estimated that around 55% of adults do not have a will. Not included in this statistic is the large percentage of people that move and do not update their will to meet the new state laws. Regardless of the reason, one needs to consider the ramifications of dying without a will. One of the main purposes of having a will is ensuring that specific assets are bequeathed to certain people. Without a will, the state disposes property according to the law. In the state of Georgia, if one dies without a will the typical procedure includes:
-The spouse receives the entire estate if there are no children
If there are children the, the estate is divided in half; the mother would get one half, and the children would have to split the second half.
- If there is no spouse, the children will equally split the estate. If a child has already passed away, their children will receive the split interest.
-If there are no children, the parents of the deceased inherit the estate.
- If there are no parents, the grandparents or aunts and uncles receive the estate. However there is even an issue of paternal or maternal grandparents.
- If there are no surviving relatives, the estate goes to the state.
This is not fun to write, nor would it be fun to go to court to have this all figured out. It is important to look over particular state’s rules. In some states, the spouse’s share is divided equally among the children; if there are six children, the spouse would receive 1/7 of the estate. An estate attorney can ensure that the proper measures are taken to protect a family’s assets and guarantee it ends up in the desired hands.

When my Grandfather retired, he decided that he was going to occupy his time by making bluebird houses. Everyone in the family had at least four or five. My Grandfather’s bird houses were so amazing, he could have definitely started a very lucrative business. However, as a former accountant, I doubt he wanted to burden himself with even more tax stipulations. Unlike my Grandfather, many individuals use their favorite hobby as a way to make some extra money. If this is the case, the hobbyist may want to consider the different tax issues. The first issue to consider is the profit motive of the hobby. Having a profit motive would require the hobby to be reported as a trade or business. The best way to determine this is by looking over the IRS’s requirements:

Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?

If the hobbyist answers yes to these requirements, the next item to consider is if the activity has generated a profit in three out of the last five years. The expenses generated from a trade or business are included as an above-the-line deduction. There are special stipulations for passive activities, but lets keep it simple for a Friday. The loss deduction is the main difference between the trade or business versus a hobby activity. A trade or business is able to claim a loss in a year; whereas, a hobby can only deduct losses up to generated income. The hobby expenses are classified into three tiers. As with all tax issues, it would be best to seek the guidance of a tax professional who will ensure the proper measures are taken when preparing the tax return.

There are certain things that I will always enjoy, and Seinfeld just happens be on the list. It’s probably my favorite pastime, during family gatherings, when my cousins and I exchange some of our favorite moments and end up laughing through the entire dinner. Well, the other day the “Comeback” episode was on (the one where George says “The jerkstore called…”) and a very relevant issue is considered. Krammer has just watched “The Other Side of Darkness” and he decides that he does not want to end up in comma as the woman in the movie. He seeks the help of the attorney and creates a living will with the help of Elaine. As entertaining as Seinfeld is, the issue of a living will can solve some very serious situations. I can vividly remember the Terri Schiavo case and the pain that tore her family apart. The debate focused around her husband who believed that Terri would not want to live in her condition and her opposing parents. A living will allows a person to apply their own beliefs to their future medical conditions. It is also recommended that individuals have a Durable Power of Attorney for Health Care. This is a legal document that authorizes a third person to make medical decisions regarding blood transfusions, organ donations and selection of medical staff. This power does not enable the third person to end life-sustaining treatment; however, it supersedes the need for a court appointed health care guardian. If one wants to establish a living will, an estate attorney is the one to see. And hopefully, one will choose an executor who is better equipped than Elaine Benes.

I grew up in an area with many military families- I would estimate that 2/3’s of my high school’s student population came from military families. It seemed that every month a new student would be added to one of our classes. As a child who never moved, I always wondered about the expenses that were related to moving. (Yes, I was a financial nerd in high school.) I am not exactly sure about that tax issues regarding military families; however, a family can typically deduct moving expenses on their tax return or receive a reimbursement from an employer. If employer’s reimburse moving expenses, it is typically not included in the employee’s gross income; these expenses cannot be deducted on the employee’s income tax return. Pretty simple issue; however, the requirements of a qualifying move need to be carefully considered. A qualifying move must be greater than 50 miles from the employee’s former home and it must relate to a job. The employee must be at the new location full-time for at least 39 weeks during the first year after moving, or 78 weeks during the first two years, while meeting the first time requirement. There are moving expenses that may be deducted: the cost of moving personal goods to the new location and traveling expenses during the move. Travel expenses are limited to the lodging, not food; any lodging that is incurred while sightseeing is not included. The expenses do not include any house hunting trips. Any non-deductible expenses reimbursed to the employee must be included in the gross income. In some cases, it may be more beneficial for the employee to deduct his own expenses on the tax return. Prior to a move, it would be wise to meet with a tax professional who can advise on the two choices and clarify the different “if’s” and “typical’s” throughout this blog.