My Financial Well

Tax Strategies for Retirees

Kimberly Overman — Tue, 14 Feb 2012 17:10:10 +0000

Managing taxes in retirement can be complex.

Thoughtful planning may help reduce the tax burden for you and your heirs.

Managing taxes for maximum benefit in retirement requires careful planning.

You’ll need to consider the tax implications of different investments — such as municipal bonds and index funds — and maintain a portfolio that fully utilizes the range of tax efficient strategies available. You’ll also want to rethink how you allocate investments to — and make withdrawals from — taxable and tax-deferred accounts.

Tax-deferred investments have greater earning potential than their taxable counterparts due to compounding, yet withdrawals from tax-deferred accounts are subject to higher taxes than investments held for a year or more in taxable accounts. In addition, some tax-deferred retirement accounts, such as IRAs, require that you begin taking an annual minimum distribution after you reach age 70½. Finally, work out a comprehensive estate and gifting plan with competent professionals so you can make the most of your money while you are alive and maximize what you pass on to heirs.

Key Points

Less Taxing Investments
The Tax-Exempt Advantage: When Less May Yield More
Which Securities to Tap First?
The Ins and Outs of RMDs
Estate Planning and Gifting
Points to Remember

Nothing in life is certain except death and taxes. – Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Municipal bonds, or “munis” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).¹ The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

The Tax-Exempt Advantage: When Less May Yield More

Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.
Federal Tax Rate	15%	25%	28%	33%	35%
Tax-Exempt Rate	Taxable-Equivalent Yield
4%	4.71%	5.33%	5.56%	5.97%	6.15%
5%	5.88%	6.67%	6.94%	7.46%	7.69%
6%	7.06%	8%	8.33%	8.96%	9.23%
7%	8.24%	9.33%	9.72%	10.45%	10.77%
8%	9.41%	10.67%	11.11%	11.94%	12.31%
The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment.

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you’ll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 35%, while distributions — in the form of capital gains or dividends — from investments in taxable accounts are taxed at a maximum 15%. (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it’s beneficial to hold securities in taxable accounts long enough to qualify for the 15% tax rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple – the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you’ll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.² In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.² For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases spousal beneficiaries are ideal, because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes. In 2012, the federal estate tax applies to all estate assets over $5.12 million, but this threshold is scheduled to revert to $1 million in 2013, unless Congress elects to extend it. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed – or gains tapped – at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

Points to Remember

Formulating a tax-efficient investment and distribution strategy may allow you to keep more assets for you and your heirs.
Consider tax-efficient investments, such as municipal bonds and index funds, to help reduce exposure to taxes.
Tax-deferred investments compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts. However, qualified withdrawals from tax-deferred investments are taxed at income tax rates up to 35%, whereas distributions from taxable investments held for more than 12 months are taxed at a maximum 15%.
You must begin taking an annual amount of money (known as a required minimum distribution) from some tax-deferred accounts after you reach age 70½.
Review how your assets fit into a comprehensive estate plan to make the most of your money while you’re alive and to maximize the amount you’ll pass along to your heirs.

Source/Disclaimer:

¹Capital gains from municipal bonds are taxable and may be subject to the alternative minimum tax.

²Withdrawals prior to age 59½ are subject to a 10% penalty.

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February 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Kimberly D. Overman, CFP President of The Financial Well Inc. and Chairperson of the FPA of Florida.

Financial Tips for Living Solo

Kimberly Overman — Tue, 14 Feb 2012 01:06:55 +0000

Are you flying solo when it comes to planning for your financial future? Consider these tips for easing the financial burden.

Living the single life no longer is an anomaly: According to the U.S. Census Bureau, 45% of households nationwide are maintained by a single person. Being single affects many areas of financial planning, including retirement, financing health care later in life, and other key issues.

If you are single, or expect to be as a result of a pending divorce, consider the following as you plan your finances:

Retirement

An increasing percentage of preretirees are planning for retirement on their own. According to the January 2012 issue of Financial Planning magazine, one-third of preretirees between the ages of 55 and 64 are single. What steps should solo planners take to shore up their finances for a comfortable retirement?

Set long-term retirement savings goals. If you have access to an employer-sponsored retirement plan, contribute as much as you can afford. For 2012, the maximum employee contribution is $17,000, and workers aged 50 and older can contribute an additional $5,000 catch-up contribution.
If you can save even more for retirement, consider maintaining an IRA. For 2012, the maximum contribution is $5,000, and investors aged 50 and older can contribute an additional $1,000.
Investing as much as you can afford for retirement over the long-term is beneficial because you will not have the luxury of falling back on a partner’s pension. In addition, your household will have one Social Security check to fund retirement expenses.

Parenting

If you have children, your financial planning could be especially challenging because you may be required to fund tuition, child care, and other costs on one salary. As you raise your family, be sure not to shortchange your needs. Put away something for retirement, even if it is only a small amount each week. Over time, this amount may compound and serve as the basis of your retirement nest egg. Be sure to appoint a guardian for your children in the event that you are not able to care for them.

Insurance and Health Care

Review your options for disability insurance and long-term care insurance. It is critical to purchase these types of insurance while you are healthy and the premiums are affordable. These insurance purchases increase the chances that you will have adequate cash flow if you are not able to work because of a disability, or if you require assistance with activities of daily living later in life.

Make sure your plans include preparing for health care expenses. You may need to direct a lawyer to draft a health care proxy in which you designate a loved one to make medical decisions on your behalf if you are not able to do so yourself.

Housing

Think carefully about the type of housing situation that suits your needs. Carrying a single-family home, especially in an expensive housing market, frequently is difficult on one income. Be sure that your home is affordable enough to permit you to invest for retirement and other financial goals.

Your situation may present additional considerations, but the suggestions mentioned here can help you manage your finances successfully. For more information, check out www.thefinancialwell.com.

Source/Disclaimer:
1Source: U.S. Census Bureau, Unmarried and Single Americans Week, September 18-24, 2011.

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January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Kimberly D. Overman, CFP, President of The Financial Well, Inc. and Chairperson of the FPA of Florida.

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2012 McGraw-Hill Financial Communications. All rights reserved.

Kimberly D. Overman CFP in the News

Kimberly Overman — Sat, 01 Oct 2011 02:12:26 +0000

As consumers, we choose how to use our resources. Use your purchasing power to choose what you are willing to pay for banking services.

Next week is National Financial Planning week. Celebrate your financial strength.

20 Ways to Celebrate Financial Planning Week

1. Balance your checkbook
2. Write down your financial goals and revisit them periodically
3. Establish an emergency fund
4. Start a savings account for a child, vacation or a gift for yourself
5. Get your estate in order: Create or revise your will and other estate-planning documents
6. Call your financial planner and share your appreciation for their service
7. Pay off a credit card
8. Get a head start on college — investigate college planning options
9. Help teach your children how to save and spend wisely
10. Evaluate your employee benefits and begin planning for open enrollment
11. Develop your holiday spending budget
12. Plan for year-end tax strategies
13. Purchase a session with a financial planner for a relative, friend or colleague
14. Give a relative, friend or colleague a subscription to a personal finance magazine
15. Invite a financial planner to speak at your workplace
16. Review your insurance coverage
17. Make a monetary contribution to your favorite charity
18. Start using personal finance software to help you better understand your money
19. Look up three financial terms that have baffled you and resolve to understand them
20. Talk to a relative about their plans for long-term care

The US Debt Ceiling and Why It Matters to You

Kimberly Overman — Tue, 26 Jul 2011 19:15:34 +0000

The US Debt Ceiling Video Presentation

Click above to view

Let’s Make A Plan

Kimberly Overman — Thu, 05 May 2011 13:15:17 +0000

NEWS RELEASE

CFP Board Says: “Let’s Make a Plan”

Kimberly D. Overman, CFP®

President of The Financial Well, Inc.

President of the Financial Planning Association of Florida

Helping to support first large-scale Public Awareness Campaign

Tampa, FL May 5, 2011, – Certified Financial Planner Board of Standards, Inc. has announced its “Let’s Make a Plan” Public Awareness Campaign, designed to help educate Americans about the importance of sound financial planning and raise awareness about the significance of the CFP® certification and the need for competent and ethical financial planning.

Kimberly D. Overman, CFP® is supporting this effort in her local community as well as at the state level by encouraging people to learn more about CFP® certification and financial planning. Ms. Overman traveled to Tallahassee in early May as President of the FPA of Florida to visit with Florida state leadership and regulators to raise awareness of the importance of financial planning in the lives of Florida residents.

“People are pulled in so many different directions when it comes to their finances, but a CFP® professional is uniquely qualified to pull all the pieces together and provide a comprehensive evaluation that looks at the whole picture of a person’s financial life,” said Charles Moran, CFP®, 2011 Chair of CFP Board’s Board of Directors.

“Florida consumers need to know that their financial advisor has the knowledge, experience, and background free from ethical violations to guide them through the maze of financial opportunities and hazards,” said Kimberly D. Overman, CFP®.

The integrated campaign includes national cable television and online advertising in addition to its print advertising.

A public service website – www.LetsMakeaPlan.org – will serve as a core feature of the campaign, where consumers can learn about financial planning, the personalized approach CFP® professionals provide and find a local CFP® professional through a search function.

The Board of Directors approved the four-year, $36 million campaign in November 2010 partly in response to many CFP® professionals who want the public to understand the important role they play in educating Americans on their financial well-being and helping people meet their life goals. The campaign will help provide clarity to consumers who are looking toward designations and certifications to provide guidance on choosing a financial planner or advisor.

“The CFP® mark truly serves as the gold standard for personal financial planning,” said CFP Board CEO Kevin R. Keller, CAE. “Just about anyone can use the term ‘financial planner.’ But only those individuals who have passed a rigorous set of criteria and meet our strict ethical qualifications can call themselves a CFP® professional.”

This is the first large-scale Public Awareness Campaign the organization has underwritten. For more information on the campaign and to find a CFP® professional, visit the public service website at www.LetsMakeAPlan.org.

ABOUT CFP BOARD

The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning. The Board of Directors, in furthering CFP Board’s mission, acts on behalf of the public, CFP® professionals and other stakeholders. CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and the federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFP Board currently authorizes nearly 63,000 individuals to use these marks in the U.S.

ABOUT KIMBERLY D. OVERMAN, CFP® AND THE FINANCIAL WELL, INC.

Kimberly D. Overman is the President & CEO of the Minority Business Enterprise certified company, The Financial Well, Inc.; a fee-only registered investment advisory firm that offers comprehensive wealth management advisory services to individuals, business owners, and non-profit organizations. With over 28 years experience in the financial services industry, Ms. Overman founded The Financial Well over 10 years ago with a desire to offer services from a life planning holistic and fiduciary perspective.

CONTACT: Kimberly D. Overman, CFP

The Financial Well, Inc.

300 South Hyde Park Ave, Suite 210

Tampa, FL 33606

813-229-2000 Tele

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Maintain a Good Credit Rating

Kimberly Overman — Wed, 20 Apr 2011 20:21:46 +0000

Key Points
• Why Credit Is Important
• Missing Payments
• How Credit Reporting Works
• Signs of Credit Overextension
• Credit Reporting Agencies
• Be Credit-Smart
• Points to Remember

Installment debt, in itself, is not a bad thing. It enables us to make major purchases that would be nearly impossible to finance up-front. The problem is, in this consumer society, we’re bombarded with advertisements for literally thousands of “must-have” products. The result is that while our parents tended to pay with cash and buy only what they could afford, we have the “buy now, pay later” mentality.

Unfortunately, our massive appetite for credit may be eroding our financial security, as more Americans continue to rely on borrowed money to maintain their existing lifestyles.

Why Credit Is Important

It is important to establish credit if you plan to buy a home or automobile some day. Credit cards also provide a means of reserving a hotel room or obtaining cash while you’re traveling.

If you are a college student, recent graduate, or a nonworking spouse, you can begin to establish credit by opening a savings or checking account in your own name. You can then apply for a department store and/or oil company credit card. Having someone else co-sign a loan for you will also get you started.

Creating a positive credit history for yourself requires using your credit card intelligently. Following are some dos and don’ts to help you manage credit effectively:
• DO NOT charge more than you can easily pay off in a month or two.
• DO NOT be fooled into paying just the low minimum amount listed on a bill. Credit card issuers make money on interest; there’s nothing they’d like more than to have you stretch out payments.
• DO consistently pay your bills by the due date.
• DO use credit for larger, durable purchases you really need, rather than non-durables, such as restaurant meals that are better paid in cash.

Missing Payments

When you miss a payment, the information immediately goes into your credit report and affects your credit rating. If you’re judged a poor credit risk, you may be refused a home mortgage or rejected for an apartment rental. In addition, a prospective employer looking for clues to your character may dismiss your job application if your credit report reflects an inability to manage your finances. In most states, an auto insurer may put you into its high-risk group and charge you 50% to 100% more if your credit record has been seriously blemished within the last five years. Many property insurers also review credit histories before they issue policies.

How Credit Reporting Works

Credit reporting agencies, also known as credit bureaus, gather detailed information about how consumers use credit. Businesses that grant credit regularly supply credit information to credit bureaus. Credit bureaus then compile this information into credit reports, which are sold to banks, credit card companies, retailers, and others who grant credit.

Your credit report helps others decide if you are a good credit risk. This information should be supplied only to those parties who have a legitimate interest in your credit affairs, including prospective employers, landlords, or insurance underwriters, as well as others who grant credit. The Fair Credit Reporting Act (FCRA), the federal statute that regulates credit bureaus, requires anyone who acquires your credit report to use it in a confidential manner.

The following information is most likely to appear in your credit report:
• Your name, address, social security number, and marital status. Your employer’s name and address, and an estimate of your income may also be included.
• A list of parties who have requested your credit history in the last six months.
• A list of the charge cards and mortgages you have, how long you’ve had them, and their repayment terms.
• The maximum you’re allowed to charge on each account; what you currently owe and when you last paid; how much is paid by the due date; the latest you’ve ever paid; and how many times you’ve been delinquent.
• Past accounts, paid in full, but are now closed.
• Repossessions, charge-offs for bills never paid, liens, bankruptcies, foreclosures, and court judgments against you for money owed.
• Who owes the debt — you alone, you and a joint borrower, or you as cosigner. (Debts that you co-sign become part of your credit history, the same as debts you incur yourself.)
• Bill disputes.

Negative information can be kept in your file only for a limited time. Under the law, delinquent payments can be reported for no more than 7 years and bankruptcies for no longer than 10 years.

Signs of Credit Overextension

1. You don’t know how much you owe.
2. You borrow to buy items you used to purchase with cash.
3. You have to juggle other bills just to pay the minimum charges on your cards each month.
4. Each monthly credit balance is higher than the last, and you keep applying for more credit, using the cash advances to pay bills.
5. You pay bills using money intended for other needs.
6. Creditors are sending overdue notices.
7. You have no savings or emergency funds to cover three to six months of living expenses.

Free Credit Reports

Under federal law, you are entitled to receive a free credit report from each of the three national credit reporting companies (Equifax, Experian, and TransUnion) once every 12 months. To get yours, visit: www.annualcreditreport.com

Be Credit-Smart

Your credit history requires maintenance, just like other areas of your life. Even if you pay your debts on time, don’t assume that your credit rating is flawless. Mistakes do occur.

The FCRA entitles you to review information in your credit file. If you have been denied credit, the company denying credit must let you know and give you the name and address of the credit agency making the report. Once you have this information, you can send a letter to the agency and you will receive the information in your credit file, at no cost, within 30 days.

It’s a good idea to obtain a copy of your credit report to check it for accuracy. A new law entitles all consumers in the United States to one free online credit report every 12 months from each credit reporting agency. To do so, log on to annualcreditreport.com. (Keep in mind that other Web sites claiming to offer “free” credit reports may charge you for another product or service if you accept a “free” report.) If you wish to dispute any information in your file, simply write the agency and ask them to verify it. Under the law, they are required to do so within a “reasonable time,” usually 30 days. If the agency cannot verify the information, it must be deleted from your file.

Points to Remember

1. Installment credit, in itself, is not a bad thing; it can enable you to make major purchases that would otherwise be difficult to finance.
2. To establish a credit history, open a checking or savings account, then apply for an oil company or retail store credit card. Use your cards sparingly, charging only what you can pay off in a month or two, and make your payments by the due date.
3. Don’t be fooled into paying just the minimum balances. If you do, you’ll stretch your payments over months, even years, and incur interest charges in the process.
4. Missed or late payments will damage your credit rating, which can affect your ability to obtain a home mortgage or rental apartment, auto or property insurance, and maybe even a job.
5. Monitor your credit rating periodically to determine that all information is reported accurately.

April 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Kimberly D. Overman, CFP, President of the FPA of Florida.

Marketplace Money – Money Through the Ages

Kimberly Overman — Sat, 26 Mar 2011 18:34:52 +0000

Kimberly D. Overman, CFP, President of The Financial Well is featured in the NY Times Money Through The Ages. In a special collaboration with The New York Times and American Public Radio, we explored the financial financial issues facing individuals and couples through their lifetime. Listen to a special episode of Marketplace Money.

Consumer Alert: Summary of New Financial Reform Law

Kimberly Overman — Mon, 02 Aug 2010 00:40:13 +0000

On July 21, 2010, President Obama signed into law the most wide-ranging reform of the U.S. financial system in decades. The Act establishes new consumer protection provisions regarding lending and credit. It also attempts to provide greater transparency and accountability for investments and financial services, and establish processes to deal with systemic financial emergencies.

To read a summary of the legislation, click on article title below:

Dealing with market volatility

Kimberly Overman — Sat, 24 Jul 2010 18:52:12 +0000

Markets driving you crazy?

Kimberly D. Overman, CFP of The Financial Well suggests you watch this presentation below to gain some perspective.

Lots of early boomers will go bust in retirement

Kimberly Overman — Tue, 13 Jul 2010 22:19:03 +0000

The oldest baby boomers, many of whom are expecting to retire soon, will likely not have enough money to carry them through their twilight years, according to a study released today by the Employee Benefit Research Institute. Click here read more.