Monday, April 14, 2014

Help your grandchildren invest in education

It was wonderful to see both Michigan State University and the University of Michigan basketball teams reach the Elite Eight. Although neither was crowned the NCAA champion, I thought both were teams we could be proud of.

Both have coaches that are great leaders and teachers, and it certainly appeared that all the players were classy student athletes. So much so that I feel compelled to talk about education.

I believe the best investment young persons can make is in themselves. Improving one’s knowledge and marketability in a competitive world is essential not only for getting ahead, but also for financial survival.

I recently came across some information from the financial firm John Hancock that I thought was worth sharing. According to “The College Board, Trends in College Pricing 2013,” four years of public, in-state college costs an average of $75,000. That’s a lot, and based on experience, I believe, it’s a bit low.

The John Hancock study also determined the source of the money that funded college expenses. Student income and savings covered just 11 percent of the tab, while parent income and savings covered 27 percent. Grants, scholarships, friends and relatives accounted for another 35 percent.

So, what was the source of the remaining 27 percent? Unfortunately, it was borrowed. Parent borrowing accounted for 9 percent and student borrowing an unbelievable 18 percent.

We’ve all read about students graduating with horrendous debt on their shoulders. A whopping 26 percent of graduates leave college with debt burdens ranging from $25, 000 to $100,000.

That’s why I want to remind all the parents and grandparents out there that there’s something you can do. You can save for your grandchildren’s education. And if you’re wondering how you can go about it, I’d like to make a suggestion.

I believe one of the best ways to help provide for a grandchild’s education is with a 529 college savings account. Simply stated, a 529 plan is a tax-advantaged investment vehicle established to encourage saving for the higher education of a designated individual.

Funds grow tax-free as they accumulate, and if the multitude of government guidelines is followed, the dollars earmarked for education are withdrawn tax-free. There are numerous ways the dollars can be invested, and as with any investment, there is an element of risk.

A small drawback is that 5.6 percent of the funds in a 529 plan count against the federal formula for determining the amount of financial aid available to the designee.

I say small because the grandparents can negate that factor. That’s because if the account holder of a 529 program is a grandparent of the student, the assets in the 529 plan are not counted against the amount of financial aid.

In other words, grandma or grandpa control the assets and it does not harm the grandchild’s ability to qualify for financial aid. What’s more, if little Johnny or Jenny doesn’t attend college, or chooses to party against your wishes during spring break, you are not obligated to pay their tuition.

The best-case scenario is that you’ve helped a loved one compete in a competitive world. And the worst case is that the investment comes back to you. With some tax liability, of course. The bottom line is that you are in control.

Monday, March 31, 2014

Uncle Sam goes overseas to get your tax dollars

I was alarmed to read that the United States Department of Treasury reported that a record 2,999 Americans renounced their citizenship in 2013. I assume the motivating factor for many was tax avoidance.

Most of us have a mental image of a greedy, selfish Thurston Howell type person looking to keep as much money as possible. Certainly that’s the case in some instances, but it’s definitely not true for everybody.

In fact, a lot of dedicated Americans working and living abroad are discovering that it’s becoming increasingly difficult just to transact some of the basic banking services that we take for granted. It’s actually becoming a very significant problem.

As American citizens, we’re required to file IRS form 8938, the Statement of Specified Foreign Financial Assets. The purpose of the form is to report ownership of foreign financial assets.

In 2010, the United States passed the Foreign Account Tax Compliance Act (FATCA.) The Act goes into effect on July 1, 2014, and, as the name implies, its intent is to improve compliance of U.S. taxpayers who hold foreign accounts.

It requires foreign businesses to report all assets held by Americans with the goal to prevent tax evasion. In other words, Uncle Sam wants to get its hands on all the additional tax dollars that U.S. citizens are trying to avoid paying. Businesses throughout the U.S. may be getting used to the bureaucracy of our highly regulated nation, but many foreign firms apparently feel differently.

For example, some foreign banks are finding our requirements so cumbersome and expensive that they’re simply choosing not to do business with Americans. Consequently, many Americans abroad are having difficulty finding a bank that’s U.S. compliant.

This is not just impacting wealthy Americans; it’s also difficult for those executives who are overseas on assignment. Many may be familiar with Eduardo Saverin, the billionaire co-founder of Facebook. He was one of the wealthy Americans who did, indeed, renounce their American citizenship.

But, as the globe shrinks, and more and more hard-working Americans are working overseas, I’m concerned about their ability to bank, invest and, yes, pay they fair share of taxes like you and me. If the policy of foreign banks is simply not to do business with Americans, what happens if a young college-age student gets an opportunity to study abroad and finds it nearly impossible to do basic banking?

The chief executive officer of the Bank of Singapore stated that they have turned down millions of dollars from Americans because the bank “doesn’t want to deal with the regulatory hassle. It is too complex, too challenging.”

I’m also concerned about the status of the U.S. dollar as the world’s reserve currency. It’s easy to take for granted, but we’ve all enjoyed the benefits of our dollar being the currency of choice. Some experts estimate that if the dollar ever lost its international currency status our buying power could be reduced by as much as 20 percent.

I can’t think of any clients or readers that want a 20 percent pay cut. But if we continue with heavy-handed regulation, we could jeopardize the dollar’s elite status.

As the world shrinks, we need to find a better balance between tax evasion, reasonable regulation and simplified compliance for our citizens, wherever in the world they may be.

Monday, March 24, 2014

Nobody knows which way the bull will run next

People that know me, and regular readers of my column, are aware that I’m fond of history. I believe history can teach us a lot, and if we paid attention to it, we might all be able to avoid making unnecessary mistakes.

In the world of investing, history is an important factor, but it should be only part of the equation when setting the course and making modifications in your portfolio.

For example, you wouldn’t drive down the freeway only checking the rearview mirror. What you already passed on the roads is a factor, but it can’t define with certainty what lies on the road ahead.

Coming off a brutal winter, many auto accidents were caused by sudden, unexpected whiteout conditions where all visibility was lost. If drivers knew there was a whiteout in the road ahead, they could simply pull off the road or change course. But the fact is, you just don’t know.

The world of investing is similar to a long drive down the freeway where conditions can change without warning regardless of the weather forecast.

We recently passed the fifth anniversary of the bull market. The upward progression has not been straight. In fact, there have been several occasions over the last five years when the market stalled or turned downwards and many investors thought a market collapse was imminent.

But instead of falling, the market has been resilient and bounced back to continue its assent. Now five years old, the current bull market is only the sixth bull market to last that long since World War II.

Of the six, only three continued on past its sixth anniversary. In other words, with history as a guide, there’s a 50 percent chance the market will continue to climb. And a 50 percent chance it will head back downward.

What strikes fear into the hearts of many investors is that the three that didn’t reach a sixth anniversary ended very badly. I recall the October 1987 plunge when stocks plunged 20 percent in a day like it was yesterday.

More recently, the horrific downturn of the 2007-09 “great recession” still lingers vividly in my mind. On the other hand, the bull market in the 1990s far exceeded its fifth birthday. In fact, it fell just short of running for 10 full years.

So, just exactly what does all this history mean? In my opinion, it means we need to be mentally prepared for a downturn. But that’s not to say that we should expect a collapse.  A lot of indicators seem to suggest that there is a lot of gas left in the tank. I would not be surprised if the current rally does get to celebrate a sixth birthday.

The bottom line, of course, is that nobody can predict the future with absolute certainty. Recently, fuelled by international events, the markets fell dramatically in one day. The very next day they bounced all the way back and then some.

History does teach us that things often happen — and change — at lightning speed. As an investor, I continue to suggest that you should diversify, not put all your eggs in one basket and keep your emotions in check. History shows that investors need an iron stomach.

Monday, March 17, 2014

The responsible way to keep tax records

For many readers, this is another three-day holiday weekend. Tomorrow is a day that a lot of people will call in to work claiming they’re ill and can’t work on St. Patrick’s Day. There will probably also be a spike in illness two weeks later when the Tigers open the season at home on Monday, March 31.

Although I’m not Irish, I can certainly understand the St. Patrick’s Day festivities. And, who can’t get excited about the Tigers? Even if you’re not a baseball fan, the Tigers opening day is a sign that winter is over.

Personally, I save my “sick day” for April 15. Like many, I feel fortunate from a financial perspective. But, even though the government takes so much taxpayer money, what upsets me most is not the amount, but their poor stewardship of our tax dollars.

For as long as I can remember, every year there seems to be a number of public junkets on the taxpayer’s dime. An IRS Star Wars party comes to mind. Plain and simple, Uncle Sam tends to be inefficient and wasteful when handling money. It’s enough to make anyone ill.

In just a few weeks, I’ll start receiving emails from clients asking how long they need to keep their tax records. My answer is a lot longer than many tax experts suggest.

Call me a pack rat, but I disagree with experts who claim you can get rid of your tax records from three to six years after filing. I can cite many examples where old returns, along with supporting data, have come in handy.

For example, Social Security no longer sends paper statements. You’re responsible to log onto their website and review your records. Early in my career, I had some clients near retirement whose Social Security data showed they had $0 income for two years. My clients knew it was wrong, but it was their responsibility to prove the information was inaccurate.

What better way than an old W2 to substantiate your claim? Can you imagine having to postpone your retirement because records showed you didn’t have the proper 10 years in the system? Old tax records can also be used as your “proof of purchase” on an item you depreciated on your tax returns over a number of years.

Another situation I’ve often encountered with clients is confusion over whether or not their IRA plans are deductible. Old tax records can help an advisor or tax preparer reconstruct the records to help unwind the problem. After all, who wants to pay tax on the same dollar twice?

Over the years, I’ve also had meetings with a surviving spouse who had little to do with handling family finances. Old returns can be an adviser’s window into past investment activity. In fact, once while going through a widow’s pile to shred, I discovered records that resulted in a sizeable amount of money for her benefit.

These are just a few examples of how old tax returns can be beneficial. It might not be as exciting as souvenir beer mugs from St. Paddy’s Day or the Tigers’ opening day program, but I suggest you also find room in your basement for your old tax returns and supporting data. You never know when it might pay off.

Monday, March 10, 2014

The only person you can count on for retirement is yourself

As we close in on the April 15 tax deadline, I want to remind my readers that it’s not too late to consider making a contribution into an Individual Retirement Account (IRA) for tax year 2013. Without going into great detail, IRAs come in three flavors. There are the traditional tax-deductible IRA, the Roth IRA and the non-deductible IRA, each with its own unique features and benefits.

Determining which one you’re eligible for and which suits you best can take some time. With the tax clock ticking, I suggest you move quickly to get everything completed by the tax deadline.

Now more than ever, it’s extremely important to save for your retirement. If you believe you’ll be fine in retirement because of your pension and Social Security benefits, you may want to reconsider. I’ve said many times that we’re in a YOYO (you’re on your own) world, and recent events make it very apparent.

For example, we hear about the Detroit pensioners on an almost daily basis. Former policemen, firefighters and other city employees are likely to see their pension checks reduced by as much as thirty percent.

Nobody knows what the final number will be, but it’s sad to see any retiree take a hit to his or her pension check. Over promises, fiscal mismanagement, criminal convictions and increased longevity have all contributed to the crisis.

That being said, the problem is not unique to Detroit. It may be one of the first cities to deal with the pension crisis, but I receive emails from an organization that tracks pension problems throughout the country virtually every day.

There’s a laundry list of cities that aren’t very far behind Detroit. It even appears likely that some states will be unable to meet their pension promises. Because of all the broken promises, real people are going to feel the pain of smaller pension checks.

In addition to the pension shortfalls that are sweeping the nation, the military recently announced cutbacks that will impact our military families’ budgets. Details will soon come out, but it looks like we will again be witness to another broken promise.

Pension cuts and military cutbacks aren’t all that concern me. If you’re still working, take a look at your report on the Social Security website. It clearly states that, on its current course, there will not be enough to pay promised benefits in their entirety.

Unfortunately, it appears that we’re entering an era of broken promises. My purpose is not to point fingers or lay blame. There’s plenty to go around. I only want to motivate readers to save for retirement. It’s really important because, at the end of the day, you shouldn’t rely on your employers’ promises to pay you after you retire.

Your retirement years shouldn’t be full of stress, especially if you thought you had everything in good order. Unfortunately, that’s no longer the case. I cannot fix the broken promises, but I can encourage everyone still working to save more on their own. If you depend on some other source to finance your retirement, it just may not be there when you need it.

I’ll say it again: You’re on your own. So please, take control now. You can’t afford to rely on others for your financial wellbeing.

Monday, March 3, 2014

Reaching the IRS shouldn’t be so taxing

Some of the hardest working people I know are tax preparers. At this time of year, it’s not uncommon to see my CPA’s car in his office parking lot when I drive by late in the day. Even on Saturday. It’s tax season. Accountants expect to work around the clock. Those that prepare taxes are keenly aware that it’s not a 9 to 5 job. But then, it’s the career they choose.

Tax preparers have to understand and process an overly complex set of rules, regulations and laws. They’re the ones in the trenches, attempting to explain to their clients why they have to pay more to Uncle Sam this year than last year.

While many people had the President’s Day Holiday off work, my firm was open, and I would guess most tax preparation firms and retail stores were open too. Wall Street and banks were closed, however, as were Government offices.

I was a bit surprised that IRS spokesman David Tucker encouraged people not to call during the mid-February holiday week. To me, it’s more than a little puzzling. At a time when it’s more difficult than ever to complete tax returns, the IRS is shorthanded. Shouldn’t they have all hands on deck? Don’t they know it’s the busiest time of year?

In fact, even though it was a holiday Monday, they at least should have considered opening the call center on President’s Day. After all, as a society we’ve reached the point where retail stores are open on Thanksgiving.

According to IRS data, they expect 148 million tax returns to be filed. I was alarmed to see that only 60 percent of taxpayers who called the IRS got through to a live person in 2012. Even so, the average wait time was more than 17 minutes. To compare, 87 percent of calls were answered in 2004 and 74 percent in 2010.

According to IRS Commissioner John Koskinen, the goal is to answer 78 to 80 percent of calls this year. However, he was quoted as saying “We don’t expect our customer service to improve very much.”

That being said, the IRS is trying to improve their technology to make it easier for taxpayers. For example, the web site had 456 million visitors in 2012. The IRS also has a smart phone app, IRS2Go (http://IRS2Go).

From a customer service perspective, the IRS needs to have its staff available at peak times. Many believe the solution is to simply hire more IRS staff. I see it differently. As a financial advisor, I have firsthand experience that the tax laws have become far too complex.

I think there’s a better solution than hiring more agents to wade through the tax laws. In my mind, the real world solution isn’t that difficult. The answer is simply to overhaul the tax code and simplify the entire process to the point that IRS office staffers feel as lonely as the Maytag repairman.

It shouldn’t be so complex that 400 million are forced to search the web site. Or that that people have to wait on hold for extended periods of time before finally hanging up in frustration. It’s obvious that the current method does not work. It’s way past time for an overhaul to make everyone’s life easier.

Monday, February 24, 2014

Don’t fear the chart! We’re not headed for a Depression

In most instances, when an item makes it way through the Internet circuit, it’s an eye-catching video or an embarrassing photo. And, often as not, it puts a smile on your face.

Recently, however, a certain graph is making the circuit and it’s nothing to laugh about. Like many people in today’s high-tech world, you may work with graphs on a regular basis.

Or maybe you haven’t seen a graph since your high school economics class. In my 16 years of writing this personal finance column, I know I have never highlighted a graph.

So, what makes this graph so unique that I’m featuring it in a personal finance column? Just the fact that it’s putting fear into the stomachs of many investors.

The graph shows the ups and downs of the Dow Jones Industrial Average Index (DJIA) from 1928 to 1929. But it’s overlaid with a graph of the same DJIA fluctuations beginning in July 2012. What makes that scary, of course, is that the two charts look eerily identical.

If we continue to follow the trend of the 1928-29 graphs, the next line on the current graph will be severely downward. In 1929, that downward movement ignited the Great Depression.

So, naturally, the chart with the two graphs has spread quickly. Bad news travels fast and fear gets attention and nobody wants to see the value of their life savings fall off a cliff.

I have always stated that nobody has a crystal ball into the future. That being said, I’m a longtime subscriber to Investor’s Business Daily, which runs numerous graphs every day that can be valuable tools in finding stock market trends. And while they’re frequently accurate, they’re by no means infallible.

Perhaps the current graph is correct and we’re headed for a severe economic downturn. But I urge everyone to park your emotions before panicking and making the next downturn a self-fulfilling prophecy.

Over time, markets always fluctuate. At some point there will be a downturn. And when that happens, I don’t want to see people panic and do something irrational with their nest egg because they fear we’re falling into a Depression. A market decline doesn’t mean the economy is about to collapse.

If you look at history, our current environment is much different than the 1920s. The Great Depression was fueled by a debt crisis. Mom and pop investors borrowed large sums against their stock portfolios in order to buy more stocks. When the loans were called, panic stock selling ensued. Today, there are limits on loans against stock accounts.

There was also a collapse in the banking industry back then. True, today’s banks are far from perfect, but they’re much stronger than just a few years ago. Plus, they now have to go through a stress test and have to comply with a ton of regulations.

In the 1980s, there was a 20 percent tumble in one day. The anticipated problems of Y2K turned out to be no problem. And, more recently, we overcame the mortgage meltdown and near banking collapse.

Surviving those, I’m confident we can all survive the next pullback, and I don’t believe it will lead to a Depression. History does repeat itself. But this is one instance where I don’t believe it will.