1. How are you compensated?
Any financial expert you are considering working with should be willing to clearly explain all fees you will pay to him or his firm, and all expenses you will pay that are associated with any investment they recommend. You will also want to ask about any fees built into the products you buy from your adviser, as this may alert you to any potential conflicts of interest. If the firm is selling a product it also oversees, you should examine the fees to see how they compare to the costs of investing in other products or similar investments.
2. What assumptions do you use when running retirement planning projections?
If you work with someone who uses a conservative set of assumptions, you may end up with more than what they have projected, not less. Likewise, an aggressive set of assumptions may be difficult to achieve. A conservative set of assumptions should be growing financial assets at 7% a year, using an inflation rate of 4% (meaning personal expenses go up by 4% a year), and increasing the value of real estate assets on paper by 2% a year.
3. Tell me about your ideal client.
Ideally, you want someone who has expertise working with someone like you. Find a financial adviser whose model client sounds very similar to your situation in terms of age, stage of life and asset level. Those with higher net worth may want to look for a firm with experts in taxes, insurance, investments and trusts.
4. Ask a potential financial adviser to explain a concept to you.
You want to work with someone who can explain financial concepts to you in language you can understand. You may consider questions like:
Interviewing multiple financial planners will take time. It is important to remember that this will be the person you trust with your financial life. If you do not understand their answers to these questions, tell them so. A good adviser will take the time to explain what you need to understand to make an informed decision.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
It is important that investors understand titles of “Financial Analyst,” “Financial Adviser” and “Financial Consultant” are merely job titles. That title is not indicative of education or affiliation. To add further to the confusion, a professional planner’s designations can often look like alphabet soup. Let’s take a look at some of the more popular initials and acronyms you may encounter:
The Certified Financial Planner™ (CFP®) certification is issued by the Certified Financial Planner Board of Standards. Professionals seeking this certification must pass a two-day, ten-hour exam, covering investment management, employee benefits, insurance, taxes, retirement and estate planning. The emphasis of the educational program is the interrelationship of the financial areas, and the need for an objective analysis of a client’s circumstances and goals. A CFP® professional must also have at least three years of personal financial planning experience and meet educational and ethical standards to maintain the right to use the CFP® mark. Additionally, CFP® professionals must complete 30 hours of continuing education every two years.
A Chartered Financial Consultant (ChFC) will have a background in the insurance industry in addition to having passed an examination on the fundamentals of financial planning, including income tax, insurance, investment and estate planning. The ChFC program builds on that knowledge with advanced coverage of estate, retirement, and financial planning applications. Individuals who hold the ChFC designation must complete 30 hours of continuing education every two years.
The Chartered Financial Analyst® (CFA) designation is awarded by the CFA® Institute to experienced financial analysts who successfully pass three examinations covering economics, financial accounting, portfolio management, securities analysis and ethics. A CFA charterholder must have an undergraduate degree and at least four years of acceptable professional work experience involving investment decision-making.
The Personal Financial Specialist (PFS) credential is granted exclusively to Certified Public Accountants (C.P.A.) who have considerable personal financial planning experience. The C.P.A./P.F.S. designation is authorized by the American Institute of Certified Public Accountants (AICPA). It can only be acquired by C.P.A.s who are AICPA members, have completed 75 hours of personal financial planning education, have at least two years of experience in financial planning, and pass a comprehensive and rigorous personal financial planning exam.
A Certified Wealth Strategist® (CWS®): This designation is administered by Cannon Financial Institute. The mission of a CWS® is to provide financial services professionals with the technical knowledge, the practice management formula, and the critical client interaction skills to create and build a dynamic wealth advisory practice that works effectively with more complex client issues. The program consists of four days of classroom training, months of directed study, completion of a final Capstone project, and 33-hours of continuing education every two years.
There are more than 100 designations or certifications available for financial experts. Obtaining one of these doesn’t always indicate the individual has a degree from an accredited college or university. Designations most often indicate that the individual has passed specific exams and is obligated to adhere to ethical standards. There are other key areas that you should consider, such as, areas of experience, affiliations and investment philosophy. Next week we’ll look at the questions you should be asking when you are considering working with a financial expert.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
Let’s take a closer look at brokers and Registered Investment Advisers.
Brokers—registered representatives of a brokerage firm—are sales-oriented agents whose job is helping customers trade stocks and other securities. They are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. FINRA protects investors by maintaining the fairness of the U.S. capital markets.
Registered Investment Advisers are regulated by the Securities and Exchange Commission (SEC) whose mission is to protect investors by enforcing federal securities laws, and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. Under SEC rules, Registered Investment Advisers have a fiduciary duty to their clients. They must put the investors’ interests above their own.
And therein lies the difference: An adviser has a regulatory fiduciary responsibility to you, while a broker’s loyalty may be with his firm.
A broker is not held to the same fiduciary standard as an investment adviser; therefore, they are only required to recommend “suitable” investments based on your investing objectives, risk tolerance, tax status and financial position. Costs and conflicts of interest are not disclosed because the broker is not acting as a fiduciary. Brokers often receive commissions on your transactions; therefore, this is where the interests of a broker could supersede those of the client.
On the other hand, a Registered Investment Adviser does not sell a product; they sell a service—financial advice coupled with the fiduciary responsibility to put your interests first. Advisory firms must recommend the best investment for the client. They are not obligated by a particular bank, brokerage firm or insurance company. Advisory firms can provide straightforward portfolio direction that is designed to be in the client’s best interest. Advisers can only charge fees in three ways: a percentage of assets under management, on an annual basis, or on an hourly or "flat fee" basis.
While there is a difference between brokers and advisers, one is not better than the other. Many registered representatives are now also Registered Investment Advisers and have moved toward fee-based billing. You may also find you need both—an adviser to help you develop a portfolio that will grow to meet your financial goals and a broker or custodian to place the stock trades for you.
Next week, I’ll take a closer look at the alphabet soup of designations in finance.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
If you have not already made your Roth or Traditional IRA contribution for 2012, you have a narrow window to do so. The longer the money has to grow, the better off you should be. Remember, the deadline for a 2012 contribution is April 15, 2013.
You should discuss your options with your financial adviser or tax consultant before making a Traditional IRA contribution. If you contribute to your IRA before April 15, 2013, you will need to notify the sponsor which tax year the contribution is for, as the sponsor can assume and report to the IRS, that the contribution is for the current year.
To make a Roth or a Traditional IRA contribution, you must have earned income. The following lists the income limits and contribution limits for a Roth and a Traditional IRA:
Married Filing Jointly
If your combined adjusted gross income (AGI) is more than $183,000, you cannot contribute to a Roth. Your contributions should be made to a Traditional IRA.
If your AGI is between $173,000 and $183,000, the amount you are allowed to contribute to a Roth phases out the closer your income is to $183,000. If your income is in this range, discuss with your tax adviser the amount you may contribute to a Roth IRA. The remainder should be contributed to a Traditional IRA.
If your AGI is below $173,000, you are allowed to make the full contribution to a Roth.
Single
If your AGI is more than $125,000, you cannot contribute to a Roth. You should contribute to a Traditional IRA.
If your AGI is between $110,000 and $125,000, the amount you are allowed to contribute to a Roth phases out the closer your income is to $125,000. You should consult with your tax adviser for the amount you are allowed to contribute to a Roth. The remainder should be contributed to a Traditional IRA.
If your AGI is below $110,000, you are eligible to make a full contribution to a Roth IRA.
2012 IRA Contribution Limits
For 2012, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of: $5,000 ($6,000 if you are 50 or older), or your taxable compensation for the year. Additionally, you may consider getting a head start on your 2013 IRA contribution by having your tax refund directly deposited into your IRA account.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
The credit you can claim is a percentage of the contribution amount with the highest credit percentages applying to those with lower incomes. The IRS uses the following chart to determine the amount of credit taxpayers can claim:
| Credit % | Income: | Income: | Income: |
| 50% | up to $34,500 | up to $25,875 | up to $17,250 |
| 20% | $34,500-$37,500 | $25,875-$28,125 | $17,250-$18,750 |
| 10% | $37,500-$57,500 | $28,125-$43,125 | $18,750-$28,750 |
Now, if you have met the qualifications above and fall into one of the income categories in the chart, you have only one more task before completing the form for the credit. This credit is applied to any contributions you made, less any distributions you received in the two-year period before the tax year in which you are claiming the credit. For example, your 2012 total contributions would be reduced by any distributions you received between January 1, 2010 and April 15, 2013. This subtraction rule does not apply to distributions that are rolled over into another plan or distributions that were made as a result of excess contributions.
Having jumped through all of these hoops, if you can claim the credit, you need to complete Form 8880, Credit for Qualified Retirement Savings Contributions, and include it with your 2012 return.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
The 1099-G is used by states to report your state tax refund from the prior year. Therefore, if your prior year tax return indicated that you overpaid your state taxes by $100, you should have received a 1099-G in January, indicating that the state tax refund may need to be reported on your current year’s tax return.
This is called the Tax Benefit Rule. If you receive a deduction for something and later recover it, you must put it back into income. If you itemize deductions and take all of the state payments you made during the year as a deduction and you overpaid your state tax, you have technically taken too many deductions.
Example:
In April 2012, you had to pay the state $505 in taxes when you filed your 2011 tax return. During 2012, you had state tax of $3,546 withheld from your pay. On your 2012 tax return, you would be entitled to a deduction for state taxes paid during 2012 of $4,051.
The $3,546 is shown on your 2012 state tax return as taxes withheld. However, let’s assume your tax liability for 2012 is only $3,361. The 2012 tax return that you are preparing during 2013 should show that you are due a refund of $185. If all goes well with your state filing, you should receive a check for $185 sometime during 2013. That $185 was part of the $3,546 you had withheld during 2012 and took as a deduction on your federal return in 2012. Your “real” deduction should have only been $3,361 because you overpaid by $185.
However, you simply deduct all state taxes paid and withheld during the year. Tax return preparation is complicated enough—imagine if you had to keep going back and forth to Schedule A (Itemized Deductions) on your federal form 1040 to change it every time you played with your state return. That would be a nightmare!
Therefore, if you itemized your deductions last year, received a deduction for your state income taxes paid during that year and received a refund on your state return, the refund amount listed on the 1099-G you received from the state is usually entered on Line 10 of your Form 1040 as income.
However, if you did not itemize deductions, you did not receive a tax benefit from your state tax payments. Hence, the refund is not income and is not included on your Form 1040 this year.
Of course this all could change if you are subject to the alternative minimum tax.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
In my last blog post, I discussed whether your dependent children needed to file a tax return. I warned that unearned investment income in your child’s name is potentially subject to “Kiddie Tax.”
Kiddie Tax is actually not a tax at all. Instead, it is a limitation the IRS has put into place allowing a child under age 18 and full-time students under age 23 to have unearned income, such as, interest, dividends and capital gains, taxed at the child’s lower tax rate. Basically, some parents found that they could sometimes lower their income tax liability by shifting investment income to their child, since the child’s marginal tax bracket was lower than theirs. The Congress closed this loophole by enacting certain rules known as the kiddie tax.
The kiddie tax rules apply to those under age 18; those age 18 whose earned income doesn’t exceed one-half of their support, and children ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. For tax year 2012, the first $950 in unearned income a child receives is not subject to tax. Income of more than $950 and up to $1,900 is allowed to be taxed at the child’s tax rate—which is usually less than the parent’s income tax rate. When the child receives unearned income of more than $1,900, the amount over $1,900 must be taxed at the parent’s rate.
There are two ways to report this income. The first option is to prepare a return for your child. The Kiddie Tax would be computed using Form 8615. If this option is chosen, the child’s unearned income over $1,900 will be calculated at the parent’s tax rate. If the child’s parents file separately, the parent’s highest tax bracket will be used. The second option is for you to report your child’s income on your tax return using Form 8814. The first $1,900 is taxed at the child’s rate, but is not included in the parent’s taxable income. The amount over $1,900 is then taxed at the parent’s rate.
You should consider both possibilities to see the total tax effect for each, as well as consider the effect each situation would have on your tax breaks to maximize your tax credits and deductions.
If you report your child’s unearned income on your tax return, you will omit the hassle of filing a separate return for the child. However, the additional income reported on your return could accelerate the phase-out of itemized deductions because of Adjusted Gross Income (AGI), limitations. With AGI limitations, additional income could also phase out your ability to deduct your IRA contributions. Finally, this additional income could reduce the amount of credits available to you. The child’s income can be included on your tax return only if the child’s unearned income is in the form of interest or dividends. If your child has any capital gains or losses, the child would be required to file a separate tax return.
Reporting your child’s unearned income on his own tax return would not affect your AGI. Therefore, your child's unearned income would not affect your eligibility for certain credits and deductions.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
Let’s talk a little about the tax rules for children. A dependent child under the age of 19, as well as full-time students under the age of 24, must generally file a federal tax return for 2012 if the child has:
Your dependent child’s basic standard deduction is generally the greater of $950 or their earned income (up to the regular standard deduction of $5,950). No personal exemption is allowed on your child’s return if the child can be claimed as a dependent on your return.
Under certain circumstances, if your child is younger than 19 years old or under age 24 if a full-time student, you may elect to report your child’s income on your return. This election alleviates the need for your child to file a separate return. However, this election is available only if your child’s income is comprised entirely of interest and dividends; your child’s income is less than $9,500, and no estimated tax payments have been made in your child’s name and Social Security number. The downside to this election is the additional income increases your adjusted gross income, which could cost you the loss of tax credits and itemized deductions.
If your child’s investment income was more than $1,900 in 2012 and the child is required to file a tax return for the year, then part of your child’s investment income may be subject to tax at your income tax rate, thus, subject to “Kiddie Tax.”
Kiddie Tax is actually not a tax at all. Instead, it is a limitation the IRS has put into place allowing a child under age 18 to have unearned income taxed at the child’s lower tax rate. Next week, I’ll take a closer look at the “Kiddie Tax” and how it may affect your adjusted gross income.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
With the last-minute tax law changes, taxpayers who have always prepared their own returns are looking for outside help to ensure they receive all the benefits they are entitled to under the new laws. Additionally, once you have a relationship with a tax professional, he should be able to advise you how the new laws will affect your 2013 taxes.
Most tax preparers are professional, ethical and honest. When choosing someone to prepare and file your taxes, you should consider several factors. First, there are several types of preparers you should never consider. Among these are companies or preparers who claim they can get you a higher refund than others. Returns that are prepared honestly and competently will all result in you receiving the same refund. There is no secret formula to calculate a bigger refund.
Second, you should avoid any preparer who bases the fee charged on a percentage of the refund. This can lead to the “padding” of your expenses and the “shaving” of your income. While these can increase the refund you receive, the fee you pay the preparer is increased, resulting in a tax return that may be questionable at best. Remember you are legally responsible for the information contained in your tax return, not the preparer.
When choosing a tax professional, you should keep in mind reputation, credentials and stability. Ask your friends and associates who they use as their preparer, and if they are satisfied with the service they received. You should be comfortable entrusting your personal information with this person or company.
Tax preparers can have different titles based on their education and experience. They can be called a Certified Public Accountant (C.P.A.), an Enrolled Agent (E.A.), an Accredited Tax Preparer, a Licensed Public Accountant or a Tax Attorney. Only C.P.A.s, E.A.s and attorneys can represent taxpayers before the IRS in all matters. This representation includes audits, collection actions and appeals. Other types of preparers can represent you during an audit only. You should inquire about the preparer’s affiliation with professional tax organizations. These organizations provide tax preparers with ongoing education and resources and hold them to a code of ethics.
Unfortunately, the IRS does not respond instantly when problems occur with your return. Sometimes it is months, even years, before they question an entry in your return. When choosing a preparer, you need to consider whether that individual or their firm will be in business for the long run. The tax professional you choose should always sign the return and provide you with a copy for your records. They should make you aware of how to reach them should you have questions when the busy tax season is over.
Choosing a tax professional is an important decision and should be made carefully. Please keep these cautions and suggestions in mind when choosing someone to prepare your return(s).
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
If you’ve researched stocks, you’ve likely come across a section offering “Analyst Opinions” with either a numerical or alphabetical score. When you are using an outside source for an opinion on a stock, you should always check to see what the information being provided means. Most information providers define their ratings or rankings to make it somewhat clear as to what they represent.
For example, on Yahoo Finance, the “Analyst Opinion” is provided by a third-party source, Thomson Reuters. The Thomson rating is a numerical score from 1 to 5, with the lower score being the most favorable. The number actually reflects the average analyst opinion on the stock. Thus, if one of the analysts polled by Thomson rates the company a “Buy,” it receives a 1 rating from that analyst; a “Sell” opinion would garner a 5 rating. Once all opinions are made, the numerical average provides the rating you see in Yahoo Finance.
Paid rating services like Value Line provide a large amount of information, including a Safety Ranking and Financial Strength rating. For a specific stock, the Safety Ranking will be from 1 to 5, with 1 being the best rating (safest), while the Financial Strength rating ranges from A (best) down to C (worst). Financial Strength is a measure of the financial position of the company. Low debt or the ability to easily service its debt, high levels of working capital, and solid earnings potential, are the attributes of a financially strong company. The Safety Rating is derived from the Financial Strength and the stock’s price stability.
Morningstar.com is a good resource for mutual fund research, as is the fund’s own prospectus. Morningstar has a widely respected rating system by which the company rates mutual funds from one to five stars with, more stars meaning a more desirable investment fund. Again, the Morningstar website lays out the criteria for their ratings, but in a nutshell the rating measures funds against their style group peers —i.e., other funds that share the same investment objective or market capitalization—on the basis of returns and risk.
Lipper also provides a numerical rating on mutual funds as seen in the Wall Street Journal, MarketWatch.com and Barron’s. Their rating system is fairly simple with a range of 1 to 5 being assigned to funds on the basis consistency, preservation, tax efficiency and expense with an overall score. An overall Lipper score of five is best, but the rating system adds value by showing the additional ratings.
Overall, ratings for both stocks and mutual funds vary from one service to the next, as each will use various methods and emphasize different factors. When researching an investment, you may want to consult several, rather than relying on just one.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.
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