Money Talks Blog by william_lako
529 Plan Funds When Your Child Receives a Scholarship or Decides Not to Attend School
August 26, 2013 03:10 PM | 24181 views | 0 0 comments | 1219 1219 recommendations | email to a friend | print | permalink

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529 Plan Funds When Your Child Receives a Scholarship or Decides Not to Attend School
by william_lako
August 26, 2013 03:03 PM | 1087 views | 0 0 comments | 18 18 recommendations | email to a friend | print | permalink

Some of the many reasons parents like 529 college savings plans are their tax advantages and flexibility. The Path2College 529 Plan offered by the state of Georgia allows Georgia taxpayers to contribute and deduct up to $2,000 each year on behalf of any beneficiary regardless of their annual income. The funds can be used for qualified educational expenses at any accredited post-secondary school in the United States. Qualified educational expenses include tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance; certain room and board costs, and certain expenses for “special needs” students.

So, what happens when you’ve been saving for years and your child receives a scholarship or decides not to attend college? Because a 529 plan has flexibility, account owners have multiple choices. First, you may decide to leave the funds in the plan, as the funds can be used for both graduate and post-graduate schools, community colleges, and certain proprietary and vocational schools. The beneficiary may need the funds later in his academic career. There is an overall maximum account balance limit of $235,000 for all accounts opened for a beneficiary.

If the beneficiary of a plan receives a scholarship, you can withdraw contributions and earnings up to the scholarship amount without a penalty. This is referred to as a “taxable withdrawal,” as both federal and state taxes will be due on the earnings portion of the withdrawal.

If you prefer to avoid a taxable event, you can change the beneficiary to another family member without penalty. “Family member” is broadly defined to include anyone related to the beneficiary as a brother, sister, parent, grandparent, son, daughter, aunt, uncle, niece, nephew, immediate in-laws or spouse of any of these persons. Half-siblings, stepchildren and stepparents also qualify.

As a last resort, you can withdraw the money as an “unqualified withdrawal.” Because the funds will not be used for qualified higher education expenses, the withdrawal does not meet the qualifications for favorable tax treatment. Generally, you can withdraw your contributions without tax implications, if you did not receive a state tax deduction for the contributions. If you received a deduction for the contribution, a ratio is used to determine the taxable portion of the contribution that has been withdrawn. The earnings portion for unqualified withdrawals is subject to state income tax, federal income tax, and a 10% penalty.

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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Benefits of Financial Planning
by william_lako
July 08, 2013 09:04 AM | 1159 views | 0 0 comments | 17 17 recommendations | email to a friend | print | permalink

Midyear is a great time to assess your financial needs and set achievable goals for your financial future. One way to accomplish this is to develop a financial plan. Most people have similar goals: to be financially secure throughout their lifetime; to be able to retire when they want to, and to be able to send their children to college. Yet, emergencies and financial crises can divert us from working toward those desired ends. Financial planning is a process in which you determine what you want to achieve in life and how best to do it with the money you have and will earn.

Diligent financial planning can help you achieve your goals by taking into account all the varied financial aspects of a person's life: taxes, insurance, retirement, budgeting, estate planning and life goals. It looks at the various—and sometimes competing—aspects of life and develops strategies and objectives that make those parts work together efficiently. With a plan, you should be able to determine what is achievable based on your current lifestyle and what type of changes you might need to make in order to reach your goals.

Do You Need Financial Planning?

Everyone can benefit from financial planning regardless of whether you go at it alone or hire a professional. Identifying what you want to accomplish and creating a strategy to achieve it can greatly increase your chances of reaching that goal. Many people are under the misconception that financial planning requires substantial wealth and complex lifetime goals. Additionally, most people have their assets in various places such as their home and belongings, retirement plans, brokerage accounts, even real estate or businesses. It takes financial planning to pull it all together to make it work in the most efficient way possible. Ideally, any important financial decision you make should be done in the context of your overall financial needs and situation.

Most people react to events rather than design a plan for the distant future. Financial planning is proactive because it provides a way for you to gain control over your assets before you need them. For example, think about your own retirement. Nowadays, people live well past retirement age—chances are you will live at least 20 years after you retire. A higher education is commonplace now, rather than the exception. With the cost of college increasing between 5% and 7% per year and increasing health care costs, coupled with our increased longevity, it is possible that you will find yourself paying for your children's education at the same time as you need to be saving for your own retirement.

How Can Financial Planning Benefit Me?

A financial plan should give you a clear picture of where you stand financially and can develop an improved awareness of financial choices. It can provide discipline and direction for how you spend your money so you will be less likely to purchase investments on impulse or follow advice that was not designed specifically for you. By going through the financial planning process, you and your family can establish measurable goals that can be compared to actual results.

It is important to understand a financial plan is not an absolute guarantee of a successful financial future. However, the more you plan, the better you should become at easing the anxiety that financial uncertainty can create.

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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Automatic Enrollment in Your Company’s Retirement Plan
by william_lako
June 13, 2013 01:29 PM | 1106 views | 0 0 comments | 23 23 recommendations | email to a friend | print | permalink

To encourage the participation in 401(k) plans and increase retirement security, employers are allowed to automatically enroll their employees into a 401(k) retirement plan when the employee meets the plan’s eligibility requirements.  If the employees do not want to participate in the 401(k), they will have to opt-out of the program.

While auto-enrollment is certainly easier than completing forms, you shouldn’t assume what you’re saving is enough for you to meet your retirement goals. Many plans start auto-enrolled participants at a 3% of compensation deferral rate. This deferral rate is outlined in the plan’s documents.

You do not have to stay with the default contribution percentage. A majority of plans have secure web portals that allow employees to log in at their convenience to make changes to their account. Your plan’s rules determine how frequently you can adjust your deferrals. However, you can change your deferral to zero at any time.

You should read the summary plan description to determine if your company offers matching contributions. It is generally a good move to increase your contributions to meet the employer match, as this is essentially free money the company is giving you. You should revisit your contribution amount as your salary increases. Your cash flow should allow you to contribute more to your plan.

Plans that have an auto-enrollment feature also have a qualified default investment alternative, which is the default investment choice for participants who do fail to make investment decisions. Often these are target date or balanced funds that offer capital appreciation. Depending on your investment time horizon and your risk tolerance, you may want to redirect some of your investment toward more aggressive or conservative options.

Your company is required to provide you information and disclosures about your investment options, which you should read carefully before investing. You may also inquire with your employer about education meetings provided by the plan’s service providers.

Even if you are automatically enrolled and you choose to keep the default investment choice, remember that 401(k) plans are not a “set and forget” investment. You should review your investment options at least once a year to make sure they are still appropriate for your age, risk tolerance and financial goals.

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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Negotiating Your Financial Aid
by william_lako
June 04, 2013 03:49 PM | 1098 views | 0 0 comments | 26 26 recommendations | email to a friend | print | permalink

It’s that time of year when financial aid award packages will be arriving. Financial aid packages may include grants, scholarships or loans, and the award may come from schools, private foundations or the government.

Like many other financial transactions, you may wonder if your financial aid package is negotiable. The answer is “it depends.” Some schools do not negotiate at all, while others follow a strict set of policies when they consider modifications.

Generally, your award letter has instructions for how to appeal your package with the school’s financial aid administrator. A school’s financial aid administrator has the authority to exercise “professional judgment” and make adjustments when there are financial circumstances that set apart your family from others.

If your circumstances have changed since completing the Free Application for Federal Student Aid (FAFSA), such as, a job loss, death of a wage earner, unreimbursed medical bills, or long-term care costs for an elderly relative, it may be beneficial for you to contact the school’s financial aid administrator to see if they can reduce the loan component of your child's aid package and/or increase the scholarship, grant, or work-study component. You may also ask if there are any new scholarships or grants available for your student.

If your child has been accepted to two colleges that are direct competitors, you may be able to ask if your preferred school will match the other school’s financial aid package. This may be a matter of the second school’s receiving more accurate information on your financial situation. You may be able to better explain your financial situation than you did on the FAFSA. However, with no shortage of students, you will not likely see a bidding war for your attendance.

A desperate plea of an inability to pay will likely garner no sympathy no matter how heartfelt. Unfortunately, most families can take on debt to pay for college. The financial aid administrator’s analysis is based on ability to pay—not willingness to pay. 

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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Interviewing Financial Planners
by william_lako
May 14, 2013 11:04 AM | 1154 views | 0 0 comments | 29 29 recommendations | email to a friend | print | permalink
When you are looking for a financial planner, you ultimately want to choose someone with whom you feel comfortable discussing your finances. Ideally, you should interview multiple planners or firms, and ask each of them to outline the services they offer; their education, experience and specialties and their methods of communicating with clients. Some relevant questions, such as the following, can provide insight on how the planner or his firm may approach planning for your financial goals.

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:  

  • How do you determine how much of my money should be in stocks versus bonds?
  • How do you determine how much money I can safely withdraw each year without depleting my assets?
  • What do you think of annuities?

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.

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The Education Behind the Designations
by william_lako
April 26, 2013 02:47 PM | 1121 views | 0 0 comments | 27 27 recommendations | email to a friend | print | permalink

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.

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He’s Your Guy When Stocks are High
by william_lako
April 19, 2013 03:32 PM | 1592 views | 0 0 comments | 23 23 recommendations | email to a friend | print | permalink
When it comes to your investments, do you “have a guy?” Sure, your investments soared during the tech boom, and fell during the Great Recession. Everyone's “guy” is a financial planner, a financial adviser or a financial consultant. The distinction has been blurred by fancy titles or neatly packaged services and products. Nowadays, investors must read the fine print of the contracts to know what type of “guy” they are working with.

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.

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Narrow Window Left to Make 2012 IRA Contributions
by william_lako
April 01, 2013 04:04 PM | 1260 views | 1 1 comments | 25 25 recommendations | email to a friend | print | permalink

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.

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Much Better
|
April 05, 2013
While this is just a list of facts, it's much better than the awful fortune cookie "advice" coming from that guy you were printing from Kennesaw College.

My only question is, how did Mr. Lako know what the 2012 tax rules would be back when he wrote this on December 31, 1969 at 7:00 PM?

Retirement Savings Contributions Credit
by william_lako
March 22, 2013 08:34 AM | 1292 views | 0 0 comments | 24 24 recommendations | email to a friend | print | permalink
If you contributed to an IRA, a 401(k) plan or certain other retirement plans this past year, you may be eligible for a tax credit to help offset the cost of these contributions. In order to qualify, you must be at least 18 years old, not a full-time student, and not be claimed as a dependent on someone else's return. If you meet these criteria and made contributions to your retirement savings in 2012, you may be entitled to the Retirement Savings Contribution Credit. This tax credit was designed to encourage low- and modest-income individuals to save for their retirement.

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:

Married Filing Jointly

Income:

Head of Household

Income:

Others

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.

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Why Do I Have To Report My State Tax Refund As Income?
by william_lako
March 15, 2013 09:53 AM | 1570 views | 0 0 comments | 26 26 recommendations | email to a friend | print | permalink

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.

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