Archives for October 19, 2018

You may think hiring a financial planner is necessary only if you’re Scrooge McDuck. After all, professional money advice comes at a cost — and not exactly a small one.

It varies depending on your net worth, but the average fee for holistic financial planning services is about 1% of assets under management.

That may not sound like much, but if you have a limited investment portfolio, you may wonder if it’s worth it. Every cent counts, and that’s 1% that won’t be working for you, growing via the magic of compound interest. You have a good head on your shoulders. Why fix what isn’t broken?

But even if you don’t have a ton of dough, hiring a financial professional can make managing what you do have easier — and possibly increase your returns. Advisors can help you steer clear of not-so-savvy market behaviors and help you with asset allocation and reallocation. They can also save you time and stress, especially if your monetary road map just got more complicated. Major life changes such a career switch, retirement, or a new business venture can leave even a seasoned investor reeling. Financial planners know the ins, outs, and loopholes that can help you make the most of your money and avoid the mistakes that are so easy to make during transitional periods.

Hiring a financial planner? Here’s how to do it right

Of course, it’s up to you whether or not those insights and savings are worth the investment. But if you are going to hire a financial planner, here are some things to keep in mind.

First, “financial advisor” could mean anything, so shop around. Stockbrokers, tax preparers, investment planners, and even bankers can all fall under its umbrella.

Since darn near anyone with even a tangential background in finance can put out a shingle that says “advisor,” it’s a good idea to seek out some more specific qualifications. For example, a Certified Financial Planner is required to pass comprehensive exams on topics such as taxes, estate planning, and retirement.

From registered representatives to CFAs, there are plenty of other alphabet-soup honorifics out there to choose from. Investigate all your options ahead of time to find out which kind of financial professional is right for your needs.

Second, get clear on how you’ll be paying ahead of time. Financial planners bill for their services in all sorts of ways, and you want to be sure you’re clear on what you’re paying for — and how — before you sign any paperwork. A “fee-only” advisor is paid based on their time or as a percentage of the assets under management, rather than making commissions on selling financial products. And that’s an important distinction! It’s way too easy to accidentally hire brokers or insurance salespeople who are more interested in selling you a product than creating a comprehensive, individualized strategy that suits your needs.

That’s why looking for the words “fee-only” is a relatively surefire shortcut to success. The vast majority of fee-only advisors bear fiduciary responsibility — meaning they’re required by law to act in their clients’ best interests. (By the way, “fee-only” and “fee-based” are not the same thing, confusingly enough. You want the first one.)

Not ready to hire a professional? There are plenty of DIY options

If your budget is tight or you’re still working on paying down debt, there are plenty of ways to invest in your future without shelling out for professional advice. Start by contributing to your 401(k) or stashing even $50 per paycheck into your IRA, for example.

Thanks to simple apps such as Acorns and Stash, you can even start investing with as little as $5, using only your smartphone.

No matter how you do it, just be sure you’re planning for your financial future in some capacity. Almost half of Americans aren’t.

OPEN ENROLLMENT SEASON is here. Whether you select your health insurance through an employer, Medicare or a government exchange, October and November are when most Americans have the opportunity to switch plans.

While shopping for health insurance can seem overwhelming, breaking down the process can help make it easier. “If people take a step back and go through a checklist, what appears to be daunting can be simplified,” says Fran Soistman, executive vice president and head of government services for the health insurer Aetna.

With that in mind, here are seven items to consider as you compare health insurance plans this fall.

Premiums. “It’s very understandable for people to zero in on the premium,” says Julie Stich, associate vice president of content for the International Foundation of Employee Benefit Plans. Since premiums are the amount of money you’ll pay every month for coverage, they are the most obvious expense associated with health insurance.

While it’s important to find insurance that fits your budget, the cheapest plan may not be the best. Low premiums can mean higher deductibles or a restricted network. Instead of buying based on premiums alone, the monthly cost should be just one criteria you consider when selecting a plan.

Out-of-pocket expenses. Most health insurance plans come with several out-of-pockets costs. The deductible is the amount you’ll pay upfront before insurance coverage begins. Some preventive care services, such as immunizations and certain cancer screenings, can be exempt from deductibles, thanks to the Affordable Care Act.

Health insurance policies may also charge copayments and coinsurance once a deductible is met. A copayment is a flat fee for a particular service, such as a $30 charge for doctor visits. Coinsurance is a percentage of the total cost of care. One of the most common types of coinsurance found in health insurance policies is an 80/20 split. This requires patients to pay for 20 percent of the bill while the policy covers the other 80 percent.

These out-of-pocket costs can sometimes be difficult to decipher. “A financial planner is going to be able to help you navigate the fine print,” says Allison Brill, vice president and wealth strategist at the financial firm PNC Wealth Management. If you don’t have an advisor, talk to your human resources office if you’re buying through an employer, or contact the insurer directly with any questions you have.

Prescription drug coverage. It’s not enough to know your plan has prescription drug coverage. It’s also important to know that your specific prescriptions will be covered. Many insurers use formularies, or lists of covered drugs, that categorize prescriptions into tiers. Generics may have a low copay, while brand name drugs cost more. And keep in mind, some insurers may require patients to try lower-tier drugs first or get prior authorization before the plan will pay for expensive medications. Adderall for attention deficit hyperactivity disorder and Humulin for diabetes are two examples of drugs that may require prior authorization.

Health savings account eligibility. A health savings account, often called an HSA, can be a valuable financial tool. In 2019, singles can make up to $3,500 in tax-deductible contributions to an HSA. Those with a family plan can contribute up $7,000 tax-free. People age 55 and older are entitled to make an additional $1,000 in catch-up contributions.

Only those with a qualified high-deductible health insurance plan are eligible to contribute to an HSA. For 2019, qualified plans are those with minimum deductibles of $1,350 and maximum out-of-pocket costs of $6,750 for coverage for a single person. Family plans must have a minimum deductible of $2,700 and maximum out-of-pocket costs of $13,500.

A high-deductible health insurance plan isn’t right for everyone. While their low premiums can make them an attractive choice, they are typically best for those who are healthy and expect to have minimal health care needs. If you do opt for a high-deductible plan, look for one that is HSA eligible so you can pay your out-of-pocket costs with tax-free dollars.

Networks. Gone are the days when health insurance policies let you go to whichever doctor you prefer. Now, most policies have networks of participating providers. Using a physician or facility outside the network could result in higher copayments or even a denied claim.

Before switching health plans, ensure your preferred doctors will be covered. Since networks can change each year, it’s smart to double-check the physician list before re-enrolling in your current plan as well. “It’s really one of the most important things,” Stich says.

People should also consider the type of policy that will be best for their situation, Soistman says. “If they’re going to be traveling a lot, they may be better off looking at a PPO (preferred provider organization) option instead of an HMO (health maintenance organization),” he explains. HMOs may have more limited networks and require all care be coordinated by a primary care physician, while PPOs may provide greater freedom to pursue care without a referral.

Available perks and benefits. Many health insurance plans offer complementary resources to their members. These are most often wellness programs that help promote good health or tools to make it easy to manage benefits.

For instance, Aetna gives members of certain Medicare Advantage plans a free gym membership through the SilverSneakers program. The company also offers Resources for Living services, which connect people to community resources such as rides to doctor appointments, free counseling sessions and legal consultations. Other insurers, such as Priority Health in Michigan, have robust online portals that allow members to track claims, make doctor’s appointments and connect with health care professionals via video chats at any time, day or night.

These perks can help sweeten the deal on insurance, but Brill says people should be wary of overpaying for a policy with services they don’t need.

Your claims history and future expectations. Knowing a plan’s deductibles and network details is most helpful when viewed in the context of your health history. Stich says people should look at their claims from the previous year for guidance on the upcoming year’s enrollment. She recommends people review whether they met their deductible, which prescriptions they filled and which specialists they saw. Then, consider whether you expect the upcoming year will be similar. If you’re anticipating life events such as marriage, the addition of a baby or a major surgery, you’ll want to ensure your insurance will provide adequate coverage for costs associated with these events.

Most workers spend a lot of time thinking about themselves. That makes sense given that in most companies, whether you are promoted, get a raise, or otherwise get ahead, it requires taking an active interest in promoting yourself.

Just worrying about you, however, ignores a vital part of the work experience: your co-workers. In many cases, the difference between liking and hating a job comes down to the people you work with. If you nurture and build those relationships, your work experience will be better. And that might help you with some of the matters of self-interest mentioned above.

Be considerate about how your actions impact your fellow workers.

1. Be thoughtful

Think about the things that have negatively impacted you, and try to make sure nobody else faces the same fate. That might mean helping a new person get comfortable or inviting someone to dinner on a work trip. It could even be as simple as helping someone learn the secrets of the communal coffee pot or which bathroom is the clean one.

2. Be the person who helps

It can be uncomfortable when someone asks for help (or needs it and doesn’t ask) and nobody steps in. Don’t wait to be asked. Be the person who pitches in and lends a helping hand simply because you see someone in need.

3. Do the unexpected

Know the mood in your office. When it’s less than positive, do something to change that. Bring in doughnuts, organize a work lunch, or do something else to cheer people up. Try to surprise people with kindness and be a source of positive energy even when times are difficult.

4. Share credit

People rarely see their part in a project as minor even when it actually was. Don’t think much about who did what. Celebrate wins as a team and share credit liberally. Say “thank you” often, and when the spotlight shines on you, make sure you redirect it to the people who helped you achieve success.

Think about more than yourself

The most important aspect of being a good co-worker is remembering that the world does not revolve around you. Make an active effort to think about how your actions not only impact other people but how they might make their lives better (or worse). Be thoughtful and mindful and remember that your actions impact other people. It’s easy to be a good co-worker. It just takes a bit of vigilance and a dose of compassion.

WHEN IT COMES TO inheritance, it’s typically more gratifying to think about how to spend the newfound money than what the tax consequences might be. But earning a payout from a deceased relative comes with its own complicated tax repercussions. And spending the gifted money too quickly or thoughtlessly could result in an unexpectedly high tax bill.

So how can heirs ensure that they’re thinking about taxes when benefiting from an inheritance? Here’s what to know about tax-savvy ways to manage inherited wealth.

Inheriting IRAs or 401(k)s. If a deceased relative, spouse or friend passes along an individual retirement account or employer retirement savings account, it’s important to note how it will be taxed.

Your options for the account depend on your relationship to the deceased person. A spouse may be able to roll the funds into their own account, an option other beneficiaries don’t have. Alternatively, a spouse can open an Inherited or Beneficiary IRA account, which carries both partners’ names and from which a young spouse can withdraw funds without triggering the 10 percent early withdrawal penalty.

Heirs who are not the spouse of the benefactor – for example, a child, nephew, niece or grandchild – don’t have the option to place the money into their own retirement account but can hold it in an Inherited IRA account.

Once they decide how to house the money, the speed with which spouses and other heirs decide to withdraw the funds can have big tax implications. If they decide to take out all the money in a lump sum, they may get hit with a “double whammy” tax bill, says Tatyana Bunich, founder and president of Financial 1 Wealth Management Group in Columbia, Maryland. Here’s why: For a traditional IRA, the lump sum would be treated as taxable income – beneficiaries could pay about 40 percent in taxes if they live in a state that charges income tax – plus it could push them into a higher tax bracket, causing them to pay more taxes on regular income.

If you need the money right away, this may be your only option. But Bunich advises setting aside at least 40 percent of that lump sum, if it’s a large payout and you live in a state with income taxes, for your tax bill, so you don’t end up unable to pay your taxes the following April.

The more tax-savvy move for heirs to make would be to spread out the distributions over their lifetime instead of taking a lump sum. This strategy is sometimes referred to as a “stretch IRA” because it allows investors to stretch out the time during which earnings can grow.

While the exact rules for how beneficiaries manage Inherited IRAs will be determined by whether the deceased person was older than 70 1/2 at the time of death, generally heirs who want to keep their tax bill as low possible must take required minimum distributions, commonly called RMDs, based on their life expectancy within about a year of inheriting the account. They won’t be hit with the 10 percent early withdrawal penalty, but they’ll be taxed on the amount withdrawn. Still, the required distributions will generally be smaller than a lump sum and less likely to knock them into a higher tax bracket.

It’s important that recipients who want to take minimum distributions take the first one before the required date or they risk being forced to liquidate the account within five years, says Chris D. Hardy, a certified financial planner, enrolled agent and director of planning and investments at Paramount Investment Advisors in Suwanee, Georgia.

Keep in mind that inherited Roth IRAs have already been taxed and do not carry the same tax burden. But don’t let that convince you to immediately withdraw a lump sum. “A lot of folks think, ‘There’s no taxes on it at all, so I’m going to pull the whole thing out,'” Hardy says. “At the end of the day, as long as you take RMDs out, funds can stay in account and grow tax-free.”

Inheriting stocks or mutual funds. A relative may choose to pass on investments that were housed outside of a retirement account, such as individual stocks or mutual funds.

The key to reducing any taxes on the sale of these investments is to remember what’s called a “step-up basis,” experts say. “When your benefactor dies, no matter what they paid for that stock or mutual fund, the cost basis ‘steps up’ to whatever the price of that stock or fund was at the date of death,” says Dennis Nolte, certified financial planner and vice president at Seacoast Investment Services in Winter Park, Florida.

So, say, your grandfather purchased Disney stock for $5 per share, and when he dies, it’s worth $100. The heir’s basis is what the value was when Grandpa died, not the price at which Grandpa bought the stock decades earlier.

That can make an important difference when it comes to how heirs calculate and pay capital gains taxes upon the sale of an asset.

Take note that these assets may have to go through probate, Bunich says. Probate is a legal process and the way an estate is settled. Assets such as mutual funds and houses that do not have a beneficiary designated may go through probate, Bunich says. “It is a very time-consuming, costly process that can only be avoided if proper planning was done in advance,” she says. “At that point, there’s nothing [to do] but work with a good attorney.”

Inheriting a house. Like with stocks and mutual funds, an inherited house enjoys a step-up basis, meaning that, for tax purposes, the cost basis is what the market value was when benefactor died.

Experts recommend getting the home appraised soon after the benefactor’s death in order to gain an understanding of what the basis is now. If it’s not being passed along to a spouse, an inherited house will typically have to go through probate, Bunich says.

Inheriting life insurance. Good news for heirs on this one. “Life insurance is kind of awesome because it’s tax-free,” Bunich says. But remember, Nolte says, that just because it’s tax-free doesn’t mean you shouldn’t do good financial planning when deciding where to stash the life insurance payout, how to spend it and where to invest it.

Inheriting cash. A cash inheritance is not taxable at the federal level, Bunich says.

In general, receiving an inheritance may ultimately be the life change that causes you to finally start seeing a financial advisor, tax planner or estate planning attorney. Getting strong advice could help you use the money most effectively and avoid a large tax bill.

Find somebody who will take a more advisory and educational role, not someone who’s there to sell you products, Hardy says. And remember that receiving an inheritance can transform your financial life for the better if you manage it wisely. “It’s a great time for somebody to hit the pause button to say, ‘I need to know what my goals and objectives are,” Hardy says. “It’s just a really good time to take a deep breath, sit back and dream and see what the money can do.”