What You Must Know About the Tax Return Deadline

March 31, 2024 — Sam H. Fawaz

It’s that time of year, folks, and I wish I were talking about spring. The federal income tax filing deadline for individuals is fast approaching—generally Monday, April 15, 2024. For taxpayers living in Maine or Massachusetts, you get a couple of extra days to procrastinate—your deadline is April 17, 2024.

The IRS has also postponed the deadline for certain disaster-area taxpayers to file federal income tax returns and make tax payments. The current list of eligible localities and other details for each disaster are always available on the IRS website’s Tax Relief in Disaster Situations page. Interest and penalties are suspended until the postponed deadline for affected taxpayers.

If I refer to the April 15 deadline in this article, you can assume I also mean any other postponed original deadline that applies to you.

Need More Time?

If you cannot file your federal income tax return by the April (or other) due date, you can file for an extension by the April 15 due date using IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Most software packages can electronically file this form for you and, if necessary, remit a payment.

Filing this extension gives you until October 15, 2024, to file your federal income tax return. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your extension is denied and explain the reason(s). There are no allowable extensions beyond October 15 unless extended by law, or you’re affected by a federally declared disaster area.

Assuming you owe a payment on April 15, you can file for an automatic extension electronically without filing Form 4868. Suppose you make an extension payment electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) by April 15. In that case, no extension form has to be filed (see Pay What You Owe below for more information).

An extension of time to file your 2023 calendar year income tax return also extends the time to file Form 709, “Gift and generation-skipping transfer (GST) tax returns” for 2023.

Special rules apply if you’re a U.S. citizen or resident living outside the country or serving in the military outside the country on the regular due date of your federal income tax return. If so, you’re allowed two extra months to file your return and pay any amount due without requesting an extension. Interest, currently at 8% (but not penalties), will still be charged on payments made after the regular due date without regard to the extended due date.

You can pay the tax and file your return or Form 4868 for additional filing time by June 17, 2024. If you request an extension because you were out of the country, check the box on line 8 of the form.

If you file for an extension, you can file your tax return any time before the extension expires. And there’s no need to attach a copy of Form 4868 to your filed income tax return.

Tip #1: By statute, certain federal elections must be made with a timely filed return or extension and cannot be made after the original due date has passed. For example, if you’re a trader and want to elect trader tax status for the current tax year (2024), it must be made by April 15, 2024, with your timely filed return or attached to your extension. Once April 15 has passed, you are barred from making the election until the following tax year. Some elections may be permanently barred after the regular due date, so check with your tax advisor to see if you need a timely filed election with your return or extension.

Tip #2: For proof of a timely snail-mailed extension, especially for those with a relatively large payment, be sure to mail it by certified mail, return receipt requested (always request proof of delivery regardless of the method of transportation.)

Caveat: Generally, the IRS has three years from the original due date of your return to examine it and assess additional taxes (six years if fraud is suspected). If you extend your return, the three (or six) year “clock” does not start ticking until you file it, so essentially, by extending your return, you are extending the statute of limitations. But contrary to popular belief, requesting an extension does NOT increase your odds of an examination.

Pay What You Owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if possible. If you cannot pay what you owe, file the return (or extension) and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time. You may be able to work with the IRS to pay the unpaid balance via an installment payment agreement (interest applies.)

It’s important to understand that filing for an automatic extension to file your return does not provide additional time to pay your taxes. When you file for an extension, you must estimate the amount of tax you will owe; you should pay this amount (or as much as you can) by the April 15 (or other) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension, potentially causing you to owe failure to file penalties and late payment penalties as well.

There are several alternative ways to pay your taxes besides via check. You can pay online directly from your bank account using Direct Pay or EFTPS, a digital wallet such as Click to Pay, PayPal, Venmo, or cash using a debit or credit card (additional processing fees may apply). You can also pay by phone using the EFTPS or debit or credit card. For more information, go to Make a Payment.

Tax Refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if 1) the return is filed electronically, 2) the tax refund is delivered via direct deposit, and 3) there are no issues with the tax return. To help minimize delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

To check on your federal income tax refund status, wait five business days after electronic filing and go to the IRS page: Where’s My Refund? Your state may provide a similar page to look up state refund status.

State and Local Income Tax Returns

Most states and localities have the same April 15 deadline and will conform with postponed federal deadlines due to federally declared disasters or legal holidays. Accordingly, most states and localities will accept your federal extension automatically (to extend your state return) without filing any state extension forms, assuming you don’t owe a balance on the regular due date. Otherwise, your state or locality may have its own extension form you can use to send in with your payment. Most states also now accept electronic payments online instead of a filed extension form with payment. Never assume that a federal extension will extend your state return; some do not. Always check to be sure.

Tip: If you want to cover all your bases, if your federal extension is lost or invalidated for any reason, you may want to file a state paper or online extension to extend the return correctly. It rarely happens, but sometimes, it is better to be safe than sorry.

IRA Contributions

Contributions to an individual retirement account (IRA) for 2023 can be made up to the April 15 due date for filing the 2023 federal income tax return (this deadline cannot be extended except by statute). However, certain disaster-area taxpayers granted relief may have additional time to contribute.

If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

Even if your traditional IRA contribution is not deductible, and you are ineligible for a Roth IRA contribution (because of income limitations), the investment income generated by the contribution becomes tax-deferred, possibly for years, and the contribution builds cost basis in your IRA, making future distributions a little less taxing.

If you make a nondeductible contribution to a traditional IRA and shortly after that convert that contribution to a Roth IRA, you can get around the income limitation of making Roth contributions. This is sometimes called a backdoor Roth IRA. Remember, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. If your traditional IRA balance before the non-deductible contribution is zero, then you’ll owe no tax on the conversion, and voila! You have just made a legal Roth IRA contribution.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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New Retirement Options Starting in 2024

January 31, 2024 — Sam H. Fawaz

The SECURE 2.0 Act, passed in December 2022, made wide-ranging changes to U.S. tax laws related to retirement savings. While some provisions were effective in 2023, others did not take effect until 2024. Here is an overview of some important changes for this year:

Matching student loan payments

Employees who make student loan repayments may receive matching employer contributions to a workplace retirement plan as if the repayments were employee contributions to the plan. This applies to 401(k), 403(b), and government 457(b) plans and SIMPLE IRAs. Employers are not required to make matching contributions in any situation, but this provision allows them to offer student loan repayment matching as an additional benefit to help address the fact that people paying off student loans may struggle to save for retirement.

New early withdrawal exceptions

Withdrawals before age 59½ from tax-deferred accounts, such as IRAs and 401(k) plans, may be subject to a 10% early distribution penalty on top of ordinary income tax. There is a long list of exceptions to this penalty, including two new ones for 2024.

Emergency expenses — one penalty-free distribution of up to $1,000 is allowed in a calendar year for personal or family emergency expenses; no further emergency distributions are allowed during a three-year period unless funds are repaid or new contributions are made that are at least equal to the withdrawal.

Domestic abuse — a penalty-free withdrawal equal to the lesser of $10,000 (indexed for inflation) or 50% of the account value is allowed for an account holder who certifies that he or she has been the victim of domestic abuse during the preceding one-year period.

Emergency savings accounts

Employers can create an emergency savings account linked to a workplace retirement plan for non-highly compensated employees.  Employee contributions are after-tax and can be no more than 3% of salary, up to an account cap of $2,500  (or lower as set by the employer). Employers can match contributions up to the cap, but any matching funds go into the employee’s workplace retirement account.

Clarification for RMD ages

SECURE 2.0 raised the initial age for required minimum distributions (RMDs) from traditional IRAs and most workplace plans from 72 to 73 beginning in 2023 and 75 beginning in 2033. However, the language of the law was confusing. Congress has clarified that age 73 initial RMDs apply to those born from 1951 to 1959, and age 75 applies to those born in 1960 or later. This clarification will be made official in a law correcting a number of technical errors, expected to be passed in early 2024.

No more RMDs from Roth workplace accounts

Under previous law, RMDs did not apply to original owners of Roth IRAs, but they were required from designated Roth accounts in workplace retirement plans. This requirement will be eliminated beginning in 2024.

Transfers from a 529 college savings account to a Roth IRA

Beneficiaries of 529 college savings accounts are sometimes “stuck” with excess funds that they did not use for qualified education expenses. Beginning in 2024, a beneficiary can execute a direct trustee-to-trustee transfer from any 529 account in the beneficiary’s name to a Roth IRA, up to a lifetime limit of $35,000. The 529 account must have been open for more than 15 years. These transfers are subject to Roth IRA annual contribution limits, requiring multiple transfers to use the $35,000 limit. The IRS is still working on specific guidance on this law change, so it might pay to wait a few months before making this type of transfer.

Increased limits for SIMPLE plans

Employers with SIMPLE IRA or SIMPLE 401(k) plans can now make additional nonelective contributions up to the lesser of $5,000 or 10% of an employee’s compensation, provided the contributions are made to each eligible employee in a uniform manner. The limits for elective deferrals and catch-up contributions, which are $16,000 and $3,500, respectively, in 2024, may be increased by an additional 10% for a plan offered by an employer with no more than 25 employees. An employer with 26 to 100 employees may allow higher limits if it provides either a 4% match or a 3% nonelective contribution.

Inflation indexing for QCDs

Qualified charitable distributions (QCDs) allow a taxpayer who is age 70½ or older to distribute up to $100,000 annually from a traditional IRA to a qualified public charity. Such a distribution is not taxable and can be used in lieu of all or part of an RMD. Beginning in 2024, the QCD amount is indexed for inflation, and the 2024 limit is $105,000.

SECURE 2.0 created an opportunity (effective 2023) to use up to $50,000 of one year’s QCD (i.e., one time only) to fund a charitable gift annuity or charitable remainder trust. This amount is also indexed to inflation beginning in 2024, and the limit is $53,000.

Catch-up contributions: indexing, delay, and correction

Beginning in 2024, the limit for catch-up contributions to an IRA for people ages 50 and older will be indexed to inflation, which could provide additional saving opportunities in future years. However, the limit did not change for 2024 and remains $1,000. (The catch-up contribution limit for 401(k)s and similar employer plans was already indexed and is $7,500 in 2024.)

The SECURE 2.0 Act includes a provision — originally effective in 2024 — requiring that catch-up contributions to workplace plans for employees earning more than $145,000 annually must be made on a Roth basis. In August 2023, the IRS announced a two-year “administrative transition period” that effectively delays this provision until 2026. In the same announcement, the IRS affirmed that catch-up contributions in general will be allowed in 2024, despite a change related to this provision that could be interpreted to disallow such contributions. The error will be corrected in the 2024 technical legislation.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Trading Places: Baby Boomers More Aggressive Than Millennials in Retirement Goals

November 6, 2014 — Sam H. Fawaz

Popular investing wisdom states that the younger you are, the more time you have to ride out market cycles and therefore the more aggressive and growth-oriented you can be in your investment choices. But that is not how individuals surveyed recently are thinking or behaving with regard to their retirement investments.

In fact, the new study sponsored by MFS Investment Management suggests that Baby Boomers take a more aggressive approach to retirement investing than the much younger Millennials — those who are 18 to 33 years old. Further, each group’s selected asset allocation is inconsistent with what financial professionals would consider to be their target asset allocation, given their age and investment time horizon.

For example, Baby Boomers, on average, reported holding retirement portfolio asset allocations of 40% equities, 14% bonds, and 21% cash, while Millennials allocated less than 30% of their retirement assets to equities, and had larger allocations to bonds and cash than their much older counterparts — 17% and 23% respectively.

Further, when asked about their retirement savings priorities, 32% of Baby Boomers cited “maximizing growth” as the most important objective, while two-thirds of Millennials cited conservative objectives for their retirement assets — specifically, 31% said “generating income” was a top concern and 29% cited “protecting capital” as their main retirement savings goal.

Perception Is Reality

The study’s sponsors infer that the seemingly out-of-synch responses from survey participants reflect each group’s reactions — and perhaps overreactions — to the recent financial crisis. For Baby Boomers, the loss of retirement assets brought on by the Great Recession has made them more aggressive in their attempts to earn back what they lost. Fully half of this group reported being concerned about being able to retire when they originally planned. For Millennials, the Great Recession was a wake-up call that investing presents real risks — and their approach is to take steps to avoid falling foul to that risk even though they have decades of investing ahead of them.

Educating Investors: An Opportunity for Advisors

The study’s findings suggest that there is a considerable opportunity for advisors to dispel fears and misperceptions by educating investors of all ages about the importance of creating and maintaining an asset allocation and retirement planning philosophy that is appropriate for their investor profile.

If you have any questions or concerns about asset allocation, retirement and financial planning or investment management, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

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Towards Better Social Security Income Planning

October 4, 2014 — Sam H. Fawaz

As you approach your social security retirement age, your thoughts turn to deciding when you should begin receiving social security benefits. With over 2,700 rules in the social security manual, you’d be forgiven (and, for that matter, so would most social security case workers) for being bewildered and confused about all of the options available to claim social security. In this article, I attempt to distill the most frequently asked questions and help reduce confusion about claiming social security benefits (SSB).

The crux of this article is to discuss the advantages of planning the payout of your (or your spouse’s) benefits to maximize your ultimate financial payoff. Coordinating your benefits with your spouse’s benefits introduces complexities that must be understood to maximize your overall benefits. Combined with the ability to file for benefits, then suspend them or filing for benefits using your ex-spouse’s earnings records, planning for social security benefits can be quite complex.

I realize that, as a financial planner, it’s somewhat self-serving to say that each person’s situation is unique and requires a personalized and thorough analysis of the facts and circumstances to determine the optimal timeframe to claim SSB. Nonetheless, no article, however detailed, can take into account all individual situations.

Note that this article doesn’t attempt to discuss the viability of the social security system or whether benefits will be available in the future (I believe that they will be, perhaps on a somewhat reduced basis).

Social Security Basics

In general, if you’ve worked and sufficiently paid into the social security system for at least 40 quarters of work in your lifetime, you probably have some SSB coming to you when you retire. Calculation of the level of your benefit is quite complicated, but mostly affected by your lifetime earnings.

Even if you’ve never worked a day in your life, your spouse’s (or ex-spouse’s) earnings and qualifications may be your “ticket” to qualify for benefits. If you’ve earned little money in your lifetime (as is the case for a stay-at-home spouse), you can often qualify for a much higher benefit if you file based on your spouse’s (or ex-spouse’s) earnings.

There are three dates in which to begin drawing social security: early retirement age (ERA), full retirement age (FRA) and deferred retirement age (DRA), each one being a later date in life than the previous. Your ERA and FRA vary depending on your birthday, and are generally higher for younger retirees (for anyone born after 1959, their FRA is 67).  For general discussion purposes, let’s assume that age 62, 67, and 70 are the ERA, FRA, and DRA respectively.

Deferring the date that you begin receiving benefits obviously means that you (and your spouse) may receive higher benefits per month until your date of death. Currently, less than 50% of filers wait until their FRA to claim benefits, and less than 6% wait until their DRA to claim benefits, despite the much higher DRA benefit (about 75% higher). The DRA benefit is generally about 30% higher than the FRA benefit. Reasons people cite for not deferring benefits include financial need, bad health, fear of social security insolvency, dying early, or plain ignorance about the overall benefits of waiting.

Once you begin receiving benefits, you may have options to suspend them within 12 months of starting them to qualify for a higher later benefit. This mostly involves repaying all of the benefits received. As more fully described below, there may be circumstances where you might want to file for SSB and immediately suspend them at FRA (without receiving payments) to allow your spouse to receive a higher (spousal) benefit or to receive a higher benefit at DRA.

Deferring Benefits

In general, deferring SSB as long as possible makes a lot of sense if you can afford to do so. The significant increase in benefits is primarily due to the additional years of compounding that occurs when you defer benefits.

At its very core, social security is exactly like taking the sums that you contributed into the system over your working years and continuing to invest it. Just like any investment, the primary factors that affect the payout are the length of time for compounding and the rate of return applied. The longer you wait for benefits, the larger the invested sum grows.

Making a decision to begin or defer benefits is an exercise in making a best guess on how long you (and your spouse if you’re married) will live. “Gaming” social security is about maximizing the benefits you collect over your lifetime. Deciding to defer social security until age 70 is a losing proposition if you’re in bad health and don’t have much of a chance to make it to or much past that age. Conversely, if you’re healthy and your family has a past history of living well into their nineties, deferring benefits may or may not lead to a higher overall lifetime payout. Obviously, the “game” ends when you die, since your benefits cease then. So just like investing, the outcome of the decision to defer isn’t known until the investing and disbursement period is over.

Essential Rules/Facts

Given the forgoing background, here are some of the essential rules/facts to know about filing for SSB and some potential tax planning points:

1.    At full retirement age (FRA), one may receive the higher of their own retirement benefit or a spousal benefit equal to 50% of their spouse’s retirement benefit.  Many do not realize that in order to claim that spousal benefit, the spouse on whose record the 50% payment is based must be receiving or have filed for (and perhaps suspended) retirement benefits.

2.    If a worker starts benefits prior to his/her FRA, and his/her spouse is receiving retirement benefits, the worker does not get to choose between their retirement benefit and a spousal benefit. They are automatically deemed to have begun their retirement benefit, and if their spouse is receiving retirement benefits, a supplement is added to reach the spousal benefit amount.  All this is reduced for starting early. The total will be less than half the normal retirement benefit.If you start your retirement early and your spouse has not claimed or suspended his/her retirement benefit, you cannot get a spousal supplement until they do file.

3.    A person needs to have been married to an ex-spouse for at least ten years immediately before a divorce is final, in order to be eligible to receive a spousal benefit based on a former spouse’s record. The ex-spouse need not approve this and may never know this is the benefit being claimed.If you marry again, you are no longer eligible for a spousal benefit on your ex’s record and a new 10-year clock starts on the marriage to your new spouse. If you are over 60 when you get married again, you will still be able to claim survivor benefits on your ex.

4.    If you take your retirement early, it not only reduces your retirement benefits, benefits for your survivor (if any) are also based on that permanently reduced amount.

5.    If you have claimed your retirement benefit early, when you reach your FRA, if your spouse then files for his/her retirement and you want to switch to a spousal benefit, you will not get 50 percent. The formula is (A-B) + C where A= ½ the worker’s Primary Insurance Amount (PIA, their benefit at their FRA), B= 100 percent of the spouse’s PIA, and C= the spouse’s EARLY retirement benefit. Since starting early means C is less than B, the total is less than 50%.  One only gets half their spouse’s benefit if the spousal benefit is claimed at FRA.

6.    Spousal benefits do not receive delayed credits. In other words, if taking the spousal benefit is good for a couple, delaying the claim for spousal benefits past the recipient’s FRA has no additional benefit.  The same applies for widow/widower benefits. They can be started early but there is no benefit to delaying past FRA as no delayed credits apply. Before a worker dies, delaying does increase the potential survivor’s benefit.

7.    Taxpayers whose income is low can find that some forms of tax planning can result in higher than expected taxation. Many retirees will make distributions from IRAs or qualified retirement plans prior to age 70½ to have a low tax rate applied. Roth conversions are often done for the same reason. A relatively small amount of taxable income can cause up to 85% of Social Security payments to become taxable.

8.    Because the income thresholds that determine how much of one’s Social Security is taxable are not indexed for inflation, over time, more and more of the benefits can become taxable.

9.    New this year, an increase in taxable income as just described can also cause a reduction or elimination of subsidies available to lower income households under the new health insurance law. Social Security payments, even the tax-exempt portions, are included in this evaluation. Supplemental Security Income (SSI) is excluded.

10.    With today’s mobile workforce, it is not unusual to find some taxpayers that worked at a job and earned a pension benefit but were not subject to withholding for Social Security taxes and another job that was subject to Social Security taxes. Many such folks are unpleasantly surprised that their Social Security benefits may be reduced due to the Windfall Elimination Provision.

11.    If you “file and suspend” for SSB, Medicare premiums cannot be paid automatically from Social Security income and must be paid directly to the Center for Medicare & Medicaid Services (CMS). Affected taxpayers should be sure to get billed properly by CMS. If it is not paid timely, you can lose your Medicare Part B coverage.

12.    When collecting retirement benefits, increases in Medicare Part B premiums are capped to the same rate of increase of the retirement benefits under a “hold harmless” provision.  This is tied to actual receipts so while delaying past your FRA earns delayed credits, there is no cap on the Medicare increases. Worse yet, the uncapped increase is locked into every future premium. This hold harmless quirk is not relevant to high income taxpayers. Hold harmless does not apply to high income taxpayers paying income-related Medicare B premiums.

13.    Because it used to be allowable to pay back all of your retirement benefits and start over, many people think that they can change their minds about starting SSB early. Withdrawing your claim this way basically erased the claim as though it never happened and future benefits would therefore be higher. Today, if you regret your choice, you can only withdraw your claim and pay back benefits within 12 months of your early start. After 12 months, you are stuck with your choice until your FRA, at which point you can suspend and earn delayed credits up to age 70. The credits are applied to your reduced benefit.

Some Strategies and Conclusion

Here are some final considerations to make when deciding to file a claim for SSB (by necessity, these are generalities that must take into account each individual’s/couple’s facts and circumstances):

•    Assess your own life expectancy, and, if married, your joint life expectancy.
•    If married, and either spouse is healthy, delay the higher earner’s benefits as long as possible.
•    If married and one spouse is unhealthy, get the lower payout as soon as possible.
•    Supplement benefits with spousal amounts, if within FRA.

As mentioned above, the decision of when to file for social security benefits can become very complex and requires assessment of many factors. Since the determination can involve differences of thousands of dollars per person, per year, it’s worthwhile to carefully assess and model all of the facts and circumstances before starting benefits.  Even though a total SSB re-do is no longer available, there are some options still available to modify benefit payouts.

It may be tempting or convenient to utilize a simplified web-based social security calculator to help you make an estimate, but be wary of any program that doesn’t model multiple scenarios or doesn’t require entry of many variables that may ultimately affect your optimum benefit. In the end, there’s no perfect answer, but perhaps a “best fit” for your situation is good enough.

If you have any questions about social security planning or any other financial planning matter, please don’t hesitate to contact me or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

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Bequest or Beneficiary: In Estate Planning, the Difference Is Crucial

September 26, 2014 — Sam H. Fawaz

When planning your estate, be sure you understand the differences between bequests spelled out in a will and beneficiary designations incorporated in retirement accounts.

The scenario plays out over and over again in attorneys’ offices: A family brings a parent’s will to be probated. The will is complete, well-thought-out, and takes into consideration current tax law. But under closer examination, the attorney discovers that the deceased’s estate plan doesn’t work. Why? Because a substantial portion of the parent’s assets pass by beneficiary designation and are not controlled by a will.

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named on the account, bypassing the sometimes lengthy and costly probate process. The “fatal flaw” of beneficiary-designated assets is that because they are not considered probate assets, they pass “under the radar screen” and trump the directions spelled out in a will. This all too often leads to unintended consequences — individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Unnamed or Lapsed Beneficiaries

Not naming beneficiaries or failing to update forms if a beneficiary dies can have its own unintended repercussions, which can be particularly damaging in the case of retirement accounts. For instance, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an estate planning professional to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

You should also review your beneficiary designations on a regular basis — at least every few years — and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.

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Are Daughters a Better “Investment?”

June 28, 2014 — Sam H. Fawaz

As Father’s Day has now passed for this year, a new survey from the online account aggregation firm Yodlee.com and Harris Interactive tells us that the financial relationship between fathers (and parents) can be very different for their sons vs. their daughters.  The survey found that an astonishing 75% of young adult men (age 18-34) are receiving financial aid from their parents, compared with 59% for comparable age daughters.  The financial dependency extends deep into adulthood; among sons aged 35-44, fully 32% are still living at home, while only 9% of women in that age bracket sleep in their former bedroom.  Even those numbers understate the disparity, because more than a third of the women who are living with their parents are doing so to support them in old age, something that sons are, according to the report, far less likely to do.
 
Overall, daughters are 32% less likely to need their parents’ money, and twice as likely to move back home because they’re unemployed.  By age 45, the survey found, most of these stark differences in financial independence have faded; sons lag only a few percentage points behind daughters in these two areas.  But then a new discrepancy emerges.  The survey found that older sons are half as likely as daughters to support their parents in old age. 

If you have any questions about any financial planning or money management services, please don’t hesitate to contact us or visit our web site athttp://www.ydfs.com. As a fee-only fiduciary financial planning firm, we always put your interests first, and there’s never a charge for an initial consultation or any sales pitches.
 
Sources:  

http://www.businessinsider.com/daughters-require-less-financial-support-2014-6
 
http://time.com/money/2861530/daughter-better-investment-than-son/

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Market Correction?

January 27, 2014 — Sam H. Fawaz

Last Monday, the U.S. markets dropped roughly 1% of their value (as measured by the S&P 500 index), and Europe and Asia were down by similar amounts the following day. The market then fell 2.1% on Friday in a sickening lurch. Today the S&P 500 fell another 0.5%. This combination was enough to cause pundits and investors to ask whether we are now in the early stages of a bear market or, indeed, if the past almost-five years should be considered an interim market rally inside of a longer-term bear market.

The answer, of course, is that nobody knows–not the brainiac Fed economists, not the fund managers and certainly not the pundits. A Wall Street Journal article noted that most of the sellers on Friday were short-term investors who were involved in program trading, selling baskets of stocks to protect themselves from short-term losses. Roughly translated, that means that a bunch of professional traders panicked when they learned that Chinese economic growth is slowing down on top of worries that the Fed is buying bonds at a somewhat less furious rate ($75 billion a month vs. $85 billion) than it was last year.

What we DO know is that it is often a mistake to panic sell into market downturns, which happen more frequently than most of us realize. A lot of people might be surprised to know that in the Summer of 2011, the markets had pulled back by almost 20%–twice the traditional definition of a market correction–only to come roaring back and reward patient investors. There were corrections in the Spring of 2010 (16%) and the Spring of 2012 (10%), but almost nobody remembers these sizable bumps on the way to new market highs. Indeed, most of us look back fondly at the time since March of 2009 as one long largely-uninterrupted bull market.

Bigger picture, since 1945, the market has experienced 27 corrections of 10% or more, and 12 bear markets where U.S. equities lost at least 20% of their value. The average decline was 13.3% over the course of 71 trading days. Perhaps the only statistic that really matters is that after every one of these pullbacks, the markets returned to record new highs. The turnarounds were always an unexpected surprise to most investors.

We may get a full 10% correction or even a full bearish period out of these negative trading days, and then again we may not. But history suggests an important lesson: if we DO get a correction or a bear market, we may not remember it a few years later if the markets recover as they always have in the past. The people who lose money in the long term are not those who endure a painful market downturn, but those who panic and sell when the market turns down. The facts are that the market is overdue for a reasonable correction after the torrid and virtually uninterrupted run up we’ve had since late 2012.

Instead of panic selling into the market downturn, you may choose to lighten up your equity weighting or re-balance some of your equity weight into other asset classes. After a long winning run, it never hurts to take some profits off the table, trim back your winners and leave the proceeds in cash to invest when the downturn ends. There are various inverse funds and other options available to partially hedge your portfolio if the uncertainty keeps you up at night. After a few days of selling, there’s usually a rally around the corner to counterbalance the weight of the selling and that’s a more opportune time to lighten up. None of this is a recommendation–they’re just some ideas to consider.

For our clients, we have raised and maintained a healthy level of cash and have used hedging to reduce our overall portfolio risk. If the correction becomes prolonged, we’ll do more of the same and await the next opportunities to re-invest. No one says that you have to stay 100% invested at all times.

If you have any questions or would like to speak to us about your portfolio needs or any financial planning matters, we’re here to help. We are a fee-only financial planning firm that always puts your interests first.

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Fee-Only Financial Advisers Who Aren’t

September 21, 2013 — Sam H. Fawaz

Today’s (Saturday September 21, 2013) Wall Street Journal contains an article entitled ” ‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone” written by award-winning writer Jason Zweig, better known as “The Intelligent Investor.” Jason acts as beacon to guide investors towards the better practices of saving and investing and warns them of the tricks and traps.

In this article, Jason points out that “You might think a “fee-only” financial adviser will never charge you commissions or other sales charges that could induce him to favor selling you something that is better for him than for you. Think again.”

Through his research, he found that many advisors who hold themselves out as “fee-only” indeed earn commissions, kickbacks, trails or other hidden compensation even though they might not sell you a product that generates one. He found that numerous advisors (661) that were Certified Financial Planners (TM) and worked for large Wall Street brokerage firms such as Morgan Stanley, UBS, RBC, Wells Fargo, J.P. Morgan Chase, Bank of America Merrill Lynch, Raymond James and Ameriprise Financial also listed themselves as fee-only advisors on the CFP (r) website. By definition, based on the nature of the firms that they work for, they cannot designate themselves as fee-only advisors or planners.

Many people also confuse fee-only with fee-based. They are definitely not the same. Fee-based means that the advisor can earn both fees for services as well as other commissions or kickbacks for selling investment, insurance or other financial products.

NAPFA, the National Association of Personal Financial Advisors (the de facto fee-only organization of planners and advisors found at napfa.org), the Financial Planning Association and the Certified Financial Planner board of standards are currently working on more clearly defining the “fee-only” standard and urging members to update their profiles and re-assert that they meet the more clearly-defined standard. I applaud this effort.

I wish to reassure our clients, prospects and friends that our firm, YDream Financial Services, takes a very serious and crystal clear stance on meeting the fee-only definition. Fee-only planners, like us, are compensated solely by fees paid by our clients and we do not accept commissions or compensation of any kind from any source. We also don’t earn any money or consideration from trails, referrals or markups. We have zero incentive to recommend any financial products and don’t accept anything (except perhaps trinkets from wholesalers or fund companies worth $5 or less handed out at conferences) that influences our recommendations. Our custodian, Charles Schwab does not reimburse or compensate us for any trade commissions or for the use of any particular financial products that they offer.

As a fiduciary, we take our responsibility to put your interests first and we endeavor do that in every recommendation or transaction that we initiate on your behalf. Finally, any conflicts of interest that our compensation approach might present are clearly discussed and disclosed with our clients and prospects prior to implementing the recommendation or moving forward with the engagement.

You can find the Wall Street Journal Article here http://goo.gl/23Oy3B. It’s worth the short read. If the link requires a log in or subscription to the Wall Street Journal Online, I suggest typing the title of the article above into your favorite search engine then click on the search hit that it finds.

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Your Returns Versus the Market

September 2, 2013 — Sam H. Fawaz

One of the most misleading statistics in the financial world is the return data we are routinely given by the financial media, telling us how much investors made in the markets and in individual stocks or mutual funds over some time period.  In fact, your returns are almost guaranteed to be different from whatever the markets and the funds you’ve invested in have gotten.

How is this possible?  Start with cash flows.  We are told that the S&P 500 has delivered a compounded return of about 7.8% from 1992 through 2011, which sounds pretty positive until you realize that this return would only be available to somebody who invested all his or her money at the beginning of 1992 and didn’t move that money around at all for the next twenty years.  If you invested systematically, the same amount every month, as most of us do, then you would have earned a 3.2% compounded return.  Why?  A lot of your money would have been exposed to the 2008 downturn, and not much of it would have enjoyed the dramatic run-up in stocks from 1992 to 2000.

In addition, there is the difference–only now getting attention from analysts–between investor returns and investment returns.  Human nature drives investors to sell their stocks and move to the sidelines after their portfolios have been hammered–which is often the worst possible time to sell.  And it drives people to start increasing their equity allocations toward the peak of bull markets when they perceive that everybody else is getting rich.  That means less of their money tends to be exposed to stocks when the market turns from bearish to bullish, and more is exposed when markets switch from bullish to bearish.

Understand also that owning a diversified portfolio means that only a portion of your investments are exposed to stocks. Assets such as cash, bonds, real estate, commodities and other non-stock investments all have returns that are inherently different than stocks, making overall portfolio return comparisons an “apples to oranges” one.

This would be bad enough, but people also switch their mutual fund and stock holdings.  When a great fund hits a rough patch, there’s a tendency to sell that dog and buy a fund that whose recent returns have been scorching hot.  Many times the underperforming fund will reverse course, while the hot fund will cool off.  The Morningstar organization now calculates, for every fund it follows, the difference between the returns of the mutual fund and the average returns of the investors in fund, and the differences can be astonishing.  Overall, according to Morningstar statistics and an annual report compiled by the Dalbar organization, investor returns have historically been about half of what the markets and funds are reporting.

And then there’s the tax bite.  Some mutual funds invest more tax-efficiently than others, and generate less ordinary income.  Beyond that, if a fund is sitting on significant losses when you invest, you get to ride out its gains without having the tax impact distributed to your 1040.  If the fund is sitting on large gains when you buy in, you could find yourself paying taxes on gains even if the fund loses money.

Sources:

http://www.forbes.com/sites/financialfinesse/2012/06/20/why-your-investment-returns-could-be-lower-than-you-think/

http://www.thesunsfinancialdiary.com/investing/understanding-ms-total-return-and-investor-return/

http://corporate.morningstar.com/cf/documents/MethodologyDocuments/FactSheets/InvestorReturns.pdf

My thanks to Inside Information publisher Bob Veres for his contribution to this post.

Posted in General, investing, markets, retirement. Tags: , , , , . 1 Comment »

The Rollercoaster Effect

June 23, 2013 — Sam H. Fawaz

There are two kinds of investor in this world.  One type pays close attention to the daily (and sometimes hourly) flood of information, looking for a reason (any reason) to jump in or out of the markets.  The other kind of investor is in for the long haul, and recognizes that the markets are going to experience dips and turns.  If these people are particularly wise, they know that the dips and turns are the best friend of the steady, long-term investor, because as you put money into the markets, as you re-balance your portfolio, you gain a little extra return from the occasional opportunities to buy at bargain prices.

Last week, the investment markets made an unusually sharp turn on the roller coaster, and showed us once again the sometimes-comical fallacy of quick trading.  See if you can follow the logic of the events that led to last week’s selloff.  Federal Reserve Board Chairman Ben Bernanke and the Federal Open Market Committee issued a statement saying that the U.S. economy is improving faster than the Fed’s economists expected.  Therefore (the statement went on to say) if there was continued improvement, the Fed would scale back its QE3 (quantitative easing) program of buying Treasury and mortgage-backed securities on the open market, and ease back on stimulating the economy and keeping interest rates low.

Everybody knows that the Fed will eventually have to phase out its QE3 market interventions, and that this would be based on the strength of the economy, so this announcement should not have stunned the investing public.  Nothing in the statement suggested that the Fed had any immediate plans to stop buying altogether; only ease it back as it became less necessary.  The statement said that this hypothetical easing might possibly take place as early as this Fall, and only if the unemployment rate falls faster than expected.  At the same time, the Fed’s economists issued an economic forecast that was more optimistic than the previous one.

The result?  There was panic in the streets–or, at least, on Wall Street, where this bullish economic report seems to have caused the S&P 500 to lose 1.4% of its valueon Wednesday and another 2.5% on Thursday.

In addition–and here’s where it gets a little weird–stocks also fell sharply in Shanghai and across Europe, and oil futures fell dramatically.  How, exactly, are these investments impacted by QE3?

The only explanation for last week’s panic selloff is that thousands of media junkie investors must have listened to “we plan to ease back on QE3 when we believe the economy is back on its feet again,” and heard: “the Fed is about to end its QE3 stimulus!”

It’s possible that the investors who sold everything they owned on Wednesday  throughFriday will pile back in this week, but it’s just as likely that the panic will feed on itself for a while until sanity is restored.  If stocks were valued daily based on pure logic, on the real underlying value of the enterprises they represent, then the trajectory of the markets would be a long smooth upward slope for decades, as businesses, in aggregate, expanded, moved into new markets, and slowly, over time, boosted sales and profits.  The roller-coaster effect that we actually experience is created by the emotions of the market participants, who value their stocks at one price on Wednesday, and very different prices on Thursday and Friday.

The long-term investor has to ask: did any individual company in my investment portfolio become suddenly less valuable in two days?  Did ALL of their enterprise values in aggregate become less valuable within 48 hours–and at the same time, did Chinese and European stocks and oil also suddenly become less valuable?  Phrased this way, the only possible answer is: no.  And if that’s your answer, then you have to assume that eventually, people will eventually be willing to pay the real underlying value of the stocks in the market, and the last couple of days will be just one more exciting example of meaningless white noise.

With all that said, it’s prudent to be cautious about going “all in” on this pullback in the market and to perhaps take some hard-earned partial profits on positions you’ve been holding. In our clients’ portfolios, we’ve upped our hedges and taken partial profits on short-term positions, but are still holding the majority of our equities and bonds.

With the action in the markets last week, we officially have the beginnings of a downtrend, but that can be very short-lived in this QE environment, so we remain on our toes. Be sure to consult with your advisor if you’re uncomfortable with your holdings or have trouble sleeping at night because of your positions. Nothing in this message should be construed as investment advice or suggestions to buy or sell any security.

If you have any questions or comments, please don’t hesitate to contact us or post them here. We are a fee-only fiduciary financial planning and investment advisory firm that always puts your interests first.

Have a great week!

Sam

Sam H. Fawaz CFP™, CPA
Registered Investment Adivsor Representative
NAPFA Registered Fee-only Advisor
Financial Planning Asssociation Member
(734) 447-5305
(615) 395-2010
http://www.ydfs.com

TheMoneyGeek thanks Bob Veres, publisher of Inside Information for his help with writing this guest post.

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