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Tuesday’s need-to-know money news

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Zemanta Related Posts ThumbnailToday’s top story: Protecting your 401(k). Also in the news: What to do if you have a large tax bill, rental mistakes to avoid, and the two legal documents you can’t live without.

How To Spot A 401(k) Rip-off
Don’t sell your retirement short.

Big Tax Bill? IRS Offers Payment Options
Taxes don’t have to drain your wallet all at once.

5 Mistakes Renters Make
Don’t let your rental become a money pit.

6 Financially Freeing Tasks Not to ‘Pass Over’
A festival of financial freedom.

2 Legal Documents You Can’t Live Without
They’re inevitable.

What same sex couples–and their advisors–need to know

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Last summer’s Supreme Court decisions on same sex marriage created a sea change for gay couples, but the details of that change depend on where they got married, where they live now and the federal agencies involved.

The changes are dramatic and complex enough that financial advisors should contact any clients with same sex partners to discuss the implications, planner Thomas Tillery explained at the AICPA’s financial planning conference in Las Vegas on Monday.

Tillery is a longtime fee-only planner with a string of credentials—CFP, CLU, ChFC, LUTCF, CRPC—as well as a masters of science in financial services and, interestingly, a masters of arts in Christian education from the Southern Baptist Theological Seminary. What Tillery doesn’t have is much patience for advisors who ignore these issues because they disagree with the Supremes’ decisions; they’re “fools,” he said, who need to understand the new realities and serve their clients appropriately.

Here’s a brief summary of what advisors and couples need to know, by agency:

The IRS. Same sex couples are considered legally married for federal income tax purposes if they were wed in a state that recognizes their marriage. It doesn’t matter whether the state where they currently reside recognizes such unions, Tillery said. Couples can apply for refunds for up to three years’ worth of tax returns if they were married during those years and their newly-recognized status would have resulted in lower taxes. Some gay couples had to pay income tax on health insurance benefits for their spouse; the elimination of that requirement could mean money back from the government.

Social Security. Here, residence matters: if the state where couple applies for benefits recognizes same sex marriage, then Social Security spousal and survivor benefits are available to that couple.  One way around this limitation is for the couple to establish residency in a state that recognizes their marriage and then apply for benefits. They could later move to a state that doesn’t recognize their marriage without risking the loss of their Social Security benefits, Tillery said.

Department of Defense. Benefits are available for same sex spouses who can show a valid marriage license from any state or country that recognizes gay marriage. The state where the couple currently lives is irrelevant. Service members can get special leave to travel to a state where same sex marriage is recognized in order to wed.

Department of Labor/ERISA.  Qualified pension plans have guaranteed protections for spouses, including automatic survivor benefits unless the spouse waives them and provisions that allow for division of retirement assets at divorce without triggering tax bills. Whether a same-sex married partner qualifies as a spouse for these provisions depends on whether the state where the employee resides recognizes same sex marriage.

The Supreme Court decisions have implications for other aspects of a couple’s financial life, including estate planning, family leaves, participation in flexible spending accounts and more.

My advice: if you don’t have an advisor who can help you with these issues, find one who can. It could make a huge difference in your financial lives and financial security.

 

 

 

Paper statements may not be necessary

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Dear Liz: I’m wondering how long we really need to keep bank statements, since banks now offer paperless options. My son doesn’t even open the statements anymore; he just views his account information online.

Answer: There’s nothing magical about paper bank statements. If your son doesn’t open them, he probably shouldn’t even get them. He can ask his bank to switch him to its paperless option and save some trees.

The IRS accepts electronic documents, and banks keep account records at least six years. Your highest risk for an audit is the three years after a tax return is filed, so you should be able to download statements if you need them in an audit. There might be fees involved to get these statements, however, so you’ll have to weigh the potential cost against the hassle of storing all that paper. Some people get the paper statements, scan them and shred the originals; others download the statements as they go and store them electronically.

If you don’t need bank records for tax purposes, there’s even less reason for getting paper statements. Eschewing them can reduce bank fees and will certainly save a few trees.

401(k) loans can get really expensive

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Dear Liz: I bought my condo in 2009. I took out a loan on my 401(k) account to use for the down payment. I left my job in early 2012, and at the time didn’t have the money to pay back the loan, so the balance was treated as a distribution. I now owe the IRS $10,000 and don’t have the money to pay them, nor can I afford monthly payments beyond about $50. I can’t borrow any money from a family member or friend. My tax guy suggested (another) 401(k) loan, but I’m really reluctant to go deeper into debt. Any suggestions?

Answer: Thank you for providing a vivid example of why people should think twice before dipping into retirement funds to buy a house. Not only are you facing a steep tax bill, but the money you withdrew can’t be restored to your account, so you’re losing all the tax-deferred gains that cash could have earned over the coming decades. You can figure that every $10,000 withdrawn costs you at least $100,000 in lost future retirement funds, assuming an 8% average annual return on investment over 30 years. If you’re 40 years from retirement, the toll can be twice as large.

So it would be good, if at all possible, to leave your retirement funds alone from now on. That means you need to come up with the cash to pay what you owe, and $50 a month doesn’t cut it. To use an IRS payment plan, you’ll need to come up with about $140 a month to pay your bill off within the required 72 months.

Fortunately, there are plenty of ways to trim your spending so you can free up more money to pay this bill. These ways include, but aren’t limited to: ending your pay TV subscription, preparing meals at home instead of eating out, trading your smartphone for a dumber one or at least switching to a prepaid plan, selling or storing your car and using public transportation, or selling your condo and moving to a cheaper place.

When people have virtually no discretionary income left after paying bills, and they’re employed, the culprits are often their housing or transportation costs, or both. Reducing these can be painful but may be necessary if you want to get on more solid financial footing.

Should you borrow to pay a tax bill?

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Dear Liz: Help! We’ve just received devastating news from our accountant that we owe around $11,000 to the IRS and the state for 2012 taxes. The reason for the huge bill is that we cleaned out my husband’s IRA to pay for our son’s college expenses. My husband is almost 65 and working part time after being laid off, and I’m 61 with a full-time job. What is the best way to pay this bill? Here are the options I can think of: 1) Cash out my three-month emergency certificate of deposit of $12,000 that I’ve saved to cover expenses in case I get laid off. 2) Take money out of my IRA. 3) Use a credit card check that will be at zero percent for the first 12 months and then will slide to 8.9%. 4) Arrange a payment loan with the IRS. 5) Sell our house in which we have 70% equity. Which is best?

Answer: Let’s take No. 2 off the table, shall we? If you learn nothing else from this experience, it should be that tapping retirement funds can trigger a big (and often unnecessary) tax bill.

Selling your house over an $11,000 bill is overkill, so let’s eliminate that option as well. Which leads us to three remaining possibilities: Use cash, borrow from a credit card or borrow from the IRS.

Borrowing incurs costs. That zero percent credit offer almost certainly comes with a fee, which is usually 3% to 5% of the total. If you can’t pay the balance within a year, you start incurring interest charges.

The short-term rate the IRS charges for installment loans is pretty low — lately it’s been around 3% — but you also typically incur late-payment penalties. The penalty typically is one-half of 1% of the tax you owe each month or part of a month until the bill is paid in full. If you file by the return due date, that rate drops to one-quarter of 1% for any month in which an installment agreement is in effect. The maximum penalty is 25% of the tax due.

How much either option will cost you depends on how long you take to pay the bill. The cost for cashing out the CD is, by contrast, almost zero. Whatever tiny amount of interest you’re getting is far less than what borrowing would cost you. If you should get laid off before you rebuild your emergency fund, your access to cheap credit could come in handy.

Going forward, let your son pay for his college expenses and conserve what’s left of your resources for retirement.

Watch out for tax refund theft

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Dear Liz: My cousin had his house broken into a little over a year ago. A lot of things were taken, but insurance replaced most of what he thought was missing. This year after he filed his return he was contacted by the IRS, which told him that a return using his information had already been filed and the refund check cashed. The IRS is investigating the situation now, but I really worry about what is going to happen to his Social Security in the future if someone else is using his numbers or those of his children. Do you have any information on what steps he should take?

Answer: Theft of tax refunds is a growing problem. In fact, tax identity theft is the No. 1 fraud on the IRS’ list of Dirty Dozen Tax Scams of 2012.

The fraud is often perpetrated by organized criminal gangs that con, steal or buy people’s personal information to create bogus returns. Some people fall right into the bad guys’ hands by responding to emails that purport to be from the IRS. (The IRS doesn’t email people to request personal or financial information.)

If the problem isn’t resolved within a few months, your cousin should contact the agency’s Identity Protection Specialized Unit at (800) 908-4490.

Since the criminals already have his Social Security number and other important financial information, he also should put security freezes on his credit reports at all three bureaus. Links to the bureaus and other information for identity theft victims can be found on the IRS’ site at http://www.irs.gov.