Member Blogs

  • With so many credit card option, it's hard to know which one is best for you.
  • Most military members should know about the free tax filing assistance programs that are available.  These programs range from free access to tax software to working with volunteers who actually prepare tax returns.  Many bases even continue this benefit for retirees. However, one of the best things you can learn to do is look beyond this year’s tax return and start tax planning.  For servicemembers and their families, there are many military-specific tax benefits, guidelines, and other ‘need to know’ items.  IRS Publication 3:  Armed Forces Tax Guide is one of the best resources for this tax information. The Armed Forces Tax Guide contains a LOT of military-specific tax information.  Since the Armed Forces Tax Guide the authoritative source for tax information, anything you find is legitimate.  Below are five things that, while you might find elsewhere, the Armed Forces Tax Guide makes crystal-clear: 1.     The Armed Forces Tax Guide specifically breaks out what type of compensation is taxable or not taxable. You can generalize that types of pay (basic, incentive, special, etc.) are taxable, while allowances (like BAH, BAS, or clothing allowances) are not.  For example, CONUS COLA is taxable , while OCONUS COLA is not.  You wouldn’t get that with the pay/allowances rule of thumb, but it’s right there in Publication 3. 2.     The Armed Forces Tax Guide contains detailed information about tax treatment of combat zone deployments (and related questions). The Armed Forces Tax Guide is the base document by which your pay offices withhold taxes (or stop withholding based upon your combat zone tax exclusion).  However, sometimes they’re wrong.  When they are, this document allows you to resolve this on your tax return if needed. For example, in 2015, I’d gone to Jordan on several exercise-related TDY visits, warranting the combat zone tax exclusion.  However, my pay office (for some reason), insisted on withholding taxes, because I was not directly involved in combat operations.  Even though my command certified travel to Jordan as being eligible for CZTE (which happens to be the combatant command overseeing combat operations in that part of the world), the pay office refused to budge. No problem.  I took my travel documents to my tax preparer (an enrolled agent and tax professional).  We verified that this travel was indeed to one of the DOD-certified combat zone tax exclusion countries, and he made the adjustment to my return. My 2015 return hasn’t been audited yet (usually tax returns are audited 2 years following the filing deadline).  If the IRS audits my return, I am perfectly able to justify my position…even though my pay office refused to stop my withholdings. 3.     The Armed Forces Tax Guide tells you how you can itemize little-known military-specific deductions.  For example, you generally cannot deduct upkeep of uniform items.  However, you can deduct: Cost of upkeep for ‘military battle dress uniforms and utility uniforms that you cannot wear off duty.’ Articles not replacing regular clothing Reservist uniforms if you can only wear them while performing duties as a reservist (i.e. not while doing your civilian job) These deductions are categorized as miscellaneous itemized deductions, which are subject to a 2% AGI floor.  In other words, miscellaneous itemized deductions only count to the extent that these costs exceed 2% of your adjusted gross income (AGI).  For example, if your AGI is $50,000, then your miscellaneous itemized deductions would only count to the extent that they exceed $1,000. Publication 529-Miscellaneous Deductions contains more detailed information about deductions subject to the 2% floor, such as tax preparation fees.  However, Publication 3 outlines military-specific examples, such as: Professional dues. These are dues for professional organizations directly related to your line of work.  This doesnt include officer club or NCO club dues. Unreimbursed education expenses Transportation expenses 4.     The Armed Forces Tax Guide contains one-stop shopping for credits You can use the guide as a quick snapshot for most of the tax credits that are available. Child Tax Credit Additional Child Tax Credit Earned Income Tax Credit-EITC is one of the IRS’ biggest areas of concern regarding tax fraud and abuse. However, the IRS remains committed to helping to ensure that qualifying families do receive the EITC they deserve.  If the Armed Forces Tax Guide doesn’t have the information you need, you can find it at the IRS’ EITC Central website . Credit for Excess Withheld Social Security Tax (only available if you have more than one employer, and the total withholdings exceeded $7,347.00 in 2016. 5.     Details on filing deadlines While filing extensions are available for everyone, certain rules exist specifically for servicemembers.  Whether you’re filing from CONUS, OCONUS, or a combat zone, there are various extensions that apply. CONUS: Everyone can receive an automatic 6-month extension by filing Form 4868 . OCONUS: There are 3 separate extensions that may apply to you (The Armed Forces Tax Guide contains more details on which ones are automatic, and which ones are discretionary—meaning you have to actually apply for them) Combat zone: Not only does the guide tell you the rules (which are more complicated than this article will detail), but it gives examples for you to follow. Keep in mind that if you owe money on your return, in most situations (not including the combat zone-related extensions) the IRS will continue to charge interest from the regular due date (April 15 or the next working day) until the date you actually pay the tax. Conclusion While most people dread the thought of doing their taxes, it’s important to note the military-specific tax rules that are in place.  If youre familiar with these rules, or at least being familiar with the Armed Forces Tax Guide, you can ensure that more of your money works for you. What do you think?  What is the most interesting tax rule that you’ve read?  Feel free to post your comments below or join the Military in Transition Facebook Group ! The post 5 Tax Tips That You Can Find in the Armed Forces Tax Guide (IRS Publication 3) appeared first on Military in Transition .
  • Rick Peterson  Performing Under Pressure  Everyday, in every moment, we can choose what to think. That choice will effect how we feel, act, and the results we reap. In pivotal moments we can consciously re-frame to see and act on an opportunity, whether it's a business deal or the razor's edge of a Major League pennant game. Re-framing teaches us how to retrain our brain to overcome our
  • When you sit down with a financial advisor, you’re not expecting to be asked questions like, “What is your ideal life?” or “What things are most meaningful to you?” Those types of questions are reserved for Oprah interviews, not financial planning sessions. You’re expecting to discuss investments, assets, tax returns, debt and retirement planning. What do those deep and probing inquiries have to do with managing your money?
  • As you transition from active service, life insurance is an important, yet overlooked aspect of your post-military financial planning.  In a previous article, I discussed five considerations about your military life insurance needs .  To build on those relevant points, this article focuses on things that may not present themselves until your transition. Life Insurance Consideration #1:  Your income (and insurable need) will probably change.  However, it might take some time for you to understand exactly how. The one constant of a military career is income predictability.  While you’re in the service, you can make career-related estimates based upon promotion rates in your community.  Even if promotion opportunities are slight, you can usually rest assured that your income won’t go down (unless you’re PCSing to a location with a lower housing allowance, and presumably lower costs).  While you might not be able to predict your income in the long-term, you know that your paycheck will come on the 1st and 15th of each month. All this is subject to change as you leave the service.  There are two changes I’ll discuss here:  near-term and long-term. Near-term:  Most people have no idea of what their near term income will look like.  Furthermore, many people may find that their post-military employment changes at least once.   Also, many people may decide to go back to school in order to improve their job prospects.  All of these factors (and more) can confuse the picture for what your long-term insurance needs are.  Since there’s a direct correlation between age and insurance premiums (see Point 4 below), you might end up spending more money over the long term if you wait for the long-term income picture to fully develop. Long-term:  While many people experience a near-term dip in income, income levels generally go up as you age.  Even if you can’t exactly project your long-term earnings or family needs, you can make educated guesses that will help inform your insurance decision.  For example, if you take a year off to finish your MBA so you can get a job with a consulting firm, and you’re planning to have a child in the next 3-5 years, you can still factor those things into a life insurance decision. Perhaps you don’t think you’ll obtain a life insurance policy now.  In that case, you could at least run the numbers. That way, you can see if you’re better off locking in a lower rate today, or if you’ll be better off waiting.  The longer you plan to wait, the more profound a difference this will be. Life Insurance Consideration #2:  Your life insurance benefits should be coordinated with your Survivor Benefit Plan benefits (if you’re eligible). If you’re eligible for the Survivor Benefit Plan (SBP), you may be inclined to look at that decision as separate from any life insurance decisions you make.  You should not.  Both life insurance and SBP serve to protect insurable needs, although they do so in different ways.  Before making a decision on either, it’s important to evaluate how SBP and insurance may fit into your planning, and what the associated costs are.  Only then are you likely to come to a decision that is right for your family. These articles may help inform the decision-making process as you decide what is right for your particular situation: Survivor Benefit Plan-What Does it Mean to Me? Why You Should Strongly Consider Not Participating in the Survivor Benefit Plan Term Life Insurance Vs. Survivor Benefit Plan (SBP)—A Side By Side Comparison Additionally, the Military in Transition Guide to the Survivor Benefit Plan presents several case studies, and some detailed analysis, which might be useful. Life Insurance Consideration #3: VGLI is not as compelling as SGLI.  Therefore, you need to think about the long-term cost of your insurance. The decision to obtain Servicemember’s Group Life Insurance (SGLI) is a no-brainer.  At $7.00/month per $100,000 of coverage, there is no cheaper insurance alternative, anywhere.  However, once you transition, rates start to go up for the same coverage under Veteran’s Group Life Insurance (VGLI).  At its cheapest (for ages 29 and under), coverage starts at $8.00/month per $1,000 in coverage.  This goes up in 5-year increments until age 75 and older.  The increases are as follows: 30-34: $10.00/month per $100,000 35-39: $13.00/month 40-44: $17.00 45-49: $22.00 50-54: $36.00 55-59: $67.00 60-64: $108.00 65-69: $150.00 70-74: $230.00 75+ $460.00 In comparison, the insurance rate outlined in my term life insurance article amounts to $195/month for $1.5 million in coverage, or $13.00 per $100,000.  This rate is roughly in line with VGLI for a 35-year old.  Since the insurance underwriting process will produce different results depending upon your circumstances, you’ll want to at least do enough work so that you can compare the numbers in your situation. Which leads us to the last two points. Life Insurance Consideration #4: The older you are, the more expensive a commercial policy will be to start. The first three points in this article outline some of the factors that might influence how much commercial insurance coverage you may need.  This point is that by delaying their decision to obtain an insurance policy, many people drive up the cost of insurance when they eventually obtain one. Using USAA’s online life insurance estimator, you can run the numbers yourself.  If you dont like USAA, there are many insurance companies that offer similar tools.  Below are the monthly premiums that I pulled up (as of 3/19/17) on USAA’s website for a 30-year, $500,000 policy, for a non-smoker with no significant medical issues and with normal weight.  The only change is for age: Age                             Premium 40                                $57.49 41                                $62.49 42                                $67.07 43                                $72.90 44                                $79.99 45                                $90.40 Disclaimer:  Since these numbers are purely an online estimate, you may (and probably will) find different quotes for your personal situation.  These examples are not intended to constitute insurance advice, but merely for educational purposes to illustrate the impact that age has on insurance rates.  Also, quotes from an online tool may (and probably will) differ from the quotes after the underwriting process has been completed. With that said, in this scenario, merely waiting for 5 years drives up the cost by $32.91 per month, or 57%.  Over the course of a 30 year policy, this would end up being a difference of almost $12,000.  Even a delay of 1 year can result in a 5-15% increase in rates. Why 5 years?  Let’s think about it.  In many cases, the best opportunity to purchase insurance for post-military life is a year or two BEFORE separating.  This is particularly true if you’re filing a VA disability claim.  However, if you haven’t already done so by the time you separate, you’ll probably be inclined to wait to see what post-military life looks like (salary, location, etc) before you actually get a policy.  This period could be about 5 years. There’s also an unintended secondary effect.  Merely postponing the execution of a decision (in this case, purchasing a 30 year policy) without making the appropriate adjustments (like adjusting to a 25-year term, if that’s part of a financial plan) could leave you: Woefully underinsured during the years where you need coverage Drastically overinsured in later years after you’ve achieved financial independence To clarify, the point is to: Emphasize the importance of planning for your insurance needs early in your transition Realize the impact that age plays in the price of life insurance Life Insurance Consideration #5: If you decide to pursue commercial life insurance, you should do so before you file a VA disability claim. As I discussed in a previous article about my personal life insurance policy experience , one of the questions that insurance underwriters ask is: “Have you ever, or are you currently, filing for disability benefits?” I don’t presume to know anything about insurance underwriting, but I imagine that answering ‘Yes’ to that question may warrant a more thorough search of your medical records.  Being able to say ‘No’ doesn’t guarantee that anything will go smoothly, particularly if you have conditions or diseases that you have to disclose. However, there are many conditions that people worry about, which insurance companies determine to be non-issues.  During my underwriting process, I disclosed my asthma, high blood pressure, and a variety of other factors.  My premiums came back at a preferred rate, meaning that I qualified for the lowest premiums for my demographic. Maybe this would have happened if I checked “Yes.”  However, I’m glad that I didn’t have to find out. Conclusion Figuring out how life insurance fits into your financial plans can be a daunting process.  Trying to figure it out while you’re transitioning can be even more difficult.  However, taking some of these factors into consideration might help you make the decision that’s right for your situation. What do you think?  What other factors should you consider when looking at life insurance as you transition from the military?  Feel free to post your comments below or join the Military in Transition Facebook Group ! Save Save Save The post 5 Life Insurance Considerations for Your Military Transition appeared first on Military in Transition .
  • The understanding of addiction as a health care crisis is growing in society. For purposes of this article, we’ll define addiction as a compulsion to use a habit forming chemical, such as alcohol, heroin, cocaine, meth, or prescription drugs, and drugs will be considered to include alcohol. In addition to the emotional trauma that addiction can bring to an individual and family, monetary impacts can be huge. Chemical habits can be expensive. Money intended for household expenses might be diverted to buy alcohol or drugs. With intensive drug use, assets might be sold, accounts deleted, and credit cards charged to the limit. If someone other than the addict isn’t monitoring finances, financial repercussions can be devastating. Regardless of who is in charge of day-to-day money decisions and investing, both spouses should be familiar with how to access accounts and check them regularly. Even after an addict is drug free, it’s wise to keep a close watch on accounts and potential theft. Addicts occasionally relapse – sometimes more than once. Another potential impact of addiction or chemical abuse is poor job performance. While some addicts are relatively high functioning or don’t use drugs at work, if there is impairment that negatively effects their job, it can result in missed work, lost promotions, reduced wages, or ultimately job loss. This can impact the individual as well as the entire family. There are various forms of treating addiction. Several twelve step programs are free, although donations are accepted. There are counselors and therapists who specialize in addiction treatment. These services, generally with appointments at least weekly to begin, can cost a few hundred to thousands of dollars per month. If inpatient treatment is appropriate, a 21 to 30 day stay is often recommended with follow up treatment after discharge. This intensive treatment may cost tens of thousands of dollars, with health insurance policies under the Affordable Care Act generally covering some of these costs. With extreme use, an addict might resort to illegal acts to obtain drugs. Stealing from others, selling drugs, and violence to get money or drugs can result in arrest. Only individuals of limited monetary means are eligible for a public defender and legal fees to defend from charges can easily run to thousands of dollars. Any criminal record can impact future earning capacity and limit job eligibility. Some employers, through legal limitations or corporate policy, won’t hire an individual with a felony record. Ignoring or denying a problem is one of the most expensive mistakes you can make. If you’re suffering from addiction, get help. Many people operate in our Happy Hour and Party Drug Society without drinking or using drugs. If you care about someone who is an addict who’s succumbing to the compulsion to abuse drugs or alcohol, encourage treatment. You can’t make an addict stop using, but you can set your own boundaries. And you can emotionally support your loved ones as they fight to overcome challenges.
  • Andrew Faas Can we really afford the price of unnecessary workplace stress? According to a 2015 Harvard University study published in the journal Management Science, more than 120,000 deaths a year may be due to stress at work resulting in approximately 5-8 percent of annual healthcare costs.   The desperate need to create psychologically healthy workplaces has come to the attention of major
  • Growing Up

    For years, kids hoped to grow up to be a ballet dancer, President, a cowboy, or a world famous author. That’s not new. And while many are tired of hearing about what’s wrong with participation trophies, the concern might not be completely misplaced. As school is starting up, it’s an excellent time to talk to kids – no matter where they are in their education – about how to hone in on a career. What someone does professionally is an integral part of life. It’s the biggest single commitment during our waking hours and determines what lifestyle we can afford. Too often the choice of a career path starts in a backwards way. It’s reasonable to focus on lifestyle, but when someone pursues an occupation strictly based on how much money can be made, it can result in a miserable life. Many lucrative professions require more time than a regular workweek to become established. So doing something just for the money can leave little time to enjoy that money and make the long hours of work tedious. If you have children who are still in school, find out which subjects they enjoy the most. Encourage them to look into careers that use the skills involved in those subjects. Part of exploring a career field is finding out the pay scales. There are a few jobs that don’t pay a living wage. But generally an occupation that provides full time employment provides pay that ultimately will provide the worker with enough money to live on. There are two big problems for children in finding the right career. One is kids not knowing what they want to do. They haven’t given intentional thought to the productive activities and school subjects they enjoy. The other, which is even more dangerous, is failing to set up a lifestyle that matches what they are making. A young woman who gets a teaching degree won’t make the same income as if she went to law school. The teacher can live a good life on what teachers make. And if she’s a public school teacher, she’ll be eligible to retire with a nice pension after 20 or 30 years of teaching. And, if she wants, she can pursue a second career, making even more money. But if she spends more than her teaching salary provides, the future income from that teaching pension won’t be enough for her overspending. One of the best things about finding a career that you like is that work is enjoyable. Sure, everyone has days that they wish they could stay in bed or go for a hike instead of going to work. But having a livelihood that’s interesting and gratifying is a benefit of its own. The money is important, but the pleasure of doing work that’s emotionally and intellectually rewarding flows into the lifestyle that the income supports. And if you do what you love, you never really work for a living.
  • MONEY TALKS  Anyone who has poked their head outside the last two weeks couldn’t help but notice that winter is fading and spring is steadily approaching. While the melting snow and chirping birds may give some solace that the dark and cold days are behind us, it’s also a reminder that tax season is quickly approaching. Each year millions of Americans make simple mistakes hastily trying to get their tax returns filed before the deadline. Before you file this year’s return, be sure to check this list to make sure you are not making one of the seven deadly tax sins. 1. Missing the Deadline  If you procrastinate getting your tax documents together, there is a good chance you could miss the April 15th filing deadline. Missing the deadline itself is not a huge issue unless you fail to notify the IRS in advance. Be sure to file a Form 4868 extension request if you are going to be late filing your taxes, which will give you an automatic six-month extension to file your return. Keep in mind that the extension is only on the filing of the tax return, not the payment due. If you think you may have a balance due with your tax return, be sure to make an estimated payment with your 4868 to avoid any penalties and interest.  2. Filing the Wrong Tax Forms  Opting to use the Form 1040EZ because, as the name suggests, it’s easy to file could be a costly mistake. The 1040EZ forces you to take the standard deduction and does not allow you to itemize your deductions. Opting to file Form 1040 instead will afford you the option of choosing to itemize your deductions or take the standard deduction, whichever is higher. If you had significant medical or dental expenses, live in a state that taxes your income, paid real estate taxes or mortgage interest, donated to charity, or had a home office, then you should seriously consider filing a 1040 to maximize your deductions. 3. Spelling Your Name Wrong  Believe it or not one of the more common mistakes you can make on your tax return is to misspell your name. Whether it was a typo, you didn’t use your full legal name, or you recently married or divorced and haven’t registered a name change with the Social Security Administration, you need to make sure the name listed on your tax return matches your Social Security Card. Making a simple error could lead to a rejected return. Even if your return is accepted your refund could be delayed if the name on the check doesn’t match that on your bank account. 4. Wrong or Missing Social Security Number  Forgetting to include or entering the wrong Social Security number for you, your spouse, or your dependents is one of the most common errors you can make when filing your tax return. The IRS uses Social Security numbers to cross-reference information it receives from your employer and other financial institutions. If unable to do so, the IRS could reject your tax return. Avoid this simple mistake by verifying each Social Security number on your tax return matches the corresponding Social Security card(s). 5. Selecting the Wrong Filing Status  Filing under the wrong status is commonly made by single parents whom mistakenly file as Single instead of choosing Head of Household. If you have a qualifying dependent living with you and provided more than half the cost of maintaining the home then you may be eligible to file as Head of Household, which will give you an extra $3,000 in deductions. Another common mistake is for a recent widow or widower to file as Single. Widows or Widowers can file as Married Filing Jointly (MFJ) in the year of death. Furthermore, you may be able to file as a Qualifying Widow(er) for two more years if you have a dependent child in the house.  6. Forgetting to Sign and Date Your Return  Technically speaking an unsigned return is incomplete in the eyes of the IRS. This means that your return may not be accepted and could be considered late, leaving you liable for penalties and interest. Be sure to sign and date your return! Keep in mind that if you are MFJ, then your spouse has to sign as well. Remember, if you are electronically filing you are not exempt for this requirement. If you are e-filing you need to sign the return using an electronic Personal Identification Number (PIN).  7. Making Math Errors  The most common error year over year on tax returns is mathematical mistakes. In fact, every year the IRS catches millions of math errors as a result of poor arithmetic and/or inaccurate transposition. Using a tax software program will dramatically reduce the likelihood of a math error. That being said, tax software does not guarantee your return will be mistake free. It’s imperative that you double check the numbers you input because the software is not smart enough to know whether or not you are entering the correct figures. Filing an inaccurate return due to a math error could lead to big trouble with the IRS and less money in your pocket.
  • The financial planning landscape can be pretty confusing.  Not only is it difficult to figure out who has your best interests in mind (as the debate over the fiduciary standard is pretty confusing), but it’s also difficult to figure out who is in the business of EARNING their fee, vice collecting it.  This article should serve as a quick snapshot (and starting point for discussions) on what a consumer should consider to be the minimum standard for hiring a financial planner.  Meeting these criteria doesn’t necessarily mean success, but failing to do so should prompt you to keep looking for someone else. 1.    Tax planning  Financial planners aren’t necessarily tax professionals.  Most planners don’t prepare taxes for their clients.  However, you cannot make the best financial decisions without considering the tax consequences.  Having a financial planner tell you:  “You should talk to an accountant about THAT decision” often means, “I’m really just here to talk with you about your investments (or insurance products).” Conversely, true financial planners usually have the Certified Financial Planner™ (CFP®) designation.  As part of the certification process, CFP® certificants have a working knowledge of taxes.  They might not be tax professionals, but they generally understand the tax implications of the decision-making that accompanies the financial planning process. Many financial planners have additional tax credentials.  For example, many certified public accountants (CPAs) end up becoming financial planners as well.  CPAs can make great financial planners for people who have complex tax situations (such as small business owners), who also have financial planning needs. An overlooked credential is the enrolled agent (EA) designation.  EAs are recognized by the IRS as tax professionals, similar to CPAs and attorneys.  This means that an EA can give tax advice to a client, then represent their client if the IRS decides to audit them. Regardless of the designation, NOT offering tax planning as part of the financial planning services should be an immediate disqualifier.  There are too many financial planners who can provide tax planning for you to settle for less. 2.   Advice on major financial decisions Should I sell my house (or buy a new one)?  Can I afford to buy a new car?  Should I accept this job offer? These are all legitimate financial planning questions.  Discussing these questions is among the services that your planner should offer.  In fact, most reputable planners will tell their clients, “BEFORE you make a major financial decision, please discuss it with me.” Why would a financial planner do that?  Because it’s easier to prevent problems than it is to fix them.  By making themselves available before the decision, a financial planner can help you avoid a bad decision they might see coming.  If it’s not worth their time to see you about a major decision, then they’re not worth their fee. At the same time, beware the person who seems to answer all of life’s questions with a new investment or insurance product.  While many broker reps will give unbiased advice for their clients, some people have the reputation of having a toolbox filled with hammers (because every problem looks like a nail).  If the conversation steers you towards an agenda that doesn’t feel comfortable, run away. 3.    Financial planning based upon major life changes Life happens.  As life happens, it has an impact on your finances.  There are at least two major types of these changes:  anticipated & unanticipated. Anticipated changes:  These can look like the major decisions I alluded to above.  They can also include things like your children’s graduation, or a parent passing from a long-term illness.  But they’re not decisions…they’re things that happen.  Sometimes, you can anticipate an event, but can’t act until the event happens.  For example, if you have a loved one who’s going through a debilitating illness, you can anticipate what’s going to happen.  But, if you’re the executor of their estate, you cannot do anything in that role until that person actually dies.  A good financial planner makes themselves available when the time is right. Unanticipated changes:  This can be a car accident, sudden inheritance, or a terminal disease diagnosis.  Or it can be any number of things that you couldn’t expect.  But you know it’s going to impact your finances, and you need to adjust your plan.  Now.  Your advisor should be available to help you deal with these changes. 4.   Evaluating documents that have to do with financial decisions Except in the most extreme situations, people usually end up dealing with contracts.  Loan documents, workplace retirement plans, insurance policies, wills & trusts, and health care plans are all examples of contracts that are: Important Require decisions Hard to understand Your financial adviser should offer to help you understand these documents.  While they might not be able to provide legal advice (financial planners can’t do that unless they’re licensed to practice law), they should be able to walk you through the financial impacts of a document you’re about to sign. 5.    Regular communications Depending on your personality, this can be a huge pet peeve, or it can be a non-issue.  However, your financial planner should at least send you regular emails regarding: Upcoming appointment opportunities Important events, such as tax-filing deadlines or end of year notices Items that you may have discussed as important, such as stock-market fluctuation Many people may feel that they don’t need to be bothered.  However, there’s a difference between the client saying that and the adviser not bothering.  The adviser should be in tune with their clients so they understand: What the client wants the adviser to proactively discuss Issues, concerns, and priorities the client may have How the client wants the adviser to communicate with them At the very least, the adviser should proactively offer to schedule regular appointments to ensure that everything is up to date.  For example, a client may not want to have an annual estate planning discussion.  However, the adviser should at least have a process that informs the client of what the adviser is currently tracking (for example, a list of the beneficiaries based upon the latest copy of the will and account documents that the adviser has).  That way, if the client knows that something needs to be updated, they can schedule an appointment at their convenience. Conclusion Today, the financial planning landscape is more complex than it has ever been.  Today’s true financial advisers are much more capable than the stockbrokers of the 70s & 80s, or the mutual fund salesmen of the 90s.  As a result, clients need to be more discerning and knowledgeable about financial planning truly covers. The adage, “You get what you pay for” doesn’t apply to today’s financial planning environment.  The right financial adviser relationship can bring you value far beyond the cost of the adviser’s services, while there are plenty of salesmen who are willing to separate you from your money.  While this article outlines five basic services you should see from your adviser, it’s just a starting point.  Ultimately, it’s up to you to determine whether you’re getting the value that you want. What do you think?  Are you getting what you expect from your adviser?  If you have questions, feel free to send me an email or post your comments below! The post Five Little-Known Services Your Financial Planner Should Be Offering appeared first on Military in Transition .
  • It’s a bill we pay every six months, yet if all goes well we never financially benefit from it.  It’s property and casualty insurance, which for most people means homeowners, auto, liability including umbrella coverage, and renter’s insurance.  You may
  • Lynnette Khalfani-Cox Getting Out Of Debt Eight out of 10 Americans owe some form of debt.  So there is a good chance a listener or someone you know has debt and would like to get out of it.  From excessive credit card bills and mounting student loans to hefty car payments and big mortgages, debt can be crippling – and not just financially. Debt takes a toll on you in many ways. It
  • Hello! A lot of people dread the idea of seeing a financial advisor. But as one of my best friends frequently says: The truth will set you free. And this month I debut a new feature called What I am Reading. Read on to learn more. Best, Michelle Morris, CFP®, EA BRIO Financial Planning Recently clients sent me the following cartoon: NON SEQUITUR © 2017 Wiley Ink, Inc.. Dist. By ANDREWS MCMEEL SYNDICATION. Reprinted with permission. All rights reserved. They did say not to take it personally! I love this cartoon, even if it does suggest that going to hell would be preferable than coming to see me! There are a lot of reasons people dread the idea of talking to a professional about their finances. There is a general taboo in this country about talking about money. Weve all heard the adage not to discuss money, politics or religion at a dinner party. Maybe thinking about money stirs up negative emotions dating back to childhood. Perhaps your mother was an extreme miser or your father spent most of his paycheck on booze. Maybe you are fearful of running out of money and becoming a bag lady. Its easier to ignore the fear rather than facing it. Maybe numbers hurt your head. Maybe youre busy and think it will all work out somehow. But its impossible to avoid lifes twists and turns and nearly all of them involve questions about money. How has my financial and tax situation changed now that I am married/a parent/divorced/widowed? What funds should I pick in my new jobs 401k plan?What should I put on my new jobs W-4 form? What should I do with the old jobs 401k plan? Will I ever be able to retire? Should I contribute to an IRA? What kind of IRA? Where should I get an IRA? Uncle Horace died and left me money, what should I do with it? What should I do with the dusty stack of savings bonds from Aunt Louise? Do I need a will? Do I need a trust? Where should I go to get either? Do I need life insurance? How much? What kind? What happens if I get sick and cant work? Do I have the right mix of investments? Im worried the stock market is going to crash, what should I do? How can I get better return on my portfolio? How can I lower my tax bill? (Likely your largest bill!) Should I buy a house? How much house can I afford? Should I pay off my mortgage? Should I refinance my house? Should I buy a second home? Should I buy the annuity my brother-in-law Bob is trying to sell me? How should I save for college? When should I start taking Social Security? The list goes on and on and on. Its overwhelming. Its anxiety producing. But its not quite as bad as eternal fire. As another of my friends says The way to eat an elephant is one bite at a time. Comprehensive financial planning can help you answer all these questions, one at a time, in the context of your big picture. And Im pretty sure most of us have comfortable climate-controlled offices.
  • Its tax season, and you should give a tax person a hug and a cup of coffee. This month I helped two clients who installed insulation save money on their tax returns with a home energy credit.
  • What I Am Reading

    Each month I share with my readers something I read that I enjoyed, whether or not it has anything to do with finances. I am fortunate to have many smart and supportive colleagues. Recently, my friend and colleague Christina Larson CFP® wrote a wonderful post on why she uses Dimensional Funds for her clients. I also use Dimensional Funds and Christina did a great job explaining why!
  • No one wants to grow up to be a goal setter. But somewhere between high school and college graduation we realize, if we want to be that marine biologist or that fire fighter we always hoped for, we’re going to have to set a goal.
  • “2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc.  Warren Buffett’s annual “Letter to Berkshire Shareholders” was published recently and had some interesting food for thought as always. Stick with low cost index funds because actively managed funds rarely outperform them, net of fees – very similar to what we advise our clients. What about the smooth talking “financial advisors” that make a lot of promises about outperformance and recommend “proprietary strategies” and fancy (and expensive) funds? He quotes an appropriate old adage:  “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”  Clink Here to Read Warren Buffetts Letter Here’s a link to an interesting research paper that explores whether a group of funds that outperform their benchmarks in one period can continue to do so in subsequent periods. Conclusion: Not very likely. Picking fund managers solely on past performance is not a winning strategy.   Click Here for the Research Note The race to the bottom continues: Last month we mentioned that Charles Schwab had lowered its standard commission price to $6.95 per online stock or ETF trade (lowest in the industry at the time). Well, last week they lowered it again to $4.95 per trade, matching Fidelity (who had lowered their trading commission from $7.95 a week prior in response to Schwab).  We suspect this downward spiral will continue – which is good news for investors. If you are or know a teacher or a public employee paying into the state pension system, here’s an interesting article that was recently published in The New York Times which compares the teachers’ pension fund in Puerto Rico to a legalized Ponzi scheme. The article includes an interactive map that compares teachers’ pension plans by state.  Ohio was one of 6 states that received an “F”. Click Here to Read the New York Times Article Chart of the Month: Pie chart that shows the breakdown of federal expenditures according to the Congressional Budget Office (CBO) and how it is expected to change in the next 30 years. Bottom line: Entitlements are crowding everything else out, which suggests that taxes will probably need to go up in the future.  We think this underscores the potential benefit of strategic Roth conversions (e.g. taking advantage of low income years in retirement before RMD’s). Source: Wall Street Journal Daily Shot 3.6.17; OFFIT Capital. h/t Anne
  • Reducing Your Tax Bill  Paying the right amount of taxes is a factor in people finding Financial Freedom.  I believe if a person can control their taxes, pay off their mortgage and car, financial freedom is within their reach in a short period of time.  During today’s show we will focus on helping you to understand about reducing your taxes to fund your Financial Freedom.  It is
  • I’ve written several articles about Roth conversions, particularly tax planning considerations & marginal tax rate impacts .  This article serves as a case study to help visualize how a Roth conversion strategy could work, and how the tax liability can fluctuate based upon the timing of Roth conversions.   There are many variables that affect tax liability for Roth conversions, including: Time horizon: The more time you have before required minimum distributions (RMDs) begin, the more years you can spread conversions.  This can allow you to maximize conversions during years with low taxable income & lower conversions during years of high taxable income Amount to be converted Total taxable income: The lower your taxable income, the more you can take advantage of conversions at the lowest tax brackets.  Additionally, the lower your income is WITHIN your current bracket, the more you can convert without spilling over into a higher bracket Investment returns on the traditional account: The higher your investment returns, the more you will have to convert.  For example, if you start with $500,000, you not only have to account for that amount, but for the future gains in that account. We’re also disregarding the Medicare Tax on Investment Income, which is 3.8% of income over $250K. In this article, we’ll use a fictional example of a military family looking to do a Roth conversion from their traditional TSP account to an IRA as they transition to post-military life.  However, we won’t focus on the WHY.  Instead, we will solely focus on three ways they could do so, and which manner presents the lowest overall tax liabilitythe HOW. In real life, the comparison of current and anticipated future tax brackets plays a very important role in the Roth conversion decision.  As a result, the decision on whether to perform a Roth conversion depends on a variety of factors that we won’t discuss here.  However, if you’re looking for a financial planning ‘rule of thumb,’ the below picture represents a close estimate from one of the financial planning profession’s thought leaders, Michael Kitces . As you can see, there appears to be an inflection point at the 28% tax bracket.  In the 10%, 15%, and 25% brackets, it appears that Roth conversions may be warranted.  In the 33%, 35%, and 39.6% brackets, it seems that Roth conversions should be avoided.  However, without context on what post-retirement tax bracket you’ll be in, it’s hard to make this an absolute rule. Disclaimer There are a lot of complexities involved in tax planning.  To avoid getting off-topic, I will make a lot of tax planning assumptions in this article.  Additionally, I will round numbers (such as salary or pension amounts) where possible.  As a result, this situation will seem overly simplistic. I will do my best to account for these variables, but there may be something that I omit.  Accordingly, this article should be read for educational purposes, not instructional purposes. Tax planning in real life is much messier than in this example, and is not a static process.  Proper tax planning should incorporate a tailored approach for each individual situation, and should be reviewed periodically.  While it’s possible to do so yourself, you may find the need to work with a tax professional or fee-only financial planner . Final disclaimer:  This article was written to be a work-in-progress.  The intended point is to highlight the benefits of converting to a Roth account at the lowest possible tax-rate.  However, Ive enclosed the a copy of the Roth Conversion spreadsheet that I used to come up with the information below.  If you have any suggested edits, comments, critiques, or concerns, PLEASE post a comment below, or email me < forrest@westchasefinancialplanning.com>.  This is not a perfect document, and I expect that it will only improve if you help me identify mistakes so I can correct them.  I will do my best to update this article as quickly as possible. Introduction Let’s welcome the Smiths.  The Smiths are retiring from the military and expect to settle down in their home of record.  John is retiring as an O-5, and expects his pension to be around $40,000 per year.  They also expect their pension to increase at the same rate of inflation.  For planning purposes, they’re using 3.77%, which is the historical average post-WWII inflation rate .   In their home of record (with no state income tax), they expect John’s new salary to start at $50,000 per year, with average salary increases of 2% per year.  The Smiths have saved $500,000 in their traditional TSP account, and would like to convert to a Roth before retirement to avoid RMDs.  They plan to do their TSP conversions to an IRA.  They don’t know if they will be in a higher tax bracket in retirement, but they would rather pay their taxes now so they can live worry-free later on.  The Smiths just turned 45, so they have about 25 years before RMDs become a concern, and are trying to figure out how to convert their account in a way that gives them the largest after-tax Roth balance at age 70. We will compare several scenarios, which dictate the top marginal tax rate at which the Smiths are willing to do a Roth conversion: Scenario 1:  Immediate conversion.  This means that the Smiths will immediately convert to a Roth IRA.  Due to their income & conversion amount, this will push them into the top tax bracket, 39.6%.  In addition, they’ll incur the Medicare tax on investment income over $250,000, which is not calculated here. Scenario 2:  25% rate.  This means that the Smiths will convert as much as possible up to the 25% rate each year.  Since they do not want to pay more, they will wait until the following year to convert additional amounts.  In 2017, this amount is $153,100 for a married couple filing jointly. Scenario 3:  28% rate.  Same as Scenario 2, except the Smiths will convert at the 28% rate as well.  In 2017, this amount is $233,350 for a married couple filing jointly. Scenario 4:  33% rate.  Same as Scenario 3, except the Smiths will convert at the 33% rate as well.  In 2017, this amount is $416,700 for a married couple filing jointly. Scenario 5:  35% rate.  Same as Scenario 4, except the Smiths will convert at the 35% rate as well. Assumptions Here’s where we’re going to make some assumptions strictly for the purposes of simplifying this scenario.  Doing so is the only way that I can provide supporting documentation (in the form of an enclosed spreadsheet that anyone can use for their purposes). While some of these assumptions may be true, it’s highly unrealistic to expect most (or any) of these factors to remain the same over a 25-year period.  It’s also unrealistic to attempt to make some projections (future IRS tax brackets, for example), so I’ve kept them constant for this article. In a true planning situation, these factors would be re-evaluated on a regular basis to account for changes: Income growth. We’re assuming zero change in employment status, other than consistent annual raises.  Also, we assume zero additional income from other sources, like after-tax investments or capital gains (like from an accidental rental).  We’re also assuming a flat, 2% raise in salary. Inflation (COLA raises) remain the same over time. For this scenario, I used 3.77% for annual pension increases.  Although this is the post WWII average inflation rate, this rate has fluctuated, and would change annually. A consistent annualized return on investment. This return is after account management fees.  Investment results depend on a variety of factors, and it is not possible to predict future rates of return.  For projection purposes, financial planners often use an annual rate of return, based upon expected long-term results that are consistent with the investment selection.  In this case study, we’re using 7% as an average long-term return.  This is probably lower than most projected returns. Tax brackets remain the same over time. The IRS typically updates tax brackets annually to account for inflation.  In this case, I’ve kept them the same. Additionally, it is possible for many servicemembers to use the 10% & 15% tax brackets for tax planning purposes.  In fact, if you’re still on active duty, you should look at taking advantage of these lower tax brackets for Roth conversions. However, this working document does not include these tax brackets because in most cases, transitioning military personnel (especially those with pensions), will find their taxable income above the 15% bracket.  In this situation, the Smiths’ starting income precludes them from converting at the 10% or 15% rate.  The tax brackets that we will use (for a married couple filing a joint 2017 return) are as follows: 25%  $    75,901.00  $  153,100.00 28%  $  153,101.00  $  233,350.00 33%  $  233,351.00  $  416,700.00 35%  $  416,701.00  $  470,700.00 Scenario 1:  Immediate Roth conversion of the entire TSP account.  In this scenario, the Smiths convert 100% of the TSP account to a Roth IRA, without regard to tax liability.  This approach will allow them to avoid RMDs, and will allow them to enjoy their retirement account growth on a tax-free basis.  Additionally, they can withdraw their conversion amounts at any time without penalty, as long as the account has been open for 5 years.  If they’re opening a new Roth account for a rollover & conversion, they would have to wait 5 years to start withdrawals. In doing this, the Smiths would pay $167,533.30 in taxes to convert the entire $500K amount.  This represents an effective tax rate of 33.51% on the conversion.  If this money were to be left alone and grow at the stated rate (7% annually), it would reach a total of $1,686,393 by age 70.  This money would be tax-free and free of RMDs, so it could continue to grow tax-free infinitely. Scenario 2:  Roth conversion at no higher than the 25% rate. Under this scenario, the Smiths will convert a portion of their Roth account every year, but only to the point at which they fill out the 25% tax bracket.  Since their combined income exceeds the 15% tax bracket ($75,900 in 2017), we can assume that all of their conversions will occur in the 25% tax bracket.  For a married couple filing jointly in 2017, the 25% tax bracket ranges from $75,901 to $153,100.  In year 1, their combined $90,000 in income would leave them with $63,100 to convert before they ‘bump up’ to the 28% tax bracket.  In year 2, their combined income increases to $91,800, leaving them with $61,300 to convert. Should the Smiths consistently apply this approach, they will have completed their TSP conversion by age 57.  However, after year 19, the Smiths’ income will have grown to the point where they can no longer convert at the 25% bracket.  As a result, they will still have a little over $111K remaining in their TSP account.  By age 70, their $111,000 this will have grown to over $167,000. The Smiths would pay $171,144.77 in taxes for their Roth conversions.  This is more than the total amount converted in Scenario 1.  However, it also includes the conversion of income growth within TSP account.  As a result, the Smiths will have a total of $684,579 over the course of 19 years.  This represents an effective tax rate of 25% on the entire conversion. Accounting for inflation, the Smiths will have paid a net present value (NPV) of $137,658.60.  In other words, using the inflation figure in the scenario, $137,658.60 represents the current value of the $171,144.77 tax liability paid over 19 years.  Conversely, the $167,533.30 in Scenario was paid in Year 1, so there is no inflation impact. If allowed to grow over time, the Smiths will have accumulated a little over $1.7 million in their Roth account.  When combined with their TSP account, their combined retirement accounts come to a little over $1.95 million. While this represents the most accumulated wealth of any scenario, the Smiths will have to deal with RMDs under this scenario (see summary table below). Scenario 3:  Roth conversion at no higher than the 28% rate. This scenario resembles Scenario 2, except the Smiths now convert at the 25% and 28% marginal rates.  Since they’re able to convert more of their income each year, they’re able to finish their conversions by Year 4. Scenario 4:  Roth conversion at no higher than the 33% rate. This scenario resembles Scenario 3, except the Smiths now convert at the 25%, 28%, and 33% marginal rates.  Since they’re able to convert more of their income each year, they’re able to finish their conversions by Year 2. Scenario 5:  Roth conversion at no higher than the 35% rate. This scenario resembles Scenario 3, except the Smiths now convert at the 25%, 28%, 33%, and 35% marginal rates.  Since they’re able to convert more of their income each year, they’re able to finish their conversions by Year 2.  This essentially is no faster than Scenario 4, but a little more expensive, since there is income that’s converted at 35% instead of at 33%. Side-By-Side Comparison & Observations Below is a breakdown of the numbers from each scenario. Maximum Conversion Rate Total Tax Liability Inflation Adjusted Tax Liability Average Tax Rate Roth Account at Age 70 TSP Account at Age 70 Total Accounts Years 25% $171,144.77 $137,658.60 25.00% $1,785,068.10 $167,019.16 $1,952,087.26 19 28% $146,937.90 $139,350.10 26.71% $1,858,855.61 $1,858,855.61 4 33% $152,006.87 $147,265.82 29.52% $1,787,201.54 $1,787,201.54 2 35% $151,839.47 $151,839.47 29.71% $1,781,723.38 $1,781,723.38 2 40% $167,533.30 $167,533.30 33.51% $1,686,393.10 $1,686,393.10 1 Observation 1:  All scenarios allowed for Roth conversions before RMDs were to begin.  The only limitation was in the 25% scenario, because the Smiths’ income eventually exceeds the 25% tax bracket.  Realistically, this probably would have stretched out a few years longer because the IRS normally adjust tax brackets for inflation.  It’s feasible that when tax bracket adjustments are taken into account, the Smiths could have completely converted before age 70 ½. In a real-world scenario, it might be worthwhile to evaluate Roth conversions in the context of retirement planning.  Odds are the Smiths could have been in a position to retire in their 60s.  If that’s the case, they could have done much of their conversions in the 15% tax bracket.  Retirement years can be a great opportunity to take advantage of low tax brackets for Roth conversions…just ask Doug Nordman .  He’s been retired since his early forties. Observation 2:  The Smiths actually paid more in taxes under the 25% scenario than any other scenario.  However, when you account for the tax-deferred growth INSIDE the TSP account, you’re paying taxes on those earnings as well.  In the 25% scenario, the Smiths convert $684,000 from their TSP account, which is over a third more than the original amount. In real life, the total amount that is converted would depend on the investment performance on the pre-conversion assets over time. Observation 3:  When adjusted for inflation, the tax liability for the 25% scenario was actually less than any other scenario.  When accounting for the time-value of money, the net present value of Year 18’s tax bill ($2,012.50), actually ended up being roughly half:  $1,072.79.  Even though more taxes are paid over a longer period of time, the value of future taxes goes down in today’s dollars. The higher the inflation rate, the more important it is to account for inflation in your projections. Observation 4:  There is a direct correlation between converting at the lower tax bracket & having the most overall wealth.  Although there was less money in the Smiths’ Roth IRA under the 25% scenario than under the 28% scenario or the 33% scenario, that’s because the Smiths were unable to convert the full TSP amount.  In a scenario where the Smiths are able to convert 100% of their TSP into a Roth account (see figure below), converting at the 25% ensures the highest Roth account balance at age 70. Observation 5:  The more room you have within your tax bracket, the faster youll be able to make Roth conversions.  This sounds intuitive, but the more that youre able to convert within your desired tax bracket, the less youll have to convert next year.  Not only will you convert less of your principal, but youll convert less of the earnings upon that principal. Below is a projection using the same figures except that the Smiths start at a lower salary (conveniently at $35,900, which puts them at the 25% tax bracket).  This scenario would have allowed them to convert faster at the 25% bracket than in the original case study, since they had more room within their bracket to do so each year. Maximum Conversion Rate Total Tax Liability Inflation Adjusted Tax Liability Average Tax Rate Roth Account at Age 70 TSP Account at Age 70 Total Accounts Years 25% $161,744.95 $139,877.33 25.00% $1,902,137.61 $1,902,137.61 10 28% $143,434.96 $136,956.57 26.37% $1,866,855.00 $1,866,855.00 4 33% $149,402.60 $145,098.82 29.07% $1,798,377.44 $1,798,377.44 2 35% $149,235.20 $149,235.20 29.25% $1,792,899.28 $1,792,899.28 2 39.6% $165,474.70 $165,474.70 33.09% $1,696,835.08 $1,696,835.08 1 Conclusion While there are many factors that go into Roth conversions, it’s important to recognize the impact that your marginal tax rate can play in the timing of those conversions.  In each of these hypothetical situations, the Smiths had plenty of time in order to implement their Roth conversion strategy. I hope this article helped conceptualize the concept of spreading Roth conversions over a multi-year period.  However, it should not be considered a substitute for a financial plan that accounts for all the variables in your life.  If you have questions, you should talk with a fee-only financial planner or tax professional in your area.  If you’d like to share your thoughts with a community of like-minded individuals, please leave your comments below or join the Military in Transition Facebook Group ! Save Save The post Roth Conversion of a TSP Account: A Case Study appeared first on Military in Transition .
  • This educational briefing video is how the stars have aligned to put the U.S. economy in an economic sweet spot. The three-minute video is based on independent economist Fritz Meyer's analysis of newly released reports, including: ● January's Conference Board U.S. Index Of Leading Economic Indicators ● U.S. Census Bureau report on January retail sales ● The Citigroup Economic Surprise
  • This briefing's video holds Wall Street and the financial press accountable for perpetuating a myth of false financial idols.
  • Jane Young, CFP, EA While recently attending the national conference of the Alliance of Comprehensive Planners, I interviewed dozens of fee-only, Certified Financial Planners.  I asked them to share the most important piece of advice that they can give to their clients.  The answers were not exciting or complicated but practical, common sense recommendations that are useful to most everyone.   The most common piece of advice, by an overwhelming margin, was to save more and spend less.  Below are the top ten most important financial steps you should take according to some of the finest financial planners in the industry. Live Below Your Means Establish good spending habits early. Monitor your expenses for about three months and create a realistic spending plan that you can stick with.  Make intentional decisions to keep your spending well below your income and always maintain an emergency fund. Save at Least 10% of your Gross Income Start saving as early as possible. Everyone should save at least 10% of their income.  If you are getting started later you may need to save closer to 15% to 20% of your income Look at the Big Picture Take an integrated approach to your finances. Your financial life is a big puzzle with a lot of interlocking pieces.   Don’t make decisions in isolation.  Create a financial plan that serves as a roadmap to integrate all areas of your financial life including investments, taxes, insurance, retirement planning and estate planning. Be True to Yourself Live, spend, and invest in accordance to your values and goals, not to impress or compete with others. Create a Realistic Investment Plan – Create a diversified investment plan that you will stick with during significant market fluctuations. Your portfolio needs to support your investment time horizon and the level of risk that you are comfortable with. Hire a Good Financial Planner – Managing your finances can be more complicated and time consuming than you realize. A financial planner can help you integrate all aspects of your financial life and can provide an objective perspective on your situation. Don’t Invest in Complex Insurance and Investment Products – Avoid insurance and investment vehicles that require a team of attorneys to understand. The words in small print are probably not in your best interest. Maximize Contributions to your 401k and Roth IRA Fully utilize tax advantaged retirement plans and take advantage of an employer match where available. Don’t Let Family Members Derail Your Financial Plan – Don’t sabotage your financial security by paying for all of your child’s college education or by supporting adult children, parents, or siblings. You need to help yourself before you can be of assistance to others. Leverage Your Real Estate – Don’t be in a hurry to pay off a low interest mortgage on your personal residence. You can benefit from appreciation on your home with as little as 10% to 20% down.
  • I recently received a question regarding the taxation transitional compensation for abused dependents.  In researching my answer, I noticed that there is a lot of information on the subject.  However, most of this information seems to be in the form of laws, directives, and instructions, which doesn’t make it user-friendly for the people who might need it.  This article is my attempt to make this topic a little less intimidating for the people who might need to take advantage of this program. This article is written primarily for the mil-spouse who might need to find out more information.  However, it’s also written for the benefit of friends or family members who might be trying to help that mil-spouse, who might not be aware that such a program exists.  Finally, this article is a primer for the accredited financial counselors (AFCs) who might have heard about this program, but are not familiar with the references and instructions.  For AFCs, I’ve listed the DoD & service-specific references throughout this article so you can learn more about how to help your customers through the application process. This article is not meant to be a comprehensive guide, but merely a starting point to help people get to the right answer. Introduction:  What is Transitional Compensation for Abused Dependents? Simply put, transitional compensation for abused dependents (referred to as transitional compensation for the rest of this article) is payment to qualifying spouses & children of servicemembers separated from service or convicted at courts-martial due to ‘dependent-abuse offenses.’ Furthermore, this program allows for commissary & exchange benefits as part of the transition.  Finally, the program allows for limited medical & dental treatment.  Finally, according to the DoD Financial Management Regulation , transitional compensation payments are not taxable.  Transitional compensation recipients should not expect to receive a Form 1099 for tax purposes.  Also, recipients need not report transitional compensation payments on their tax return. How Much is Transitional Compensation? According to DoD Policy , transitional compensation for a mil-spouse is at the same rate as defined in 38 U.S. Code §1311 – Dependency & Indemnity Compensation to a Surviving Spouse .  There is also an additional amount for children under this section.  For children without a mil-spouse parent, the amount is the same as the rate defined in 38 U.S. Code §1313 – Dependency & Indemnity Compensation to Children .  You can find annual updates to these payments on the DoD Comptroller’s website . How Long Does Transitional Compensation Last? According to DoD policy, transitional compensation does not last more than 36 months.  The policy also describes situations in which it would last less than 36 months.  These include: Situations in which the servicemember’s obligated service (enlistment for enlisted personnel) is less than 36 months Qualifying offense is remitted or reduced to a lesser, non-qualifying offense Disapproval of administrative separation by competent authority There are also forfeiture provisions.  These include: Remarriage Cohabitation (living with the servicemember who was separated) Being an active participant in abusive behavior Because of these situations, it is important to become familiar with the DoD Policy as well as service-specific guidelines, outlined later in this article. How do I know if I’m eligible? Many people who are eligible for transitional compensation may not know whether they’re eligible.  If you believe that you’re in a situation that might qualify, the first thing you should do is set up an appointment with your installation’s financial counselor, chaplain or legal office. If you aren’t close to an installation or cannot find someone on your installation to assist, please join the Military In Transition Facebook Group .  This group exists specifically to help transitioning servicemembers & their families find the resources they need to make their transition.  There are AFCs in this group that can help put you in touch with the right people How do I apply? This goes hand in hand with the previous question.  If you’re able to set up an appointment with your installation’s financial counselor, chaplain or legal office, they’ll probably be able to help you fill out your Transitional Compensation Application form and get it to the right office.  By service, below are the starting points for you to get more information about claims submission: Army:    Installation Family Advocacy Program (FAP) Manager or victim advocate Navy:     Servicemember’s servicing personnel activity Installation Fleet & Family Service Center (per the Navy Instruction, but assume this means Fleet & Family Support Centers) Air Force:  Installation Military Personnel Flight Marines:  Installation Family Advocacy Program (FAP) Manager Coast Guard:  Family Advocacy Program Manager office References Transitional compensation isn’t just a DOD policy, it’s codified by U.S. Law.  10 U.S. Code §1059 authorizes the Secretary of Defense to establish a program to pay monthly transitional compensation to abused dependents.  DoD Instruction 1342.24, “Transitional Compensation for Abused Dependents,” further clarifies this as a matter of DOD policy.  Also, each service has its own policy: Army:  AR 608:  Army Community Service , Appendix H Navy:  OPNAVINST 1750.3: Transitional Compensation for Abused Dependents Air Force:  Air Force Instruction (AFI) 36-3024, Transitional Compensation for Abused Dependents Marines:  MCO 1754.11:  Marine Corps Family Advocacy & General Counseling Program Coast Guard:  Commandant Instruction 1754.16A: Transitional Compensation and Other Benefits for Abused Dependents Conclusion Transitional Compensation is a very important program for those family members who need assistance.  While the DoD & services have done a great job implementing this program, it appears that many dependents may be unaware that: Transitional compensation exists for their benefit What benefits are included How to apply for transitional compensation Who to talk to Although this article might help close some of the gaps, the most important aspect is getting access to the right office & resources.  To that point, please feel free to share this article.  Also, if there’s information that should be part of this article, please feel free to leave your comments below or join the Military In Transition Facebook Group ! 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  • David T. Scott  Account Based Marketing Owning your own business is the number one way to rapidly build extraordinary wealth.  A business not correctly manage will be a quick way to lose wealth.   Consistent marketing and client acquisitions are signs of a successful business.  Account Based Marketing (ABM) is the hot new marketing trend, popular with the Fortune 500. The
  • When it comes to providing financial advice, we like to think our advice is not unlike the “treatment” and advice doctors provide for our physical condition.  But, instead of treating a torn achilles, a heart condition or the flu, we provide advice on “healthy” asset allocation, tax strategies and retirement projections, etc. Recently, the Department of Labor has brought to light a concept known as “the fiduciary standard” which in the most basic terms means “always acting in the client’s best interest”.   So in the medical field, it’s the equivalent of having the assurance that your doctor’s advice and recommendations are what’s best for you and not for them.  On the surface, it makes perfect sense.  Of course, the devil is in the details as it relates to someone who calls themselves a “fiduciary” as this is not a black-and-white question.  Rather – there are shades of grey that must be defined in order for you to know exactly what kind of a fiduciary you are looking for.  And we think the best way to illustrate this is to compare it with how we work with doctors. We call this The Doctor Test and below we detail the four types of fiduciary.  (Note: For a more detailed analysis and background on how these standards developed, feel free to read a recent and comprehensive post from Michael Kitces, a financial planning industry expert.)  In short, we would like to see the financial industry operate with the same high ethics as the medical industry. Keep in mind, each of the following types of advisors can certainly claim to call themselves “fiduciaries” just like a medical professional earns the right to call themselves a “doctor”.  However, the TYPE of “fiduciary” or the means by which they practice is critical in evaluating whether your definition of a fiduciary aligns with your financial planner’s. 1. The “SEC” or State Registered Investment Advisor (RIA): This type of advisor complies with the Investment Advisors Act of 1940, which states they must not act in any way that is fraudulent or misleading.  Sounds great right?  BUT, this just means they must disclose their conflicts of interest, it doesn’t mean they don’t actually HAVE conflicts of interest.  So they could be paid on commissions for recommending that mutual fund, they just have to disclose it in their filings.  Did you really read the small print in the disclosure they provided? The “Doctor” Test:  You’re having chest pains and your doctor correctly diagnoses you need to take a particular prescription that would help treat the condition.  He or she recommends an expensive drug even though there’s a generic alternative at a fraction of the cost.  In the paperwork you signed, it says he could get taken on a fishing trip or a nice seminar in Barbados for recommending this drug.  Would you be OK with that? Of course not, and thats why doctors dont operate in this manner. 2. The Department of Labor (DoL) Fiduciary: This advisor complies with the new DoL regulation that requires “always operating in clients’ best interest” when providing retirement advice. Again- sounds great.  However, the problem is this standard only applies to investment advice on retirement accounts.  It says nothing about broader financial planning topics and does NOT apply to non-retirement accounts.  This makes no sense. The “Doctor” Test:  You’ve been experiencing knee pain and turn to a doctor for help.  She evaluates your knee and recommends an effective knee brace (with no financial incentive) to help you alleviate the symptoms.  But then you mention your aching back and while it could be directly related to your knee problems, she doesn’t have to provide the same heightened standard of advice and recommends an expensive, high-risk procedure to be performed by a doctor she gets a referral fee from.  Any doctor we know would never practice like this.  But just like our bodies are one system of interacting components, so are our financial accounts.  It shouldn’t matter if one is classified as a retirement account or one is not! 3. The Certified Financial Planner ® Fiduciary: The CFP certification is an outstanding program as it is comprised of a rigorous series of education requirements, comprehensive (and very long) exam and continuing education which covers almost all aspects of personal financial planning.  We are CFPs here at Magis Wealth Planning so we certainly endorse the high standards the CFP Board requires of its members.  While the certification is a great start in evaluating a planner, it’s not a legal  standard. Which means that to call oneself a CFP, you must pass their exam and agree to adhere to their Code of Ethics.  That’s fine but what if a CFP doesn’t comply?  There is no legal recourse. The CFP Board can’t fine anyone or subpoena anyone or force anyone to testify in a legal matter.  Their only recourse is to strip a violator of the certification.  While this might be detrimental, stripping one of their CFP mark does not preclude them from practicing as a financial planner. The “Doctor” Test:  Let’s say you’ve heard there is a doctor who has some high-level certification for rotator cuff surgery.  Of course if you need that procedure, you would certainly seek them out.  But what if he hasn’t kept up on the latest & greatest techniques and technologies associated with the surgery.  What’s the risk to him?  Well, he could lose that high-level certification.  But with a solid reputation already established, maybe he might not care.  But you would certainly care.  The point is the downside risk to the doctor is not as equitable to you as it is to him. 4. The “Crystal Clear” Fiduciary: In our minds, this is the most stringent standard that we believe all people seeking financial advice should demand.  These are financial advisors who usually are members of networks of like-minded advisors such as NAPFA & Alliance of Comprehensive Planners (full disclosure:  we are member of both organizations) which actually document and sign a contract with clients which explicitly states on paper they are ONLY compensated by client fees and there are no other means of compensation like commissions, referral fees or golf-junkets to the Bahamas for selling annuities. The “Doctor” Test:  We wish we could walk into a doctor’s office or a hospital and among all the paperwork we have to fill out (over and over again, it seems), see an explicit declaration that this doctor is only compensated by what we pay them and their medical advice is not “clouded” by potentially more lucrative recommendations from third parties.  Were confident doctors actually do operate without the conflicts, we just wish the same were true for the financial industry. The point is this:  The advice business, be it medical or financial, can be confusing enough with all the acronyms and esoteric terminology.  What should be completely transparent is the compensation model that may or may not be driving recommendations from our practitioners.  In short, we would like to see the financial industry held to the same high standards as the medical industry. We think a great way to cut through the confusion on all the standards, acronyms and certifications is to simply apply the “Doctor Test” when evaluating a financial advisor.  This should go a long way toward aligning your physical health with your financial health.