September 2010
FLA Blog
Jim Oliver & Associates, P.C.
FB Bancorp Building
17300 Henderson Pass
Suite 240
San Antonio, TX 78232
p:210.344.0205
f:210.344.4362
cpa@teamoliver.com
www.teamoliver.com
Financial Life Advisors
FB Bancorp Building
17300 Henderson Pass
Suite 290
San Antonio, TX 78232
p:210.918.8998
f:210.344.4362
advisor@teamoliver.com
www.fladvisors.com
This firm is not a CPA firm.
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September Tip - Cost Basis Reporting
The Emergency Economic Stabilization Act of 2008 includes new cost basis requirements for brokerage firms, expanding the current reporting on IRS Form 1099-B.This means that going forward brokerage firms will be including detailed cost basis information directly to the IRS about sales.
You have several accounting methods available when selling securities, but if you do not specify which method is being used, a default is applied. For instance, when selling a stock, you can specify which specific shares you sold. Some shares you own may have a higher or lower cost basis (original purchase price) and thus affect how much tax you will have to pay. If this election is not made at the time of sale, it can not be changed retroactively.
If you are a client with Financial Life Advisors, we already track and identify which specific accounting method should be used with each transaction. If you are not using our services, make sure to discuss cost basis reporting with your broker or adviser.
Articles in this Month's Issue
The Top 5 Things You Need to Teach Kids About Money
What if there was mandatory money instruction for every child in America from kindergarten on up and every adult was required to take an annual test confirming those concepts well into their senior years?
It’s a nice fantasy. But in reality, the first money lessons a child gets come from their parents, and experts agree that the way parents teach and reinforce those concepts will have a major impact on their kids avoiding major financial problems later in life.
So, a question for parents: How equipped are you to teach your kids about money?
If you don’t feel confident about creating a money curriculum for your child, don’t worry, there’s help. Start by planning your own financial future with a qualified financial planner. You can take a close look at where you need to be with your finances and gather ideas to teach your kids about money as well.
However you personalize the lesson, every parent needs to involve these five basic concepts in a child’s money education:
1. Work: It’s true. The first great lesson isn’t so much about money as what it takes to earn money. As early as kindergarten or first grade, your kid is going to have to start paying for things. Children need to understand as early as possible that a good day’s work should deliver a good day’s pay, so it’s a good idea to come up with age-appropriate chores in exchange for an allowance. The best place to start is with simple jobs like setting the table and making beds. For older kids, yard work, laundry and housecleaning are good to add to the list.
How big should that allowance be? Try to match the allowance closely to the expenses you want your child to cover and leave a little wiggle room for treats. That way, the child begins to understand choice while learning that spending requires limits. Also offer options that allow children the opportunity to earn additional money for extras – toys or privileges, for instance – then stress why working for treats is important. When kids are younger, you should keep a frequent watch over how they’re handling their cash – checking in every day or so – and then allow them more leverage as they demonstrate wise decisions.
2. Saving: Once you teach your kids about spending, help them identify larger goals they have to save for. Buy a piggy bank – young children relate very well to this tried-and-true symbol of saving. It gives them someplace to put money out of sight so they don’t spend it, and you should impress upon them that they are free to tap into it only to accomplish a goal that the both of you initially discuss. Again, as they make smarter decisions, let them have more responsibility. And this lesson shouldn’t just be about buying stuff – kids need to learn how money can be used for setting and accomplishing goals.
If it makes sense for you, you can also add incentives to save. One idea: Tell your son or daughter that you’ll give them $1 for every $5 or $10 they put in the bank. It will definitely make them think twice about an impulse purchase.
3. Budgeting: Budgeting is one of the most universally misunderstood money concepts for children and adults. That’s why it’s so important to make sure a child understands why it’s so important to write down money priorities and keep track of whether those priorities are being met. When a child gets a little older, it might be a good idea to help them establish a budget for everyday expenses with an important side goal, such as accumulating spending money for a much-anticipated family vacation. Parents might show kids a similar exercise for how they’re setting aside money for the trip. Unsure how to set up a budget? PBS Kids offers an example.
For younger kids, it might make sense to turn the budgeting process into a game. Parents might take a stack of fake money, give it to the child and ask what they would spend it on. The child would write down each purpose – toys, school lunches and special things they need to save for – and get them to write down how they’d allocate the cash. This can turn into a real exercise later.
4. Delayed gratification: If budgeting and savings are going to work, kids need to know they can’t spend their money whenever they feel like it. Parents need to lead by example here. If kids always see you paying with plastic and bringing home carfuls of shopping bags each week from the mall, they might get a sense that money is limitless. On the other hand, if they see you making lists, tearing out coupons and talking about saving for particular goals over the long term – they might start to mimic that behavior.
5. Helping others: It’s important for children to know that there is always someone less fortunate than themselves and it’s important to help, even in a small way. Increasingly, kids are involved in charitable and community activities as part of their educational process – such work even figures into college applications. Teaching your children to set aside a little for those who have less might be a good first lesson in what should be a lifetime of sharing with others. Also, don’t forget that charity isn’t always about money. Kids should also learn the importance of giving their time and labor to important causes and people in need. And if they think of unique and effective ideas to help, by all means, praise and encourage that activity.
September 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.
The Smart Way to Review - and Improve - Your Retirement Holdings
A May report by human resources consultant Hewitt Associates showed that the average U.S. employee will need more than 15 times their final pay in retirement resources (including personal retirement savings, employer-based retirement savings and Social Security) to maintain their current standard of living during retirement. Unfortunately, Hewitt found that four out of five workers are still expected to fall short of meeting all their financial needs in retirement unless they take immediate action to improve their savings habits or retire at a later age.
Everyone should set a quarterly review of their holdings in 401(k) plans and other resources because that’s typically when statements come out. But knowing their performance information isn’t enough.
Most people don’t take a comprehensive view of their retirement picture – they might check their individual IRA statements and check on how their employer-based pension accounts are doing, but to make sure their retirement engine is really chugging along, good advice is key.
That’s why it might be wise for investors to get a fresh start with retirement advice this fall. It doesn’t matter if you believe your investments are falling behind or if you’ve never started – make time to consult with financial planning professionals to make sure your personal and work-related retirement savings complement each other.
Things you should do:
Check your allocations first: While you don’t want to make severe moves (many people are tempted to do so after a major market downturn and most end up missing the benefits of a recovery), you do want to know whether your asset allocation fits your age and retirement goals. Also, if a major life event occurs – divorce or widowhood, starting a family – that’s another important reason to re-evaluate your retirement numbers. As we age, we generally need to put less money in volatile investments like stocks and more in conservative investments with guaranteed returns like Treasuries, bonds or CDs. If you’re behind on your retirement goals, you will probably have to take on a bit more risk, but it’s best to do so with proper supervision. After all, no one wants to be left out of a market upswing when they have catching-up to do. But they certainly don’t want to be overexposed in volatile investments when the market heads down – that’s the lesson most people learned in 2008.
Save even if your company has cut or discontinued matching: Matching is one of the greatest things about working for an employer. Unfortunately, many employers retracted the benefit during the recession. Even if your company doesn’t bring back matching, you’ve got to try and pick up the slack. You will still realize the benefit of pre-tax contributions made to your traditional 401(k). And, when you have money automatically taken from your paycheck you are “dollar cost averaging”. That means the fixed dollar amount that comes from your paycheck buys more shares when prices are low, and fewer when prices are high. Thus, your average cost per share is lower than the average price per share.
If your employer doesn’t enroll you, make sure you do it: According to the Profit Sharing/401(k) Council of America’s 2009 statistics, nearly 40 percent of U.S. employers automatically enroll workers in their 401(k) plans. Nearly 83 percent of U.S. employees have some money in those plans. If you’re not in either camp, you need to join, even if your company doesn’t match – the tax advantages are too attractive.
Continue to save while you wait to join a plan: A significant number of companies don’t let you join the 401(k) until you’ve been working there a year. If that’s the case, get in the habit of putting money away for retirement anyway. Start an individual IRA with the funds you would put in the company plan, or set aside money in a savings account so you can supplement your cash flow and put the maximum amount into your 401(k) once you’re allowed to join.
Contribute the maximum: Not every employee can afford to contribute the maximum allowed by the plan, but try. In 2010, the maximum 401(k) contribution will be $16,500, and those 50 and older can make an additional catch-up contribution of $5,500.
Don’t rely on the 401(k) alone: Particularly if matching lags for a while, 401(k) plans can’t be relied upon as a single source of retirement dollars. You must invest outside your company plans.
Don’t over-invest in company stock: Most financial planners advise that you put no more than 15 to 20 percent of your whole 401(k) portfolio in company stock.
Don’t borrow from the 401(k): A 401(k) shouldn’t be a house fund or a source of emergency cash. You’re taking money out of the account that otherwise would grow tax-deferred, and if you fail to pay back the money, you could face income taxes and penalties. Instead, build an outside emergency fund of three to six months of living expenses you can draw from.
Don’t cash out: Some workers think it’s a great idea to treat a 401(k) as a windfall for when they quit a job. Don’t do it. You’ll pay huge penalties and lose your retirement savings momentum.
Keep track of 401(k) accounts left behind at former employers: Maybe you’ve changed jobs several times and never got around to moving older, smaller 401(k) accounts from past employers to current ones or into a self-directed retirement account. Always get advice about 401(k) funds when you leave an employer.
Always re-evaluate if the company radically changes your retirement offerings: Big changes in funds and options require scrutiny. And with recent regulatory changes, governing fees and other once invisible charges that ended up coming out of investors’ pockets, it’s worth having a talk with your financial planner and maybe your HR department.
September 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.
10 Things You Should Know About Identity Theft
Criminals use many methods to steal personal information from individuals. They can use your information to steal your identity and file a tax return in order to receive a refund. Here are ten things the IRS wants you to know about identity theft so you can avoid becoming the victim of a scam artist. - Identity thieves get your personal information by many different means, including stealing a wallet or purse or accessing information you provide to an unsecured Internet site. They even look for personal information in your trash. They also pose as someone who needs information through a phone call or e-mail
- The IRS does not initiate contact with a taxpayer by e-mail.
- If you receive an e-mail scam, forward it to the IRS at phishing@irs.gov.
- If you receive a letter from the IRS leading you to believe your identity has been stolen, respond immediately to the name, address, or phone number on the IRS notice.
- Your identity may be stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know.
- If your Social Security number is stolen, it may be used by another individual to get a job. That person's employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.
- If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or changes to your credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification - such as a Social Security card, driver's license, or passport - along with a copy of a police report and/or a completed Form 14039, IRS Identity Theft Affidavit.
- Show your Social Security card to your employer when you start a job or to your financial institution for tax-reporting purposes. Do not routinely carry your card or other documents that display your SSN.
- If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, 1-800-908-4490.
- For more information about identity theft - including information about how to report identity theft, phishing, and related fraudulent activity - visit the IRS Identity Theft Resource Page, which you can find by typing "identity theft" in the search box on the IRS.gov home page.
Top 5 Money Decisions to make in Divorce
The money decisions you make in the first weeks of a marital separation can affect your financial security for the rest of your life.
And at a time of maximum emotional stress, the right decisions about money can be hard to come by on your own – that’s why financial planning advice is crucial the moment a separation happens. Waiting until divorce papers are filed may be too late.
Anyone filing divorce should seek the help of financial and tax advisers as well as attorneys skilled in divorce, experts say, because the financial issues that get pushed to the background eventually can take a surprising and disastrous toll on the newly single ex-spouse and his or her children.
Here are the five main money decisions that should be made in a divorce.
1. Get financial advice immediately: Good divorce attorneys will tell you to get decent financial, tax and estate advice in concert with your divorce action. Each of those financial parties will tell you to get a good attorney. Get the best referrals you can on each. The bottom line is to pick quality among all your advisors so you can preserve assets and plan your money going forward. It’s also important to be as honest as possible with each of these parties -- otherwise they can’t do their jobs properly.
Financial planners will help you start at ground zero with your money. A qualified financial planning professional can help you budget, save and invest for a new life. The Lilac Tree, an Evanston, Ill. based not-for-profit organization for divorcing women, routinely stresses that the budgeting process is crucial, since women now outnumber men in filing for bankruptcy and their long-term earnings prospects are generally dimmer. You can also find a qualified financial planner in your area by searching the Financial Planning Association’s PlannerSearch.
These advisers will help you determine how to file your taxes as well. There are always special situations in a divorce that will determine whether a couple will need to file jointly or separately during the last year that the marriage exists. This is definitely worth discussion since tax fraud can be a liability issue for the spouse who had no involvement or awareness of the fraud taking place.
Last thing. Even though it might be the last thing on your mind, start or restart your retirement planning and college planning for your kids at this stage. Why? Because if your soon-to-be ex-spouse controls more assets, you should negotiate for more of a settlement in these areas.
2. Make sure your assets are valuable: Unless you know what the assets in a marriage are really worth, how do you know what to demand in a property settlement? Keeping a house may be a great idea, but if it’s in poor repair, are you sure you can afford to keep it? Licensed appraisers in a variety of asset categories should be enlisted to make sure what joint property is truly valuable, from real estate to art. Divorcing spouses need to make sure they have enough money to finance repairs and replacement of any assets that they’ll be paying for as a single person.
3. Protect your kids: In many states, college-age children have the right to demand financial support or college funding at the state level so their education isn’t interrupted. While both parents should advocate in their kids’ best interest, this isn’t always the case. Be aware of your state’s divorce laws with respect to child support.
Child support guidelines vary from state to state. But generally the criteria for establishing child support amounts are typical throughout the United States and these guidelines are established by each state's legislature. If your state has a special program that allows a spouse to pay into a special account so child support is recorded every month, consider it. It provides a paper trail and enforcement system for assuring that children get the support money they’re entitled to. Federal law requires all child support payments be made by wage assignment and health insurance by Health Insurance Orders. Child support collection statistics reflect that only 20 percent of non-custodial parents pay their court ordered child support monthly. That’s why so many laws have been established to force compliance. Make sure you understand them.
4. Watch your spending: Overspending is a real issue in the early stages of divorce as couples set up private homes. But some individuals find that spending makes them feel better, and this is one of the biggest reasons ex-spouses face financial disaster after divorce. Strict budgeting should be one of the first things you do once you split.
5. Protect your credit: If your soon-to-be ex-spouse has tax or credit issues, you need to rely on your advisers to set up any legal firewalls you can before your divorce is final. And if you leave your marriage with clean credit, don’t do anything to damage it. Whatever debt you have, pay it on time, and resolve to pay it off.
September 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.
This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
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