Financial Planning Stuff You Need to Know » Estate Planning

Unmarried Partners and Planning Software: Often a Bad Fit

Chris Long — Thu, 14 Jul 2011 19:23:22 +0000

If you are in a domestic partnership, civil union, or marriage that is not recognized at the Federal Level most of the software that financial planners use won’t work for you.

Here’s why:
Most software is keyed off the IRS tax filing status. This filing status is used to generate future tax projections. Let’s say you are in a newly minted Civil Union here in Illinois which is not recognized by the Federal Government. The planner has two options.

Option 1: Plan jointly but get the taxes wrong
In this scenario the planner enters in the information for both partners together. This allows for sharing of household expenses, and joint purchases, or liabilities. That’s great but in order to do that the software only allows the planner to check the “married” box, which means that all of the federal tax calculations will be incorrect leading to possible misleading projections.

Option 2: Get the taxes right but no joint planning
In this scenario the planner enters information for each partner separately. This means that the Federal tax calculations will be correct, but the couple will have two separate plans, vs. a joint plan.

Luckily a few software programs, including the one I use, do allow for joint planning with a “single” federal tax status. If you are part of a couple that is not considered married under Federal law make sure to ask your planner if their software can handle that. You may be surprised by the answer.

401k vs. Roth IRA, vs Traditional IRA — what should you do?

Chris Long — Fri, 26 Mar 2010 14:32:30 +0000

Many of us face a dilemma: Should I invest in a Roth IRA, my 401k plan, or a Traditional IRA or some combination? Here are some simple rules of thumb:

If you employer matches your 401k contributions:

Invest in your 401k up to the amount to get the maximum match
Then invest in a Roth IRA if you are eligible
Then invest in your 401k again (no match)

If you employer does not match

Invest in a Roth IRA if you are eligible
Invest in your 401k

The situation is more complex if you are not eligible to contribute to a Roth IRA with many contingencies that are best handled on a case by case basis. Also, if your employer has a high cost 401k plan you may actually be better off investing some of your funds outside of your 401k in a regular taxable account once you have invested enough to receive the maximum 401k match.

The reason why Roth IRA contributions are a better bet for most people vs. a regular 401k contribution include:

Tax rates are likely to be higher than they are today in the future when you withdraw your 401k contributions.
You will have Required Minimum Distributions from a 401k plan at age 70-1/2.
Your heirs will required to take distributions from your 401k plan and pay taxes on them. There are no required distributions from a Roth IRA and any distributions are tax free.

Obama Plans to Keep the Estate Tax

Chris Long — Mon, 12 Jan 2009 21:44:57 +0000

According to the Wall Street Journal President Elect Obama plans to keep the estate tax vs. letting it expire in 2010 as the current legislation calls for. He plans to keep the exemption at $3.5MM.

What does this mean for you? If you die and your net worth is less than $3.5MM you will not have any estate taxes. If you have over $3.5MM then your will pay a tax of about 45% of the amount over $3.5MM. There are many exemptions and credits available so that even if your estate is over $3.5MM you may not have to pay tax on some or all of the amount above $3.5MM.

It is likely that this $3.5MM limit will be raised with inflation over time. Should you already have an estate over the $3.5MM limit or it will be shortly, you should make sure your estate plan is up to date.