asset location - Part 11

How PEP And Pease Don’t Actually Penalize Deductions, They’re Just 1% Surtaxes On Income

November 25, 2015 07:01 am 3 Comments CATEGORY: Taxes

Back in 1991, Congress first enabled the "Pease limitation" phasing out itemized deductions, and the "Personal Exemption Phaseout" (PEP), which were designed to limit the tax benefits of those deductions for higher-income taxpayers. While the PEP and Pease limitations were themselves phased out in the mid-2000s, the American Taxpayer Relief Act of 2012 re-enacted them beginning in 2013, making them a current tax planning issue.

Yet the irony is that while they are referred to as "phaseouts of itemized deductions" and a "personal exemption phaseout" the reality is that the Pease limitation and PEP are applied primarily based on the extent by which someone’s income is over specified thresholds. As a result, while they're labeled as penalties to deductions and exemptions, the Pease limitation and PEP actually function more like surtaxes on income, amounting to a 1% marginal tax rate increase for the Pease limitation, and another 1% rate increase per family member for the PEP.

The reason why this distinction matters is that ultimately, as surtaxes on income, the PEP and especially the Pease limitation are not actually disincentives against deduction-producing strategies; for instance, with almost all taxpayers, the tax savings of charitable giving is actually identical with or without the Pease limitation! In the end, this means that advisors and their clients should be cautious about trying to avoid deductions when faced with PEP and the Pease limitation; instead, simply recognize their 1% surtax effects, and focus planning on income given the higher marginal tax rates that result!

CapGainsValet Launches Aggregated Information Source For Year-End Mutual Fund Capital Gains Distributions

November 3, 2015 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

As we move through the fourth quarter, this is the time that fund companies start publishing their estimates for end-of-year capital gains distributions – a tax event that can have significant ramifications for investors, yet one for which its remarkably difficult to aggregate together relevant information across a wide range of investment companies.

Until now. Financial advisor (and Chief Investment Officer) Mark Wilson of The Tarbox Group has (re-)launched his Capital Gains Valet (or CapGainsValet for short) service, which pulls together all the reference links for investment company capital gains distribution estimates to a single site location. And the service is made available to advisors and other investors for free (Wilson simply asks for donations to his charity of choice).

And notably, in a year where markets have been relatively flat but many funds have significant embedded capital gains due to the past 6 years of a raging bull market, it becomes especially important to plan in advance for year-end distributions… both for those who might consider selling a recently-purchased fund with a large gain looming, or who may wish to defer buying a large-gain-distributing fund until after the end of the year. Or alternatively, at least focus on the asset location benefits of placing such gains-distributing funds (especially those with large embedded capital gains) inside of a retirement account in the first place!

Weekend Reading for Financial Planners (Oct 24-25)

October 23, 2015 02:01 pm 16 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week’s edition kicks off with the big announcement that eMoney Advisor has developed an integration with MoneyGuidePro, allowing MGP users to adopt the eMx Select advisor dashboard and client PFM portal while continuing to use MoneyGuidePro for financial planning purposes. Also in the news this week was the separate launch of MoneyGuidePro’s new “MyMoneyGuide” digital marketing solution, and a new study from Cerulli suggesting that robo-advisors need to significantly accelerate their ongoing asset growth just to survive (and that other industry studies projecting robo-advisor growth may be unrealistically optimistic).

From there, we have several technical articles this week, from some guidance on how early retirees can aim to maximize their premium assistance tax credits when buying health insurance until they’re eligible for Medicare, to a discussion of why ETF adoption has still been slow in the retirement plan marketplace and what it will take for the trend to shift, and a new study from retirement researcher Wade Pfau looking at various forms of variable spending strategies in retirement and how they line up to each other.

We also have a number of practice management articles this week, including: the growth of technology solutions that allow financial advisors to engage with prospective clients through their website before ever meeting with the prospect; how video conferencing with clients has grown, with almost 70% of advisors using video tools to meet with at least a subset of their clients; and a review of the new financial planning software solution RightCapital.

We wrap up with three interesting articles: the first provides a great reminder (and cautionary tale) of how digitally distracted we’ve allowed ourselves to become, and the importance of periodically “unplugging” to ensure you take time to engage in some critical thinking and strategic planning for your business; the second is a discussion of the ongoing “breakaway broker” trend, which appears to be accelerating into larger and larger teams breaking away from wirehouses and insurance company broker-dealers; and the last raising the question of whether the core topic areas of financial planning are still too rooted in the financial planning products of old, and whether it’s time for financial planning to evolve to the next stage, which might even include coming up with a new or different name for what it may eventually become.

Enjoy the reading!

Weekend Reading for Financial Planners (Oct 10-11)

October 9, 2015 02:29 pm 25 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big advisor #FinTech announcement that Morningstar is acquiring the rebalancing software platform Total Rebalance Expert (tRx). Also in the news this week was the launch of a new advocacy platform (courtesy of TD Ameritrade) to make it easier for advisors to submit comments to their Congresspeople regarding advisory industry regulatory issues, and a new study from Cerulli suggesting that a whopping 25% of wirehouse advisors could leave for independent channels in the next 4 years as post-financial-crisis retention deals start coming up for renewal.

From there, we have a few practice management articles this week, including a discussion of the growing number of younger advisors looking to buy out the advisory firms of retiring advisors, an excellent article by Angie Herbers on the growth barriers that advisory firms face as their size (and complexity) increases, and an explanation of what "distributions-in-guise" are and why the SEC is cracking down on them (highlighted by a recent $40M fine against investment adviser First Eagle Investment Management).

We also have a couple of technical planning articles this week, from a new research study out of the Center for Retirement Research finding that one of the primary reasons people lapse their long-term care insurance policies is due to cognitive decline (a sad reality, as those are also the people most likely to need the coverage!), to a look at the concept of the "tontine" and why it may soon make a comeback as a retirement income solution, and a discussion of how market valuations not only tend to mean revert to historical average valuations to but mean invert to historical valuation lows (which has significant implications for forward market returns from today's valuation levels!).

We wrap up with three interesting articles: the first looks at the world of financial advice in the U.K., which implemented advisor reforms two years ago that included an outright ban on all investment commissions, and is now starting to yield some data about whether low- and middle-income consumers really are abandoned in a no-commission world (the early data suggests they're not abandoned, but advisors may end out needing to charge fees higher than what consumers are willing to pay!); the second provides a good reminder than virtually any business model for advisors presents some conflicts around the advice delivered, as the easiest course of action is always to give advice that rewards the current business model; and the last is a critique from the editorial team at Investment News regarding the recent proposed NASAA model fee disclosure rules for broker-dealers, which ironically would increase transparency of "miscellaneous" broker-dealer fees but require no actual transparency regarding the (typically much larger) fees, commissions, and other compensation that consumers pay to the broker themselves!

And be certain to read through to the end, and check out Bill Winterberg's video coverage of the recent tRx Unplugged 2015 conference as well!

Enjoy the reading!

FPA Southern Wisconsin 2015 – Presentation Handout Materials & Supporting Information

Thanks so much for coming to my presentation for the FPA Southern Wisconsin 2015 Symposium!

Presentation Materials

Click the links/images below to download a copy of the presentation materials:

Weekend Reading for Financial Planners (Sep 26-27)

September 25, 2015 02:29 pm 28 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with some notable industry news, including a proposal from the SEC to institute "swing pricing" for mutual funds in times of market stress, to a new series of cybersecurity exams as regulators continue to eye new rules for advisors to protect client data, to the latest series of studies on advisor adoption of social media finding that advisors, finally, are starting to see real business results from their persistent social media efforts.

From there, we have several articles about the ongoing debate of whether advisors should be switching to retainer fees from the currently popular AUM business model, which collectively raise the question of whether the AUM model is too conflicted and it's time to move on, or whether the reality is that advisors are simply succumbing to competitive pressures as the AUM model is no longer the differentiator it once was and too few advisors have really crafted a specialization or niche around which they can demonstrate a unique value proposition for clients.

We also have a couple of technical planning articles this week, including: a reminder of the issues to consider given the likelihood that many mutual funds will be making big capital gains distributions in December for the first time in years; a discussion of the recent proposal from one Fed governor that the Fed may use negative interest rates as a policy tool to stimulate the economy, and how the strategy would work; and a look at how one advisor aims to create alpha for clients not just by trying to pick the best investment managers but considering ways that combinations of investment managers can be more valuable than any one individually.

We wrap up with three interesting articles: the first is a new study from the Center for Retirement Research suggesting that our shift from Defined Benefit to Defined Contribution plans in recent decades may not have been nearly as damaging to retirement savers as previously believed, once accounting for the fact that savers into DC plans actually get the direct benefit of the market returns that grow the account balance over time; the second is another notable study, finding that when it comes to retirement savings, showing people how much their peers are saving can actually backfire, making them feel so far behind that they're actually discouraged and less likely to save; and the last is a fascinating discussion of how success as an advisor can create more problems than it solves as the burdens of the business increase, and how the best solution is to keep raising your fees, to the point that if you're not turning away at least 1/3rd of your new clients and 1/5th of your existing clients every year, you may not be charging enough.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a fresh push on cybersecurity from the SEC (including a $75k fine against an RIA for not creating a cybersecurity policy), how advisors should handle a "ransomware" demand if their own computers are hacked, and the launch of a new financial planning software provider RightCapital.

Enjoy the reading!

Available Kitces Webinars For CE Credit

Below is a list of currently available webinars in the Kitces.com Members Section.

Upon completion of the requisite quiz, CE credits will be reported directly to the CFP Board and/or IMCA on your behalf at the end of the month!

Session Description:

Nearly every prospective retiree faces the decision about when to begin receiving Social Security payments, which can begin as early as age 62, or be delayed as late as age 70. The good news of delaying benefits is that they receive a guaranteed increase for each month and year of waiting; the bad news is that during the waiting period, no payments are received! This trade-off creates a "breakeven" period that must be reached in order for delaying to be beneficial. And for married couples, the situation is further complicated by the fact that the timing of when one spouse takes benefits can impact both the timing of spousal benefits and the size of survivor benefits. In this session, we look in depth at the trade-offs of Social Security timing, especially for married couples, the interplay between retirement, spousal, and survivor benefits, and strategies to optimize and maximizing Social Security retirement benefits for couples (includes divorced ex-spouses).