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Financial Planning FAQs

Note:  All information is obtained from sources we believe are accurate, but not guaranteed.  Minster Bank does NOT provide tax or legal advice.  You should consult your own attorney and/or tax advisor before pursuing any techniques shown in this presentation.

 

Click one of the below topics for questions and answers:

 

Financial Planning

Question:  I have heard a lot about Financial Planning.  What should I expect from a Financial Plan?

Answer:  A comprehensive financial plan is comprised of the following:

  • Insurance
  • Investments
  • Taxes
  • Retirement Planning
  • Estate Planning


A good financial plan will review your insurance coverage, your investments, your taxes, help create a retirement plan, review funding of your children's education, and prepare for your estate planning.

 

At Minster Bank we do not attempt to replace your insurance agent, attorney, or your CPA, rather we try to consolidate the planning done into one comprehensive financial plan.

 

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Question:  Are Points paid on my mortgage loan deductible?

Answer:  Points paid by the buyer are considered prepaid interest and, assuming your mortgage qualifies for fully deductible interest, the points you paid are fully deductible. The real question is: Are they deducted in the year paid? According to IRS Publication 17, Your Federal Income Tax (2000), For Individuals, generally you must deduct the points over the life of the mortgage. However, since this is the tax code, there is are exceptions. You can deduct the points in the year you paid them if you meet all the following criteria: (The following list is quoted directly from Publication 17.)

 

1.   The loan is secured by your main home.

 

2.   Paying points is an established practice in the area where the loan was made.

 

3.   The points paid were not more than the points generally charged in that area.

 

4.   You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.

 

5.   The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.

 

6.   The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or broker.

 

7.   You use the loan to buy or build your main home.

 

8.   The points were computed as a percentage of the principal amount of the mortgage.

 

9.   The amount is clearly shown on the settlement statement as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.

 

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If you meet all the above tests, you may choose to either deduct all the points for the year paid, or amortize them over the life of the loan.


If you take out a second mortgage to improve your home, you may deduct points for the year paid if tests one through six above are met.


If you are a seller who paid points, you may not deduct the points at all. Instead, you must list the amount as a selling expense, thereby reducing the amount you realized from the sale of your home.


If you amortize the points but you pay your mortgage off early, the remaining balance of the points may be deducted for the year you pay your mortgage off.


If you meet all the tests above except number three, you may deduct (for the year paid) the customary amount of points for your area and spread the excess over the life of the loan.


If you satisfy all the tests above except number 6 (funds provided by buyer), you may deduct for the year paid the amount of points equal to the funds you provided plus any points paid by the seller, and spread the balance over the life of the loan.


If you are refinancing your existing mortgage, you must amortize the points. (However, if you use part of the refinancing proceeds to improve your main home and you meet the first six tests, you may deduct the points on the home improvement portion of the loan in the year you paid them, and amortize the rest.)


Question: Can we deduct our PMI on our taxes?

Answer: The Internal Revenue Service's position is that private mortgage insurance (PMI) is, by definition, insurance and not interest. The logical extension of this position is that PMI payments are not a deductible item.

Interest is defined as a payment one contracts to pay for the use, forbearance or detention of money. Court rulings have said that it isn't necessary for a payment actually to be called interest to be interest. Conversely, calling any old payment interest doesn't necessarily make the payment interest.

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Financing Secondary Education


Question:  I have seen some pretty amazing dollar amounts regarding how much it will cost to send my young children to college in the future.  How much will it cost, and how should I best go about saving for my children's college education?

 

Answer:  In the year 2000 the cost of tuition, fees, room and board for a four-year education at a public school is estimated to be $32,344.

 

Three of the most common methods of saving for your child's education include:

 

Education IRA: earnings grow tax-free meaning no taxes are due when the funds are withdrawn for higher education expenses.  The downside is that a maximum of $500 per year can be contributed to this type of account.

 

Uniform Transfer to Minor Act (UGMA/UTMA): gifting money to child's account, earnings will be either tax-free or taxed at the child's rate, depending on the amount of earnings.  The downside is that the ownership of the account completely transfers to the child once they reach legal age.


Section 529 Savings Plans: earnings grow tax-deferred, (often tax-free for state income taxes) and will be taxed at the beneficiary's rate when withdrawn for qualifying educational expenses.  Investment options are somewhat limited, but should meet investors' requirements.


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Investments

 

Question: I own a stock that isn't worth anything, including the effort to sell it. I figure I might net $20 or less from the sale. Do I have to sell the stock in order to be able to claim a loss on my 1040? Or is there a tax rule that allows me to claim a loss in acknowledgment that the stock is worthless.

 

Answer: You don't have to sell the stock to claim a loss. If it's truly worthless, you couldn't sell it anyway. But, you have to establish that it really is worthless. Perhaps your broker can provide you with some evidence.

 

If the stock is of no value, claim the loss on Schedule D. The date of sale is deemed to be the last day of the tax year in which the stock became worthless. How long you've owned the security will determine if the loss is a long-term or a short-term capital loss.

 

Question: I have a 14-year old daughter who earned money washing cars on the weekend. She saved all she earned and it amounted to $1,000. I suggested she invest that money in a Roth IRA account. I realized its earned income (which is what Roth IRA requires), but it's not earned through employment. Can she open a Roth IRA account with it?

 

(And/Or): My two young children (ages 10 & 12) work for me in my sole proprietor (Schedule C) business. They have earned income of about $3,000 a year. I'd like to have them establish a Roth IRA. My question is can children have a Roth? If so, can these funds be used for qualified higher education expenses when the children enter college?

 

Answer: Both questions address whether a minor can establish and contribute to a Roth IRA. The answer is yes, as there is no age limit in the law regarding Roths. So long as children meet the applicable income requirements and limits, they're eligible to open and contribute to a Roth, even at the tender ages of 10, 12 and 14.

 

The money earned washing cars would be considered earned income. With regard to employing minor children in your business, as long as they actually work in the business and are rendering services for which they're being paid, the earned income would allow them to contribute to Roths. The IRS would take issue if it felt you were diverting income to your children solely as a tax-avoidance scheme.  There's nothing to stop your child from taking a distribution from a Roth IRA and using the funds for educational purposes. That is, if they're willing to pay the taxes and penalties that might be due from taking a distribution that is not a qualified distribution.  After five years, Roth IRA contributions or a previous rollover from a traditional IRA - but not any of the earnings -- can be withdrawn tax and penalty-free. But quite simply, Congress envisioned the Roth IRA as a retirement vehicle -- not an education-financing vehicle.

 

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Retirement

 

Question:  I have heard it will take over a million dollars for my spouse and I to able to retire comfortably.  How do I go about attaining that level of income, and how do I know if I am on track to reach my goals?

 

Answer:  No one can provide a number as to what it will cost for everyone to retire.  The total dollars needed to retire depend on several factors including: estimated income, estimated expenses, inflation, return on investments and much more.

 

The best way to prepare for your retirement is to do it as part of a comprehensive financial plan.  A comprehensive financial plan is comprised of the following:

 

  • Insurance
  • Investments\
  • Taxes
  • Retirement Planning
  • Estate Planning


A good financial plan will review your insurance coverage, your investments, your taxes, help create a retirement plan, review funding of your children's education, and prepare for your estate planning.

 

At Minster Bank we do not attempt to replace your insurance agent, attorney, or your CPA, rather we try to consolidate the planning done into one comprehensive financial plan.

 

Question:  I have recently changed jobs.  What are my options regarding my retirement plan at my former employer?

Answer:  You actually have several options, some of which include:

 

Leave it in your old employer's plan - as long as you have more than a $5,000 vested balance you can leave it in your old employer's plan.  The downside to this option is that your employer may charge you a fee for this option, you are limited in investment options to what is available in the retirement plan, and you have to deal with the company's human resource's department for any events such as when you move, any investment changes, etc.


Roll it into your new company's retirement plan.  All plans do not accept rollovers, and your money will be invested in only the options available in your new companies retirement plan.

 

Take a lump sum cash withdrawal.  If you are under age 59 ½, your old plan will be required to withhold 20% in income tax from your withdrawal.  You will also have to pay a 10% early withdrawal fee.

 


Roll it into an Individual Retirement Account.  Eligible distributions from an employer sponsored plan are directly rolled over to a Rollover IRA.  Direct rollover avoids 20% withholding requirement.  If distribution is made payable to plan participant, must roll over within 60 days of receipt to maintain tax-deferred status.

 


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Question:  As a small business owner, I am always looking to reduce my taxes.  I am also looking for ways to keep my employees and provide the types of benefits that will help me attract new employees.  Is there any type of retirement plan which will be affordable to me, and can help meet my needs?

 

Answer:  There are several different types of retirement plans which are affordable to small business owners, including:

 

Simple IRA Plan - employees defer a portion of their salary on a pre-tax basis.  Employer must make either a dollar-for-dollar matching contribution up to 3% , or a non-elective contribution equal to 2% of all employee compensation.  All employer contributions are tax-deductible.  In many cases the owner of the company can save more in taxes, than the entire cost of the plan, while creating their own retirement nest egg.  Reporting and testing requirements of the plan are very minimal.


SEP IRA Plan - employer makes non-discriminatory contributions directly to the IRA account of each eligible employee up to 15% or$25,500 as indexed for inflation.  Employer contributions are discretionary and may be deducted as a business expense up to 15% of annual compensation.  There are no required government filings and no annual IRS reporting.  SEP plans do require that you do an annual Top-Heavy test.  If 60% of assets belong to key employees, the plan is deemed top-heavy, and a mandatory 3% contribution is required for non-key employees.


Question: I just read the standard amount that must be withdrawn from IRA account at age of 701/2 has changed. Can you please explain?

 

Answer: Back in 1987, the IRS issued proposed regulations that governed treatment of required minimum distributions from qualified plans, IRAs, deferred compensation plans, annuity contracts, custodial accounts and retirement income accounts. Those proposed regulations were never finalized. The Service recently issued new proposed regulations that contain many of the provisions of the earlier ones and new sections designed to simplify the computation of the minimum distributions. The newly proposed regulations will be in effect for distributions required for calendar years beginning in 2002, but taxpayers may rely on them for tax year 2001 distributions.

 

The regulations provide a uniform Minimum Distribution Incident Benefit (MDIB) table that may be used to determine the minimum distribution that is required for those who are at least ages 701/2. The new table basically simplifies the computation, requiring that a taxpayer need only to divide the remaining balance of a plan by a factor found in the MDIB table to establish the minimum distribution required. The new factor has the effect of reducing the minimum annual distribution required thereby allowing a larger amount of asset to remain in qualified plans.

 

Another change made by the proposed regulations permits a beneficiary to be determined up to the end of the year following an employee's death. The proposed regulations also allows life expectancy at the time of death to be taken into account in calculating post-death minimum distributions.

 

The new rules affect only the computation of minimum annual distributions and use of the new table and procedures are voluntary, not mandatory. Taxpayers still have the option of using the old distribution rules that were not eliminated from the proposed regulations. And of course, taxpayers continue to have the option of distributing more than the minimum required amount from a qualified plan.

 

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Question:  I have heard it will take over a million dollars for my spouse and I to able to retire comfortably.  How do I go about attaining that level of income, and how do I know if I am on track to reach my goals?

 

Answer:  No one can provide a number as to what it will cost for everyone to retire.  The total dollars needed to retire depend on several factors including: estimated income, estimated expenses, inflation, return on investments and much more.

 

The best way to prepare for your retirement is to do it as part of a comprehensive financial plan.  A comprehensive financial plan is comprised of the following:

  • Insurance
  • Investments
  • Taxes
  • Retirement Planning
  • Estate Planning


A good financial plan will review your insurance coverage, your investments, your taxes, help create a retirement plan, review funding of your children's education, and prepare for your estate planning.

 

At Minster Bank we do not attempt to replace your insurance agent, attorney, or your CPA, rather we try to consolidate the planning done into one comprehensive financial plan.

 

return to top

 

Question:  I have recently changed jobs.  What are my options regarding my retirement plan at my former employer?

 

Answer:  You actually have several options, some of which include:

 

Leave it in your old employer's plan - as long as you have more than a $5,000 vested balance you can leave it in your old employer's plan.  The downside to this option is that your employer may charge you a fee for this option, you are limited in investment options to what is available in the retirement plan, and you have to deal the company's human resource's department for any events such as when you move, any investment changes, etc.

 

Roll it into your new company's retirement plan.  All plans do not accept rollovers, and your money will be invested in only the options available in your new companies retirement plan.

 


Take a lump sum cash withdrawal.  If you are under age 59 ½, your old plan will be required to withhold 20% in income tax from your withdrawal.  You will also have to pay a 10% early withdrawal fee.

 


Roll it into an Individual Retirement Account.  Eligible distributions from an employer sponsored plan are directly rolled over to a Rollover IRA.  Direct rollover avoids 20% withholding requirement.  If distribution is made payable to plan participant, must roll over within 60 days of receipt to maintain tax-deferred status.


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Question:  As a small business owner, I am always looking to reduce my taxes.  I am also looking for ways to keep my employees and provide the types of benefits that will help me attract new employees.  Is there any type of retirement plan which will be affordable to me, and can help meet my needs?

 

Answer:  There are several different types of retirement plans which are affordable to small business owners, including:

Simple IRA Plan: employees defer a portion of their salary on a pre-tax basis.  Employer must make either a dollar-for-dollar matching contribution up to 3% , or a non-elective contribution equal to 2% of all employee compensation.  All employer contributions are tax-deductible.  In many cases the owner of the company can save more in taxes, than the entire cost of the plan, while creating their own retirement nest egg.  Reporting and testing requirements of the plan are very minimal.

 


SEP IRA Plan: employer makes non-discriminatory contributions directly to the IRA account of each eligible employee up to 15% or$25,500 as indexed for inflation.  Employer contributions are discretionary and may be deducted as a business expense up to 15% of annual compensation.  There are no required government filings and no annual IRS reporting.  SEP plans do require that you do an annual Top-Heavy test.  If 60% of assets belong to key employees, the plan is deemed top-heavy, and a mandatory 3% contribution is required for non-key employees.


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Estate Planning

Question:  I have heard a lot about people setting up trusts lately, how do know if I need a trust?  What are some of the advantages of having a trust versus a will?

 

Answer:  There are many different reasons for setting up trusts and many different types of trusts.  There is no general answer to whether a person needs a trust or not.  A trust may be one way to help you reduce the fees involved in the probate process, it may also provide you with additional privacy during the transfer of assets at death.  A trust can also provide you with professional investment management while you are on an extended vacation or are unable to attend to your finances due to illness.  Some trusts can also help you control the amount of taxes payable at death or protect a child's inheritance.

 

Question: Can traditional IRA assets be donated or must they be "cashed in" and then transferred? Are the rules different depending upon the recipient, be it a charity or not-for-profit organization not controlled or owned in any way by donor?

 

Answer: You may bequeath your interest in an IRA to a charitable organization in your will, but you may not directly contribute IRA assets to an exempt organization during your lifetime without triggering a distribution. If you wish to make such a charitable contribution of the assets in your IRA, you would first have to take a distribution from the IRA and then make the contribution. If you take the distribution before age 591/2, it will most likely be subject to income tax as well as the 10 percent premature distribution penalty, nullifying any tax benefit you'd have received from making a tax-deductible charitable contribution.

 

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Question: I realize my husband and I each have a ceiling of $675,000 before estate taxes are due if we should die. We each have assets in our own names. The question is: Are all assets calculated in the $675,000, i.e., IRAs, Roth IRAs, annuities, residences, cars, cash, furnishings, stocks and bonds? If so, and I have less than $675,000 and my husband has more, our one option would be to give a percentage of house to me, which would at least equalize the assets. Could you make the division 65/35 on house? What are your suggestions? I've heard that Congress may change the estate tax laws shortly. Should we wait to see what they do before going through any paperwork?

 

Answer: Since your net worth is significant, my first suggestion is that you confer with a competent estate tax attorney who can help you arrange your affairs in such a way so as to minimize any potential estate tax consequences for both you and your husband. It would be money wisely spent.

 

In answer to your specific questions, all assets of a decedent are initially includable in their estate. For married persons, however, there are provisions in the current estate tax law that minimize or eliminate estate taxes on the estate of the spouse who passes on first. The law provides for an unlimited marital deduction. That means that any assets bequeathed to a surviving spouse are deducted from the taxable estate and therefore not be subject to estate taxes. With that in mind, and as long as you have prepared wills making those bequests, it doesn't appear that you need to go to the trouble of changing title to assets. Again, though, an estate tax attorney can look at the totality of your holdings and provide you with the best advice.

 

The possibility that changes in the estate and gift tax laws will be made by this Congress is high. I wouldn't want to hazard a guess at this point as to the extent of those changes. Since the Senate is split evenly, I don't foresee an elimination of the estate and gift tax in its entirety. The most likely change will be an increase in the amount of what's known as the unified estate and gift tax credit. That credit currently equates to the $675,000 exemption you alluded to in your question. The exemption amount, even without any changes to the current law, is due to increase over the next few years, settling at $1,000,000 by the year 2006. We'll have to wait and see.

 

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