---

Plot spoiler: LGBT couples are treated differently than heterosexual marriages when it comes to inheriting IRA’s.  Here’s how to avoid having disapproving Aunt Sally end up with your dough.

---

The US federal government doesn’t recognize the marriages of gay and lesbian couples. Consequently, LGBT folks have to take extra steps to make sure that, in the event of their death, their assets are distributed in accordance with your wishes.

A. What Happens When You Die

Not to get morbid or anything, but some folks die prematurely. Best to plan now (just in case) rather than later. A last will and testament delivered via Ouiji board will not be admissible in most courts of law.

In the event of your death, the assets in your 401(k) will be transferred into a traditional IRA.  If you had a Roth 401(k) it will be transferred into a Roth IRA.  Everything in this post that refers to an “IRA” also refers to a “401(k).”

B. The Beneficiary Form

The best and simplest way to transfer your IRA assets to your intended heir, is to name him/her/them on the IRA’s beneficiary form.  Keep it updated, and keep a copy.

Not only does the beneficiary form make it clear who gets the money, assets transferred through a beneficiary designation don’t go through probate– they are available immediately to the recipient.  If you don’t fill out the beneficiary form (and if you don’t have a will), your assets are transferred “by law” which usually means that the heirs will be your parents and/or siblings — perhaps not what you had in mind.

C.  Rich Straight People Really Are Different

When a federally-recognized spouse inherits an IRA, he/she can usually just roll the assets over into his/her own IRA account.  The assets grow tax-free until funds are withdrawn in retirement (or until the heir reaches the age of required minimum distributions, 70 1/2).

Read the rest of this entry »

Tags: gay taxes, IRA inheritance, marriage inequality

---

Plot spoiler: Even if you can afford the higher monthly payment of a 15-year mortgage, consider getting a 30-year term, instead.  Invest the difference, and in 15 years (with a 6% return) you’ll have enough to pay off the mortgage, and you’re not locked in to the higher payment

---

If you’ve had your current mortgage for more than about two years, now might be a good time to refinance.

This assumes, of course, that you’re planning to own your home for several more years and that you have positive equity (the value of house is more than the amount of the loan that you would be seeking).   Interest rates are being held down by the Fed in an effort to get the economy going again, so it’s a good bet that they’ll stay low at least for the next few months.

I made a few calls and found that going rate for a fixed-rate 15-year term loan is about 4.65%, and the similar rate for a 30-year loan is 5.25%.  If you’re only going to be in your house for a few years, then you can save a few pennies with an adjustable rate loan, but with fixed rates so low, you don’t really save much.

Example:  A $200,000 loan

If you need to finance $200,000, the monthly payment for the 4.65% 15-year loan is $1,545.  The monthly payment for the 5.25% 30-year loan would be $1,104 which is $441/month less.  Over the life of the 15-year loan, you would pay a total of $278,165.  Alternatively, if you chose the 30-year loan, you would pay a total of $397,587  – almost twice the amount borrowed.   You might think that if you can swing the higher payment, you’re better off paying it off quickly.  After all, who wouldn’t want to save $119,422?

However, there are some advantges to paying off your mortgage at the slower rate:

• You have less of your money tied up in a house, and
• If you lose your job, you’ll be grateful that you have a lower monthly payment.

Read the rest of this entry »

Tags: 15-year vs. 30-year mortgage, effect of inflation on mortgage payment, mortgage, mortgage interest tax deduction

I recently posted about a flaw in the Morningstar website.   In general, Morningstar has a great site — one of the best on the web, so I was disappointed to find an error in the way that it graphs the return of exchange-traded funds (ETF’s).

If you click on the “ETF” tab of the Morningstar site and create a graph comparing the return of an ETF to a mutual fund, you’ll see that the value graphed for the mutual fund includes the distributed capital gains and dividends (as if they were reinvested).  This is the true return on investment, recognizing both realized and unrealized gains.  However, the graph of the ETF does not include the distributed returns and falls precipitously at the end of every year (when capital gains are typically distributed).

However, if you go to the “Mutual Fund” section of Morningstar and compare the same mutual fund and ETF, the graph correctly displays the value of both the ETF and mutual fund.

Three days after I posted, I received a nice note from Shawn Malayter, Director of Media Relations for Morningstar’s Software Division:

Helen,

I’m writing in response to your recent blog post on the Morningstar.com ETF chart. The issue seems to be that ETFs, because of the need for intraday charting, are using a stock-style chart that does not calculate total return in the way that you would for a mutual fund. Our software team is aware of the issue and has been working on modifying our ETF charts so that they provide total returns that are inclusive of any payouts. The changes should be completed soon.

Thank you for raising the issue, and we hope you continue to visit the site often.

Best regards,

-Shawn

My faith in Morningstar is restored. I’m impressed that they took the time to write.  I’m also happy that they’re working on the fix.  And, yes, Shawn, I certainly will return to the Morningstar site often.

Disclaimer: I am a customer of Morningstar as I do subscribe to their Premium services.  I was not asked to write this post nor did I receive any compensation.

Tags: comparing ETF to mutual fund, graphing ETF return, graphing mutual fund return, Morningstar

The full extent of the damage to Haiti won’t be known for weeks, perhaps months, but there is no doubt that help is needed now.  Many people, my family included, want to make a donation.  Our first stop is the Charity Navigator website, which maintains a list of charities supporting the Haitian relief effort.  Charity Navigator rates the major charitable organizations on their efficiency, that is, how much of your donated dollar will be used to actually help people instead of going to fundraising or executive pay.

I was surprised that the American Red Cross only garnered three stars until I saw that the CEO is paid over $500,000/year.  Doctors without Borders rates the full four stars and pays its CEO only $115,000/year.   The good Doctors will get my money.

Here is the list of four star charities, as rated by Charity Navigator, helping in Haiti, starting with five organizations based in Haiti:

• Haitian Health Foundation
• Hands Together
• Hope for Haiti
• Hope for Haiti Children’s Center
• Love A Child, Inc.

• Action Against Hunger-USA
• ActionAid International USA
• ADRA
• American Jewish World Service
• AmeriCares
• Beyond Borders
• CARE
• CHF International
• Childcare Worldwide
• Convoy of Hope
• Direct Relief International
• Doctors Without Borders, USA
• Feed My Starving Children
• FINCA International
• Food For The Poor
• International Orthodox Christian Charities
• International Relief Teams
• Islamic Relief USA
• MADRE
• Medical Benevolence Foundation
• Operation Blessing International
• Operation USA
• Oxfam America
• Partners In Health
• Samaritan’s Purse
• Save the Children
• United Methodist Committee on Relief
• United States Fund for UNICEF
• Water Missions International
• World Hope International
• World Vision

Disclaimer: I have no personal affiliation with any of the charities listed above.  I do not receive any compensation for including them in this list, nor do I receive any compensation if you choose to donate, other than a warm sense of purpose.

Carnivals: This post was included in this week’s Carnival of Personal Finance hosted at Million Dollar Journey.

Tags: charity, donations, Haiti, Haitian relief

Chance are you don’t need to file estimated taxes, but if you do, the fourth installment of 2009 estimated taxes is due Friday, January 15th.

Most folks have sufficient tax withheld from their paychecks to cover their tax bill, but if you have additional income, e.g. rental income, a side business, or significant dividends or capital gains, then you may need to pony up to Uncle Sam every quarter.  I remember that as a graduate student I had to file estimated taxes, since the University didn’t withhold taxes (I never understood why they didn’t).

If you end up owing more than $1000 and you didn’t pay at least 90% of your 2009 tax or 100% of your 2008 tax (whichever is smaller), then you may be subject to penalties.  So, if you need to,  send Uncle a check now.  And don’t forget your state taxes, too.

IRS Form 1040-ES

Massachusetts 1-ES

Tags: estimated taxes, Massachusetts

“So tell me what you want, what you really really want…”  — Spice Girls’ “Wannabe”

Last August, I created my Gold Star Portfolio — a collection of low-cost mutual funds that have demonstrated exceptional long-term performance.   I identified good funds for four major categories of asset allocation:

• U.S. Large Cap,
• U.S. Small Cap,
• Foreign, and
• Bond.

Improved diversification

A healthy diet includes the four basic food groups, but also a range of foods within each group.  For example, carrots are great for you, but you should also have green leafy vegetables, too, like swiss chard.

Similarly, a healthy portfolio diversifies each category into a range of investments. For example, in the Foreign section of your portfolio, you might want to have some exposure specifically to emerging markets as well as the more industrially developed nations.

Emerging markets are countries that are undergoing tremendous growth, especially in the creation or expansion of a middle class.  Think China and India.  They also have the tendency to fall apart due to political instability and can have relatively immature financial markets with currency fluctuations and less-than-transparent business transactions.

I recently wrote about different ways you can invest in the so-called BRIC-nations:  Brazil, Russia, India, and China.  But to cover the broader emerging market category, I want to also look beyond these four nations.

Read the rest of this entry »

Tags: ADRE, asset diversification, BLDRS Emerging Markets 50 ADR Index, BRIC investing, DFEMX, DRPEX, emerging markets, Gold Star Portfolio

Now that we’ve improved the energy efficiency of our cars through Cash for Clunkers, President Obama has proposed helping us improve our homes through Cash for Caulkers.  The proposal would provide a tax credit of up to $12k per home for 50% of the cost of projects that improve the energy efficiency of existing homes.   Unfortunately, Congressional funding to enact this legislation seems to have stalled.

Improving the energy efficiency of a home is more complicated than buying a vehicle. Each home is different and requires a thorough energy audit to identify and prioritize problems to deliver the best bang for the buck. The first challenge, of course, is to find a reputable and unbiased company to help you. Ask a guy who specializes in window replacement and just guess what he’s going to recommend.

Speaking of windows, it turns out that it may not pay to replace old single-panes with new double panes. In many cases, heat is lost primarily through lack of insulation around the frame and poor weatherstripping. It may be more cost effective to do a window tune-up rather than a replacement.  Read the rest of this entry »

Tags: Cash for Caulkers, energy, energy audit, Massachusetts, tax credits for energy efficiency

The taxman cometh.

All that money feathering your IRA nest isn’t tax free — just tax-deferred. Uncle Sam wants his cut. Once you turn 70 1/2, you must start withdrawing it at a rate determined by the government and pay tax on it.  This is the required minimum distribution (RMD).

You can use the RMD to fund Roth contributions, but only up to the annual limit, currently $6,000.*  I wondered whether it would make sense to accelerate the withdrawals by converting the IRA into a Roth.

As is usually the case, this turned out to be a more complicated question than I expected.  I built a spreadsheet with lookup tables for tax rates and the RMD schedules.  I created three accounts:  an IRA, a Roth, and a taxable portfolio.  RMD’s from the IRA end up in the taxable portfolio, after paying taxes.

For every scenario I tried, it did not make sense to accelerate distributions.  A typical result is shown below.  (Click on the graph to enlarge.)

Read the rest of this entry »

Tags: required minimum distribution, RMD, Roth conversion