Divorce Team

You’re going through a divorce. You may feel that you’re watching your life crumble, including your finances. It’s tempting to want to save money by doing it all yourself. Whether ending the marriage was your idea or not, it’s a time when you’ll be making big decisions that are different than any decisions you’ve ever had to make. It’s not time to be penny wise and pound foolish. Because divorce isn’t an everyday occurrence, here are some pointers that can help you and save you money.

Too many people assume attorneys make things worse. With a good attorney, that’s not true. Many people have never had another reason to hire an attorney, so they don’t know a good attorney from a bad one. In a divorce, part of being a good divorce attorney is assuming you’ll be able to negotiate a settlement without going to court, but being willing to go to court if needed. Also, a good attorney isn’t going to make promises about the outcome. There is a range of potential outcomes if you go to court. So an attorney can give you an idea of what to expect, but very few guarantees.

A financial expert who specializes in divorce can be a huge help. Generally, the financial expert will be able to do some calculations to show you what several different financial settlements will look like. This expert will cost less per hour than an attorney and can go to court to testify in your case if necessary. A good financial professional who doesn’t usually do work on divorce cases may come up with some great ideas, but if those ideas won’t make it through a negotiation or a court hearing, it’s not the help you need.

If you have minor children, you might need some professional input there. Good parents generally agree that the well being of their children is the most important concern in a divorce. Many parents can come to a parenting agreement that works without professional help. But don’t hesitate to hire a parenting specialist if you can’t agree on issues about your kids.

Maybe the most important professional for you in a divorce is a therapist. Friends and family are important for emotional support, but sometimes they tell us what we want to hear. A good therapist helps you move forward with your new life. Therapy doesn’t have to be a long term commitment. Divorce is a huge life transition. Some objective help is worthwhile.

Once a divorce is finished, the courts aren’t generally inclined to allow people to have a “do over” because one of the former spouses changed their mind. The decisions you’re making will impact the rest of your life and they’re not the type of choices you make all the time. You owe it to yourself to make well thought out decisions and professionals can help you do that.

Three Financial Mistakes for Young Adults to Avoid

There are some great financial strategies that make a sound financial life achievable. There are also some mistakes that can slow down or stop a young adult from getting started on a good financial path.
1. Avoid bad debt. It’s easy to live beyond your means. Credit cards can be a convenience, but in the age of debit cards, there isn’t much need for credit cards. If you use credit cards, pay them off completely each month. Doing this builds your credit history in a positive way, so when you’re ready to borrow money at a reasonable level for a good reason – your first home, a reliable car – it’ll be easier. Also, don’t stress about student loans unless they’re at astronomical levels. Student loans can help get a better earning foundation. They’re cheaper than credit cards and for many people right out of college or trade school, the interest is tax deductible.
2. Don’t try to live your parents’ lifestyle. That doesn’t mean to avoid the Baby Boomer memories of shag carpet and Woodstock. What it does mean is that it took your parents lots of work and time to build up to their current lifestyle. Take a close look at what your current income will allow you to spend. Let that drive everything from how much you pay in rent (maybe a roommate makes sense), what kind of car you have (a solid used car will work until you make more and can buy a new car), and your social life (got to have that – look for fun ways to enjoy friends without running up credit cards).
3. Don’t be without a safety net. If you think, “My parents will help me out if I get in a bind.” Before you let that be your safety net, think how you feel about paying all your parents bills when they retire. They need to be saving for their future and you do, too. So with your income driving your current lifestyle, you’ll stay out of debt. When you decide what you’ll spend, save at least 10% of what you make. For the first year or so, put it in a basic savings or money market account. Once you have the cushion build up, you can start diversifying.
Avoid going the wrong direction as you start out. It saves you the trouble of cleaning up your finances later.

Friendly Advice

We all get advice from our friends, whether we want it or not. When it comes to financial advice from your friends, take it with caution.

Many people are Do-It-Yourselfers when it comes to their finances. As a financial professional, I’ve seen people who are pretty good at it. I generally meet them when they come to see me for a sanity check. There’s always something I can recommend that they didn’t think of and they appreciate it. But some Do-It-Yourselfers are a mess – and the mess is compounded by the fact that they don’t know that they’re a mess. So your buddy who makes all his own financial decisions through reading (which may be giving him bad information) or his own brand of logic (which may be illogical) may be unintentionally giving you bad advice.

Another pitfall of friendly advice is that your friend’s situation may be different from yours. So what your BFF from college is doing may be perfect for her, but doesn’t fit you. Perhaps she has more money than you, or less money that you. Maybe you have the same saved in investments, but her tax situation is much more complex than yours, which impacts everything else she does with her money. Several years ago I was proposing a tax credit to a prospective client. It was pretty complicated and at some point as he was struggling with whether or not to get involved in the credit, I told him I owned this same tax credit. That gave him lots of comfort, but I felt like it gave him a little too much comfort, so I told him that I was also wearing a red dress, but that the red dress wouldn’t look good on him. Financial advice isn’t “one size fits all”.

So take the advice of your friends with caution. Get advice from a professional who’s looking out for you – without their own agenda clouding that advice.

Fantasy Tax Choices

Most of these blogs are helpful hints to think through financial issues that impact you.  This one is not that applicable to most readers.  It’s certainly not political, but may give food for thought about the negotiations that go into tax legislation.  As the national debt limit is being debated, there’s governmental discussion over tax cuts and tax increases as opposed to tax reform.  The tax code is certainly more complicated than it should be, as are other government funding issues.  Some of the most simple solutions may never get serious consideration because they are, in fact, so simple.  Here are a couple that will probably never off the ground.

 Flat Tax

A true flat tax would be exactly that.  Everyone would pay the same percentage of every dollar they get from anything  that’s income.  So wages, dividends, interest, capital gains, sales – everything – would be taxed at the same rate.  Deductions would either be minimal (alimony paid, the cost of items sold for profit, etc.) or non-existent.  So if you make $15,000, you’d pay the same percentage of you income that someone who makes $500,000.  Those with higher income pay more dollars, but you’d each pay the same percentage.  To have our current system – the more you make the higher percentage you pay may seem fair in the sense that those who make more have more disposable income.  But the deductions always end up debated and making things complicated.  Shouldn’t we encourage home ownership by giving people a tax break for their home mortgage?  Maybe so, but what about all those innovations that could save the environment?  Shouldn’t they get a break?  How about farmers?  They feed our nation and should be able to pay less in taxes.  Right?  And so it begins.  What the “flat” tax is and how it’s structured has as much potential for interpretation and complication as our current tax system once it gets started.

National Sales Tax

This is so simple it wouldn’t even require filing a tax return.  The government could impose taxes for anything purchased in the country.  They could even set different rates for different purchases to help out lower income households.  So food purchased at a grocery store could be at a low tax rate or no tax, but food purchased at a restaurant could have a higher tax.  We all have to eat, but those who don’t make a social occasion of it pay less to eat than those who do.  Cars could have a higher tax rate, maybe even much higher for vehicles in a higher price range.  Houses could have the same structure as cars and the tax could be part of what we’re able to finance with a mortgage.  But how do people get to claim their deductions? And so a national sales tax falls apart, too.

Sigh…

And so it all ends up with the same concerns about having a system that generates income for government, attempts to tax those who can afford it, and gives breaks to those who are doing things that society wants to reward.  To be clear, my descriptions of these two alternatives aren’t the ones that have been put forth for public debate.  They describe a basic concept and how it might work.  Unfortunately it seems that none of the systems – including the one we currently have – work for everyone.

Finding a Financial Advisor that’s Right for You

If you want financial planning, finding a professional to guide you through the process is a daunting proposition.   Even referrals aren’t always the solution, since many of your friends might not completely understand what their financial advisor does or whether what’s done is right for them.   Finding a financial planner can be intricate and in depth.  There are also a few simple concerns you can explore to work toward finding a professional that’s a good fit for you.  Here are four basic issues you can address. 

The first is what the planner’s credentials are.  Credentials are different from licenses.  So having a securities license, insurance license, or a title from a financial institution will not automatically provide the training to qualify an individual for financial planning.  Financial advisors who are Certified Financial Planners have the training and experience to provide financial planning.  This incorporates, but isn’t limited to, investments, taxes, retirement planning, estate planning, cash flow and insurance. 

The next step is to ask how the planner is compensated.  A fee-only planner doesn’t need to sell you products like investments or insurance to make a living.  The planner may be paid through a flat retainer, hourly, or some percentage of assets that are managed. 

The third question is what services the planner provides.  If you work for a living and all your financial needs must be met with what you earn, you might not need an advisor who specializes in people with a large inheritance.  And if you want someone who’ll incorporate all the pieces of your financial life, you won’t be best serviced by a planner who only manages investments. 

Another question to address is whether the planner has an obligation to do what’s in your best interest or if he works for a firm that requires that he provide certain products or services to all clients, even if the client doesn’t need them. 

So where can you find advisors that are likely to have answers to these questions that will make it easier for you to find one that works for you?  There are a couple of professional organizations that foster fee-only financial planners that have their clients’ best interests as their primary goal.  The National Association of Personal Financial Advisors (NAPFA) at  www.napfa.org and the Alliance of Cambridge Advisors at www.acaplanners.org have advisor search functions.  Also, the NAPFA site has a more in depth questionnaire you can use for more in depth interview questions.

Prepare for 2011 Taxes Now

While making my way through tax season, I see several items that can be done year round to make your life easier from a tax perspective.  Here are just a few that can save you time and money.

Cost basis – Technology and regulatory reform have made keeping track of what was paid for investments easier, but not perfect yet.  Any time you move investments from one financial institution to another, make sure you ask the institution that you’re leaving for the cost basis on the investments.  It’s much more difficult to go back years later and ask about an account that was closed a long time ago.  That’s especially true if the investments moved into your name from a divorce.  Get the cost basis while the paperwork from the divorce is being processed.

Items donated to charity – Each time you take a pile of used stuff to a charity for donation, make a list of the items and attach it to the receipt.  Then total the thrift store value of those items on each receipt.  The IRS wants pretty specific records for donations like these, not just an indication of how many bags or boxes of things you gave.

Tax planning – If you’re either getting a big refund or paying big every year, you’re not managing your taxes well.  If you owe a lot each year, you’re probably paying interest and penalties which is a waste of your money.  If you get a big refund each year, the IRS has your money and you need to wait until you file your return to get it back.  The IRS won’t give it to you mid-year just because you ask, nor will they pay you interest when they send your refund.  They shouldn’t have to since they’re not a bank.  A good tax professional can help you estimate what your withholdings and quarterly estimated tax payments should be during the year.  Then your refund or what you owe should be a manageable level. 

Consistent preparation – Find a good tax professional and stick with them.  This is efficient on many fronts.  If the preparer isn’t just entering data and doesn’t have too many clients, they will become familiar with your situation and be able to suggest some tax saving strategies as well as have a pretty good idea if you’ve missed reporting some income or claiming some deductions.  Even the preparer’s software helps with that by keeping track of items from one year to the next.

You don’t need to have your life revolve around your annual tax return.  But being just a little proactive can help your tax filing be more accurate and easier to prepare.

Top Ten Things To Do During Tax Season (Apologies to David Letterman)

10. Get your things organized and to your preparer as soon possible to avoid needing to file an extension.

9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.

8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.

7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.

6. Start your file now for 2011 tax data.

5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.

4. Start a mileage log with a section for charitable miles, medical miles, and business miles.

3. Keep track of all your out of pocket business expenses.

2. Keep organized on your other financial issues, not just taxes.

1. Reward your tax preparer with chocolate – especially if it’s me!

Happy Financial New Year!

The economy still isn’t out of the woods.  Many people still feel the pressure of a sluggish financial landscape.   As the year beings, it’s good to get some financial goals in place.  Basics are a good starting point.

–          Spending – Spend less than you make.  If you need to make adjustments in your spending, buckle down and do it.  Also, you’ll want to include in your budget the next three items.

–          Debt – If you have credit card or other unsecured personal debt, work on paying it down.  Pay the biggest amount possible on the debt with the highest rate.   If you’re working on spending, the debt won’t increase.

–          Emergency savings – Put money away for emergencies.  You want to have some money that you can use to cover unexpected financial needs.  If you have no emergency funds, work toward 5% of your pre-tax income.

–          Retirement savings – Things will get better in the financial world, so save toward not having to work to cover expenses.  If your employer matches part of what you contribute, get to that level as quickly as possible. 

If you’ve got these under control, get with a fee-only financial planner to work on some bigger goals.  The financial world will get better.  The faster we all get away from the behaviors that brought on the meltdown, the faster the economy will get better.

To Roth or Not To Roth

Congress lifted the income ceiling in 2010 for conversion of a traditional IRA to a Roth IRA. So lots of people are wondering if a conversion is a good idea.  The answer is – as it so often the case – that it depends. 

What’s the difference between the two types of IRAs?  Contributions to a traditional IRA might be partially or fully tax deductable, so this type of retirement account has some or all of the balance subject to tax when the money is withdrawn.  Also, with a traditional IRA, you are required to withdraw a portion of the account every year beginning when you turn 70½ and those withdrawals are taxable.  Contributions to a Roth IRA are never tax deductible, but withdrawals aren’t subject to tax.  Also, you are never required to withdraw the money from a Roth.  Both types of IRAs have a 10% penalty if you take money out prior to your age 59½, with a few exceptions. 

Converting from traditional IRA to Roth means that the taxes need to be paid on the taxable portion of the traditional IRA, which sometimes means the entire amount.  During 2010, that converted amount can be taxed partially in 2010 and partially in 2011.  But unless you know you’re going to drop into a lower bracket in 2011 due to a life event – retirement, quitting a job to go to school full time, taking a big pay cut – spreading the tax over two years probably doesn’t make sense.  We know the tax brackets in effect for 2010 and it’s likely that they’ll be higher in 2011.

It’s important to remember that you don’t have to convert your entire IRA.  You could decide to convert just part of it.  So if the top IRS tax bracket you are subject to is 28%, you could convert enough of your IRA to a Roth that you wouldn’t have income pushed into the next tax bracket and leave the rest in your traditional IRA in place.  That Roth balance will now be available in your retirement years to be withdrawn only if you want to withdraw it and will be tax free if you do use it. 

So who is a Roth conversion most appealing to?  If you are in a lower tax bracket this year than normal, you might want to consider it.  Maybe you just retired or you’ve been laid off or had a pay cut in your household.  If you are ten or more years away from retirement and don’t expect your tax bracket to go down much when you leave the workforce, that’s another favorable thing.  So if you’ll have a pension that will pay you when you stop working or your IRA is really large, you might want to look at a conversion.  Ironically, the people who haven’t been eligible this year – high income earners – often have the hardest time justifying a conversion.  I recommend doing a Roth conversion prior to age 59½ only if you have enough cash outside the IRA to pay the tax.  So paying between 28% to 35% to the IRS (on top of any state income tax) to move into a tax free instrument is a difficult pill to swallow at just about any time.  But to do it during a recession when it’s especially important to keep lots of funds liquid in case of a loss of income or another financial emergency is too aggressive for some of these folks.  For people already in retirement, a low stock market can be a good time to do the conversion.  If you account values are down, moving some money to the Roth will allow that money to grow tax free.  Assuming growth on the account of 8%, it takes about three to five years to get back what was paid in taxes.  From then on, all the growth I  the Roth puts you ahead in the tax game on your retirement funds. 

Still undecided?  Make an appointment with a financial planner to see if your particular situation could make sense for a conversion.  Your situation is unique and one of the factors that can’t be quantified is whether or not you’re comfortable with the transaction.

Revisiting Your Divorce During the Recession

When a divorce is final, the spouses or a third party like a judge or arbiter have made decisions about how assets, debts, and cash flow will be handled.  It’s common to have requirements to sell a home and divide the proceeds, refinance debt to remove one spouse from a loan or credit card, or have alimony (also known as spousal maintenance) paid by the spouse who was the primary earner.  I’ve said that there are few things in life as final as Final Orders in a divorce.  But that’s not always the case.

These “final” decisions are based on many factors – how long a couple was married, what the financial resources are to both parties going forward, and what’s deemed fair in that particular state and courthouse.  These factors usually incorporate what has happened historically in the economy, which is assumed to be a foundation for what will happen in the future. 

In the midst of the worst recession since the Great Depression, some people are exploring reopening their financial settlement.  Maybe the house that was to be sold when the kids moved out is now underwater.  Maybe the credit card to be refinanced can’t be.  Maybe one of the former spouses has lost a job or has had earnings reduced. 

So when is it reasonable to restructure a divorce settlement from several years ago?  Ethical, intelligent people in the family law arena struggle with how to address this in the current environment.  Answers and outcomes vary widely.  There is a long list of considerations, but here are a few.

–         The first and biggest is whether or not the divorce decree allows for changes.  If alimony was part of the settlement and specified as non-modifiable, that is probably not worth pursuing. 

–         If the reasons you want to revisit your settlement are factors that impact your ex as well as you, think carefully about why your divorce would be worth modifying after the fact.  For instance, if your income is down, but your ex has also lost earnings, it might not make sense to revisit alimony.

–         If the factors that negatively impact you are outside the control of your spouse, a judge might not rule in your favor.  For instance, if the house was to be sold and proceeds divided, but more is owed on the house than it would sell for, forcing a sale won’t get either of you a great outcome.  But if the house could be sold for less than originally anticipated and you’d each get some money and you’d now be off the mortgage, that’s worth approaching your ex about.

–         If you want to make a change because you believe in your heart that your long term well being will always be the responsibility of your former spouse, think again.  This is true in any economy.  Unless you are disabled, it’s probably in the best interest of you, your ex, and your kids that you assume that you are responsible for making your financial future a good one.  When people tie their futures to each other through a marriage, they agree to weather storms together.  When they untie their futures through a divorce, they can each assume the autonomy to make their own choices and live with the consequences of their life decisions.  Looking to someone else to solve your problems is seldom healthy emotionally or financially.