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Carrie Schwab-Pomerantz

Helping Young Adults Means More Than Writing a Check

Dear Carrie, Several years ago, I loaned my then 24-year-old son money to buy a car on the condition that he pay it back in monthly installments. Because of some job problems, he wasn’t able to keep up with the payments. Now he’s back on his feet and wants to start paying me again. While I’m happy he’s being responsible, I’m hesitant to take his money. I’m more financially secure than he is, and I know there are lots of things he needs to save for. On the other hand, I don’t want to lessen his sense of responsibility or independence. Any ideas on how to handle this?

—A Reader

Dear Reader, This is a great question because so many parents of young adults are faced with a similar dilemma. As you watch your kids struggle financially, of course you want to help. To me, that’s what families are for. And once your kids are grounded and feel confident that they can take care of themselves, it’s a pleasure to help them — and can make a big difference in their lives and the lives of their own families. However, how you give the help is important.

I applaud you for offering to loan your son the money for his car, not just making it a gift. Paying for a car over time provides important financial lessons, involving saving, budgeting and working towards a specific goal. Now that your son is in a better financial position and wants to pay you back, he obviously appreciates those lessons. And, as you imply, it’s important not to do anything to take away his drive.

On the other hand, as a mother, I completely understand your desire to continue to help him. So first, let’s talk about how you might handle the payments. Then we’ll explore other positive ways to give financial help.

Be creative about a repayment plan

Since you’re uncomfortable accepting payments because your son needs the money more than you do, there are a couple ways to handle this that could work for both of you.

One idea is to set a monthly payment your son could easily afford. Accept the payments, but put half aside to help him again when he needs it. You don’t even have to tell him you’re doing this. He’ll feel the pride and confidence that comes with making good on a debt. And you’ll know that you’re actually using that money for his future benefit.

Another possibility is to strike a deal where your son divides his payment into two parts: half to you and half into his savings account or IRA. That way, he’ll be encouraged to pay his debts as well as save for his future.

By accepting some sort of payment, you’re acknowledging your son’s financial responsibility and encouraging his good habits. Refusing to accept payment might actually undermine both.

Look for other ways to help that foster growth and independence

Even if you’re in a position to help grown kids financially, I think it’s important to be selective and not just write a check. Ideally, you want to offer help that reflects your values and can have a positive impact both today and down the road. Here are three areas to consider:

—Insurance and health care costs: If a young adult doesn’t have health insurance, consider paying initial premiums on a high deductible policy. You’ll not only be helping with the monthly bills, you’ll be emphasizing the importance of having adequate coverage. Even with a high deductible policy, there still may be periodic medical expenses that need to be covered. You could offer to pick these up for a specified time period. If you make a direct payment to a healthcare provider or hospital on behalf of another person, there’s no gift tax.

—Education, both for kids and grandkids: Whether it’s an advanced degree or the need for new job skills, education is expensive. Would you be willing to cover these costs? What about paying for daycare or pre-school for the grandkids?

—Keeping a roof over their heads: Coming up with move-in costs such as first and last month’s rent plus deposit is a struggle for many young adults just getting started. Covering these costs can be an excellent opportunity to help get a young person get off the ground. When it comes to buying a first house, helping with a down payment is a positive way to offer support, whether as a gift or a loan.

Make a gift as part of estate planning

If reducing your taxable estate during your lifetime makes sense, you can gift up to $14,000 a year to an individual without incurring gift taxes ($28,000 for a married couple splitting gifts.) You might also consider gifting larger amounts to a 529 College Savings Plan—an excellent opportunity for grandparents to make a significant, targeted contribution.

There are many reasons why grown kids might need financial help — after all we live in a very expensive world — so if you can help, by all means, do it. To me, it’s an investment in the next generation. Just make sure you’re comfortable with what you’re giving and that your kids know what’s expected in return.

Photo via Images Money, Flickr

Ask Carrie: The Lowdown on 401(k) Loans

Dear Carrie: Is there a limit to the number of times you can borrow from your 401(k)? — A Reader

Dear Reader: During difficult economic times, borrowing from your 401(k) can seem like a great idea. After all, it’s your money and you are, in effect, borrowing from yourself and paying yourself interest. So it would seem like a risk-free solution for getting extra cash when you need it.

There are a lot of positives to a 401(k) loan. There’s no credit check required; you get a competitive interest rate regardless of your credit score; and there aren’t any taxes or penalties on the money as there are with an early withdrawal. However, as with most things, there’s also a minus side because borrowing from your 401(k) — and borrowing often — can also expose you to a few risks.

But before we get into those issues, let’s first answer your specific question. While the IRS has regulations regarding penalties and taxation on withdrawals from retirement accounts, whether or not you can borrow from your 401(k) — and how many times — depends on the provisions of your individual plan. So the first thing you need to do is check with your employer or plan administrator to determine what your specific plan allows.

Even if your plan allows you to borrow multiple times, there’s more to it; following are some general guidelines.

How much you can borrow

Loans from a 401(k) are limited to one-half the vested value of your account or a maximum of $50,000 — whichever is less. That’s clear enough when you’re taking out a single loan: if you have $40,000 in vested assets, you can borrow up to $20,000; if you have $120,000 vested, you can borrow the maximum of $50,000.

It gets trickier when your plan allows you to carry more than one loan at a time. In this case, the maximum amount of a second loan is determined by the highest outstanding balance you’ve had on a first loan in the 12 months prior. So, let’s say you borrow $40,000 on January 1, 2016 and repay $25,000 on April 1. Then on December 1 of the same year, you want to take another loan.

Even though you’ve repaid part of your first loan, you would still be limited to a maximum second loan of $10,000 because your highest balance within the previous 12 months was $40,000. If you waited until April 2 of 2017, you’d be able to borrow $35,000 because your $25,000 payment would have been factored in and your highest balance in the prior 12-month period would then be $15,000.

As you can see, it’s not just a question of how often you can borrow but how much you can borrow at a given time if you’re carrying multiple loans.

When you have to pay it back

The term of a 401(k) loan is five years unless you’re borrowing to buy a home. Your repayment schedule is usually determined by your plan. At the very least, you must make payments quarterly. This is really important. Even though you’re paying yourself back, if you don’t follow the repayment schedule (or if the term or amount of the loan isn’t within the allowed parameters) the loan could be considered a “distribution” and be subject to federal income tax and a 10 percent early withdrawal penalty if you’re under 59 1/2 (state income taxes and penalties may also apply).

What happens if you lose your job

The next consideration is job stability. If you borrow against your 401(k) and then lose your job, in many cases you have to pay back the loan at termination or within 60 days. (Again, the exact timing depends on the provisions of your plan.) This is no small matter. If you need the loan in the first place, how will you have the money to pay it back on short notice? And if you fail to pay it back within the specified time period, the outstanding balance will likely be considered a distribution, again subject to income taxes and penalties. So while you may feel secure in your job right now, you’re wise to at least factor this possibility into your decision to borrow.

The impact on your retirement savings

Also, don’t forget that while a 401(k) loan may give you access to ready cash, it’s actually diminishing your retirement nest egg. First of all, you’re losing the tax-deferred growth of your savings. But on top of that, some plans won’t allow you to contribute more to your 401(k) until you pay back the loan. In that case, not only are you prevented from saving more, you could also miss out on your employer match.

As you can see, while there aren’t strict rules about how many times you’re allowed to borrow against your 401(k), doing so can have other far-reaching consequences. If you have no other options, it can be a convenient solution. But my advice is to protect your retirement assets and consider all other available choices before signing on the line. In fact, maybe you should be focusing on building your emergency fund so the next time you’re in need of cash, you’ll have it.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. MEMBER SIPC.
DIST BY CREATORS SYNDICATE, INC. (0316-1056)

First Steps for Your Baby’s Financial Future

Dear Carrie: I’ve just had a baby! Things are pretty crazy in my house right now, but I want to be sure I give my daughter every opportunity I can. I have a little bit of money saved up, but I’m uncertain what the best use is for it. Should I buy a savings bond, a CD, open an investment account or put it all in a college fund? — A Reader

Dear Reader: First, congratulations to both you and your daughter. I’d say she’s pretty fortunate to have a mother who, in the midst of all the new baby responsibilities, is already thinking about the future. As a parent myself, I can tell you that the future — and all the related expenses — comes all too quickly!

Being ready for those expenses goes hand-in-hand with smart saving habits, so it’s great that you’ve already begun. Whatever the future holds, continuing to save will be the cornerstone of providing a solid financial foundation for your daughter.

In terms of what to do with the money you’ve already saved, that depends on how you expect to use it. While college is often a primary goal, there will be a number of interim financial goals that you’ll want to meet as your daughter grows up. Let’s look at how you might plan for each.

Consider a 529 Account for College Saving

When it comes to planning for higher education, a tax-advantaged college savings account such as a 529 Plan is often the best choice. This is a state-sponsored program that lets parents, relatives and friends invest for a child’s college education. The account belongs to you, not your child, and you remain in control of the money.

Usually you have a choice of professionally managed investment portfolios. Potential earnings grow tax-deferred. And you pay no federal taxes on earnings as long as you use the money for qualified higher education expenses such as tuition, books, and room and board.
Opening minimums vary by state, but can be as low as $25. You’re not limited to your own state’s 529, so you’re free to shop around at different financial institutions (though you should first consider any state tax benefits your own state’s plan may offer). Plus, you can set up automatic contributions — say $50 or $100 a month — making it easy to keep saving.
If grandparents want to help, gift tax rules make it easy for them to contribute larger amounts. This can benefit their estate planning as well as your college planning.

Designate Different Accounts for Other Needs
While a college account may be at the top of your list, there will be other opportunities — say, music lessons or private schools — that you want to provide for your daughter along the way. To save for these eventualities, consider a couple of other types of accounts.
–Custodial Brokerage Account: This is a brokerage account managed by a parent or guardian on a child’s behalf. It offers minor tax advantages and has minimal restrictions on how the money can be spent as long as it’s for the benefit of the child beyond daily living expenses. Unlike a 529, there are no recommended investment portfolios. You can choose from a wide variety of investments — stocks, bonds, mutual funds — according to your feelings about risk. A key difference is that the child takes control of the money at the “age of majority,” which is 18, 21 or 25 depending on state rules. That’s something to think about.
–Regular Brokerage Account: This is a taxable account that you could open in your own name and earmark the savings and investments for your daughter. You’d then have the control and freedom to use the money as you see fit.
–Passbook Savings Account: This could be for short-term savings needs. It’s also an account your daughter could contribute to, as she gets older.
As for investments, equities generally have the greatest potential for long-term growth. Realize, though, that because stocks are volatile, they should be reserved for goals beyond a 3-5 year time frame. For shorter-term goals, CDs and Savings Bonds are safer; the downside is that they carry very low interest rates.

Create a Plan
If you have a savings plan, putting money aside will be easier, so here’s what I suggest right now. Assuming college is your first goal, put the money you currently have saved in a college savings account and commit to adding more each month. There are a number of online calculators to help you determine a realistic monthly savings goal.
As you’re able to save more, consider a brokerage account or passbook savings account for other types of expenses. Once you know your monthly college savings goal, you might also establish a monthly savings goal for this account and put it on automatic.

Don’t Forget your Daughter’s Financial Education
As your daughter gets older, be sure to involve her in the process. Help her create her own savings goals and have her save a portion of any money she gets. This will get her into the savings habit early, teach her how money grows, and help her make good spending decisions. Because no matter how much you save for your child, teaching her to be financially independent is really the greatest opportunity you can give her.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. MEMBER SIPC.
DIST BY CREATORS SYNDICATE, INC. (0316-1055)

Photo: U.S. Republican presidential candidate Gov. John Kasich (R-OH) holds a baby while former Republican presidential nominee Mitt Romney (R) speaks at a campaign rally at the MAPS Air Museum in North Canton, Ohio March 14, 2016. REUTERS/Aaron P. Bernstein

Thinking Of Taking An Early 401(k) Withdrawal? Consider the Ultimate Cost

Dear Carrie: If you’re younger than 59, and a half, is it possible to withdraw money from your 401(k) without having to pay it back? — A Reader

Dear Reader: The balance in your 401(k) can be a tempting source of cash when times are tough and you have no other options. Yes, it’s possible to withdraw early without having to pay it back, depending on your personal situation and your specific plan.

But being possible doesn’t necessarily mean it’s practical for your financial future — and the IRS doesn’t make it easy. There are a lot of rules and regulations. So before taking any money from your 401(k), I’d take a step back and carefully review the basics as well as the short- and long-term costs.

Basic Taxes and Penalties

First, no matter your age, all 401(k) distributions are taxed as income according to your tax bracket the year that you withdraw the money, unless you have a Roth IRA. What’s more, unless you meet specific criteria, early distributions are subject to an additional 10 percent penalty. Together, this could take a huge bite out of your distribution — not to mention your future potential retirement savings.

Criteria You Have to Meet

If your plan allows it, you may qualify for a hardship distribution as long as you prove immediate heavy financial need. The amount of a hardship distribution is limited to your own contributions to the 401(k), and possibly your employer’s contributions, but doesn’t include your income earnings or savings. The terms of proof once again depend on your plan, but in general, the IRS defines immediate and heavy financial need as:

–Medical expenses for you, your spouse or dependents.

–Costs directly related to the purchase of your principal residence — excluding mortgage payments.

–Postsecondary tuition and related educational fees, including room and board for you, your spouse or dependents.

–Payments necessary to prevent you from being foreclosed on or evicted from your principal residence.

–Funeral expenses.

–Expenses to the repair of damage to your principal residence.

What You Stand to Lose

Regardless of why you need the money, you’ll have to pay both income taxes (unless it’s a Roth IRA) and an additional 10 percent penalty. Let’s put that into real numbers. Say you want to take $20,000 from your 401(k) and you’re in the 25 percent tax bracket. Income taxes on your distribution could be $5,000. Now add the 10 percent penalty of $2,000. You could end up having to deduct about $7,000, or 35 percent, from your $20,000 distribution — a hefty price cut.

Next, figure out how much you’d lose in potential earnings over time. For example, if you had a total of $20,000 in the account, and let that money grow at a hypothetical annual interest rate of 5 percent for another 15 years, you’d have over $41,500 — more than double your money!

Finally, even if you continue to make contributions after an early distribution, annual 401(k) limits will make it hard to recoup your losses. On top of that, in certain circumstances, you’re not allowed to make additional contributions for six months after the withdrawal. That’s six months of lost savings.

This example is hypothetical in nature and not intended to represent, predict or project the performance of any specific investment. Charges, expenses and taxes that would be associated with an actual investment are not reflected.

Penalty-Free Options

There are some exceptions to these rules. For instance, if you leave or lose your job at age 55 or later, you can take a lump sum 401(k) distribution. You can also set up a payment schedule of substantially equal payments over your lifetime, which has to be a minimum of 5 years or until you reach age 59 and a half — whichever is longer. This is known as separation of service, and while both situations are penalty-free, you’d still pay income taxes.

The penalty is also waived if you become disabled: You’d pay for medical expenses exceeding 7.5 percent of your adjusted gross income. If you die, a payment is made to your beneficiary or estate. Otherwise, it would be waved if you were mandated to give your distributions to a former spouse under a qualified domestic relations order.

Another Less Costly Option — a 401k Loan

A 401(k) loan is potentially a less costly way to take some cash if your retirement plan allows it. There are no penalties or taxes, but you do have to pay interest. On the plus side, that interest will go back into your account, so in a sense you’re paying it to yourself. However, repayment schedules are strict and failure to repay may trigger penalties and taxes. Also, if you lose your job or change jobs, you’ll almost certainly have to pay back the entire loan within 60 days. If you don’t, once again you’ll likely be hit with penalties and taxes.

The Ultimate Cost

To me, taking an early distribution should be a last resort. I’d advise you to think carefully and talk to your tax advisor. Make sure you understand what a distribution would mean in terms of upfront dollars and lost opportunity for growth. While it may seem like the answer to a current financial need, you could be sacrificing your future financial security by depleting your retirement savings now. That’s the ultimate cost.

DIST BY CREATORS SYNDICATE, INC. (0316-0926)

Photo: Flickr user _e.t.

Does Your Teen Need to File a Tax Return?

Dear Carrie: My daughter is 16 and has her first paying job. Does she need to file a separate tax return? — A Reader

Dear Reader: Congratulations to your daughter — and to you. A first job is an important milestone for both kids and parents. It’s a step toward independence and personal responsibility for your daughter. And it’s an opportunity for you to teach her some financial realities.

Taxes are definitely a part of that financial reality. So I’ll first discuss the parameters for filing a tax return. Then I’d like to get into ways you can help your daughter learn to manage her money wisely — which, to me, is the most important lesson of all.

Basic Guidelines for Filing a Teen’s Tax Return

Whether or not your daughter needs to file a separate tax return depends on three basic factors:

–Is she considered a dependent by the IRS?

–How much income does she have?

–What type of income does she have?

The IRS considers a child to be a dependent if he or she:

–Is under 19, or under age 24 and a full-time student, or permanently disabled at any age;

–Lives with you more than 50 percent of the year

–Doesn’t provide more than half of his or her own financial support.

Next, you need to look at her income, both the amount and type. Here’s where it gets more complicated, because there are different rules and income limits for earned income from a job, unearned income from dividends, interest or investment gains — or a combination of both

For Earned Income Only

This is pretty straightforward. A dependent who doesn’t have unearned income only has to file a separate tax return if earned income is above the standard deduction — $6,300 for 2015. So if your daughter earned less than that, she wouldn’t have to file.

But it could be a good idea to do it anyway. If her employer withheld federal income tax, she might be entitled to a refund. You don’t want her to miss out on that. Plus, it’s a good learning experience.

For Unearned Income Only

Unearned income is a different story. If a child has unearned income above $1,050 for 2015, a tax return is required. But when dealing with unearned income only, you can choose to either file a separate return for your child or include that income on your own return. One caveat: If you include it on your return, it could boost you into a higher tax bracket — and possibly higher tax rates.

For a Combination of Both

The rules change again if a dependent has both earned and unearned income.

In this case, you need to file a separate return if:

–Unearned income is more than $1,050.

–Earned income is more than $6,300.

–Combined income totals more than the larger of $1,050 or earned income (up to $5,950) plus $350.

To make this a little clearer, let’s say your daughter had $100 in interest income plus $5,000 in earned income. She wouldn’t have to file a return because both her unearned and earned incomes are below the thresholds and her total income of $5,100 is less than $5,350 (earned income plus $350). However, if she had $400 in interest income, she would have to file because her total income of $5,400 would be more than her earned income plus $350.

Now let’s say your daughter had $400 in earned income and $800 in interest income. In this case, she would have to file a return because her total income of $1200 is more than $1050.

All this can be a bit confusing, so unless your daughter’s situation is fairly straightforward, I’d talk to your tax professional. Also check out IRS Publication 929 for a thorough treatment and worksheet.

A Word on the “Kiddie Tax”

You may have heard of the Kiddie Tax, so I think that’s also worth a mention. This has to do with tax rates on unearned income.

For 2015, your child’s unearned income less than $1,050 is not taxed. Unearned income between $1,050 and $2,100 is taxed at his or her rate. Unearned income above $2,100 is taxed at the parent’s highest income tax rate. If your child has a lot of unearned income, that could be pretty significant.

Going Beyond Taxes

Whether or not your daughter files a return, I’d definitely talk to her about taxes and withholding, and have her work with you as you prepare either hers or your own return.

Then take it beyond taxes and talk about responsible money management. Now that your daughter is earning her own money, help her create a budget so she can make the most of it. For instance, what do you expect her to pay for? Clothes? Entertainment? Gas? Have her keep track of her expenses monthly (an online budget calculator can help).

Suggest that she save a certain percentage of her paycheck each month for some future goal. If she hasn’t done so already, help her open both checking and savings accounts and set up an automatic deposit from one to the other. Now that she has earned income, you might even help her open a Roth IRA.

Establishing good money habits early is incredibly important but, in general, kids don’t learn much about managing money in school. It’s up to you. So show her how you manage for both the short- and long-term. If you take it step-by-step, and include her where appropriate in your own money strategies, you’ll set her on the path to being able to not only handle her taxes, but her financial future, as well.

DIST BY CREATORS SYNDICATE, INC. (0216-0833)

Photo: Flickr user Cliff.

Online Scams: How Can You Protect Yourself and Your Family?

Dear Carrie: My mother is quite independent and does a lot of her financial business online. I hear about fraudsters preying on seniors all the time and worry about her falling for a scam. How can I protect her?

Dear Reader: It seems there’s no limit to the imaginative scams that today’s fraudsters can come up with. Just when we’ve all become aware of the email from a “friend” purporting to have been robbed in some far-flung place and needing money, there’s the new scam threatening arrest if you don’t pay back taxes or the tech support scam or—you name it. Seniors are a prime target because they’re perceived as more likely to have assets—and perhaps less likely to be skeptical.

But financial fraud isn’t age specific; we’re all targets. When you consider that the FBI’s Internet Crime Complaint Center (IC3) received 269,422 complaints representing more than $800,000,000 in losses in 2014 alone (and it’s estimated that only 15 percent of victims report crimes), you start to understand the enormity of the problem.

So, while it’s great that you want to protect your mother, when it comes to the potential for being scammed, we all need to take heed. My advice would be to sit down with her— and the rest of your family — to discuss best practices for fraud protection both on and off the Internet.

Become Familiar With the Latest Scams

Most scams are designed to defraud you of your money or get your personal information to access that money. Here are a few common frauds we should all be aware of:

—Emails purportedly from government agencies or financial institutions requesting personal and financial information or money

—Calls from familiar sounding charities pressuring you for quick donations by credit card or wire transfer

—Offers of discounted health insurance or low-cost medications

—Goods for sale, such as a car, at below market value, and insistence on a rush sale with payment by wire or to a third party

—Email purportedly from a legitimate collection agency stating that a loan is delinquent and must be paid in full to avoid legal consequences

—Offers for free gifts, vacations or “found money” dependent on some sort of upfront payment, such as a finder’s fee, taxes or delivery charges

—Various investment frauds, including offers of high-yield investments, letters of credit or prime bank notes

—Hot stock tips, especially for “penny stocks,” from unknown callers or e-mails even if they claim to work for well-known brokerage or investment firms

You can find a more complete list of common frauds at fbi.gov. Scam alerts are also posted on ftc.gov. A couple especially of note for seniors are emails supposedly from Social Security and Medicare asking for personal information. Another scam involves the new chip cards where emails, seemingly from credit card issuers, ask you to update account information before receiving your new card. Once you give out the information or click on the link, you’re had!

Review Techniques for not Falling Victim

Scammers are smart and know how to push emotional buttons. While we all hope we won’t be taken in, it happens. So to help protect your mother — and yourself — review the things to do and not do to stay clear of scams:

—Never reply to an unknown email.

—Never click on a link or download information unless you know the sender. Even then you need to be cautious because some links and downloads may contain malware or spyware that can monitor or control your computer use and gain access to your personal and financial information.

—Don’t return a call to a phone number provided in an unknown email, even if it has a local area code.

—Never email personal or financial information such as your social security number, date of birth, passwords. If you receive a suspicious email from a bank or other company requesting such information, contact that company by phone directly. You can report the email to the FBI at www.ic3.gov.

—Make sure you have up-to-date security software on your computer. Create secure passwords, don’t use the same password over multiple sites, and change your passwords periodically.

—Use different passwords for online banking and consider using two-factor authentication, where you enter an additional verification code sent to your phone or a separate device.

—Read your bank, investment and credit card statements.

—Get a copy of your credit report at annualcreditreport.com.

—Designate a single credit card for online purchases and monitor it closely.

And in this age of social media, be cautious about what you put online via social media. Your vacation plans, purchases, identity of family members, birthdays, or special interests can all be fodder for enterprising fraudsters. Also avoid clicking on links on social media sites. You can’t be certain where that link is really taking you.
Stay Informed — and Alert

There’s no way to protect yourself completely, but forewarned is forearmed. Check out the list of Common Fraud Schemes at fbi.gov. Sign up for AARP’s FraudWatch Network (or have your mother sign up). And by all means, if you’ve been the victim of fraud, identity theft or deceptive business practices, file a complaint with the FTC at ftc.gov or by calling 1-877-FTC-HELP (1-877-382-4357).

Unfortunately, in today’s world, we can’t be too trusting or complacent. It’s great to have the convenience of handling our financial business online, but at the same time we must be vigilant in protecting our information and ourselves. If your mother is Internet savvy, she may be more sophisticated than you think about avoiding fraud. But here, too, don’t take anything for granted. Have the conversation now—and check in with her periodically—for both of your sakes.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is board chair and president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

DIST BY CREATORS SYNDICATE, INC. (0216-0715)

Photo: An employee of a money changer holds a stack of U.S. Dollar notes before giving it to a customer in Jakarta, October 8, 2015. REUTERS/Beawiharta

Ask Carrie: Should I Consolidate My Student Loans?

Dear Carrie: I’ve been carrying a number of both federal and private student loans for several years. While I’ve been able to keep up on payments, I’m thinking about consolidating to make things simpler. Is that a good idea? — A Reader

Dear Reader: You’re absolutely right that consolidating your student loans could make life a lot simpler. You’d have a single payment with a single due date. You could put that payment on automatic and be done with it.

But while simpler is preferable, there are other factors to consider. What will your new interest rate be? Do you want to lengthen or shorten the term? Will consolidation affect federal forgiveness or repayment plans? To me, it’s not just about simplifying your life, but also about improving your financial situation.

There are a couple of ways to go, so let’s start by looking at consolidation options, then go deeper into how to decide what’s best for you.

Ways to Consolidate

In the past, federal and private loans had to be kept separate. But as of 2014, it’s possible to combine them. Since you have both types of loans, you have a couple of choices. You could:

–Consolidate federal and private loans separately. You’d then have only two payments. You consolidate federal loans through the Direct Consolidation Loan program run by the Department of Education. Both subsidized and unsubsidized loans are eligible. You can get a complete list of eligible loans at studentaid.ed.gov.

The Department of Education doesn’t handle private loans. To consolidate those, you’d go to a private lender such as a bank. The process is a bit different because, in this case, you’re actually refinancing your loans. Different lenders offer different rates and terms, so you’d want to do a bit of comparison-shopping.

–Combine federal and private loans into one new loan. This process, in effect, pays off all your current loans and gives you one new loan, with one monthly payment. Again, you do this through a private lender.

Important Things to Consider

There are pluses and minuses to each option. To decide what is best, look at three important factors.

–Interest rates. Consolidation may result in a lower interest rate — especially if any of your loans have adjustable rates — but that’s not always the case.

When you consolidate federal loans, your new interest rate is a weighted average of your current rates rounded up to the nearest 1/8 of 1 percent. It could be higher or lower. The positive is it’s fixed, so you can be confident that your payments won’t go up over time. The downside is that if interest rates decrease, you will be left with the higher rate.

With a private lender, interest rates are more flexible. In fact, you may be able to significantly lower your interest rate, depending on factors such as your credit score (the higher your score, the better the deal), income and savings.

–Loan terms. When you consolidate, you can either lengthen or shorten the term of your loan.

Repayment schedules with the Direct Consolidation Loan program range from 10-30 years. When you lengthen the term, your monthly payments may go down, but the amount of interest you pay in the long run will most likely go up. Increase a 10-year loan to 25 years, and your monthly payment could go down about 40 percent; however, you could end up paying almost twice as much interest over the life of the loan. Of course, you do have the flexibility to pay it off more quickly.

With a private lender, you may be able to considerably shorten the term, but you’ll be tied into a higher monthly.

–Extra benefits. Are there any extra benefits attached to your loans? Some lenders offer reduced payments for direct debits or interest rate discounts when you pay on time. Take that into consideration.

Likewise, be aware of federal loan-repayment and forgiveness programs. For instance, federal Direct Loans qualify for income driven repayment plans where payments are capped at 10 or 15 percent of discretionary income. After 20-25 years of consistent, timely payments, the balance of the loan is forgiven. While not all federal student loans qualify for this program, a Federal Direct Consolidation Loan does.

Also, do you qualify for a loan forgiveness program such as the Public Service Loan Forgiveness, specifically designed for public service workers such as teachers, nurses and those in the military? PSLF offers loan forgiveness after 10 years of payments.

Private loans may not qualify for these programs. If you combine your loans into one private loan, be sure to check that out.

Before You Decide

One potential benefit of having multiple loans is that it may provide you with more flexibility for repayment. For example, let’s say that in a few years, you’re in a position to write down your balance. By paying off a discreet loan, you would eliminate that payment entirely, reducing your monthly outlay. However, if you have consolidated all of your loans, you will be committed to the same monthly payment regardless of the remaining balance.

Another strategy would be to make additional principal payments to your highest interest loan while you continue to make the minimum monthly payments on your lower interest loans. That way, you can pay off the highest interest loan first, and effectively lower your overall interest rate.

Weighing the Pros and Cons

As you can see, consolidation is not a straightforward decision. You have to think beyond simplicity to how a new loan might affect your finances over time. Make sure you understand the consequences.

With this in mind, I suggest you do a little more research. Two good resources are the Department of Education (www.ed.gov) and Finaid.org. You might also want to check with your financial advisor who can help you look at the big picture before making your decision.

Realize, too, that student loans are getting a lot of political attention, so whatever you decide to do now, keep your eyes and ears open for any new opportunities in the future.

Carrie Schwab-Pomerantz, Certified Financial Planner, is board chairwoman and president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at askcarrie@schwab.com. For more updates, follow Carrie on LinkedIn and Twitter (@CarrieSchwab). This column is no substitute for individualized tax, legal or investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax adviser, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2016 CHARLES SCHWAB & CO., INC. MEMBER SIPC.
DIST BY CREATORS SYNDICATE, INC. (0216-0613)

Photo: Jorge Villalba poses for a portrait on Sept. 3, 2015 in Encino, Calif. Villaba is struggling to pay off student loan debt. (Brian van der Brug/Los Angeles Times/TNS)

Couples And Credit Scores: Is It A Match?

Dear Readers: Imagine this scenario: Over a wonderful dinner, you and your sweetheart have discussed the future, what you each want out of life, your dream house, the possibility of a family, and everything seems to be pointing to your happiness. Then, the love of your life graciously offers to pick up the tab, hands over a credit card — and the card isn’t accepted. And then a second credit card gets the same response. Oops. Should warning bells go off? Or at least a caution light?

I’ve always believed that finance and romance should go hand in hand, and that couples need to be as open and honest about their financial feelings as they are about everything else. In fact, a study released last summer by researchers at the Brookings Institution, the Federal Reserve Board and UCLA narrows the financial focus for couples down to a very quantifiable number: your credit score. The study proposes that matching high credit scores can indicate not only financial compatibility but also a strong romantic match.

So, as Valentine’s Day approaches, I thought I’d give my readers’ love lives a potential boost by talking about the best way to boost their credit scores. Because if there’s one thing that can dampen the romance in a relationship, it’s not being able to get that loan or that mortgage — or even that perfect job — due to lousy credit.

Five Steps to Better Credit

Before we get into how to build a better credit score, let’s talk about why it’s important. Your credit score isn’t just about your ability to borrow money. It can affect many aspects of your life. Some companies use credit scores in making hiring decisions, landlords can use credit scores to screen rental applicants, and some insurance companies use your credit score to help determine your premium.

Plus, negative credit information generally stays on your credit report for seven years, so mishandling credit today can haunt you in years to come.

What can you do now? If you don’t know your current score, you can purchase it from one of the three major credit bureaus — Equifax, Experian, or TransUnion. Or better yet, some credit card issuers will provide credit scores for free, so be sure to check with your provider first. To put things into perspective, the top score is 850, the median is 725, and 760 or higher will typically qualify you for the best deals. Then, whatever your score, take these steps to keep it as high as possible:

–Pay your bills on time. Paying your bills on time and in full where possible is the best thing you can do. This alone accounts for about 35 percent of your score.

–Use credit cards with care. How much and how often you borrow makes up 30 percent of your score. Keep your credit card balances low — no more than 25 percent of your available limit.

–Increase the length of your credit history. The longer you have credit — and use it wisely — the better your score. Your history accounts for 15 percent of your score.

–Minimize new credit requests. Applying for multiple credit cards or loans in a given period of time can lower your score. New credit requests account for 10 percent.

–Hold different kinds of credit. About 10 percent of your score depends on the type of credit used. A consumer with revolving debt i.e., credit cards, a car loan, and a mortgage, and who keeps up payments, will have a higher score than someone who uses just one form of credit.

Why Couples Should Talk About This

I believe the way people handle money says a lot about them. It can indicate a sense of responsibility or lack of one. It can suggest how trustworthy a person is. And it can reveal attitudes about planning and working toward a goal. Ultimately, how you handle money reflects your values.

All of these things are relative and difficult to quantify, but a credit score is pretty tangible. Of course, your score can be affected by things out of your control. For instance, if you lose your job, you may end up being late on your bills. But if one partner in a relationship can’t handle debt, consistently runs up bills he or she can’t pay, or regularly falls behind on everyday financial obligations resulting in a low credit score, that can be a harbinger of future financial problems — and perhaps future relationship problems as well.

Making a Good Financial Match

So, if Valentine’s Day has you lovingly planning your future together, make sure you’re also financially compatible. Talk about your finances and your individual expectations. Lay it all out on the table: what you own, what you owe, your individual and mutual financial goals, and how you’ll share every-day and long-term financial responsibilities. Get your personal credit scores. If one of you has a lower score, talk about why this is, what this means, and how you can work together to raise it.

Whether it’s saving, paying off debt, buying a house or paying for a child’s education, today’s perfect romance will be affected by the future financial issues of having a life together — for better or worse. You can make it better by talking about these issues now, boosting your individual credit scores, and perhaps, at the same time, increasing your chances for a long and happy relationship.

Photo: A couple holds hands on the beach. Flickr User Terrell Woods https://www.flickr.com/photos/terrellcwoods/8976772514/

Ask Carrie: Do Asset Allocation And Diversification Still Work?

Dear Readers, Here we go again. Just when we thought we could put the worries of 2008 and its aftermath behind us, market volatility once again has individual investors spooked and wondering what to do. While every investor knows that risk comes with the territory, the recent wild gyrations are enough to make even the hardiest investors question their approach.

So it comes as no surprise that I’m getting a lot of questions about how to protect a portfolio. People understandably want to know if the standard thinking has changed, and if so, how. The good news is that even though some points of execution have been fine-tuned, the fundamental principles of asset allocation and diversification remain the best ways to control risk. Let’s take a look:

Asset Allocation and Diversification Still Best for Risk Control

Asset allocation and diversification seem pretty similar, and a lot of folks confuse the two, but they’re actually quite different. The key to creating a lower-risk portfolio is to understand that difference and how the two work together.

Asset allocation is the way you divide your money among stocks, bonds, cash and other investments. This division into the various asset classes should be based on how much risk you’re willing to take and how soon you’ll need your money. Stocks carry the highest risk, cash the lowest, and bonds/fixed income are somewhere in between. Any money you’ll need within the next three to five years should be kept in lower risk investments.

The use of asset allocation as a way to manage risk was first introduced in the 1950s as Modern Portfolio Theory. This theory basically proposed that rather than judging risk by looking at an individual investment, you need to look at how all the investments in your portfolio work together. By choosing a variety of investments that react differently to market conditions — those described as having a low correlation to each other — an investor could reduce overall risk.

Diversification takes this a step further. It spreads your money around different types of investments within each asset class. For instance, instead of one stock or bond, ideally you would have many of each. Dividing even further, you want to have different types of stocks, such as large cap, small cap and international. And within those divisions, it may be best to have stocks in different sectors (i.e., technology, healthcare, telecommunications) and different industries within the sectors. Your ultimate goal is to find investments that don’t move in lock step with one another. That way, when one investment goes through a rough patch, another will hopefully compensate.

You might say that asset allocation lays the foundation for the structure of your portfolio, and diversification fills it in. With the two working together, you have greater exposure to investments that ideally will perform differently under various markets conditions — one may go up when the other goes down — and balance your risk.

Adapting to Changing Market Realities

But we live in a far from ideal world. Since the 2008 financial crisis, there’s been a much higher correlation between asset classes. Anticipated returns from stocks and bonds are both lower. Globalization has meant that markets are more susceptible to external shocks — not only financial but also political and environmental. And investors are more wary. As a result, updated portfolio advice, while still built upon asset allocation and diversification, focuses more on downside risk with the goal of giving you the greatest return for the least risk. This means that there are some further refinements that today’s investor needs to consider.

Finding your Target Asset Mix

As I mentioned before, the appropriate basic mix of asset classes depends on your feelings about risk and how long you plan to keep your money in the market. Traditionally, an aggressive investor with a long time horizon and a high risk tolerance might have as much as 90 percent of a portfolio in stocks with 10 percent in cash; a moderate investor could have perhaps 60 percent stocks and 40 percent bonds and cash; a conservative investor could pare that back to 20 percent stocks and 80 percent bonds and cash. Of course, the more aggressive the portfolio, the greater the risk.

Those broad categories still hold, but what’s evolved is the fine-tuning possible within them. Individual investors now have access to what are considered “non-traditional” asset classes that can offer even greater diversification. These include things like real estate investment trusts, commodities (i.e., energy, agriculture, precious metals), Treasury Inflation Protected Securities and international bonds among others. These non-traditional asset classes have low correlation to traditional asset classes — they move differently in different markets –s o adding them to your portfolio can potentially lower your investment risk.

How to Stay on Top of it All

An appropriate asset allocation and a long-term view are still fundamental to mitigating risk and protecting your portfolio, but that doesn’t mean you should invest and forget.

While it’s never smart (and rarely successful) to try to time the market, you can take advantage of market opportunities or attempt to avoid risk by tactically changing your asset mix within a certain range. It’s important to note, however, that this doesn’t mean that you would move in and out of the market altogether, but rather making subtle shifts to respond to changing market conditions. For instance, if your current equity allocation is 40 percent, you may choose to underweight or overweight by a small percentage, depending on the markets. At the very least, you should be reviewing your portfolio quarterly and rebalancing yearly to stay within your target asset allocation.

There’s a lot to think about, but bottom line, yes, asset allocation and diversification are still essential for protecting your portfolio. But to make yourself feel even more secure, it would be a good idea to check in with your financial advisor and discuss adjustments you might make in light of our current financial realities.

This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Asset allocation and diversification cannot ensure a profit or eliminate the risk of investment losses. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at Creators.com.

Photo: Traders work on the floor of the New York Stock Exchange January 20, 2016. REUTERS/Brendan McDermid

Should You Refinance Your Mortgage?

Dear Carrie: I’m thinking of refinancing my mortgage since I know interest rates are going up. Does it still make sense or have I missed the boat? — A Reader

Dear Reader: Rising short-term interest rates are on a lot of people’s minds these days. For savers, it’s a plus, but borrowers — especially those with credit card balances — may see their payments creep up over time. However, for homeowners with a mortgage, it’s a slightly different story.

While adjustable rate mortgages may be affected by short-term rate increases depending on the benchmark used to adjust the rate, fixed mortgage rates tend to be more closely aligned with the 10-year Treasury note. So, for instance, the recent increase in the short-term federal funds rate is unlikely to cause rates for a 30-year fixed mortgage to increase dramatically. Plus, even though we’ve seen rates inch up, when you compare today’s mortgage rates to historical norms, current rates are still a good deal.

But rates aside, deciding whether or not to refinance depends on a lot of personal factors. So you first need to ask yourself some questions and look at some specifics.

What’s Your Goal?

People refinance for a lot of reasons. Do you want to lower your monthly payment? Reduce the length of your mortgage? Take out extra money for home improvements? These are important initial questions.

If decreasing your payment is a top priority and you can lower your interest rate by .5 to 1 percent, it’s probably worth the effort. For instance, lowering the interest rate on a $350,000 30-year fixed mortgage by 1 percent could lower your monthly payment by about $300 a month.

On the flip side, if your goal is to shorten the length of your mortgage and you refinance that amount for 15 years, your monthly payment would go up, but you’d save a considerable amount in interest over the life of the loan.

How Long will You be in the House?

Refinancing usually involves paying points and fees. Points basically represent interest you pay upfront to get a lower rate on your loan. It’s not uncommon for points and fees to add up to 3-6 percent of your loan. You can pay this out of pocket or, often times, add them to the balance of your loan. (One positive: points on a refi are tax deductible, amortized over the life of the loan. Should you refi again, you can deduct any unamortized points at that time.)

However you pay them, it will take time to get to the breakeven point where these additional costs are offset by the lower rates, so you have to think realistically about how long you intend to be in your home. If you plan to sell in the near future, the extra cost of refinancing may outweigh the monthly short-term savings.

How Much Home Equity do You Have?

Just like with the down payment on a first mortgage, if you have less than 20 percent equity in your home, you’ll likely have to pay private mortgage insurance. PMI fees can range from less than half a percent up to about 1.5 percent of your loan. While that may not add a considerable amount to your payment, if your goal is to reduce your monthlies and you have very little equity, you may want to reconsider.

Do the Math

As you can see, it becomes a numbers game. A good way to start is to run some different scenarios using an online mortgage refinance calculator. That way you can see how it all adds up and decide on the optimum rate and loan term for you. In this interest rate environment, it could be smart to move from an adjustable rate mortgage to a fixed — depending on the rate, of course.

Also be aware that to get the best rate, you need to have a good credit rating, so you might want to begin the process by looking at your debt ratio and paying down outstanding credit card balances.

And if you’re increasing your loan balance or shortening the loan term, each of which could increase your monthly, make sure you’re being realistic about your ability to handle the new payment from your income. The last thing you want to do is to shortchange your retirement savings or emergency fund for the sake of your mortgage.

Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty,” available in bookstores nationwide. Read more at http://schwab.com/book. You can email Carrie at askcarrie@schwab.com. This column is no substitute for individualized tax, legal or investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax adviser, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo: You want to keep a house like this. Flickr

What’s The Best Way To Choose A Guardian For Your Kids?

Dear Carrie: My husband and I can’t come to an agreement on whom to appoint as a guardian for our three young children. He says his brother, I say my sister. How can we reach an agreement? — A Reader

Dear Reader: Although my kids are now grown up, your question takes me right back to when my husband Gary and I were trying to make this same decision. Like you, we were fortunate enough to have a few choices, but choosing among them seemed impossible. And let’s be honest, there are always pros and cons to every possible choice, because no one, no matter how special, can really take your place.

Because it’s such an emotional decision — and because it’s so important (if you don’t name a guardian, the state will choose one for you) — I think the best way to go about it is to make a list of all the important considerations. Then you and your husband can examine each one from a practical perspective as well as an emotional one and, hopefully, come to an agreement. That’s what our estate-planning attorney helped us to do and I’m happy to pass his insights on to you.

Ask Yourself These Questions

Answering the following questions will help you zero in on what’s most important as you consider the possibility of someone else raising your children.

–Does the prospective guardian share your values? Whether it’s religious, moral, political or personal, ideally you want someone to raise your children with the beliefs and attitudes that you hold dear. Of course, no two people think exactly alike, but if, for instance, you want your kids to grow up in a socially liberal environment, you’d want a guardian to have an open mind on social issues.

–How intimately does this person know you and your family? How comfortable are your kids with this person? The closer your kids are to a potential guardian, the easier it will be on them during what is a very difficult transition.

–How many children does the prospective guardian already have? What is their parenting style? If someone already has a full house, there may not be room for your kids. And in terms of parenting, you want someone who could provide a sense of continuity when it comes to things like discipline and personal responsibility.

–What’s the age and health of the individual you’re considering? Since you mention your siblings, age may not be a factor, but it’s good to think about these things. Depending on the age of your children at the time, this could be a long-term commitment.

–Where does the guardian live? Do you want your children to be uprooted? It’s one thing to move a toddler across country but quite another to tear a teenager away from junior high or high school where friends and social networks have already been established.

Focusing on these issues may point more toward one or another potential guardian. But once you’ve answered these questions to your mutual satisfaction, there’s still another important consideration.

Think About Financial Stability

Hopefully you and your husband have enough life insurance to provide for your kids financially through college. It’s one thing to ask someone to care for your kids and quite another to ask them to support them.

But whatever your financial circumstances, whether it’s through personal assets or insurance, your children will most likely have some type of inheritance that needs to be managed carefully. Fortunately, you can choose to appoint both a personal guardian and what’s called a guardian of the estate. They don’t have to be the same individual.

So let’s say your sister is the most financially savvy and your husband’s brother has the best family set up to care for the children. You could involve each according to their circumstances. However, it’s very important that the guardian of the person and the guardian of the estate get along and agree on what’s best for the kids.

Get the Guardian’s Consent

Once you and your husband agree, the next step is to talk to the prospective guardian. Make sure he or she understands why you’ve chosen them and is willing to take on the responsibility. Actually, I think it’s a good idea to have a second choice in case the first one is unable at the time to fulfill the role.

Realize That You Can Revisit Your Choice Every Few Years

Nothing is cast in stone, not even your will. If something changes over the years, don’t hesitate to change your guardian choice. No one’s feelings should be hurt. The deciding factor should always be what’s best for your children at the time.

Believe me, I know this whole process isn’t easy, and hopefully your guardian will never have to step in. But make the choice now, and put it in writing. Then as you and your family go about living a full and happy life, you can rest a bit easier knowing your kids are taken care of — just in case.

Photo: What will these parents do if they can’t care for their child? REUTERS/Jonathan Ernst

What’s a Financial Plan? Do You Need One?

Dear Carrie: I’m in my late 30s, have a great job and about to get married. Unfortunately, though, I don’t feel that I have a real handle on my finances, especially as I look ahead to married life. Is there a good way for me to get up to speed? — A Reader

Dear Reader: Great question — and a great time to be asking it. With a good job and an upcoming marriage, you’re poised to begin an exciting journey — one that will have a number of financial destinations along the way. But to keep moving forward — and help you steer the clearest path — you need a good map. To me, one of the best guides you can have at a time like this is a financial plan. Here’s why.

Why a Financial Plan Makes Sense

First, a financial plan isn’t just about managing your money. It’s about identifying your life goals — some that you’ve already thought about, and some that may not be obvious. The process itself will help you think big and sort out your priorities. It can also be an excellent opportunity for you and your fiancee to explore your goals together.

Second, a comprehensive financial plan is comprehensive. It looks at all the interrelated parts of your financial life — money in, money out, investments, retirement planning, insurance, taxes, estate planning — to make sure they’re all coordinated.

Finally, a good financial plan is actionable. It will give you concrete steps to take as you move toward your goals, and can also help you understand how to adjust if your goals change down the road.

What a Financial Plan Includes

A comprehensive financial plan has many parts, including:

–A personal net worth statement — a snapshot of what you own and what you owe. This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.

–A cash flow analysis — so you can see how much money comes in and goes out every month. This is the foundation for your budget (including identifying what’s fixed and what’s discretionary) and can also help you get a handle on your debt.

–A retirement plan — specifying how much you need to save each year.

–A plan for funding education.

–An investment plan based on your goals, resources, and risk profile.

–A review of your insurance coverage — making sure you have the right types and amounts.

–A review of your income tax profile.

–The foundation for an estate plan — which is important for everyone, but especially when you have children.

Putting all this together takes time and expertise — and that’s where an experienced financial planner comes in. By gathering your information, evaluating your financial status, and developing and helping you implement specific recommendations, a financial planner can help your get your financial life on track.

Working With a CERTIFIED FINANCIAL PLANNER Professional

There are many types of financial planners, but I recommend working with a Certified Financial Planner professional. The individuals with this credential have completed extensive training, passed a rigorous test and meet ongoing continuing education requirements.

The key is to find a financial planner that you trust and are personally comfortable with. Many offer a complimentary initial consultation, so you can ask questions and see if you’re a good fit. You might start with recommendations from friends, colleagues or other financial professionals. Make an appointment for a consultation and, before you meet, make a list of questions. Ask about cost, background, types of services and number of clients. Ideally, you and your fiancee should decide on a planner together as you consider how you’re going to handle your finances as a couple.

An Extra Word About Cost

Financial planners can be compensated in different ways. Some may charge an hourly fee; others may give you a set price based on the complexity of your financial situation. Be cautious when it comes to financial planners who are paid by commission. When interviewing a potential planner, be sure to ask if he or she is compensated for selling you any particular financial product. If so, consider how that inherent conflict of interest may impact his/her ability to provide you with the best and most objective advice for your situation.

Many people think a financial plan is only for the wealthy. But to me, it can be well worth it for most everyone, and can more than pay for itself if you follow the recommendations. In fact, in today’s complicated financial world, it can be the one guide you need most.

Photo: A financial plan is about your life goals. studio curve via Flickr

Ten Financial Resolutions For A Brighter New Year

Dear Reader: It’s that time again — the time to reassess your finances and commit to making next year your best financial year yet. So in the spirit of the season, here’s my annual financial shape-up column.

But before you read on, here’s something to think about: it’s not about how many resolutions you make, but how many you’re actually able to keep. Just as it’s easier to stick with resolutions to shape-up physically if you have concrete and realistic goals, giving yourself some attainable financial goals will help you develop — and stick with — a financial program that will produce results.

Keep these goals front and center as you take these recommended steps to a more financially secure 2016.

1) Assess your current situation. This is the first step in making positive changes. Look at what you own and what you owe to find out if you’re in the red or the black. An online worksheet can help you easily add up assets and subtract liabilities to get a snapshot of your current net worth. If you have net worth statements from previous years, review and compare them to help understand your financial trends — and decide where to make changes.

2) Look at last year’s spending. Is your money going where you really want it to go? It will if you spend mindfully. Basically this means making spending decisions in the context of your goals. So if one of your top goals is to build your retirement nest egg, do you need to spend less to save more? Does taking that big vacation mean dining out less often? Whether or not you need to reprioritize spending, having an awareness of patterns will help you make better decisions throughout the year.

3) Make a 2016 budget. Now that you’ve looked at last year’s spending, focus on your budget for 2016. Track your spending for a month to see where your money is really going. Do you need to make adjustments — a little more here, a little less there? Take a fresh look at your essential and nonessential expenses (an online calculator can help). If during the year you have to spend beyond your budget, decide then and there how you’ll bring things back into balance. Don’t let overspending become a habit.

4) Get on top of debt. Not all debt is bad (for instance, a mortgage), but there’s really nothing good about carrying a credit card balance. Systematically pay down balances by focusing on higher interest cards first. Once you’re at zero, resolve to charge only what you can pay off each month.

5) Build an emergency fund. Everyone’s situation is different, but bad things — an illness, the loss of a job — can happen to anyone. So protect yourself. Ideally, keep enough cash in an easily accessible account to cover three-to-six months’ worth of essential expenses (more if you’re retired). Promise yourself you won’t touch this money unless you absolutely have to.

6) Review your insurance coverage. Certain types of insurance are essential: health, car, homeowners or renters insurance. Make sure you have adequate coverage for these important things. You might then look into disability insurance if you’re in your peak earning years; an umbrella policy if you have significant assets; and life insurance if you have dependents. But be cautious about insurance you probably don’t need. To me, money for things like life insurance for children, flight insurance, or even rental car insurance is better spent elsewhere.

7) Check your progress towards retirement. This is a big one. Whatever your age, you should be saving regularly — ideally, automatically — whether it’s through an employer plan, an IRA or both. Use the New Year as a motivation to review your retirement goal and see if you’re on target. If not, ramp up your savings. If you’re just starting to save and you’re in your 20s, 10 to15 percent of your annual salary should do the trick. In your 30s, you should earmark 15 to 25 percent toward retirement. In your 40s and older, you’re looking at 25 to 35 percent.

8) Rebalance your portfolio. This is the ideal time to review and rebalance your portfolio. If you didn’t do a 2015 year-end review, start 2016 by looking at your asset allocation and making changes to keep your investments on track with your goals and timeline. Take advantage of online tools and quarterly reports available from your broker. If your investments have grown beyond your comfort level in managing them, seek out a financial advisor who can partner with you throughout the year.

9) Create/review your estate plan. You may not need a complex plan, but don’t put off creating at least a simple will, particularly if you have minor children. Review beneficiary designations on your retirement accounts and insurance policies, especially if you’ve had a life change such as a new baby, marriage or divorce. An advance health care directive is also a necessity to protect both yourself and your loved ones.

10) Keep the dialogue going! Lastly, make money an ongoing topic of conversation. Talk to your spouse about your plans and decisions. Don’t hesitate to share your financial know-how with your children or other family members. Encourage everyone to ask questions and freely discuss financial concerns and insights.

I hope this list provides inspiration to renew, refocus and resolve to get — and keep — your finances in the best shape ever. Here’s to a happy and financially rewarding 2016!

Carrie Schwab-Pomerantz, Certified Financial Planner, is board chairwoman and president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at askcarrie@schwab.com. For more updates, follow Carrie on LinkedIn and Twitter (@CarrieSchwab). This column is no substitute for individualized tax, legal or investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax adviser, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. MEMBER SIPC. DIST BY CREATORS SYNDICATE, INC. (1215-7321)

Photo: 401(K) 2012 via Flickr

If You Become Incapacitated, Will Your Family Know What to Do?

Dear Carrie: My friend’s 90-year-old mother was just diagnosed with early stage dementia. Unfortunately, she never provided any written or verbal guidance about her wishes for care, so my friend finds herself in a very tough spot. I want to make sure this never happens to me or to my loved ones. What do we need to do to prepare? — A Reader

Dear Reader: Contemplating the possibility of dementia is tough, whether you’re talking about yourself or a loved one. We want to think that it only happens to the very elderly, someone in their 90s such as your friend’s mother. And so we put it off. But according to the “2014 Alzheimer’s Disease Facts and Figures, Alzheimer’s & Dementia” report by the Alzheimer’s Association, one in nine Americans age 65 or older have some form of dementia. And the annual number of new cases of Alzheimer’s and other dementias is projected to double by 2050. It’s scary. It’s sobering. And to me, it means there’s a real need to confront this possibility — and prepare for it — when we’re young and clear-headed enough to look at financial and healthcare decisions from a practical as well as an emotional perspective.

Your friend’s situation is a heartbreaking example, and you’re very wise to take steps now to prevent this from happening to you and your family. But no matter how forward-thinking you are, it won’t be easy. You may be willing to face the possibility of incapacity, but others may not be so comfortable with the idea, either for you or for themselves. So you may have to tread gently. Here are some thoughts on how to go about it.

Think Realistically About Care Options

Exploring care options for someone with dementia is more of a challenge than with other diseases. That’s because, while there is certainly the need for doctor’s visits and medications covered by insurance, a lot of the care required by people with Alzheimer’s or other forms of dementia involve more personal care, called the activities of daily living (ADLs). Where do you turn for help with eating, bathing, dressing or just making sure you don’t injure yourself? These things aren’t generally covered by health insurance.

Again, according to the report from the Alzheimer’s Association, unpaid caregivers such as family members provide billions of hours of care. Professional care is available, such as assisted living, in-home care or adult daycare centers, but the costs can be a challenge. For instance, basic assisted living services average about $42,000 per year according to alz.org as of 2015. And that’s just the estimated average. I recently spoke with someone who was paying $12,000 a month to have both parents in assisted living with full care.

Your own family and financial circumstances may well determine what care might be available to you or to a loved one. But whether you’ll have to rely on professional assistance or you have a supportive family network that can provide help, be aware that you’ll be dealing with potentially significant emotional as well as financial costs.

Plan for the Financial Side

There’s a whole list of costs you may have to deal with from ongoing medical care, to home safety related expenses to full residential care.

Most insurance policies don’t cover nursing home care or help with ADLs. And while Medicare covers some skilled home health care such as skilled nursing care, long-term care isn’t covered. Medicaid is a possible solution, but it’s only available when an individual has depleted most of their personal assets.

Unless your family has significant assets to self-insure, you may want to look into long-term care insurance. Here, too, you have to be cautious. Not every LTC policy covers Alzheimer’s. And you want to make certain that a policy covers things like assisted living, skilled nursing home care and licensed home care.

There are, of course, other financial options. People with a lot of equity in their homes may see that as a potential source of funds. Others may max out a health savings account (HSA) every year and keep it in reserve for this type of care. Your retirement funds can also be a significant resource.

Talk to Your Family About the Emotional Side

Once you’ve thought through potential practical solutions, talk to your family. Be upfront about why you’re bringing up the subject. Your friend’s story could be a good starting point.

If you’re talking to your parents, they may welcome the chance to discuss their own fears and desires. Your children may be more resistant, but make it clear that you’re not being morbid, just realistic. And no matter what response you get, be willing to listen to everyone’s concerns.

Put Your Paperwork in Place

Basic paperwork includes an advance healthcare directive, power of attorney for healthcare, a will and/or trust, and a durable power of attorney for finances. You’ll find more specific information on legal documents for someone who’s incapacitated at alz.org.

There’s no one solution for every family. But thinking about it and planning ahead is something everyone should do. It also would be a good idea to consult with your financial advisor about the best way to prepare financially given your personal circumstances. I applaud you for being willing to tackle this very difficult subject.

Photo:: MoneyBlogNewz via Flickr

Can You Turn Your Investment Loss Into Tax Savings?

Dear Carrie: I’ve heard people talk about balancing out their capital gains with capital losses before the end of the year, but I’m not sure how that works. Can you explain? — A Reader

Dear Reader: This is a great question and a perfect time to be asking it. It’s always smart to review and rebalance your portfolio at year-end to make sure your asset allocation is still on target. It’s also a good time to consider harvesting some capital losses. By doing so, you may ultimately be able to trim your losses and your taxes — as long as you complete any sales by the end of the year.

So before your holiday to-do list gets too overwhelming, take the time to review your investments — both winners and losers — to see if balancing capital gains and losses could lower your tax bill. It’s not a difficult process, but it does take some careful calculations. Here’s a step-by-step guide and an example to help you get started.

Categorize Your Investments as Either Short-Term or Long-Term

For tax purposes, investments are considered either short-term or long-term. A short-term investment is one that you’ve held for one year or less. A long-term investment is one that you’ve held for more than a year.

This time difference is important because realized gains on short-term holdings are taxed at your ordinary income tax rate. Gains on long-term holdings are taxed at a much lower rate — from zero to 20 percent depending on your tax bracket.

Calculate Your Long- and Short-Term Gains and Losses

Of course, you only realize a capital gain (or loss) when you sell an investment in a taxable account. But once you decide what to sell, you’ll want to carefully calculate your estimated gains and losses. That’s because you can use up to $3,000 of losses to offset any gains in a particular year to potentially bring your tax bill down. Any losses above the $3,000 may be carried forward indefinitely to offset gains in future years.

Because both capital gains and capital losses are categorized as either short-term or long-term, depending on how long you’ve held the investment, almost every sale will create one of the following four results: a long-term capital gain, a long-term capital loss, a short-term capital gain, or a short-term capital loss.

How these net out will determine if you ultimately have a capital gain or loss, and what kind.

Net Out Your Gains and Losses to Come up With a Single Number

This is a three-step process:

–Net your LTCGs against your LTCLs.
–Net your STCGs against your STCLs.
–Net your long-term result against your short-term result to come up with a single taxable figure.

Here’s an example of how this works: This year Sam decided to sell several investments in his taxable account. His sale of long-term investments resulted in a LTCG of $11,000 and a LTCL of $6,000, which netted out to a LTCG of $5,000. He also made short-term sales that resulted in a STCG of $5,000 and a STCL of $6,000, which netted out to a STCL of $1,000.

Sam was then able to net out his capital gains and losses — $5000 in long-term gains against $1,000 in short-term losses — to come up with a $4,000 long-term capital gain. This provides a valuable benefit for Sam because he was able to make the sales he wanted, lower his capital gains, and end up paying only the lower long-term capital gains tax rate.

If Sam had ended up with a net capital loss, he’d be able to deduct up to $3,000 against his ordinary income and carry over any remainder as a deduction in future years. Either way, he’s ahead in terms of taxes.

Watch Out for the Wash-Sale Rule

Sometimes it can make sense to sell a stock or mutual fund to take a tax loss, even if you think it’s ultimately a keeper and figure you’ll buy it back at a future date. It seems like a smart move, but watch out for the wash-sale rule. If you sell a security at a loss, and buy the same or a “substantially identical” security within 30 days, the loss is generally disallowed for tax purposes. The IRS doesn’t miss a trick!

Be Sure to Specify Shares on a Partial Sale

Here’s another potential catch. When you sell, your broker is required to report the cost basis for stocks purchased after Jan. 1, 2011. When you make a partial sale, the default method is FIFO, or “first in, first out.” FIFO may not be the most tax-efficient method, however, especially if you bought additional shares later at a higher cost. But you do have the option to specify which shares you want to sell, so if you’ve purchased shares of the same investment at different prices, you may be able to lower capital gains and minimize taxes by selling shares with a higher cost basis.

This year-end maneuver can potentially make a difference in your tax bill, but don’t let it cloud your long-term perspective. Always keep your goals and your asset allocation top of mind as you consider what and when to buy and sell. To me, that’s the real key to smart investing.

Investing involves risk, including possible loss of principal. Diversification and asset allocation cannot ensure a profit or that an investor’s goals will be met and cannot eliminate the risk of investment losses.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. MEMBER SIPC. DISTRIBUTED BY CREATORS.COM (1215-7089)

Tax-Free Gift Limits: How Much Money Can You Give?

Dear Carrie: My mother is feeling especially generous this holiday season, and has mentioned that she intends to give each of her children and grandchildren a significant monetary gift. I’m wondering, though, what that means tax wise for her — and for all of us? — A Reader

Dear Reader: How wonderful for you and your children that your mother is in a position to help you all financially. I’m a big believer in one generation helping the next, and the holidays are an excellent time to share one’s good fortune. I’m also happy that you’re concerned about the tax situation for your mother, as well as yourself. It shows a mutual concern and a sense of financial responsibility. Gifts are great to give, but it’s even more gratifying when the receiver is aware and appreciative.

In this situation, I’m pleased to tell you that chances are there will be no tax liability for either your mother or any of the recipients. That’s because current gift tax laws allow for some pretty hefty exclusions for the giver, and gifts aren’t considered as income to the receiver, regardless of the size.

But, of course, as with anything to do with taxes, there are some very particular dollar figures that you should be aware of. So here are the basics that perhaps you and your mother can review together.

What You Can Give Tax-Free Annually

While technically the IRS considers any gift a taxable gift, currently an individual can gift up to $14,000 a year to anyone — and any number of people — without incurring gift taxes, or even having to report the gift. Married couples splitting gifts can give up to $28,000 a year (splitting gifts requires you to file a gift tax return where you make the election to do so — see below).

This means your mother could give each of her children and grandchildren up to $14,000 during this 2015 holiday season, and not only would she not have to file a gift tax return, none of you would have to pay taxes or even report the gift.

Just for the record, if your mother should choose to make direct payments to providers for tuition or medical expenses for any of you, those payments wouldn’t be considered taxable gifts, and aren’t included in the $14,000 annual limit. By doing that, she could give even more without tax consequences.

How the Lifetime Exclusion Works

If you stay within the $14,000 annual exclusion, giving monetary gifts can be pretty simple. It’s when you give more than $14,000 to any one person during the course of a year that things get a bit more complicated.

You may have heard of the lifetime exclusion. This is the amount you can give above and beyond the $14,000 annual limit during the course of your life without incurring gift taxes. For 2015 that amount is a whopping $5,430,000 and will go up to $5,450,000 in 2016.

With such a high limit, you’d be right to think that most people won’t need to be concerned. But, whether or not you ever reach the limit and have to pay gift taxes, you are required to report any gift that’s more than the $14,000 annual limit. The excess counts toward your lifetime exclusion, and will be used to calculate whether your estate will owe taxes upon your death.

Here’s an example:

Let’s say your mother has two children and four grandchildren. As an individual, she can give each of these six people up to $14,000 this year without having to report the gifts or pay gift taxes.

However, let’s say that she wants to give each family member $25,000 this year. In this case, anything above $14,000 given to any one individual has to be reported, and counts toward the $5,430,000 exclusion. So she’d have to report that extra $11,000 per person and would subtract $66,000 from her lifetime exclusion (the cumulative total is always reported on the most recent gift tax return).

A couple More Important Points:

Another thing anyone contemplating giving large gifts should be aware of is that to qualify for the exclusions — both annual and lifetime — a gift must be a present interest, which means that the recipient has an unrestricted right to the immediate use of the property. A gift of future interest, which is restricted in some way by a future date, doesn’t qualify (there are some exceptions, including custodial accounts and so-called “Crummey trusts”). Gifts of cash and property where title passes immediately are examples of gifts of present interest.

I also want to expand a bit on gift splitting. As I mentioned, a couple can combine their annual limit and give twice as much (currently $28,000) to any number of individuals each year provided both are in agreement. However, if they decide to do this for one gift, they must split all other gifts during that year. And they would also have to file a gift tax return (IRS Form 709).

Making the Most of the Gift

Your mother’s generosity can provide opportunity for all of you on many levels. This would be a perfect time to sit down together as a family and talk about saving, investing and how to make your mother’s gift grow. Even young children can learn about setting goals, budgeting and how to prioritize spending. A custodial account is a great way to teach young people about investing. And discussing these things might give the adults a fresh perspective on their own finances.

To me, while you’re all lucky to receive this holiday windfall, the chance to focus as a family on wise money management could be the greatest gift of all.

Photo: Philip Taylor via Flickr

Top 10 Year-End Tax Planning Moves

Dear Readers: With time rushing by and the end of 2015 in sight, you may be lamenting that you haven’t accomplished all that you had planned. But even if you’ll have to put off certain things until 2016, you still have time this year to make some smart financial moves.

To help you finish out 2015 with a flourish, here’s my list of top 10 year-end financial to dos.

— Max out retirement contributions: Make sure you’re on target for retirement — and save on taxes, too — by contributing the maximum to your tax-advantaged retirement accounts, whether you have an IRA, a 401(k) or both. For 2015, you can contribute $5,500 to a traditional IRA, plus a $1,000 catch-up contribution if you’re 50 or older. Hopefully, you’re already contributing enough to your 401(k) to capture any company match; if you can do more, you can contribute up to $18,000, plus a $6,000 catch-up for those ages 50 and up. Even if you have a Roth IRA or Roth 401(k) with no upfront tax deduction, max out your contributions. It’s a yearly opportunity you don’t want to give up.

— Take advantage of an HSA: If you have a health savings account tied to your high-deductible health insurance plan, now’s the time to max it out. An HSA lets you make tax-deductible contributions that you can later withdraw, tax-free, for qualified medical expenses. HSA contribution limits for 2015 are $3,350 for singles and $6,650 for a family, with a $1,000 catch-up for age 55 and up. And if you’re lucky enough not to need the money immediately, you can save it for future use.

— Harvest capital losses to balance gains: As you consider your year-end portfolio rebalancing, see if it makes sense to take some capital losses to cancel out capital gains. Not only will it save you money on capital gains taxes, it will give you the chance to clear out some of the losers, reset your asset allocation, and reinvest in areas that you think may have more potential for gain.

— Prepay where possible: If you have the means, prepaying things such as property taxes, medical bills or estimated state taxes can give you added deductions to further reduce your taxable income.

— Use, don’t lose, the money in your Flexible Savings Account: Unlike an HSA, with an FSA you generally have to use the money you put into it during the calendar year or lose it. While new rules allow an employer to let you carry over $500 or give you an extra two and a half months to use the funds, it’s not required. Either way, now’s the time to check the balance in your FSA and put those funds to work.

— Take your required minimum distribution: This won’t save you on taxes, but it will save you a hefty penalty. You must take RMDs from traditional IRA and 401(k) by Dec. 31. The only exception is your very first RMD, which you can delay until April 1of the year following the year you turn 70. This isn’t to be treated lightly. Miss the deadline and the penalty is 50 percent of the amount that should have been withdrawn.

— Get a jump on tuition: Will you be facing a big college tuition bill this spring? If you can pay it before the end of the year, you might be able to ease the pain a bit with up to a $4,000 tax deduction. There are income limits ($80,000 for single filers/$160,000 for married filing jointly; not available if married filing separately), but if it works for you, it’s worth considering.

— Give your health insurance a checkup: Make sure you have the most complete and cost-effective coverage available. Open enrollment for 2016 coverage on the Health Insurance Marketplace is from Nov. 1, 2015, to Jan. 31, 2016, so now’s the time to do some comparison-shopping.

— Make tax-free gifts: If you can afford to be generous, Uncle Sam makes it even easier to give gifts to special people on your list. In 2015, you can give up to $14,000 each to any number of individuals with no gift tax or reporting requirements. And there’s no tax for the recipient.

— Be charitable: Giving to charity not only feels good, it has tax advantages as well. Consider opening a Charitable Gift Account (also called a donor advised fund) and get an upfront tax deduction for your charitable contribution. If you fund your account with appreciated stock, you’ll get the added advantage of avoiding capital gains taxes while getting a tax deduction for the full market value of the donated stock.

Get these to dos out of the way now and you’ll have that much more time to enjoy the rest of the year. There’s no time like the present!

Carrie Schwab-Pomerantz, Certified Financial Planner, is board chairwoman and president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at askcarrie@schwab.com. For more updates, follow Carrie on LinkedIn and Twitter (@CarrieSchwab). This column is no substitute for individualized tax, legal or investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax adviser, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2015 CHARLES SCHWAB & CO. INC., MEMBER SIPC. DISTRIBUTED BY CREATORS.COM

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