Wednesday, January 18, 2012

Financial Housekeeping for a New Year

Live in the present.  Take a deep breath.  Isn't that better?

2011 is the “year that was” and 2012 is the “year that will be”. Of course we don’t know what kind of year it will be, but it is upon us nonetheless.

Herewith, my to-do list to begin a new year:

Fund your IRA for 2011 before April 17th
• The IRS allows you to contribute to an IRA account for the prior tax year up until the due date of your tax return for that year – April 17th 2012 for most of us.
• If eligible, fund a ROTH IRA – distributions will be tax-free in retirement. Eligibility depends on your adjusted gross income: less than $107,000 if single, less than $169,000 if married.
• If you are fortunate enough to have an income exceeding these limits, fund a Traditional IRA and convert it to a ROTH IRA at a later date – this is perfectly legal – I call it the “Back Door ROTH IRA”.
• Annual IRA contribution limits: $5,000 if less than age 50, $6,000 if 50 or older.
• The contribution limit is applied to all IRA accounts for a given tax year - $5,000 or $6,000 total, no matter how many IRAs.

Fund your IRA for 2012
• You can fund your IRA for the current year anytime beginning January 1st – BUT don’t fund for this year before you have fully funded last year.
• Funding for 2012 NOW gets the money working sooner.

Adjust your 401k Contribution
• For 2012, the maximum annual contribution limit for 401k, 403b and 457 plans is $17,000. This is an increase of $500 from 2011.
• If you are paid semi-monthly, the $500 increase is just under $21 per paycheck – you won’t miss it. You did put in the maximum $16,500 last year, didn’t you?
• If you are age 50+, you can still add the $5,500 catch-up contribution on top of the $17,000 for a total of $22,500.

Review your income tax withholding
• If you will get back more than $1,000 from Uncle Sam, your income tax withholding is too high. You earn no interest and the money is worth less due to inflation. It is not “savings”.
• You can adjust your withholding by filing a W-4 with your employer.

Re-finance your mortgage
• Mortgage rates are at near historic lows.
• Rates on 30 year loans are in the 3.9% range. Rates on 15 year loans are near 3.25%.
• My effectiveness rule is: will the new payment reduce my annual outlay by at least one month’s payment?
• Contact your current lender – they may have an “E-Z Re-Fi” program that will reduce your rate with nothing more required than the paperwork.

Review your legal documents
• Pull out your Wills, Durable Powers of Attorney, Healthcare Directives, etc – does everything still look good?
• New children? New marriage? Good time to visit your attorney.

Get started on financial aid for college
• The FAFSA can be filled out any time after January 1st .
• You should fill out a FAFSA for each student even if you think you won’t qualify for any aid.

Review your spending plan
• Estimate expenses for the year.
• Pre-fund vacations and other large expenditures by depositing money in a specific account every payday.

Relax and enjoy life. Even if you only do one of the items on this list you’ll be ahead of 100% of the people who do none of them!
Kim Miller, CFP®

Thursday, January 12, 2012

How to Catch a Falling Knife Without Getting Cut

You’ve probably heard the adage “never try to catch a falling knife”. Like all such wisdom it’s grounded in truth. What are your chances of grabbing the handle versus the blade? Not good given that the blade of most knives is twice as long as the handle. But today you have an opportunity to catch a falling knife with no risk of getting cut: re-finance your mortgage.

The US national average for a 30 year fixed-rate mortgage is currently around 3.92%. How does this rate compare to your rate?

Here’s an easy calculator you can use to estimate your new payment:

The rule on the efficacy of re-financing is typically quoted as: “a 1% reduction in rate”.

My rule is: “a reduction in total annual payments equal to at least one month’s payment under the current loan”.

For example:

  • Current loan of $200,000 at 4.875%, monthly payment of $1,058 (annually = $12,696)
  • New loan of $200,000 at 3.92%, monthly payment of $946 (annually = $11,348)
  • Monthly savings: $112
  • Annual savings: $1,344
Voila. You own the same home with a 10% reduction in financing costs.

Caveats: rates offered are highly dependent on your credit score, employment, household income and household debt ratio among other factors. Pay attention to “points” (pre-paid interest)  and closing costs. Your best place to start is with your current lender – they may have an “EZ Re-Fi” program designed to keep your business on their books. Many lenders are offering “paperwork only” re-fi’s just for this purpose.

Wednesday, January 11, 2012

4 Year-End Financial Housekeeping Tips

You can put a stop to third class (junk) mail, credit card solicitations, receive a copy of your credit report for free and check your credit score by visiting these websites and following the easy instructions.

Stop junk mail:

Stop credit card offers:

you will still receive credit card offers from your own bank/credit card company but all the other ones will stop. Not only will your mail volume decrease but your risk of identity theft will also decrease - credit card solicitations are a prime source of identity theft.

Obtain a copy of your credit report:

The three credit bureaus (Experian, Transunion and Equifax) are each required to provide you with a free copy every 12 months. If you rotate your requests, you can get a free copy of your credit report every four months or so. Credit report and score overview attached.

Check your credit score:
You can purchase your FICO credit score at for $19.95 (don’t sign up for the “free” version – it’s not free). You can review and monitor other non-FICO credit scores at several websites for free. I have personally used a site run by the credit bureau Transunion – it uses a credit score called the Transrisk score. It is not the FICO score but is constructed in a similar fashion and is useful in keeping an eye on your credit score at no cost.

Kim Miller, CFP®