Happy New Year, and welcome to many tax-law changes that became effective Jan. 1.

Most of the changes stem from annual inflation adjustments that affect income-tax brackets and many other provisions.

These changes apply only to 2012. Thus, they won’t affect what you owe for 2011 when you file your return this year.

Here are a few:

• Federal income tax-bracket thresholds for 2012 have risen for each filing status. For a married couple filing a joint return, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700 for this year, up from $69,000 for 2011, according to the Internal Revenue Service.
• The standard deduction is up slightly. For singles, the basic deduction amount for this year is $5,950, up from $5,800 last year. For married couples, it’s $11,900, up from $11,600 in 2011. There are additional amounts for those who are 65 or over, blind or both.
• The amount of each personal and dependent exemption is $3,800 for 2012, up by $100 from $3,700 for 2011.
• The maximum amount of the earned income tax credit for low- and moderate-income workers and working families rose to $5,891 for 2012, from $5,751 in 2011. The maximum income limit for the EITC rose to $50,270 from $49,078 in 2011.
• The foreign earned income exclusion amount rose to $95,100 from $92,900 for 2011.
• The IRS’s optional standard mileage rate for using your car for business will remain unchanged at 55.5 cents this year, the same as in the second half of 2011. This also applies to vans, pickups or panel trucks. Drivers have a choice of using this rate or deducting certain actual expenses. But the rate for using your car for medical or moving purposes is down to 23 cents a mile for this year, from 23.5 cents in the second half of 2011. The rate for using your car to help a charity remains unchanged at 14 cents a mile. This rate is set by Congress.

For more details on the inflation-related adjustments, see IRS Revenue Procedure 2011-52 at www.irs.gov.

By TOM HERMAN

Article source: Wall Street Journal

 

Chances are you have a 401(k) plan at work. And the chances are you’re not making nearly enough of it. A new year means a new leaf: This is as good a time as any to start turning that around.

If you’re letting your 401(k) languish, a report released over the holiday season shows that you’re not alone. According to the latest study by the Employee Benefits Research Institute, a think tank in Washington, most of us continue to neglect our 401(k) plan. The median account contains a balance of just $18,000, says EBRI.

Good luck with that.

Here’s a five-step plan to fix your 401(k).

1 Take control.

Take a look at the full range of investment choices available to you. That should include, at a minimum, a handful of low-cost domestic and international stock and bond funds. If your plan doesn’t even offer those you should talk to the people in charge at your employer and insist that they move to a better plan.

Many people are too intimidated, or busy, to choose their portfolio. If you’re in that camp, your plan will have dumped your money into a default portfolio—such as a low-yielding but “stable” fund, or a target-date fund ostensibly designed for someone of your age.

There is nothing inherently wrong with these funds. But that doesn’t mean you can rely on them, either.

These default options aren’t designed for your best interests, but for the best interests of your plan provider. Instead of maximizing your likely returns, they are designed to minimize the provider’s risk of a nasty lawsuit.

As a result, your money may well be sitting in a poorly designed portfolio that guarantees mediocre performance. Target-date funds, for example, are a great idea in theory. In practice, most are far too heavily weighted toward U.S. stocks, and they use a cookie-cutter approach to investing.

Consider the alternatives available to you.

You also should understand if your company makes matching contributions, and, if so, how much it will match. There’s no good reason for missing out on a company match. It’s also a good idea to find out if your plan allows such things as personal loans: This may offer you access to cheaper capital than a bank, although there are risks in borrowing from your plan.

2 Cut your costs.

Many 401(k) plan providers stock their plans with high-fee mutual funds. That’s great for them, and bad for you. Most mutual funds are far too mediocre to justify hefty fees, which just soak up a lot of your investment returns. A fund that charges you an extra 1% a year may end up costing you most of the tax benefits of your plan.

There are managed investment funds out there that are worth the money, but few of them—if any—are likely to find their way into a 401(k) plan. If you’re stuck with plain-vanilla funds, you are going to be better off going for the ones with the lowest costs. Nearly all the time your best options will be the low-cost index funds.

3 Lighten up on U.S. stocks.

Most people keep most of their stock-market investments in the U.S. It’s safer, right? I mean, it’s the home market so it’s less risky than foreign stocks, yes?

That’s what conventional wisdom says, but it’s hooey. Investors sell themselves short by investing too much in the U.S.A. You’re already overinvested here anyway—you have your life and career here.

And U.S. equities start 2012 looking relatively expensive. U.S. stocks today are somewhere between modestly and heavily overpriced when compared to such metrics as average earnings or the value of corporate assets, according to data from the Federal Reserve and data tracked by Yale University economics professor Robert Shiller.

The dividend yield on the Standard Poor’s 500-stock index, at just 2.1%, is very low by historical standards.

Predicting future stock-market returns is notoriously difficult. But based on current valuations, the U.S. stock market seems to offer a mediocre bet.

4 Look internationally.

Many 401(k) plans go light on international investment options. The real reason is simply the incompetence and complacency of plan sponsors.

But if your plan offers international options, take advantage. The turmoil of 2011 has left many overseas stock markets looking like a good value.

Western European markets fell nearly 30% from last year’s peak. Japan’s Nikkei 225 index is now lower than it was during the tsunami panic nearly a year ago. Emerging markets from Brazil to India, the investment hotshots of 2010, have dropped dramatically out of fashion again. Their stock markets crashed last year.

These offer some excellent buying opportunities.

Emerging markets account for about a third of the world economy, and their share is growing. Developed overseas markets, meaning Europe, Japan and Australasia, account for about two-fifths. They are on sale, and most people are underinvested there.

5 Review your bond funds.

As a general rule, your 401(k) and other tax shelters are where to hold the bond portion of your portfolio. That’s because bonds are much more vulnerable to taxes than stocks.

Bonds generate most of their returns through coupons, and those are usually taxed at ordinary-income tax rates. By contrast, stock dividends and capital gains generally get taxed more lightly.

Right now is, admittedly, a risky time to invest in U.S. bonds. Yields on U.S. Treasurys have slumped to historic lows. Any pickup in the economy, and inflation, could send bond funds tumbling.

While Treasury bonds offer meager yields here, look at any corporate bond funds. That includes investment-grade bonds and more volatile high-yield bonds.Both offer somewhat better yields. Emerging-markets bonds offer particularly good opportunities, argues investment guru Rob Arnott, chairman of Research Affiliates. They pay higher interest rates than those in the U.S., while their governments’ finances are actually in better shape.

It’s crazy that most 401(k) plans offer such a limited range of investment options. Paradoxically you don’t get full control of your money unless you leave your employer, when you can roll the plan over into a self-directed individual retirement account. But your 401(k) still represents a great investment asset, and this is a good time to get it into shape.

Write to Brett Arends at brett.arends@wsj.com

Article source: Wall Street Journal

 

I’ve never been a fan of New Year’s resolutions: Read more fiction. Read fewer celebrity magazines. Eat more vegetables. Drink less wine. Stop leaving my clothes hanging over the chair in my closet rather than hanging them up/yelling at my kids/watching reality TV/starting to write columns the night before they’re due.

Who needs to fail so early into the fresh start of an unsoiled Filofax?

And yet, the greatest lesson I’ve learned in writing this column—and in reading the thousands of emails you all have written to me in response (I do read them all)—is that the key to gaining control over the chaos is to be mindful about not just how I spend money, but how I think about it as well.

So here it goes: The Checks Balances 2012 Resolutions.

The key to gaining control over the chaos is to be mindful about not just how I spend money, but how I think about it as well.

1. I resolve to make and bring lunch to work once a week.

I spend a huge amount of money—in excess of $12 a day—on lunch during the workweek. This is not because I overeat (I may have plenty of vices, but this is not one). Nor do I eat fancy—in fact, I most often eat lunch at my desk (even though I hate crumbs in my keyboard, it is a gross inevitability of modern-day cubicle life). The problems are twofold: First, I work in midtown Manhattan, a neighborhood not known for its affordability; I’ve paid $3.50 for a peanut-butter-and-jelly-on-white-bread sandwich. Second, by the time I pry myself from my desk to get lunch, I often am starved. I am motivated by proximity, not cost.

So, at least one day per week, as I am packing a lunch for my son to take to school the following day, I will do so for myself as well. Maybe I’ll convince him occasionally to write me a note that he’ll tuck in my lunch bag as I do for him. Saving 12 bucks will never taste sweeter.

2. I will make a list every morning.

In addition to my full-time job, I write this column every other week, I have two kids, I have one husband, I have a home and I have an hour-plus (each way!) daily commute between the aforementioned full-time job and home. I am always running late—for my deadlines, for the bus, for the kids’ karate/ballet/reading/ski classes. I am in a constant frenzy of being frazzled. As far as my time-management skills are concerned, well, I’d never get promoted to management. And the truth is, the nonstop frenzy is costly, in ways big and small. For instance, when I forget that I need to buy a new bulk packet of discounted bus passes, I end up paying double the fare. When I leave work three minutes late and miss the bus, I might not get home before my daughter’s bedtime. That is a high price to pay for disorganization.

Thus, I resolve to make a list EVERY. SINGLE. MORNING.

In college, I was an epic list maker and considered my lists something akin to diary entries I would reflect back upon at times. These days I make lists, but haphazardly. When I do, I am so much more efficient and less manic.

Also, I love crossing items off lists, the feeling of self-satisfaction is so unmatched that I am not ashamed to admit I add items to lists I have already done just so I can cross them off. Maybe I’ll make the first item on my daily list, “MAKE A LIST”! I can hear the squeaky sound of the Sharpie blackening the center of those letters now.

3. I will pay my bills on time.

I pay interest and overdue fines less than I once did and more than I should. Paying these fees is a colossal waste of money. You know this. I know this, too. You don’t need to send me an email calling me an irresponsible financial disaster unworthy of love and employment. I get paralyzed by the anxiety of knowing I am running out of time and that leads to procrastination. I know, I know. I’m a work in progress.

I will achieve the bill-paying goal by writing on my morning list: “PAY YOUR BILLS, CROSS THIS ITEM OFF YOUR LIST AND BASK IN GLOW OF YOUR OWN SPLENDOR!”

4. I will earn more money.

I have no idea how I might fulfill this resolution and will be shocked if I do. But when setting financial goals, it feels like an essential one.

5. I will buy a lottery ticket now and again.

See Resolution No. 4.

6. I will be smart.

I will not go to the grocery store when I am famished, because when I do, I buy high-priced junk food that I actually don’t enjoy eating and won’t let my kids eat. I will not buy clothes that are on sale just because I feel like I’m getting a great deal on an item that I otherwise would not consider buying. I will put a little time into finding online coupons for yoga studios. I will not surf craft-supply websites after I’ve had a glass of wine.

7. I will enjoy my life and will treat myself and my kids to responsible indulgences.

I have had the same Kate Spade wallet since 1995. It is falling apart: The separation between the coin and dollar compartments no longer exists. I had made a mental note to find a new wallet online but since I wasn’t at that time keeping a daily list, it never happened.

The other day when I was looking for stamps deep in a desk drawer, I came upon my late mother’s green leather wallet. I unsnapped it and raised it to my nose to see if I could still smell her. Inside, I found a dollar bill.

You can’t take it with you.

I’ll carry Mom’s wallet as a reminder of that.

—Katherine Rosman writes about pop culture and technology for The Wall Street Journal; she and her family live outside New York City. Email: checksandbalances@wsj.com. Twitter: @katierosman.

Article source: Wall Street Journal

 

If you needed a reminder of just how byzantine the rules are that govern inherited IRAs—and the importance of preparing your family for receiving such an account—the IRS just handed you one.

In a surprising move, the agency recently gave a teenager who inherited her father’s retirement account permission to undo a lump-sum distribution by her mother and transfer the money into an inherited IRA.

The so-called private-letter ruling was unusual: The Internal Revenue Service rarely allows tax-deferred retirement assets that someone has inherited and withdrawn as a lump sum to later be put into an inherited individual retirement account.

To be sure, a private-letter ruling applies only to the taxpayers who ask for it. It includes few specifics, such as names or dollar amounts, and doesn’t set a precedent.

Still, the ruling serves as a reminder to parents who have stashed most of their savings in retirement accounts—and the guardians of children who inherit them—that they should take special precautions to make sure those children get the most from their inheritance.

If you are the guardian of a child who inherits such an account, you should consider moving the assets into an inherited IRA for the child rather than simply withdrawing the money and paying a sizable chunk of the inheritance in taxes upfront, says William Schmidt, an estate-planning attorney at Schmidt Federico in Boston.

Parents—especially those who are single, divorced or remarried—might want to set up a “see-through” trust to protect an inherited IRA’s assets and handle annual distributions, says Bobbi Bierhals, a partner at McDermott Will Emery in Chicago. With young children, it generally makes sense to wait to make those distributions available at an older age, and to let the trustee use them to help pay for the child’s upbringing.

Even if you don’t expect anyone in your family to tamper with your plans, inheriting an IRA is much more complicated than you might expect. Here are some ways to handle it smoothly.

Think before you liquidate.

Leo Casper, a certified public accountant in Moorestown, N.J., meets with his clients’ adult children to show them how much more valuable an inherited IRA could be by leaving it intact and taking annual withdrawals, rather than liquidating it and paying taxes right away.

If you inherit a $100,000 IRA at age 40, “it can easily grow into three, four, five times the amount that was inherited,” he says. By contrast, opting for the cash could leave you with only a $60,000 inheritance after taxes.

Move, and retitle, the account correctly. If you inherit an IRA from anyone other than your husband or wife, you can’t roll it over into your own IRA. Instead, you have to retitle the IRA so it is clear the owner died and you are the beneficiary. Mr. Casper suggests using this format: “Robert Jones, Deceased (date of death), IRA F/B/O (for benefit of) William Jones, Beneficiary.”

If you are moving the account to a new IRA custodian, make sure you do a direct “trustee to trustee” transfer. If the check is made out to you, and you are anyone other than the surviving spouse, the IRS will consider it a “total distribution” subject to tax, effectively ending the IRA.

Meet the deadlines. If the IRA owner dies after 70½, when required withdrawals start, and didn’t yet take a withdrawal for that year, the heir must do so by Dec. 31 of the same year, Mr. Casper says. Those who miss the deadline are subject to a 50% penalty on the amount that should have been withdrawn.

The deadline for taking the first required withdrawal from the inherited account is Dec. 31 of the year following the year of the owner’s death.

Do the right math. With an inherited IRA, you have the chance to spread distributions across your life expectancy—a big advantage if you have decades left to live. That way, the bulk of the account can increase in value while taxes are deferred.

But you might not realize that the way you have to calculate the minimum IRA withdrawal amount is different from the way retirees calculate required distributions from their own accounts, says Jay Starkman, a certified public accountant in Atlanta.

First, look up your life expectancy on the table in IRS Publication 590 at www.irs.gov. Each year, subtract a year from your initial life expectancy to figure out how much to withdraw. Most IRA custodians will calculate it for you—but you need to make sure they are doing the right math for an inherited account.

Check the code. When you get your 1099 form, which reports distributions you receive, make sure that it includes “Code 4,” Mr. Starkman says—the code used to show that it is a distribution on account of death.

Keep your own copy of the beneficiary form. Mr. Starkman nearly missed the deadline for the first required distribution after inheriting his mother’s IRA. The reason: It took the IRA custodian more than a year to find the paperwork showing he had been named the beneficiary.

Know the Roth rules. Yes, there are no required minimum distributions for owners of Roth IRAs. But heirs to such accounts are required every year to withdraw a minimum amount specified by the IRS or pay a 50% penalty, Mr. Starkman says.

Still, there is some good news: No tax is due on those required withdrawals.

Write to Kelly Greene at familyvalue@wsj.com

Article source: Wall Street Journal

 

History suggests investors should bet on an election-year rally. World events might suggest otherwise, strategists say.

Since 1926, the Standard Poor’s 500-stock index has returned 11% during an election year, the second-best year of the four-year election cycle, according to Credit Suisse research.

Even better: Out of 21 election years since 1926, investors have lost money in only four.

But some strategists are urging caution in 2012. They say the current presidential cycle already is behaving far differently from a typical one. And with so much uncertainty outside U.S. borders, the election might not have the same effect it has had in past years.

“You can’t compare this election to any during the last 30 years,” says Rebecca Patterson, chief market strategist at JPMorgan Asset Management.

Historically, the market has performed best during year three of the election cycle, when the SP 500 has averaged returns of 17.5%. That’s followed by the election year’s 11% gain, which trumps years one and two by 2.4 percentage points and 1.4 point, respectively.

The two possible results this time—a Democrat stays in office or a Democrat hands off to a Republican—have produced mid-double-digit returns during past election years, according to Credit Suisse.

Republican presidential candidates prepare to debate at the Sioux City Convention Center in Sioux City, Iowa, on Dec. 15. The Iowa caucus takes place on Jan. 3.

This cycle, however, hasn’t followed the historical pattern. The first and second years of President Obama’s presidency stand a good chance of being the best, not the worst: The SP 500 gained 26.5% in 2009 and 15.1% in 2010, well above the average first- and second-year returns of 8.6% and 9.6%. Meanwhile, 2011, the third year of President Obama’s term, should have been the best of the cycle—yet the SP 500 gained just 2.1% counting dividends, and was essentially unchanged without dividends.

One reason the cycle is playing out differently is the lingering effects of the financial crisis. Typically, both major political parties look to stimulate the economy during the third and fourth years of the election cycle, in order to win votes.

But judging from the recent wrangling over extending the payroll tax cut, federal unemployment benefits and Medicare rates for 2012, investors shouldn’t expect much stimulus anytime soon, strategists say. A failure to extend those benefits could knock 0.8 percentage point off of gross domestic product in 2012, according to research from investment bank Nomura.

That doesn’t mean the market can’t rally. The SP 500 gained more than 20% in 1976, the year Jimmy Carter unseated Gerald Ford, and in 1980, the year Ronald Reagan defeated President Carter. In 1992, when Bill Clinton defeated George H.W. Bush, the market rose 7.6%. In 1948, when Democrat Harry Truman upset heavily favored Thomas Dewey, large-cap stocks returned 5.5%.

No matter who wins in 2012, investors should expect a volatile year in the markets, says Barry Knapp, head of U.S. equity strategy at Barclays. He looked at past elections that occurred soon after recessions or periods of economic turbulence. His finding: Market volatility rises during the primary season, falls and then nearly doubles during the 12 weeks leading up to the election, as the outcome becomes its central preoccupation.

“There will be lots of ebbs and flows,” says Mr. Knapp. “But by the conventions, the election will be the central focus.”

The U.S. election won’t be the only source of political uncertainty this year. Seven G-20 nations will be holding elections of their own in 2012, including France, Italy and Mexico. Just two did in 2008, according to Strategas Research Partners.

And with Europe still wrestling with its debt crisis and the jury out on whether emerging markets will avoid recession, the results will also have an impact on markets, strategists say.

“The U.S. still matters, but that’s a huge list of elections,” says JPMorgan’s Ms. Patterson. “There’s a lot of uncertainty that will reverberate globally.”

She recommends emerging-market stocks because, unlike Washington, emerging-market governments have cash to stimulate their domestic growth, and their central banks have room to reduce interest rates.

David Rosenberg, chief economist and strategist at investment firm Gluskin Sheff Associates in Toronto, recommends investments that typically do well in periods of volatility, including “hybrid funds” that blend corporate bonds and dividend-paying stocks, and top-rated “junk” bonds—which are already priced for a recession, he says.

“This is the most important election since 1980,” Mr. Rosenberg says. “It will be a rollercoaster ride.”

Article source: Wall Street Journal

 

MF Global Holdings Inc. bankruptcy proceedings drag on, some customers who had brokerage accounts at the firm are becoming increasingly doubtful that they will get all of their money back.

Tom Forester, who manages the $232 million Forester Value fund, says his wife, who was an MF Global customer, has yet to see all of her funds returned.

Mr. Forester’s fund, which uses options to hedge market risk, isn’t an MF Global customer, but Mr. Forester says he plans to open a second brokerage account for the fund to spread his bets in case his primary broker faced a similar failure.

“God forbid something happens to them, but we want to have a back-up quickly,” he says.

The question many investors are asking is whether they could be next.

The good news is that people who merely hold a stockbrokerage account are probably protected. But for those who trade options and futures or use leverage, the answer is more complicated, say lawyers, investment advisers and former regulators.

“You have to examine the fine print,” says David Kotok, chairman of Sarasota, Fla., investment advisory firm Cumberland Advisors. “Anybody who ignores it does so at their peril.”

Commodities broker MF Global filed for bankruptcy protection at the end of October, after $6 billion worth of bets on troubled European sovereign bonds frightened customers away and caused the company to run out of cash. A last-minute sale of the firm fell through when accountants discovered a shortfall in customer funds, now estimated to be $1.2 billion or more.

An MF Global spokeswoman declined to comment.

The shortfall wasn’t supposed to be possible. Brokerages are required to segregate customer assets from the firm’s assets.

In the past, that has meant that even if a firm ran out of its own money, the customer accounts could easily be transferred to a new broker, says Michael Greenberger, a law professor at the University of Maryland and former director of trading and markets at the Commodity Futures Trading Commission, which regulates the industry.

“The system has held up until now,” he says. “This is a black eye. People are going to be less likely to use futures trading than they were.”

In the event a broker fails and customer funds are missing, the Securities Investor Protection Corp. will replace for each customer up to $500,000 worth of missing securities, including up to $250,000 in cash. SIPC doesn’t replace futures contracts, and, so far, a similar system hasn’t been set up for accounts regulated by the CFTC.

Many securities firms also buy insurance to supplement SIPC. Scottrade, for example, says it buys coverage through Lloyd’s of London that brings customer protections up to $25 million, including up to $1,150,000 in cash.

You’ll still be subject to problems if the insurer can’t make good on claims, notes Mr. Kotok. If you’re willing to put up with the hassle of managing multiple accounts, or if your brokerage doesn’t offer supplemental SIPC coverage, make sure to get an account for each $500,000 chunk of assets you hold, he says. Also, open “cash” accounts that opt out of margin agreements, he says, because such accounts restrict what brokers can do with the money.

Commodities accounts face another complication: Even though brokers are supposed to segregate client funds, the CFTC permits them to use the funds to make ultrasafe investments and keep whatever gains come as a result, says a former CFTC official who now represents some firms affected by the MF Global collapse.

The problem: Until recently, the CFTC included foreign sovereign bonds in its universe of safe investments.

Earlier this month, CFTC commissioners passed a rule that would restrict brokers from investing in foreign sovereign bonds with customer funds. Brokerages have until next summer to comply.

Some lawyers have theorized that MF Global might have used customer funds as collateral to back its own trades, a process called “rehypothecation.” Most commodities brokerages agreements include clauses that allow the practice. In the event of a default, that could mean customers with missing funds could be considered unsecured creditors and be forced to wait in line with other creditors to get their money back, says Bruce Krasting, an independent analyst and former hedge fund manager.

“It’s standard language. I don’t think you could even be a big shot and get a carve out to disallow it,” he says. “Every agreement I’ve seen permits rehypothecation.”

Some lawmakers and regulators have called for commodities brokers to create and fund an insurance program, similar to SIPC, to protect customer assets. But until they do, there aren’t many options for small investors who trade futures to protect themselves.

“The ultimate safety here is reform,” says Mr. Greenberger. “There isn’t a whole lot small traders can practically do to protect themselves.”

Article source: Wall Street Journal

 

Homeowners who have resisted the urge to refinance their mortgages until now could be rewarded for their willpower. Mortgage rates have fallen to new lows—and banks are rolling out incentives to win business.

Economic uncertainty in Europe and slow growth in the U.S. are prompting investors to pile into ultrasafe U.S. Treasurys. That, in turn, is pushing down mortgage rates, which are tied to Treasurys.

The average interest rate on a 30-year mortgage fell to 4.05% for the week ended Dec. 23, the lowest in 60 years, according to HSH Associates, a mortgage-data firm. And rates on jumbo mortgages—private loans that in most parts of the country are larger than $417,000—also have hit new lows, averaging 4.61%.

Despite the incentives, many would-be applicants remain sidelined because they can’t meet the long list of qualifications.

“It’s hard to argue rates will get much lower than they are today,” says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

That’s good news for homeowners. A person who refinanced a $400,000 30-year mortgage in February would pay an interest rate of 5.04% on average, according to HSH Associates, and fork over $2,157 a month; at the current rate of 4.05%, he’d save $236 per month, or $2,830 per year.

What’s more, demand for refinancing is declining, since many homeowners already took advantage of lower mortgage rates. Applications for refinancing are 17% below this year’s peak in September, according to the latest data from the Mortgage Bankers Association.

That and other factors have prompted some lenders to offer incentives to win new business—particularly regional and community banks, which are focusing more on jumbo mortgages, says Stu Feldstein, president at SMR Research, which tracks the mortgage market.

The discounts can be sizable. Regional bank Valley National Bank charges homeowners in New Jersey and eastern Pennsylvania a flat fee of $499 for closing costs on mortgages as large as $1 million. Since average closing costs on a refinance run about 2% of the total loan amount, a person with an $800,000 mortgage could save about $15,500.

A spokesman for the bank says it is aggressively marketing the discount in part to bring in more customers.

While many lenders don’t refinance mortgages that are larger than about $2 million, Union Bank—which has branches in California, Oregon and Washington—refinances up to $4 million at no extra cost. (Many banks that refinance multimillion-dollar mortgages tack up to an extra quarter of a percentage point on the interest rate.)

Since November, Union Bank has also allowed borrowers to roll the costs of a refinance, like the appraisal fee and loan processing fee, into the mortgage. And borrowers whose original mortgage is from Union Bank don’t have to provide all of the income documentation that other customers do in order to refinance.

In part, the bank’s goal is to develop relationships with high-net-worth clients, says Stuart Bernstein, national production manager of residential lending at Union Bank.

Despite the incentives, many would-be applicants remain sidelined because they can’t meet the long list of qualifications.

The home-equity requirement is one of the toughest hurdles, says Mr. Feldstein. Homeowners with at least 10% home equity make the cut, but people with less have a tougher time.

Borrowers with 10% to 19% equity in their home usually have to buy private mortgage insurance, whose cost varies based on many factors, including their credit score. A borrower with 15% equity and a FICO credit score above 720 could pay 0.44% of the total loan amount, says Keith Gumbinger, vice president at HSH Associates. On an $800,000 loan that would be $3,520 a year—eating into the potential savings of a refinance.

In December, the federal government rolled out a revamped version of the Home Affordable Refinance Program with relaxed home-equity requirements, to allow more borrowers to refinance. To qualify, the current mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, and borrowers need to be mostly current on payments.

For regular refinancing, applicants need a FICO credit score of at least 740 to get the best rates, says Mr. Gumbinger. And they must provide copious documentation, including at least two years’ worth of tax returns and proof of income as well as recent statements for assets such as retirement and brokerage accounts.

After clearing those hurdles, you might wait about 60 days for refinancing to be completed, says Mr. Gumbinger—longer than the typical 45 days. While some lenders are offering 60-day rate locks for free, others charge a quarter of a percentage point of the total loan amount for the service. On an $800,000 mortgage, that’s $2,000.

Or you could opt to take your chances with a free 45-day lock and hope rates don’t spike between day 46 and the date your loan closes. With the euro zone still in economic crisis and global investors rushing to the safety of U.S. Treasurys, housing-market analysts say it could be at least six months before rates rise significantly.

Write to AnnaMaria Andriotis at AnnaMaria.Andriotis@dowjones.com

Article source: Wall Street Journal

 

The best is the enemy of the good. Or so said Voltaire, the French philosopher. I could be wrong, but…I think he was talking about long-term-care insurance — and how to fix what is probably the biggest hole in your plans for retirement.

This all came to mind after I read a recent “retirement and health” poll by the Harvard School of Public Health. Researchers found that more people age 50-plus now recognize the likelihood of needing long-term care as they age (which is good) but that they have no idea how to pay for it (which is bad). According to a MetLife study, a home health aide charges $21 an hour, on average; assisted living can set you back around $3,500 a month. Yes, you can try to self-insure, but many nest eggs will be hard-pressed to finance retirement alone, much less long-term care. You might think Medicare will be your safety net, but the program only covers short-term stays tied to illness or injury — not assisted living or nursing-home care. And the Class Act, the federal program designed to offer long-term-care coverage directly to the public, was scuttled last fall.

Which brings us to Voltaire. His notion — that the best solution can make a good solution seem less beneficial than it actually is — explains why many people turn their backs on long-term-care insurance. (Nearly 15 percent of individuals over 60 have coverage, according to a recent report.) Typically, financial advisers and insurance agents push us to buy the best coverage possible: policies with hefty daily payouts (at least $200) that will cover years (and years) of care. Their intentions, for the most part, are good — but the “best” option is expensive. Depending on your age, annual premiums can easily reach $4,000 or more. The result: We decide against buying any protection at all.

Don’t let your search (or an adviser’s clamoring) for perfect coverage prevent you from considering policies that are simply good. Indeed, we choose good frequently in our lives — in cars and investments, to name two. When it comes to long-term-care insurance, options other than the so-called best can do more for you and your family than you might realize.

I recently spoke with John Manchester, 60, who runs a packaging business in Hartland, Mich. His mother died several years ago at age 80, after spending time in an assisted-living facility and a nursing home. Before she became ill, in her 60s, her children purchased a long-term-care policy — for about $1,700 a year — that provided $50 a day for life, once a claim was filed. That coverage, when coupled with his mother’s savings, paid for her care without exhausting her estate. “Would we have liked having more than $50 a day?” Manchester asks. “Absolutely. But that money kept us from getting into a serious downward spiral with her assets.”

Or consider something slightly more ambitious. I asked Bill Comfort, who heads Comfort Assurance Group in St. Louis, to price policies providing $100 a day for three years with a 3 percent compound inflation rider to help keep pace with rising costs. The premiums — from Prudential, Transamerica, Genworth and United of Omaha — averaged just over $1,500 a year for a single individual age 60, and just under $2,400 for a couple the same age.

Of course, some financial advisers will dismiss $100 a day, and a 3 percent inflation rider, as being hopelessly inadequate. (The average daily rate for a private room in a nursing home is $240.) But $100 might be sufficient — and affordable — for some. That coverage ($36,500 a year) could be just enough to supplement your particular nest egg if you need care. “A Mercedes might be the best car on the highway,” Comfort says, “but a Malibu with cloth seats still has a five-star safety rating.”

None of this is to say that long-term-care insurance is the answer to all our prayers. The product itself remains ridiculously complicated, and the industry has often been its own worst enemy. In particular, steep premium increases in recent years on existing coverage have unnerved would-be buyers. But Dawn Helwig, a principal and consulting actuary at Seattle-based Milliman, says the worst of the hikes may be over. The reason: Pricing today is based on different assumptions. First, she notes, insurers are now using more realistic “lapse rates” (the odds of people dropping their coverage before using it) than in recent years. Second, carriers have more experience with how, and how long, policyholders actually use their benefits. And last, insurers now expect returns of about 4 percent on reserves, making investment shortfalls (and thus, premium hikes) less likely.

But the point is not just that some coverage is better than none. It’s better only if it can meet your particular needs when the time comes. Claude Thau, a specialist in long-term care at Target Insurance Services in Overland Park, Kan., says he typically recommends coverage of at least $150 a day, with 5 percent compound inflation coverage. But, he notes, some people can benefit from policies that pay out, say, $100 a day — if that coverage is part of a well-thought-out plan. Such a figure, Thau notes, could buy four to five hours of home care daily. “That’s huge,” he says. “Think of the benefit to a spouse or caregiver if their burdens are reduced.”

And that’s the point: designing a reasonable and affordable policy to meet your specific needs. Planning for long-term care is just common sense. Regrettably, “common sense is not so common.” I wish I had said that. But Voltaire did.

Article source: Wall Street Journal

 

If you use your car for business, you may be eligible for valuable tax deductions.

Drivers have a choice of how to calculate the deduction. When in doubt, crunch the numbers both ways to see which produces the bigger deduction for you.

One method is to calculate the actual costs of using your car, van, pickup or panel truck. Actual expenses may include such items as oil, gas, tolls, depreciation, licenses, lease payments, insurance, garage rent and repairs.

Make sure you keep detailed records, in case your tax return is audited. For details, see Internal Revenue Service Publication 463 at
www.irs.gov
.

The other option is to use the optional standard mileage rate issued each year by the IRS.

The IRS recently said its standard rate for 2012 for use of a vehicle for business purposes will be 55.5 cents a mile—the same rate as in the last half of this year.

The standard mileage rate for using a vehicle for medical or moving purposes will be 23 cents a mile next year, down half a cent from 23.5 cents a mile in the last half of this year.

How does the IRS figure out these rates? The standard mileage rate for business is based on an annual study of “the fixed and variable costs of operating an automobile,” the IRS said. The rate for medical and moving purposes is based on “the variable costs as determined by the same study,” which is conducted by Runzheimer International.

There is a separate rate for using your vehicle to help charitable organizations. That rate, set by Congress, is unchanged at 14 cents a mile.

Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.

Article source: Wall Street Journal

 

For the more than 36 million Americans who will turn 65 in the coming decade, the best cities and towns to retire in now have a much higher bar to clear: They can’t just be great places — they have to be affordable. Each week, SmartMoney.com tours a different state to find less-expensive alternatives to the most well-known golden year destinations.

Those eager to retire in the south often make a beeline for Florida’s warm weather, sugar-sand beaches and income-tax-free living. But retirement pros say they may be overlooking a better deal in Florida’s neighbor to the north: Georgia.

What makes Georgia such compelling place to retire? For starters, while Georgia does have income tax, the state’s rules will soon be far more favorable to retirees, says Paul Jacobs, a financial planner at Palisades Hudson Financial Group in Atlanta. In 2012, $65,000 of retirement income, which includes investment income from IRAs and 401(k)s, will be exempt from state income taxes for those 65 and up; by 2016 all retirement income with be tax-exempt. On top of that, Georgia has nice weather all year round, plenty of Southern charm, world-class golf courses and — for those looking to travel in their golden years — one of the largest airports in the nation, says P.J. Protos, a financial adviser at SunTrust Investment Services in Atlanta.

Of course, some retirement destinations in Georgia are pricier than others. Take St. Simon’s, a small beach town that’s become popular with retirees for its sparse traffic, golf courses and Spanish moss-draped trees. But all that quaintness comes with a cost: The town has a cost of living that’s 32% higher than the national average, and the typical home running upwards of $400,000.

But don’t let one pricey town thwart your move to Georgia. Here are four relatively affordable retirement havens in the Peach State.

Article source: Wall Street Journal