Avoid Haunting Your Heirs With Unnecessary Taxes

jack o lanternNaming beneficiaries for IRA and 401(k) accounts is critical: It keeps these assets from becoming part of your estate and potentially raising your heirs’ tax exposure.

But if you don’t plan carefully beyond this move, your heirs could still be haunted by Uncle Sam in the form of big tax bills when they take cash from these accounts.

Many people don’t see this peril because they’re focusing on estate tax exposure. Estates worth less than $5.43 million aren’t subject to federal estate tax, or state estate tax in some states. So people figure that if IRA and 401(k) assets become part of their estate, taxes aren’t a problem as long as the estate’s worth is still below that threshold.

But these folks may not be considering the income tax hit their heirs might take. If you and your heirs don’t take the right precautions, these transfers can result in painful income tax and penalties.

Those inheriting a 401(k) account should look at the plan document or summary plan description to find out what rules apply to their situation. It’s a good idea to ask a tax professional for help, as it can be complicated.

Rules may differ depending on whether the person who died was one’s spouse, and whether he or she was already receiving periodic payments from the account. Some 401(k) plans mandate posthumous lump-sum cash-outs within a defined time period, and such distributions can trigger a tax event.

This is because the money withdrawn from 401(k) plans and IRAs is always taxable. Money goes into these accounts pre-tax and isn’t subject to federal income tax until it’s withdrawn. Remembering this eternally, the ghost of Uncle Sam looks for opportunities to tax these assets as income.

Here’s what you can do to thwart that ghost.

Update your beneficiary information

If you haven’t named beneficiaries for your 401(k) or IRA accounts with the financial institutions that hold them, do so as soon as possible. Otherwise, these assets could become part of your estate and potentially subject to probate fees, state estate tax and, if your estate is large enough, federal estate tax. If you’ve had life changes that affect whom you want to name — such as divorce, the death of a spouse or remarriage — contact the financial institutions holding these accounts and update your beneficiary forms.

Remember that spouses are special heirs

Spouses get preferential tax treatment from the IRS when inheriting retirement-plan assets. (Now that the U.S. Supreme Court has upheld same-sex marriage, these spouses can legally designate their partners as beneficiaries in all 50 states.)

Unlike other heirs, spouses can assume an inherited IRA as their own; they can roll it into their own accounts.

Be aware of advantages for younger spouses

If you die at age 59½ or older, the IRS threshold for avoiding the 10% penalty on withdrawals, your (younger) spouse can avoid this penalty, provided your spouse retains your account as an inherited IRA. But if he or she transfers these assets to his or her own IRA account, this penalty will apply to all withdrawals from that account until your spouse reaches the threshold age.

All withdrawals are subject to income tax — at any age. It’s the penalties that can be avoided. Required distributions will be imposed, and for a spouse’s IRA these apply after he or she reaches 70½.

A spouse who doesn’t need to take withdrawals right away from an inherited account may opt to simply roll over the account to his or her own, to take them later. Even if a spouse makes a decision in favor of an inherited IRA, he or she can later convert the account and roll it over into his or her own.

Pay attention to deadlines

After your death, various moves by heirs regarding these accounts must meet strict IRS deadlines. When transferring assets, heirs need to act within defined windows of time or face disqualification or unnecessary taxes.

Have family discussions

Discuss the transference of retirement accounts with your family now to avoid extra turmoil following your death — for example, unprepared heirs might contact a financial professional who moves assets prematurely in ways that trigger tax hits. Your heirs should get qualified advice in advance and follow up with those same advisors when the time comes. All of this preparation should result in a clear plan listing the necessary steps to take upon your death. Heirs should name their own heirs for the new accounts.

These are just a few considerations for keeping Uncle Sam from haunting posthumous transfers of your tax-deferred accounts. To learn more, contact a qualified financial professional.


Possibly boring, but who cares? These stocks sure beat zero yields.

The Fed’s latest decision this week to again stand pat on whether to raise interest rates has at least some investors happy. Holders of utilities stocks are seeing their shares rise as expectations reset for continued low cost capital to this sector.

Anyone searching for income in this market has of course been frustrated by the low yields offered by government bonds, money market funds, and savings and time deposits. Yields for these securities remain close to zero percent on investment. Conservative investors dislike the risks generally posed by stocks and by long term bonds, which can be subject to volatility like we experienced in August.

Just staying in cash may be tempting, but is often unrealistic unless the investor opts in to draw down his or her balance over a period of years. There is a way, however, for conservative investors to put their money back to work. 

Anyone who has lost patience with zero returns for yield may find an attractive alternative in shares of selected U.S. public utilities. Companies providing natural gas, electricity, and water to residential and commercial customers are supplying life’s necessities. Utility companies can exhibit more consistent revenues and profits than do companies exposed to the wider swings of today’s economic cycles. Most consumers will pay their utility bills before they use funds for other bill payments.  Utilities can benefit as the population grows, as rate increases are imposed, and as service areas expand.

At present, dividends in the public utility market range from three to over five percent per year! The dividends, although never guaranteed, are usually consistent. In choosing among these stocks, investors should favor those companies that pay steady dividends or that increase dividends over time.  In this way, long-term investors buy a hedge against future inflation.

Many utilities are currently reinventing themselves, in face of growing competition from homeowners investment into solar panels. For this reason, careful research can identify those companies that are actively seeking new business models for offering value to their customers.
A company that delivers an indispensible product, enjoys government mandated price increases, and is favored with near compulsory billings should merit an investor’s attention. As a financial planner, I often work with my clients to diversify their income holdings to include utilities will for greater current income, opportunities for increasing income, and some appreciation.

People interested in this sector might review the white papers recently published by the major accounting firms with utilities practices. These include KPMG, Deloitte and PWC. The insights provided by these strategists are excellent. They have helped me discover some of the better opportunities for growth among utility stocks.
At McClurg Capital, we are registered investment advisors serving Bay Area investors for more than 25 years. All client assets are held in custody in a separate account in client names at the Pershing Division of the Bank of New York Mellon.

If you agree utilities would may fit into your investment strategy, give me a call. We can build a portfolio of individual utilities for you that will serve you well.

Steady the Course With Preferred Stocks for Yield

During market unrest, preferred stocks can offer smoother returns.

Starved for income, on deposits at the bank? Looking for ways to get bigger income payments from your fixed income holdings? Then you might consider preferred stocks , before you starve for lack of income.  But don’t jump into these quirky securities before you understand their pros and cons.
Information about preferred securities is not as readily available as is information about a company’s common stock. For that reason it pays to do a little more research, to understand how they are similar to bonds, and how they differ. 
Typically issued by banks, real estate investment trusts, and utilities, preferred stocks usually pay a fixed rate of dividends.  That makes them similar to bonds, which usually pay a set dollar amount of interest.  Payments are usually quarterly, better than for bonds, which typically pay just twice a year.  Issuers of preferred securities give preference over holders of common stock when paying out the dividends.

Before any company issuing them reduces dividends, it must first ax those paid on common stock.  Any such decision of course can affect the company’s credit rating. Consequently most companies issuing these securities rarely reduce the dividend paid on preferred classes of their shares.

Preferred holders also get preference over common holders in the event a company liquidates or goes bankrupt.  Of course bondholders get first dibs on the firm’s assets, in this scenario; preferred shareholders would be paid from assets left over.
So, if these stocks are harder to understand, why consider them? There are several reasons why investors should give these a closer look.  One: preferred stocks generally yield more than a company’s common stock and sometimes yield more than the firm’s bonds.  In addition, dividends from some preferred stocks are qualified, meaning that they are taxed at a top federal tax rate of 23.8%*.  Non-qualified dividends are taxed at a maximum federal rate of 43.4%*.    For this reason, it’s best to use non-qualified preferreds inside of tax-deferred accounts, such as IRAs.

Two: in the context of current market volatility, preferred stocks can be less risky.  That is, they oscillate less in value day to day than do common stocks.  Of course, bonds – that is, actual bonds, not the mutual fund or ETF forms- can move around even less as they are not as actively traded by retail investors.  Therefore, they usually don’t exhibit the wild swings that the equities market may on a particularly volatile day.

This said, when compared to common stocks, preferred stocks offer less opportunity for appreciation.  Like bonds, they tend to trade within a narrow range near their par or face values and are purchased primarily for income, not growth.
However, rising interest rates can reprice preferred stocks downward below their par values, raising the current yields for new buyers. Existing shareholders would be holding discounted valuations until redemption. For this reason, inflation and rising interest rates are risk factors.  Because preferreds pay fixed dividends, higher rates could force down preferred share prices.

Unlike bonds, preferred shares do not have a fixed maturity date, but most may be redeemed by their issuers.  Before buying a preferred, find out when it can be called and at what price. You could lose principal if the stock is redeemed at a call price below your purchase price.
Have questions? Time for a checkup. Review the level of fixed income in your portfolio and whether you are adequately diversified for yield and return.
*Includes Medicare Investment Income Tax of 3.8%

What to Ask Your Spouse About His or Her 401K Plan

Couples should coordinate asset allocation across all of their retirement holdings, including those in employer plans. 

Moving from the “I” vs. “we” mentality in planning for life’s goals.

Planning for life’s finances can be challenging enough for one, but when doing so for two people, it’s even more important to take the time to do it – and to do it right.

972a67b5-ab0d-4127-bb66-1307cd7c62b3If you are a partner in a couple that rarely if ever discusses finances, it may be time to schedule a conversation. If you are married, you are already subject to joint taxes. It makes sense to discuss the individual decisions you are making that contribute to the rate of taxation that you both share.

Even more important will be a discussion about how to sustain your life bond into retirement. And how to do so by allocating all assets, including all holdings in employer retirement plans.

As a financial planner, I work with couples who are trying to move from “I” to “we” mentalities when planning for life’s goals. In community property states, there is already a reality defined by law about what constitutes shared or marital property. Retirement plans fall into the shared category. But somehow, many people overlook this when making decisions about how to make choices about their workplace retirement plans.

Better communication by partners about goals and how to fund them can strengthen commitments that they have already made to each other. This discussion can also reduce anxiety about where salaries may be going and whether joint savings will be enough to finance retirement.

This discussion can be even more important for same sex couples. The June decision by the US Supreme Court to uphold the right to same sex marriage throughout the United States has led many people to reevaluate their retirement plans – and other retirement related choices.

Here are seven ideas for coordinating 401K or equivalent plans, with those of your spouse.

-Discuss your relative savings goals, the timeline for achieving them, your taxation rate, and whether your annual deferral rates will allow you to retire by the age you desire. In your review, consider any difference in your ages, other savings you may have, your relative tolerances for risk, types of investments you have available to you in employer plans, and how you might allocate among them to balance risk and reward.

18-Various online calculators are available that can estimate the rate of savings and return necessary to arrive at a given dollar figure over a specified period of time. These are approximate calculations that should be vetted by a financial planner and or tax professional on a periodic basis.

-Look deeper into your plans to determine how to optimize among the funds provided. Some plans offer lower fees on funds and lower overall expenses allocated by participant. Examine how the individual funds are rated. You can even chart relative performance using no-cost tools on such websites as http://finance.yahoo.com.

-Determine how to weight the strategic asset classes offered in your plans, which include equities, fixed income, and cash. Using a website such as www.morningstar.com can help you choose an approximate mix to reduce risk of overexposure in any one category. If your plan is a 403b, you may also have the option to invest in a tax deferred insurance contract, also known as an annuity.

-Judge whether some assets you would like to hold would be better held in a taxable account. These might include tax exempt municipal bonds and stocks that pay no dividends – but that offer substantial opportunity for appreciation. If available to you, you could also holding such stocks in a Roth IRA, which can allow you to forego taxation upon the sale of these holdings provided you satisfy the other requirements imposed by the IRS.

-Once you have decided what assets to hold in what mix, be sure to rebalance this mix quarterly. Equities usually outpace bonds, so to hold true to fixed income weight you will need to sell off a little equity each quarter. You would then reinvest the proceeds into fixed income.

-Review all fund choices at least once a year and don’t be afraid to jettison funds that are off target or that are underperforming their category. If your two plans offer vastly different menus of fund selections, compare the funds available in both plans. Choose the best funds from either plan and allocate as if you were managing a single portfolio.

-Update beneficiary information as needed. Be sure to indicate your spouse as a primary beneficiary; and to choose a contingent beneficiary as appropriate. If you elect to name a trust as a beneficiary, be clear on the tax impact of this decision. Any trust document used should offer some language about pass through rollovers so that heirs aren’t forced into a tax event. Better yet name the heirs as contingent beneficiaries, so that tax glitches don’t force lump sum payouts at higher tax rates.

If you find yourself struggling to get on the same page as your partner in this conversation, a financial planner can help.   The subject of money is often touchy. We help our clients with the negotiation necessary to arrive at consensus.

Transitioning From Growth to Income for Retirement

Originally Published on NerdWallet.com

Learn more about Kathleen on NerdWallet’s Ask an Advisor

If you’re age 50 or older and are like most investors, you’re investing largely in mutual funds through an employer-sponsored retirement plan. If you have a brokerage account, you’re probably choosing funds rather than individual stocks.

Investors who have a little more knowledge will often assess the balance of their holdings and the ratings of the funds they own. They may subscribe to newsletters or visit financial sites that provide guidance and recommend stocks and funds.

So much of that guidance, however, is focused on growth — the potential for price appreciation as investments increase in value. The only way to turn investment growth into cash is to sell the investment. As investors get closer to retirement, though, they want to know more about how much income their portfolios are earning — that is, how much cash their holdings are actually generating. Growth may be high, but income may be quite low.

So what is an investor to do? Ride the hills and valleys of the market and hope for the best from a growth standpoint? Or take steps to lock in more certainty about income?

Making the transition from growth-focused investing to income is often challenging. Investors comfortable with stock funds may have a hard time adjusting to the notion that a mix of securities might better achieve their income goals.

To choose the strategy that’s best for you, it’s important to understand some income-related financial terms and definitions.


To explain yield, I often use the analogy of a house rental. Say you rent a house to a tenant. The rent you collect, minus your expenses, is your yield — that is, the income from the property. The rent by itself is not the value of the property. The property value can rise or fall independent of the rent you receive. You realize a gain or loss on the property only when you sell the house. In the interim, you can take deductions against income on your taxes.

Stocks pay dividends, bonds pay interest, and these payments are made on specific dates, often several times a year. Divide the annual amount of payments by the value of the stock or bond to determine the effective rate at which it pays income. That is yield.


Dividends are paid by common and preferred stocks, usually on a quarterly or semiannual basis. Preferred stocks are a type of fixed-income instrument, with a guaranteed dividend. Common stocks are the more typical equity issues; their dividends aren’t guaranteed, although they have greater potential for growth.


Interest accrues and is paid on debt instruments such as certificates of deposit and bonds. The bond owner receives interest, usually twice a year, in the form of a “coupon” payment. (Bond funds usually distribute interest monthly.) Investors get their principal back when they redeem the CD or bond.

Capital gain distributions

Capital gains are the fruits of growth — money made by selling an investment for more than you paid for it. Mutual funds declare and distribute capital gains from the sale of investments within the fund. These distributions are typically not guaranteed.

Other income sources

Annuities produce regular, guaranteed payments that are usually a mix of income and a return of capital. Depending on the annuity, there may be a guarantee of lifetime income.

Covered calls are an additional source of revenue for people who own a portfolio of common stocks. Engaging in a call strategy requires an in-depth conversation with your financial advisor to review your risk tolerance and the tax implications for realized gains.

What income sources are right for you?

Well-diversified investors may be using a mixture of all these strategies to produce the annual income they need from their accounts. The actual allocation of weight among strategies may depend on the risk tolerance of the investor, as well as the amount available to invest. All of these decisions are made in the context of an investor’s need for liquidity — the ability to convert investments to cash. Investors who are already retired are normally advised to keep a percentage of assets in cash to have available for emergency needs. This lets them avoid “fire sale” events should markets turn down.

Planning ahead

A discussion with a financial planner can help you identify the income sources that make the most sense for your retirement. Tax issues should also be considered, as larger withdrawals from IRA and 401(k)-type accounts can affect your tax rates. Having tax-free Roth IRAs can help as well.


Mars, Venus and the Shared Wallet, Women and Money

Women and men differ fundamentally in their approaches to investing and finances. What studies show.

Why would 27% of women in households earning more than $200K fear ending up broke, homeless and as a bag lady, in their later years?

While advising couples, I have noticed that men and women often have very different approaches to investment decisions and managing risk. Curious to learn more, I researched available studies to learn more about the scope of these differences and why they occur.

The findings were in some cases very surprising. However they almost universally validated my anecdotal evidence that women tend to be more conservative than are men, when making decisions about finances and investments.

These tendencies occur for a number of reasons. The studies have shown that more women than ever are supporting households as a primary breadwinner, and that women are living for longer periods of time. Female headed households are also more likely to include extended family members, including children, and older parents. Decisions about allocating a paycheck may need to support several people.

Married women were also found to be very interested in finances; but less likely to be taking the initiative in a conversation with professionals about household finances or investing. They were found to be very concerned about their financial security. Most surprising to me, personally, was a finding that 27% women in households earning more than $200,000 a year had a deep seated fear of ending up broke, homeless and as a bag lady later in life.*

Among married women, most were far likelier to discuss a purchase of more than $360 with their husbands prior to making it. By comparison, the husbands surveyed were not likely to involve their spouses in a purchase decision unless the amount exceeded $1200!

There are many implications of these studies. One of the first takeaways for me is that it is important for women, if they are not already well informed and assertive, to delve into household finances and to share in decisions about them. Women should choose professionals – whether they are CPAs, tax preparers or financial advisors – with whom they can collaborate, rather than be patronized.

Also, women in significant relationships should understand that their voices should be heard on money topics. It is important for couples to work toward ease in communications about money, an often difficult subject. In community property states, salaries and retirement assets are considered to be marital property. It is logical that both spouses work together on decisions about these assets rather than assigning more control to the one who earns more.

One way women can be made to feel more comfortable about investment decisions and saving for retirement is to engage in planning. The studies found that women who plan had a higher level of confidence about achieving their eventual goals, and more awareness of the resources and milestones necessary to attain them. These women also felt more comfortable with assuming some risk to attain the desired outcome.

Estate planning can also be important, to help women feel reassured that they will have sufficient resources for their later years. The process of creating a will or trust can identify issues for funding legacy goals, as well as the needs of a surviving spouse. Estate planning can also direct the outcome of “instant estates” created, when an untimely death of a parent or both parents triggers life insurance payouts for children. Estate planning may serve as a reality check on levels of current spending, which may not allow for sufficient accumulation toward retirement.

Recently, I spent a morning talking with women about life planning, and estate planning. Even people who don’t self identify as rich realized that if both parents were to die, leaving the insurance payouts of a group life insurance plan for children, that the parents’ estates could suddenly be substantial. Informed choices of when to start Social Security benefits and to coordinate benefits with those of a spouse can provide life-changing results.

If you would like to learn more or to read more about these studies, to assess where you may be with some of these decision points, I can send you some links. You can also consider attending my panel discussion tomorrow in Mill Valley. Link is below. I would also be happy to engage you in an important planning discussion, toward taking more control over your finances, and life goals.

The bottom line is that life circumstances can significantly affect risk tolerance and assumptions regardless of gender. Rather than totally avoid risk, we need to ask ourselves how much we might tolerate to reach a desired goal.

*Allianz Life, 2012

**Research studies by: Allianz Life, 2012; Sullivan Trust Study, BNY Mellon, Jan. 2011; Spectrem Group, Oct. 26, 2011, Experian, 2014; and Family Wealth Advisors Council, 2012.

“Yours, Mine, Ours:” Keeping Assets Separate During Marriage

Relationships start with romance, but can erupt into anger if a couple doesn’t work on intimacy on the money level.  As a trained mediator and financial planner, I have seen the potholes that people blunder into on this subject even when love dodges other obstacles.

If you are planning for a marriage in a community property state like California, it’s important to set expectations and discuss community property, that is, the basics. It is also important to decide how to commingle your net worth to build your life together as a couple. You may decide to keep certain assets separate, and you may negotiate with each other tradeoffs relative to these decisions.

After a marriage, you may decide to formalize agreements concerning separate property such as inheritances. There are agreements you can create with the aid of an attorney, who may be specialized in family law, estate planning, or real estate, as appropriate.


Community property

The doctrine of community property is defined by state statutes. In states where it applies, both a husband and wife are responsible for the expenses of the family and for the education of children including stepchildren.  The law deals entirely with property, and sources of income, and sets a fiduciary standard of care for each of the spouses when managing community assets.

Ironically, couples may or may not have sources of income that are separate property but if they file married jointly under the federal tax code, they may each be liable for the taxes levied on separate assets or activities. For instance, there could be business income coming from a pass through business entity, such as an S-Corporation. Even if a pre-nuptial agreement defined the business as a separate asset, the business income may be marital property, and the taxes associated with it a shared debt obligation to the US government.

Separate property

First a definition:  Separate property can be anything you owned before marriage or included in a prenuptial agreement that was explicitly defined, and agreed to by your spouse. In California, your spouse should have been counseled by an attorney to grant fully informed consent. Assets that arrive during the marriage can remain separate if they fall into certain categories, like gifts and inheritances, and can retain that status if kept separate.  That is, they cannot be commingled with community assets.

The muddle in the middle

During the course of a marriage it is common for spouses to draw upon separate property to finance aspects of their lives together.  For instance, a wife’s trust account might be partially collateralized by a bank to help lower the amount of down payment necessary on a house. The wife cannot remove her trust account from the bank without forcing a refinancing of the loan. The asset is still titled in the name of her trust but the account is encumbered for the good of the community. This arrangement may actually violate the terms of her trust, said one estate planning attorney, because the wife has fiduciary responsibility to protect assets for the trust’s named heirs.

Or, in another example, income received from a separate asset such as an inheritance or a personal injury claim is used to finance ongoing living expenses. The dividends may be deposited to a family checking account. This may or may not create a claim for community property later.

Salaries and wages are always considered to be community property.  Couples may trade off community assets for other things if they negotiate a prenuptial or post-nuptial contract for this purpose.  Couples may agree to economic restitution should they ever split if, for instance, one partner must make a career sacrifice for another, resulting in a salary cut.

State statutes may override some of these agreements and judges may overturn agreements if they are not in the best interest of children, or are a violation of codes. Also, as I stated previously, in California, spouses must each obtain separate legal counsel when signing prenuptial or post-nuptial agreements.

For better and for worse

Commingled assets may present no problem when couples stay together. However, couples who fight about money or who transition into a divorce may discover the unwelcome realities of separating assets that are no longer solely his or hers, but that are now shared.

This new reality is not necessarily bad. Life as a couple for the parties involved is usually more satisfying than life as single individuals. Marriage is an economic relationship as well as a romantic one. The challenge to partners is to find the right balance, and to be able to talk comfortably about the resources necessary to sustain a couple’s economic life, together.

Financial planning can help achieve this level of détente. Having a third party mediate the discussion can clear the air for a difficult but necessary conversation.

Getting advice

To learn more about protecting assets for children of a previous marriage, or if you are contemplating divorce, consult with an attorney. Getting advice is even more important if one of the spouses :

–owns a business prior to marriage that may become subject to control issues or necessitate sale after his or her passing;

–has substantial separate property, either before marriage or that is inherited or otherwise acquired during the marriage;

–has had issues getting his or her spouse to properly manage community debt, including credit cards and small business administration loans;

–wants to refinance a house previously owned before marriage, and /or wishes to keep its ownership separate during marriage.

Family law attorney Sarah Davis of San Francisco suggested that spouses discuss use of separate money to benefit their life as a couple.  “This is especially true  if either one of the spouses expects to eventually be reimbursed for the loan or use of the money, ” she said.  She advises couples, “Discuss how accounts will be kept.

“Spouses have fiduciary duties to one another.  If one spouse has a business, he or she will need to balance accounting for the business with accounting to his or her spouse for the business funds and payouts.”

The big takeaway here is that it’s always a good idea to seek professional legal advice before acting before acting upon any assumptions of what constitutes separate vs. marital property.

Want to pay less down for a home? Check out the new guidelines.

Newer, low down payment options help more borrowers qualify for home loans. 

Mortgage interest deductions remain an important tax-sheltering strategy.

As a financial planner, I work collaboratively with many professionals in my community. One very valuable professional to know is a mortgage banker.  Consumer purchases or refinancing of a home usually represent the largest expenditures people may make in a lifetime. Recently, banks began to relax the amount required of consumers for down payments.

That said, responsible borrowers should make sure that the amount to be paid monthly stays within recommended guidelines.  For instance, the amount represented for a monthly mortgage, insurance and property tax payment should be represent no more than 38% of gross monthly income.  If the payment exceeds this ratio, the borrower may be at risk for a cash crunch should unexpected events occur.

Consumer research done by Fannie Mae*, shows that many people have problems mustering the initial money needed for the down payment and closing costs.     This is because 44% of first time buyers think they need 20% for the down payment, according to Fannie Mae.

The larger down payment lowers the monthly mortgage payment, and of course, represents less risk for the lender and borrower. Even so, responsible borrowers may now be able to make less of a down payment.

Mortgage banker Rosette Pollock of Greenbrae, California, said buyers wanting to invest less than 20 percent down can explore several new options.  For instance, she said, Fannie Mae has announced a 3% down payment choice for an owner-occupied home.  Under this program, the maximum loan amount is $417,000.  The 3% down payment can come from the borrower’s own saved funds or a gift from an eligible source.

In exchange for putting less than 20% down, the borrower would incur a monthly mortgage insurance payment which protects the lender in case of default.   Depending on the borrower’s adjusted gross monthly income, the mortgage insurance cost may be tax deductible. Borrowers should consult their tax accountant for additional information.   Find more information on the IRS website @http://www.irs.gov/publications/p936/ar02.html#en_US_2014_publink1000229890.

Yet another program, available from the Federal Housing Administration (FHA), requires only a 3.5% down payment for property purchased in selected areas including Marin. The loan may be made up to a maximum amount of $625,500 depending on the county.  FHA would also ask for a one-time upfront mortgage insurance premium, and a monthly mortgage insurance payment.   FHA recently announced it is lowering the monthly mortgage insurance amount.  “On a $500,000 loan, this new announcement will save a home buyer $2,500 a year,” Pollock said.

A private program, also available in Marin County, asks for only 5% down on a purchase up to $658,421 with no monthly mortgage insurance, Pollock added.  “The borrower cannot own any other residential property and the property would need to be located in an eligible census tract,” she said. “Otherwise there is a restriction on income, with the maximum modified gross income income allowed being $135,493.”

If the property is located in an eligible census tract, the borrower’s income can exceed $135,493.  Additionally, reduced interest rates are available.  Pollock said there are currently 13 eligible census tracts in Marin (San Rafael has 4 tracts, Novato has 4 tracts, Ross Valley has 2 tracts, and Southeast Marin, Bolinas, and Northwest Marin all have 1 eligible tract).  If you live or want to buy outside of these areas, check with your local mortgage banker for other eligible census tracts. Census tracts cross zip codes, so to determine whether a property is eligible, enter the address on this link: https://geomap.ffiec.gov/FFIECGeocMap/GeocodeMap1.aspx .

If the borrower buys a home or even refinances in one of the tracts, he or she receives a discount off the rate for the private program mentioned by Pollock.  Unlike for other programs, there is no monthly mortgage insurance on the home which helps lower the monthly payment.   Borrowers do need to qualify based on income, assets, and credit in all cases (no short sales for the past 4 years).  The  maximum debt to income ratio is 38% for a borrower’s income divided by the new mortgage payment (principal, interest, taxes, insurance, and HOA** if applicable).   The ratio for borrowers’ income divided by the new mortgage payment + all other liabilities must not exceed 44%.

Still other lending options exist for a home buyer who can make a 10% down payment.  Lenders may offer financing up to $1,500,000 and with 15% down payment.  This would permit a qualified borrower can purchase a $2,000,000 home.


Whether owning this much equity in a home makes sense for you, personally, is a discussion to have with your financial planner and tax advisor. If you live in an area outside California, check with your mortgage banker to see what programs may be available for you.

Having a mortgage can lower your income tax bill, and create a more stable, positive experience in living in a community. However, if your short term plans – in the next 5-7 years – involve a relocation or retirement, purchase of a home may not be right for you. Check your assumptions of equity growth, taxation benefits and cash flow with a trusted professional.


California residents can ask Rosette to provide them additional information by emailing her at

rpollock@terramb.com.  For financial planning advice feel free to contact me for an appointment at knemetz@mcclurgcapital.com.

*=Federal National Mortgage Association
**= Homeowners Association Dues

A Roth IRA account can benefit retirees with tax-free income

Use current market volatility to your advantage, when converting IRA to Roth assets. For less of a tax bill, move over your devalued assets – and hold until they regain their valuation. 

When the market enters a downturn, it’s a good time to evaluate whether you can benefit from the volatility to convert pre-tax retirement assets into Roth IRA account.

For many higher income earners, a Roth conversion is the only method

Since amounts to be converted can be transferred in actual shares of investments held, rather than just cash, investors can move over devalued assets and pay relatively less tax for the conversion than they would have possibly paid in 2014.permitted by the IRS to convert IRA assets into long-term, tax exempt status.  

Anyone holding energy assets, for instance, who chooses not to sell them in face of current market headwinds, might consider whether moving these assets into a Roth account offers advantages both short term and long term.  Some caveats apply for higher earner households, however.

The Medicare surcharge tax on investments, and on excess income, for instance, should be considered if the amounts transferred from IRA to Roth accounts push modified adjusted gross income over trigger thresholds.  In 2015, these thresholds are $200,000 of modified adjusted gross income for people filing as single, and $250,000 for people filing as married.

The applicable IRS rules exclude income from muni bonds and muni bond funds from investment income calculations.  Distributions from IRA or 401K accounts are included in modified adjusted gross income, not in investment income.  For people earning wages, an additional employer payroll tax applies for amounts earned under $250,000 married, $200,000 single or head of household. Half the payroll tax, or 1.45% , is paid by the employee; half by the employer, under these thresholds.

If you choose to move assets including cash from a retirement plan to a Roth account, you would owe income tax on the amount you choose to transfer.  This amount could boost you beyond the trigger threshold if you are not careful.  Offsets to this increased income could include higher pre-tax contributions to retirement plans; and increased deductions for mortgage interest, state income taxes and local property taxes.

Since you are permitted to move actual shares rather than just cash into an IRA account, you could choose to move the shares of companies or securities that have suffered valuation loss in current market trading. In this way, you do not realize the loss; you just optimize it for the purposes of paying for the conversion at a lower tax rate.


The one aspect that often trips people up in conversions is the IRS requirement that you must aggregate all your IRAs to determine tax liability.  You must consider all your IRAs and where those dollars came from.  If you have another pre-tax traditional or rollover IRA out there and if you originally took a tax deduction on those dollars, this affects your tax liability on the Roth IRA.

For example, if you open a $5,000 nondeductible IRA and you also own a rollover IRA worth $95,000 from a previous 401(k) made with pretax contributions, then 95 percent of your contribution to the nondeductible IRA will be taxable when you do the Roth conversion.

While an experienced financial planner can help you determine the correct liability, the strategy works best for people who don’t have other IRAs or who have rolled deductible IRAs into a 401(k) plan, eliminating the account from the tax consideration.

Another factor to consider is the length of time separating the actual conversion from the time you expect to take distributions. The longer you can wait, the more benefit you may realize from the conversion of assets.  People nearer to retirement may be counseled not to do the conversion or to do a smaller conversion, if they will need income in less than 5-7 years.

Why consider a Roth IRA?

The answers vary depending on your situation. Here are some quick points to explore with your financial and tax professionals.

–Having a Roth IRA can allow you to lower your Social Security taxation. Distributions of capital after 5 years are not taxed; withdrawals of gains and income also escape taxation after this time.

–Extending your purchasing power and the longevity of your retirement accounts when you most need them; in your distribution years.

–Avoiding higher taxes later, if you expect your taxes to rise either due to adjustments in taxation rates or because of rising income from pensions and required distributions.

–Having more assets to support your income needs if you live long, as Roth IRA accounts are not subject to required minimum distributions applicable to other types of retirement accounts.

–Having the ability to pay the conversion tax now, or the tax in installment payments over a short period of years.

–Leaving more for heirs. That is, you don’t need the money in the Roth account and want to leave an income tax free Roth IRA to your heirs for gift and estate planning purposes.

Keep in mind that this analysis offers broad perspectives on possible advantages of Roth conversions for a variety to people. A tax expert can verify whether these advantages apply to your situation.

Making Sure Your Gifts Will Be Appreciated

Depending on the cultural or family context, an outright gift of
cash can create misunderstanding.

Ever had the experience of giving a cherished gift, only to notice confusion on the part of the recipient?

If you are giving to someone of a different culture, their customs and culture may misinterpret for instance a gift of cash as crass or as a violation of a cultural norm.present handoff

In many areas of California, and in the US, families bridge racial, religious and language differences in the local populations. In business circles, especially in big cities where many cultures and contexts come together, an innocent gift may inadvertently create a cultural misunderstanding.

Of course, people who travel internationally for the holidays may be more attuned to these differences in customs around gift giving. But even those people who have lived abroad for some time can get an unexpected reaction should they forget local customs in a social setting.

In the spirit of the holidays, I thought I would offer a quickie list of do’s and don’ts when making gifts across cultural divides. Givers should gain, in that their gifts will be even more appreciated once the recipient realizes the thought that went into the selection.


In many western countries, Christianity may be the dominant religion. However in inviting people to holiday gatherings, don’t assume that everyone shares your beliefs. This issue sometimes comes up in families within the USA as well, if members have married people of other faiths. In these situations, it may be better to create some neutrality around the event, either in choice of day, décor, or festivities, or in honoring several customs or faiths at the same event. Depending on the cultural context, it may be wiser to give a gift to children, for instance, on another day than the religious holiday.

Cultural contexts

Gifts of money are not well received in certain cultures, especially if the recipient perceives himself or herself of a superior social rank. For instance, most people in the US would not give a boss a gift of money. A bottle of wine, yes, but not a gift card or money. However people living or from the Middle East may be also offended by a gift of money. But this norm varies too. In Jewish families a gift of Hannukah “gelt,” that is, chocolate money coins, is perfectly okay and fun for children. In Chinese cultures, red envelopes stuffed with cash are exchanged among family members and between bosses and employees. The amounts inside may be nominal such as $1, to bring luck for the coming year; or they may be a significant gift.

When visiting the homes of a host or hostess who originated from another county, you might also think about their expectations of guests. For instance, guests may or may not be expected to bring a gift to dinner, such as flowers or a dessert, or a small gift from their home countries. When in Mexico, for instance, or socializing with people from this country, you might bring white flowers, as they are considered uplifting. However when visiting a Japanese family, white might be a taboo color, symbolic of death.   For other cultures, other colors have these connotations. It pays to do a little research.


The overstuffed bear in a big box under a Christmas tree may attract the attention of the little ones. But the bear may come and go in just a year or too while a gift of college savings can grow over many years, and make a tangible difference in the life of your child or grandchild. Don’t hand over an envelope with cash if this is your goal. Do open a college savings 529 account or transfer shares of stock into a custodial account for a child.

The College Board reported that average college costs in 2012-2014 were $8655 for in state public colleges, $21707 for out of state public colleges and $29056 for private colleges. These numbers are growing an estimated 7 percent every year. Parents particularly may appreciate that you are helping teach their children to save a portion of their incomes for the many years ahead.

Having college savings available after high school graduation is a wonderful blessing, because the alternatives are quite burdensome. Rising interests rates make student debt increasingly unattractive despite tax deductions available for interest. And uncertain equity valuations in homes make it unwise for parents to finance college using home loans.

Looking ahead

Gift exchanges are a fun and wonderful way of celebrating families and friendships. Following a few rules of etiquette makes the gift even more pleasurable for the recipient.