Personal Finance: Another Perspective

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Personal Finance Another Perspective

• Preparing for the Final Exam
• Review 3

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Preparing for the Final Exam

• How to do well on my exams (by order of what I
  think is most important)
• 1. Review the previous quizzes
• Check your answers on Blackboard
• 2. Review the PowerPoints and case studies from
  each class
• These are the things I consider important
• Especially look for application problems
• 3. Review your 7 - 3x5 note cards or write up a
  good one-sided reference sheet (8.5 x 11)
• 4. Review the readings and syllabus (4
  objectives)
• Think through the purpose for each reading

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Review Questions

• 1. Retirement Planning
• 2. Estate Planning
• 3. Money and Marriage
• 4. Money and Marriage II
• 5. Defined Benefit Plans
• 6. Qualified Retirement Plans
• 7. Qualified Retirement Distributions
• 8. Individual Retirement Plans

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1. Retirement Planning

• Data
• Suzanne is 25, single, and makes 50,000 per year
  at her current job. Her company has a 401(k) plan
  that matches 50 percent of her contributions up
  to 3 percent of her salary. She determined that
  she can save 15 of her salary every year, and
  will put all 15 or 7,500 away for retirement.
  She expects her tax rates to be lower in
  retirement.
• Applications
• Which investment vehicles should she use and why
  in 2009?

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Answer

• First, look to free money
• If Suzanne will save 3 percent of her salary, or
  1,500 per year, her company will match that with
  50 percent of that amount, or 750.
• Note that this is tax-deferred money, or money
  that has not been taxed yet. The maximum
  contribution for 2009 in a 401(k) account is
  16,500
• Since the first priority of money is free money,
  she should invest 1,500 here first.
• Note that there is also a tax saving here, as
  investments reduce her adjusted gross income

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Answer

• Second, look to tax-advantaged money.
• A traditional IRA would likely be her second
  choice. Because she expects tax rate to decline
  in retirement, the traditional is the best idea.
• She can invest up to 5,000 per person in 2009 in
  a Traditional IRA
• She invested 1,500 in her 401(k) plan and 5,000
  for herself in a traditional IRA

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Answer

• Third, look to tax-deferred money.
• With her additional funds, she could invest the
  remaining 1,000 in her company 401(k), even
  though there is no additional match.
• Note that her goal was to invest 7,500 for
  retirement. In reality, she
• Invested 7,500 of her own money
• Got a free 750 match from the company
• And saved taxes on the 7,500 in her 401k. At a
  30 federal and 7 state rate, that 401k tax
  deferral saved her 2,775 in next years taxes as
  well
• Total retirement savings of 10,275

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Answer

• Where should she put different types of financial
  assets?
• Retirement Accounts 401k, IRAs, 529 Funds, etc.
• Financial assets in which she trades actively
• Taxable bonds, and high turnover funds
• She does not pay taxes until she takes out funds
• Taxable Accounts investment portfolios
• Stocks and mutual funds with a buy and hold
  strategy
• Tax-free bonds and tax-efficient index funds
• She pays taxes on these funds each year

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2. Estate Planning

• Data and Calculations
• Barney, a widower of five years, passed away in
  December 2009. The value of his assets at the
  time of death was 4,200,000. He also owned an
  insurance policy with a face value of 300,000
  (which was in an irrevocable life insurance trust
  (ILIT) with his daughter as beneficiary). The
  cost of his funeral was 20,000, while estate
  administrative costs totaled 70,000. As
  stipulated in his will, he left 350,000 to
  charities. Also, in years 2002-2004 (3 years),
  Jennings had provided his niece with 25,000 per
  year funding for college tuition. Of this
  25,000, 8,000 was paid directly to the college
  for tuition and fees, and the remaining 17,000
  was paid to his niece to cover her living
  expenses while she was going to school. In
  addition to paying for his nieces schooling, he
  also gave his niece 25,000 as a graduation
  present in 2005 for a down payment on a new
  house. Based on this information, and assuming
  to estate taxes were paid, answer the following
  questions and the charts on the following pages
• Determine the value of Jenningss gross estate,
  his taxable estate, his gift-adjusted taxable
  estate, and his year 2009 estate tax?
• Annual Tax-free Gift 2006 12,000, 2003-2005
  11,000, 1992-2002 10,000

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Unified Estate and Gift Tax Rates
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Unified Estate and Gift Tax Rates
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Unified Estate and Gift Tax Exemptions
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Assets 4,200,000 Insurance policy 300,000
Funeral cost 20,000 Estate administrative
costs 70,000. Charities 350,000 Each of the
past 3 years (2002-2004) 25,000 per year
funding for college tuition, of this, 8,000 paid
directly to the college, 2005 graduation present
25,000

• What is the value of Jenningss gross estate?
• Gross Estate assets life insurance policies
  not in irrevocable trusts
• Gross Estate 4,200,000 (Note the life
  insurance policy is not included in his estate)
• Determine the value of his taxable estate?
• Taxable Estate Gross estate funeral expenses
  administration expenses - gifts to charity
• Taxable Estate 4,200,000 20,000 - 350,000
  - 70,000 3,760,000

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Assets 3,200,000 Insurance policy 300,000
Funeral cost 20,000 Estate administrative
costs 70,000. Charities 350,000 Each of the
past 3 years (2002-2004) 25,000 per year
funding for college tuition, of this, 8,000 paid
directly to the college, 2005 graduation present
25,000

• Determine his gift-adjusted taxable estate?
• Gift-adjusted Taxable Estate Taxable estate
  gifts in excess of the annual allowance
• Gift-adjusted Taxable Estate 3,760,000 7,000
  6,000 6,000 14,000 3,793,000
• Of the 25,000, 8,000 was paid to the school, so
  it is not counted in the tax-free gift. Only the
  17,000 is counted, less 10,000 in 2002 and
  11,000 exclusions in 2003 and 2004 or 7,000
  12,000.
• Of the 25,000, 11,000 was the tax-free
  exclusion amount in 2005, resulting in 14,000 to
  be added in excess of the allowance

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Assets 3,200,000 Insurance policy 300,000
Funeral cost 20,000 Estate administrative
costs 70,000. Charities 350,000 Each of the
past 3 years (2002-2004) 25,000 per year
funding for college tuition, of this, 8,000 paid
directly to the college, 2005 graduation present
25,000

• Determine his estate tax for 2009 on a
  gift-adjusted tax of 3,793,000?
• Estate tax use the table provided earlier
• 2009 Estate Tax 3,793,000 45 1,706,850
  the unified credit amount of 1,575,000
  131,850
• You can also take the 3,793,000 - 3,500,000
  293,000 .45 131,850

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3. Money and Marriage

• Data and Applications
• What were the 10 major principles of money and
  marriage? Why are they so important?

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Answer

• 1. The key Principles of Marriage and Money are
• 1. The family is ordained of God
• There is no higher earthly institution or
  organization. It must be first on your priority
  list
• 2. No one or nothing is more important than your
  spouse
• Your spouse has priority over all things,
  including job, hobbies, friends, money, and all
  other things
• Your spouse should know and feel it

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Answer

• 3. Partners are equal
• Your spouse is equal in all areas, including the
  responsibility with you in fulfilling your
  parental responsibilities. Neither of you should
  have power over the other. The Lord counseled
• No power or influence can or ought to be
  maintained by virtue of the priesthood, only by
  persuasion, by long-suffering, by gentleness and
  meekness, and by love unfeigned. (DC 12141)

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Answer

• 4. Partners should seek the best interests of
  the family
• All actions of the spouses should be in the best
  interests of the family.
• Since the family last throughout eternity, work
  on that which lasts longest
• 5. Financial problems are usually behavioral
  problems, not money problems
• Determine the reason for the poor behavior, and
  work on that

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Answer

• 6. Change is necessary
• None of us are perfect
• We should first work on improving ourselves
  first, then try to show our spouses-- through
  example--the best way to go
• 7. Money spent on things you value leads to
  satisfaction and accomplishment
• Know what you want to accomplish in life, then
  work on those things.
• Those should be the most important things to you.

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Answer

• 8. Financial freedom is more the result of
  decreased spending than increased income
• Happiness is not dependent on money, but our
  attitude toward our spouses and what we have been
  blessed with
• We should be willing to curb our spending on
  things that are not important
• 9. Spouses are to leave their parents and become
  one.
• Spouses need to stop the traditions of the
  fathers and do things the way they, as a couple,
  consider most important.

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Answer

• 10. The best things in life are free
• The things which are most important, the things
  which bring eternal life, are free.
• And, if you keep my commandments and endure to
  the end you shall have eternal life, which gift
  is the greatest of all the gifts of God. (DC
  147)

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5. Money and Marriage

• What were the five major issues in money and
  marriage discussed in this section? Why are they
  so important?

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Answer

• The five most common problems regarding finance
  in marriage are
• 1. Lack of financial knowledge
• Knowledge is important to make good decisions.
  We are responsible to teach our spouses and
  children so we all operate from a similar base of
  information
• But knowledge by itself is insufficient.
• You must be willing to act on that knowledge

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Answer

• 2. Lack of communication
• Relationships require communication to stay
  healthy.
• Develop processes to ensure time to communicate
  effectively in all areas of you lives (not just
  financial)
• 3. Differences in financial personality types
  and family baggage
• We were all brought up differently.
• While we cannot change how we were brought up, we
  can change how we work together as partners and
  the legacy we will leave for our children

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Answer

• 4. Lack of shared financial goals
• It is critical that partners be working toward
  the same general goals.
• Set those goals together and then work on them
  together
• 5. Lack of gospel maturity
• Gospel maturity is not just knowing what you
  should do, but doing it as well
• The more willing we are to do what needs to be
  done as a partner, the better the marriage will
  be and the more likely we will be able to return
  with our families to Heavenly Fathers presence.

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6. Defined Benefit Plans

• Data
• Greg is 60 years old and has been working for 30
  years with a company that has a defined benefit
  plan. The formula is the five highest annual
  salaries within the last ten years multiplied by
  a company determined factor of 1.5, times years
  in service (to a maximum of 33). Assuming Greg
  stays with the company until his retirement at
  age 65, an assuming his highest five years annual
  salaries average 80,000.
• Applications
• A. How much can Greg expect to receive annually
  at retirement?
• B. What is the percent of his final salary?

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Answer

• A. Greg can expect to receive
• 80,000 x .015 x 33 yrs 39,600
• B. This is 39,600/80,000 or 49.5 of his final
  salary

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7. Qualified Retirement Plans

• Data
• Bill is 55 and plans to retire in 10 years.
• Applications
• A. How much can he contribute into his companys
  Roth 403b plan in 2009 (assuming his salary is
  below the IRS determined phase-out limits)?
• B. If is company has a matching program, what
  impact will that have on Bills contribution?

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Answer

• A. Contribution limits for the 401(k), Roth
  401(k), 403(b), Roth 403(b), and 457 Plan annual
  contribution limits are
• Year Contribution Limit Catch Up Contr.
• 2006 15,000 5,000
• 2007 15,500 5,000
• 2008 15,500 5,000
• 2009 16,500
  5,500
• Since Bill is over 50 years old, he could
  contribute 16,500 plus a 5,500 catch up
  contribution in 2009.
• B. The company match will have no impact on the
  amount that bill can contribute.

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8. Qualified Retirement Plan Distributions

• Data
• Bill retired on his 60th birthday and did not use
  any of his traditional IRA balances. On December
  31st when he was 69, he had 500,000 in his 401k
  plan.
• Calculations
• A. How much would he be required to take out of
  his account the next year, i.e. the year he turns
  70 1/2?
• B. How much would he be required to take out if
  this was a Roth 401k?

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Answer

• A. From the table, his life expectancy at age 70
  is 27.4. Bill will be required to take a
  distribution of his 401k plan of 500,000 / 27.4
  or
• 18,248 the next year.
• B. If this was a Roth 401k, he would still have
  required distributions. However, if once he
  retired, he rolled his Roth 401k over to a Roth
  IRA, there would be no required distributions.
  Legislation for Roth 401k retirement vehicles
  have not yet been changed to eliminate this
  quirk.

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9. Individual Retirement Plans

• Data
• You just got out of school last year and you have
  already begun your retirement program. You have
  filled your company match this year, and have an
  additional 4,000 to invest for retirement above
  and beyond your other goals. You are discussing
  with your spouse the benefits of the Roth versus
  the Traditional IRA.
• Applications
• Which should you select and why?
• What are your assumptions that would impact your
  choice of IRA vehicle?

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Answer

• a. Which plan you choose should be based on four
  key thoughts
• What is your projected tax rate in retirement.
  If you forecast your tax rate to be higher than
  it is now, the Roth is preferred. If it will be
  lower than now, the traditional IRA would be
  preferred
• Do you need the tax break now? It the reduction
  in AGI is important, then you would choose the
  traditional
• Can you put in more money? Remember that there
  are tax benefits to the traditional, but if you
  can go without those benefits, you are actually
  putting in more money into the Roth IRA (due to
  taxes).
• Are you within allowable limits for the
  traditional or Roth? If not, you cannot invest
  in that retirement vehicle.