Main Line 844-469-3904

« October 2014 | Main | December 2014 »

6 posts from November 2014

11/14/2014

Mortgage Interest And Points Paid:Tax Deductible?

Refi

 

I often get asked questions about how much mortgage interest is deductible and what size loan to use when financing a home purchase. Also it is common to get into a discussion about if paying points to pay down interest make sense and if they are deductible. 

While every situation is different with regard to mortgage size, and I am a fan of getting the largest mortgage that one can possibly afford in most cases but not all, I will tackle the deductible nature of interest and points here to clarify how it works.

Mortgage Interest: Interest paid on a qualified residence is limited to interest on the acquisition indebtedness secured by a principal or secondary residence up to a maximum debt level of $1,000,000, plus home equity indebtedness secured by a principal or secondary residence up to a maximum debt level of $100,000.

Points Paid: Points paid on a loan are really nothing more than prepayments of interest. Generally points must be capitalized and amortized over the life of the loan. However, the points incurred on a loan that is used to buy or improve a principal residence generally are deductible in the year the points are paid. 

Points Paid on Refinance: These points must be deducted ratably over the life of the loan (amortized). If it is a second refinance the un-amortised (not deducted) points from the first refinance are deductible in full when the first refinance loan is paid off.

Choosing to pay down loan interest by paying points can help lower a payment to a level that is more affordable. Often I suggest that not doing so is the better decision. Buyers will have use of the funds used to pay the points and often through investment may be able to generate a better return on those funds than paying down the points would generate over time. However, doing so really is specific to the home purchasers own situation. In many cases, home purchases are as much an emotional decision as they are a financial decision and if paying down points to make a payment more affordable gets a buyer in the home they love and want that may in itself make paying points well worth it.

 

11/13/2014

Negative Returns In Retirement: Draw Down

 

Retirement, time to sit back relax and enjoy life. Wait for many people retirement will last 30+ years. This often means needing equities in a portfolio, riskier assets...Relax again you have an asset allocation designed to generate the needed returns, balancing risk, to get you through retirement. Wait what if when you go to generate needed income from your investments and the market is in a downward trend, multiplying the effect of the downward pressure on your portfolio...Can this significantly reduce your ability to achieve your retirement income goals because now you have less working toward those goals?

Positive returns over loner periods of time for a portfolio although very important often do not show the truth of how generating returns effect a persons ability to use their money and  meet their real goals of a specific lifestyle. Yes you will here that the stock market averages a certain rate of return annually, 7% or 8% or..., and that over time history has shown us stocks will go up and we can plan based off of these potential returns. This is true for most assets. The problem with this thinking while in retirement is understanding that most assets do not generate these returns in a "sequential" fashion. Meaning that although the market may historically return any given rate of return over time the course that those returns take are not predictable and reliable. 

DrawDown

 

This was particularly on display for many investors nearing or in retirement in the 20008 to 2010 period. Recently in an article I read online written by a wise advisor, this concept was well articulated by using a rain fall analogy. I being a skier will give one using snow fall....

My favorite ski resort advertises a long season typically starting in early November and running all the way through the end of June and often as far as the 4th of July. They also boast about 400+ inches of seasonal snow fall...Wow...50 inches of snow per month not bad, 4 feet of snow each month no wonder they can make it to July often. Wait, there are years they close early and often the conditions are lousy. Why? The answer is that 200+ inches has fallen in any given month of the season at a time and some months there is none. This can make for a tough season especially those of us who travel 5+ hours to get there on the weekends when we have the time during the season. Would be nice to be able to enjoy the powder when it falls. Alas I cherish the days I get when their is fresh powder. I have gone seasons with out it!

Now back to the point of investing, retirement and understanding the need to manage for downward returns...

While in retirement it is good to invest at least some portion of your retirement assets in investments or with investment managers that have a mandate of minimizing the effect of the decline of the asset(s). 

Understanding the concept of maximum draw down and using strategies and managers that seek to minimize the effect of this on a portfolio of investments can be extremely important for investors nearing or in retirement. You need your assets to last. Looking at managing the depth of your portfolios downward performance can greatly enhance the potential of your meeting your true investment goals, which are to live the lifestyle you want or can for as long as you can.

Selecting the right bonds, mutual fund managers, ETF's, Separately Manged Account Managers or using sophisticated options strategies to structure a portfolio in order to help minimize draw downs can limit upside but it can also help with making sure the portfolio is less depleted in a down market when income generation is needed.

11/06/2014

Roth IRA Conversions Benefits

Not working

 

Roth IRA conversions: are often a great strategy used to minimize the effects of taxation on your hard earned and saved money. Taxes are important to understand in managing our wealth. It is not just about how much money we have it is also about how much we can use for our own purposes.

With a Roth IRA conversion investors convert a Traditional IRA to a Roth IRA. This allows for the utilization of the Roth IRA rules which can often be more beneficial than Traditional IRA rules. Primarily the benefit of not having to pay income tax when you withdraw funds for retirement out of a Roth IRA is what is attractive to investors. Not everyone is eligible to contribute to a Roth IRA. Individuals are not allowed to contribute if their income exceeds Roth IRA income limits.

People that do not qualify to invest in a Roth IRA often end up investing in 401k plans and Traditional IRAs. Traditional IRAs also are subject to income limits and other eligibility requirements, allow for a tax break on the contribution but you pay income taxes in retirement. 401(k) plans have similar tax treatment on contributions and distributions in retirement to a Traditional IRA. Roth IRAs are opposite.

The IRS allows for individuals to convert their Traditional IRAs to Roth IRAs without income limitations. There is no 10% early withdrawal penalty as long as the funds are moved into the Roth IRA in a 60 day period. Most often the conversions are done immediately.

When you convert to a Roth IRA from a Traditional IRA you pay income tax on the contributions. The taxable amount that is converted is added to income and regular income tax rates are applied.

Why Convert?

Paying as little tax as possible allows for investors to enjoy more of their money. Conversion to a Roth IRA generally allows investors to save money in the long run. Choosing a year where an investor might know their taxable income is going to be lower than others allows them to execute a conversion in a low income tax bracket year. If the government announces upcoming income tax rate increases this also provides a reason to execute the conversion in the existing lower tax bracket year.

The benefit then becomes that in retirement the entire balance of the funds in your Roth IRA are available for investors to use and there is no after-tax balance calculations to manage. The original owners of the Roth IRA are also not subject to Required Minimum Distributions (RMDs) beginning at age 701/2 like owners of a Traditional IRA and other retirement plans are. This is often also perceived as a potential benefit for owners.

Please keep in mind though that high income earners may convert to a Roth but may not be able to make additional contributions of funds.

For more information and an analysis on how this strategy might benefit you please call us at 310-433-5378 or contact us via the web at www.prominencecapital.com

11/05/2014

Retirement Accounts: Creditor Protection?

Keep my money

Often clients are looking for ways to protect there assets from creditors and have questions about whether their IRA provides any protection.

The answer is that retirement accounts are protected from creditors to varying degrees under state and federal bankruptcy laws. This includes most IRA accounts.

However, there is one situation that has recently been changed that investors should understand. Recently the U.S. Supreme Court case of Clark vs. Rameker, June 12 2014, held that Inherited IRA's are NOT protected in bankruptcy. The ruling was made after the court decided that Inherited IRA's are not retirement accounts and thus not eligible for creditor protection.

 

11/03/2014

Mortgage Underwriting: Asset Depletion

 

Home

Qualifying for a mortgage loan has gotten more and more difficult since the real estate bubble in the early and mid 2000's lead to the great recession. Many different underwriting techniques that were previously common to see have become less common these days. One such technique, Asset Depletion, is one of those less commonly found in today's mortgage lending community.

Asset depletion is a technique originally designed to allow borrowers who are asset heavy and employment income light to qualify for a mortgage. This technique was especially beneficial for business owners who show low income levels or wealthy individuals with insufficient income or difficulty providing a qualifying employment history.

Today the ability show great amounts of income and several years of history of it tend to dominate what lenders are looking for. However some lenders are willing to use asset depletion techniques to help borrowers qualify for their loans.

Asset depletion is a calculation where a borrower's liquid assets are entered into a calculation to bring up the amount of monthly income they have in order to make mortgage payments. Generally the calculation is a borrowers total assets divided by a set number of months, such as 360 for the standard 30 year loan. Qualifying assets tend to be only liquid assets such as cash, investment accounts and retirement accounts. 100% of the assets in cash accounts and non retirement liquid investment accounts typically qualify. For retirement accounts the amount that qualifies is generally about 70% of the asset base and could potentially be close to 100% if the borrower is over 591/2 years old. Check with your lender to see what they are willing to use in their calculation. 

For instance a borrower who has $1,000,000 in liquid assets and $500,000 in retirement assets may have qualifying monthly income of $3,750. ($1,000,000 + $350,000=$1,350,000; divided by 360)

This is an underwriting technique and does not require the borrower to actually deplete their asset base to make payments.

Asset depletion is not a gurantee to mortgage approval. It is a technique that only helps satisfy the income portion of the underwriting process. Lenders that use this technique often need a good understanding of the borrowers specific situation before they would even grant using this technique as part of the potential approval process.

Investor Life Cycle: Where are you?

Understanding how to invest money to appropriately meet a clients needs and expectations is the job of an Investment Management Professional. Determining where clients are in their life cycle needs to be determined in order to make appropriate decisions. Typically concepts such as Time Horizons, Risk Tolerance, Investment Knowledge, Current Income and Years of Investing Experience are discussed to determine how to appropriately allocate capital.

There are many other concepts often discussed along with these but an understanding of where someone is in their investment life cycle can also be very helpful to making decisions.

What is the Investment Life Cycle?

It can be defined many ways but I find the following three phase approach to be simple and helpful when combined with other concepts for deriving portfolio construction and selecting specific investments.

  1. Accumulation Phase-earliest stage in an investors life cycle where the investor is accumulating assets. There is a long time horizon and often more risk can be accepted because there is more time to achieve objectives. In this phase there can often be short term needs that must be considered and the appropriate amount of investment risk taken: such as when a large purchase is looming. For instance the purchase of a home.
  2. Consolidation Phase-this phase is typically when wealth accumulates more rapidly. In this phase many of life's large purchases and immediate cash needs are already addressed and income is often significantly out pacing expenses allowing for more rapid building of wealth. Time horizon to the next phase (Spending Phase) is getting shorter over this phase.
  3. Spending Phase-this phase is signified when earned income has ended and investment income from accumulated wealth is now the primary source for living expenses. Typically called retirement. Longer life expectancies can lead to long time horizons in this phase. Some would say this is the phase where one would now enjoy the utility of the wealth they have created. Risk tolerance tends to be significantly lower as asset fluctuations are less desirable. However some risk is often required for potential growth to combat the prospects of long time horizons in this phase.

Understanding which phase you fit into can greatly help with understanding why certain investments are necessary and how they fit into your overall investment portfolio. Knowing what phase you are in can make the uneasy feelings about investments more understandable as to why they may be necessary.

To discuss your specific situation please contact Prominence Captial at 310-433-5378. We can also be contact via the web at www.prominencecapital.com