Book Review – The Value of Debt

When it comes to debt most people have a reflex aversion to it.  It’s not surprising considering that most popular financial sources all claim that you should get rid of all of your debt as soon as possible.  I recently read “The Value of Debt: How to Manage Both Sides of a Balance Sheet to Maximize Wealth” by Tom Anderson.  Anderson takes a different view of debt.  He explores how to use your personal balance sheet to enhance your net worth.   He has five tenets on how an individual or family should approach debt.  One of the tenets is to Explore Thinking and Acting Like a Company.  The goal or most if not all companies is to make a profit.  A lot of the principles that CFO’s use towards strategically using debt are applicable to families, but rarely used.  An example of a company using debt when you wouldn’t think they would need to is Apple issuing $39 billion in bonds since 2013 even though they have $178 billion in cash reserves.  Anderson is not suggesting that families start selling their own bonds, but there are other strategies that can be utilized to achieve your goals.  The main one is creating an Asset-Based Loan Facility.

Anderson claims that the strategic use of debt will allow you to have:

  1. Increased Liquidity – having more ready access to liquid funds or cash
  2. Increased Flexibility – having more options for addressing the direct and indirect costs of financial distress
  3. Increased Leverage – in good times, you have the ability to enhance and accelerate the accumulation of wealth
  4. Increased Survivability – a diminished likelihood that real survival issues, to your way of life or to life itself will arise.

A couple of the strategies in the book I liked in addition to the Asset-Based Loan Facility were options on how to finance cars, 2nd homes, boats, or other luxury items as well as how to maintain an ideal debt ratio..  It’s not about buying what you can’t afford, but about implementing a strategy to better purchase things you can afford and how to maximize value.

Anderson followed that book up with the 2015 release of “The Value of Debt in Retirement: Why Everything You Have Been Told is Wrong.”  I’m looking forward to reading that one too.

Are You On Financial Track?

Do you ever wonder if you are on track financially?  Sure. you can find plenty of websites out there with calculators that will say by age 30, 40, or 50 you should have various amounts saved.  But is it possible to lump everyone together based on a certain age?  What if you want to retire at age 55, and not at 65 years old?  Or what if you want to purchase a retirement home in the Hamptons?

Utilizing the KISS protocol I like to take the approach of creating a dashboard that tracks specific goals.  A goal that you track can be anything.  You may want to ensure things like you are on track to retire at a specific age,  see your net worth grow by a percentage each year, generate a certain amount of passive income, or that you will have enough college savings for your kids.  Below is a sample dashboard that shows how you can take different measurements of your health at different times


For each of the measurements (Net Worth, Education Savings, Passive Income) the 1, 5, and 10 year goals in the box are generated by doing an analysis on what someone wants to achieve.  For example in the net worth section, this person wants to hit specific net worth goals ($2, $5, and $12 million) over the next 1, 5, and 10 years.

In the Education section they said that they wanted to have enough saved by the time their child goes to college to cover 100% of the cost.  In this case we could take a yearly measurement of their college savings and make determinations if they should save more or less, or be more or less aggressive  with their investments.  Or maybe they are on track and they do not have to make any changes.

In the Passive Income section usually everyone’s initial goal is to achieve financial independence by having enough passive income to cover all of their expenses.  The first step with the analysis would be to  take a look at how much passive income their investments are currently generating and then see what the gap is to get to financial independence.  From there we would see how much every year the would have to save and allocate to income generating investments.

Determining and tracking your financial health is not rocket science.  But it does take a system and a discipline to constantly measure and adjust what you are doing so that you stay on track and get to where you want to go.

Find Unclaimed Money


One of the best feelings is reaching into your coat or jeans pocket and finding money you didn’t think you had.  It doesn’t matter if it’s a $1 bill or a $20, it still makes it a good day.

Your coat pocket is not the only place you can find money you didn’t think you had.  Nowadays you can find it online.  Unclaimed money essentially hides in plain sight.  You can find things like abandoned bank and investment accounts, uncashed dividend checks and paychecks, tax refunds and funds due from canceled insurance policies.

An estimated 2.5 million claims totaling $2.5 billion were returned to rightful owners in 2012, according to the National Association of Unclaimed Property Administrators.

Here are steps to see if you have any that is yours.

  1. Go to, a site endorsed by the National Association of Unclaimed Property Administrators.  It lets you search in many states at once, free of charge
  2. Check in all of the states where you have lived.  Search under maiden names, trusts, or any businesses that you may have owned
  3. If you find some money that is associated to you there will be a claims process to go through.  The documents required to complete the claim will vary.

I looked for myself a couple of months ago and found about $50 that I was owed.  I filled out a form and in a month a check for $50 was mailed to me.

Get Your Financial S*#t Together


At the start of the year many people make New Years resolutions to get a handle on and improve their finances.  Unfortunately by now many of those people have given up on those resolutions.  The main reasons for abandonment are usually not having enough time to focus on the task or feeling that it is too daunting to put a financial plan together.

If you want to get a better handle on your finances here are five concepts that you should start with to build the foundation of your financial roadmap.

 Net Worth

Yes, you have one. This is the sum total of your assets (bank account balances, savings, investments, etc.) minus your debts (loans, mortgage, credit card debt, etc.). Your net worth is the easiest way to get a big-picture perspective on your finances and allows you to see if you are making your progress to your financial goals.

Here is one of many net worth calculators that exist. Take 5 minutes and calculate it.

Cash Flow

I often talk about the importance of getting a handle on Cash Flow (the income you have coming and the money you spend on expenses going out).  It is the foundation of getting control of your personal finances.

A lot of people think that budgets are only for people who have too much debt, are tired of never having money, have trouble paying the bills, or are blindsided by unexpected expenses.  That couldn’t be further from the truth.  Everyone should have a handle on what they are spending. Your living expenses are just one part of the cash flow puzzle.  How can you know how much you should be saving for retirement, investing for your child’s education, or have in an emergency fund if you do not have a handle on your cash flow?

Keeping track of all of your expenses can be a tedious process.  Do it for a month to understand where you are.  Keep track of every dollar you spend for a month and all of your income that you earn.  Then figure out what expenses you pay annually, semi-annually, or quarterly, and add their monthly amount to your tracker.  Even if you use a pen and paper or a spreadsheet to track everything the exercise will be valuable.


Liquidity is how accessible your money is.  Cash is the most liquid your money can be, because you can access it immediately.  Your home on the other hand would be on the opposite side of the liquidity spectrum.  Even if you sold it today, it would probably be a couple of months before the sale closed and you had the proceeds available to you.  Never mind the fact that you would need to find somewhere to live.

You never know when an emergency will arise.  You want to have enough money fully liquid but not too much where you have your dollars sitting around not earning anything.  Figure out how much time it would take for you to get your hands on $10,000, $25,000, $100,000, and $250,000.

Passive Income

I call passive income the holy grail of personal finance because it gives you the ability to achieve financial independence.   If you wanted to you would have the ability to quit your job, yet still pay for all of your expenses.

A valuable exercise is to use the assets in your net worth statement you calculated above and figure out  the amount of income those assets could generate if you stopped working today.  Then set some goals on how much passive income ($100,000 a year, $250,000, $1,000,000, …)  you would like to have and put a plan on the actions needed to achieve that.  Here is an article I wrote on how to execute on that topic

Planning for a Catastrophe

One question that is critical to answer is how are your family’s expenses paid for if you and/or your spouse die or become disabled.  If you calculate your passive income above and you do not have enough to cover your expenses, or if your assets cannot generate enough income each year until you are slated to stop working it may be wise to look at adding life and disability insurance.

There are different ways to figure out how much life insurance you need.  My favorite is to focus on the income that will be lost if something happens to you.  Here is a calculator that helps you calculate how much life insurance you should purchase.

The title of this article was inspired by a great blog I came across at On that website you can get free templates on life and death planning topics like a Will and Power of Attorney.  The author started the blog when in 2009 her husband died in an accident.  She was shocked by the number of things they had ignored or left disorganized.

Getting a handle on your finances can seem like a daunting task, but if you start off focusing on these 5 areas you’ll create a foundation for your finances.  Once you have these in place the next area I would focus on would be with planning for goals like (Ensuring you have enough money to retire, paying for your children’s education, buying a vacation home, …)

Everyone can use some passive income

Passive income is looked at as the holy grail of finance and investing.  When you think of it who wouldn’t want $100,000 or $1,000,000 of income coming in each year without having to spend an hour at the office.  It gives you more freedom, flexibility and can help you achieve financial independence.  Most people think that having passive income is something that is unachievable, but it can be done by setting a goal, putting together an action plan, and executing that action plan.

Outside of putting their kids through college and not running out of money in retirement, passive income one of the most popular financial goals I hear from my clients.  But even after reading books like Rich Dad / Poor Dad or The 4 Hour Week that emphasize the importance of passive income , you’ll probably still wonder what you have to do to achieve it.

Set a Passive Income Goal

The first step is to set a goal for how much passive income you would like.  Everybody has a different level of income that will bring maximum happiness due to different desires, needs, and living arrangements.  It’s up to you to find out your optimum income level.  Some people shoot for enough passive income to achieve financial independence and the ability to cover all of their expenses.  You do not need stop at $100,000 though, maybe you want $1 million or $5 million a year in passive income.  This is the time to dream, and dream big!

Put Together an Action Plan

Goals are great, but they come to life when you put an action plan together that shows how to achieve that goal.  Passive income starts with savings.  Without a healthy amount of savings, nothing works.  You must create a system where you are saving X amount of money every month, investing Y amount every month, and working on Z project until completion. Things will be slow going at first, but once you save a little bit of money you will start to build momentum.

We’ll look at a simple example that shows how you can achieve that $100,000 a year in income goal using real estate.  Let’s say if you need $50,000 of cash to put a down payment and purchase a $200,000 investment property that produces $20,000 of net income each year.  You would have to save and allocate $50,000 in 5 buckets over a period of time to purchase the 5 properties.  Let’s say you can save $25,000 a year.  You would be able to purchase a new property every 2 years and in 10 years you would have the 5 properties producing $100,000 a year in income.  I am simplifying things a little. In reality, once you started purchasing a couple of properties, you could start using the equity in each property to purchase additional properties. Your yearly net income would go up each year also as you are raising rents.  On the downside a property that cost $200,000 today will most likely cost more in the future so you will need more than $50,000 to purchase each property.  Also increasing would be things like property taxes and other expenses.

Real estate is not the only thing that produces passive income and I recommend having different sources added to your mix.  Things like dividends payments from stocks or interest from acting as a bank and lending out money are other examples that work.  Another example is royalties from things like authoring a book or writing or recording music.

 Force Yourself to Start

Starting is the hardest part, but also the most important.  Circle a date to get started and push aside any distractions.  Once you get started you can use a thermometer to track your goal and ensure you are progressing as you had planned.


Small Business Retirement Plans


The vast majority of businesses in the U.S employ fewer than 100 workers, yet these employees have less access to things like retirement planning vehicles and other benefits than those who work for larger companies.  Here’s an overview of all the major features of each kind of retirement plan, including SIMPLE, SEP, 401(k), defined-benefit, and profit-sharing plans.  In choosing the right plan, it pays to have a working familiarity with the different kinds of retirement options.

Below, I’ve compiled the major features of each type of plan, along with an overview of benefits


A SEP will allow you to set up a type of IRA for yourself and each of your employees.  You must contribute a uniform percentage of pay for each employee, although you won’t have to make contributions every year.  SEPs have low start-up and operating costs and can be established using a two-page form.  As a small employer, you can also decide how much to put into a SEP each year, offering flexibility when business conditions vary.

Key Advantage: Easy to set up and maintain

Employer’s role: Set up plan for selecting a plan sponsor and completing IRS Form 5305-SEP.  No annual filing requirements for employer

Contributors to the plan: Employer contributions only; 100% tax-deductible

Date to set up new plan: By due date of tax return (including extensions)

Maximum annual contribution (per participant): Up to 25% of W-2 wages or 20% of net adjusted self-employment income for a maximum of $52,000 in 2014

Contributor’s options: Employer can decide whether to make contributions year-to-year

Minimum employee coverage requirements: Must be offered to all employees who are at least 21 years of age, were employed by the employer for 3 of the last 5 years and had earned income of more than $550

Participant Loans: Not allowed

401(k) PLAN

401(k) plans – both traditional and Roth – have become a widely accepted retirement savings vehicle for small businesses.  They can vary significantly in their complexity

Key advantage: Permits higher level of salary deferrals by employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. Also may require annual nondiscrimination testing to ensure plan does not discriminate in favor of highly compensated employees.

Contributors to the plan:  Employee salary reduction contributions and/or employer contributions

Maximum annual contribution (per participant): Employee: $17,500 ($23,000 for participants 50+) in 2014.

Employer/employee combined: The lesser of 100% of compensation or $52,000 ($57,500 including catch-up contributions for 50+) in 2014.

Contributor’s options: Employee can elect how much to contribute pursuant to a salary reduction agreement. The employee can make additional contributions, including possible matching contributions, as set by plan terms.

Minimum employee coverage requirements:  Generally, must be offered to all employees at least 21 years of age who have completed a year of service with the employer

Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.

Participant loans: Plan may permit loans and hardship withdrawals.

Withdrawals:  Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty


Provide a fixed, pre-established benefit for employees.  This traditional type of pension plan is often viewed as having more value by employees and may provide a greater benefit at retirement than any other type of plan.  However, defined plans are more complex and therefore costlier to establish and maintain than other types of plans.

Key advantage: Provides a fixed, pre-established benefit for employees; allows higher tax-deductible contribution for older employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required. An actuary must determine annual contributions.

Contributors to the plan: Primarily funded by employer

Maximum annual contribution (per participant): Actuarially determined

Maximum annual benefit: The maximum annual benefit at retirement is the lesser of $210,000 or 100% of final average pay

Contributor’s options Employer generally required to make contribution as set by plan terms

Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year

Vesting: Rights to benefits may vest over time according to plan terms

Participant loans: Plan may permit loans


Your contributions as an employer to a profit-sharing plan are discretionary.  Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.  As with 401(k) plans, profit-sharing plans can vary greatly in their complexity.

Key advantage: Permits employer to make large contributions for employees

Employer eligibility: Any employer with one or more employees

Employer’s role: No model form available. Advice from financial institution or employee benefit advisor may be necessary. Annual filing of Form 5500 is required.

Contributors to the plan: Annual employer contribution is discretionary.  Date to set up new plan By year end (generally Dec. 31)

Date contributions are due:  Due date of tax return, including extensions

Maximum annual contribution (per participant):  The lesser of 100% of compensation or $52,000 in 2014. Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.

Contributor’s options: Employer makes contribution as set by plan terms. Employee contributions, if allowed, are set by plan terms.

Minimum employee coverage requirements: Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.

Vesting: Employee salary reduction contributions and most employer contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms (5-year cliff or 3-7 year graded, or 2-6 year graded if top-heavy)

Participant loans: Plan may permit loans

Withdrawals: Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination). Early withdrawals subject to tax penalty.


SIMPLE (Savings Incentive Match Programs for Employees of Small Employers) plans are usually set up as IRAs. They are easy to establish and inexpensive to administer. Your contributions as an employer are flexible: you can either match employee contributions dollar for dollar—up to 3% of an employee’s compensation—or make a fixed contribution of 2% of compensation for all eligible employees.

Key advantage: Employers who set up a new plan may be eligible for a tax credit of up to $500 a year for the first 3 years to help defray the costs of starting the plan. File IRS Form 8881

Employer eligibility: Any employer with 100 or fewer employees that does not currently maintain another retirement plan

Employer’s role: Set up plan by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. No annual filing requirements for employer. Bank or financial institution processes most of the paperwork.

Contributors to the plan: Employee salary reduction contributions and employer contributions

Date to set up new plan: Generally by 10/1 of the year before the start of the plan

Date contributions are due: Due date of tax return, including extensions; elective deferrals by participants due 30 days after the last day of the month for which contributions are made

Maximum annual contribution (per participant): Employee: Up to $12,000 in 2014 ($14,500 if age 50+). Employer: Either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years); or contribute 2% of each eligible employee’s compensation (up to $260,000 of compensation in 2014).

Contributor’s options: Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee’s compensation (up to $260,000 of compensation in 2014).

Minimum employee coverage requirements:  Must be offered to all employees who have earned income of at least $5,000 in any prior 2 years and are reasonably expected to earn at least $5,000 in the current year

Vesting: Employer and employee contributions are immediately vested 100%

Participant loans: None allowed

Withdrawals:  Can occur any time after contribution is made, but 25% penalty if withdrawal occurs during 2-year period beginning on the first day of participation

2014 Last Chance Financial Planning

Take the 2014 Last Chance Financial Planning Challenge and determine if you need to take any actions before the end of the year to get your financial house in order.

It’s a simple checklist that covers only those areas that need attention at year end – taxes, retirement savings, investments, insurance, and medical. It might take you five minutes, tops.


Variable Annuities – Love Them or Loathe Them

Fixed income annuity contracts have gained popularity with conservative investors as a safe means of growing their money on a tax-deferred basis.  In the bull markets of the ’80s, a new type of annuity contract allowed investors to participate in the debt and equity markets and enjoy the benefits of annuities at the same time. These vehicles are known as variable annuities because of the variability of the returns realized.  Not many investments have a love/hate relationship from both investors and financial professionals as variable annuities.  Let’s explore why there is controversy with these vehicles.

An immediate annuity is where you exchange your lump sum of money for an income stream paid out to you for as long as you.  With a deferred annuity, your money either earns interest (fixed) or is invested in mutual fund-like sub-accounts (variable annuity) until you either withdraw it or annuitize it (described below).   There are only two ways to receive a lifetime income stream using annuities; annuitization and drawdown.

Annuitization – This is the original design for receiving lifetime income payments from an annuity. You hand the insurance company a lump sum of the money and the insurance company pays you a monthly stream of income for the rest of your life.  The size of that monthly stream is based on how big the lump sum you give the insurance company, your age, and what the interest rates are at the time you annuitize.   If you choose to annuitize, you may want to consider structuring the  policy as “Life with Installment Refund” or “Life with Cash Refund” so that you guarantee a lifetime income stream, but also guarantee that 100% of your money will go to your listed beneficiaries if you die early in the contract. Below are some of the positive and negative points to consider when it comes to annuitization.

Drawdown – This strategy is used when you attach an income rider to a deferred annuity contract like a variable annuity or a fixed-indexed annuity.  Income riders should be used for income planning at a specific date down the road, or target date. Drawdown really means subtraction, so when you start receiving your lifetime income payments, that amount is subtracted from your contract totals.


  • Flexibility — Income riders allow you to start and stop your lifetime income stream, and you can also change your initially planned start date if desired.
  • Target Date Planning — Drawdown strategies using income riders work best when you need your lifetime payments to start two years or more in the future.
  • Hybrid Benefits — Deferred annuities with attached income riders can also have additional guarantees like death benefits, confinement care benefits, or growth strategies that allow you to possibly accomplish more than one goal with one annuity.


  • Low actuarial payout — Income rider drawdowns always have a lower actuarial payout % than if you annuitized. Having the flexibility that an income rider provides equals a lower payout.
  • Rigid contract rules — This one is really scary. A vast majority of variable annuity policies with income riders have very strict rules about how to properly access the contract for lifetime income. With some, if you take out more than the policy allows, it completely destroys the contractual guarantees. There will be some true horror stories in the near future concerning this issue.
  • Rider growth can’t be taken lump sum — Income riders used for target date income planning sometimes have annual guaranteed growth rates as high as 6% to 8% during the deferral years. It’s important to know that this amount cannot be accessed in a lump sum and can only be taken in lifetime payments, and that annual growth % stops when you begin your payments.

Fees and Expenses – Along with the potential to make a lot of money, you’ll also deal with several fees and expenses on either an annual, quarterly, or monthly basis.

  • Contingent-Deferred Surrender Charges. Like fixed and indexed annuities, variable annuities usually have a declining sales charge schedule that reaches zero after several years. You may have to pay an 8% penalty to liquidate the contract in the first year, a 7% penalty the next year, and so on until the schedule expires.
  • Contract Maintenance Fee. To (presumably) cover the administrative and record keeping costs of the contract, this fee typically ranges from $25 to $100 per year, although it is often waived for larger contracts, such as those worth at least $100,000.
  • Mortality and Expense Fees. These cover many other expenses incurred by the insurer, such as marketing and commissions. This fee can run anywhere from 1% to 1.5% per year; the industry average is about 1.15%.
  • Cost of Riders. Most variable annuity contracts offer several different types of living and death benefit riders that you can purchase inside the contract. These riders provide some additional guarantees, but each rider usually costs 1% to 2% of the contract value.

Taxes – Fixed, indexed, and variable annuities all get taxed the same way. Any growth in the contract is taxable, and getting your principal back is not. Each payment will reflect the ratio of growth to principal on your contract. If you doubled your money, then half of each disbursement will be taxable. For example, if a distribution is taken from a $300,000 contract for which $150,000 was originally contributed, then the ratio of principal to gain is 50/50. Therefore, half of each distribution is counted as a tax-free return of principal. And don’t forget, as with most other plans, any money you withdraw before you’re 59.5 is subject to a 10% early withdrawal penalty from the IRS.

Variable annuities can provide great returns, but they’re the riskiest type of annuity contract you can buy. Unlike fixed and equity indexed annuities, variable annuities do not guarantee your principal investment, interest, or other gains.

Only after you truly understand your own situation can you honestly evaluate variable annuities as a suitable investment alternative for you. It’s also important to know that the universe of variable annuity products is vast, and that their features and expenses vary widely, so it would be difficult to form a judgment based on any one product.

Estate Planning Using Roth IRAs and Life Insurance

Both Roth IRAs and cash value life insurance policies offer compelling tax benefits for the right people.  Life insurance and Roth IRAs have a lot in common. They are both often used as wealth transfer tools to help facilitate an efficient transfer of assets from one generation to the next. Despite their many similarities, however, Roth IRAs and life insurance are very different and the rules that apply to one don’t always apply to the other.

Advantages of a Roth IRA – Roth IRAs are simply a type of investment account that provides tax advantages to the stocks, bonds, funds or other assets held within them. Roth IRAs give the account holder a tremendous amount of flexibility when it comes to choosing investments. Expenses in stock mutual funds and direct investment in exchange-traded funds, stocks and bonds are frequently lower than with cash value life insurance — especially in the short term. This is due to the cost of insurance itself, as well as to the commission structure of life insurance products:  You don’t write the check, but if you buy a permanent life insurance contract, you will usually have less cash value than you contributed to the policy in the early years of the contract, unless you are transferring a lump sum.

Advantages of Life Insurance – Life insurance is unique among investment or savings vehicles in that the life insurance company will provide a large tax-free death benefit to the beneficiary in the event the insured dies. This is the primary reason to buy life insurance.  Life insurance cash values also don’t impose a 10 percent penalty on withdrawals. You can access your cash value in a policy penalty-free, at any time, and for any reason.

Differences between a Roth IRA and Life Insurance

Life Insurance Protection – Cash-value life insurance combines an insurance policy with an investment account. This means that if you die while investing money in life insurance, your heirs will receive a sizable death benefit that will be much more than the money you paid into your account. A Roth IRA is only an investment account. If you die with this account, your heirs only receive the money you’ve invested. 

Rate of Return – Investments in a Roth IRA will grow faster than the same investments in life insurance solely because in a Roth IRA you do not have to pay for that life insurance expense.

 Health Exam – To qualify for life insurance, you need to pass a health exam. The insurance company might check your health records, send over a nurse to give you a physical or ask you to get a checkup with a doctor. If your health is too poor, you could get a rated, more expensive policy that would hurt your investment return. It’s possible to get denied insurance altogether. Because a Roth IRA is just an investment account, no health exam is needed to use this plan.

Contribution Restrictions – There are some restrictions on investing money into a Roth IRA. As of 2014, you can only invest up to $5,500 a year into a Roth IRA if you are younger than 50 and up to $6,500 a year if you are 50 and older. In addition, if you earn over a certain amount of income the amount of your contribution may be reduced or you may not be able to contribute at all.  There are no contribution restrictions on life insurance. You can invest as much money per year as you want, and your annual income doesn’t matter. 

Early Withdrawals – The investment gains in a Roth IRA are only tax-free if you take them out when you are 59 1/2 or older. If you take your gains out earlier, the IRS charges income tax plus a 10 percent penalty. With life insurance, you can take out your money through a loan whenever you want. This makes it a better choice for early retirement.

 Reasons why whole life insurance is not like a Roth IRA

No Interest Free Withdrawals – The reason some people fall for this scheme is that the money in a whole life insurance policy does grow in a tax-protected manner, and when you borrow the money from the policy later in life (remember you can’t withdraw the money, because that’s taxable, so you borrow it), it comes out tax-free “just like a Roth IRA.”  However, it is not interest-free.  Just like when you borrow from a bank, when you borrow from an insurance policy you have to pay interest.  It doesn’t seem fair, I know, but that’s the way life insurance works.  You have to pay interest to borrow your own money.  When you withdraw from your Roth IRA, you owe neither taxes nor interest.

Excessive Fees Lower Returns – Roth IRAs can be extremely inexpensive.  There is no fee at all to open one at Vanguard.  They also have no closing fees.  The expense ratio for investments can be as low as 0.05% a year.  Try comparing that to the typical whole life policy.  The insurance policy not only has a number of “garbage fees,”  The more you pay in fees, the less that goes toward the investment, and the lower your returns.

You Cannot Stop “Investing” – With a Roth IRA, if you make less in any given year or just decide you want to blow your money on a boat, you can do that.  Not so with a life insurance policy.  If you don’t pay the premiums, the policy will lapse.    You could argue that this is a pro or con for a life insurance policy.  It is a negative because you do not have flexibility that you do with other investment vehicles but it does serve as a forced savings plan which some people need.

Different Asset Protection And Estate Planning Treatment – Roth IRAs and whole life insurance may be treated very differently when it comes to asset protection and estate planning issues.  Depending on the state, some or all of your Roth IRA may be protected from creditors.  The same goes for the cash value in a whole life insurance policy.  In some states one is protected more than the other, and vice versa in other states.  In some states neither receives much protection, and in other states both are completely protected.  The point is they aren’t substitutes for each other.  The same goes with estate planning issues.  A Roth IRA passes to heirs income tax-free but subject to any possible estate taxes.  It can be “stretched” to allow for additional years of tax-free growth for heirs.  The cash value of a whole life insurance policy disappears when you die, and your heirs are paid the death benefit (minus any money you borrowed out of the policy) without having to pay income or estate taxes on it.  Any additional earnings on that money, of course, would be fully taxable to the heirs.  The money in both a Roth IRA and whole life insurance passes to heirs outside of probate.  Both have their positive aspects, but they are very different.

If you’re looking to leave a legacy to your heirs when you die, there are many tools to consider. Life insurance and Roth IRAs are but two of the many options we’ve chosen to contrast here today. In some cases, life insurance may not be available due to poor health. In other cases, such as when your beneficiaries will be in a lower bracket than you are now, there may be a greater net benefit by leaving them larger amounts of tax-deferred accounts, like IRAs instead of a smaller amount of Roth IRAs. The bottom line is that every situation is different and there’s no one-size-fits-all solution. Do your homework, seek competent advice and give yourself the best opportunity possible to achieve your goals.

Tax filing statuses

Your tax filing status has a major impact on what you’ll pay in taxes for the year. There are five official filing statuses, and the one you pick determines whether you can take certain tax deductions or exemptions that could lower your final tax bill.

Single – This applies to never-married, unmarried and divorced taxpayers. You are considered single for the whole year if you were legally single on the last day of the year.

Married filing jointly – You are considered married for the whole tax year as long as you were married on the last day of the tax year.  Same-sex marriages are now recognized for federal purposes, including tax filing, even if their home state does not accept such marriages as legal. When you file jointly, both spouses report all their income on one Form 1040. Both filers may be held responsible for any tax (or subsequent penalty and interest) due.

Married filing separately – Here couples segregate their income, deductions and exemptions and file two individual returns. This might be advisable in cases where, for example, one spouse had large medical expenses. Because these costs must exceed a percentage of the filer’s income before they are deductible, using only the eligible spouse’s earnings by filing separately might make that deduction threshold more attainable.

Most people find that filing jointly is the best way to go, but there are instances when filing separately is more prudent.

Reasons to File Jointly

  • More deductions and credits are available. Filing jointly gives you access to more credits, including the child and dependent care, earned income, and the elderly and disabled credits. You can also take advantage of deductions for college tuition and student loan interest. Generally, these are not available if you file separately. Consult the IRS website for a full list of available deductions and credits for married couples filing jointly.
  • You can deduct IRA contributions or contribute to a Roth. As long as you meet income requirements for married filing jointly status, you can deduct traditional IRA contributions or contribute to a Roth. On the other hand, if you file separately, you may lose the ability to deduct or contribute because income requirements are much more strict.ü  You may pay less in taxes. The taxes you’ll pay when filing jointly are usually lower than if you combine the taxes due on two separate returns.
  • It’s easier if you itemize. If you itemize, filing jointly is often your best option. If you file separately and one spouse itemizes, then the other needs to also, even if the itemized deductions are less than the standard deduction.
  • It’s more convenient. It’s faster to simply file one, unified return. Unless other reasons are very compelling, you will likely want to file jointly.

Reasons to File Separately

  • You can deduct excessive unreimbursed medical expenses. Because you can only deduct medical expenses in excess of 7.5 percent of your adjusted gross income, filing separately can allow one spouse with heavy medical expenses to deduct more of them against their income only.
  • You can protect yourself from an unethical spouse. If your significant other tends to be more “creative,” so to speak, with their return and deductions, you might want to file separately to protect your own interests in the event of a tax audit.
  • Protect your refund against seizure for child support. If your spouse owes child support, filing separately will protect your tax return money from government seizure.
  • Protect your refund against seizure for back taxes. If your spouse owes the IRS for back taxes, filing separately will protect your tax refund money from being applied to this debt.
  • If you are legally separated. If this is the case, you are required to file separately by law.
  • Avoid complications if you are getting divorced. If you are in the process or know you will be getting a divorce soon, filing separately is a good idea to avoid any tax complications after it’s finalized. 

Head of household – This status applies to unmarried taxpayers who during the tax year provided more than half the cost of keeping up a home for the filer and a qualifying person who lived in the home for more than six months. Being financially responsible for a dependent — even a parent — could give you the option of filing Head of Household. Tax rates for qualified filers usually are more favorable than those in the single or married filing separately categories. Head of household filers also get a larger standard deduction amount than do single filers. In some cases, married persons who have not lived with their spouses may qualify for this status.

Qualifying widow or widower with a dependent child – You can still file a joint return for the tax year in which your spouse passed away. After that, you might be eligible to file as a qualifying widow or widower.  This filing option is available for two years following the year of a spouse’s death and basically applies the filing data afforded married joint filers. The key here is that the surviving spouse cared for a dependent child who lived with the adult for the full tax year. During that time, the taxpayer must have paid for more than half the cost of keeping up the home.

Below is a flow chart from LearnVest that can help with your decision on which filing status to use.


So take the time to examine your personal situation and how it fits into the various filing status choices.

Always keep in mind that the IRS lets you file under the applicable status that offers you the best tax advantage. The tax savings you might get by selecting the correct status could make any extra trouble worthwhile.