Boston Bankruptcy Lawyer Blog

As we enter the final weeks of the calendar year we post this blog article to inform Massachusetts consumers of a few things they can do to reduce taxes and keep their retirements accounts active. Our Massachusetts Financial Planning for 2011 blog article in our http://www.bostonbankruptcylawyerblog.com/ blog should be revisited.

Tax planning basically involves two things: deferring income and reducing taxable income. Deferring income may seem counter intuitive, but it can reduce your taxable income this year.

Defer income to 2012 if you can; any year-end bonus that you are entitled to could be requested or given in January. Thus, you will not be required to pay the tax until 2012.

Pay deductibles in 2011; these could include medical bills, interest payments, state and local taxes, including property taxes.

Tax rates are set to remain the same for 2012; there are six tax rates, 10%, 14%, 25%, 28% and 35%. Long term capital gains will be taxed at a maximum rate of $15% next year too, however, if you are in the 10% or 15% tax bracket, you will pay 9% on capital gains! Knowing all of this may help you in year end tax planning.

If you had to pay the alternative minimum tax (AMT) in 2010, beware of it for this year; if your income went up unexpectedly, look into this before year end. The AMT disallows various deductions, so check with your tax advisor or a computer tax program.

Massachusetts's small business owners should consider purchasing qualifying capital because in 2011 you can take advantage of the 1005 depreciation deduction. This goes down to 50% for 2012 acquired property. The maximum amount for 2011 is $500,000, however, in 2011, the maximum amount is $139,000.

Massachusetts home owners should consider making energy efficient home improvements because this deduction goes from 10% this year to 0 in 2012. Such improvements include certain roofs, windows, doors, insulation, energy efficient furnaces and hot water heaters,

2011 is the last year that folks over 70 to make a charitable contribution from your IRA or other deferred retirement account and not pay any tax on the distribution. This applies up to $100,000. This also counts towards your minimum required distribution for 2011.

Each year you must take at least a minimum IRA or 401k distribution for everyone that is over 70 ½. There is a steep penalty for those that fail to do so. Most plans administrators, such as Fidelity, Schwab, Vanguard or your employer, will complete the calculation for you.

Finally, what should our Boston bankruptcy and Massachusetts bankruptcy clients do with respect to their retirement accounts? Since most retirement accounts are bankruptcy protected in Massachusetts, they should consider contributing as much as possible. In 2011, the IRA contribution limits is $5,000, and $6,000 if you are over 50. This is the same for Roth IRA accounts. There are phase For our 401k clients, the limits are $16,500, and $22,000 if you are over 50. 403(b) and Section 457 participants have the same limits. This is different for "highly compensated employees."

For articles regarding Massachusetts motor vehicle accidents, Boston car accidents and motor vehicle injuries in Massachusetts, see our Massachusetts injury blog.

Massachusetts will join some 42 other states and allow us to dictate, in a will, a trust for the care of your pets. On April 7, Massachusetts's law will include An Act Relative to Trusts for the Care of Animals. The law finally allows you to leave money and care instructions for your pets in your will. You can set up a trust similar to one you would to provide a college fund for a child or a special needs trust for an incapacitated adult. Boston attorney Neil Burns will draft wills for clients to include an Animal Trust.

The new law contains some restrictions. First, the trust can only be set up for an existing pet, or pets. Second, the trust terminates upon the death of the named pets, regardless of its offspring. Third, the trust is subject to the Probate Court's distraction to lower the amount. Finally, a secondary beneficiary may sue the trustee if she feels that he is not adequately providing for the pet. Any money left over after the pets die would be distributed per the will.

In a wonderful bar exam-like twist in the new law, the trusts are exempt from the rule against perpetuities. See Massachusetts General Laws, Chapter 3C, Section 1 (g)

Retirement accounts held by Massachusetts consumers, including the IRAs, Roth IRA, 401ks and 403b plans, are critical for our long term financial security in this day and age. Retirement accounts are protected from creditors and in Massachusetts bankruptcy. But can you and your spouse agree on how to invest? A "Love and Money" survey by financial services company PNC show that couples are "split" on how to plan their finances. While the retirement account may be in one name, the plan for the family should be undertaken jointly. The late 2010 survey, indicates that following the "great recession" a majority of men say they are planning their financial affairs better than before, while women disagree. Women also worry more than men about the recession, inflation and having sufficient money to support their lifestyle. Now could be a good time to come together.

Perhaps most concerning in the study was that the majority of men claim to be in charge of their financial decision making, 53%, whereas only 15% of women claim to be the ones mostly responsible. Furthermore, men claim to be higher risk investors than the women surveyed.

Fortunately, of the parents surveyed, there seemed to be an equal understanding about how the recession affected their children. The recession caused more parents to discuss finances with their children. Unfortunately, a higher percentage of parents are worried about their children's futures, versus a 2006 study. The PNC folks stress talking to children "earlier and more often about money, starting as early as the first grade."

Our Massachusetts bankruptcy clients often ask how to get their financial house in order. Many clients have a 401k or other retirement plan. Others may be completing a bankruptcy discharge and are looking for a life after bankruptcy. Whether you are coming off a Massachusetts bankruptcy or simply refocusing on your financial situation, we've put together some initial rules of thumb with some good links to aid our clients and friends.

1. Create a budget: list your expenses, all of them, divide them into fixed (mortgage or rent, car payment, utilities) or variable expenses; analyze where you can cut back on variable expenses short term (and fixed expenses long term)

2. Establish a financial emergency fund - experts differ on how much should be in your fund, with some saying 3-6 months if you have a home equity line of credit you can tap, or longer if you don't or want to be conservative; this money should be kept in ultra short, low interest rate, FDIC insured money market accounts;

3. 401k, IRA, ROTH IRA accounts - while retirement may be far off, at that time you may not be willing or able to get a second job or cut back on expenses. Social Security http://www.ssa.gov/pubs/10035.html may be reduced. Thus, now, think with the end in mind, as Stephen R. Covey says in The 7 Habits of Highly Effective People. First, max out whatever your employer will match in a pension plan; next review your budget seriously consider putting the maximum matching contribution allowed in your 401k and/or your other retirement accounts.

Continue reading "Financial Planning for Massachusetts Consumers for 2011" »

The New Year has closed some doors for 401k and other retirement account owners. But lots of retirement plan options remain. If you haven't made deposits into a work sponsored 401k plan for 2010, your time is indeed up. (But this could be a wonderful time to get started for 2011!) On the other hand, if you have income in 2010, you have until April 18, 2011 to establish and fund a SEP IRA, for 2010. This will lower your taxable income for 2010 and, moreover, give you a tax-deferred account that can grow until retirement. All of these retirement vehicles would be protected in bankruptcy.

The SEP IRA allows you to contribute up to 20% of your net income (minus half of your self employment tax) up to 49,000 in 2010.

For 2011, also consider a solo 401k which must be set up before the end of the year, but can be funded up until the tax return date in 2012 to fund it.

Many of our Massachusetts bankruptcy clients have loans against their 401k plans. Our clients often ask if 401k loans are reported to credit reporting agencies. Fortunately, 401k loans are not reported because they are not loans from a bank or lending institution. Clients rationalize the loans, saying that they are simply borrowing from themselves, AND the interest goes to them too. Unfortunately, it is not always that simple. On the one hand, they are legitimately borrowing money from their own retirement account, where there are no complex qualification rules, so it is a simple and quick way to get money. And there are no adverse credit consequences.

However, there are numerous downside considerations to 401k loans. First, you are not earning money (interest, dividends, capital appreciation) on the money that you have withdrawn, assets that you have already targeted for retirement. Second, the money you use to pay yourself back has already been taxed, so it costs more to repay yourself $1 than it did to pay yourself $1 when it was deducted from you paycheck, tax deferred. Third, there is no tax deduction on the interest paid. Most importantly for our bankruptcy clients, if you fail to repay the money per the plan rules, it is considered a "taxable event" in which case you will get a 1099 form from the company and have to pay taxes on what will be considered the 401k distribution. Those taxes would include your normal tax rate, plus a 10% penalty for withdrawal if you were under 59 years old, or 55 if you have lost your job. Thus, the tax could be 40%!

Continue reading "401k Loans in Massachusetts Bankruptcy and Credit Reporting" »

Many of our Massachusetts bankruptcy clients are able to protect significant retirement assets in their retirement accounts. As such, we remind our clients of the various options they have before year end. You can get a good chart on what qualifies for retirement deductions in 2010 by clicking here. We work with bankruptcy and post bankruptcy clients to protect their assets legally.

The following are a variety of ideas; however, you must talk to a tax professional before undertaking a specific plan of action. Also, be aware that you cannot generally combine these various plans, and, when you can, there are personal, and family, income limits.

Roth IRA Conversions: In 2010, if your income is under a certain limit, you can convert all or part of y our IRA into a Roth IRA. Be careful, this is a taxable event and you should seek tax advice before doing so. However, it is a good idea to consider this, especially if your account is down, due to the market, and, and this part is especially important, if you have outside monies to pay the tax. All too often we get clients who converted, or withdrew, IRA monies, and failed to pay the tax. That tax is generally not discharged in bankruptcy.

Continue reading "Massachusetts Consumers Year End Retirement Notions; Bankruptcy Protection" »

This note is not intended as a primer on Social Security, but a brief essay, by a Boston bankruptcy attorney who regularly receives a host of questions from clients on where its going, where it came from, and what is does now. From its inception during the Great Depression in 1935, the Social Security Act was expected to "To provide for the general welfare by establishing a system of federal old-age benefits and by enabling the several states to make more adequate provision..." Essentially, the federal Act was intended to provide economic security for all; a matter too critical to be left to the several states and their various laws.

With the economy devastated by the Great Depression and no longer relying on local farming, there was need for a federal action. President Roosevelt established a Commission which modeled the Act on German leader Bismarck, who, in 1889 designed the contributory pension system. Most of Western Europe adopted some form of what we know as Social Security before 1935. The Act covered assistance to the states to provide for three basic needs: the aged, the blind and dependent children. The law has been amended and augmented numerous times since then. In 1965 Medicare was added, to provide for medical care for the aged and in 1972 the cost of living adjustments were added.

Continue reading "Social Security, Lies and Videotape - a Massachusetts Consumer Lawyer's Perspective" »

Massachusetts consumers who file for personal bankruptcy protection are fortunate when it comes to protecting retirement accounts. This is because whether they use the bankruptcy state exemptions (generally used when protecting a home with equity) or the federal exemptions (more generous for other assets), retirement assets can be protected if the Bankruptcy Petition and Schedules are properly prepared and filed.

Most retirement accounts that are employer sponsored, such as 401(k) accounts are protected under the Employee Retirement Income Security Act (ERISA). In fact, other than domestic (divorce) or tax (IRS) actions, those assets are generally fully protected from creditors.

Individual Retirement Accounts (IRAs) are not protected under ERISA, however, they are protected in both the state and federal exemptions with certain restrictions.
These are general rules, and consumers should not transfer assets into our out of what they perceive to be a protected vehicle without first talking with an attorney.

Our clients often ask for personal investment advice regarding the assets they can protect in filing a Chapter 7 personal bankruptcy. Massachusetts investors need to know that they can exempt their qualified retirement accounts. In our September 1, 2009 blog article, we discussed asset allocation for our Boston, Massachusetts clients' qualified accounts. This article is merely an update; a reminder to check that you are making the most of your retirement, or other long term savings, investments. The US Securities and Exchange Commission offers a primer as well!

In a survey undertaken by Barrons, the 2010 recommendations of the 20 top money managers revealed some interesting trends. They recommended between 37% and 67% in equity (stock) investments; 15% to 45% in fixed income (bond); 8% to 33% in alternative (commodity etc.) investments; and 0% to 15% in cash. Of particular note was the renewed focus on non United States equity and debt. Barclays and Deutcsche Bank recommend that 22% of equity be invested oversees. Morgan Stanley puts the percentage at 24%

There are many other websites out there that will help you get started with investing.

Our Massachusetts clients who are not covered by retirement plans (such as 401k's or 403b's) often request clarity regarding retirement account options. With April 15 just around the corner, we are glad to provide an update. First, we need to identify the various "vehicles" available. The basic plan is the Individual Retirement Account, or IRA. An IRA allows you to deposit up to $5,000 (or $6,000 if you are over 50) into a tax deferred account each year provided you meet certain criterion. The good news is that this reduces your taxable income by the amount you put in. Further, if you can pay the tax on the income, you can do a ROTH IRA, which has an income restriction for qualifying, however, has the added benefit of allowing tax free withdrawals - by you or your heirs. The monies can be invested in stocks, bonds, mutual funds, commodities, certificates of deposit or otherwise, so long as they stay within the host company's IRA account.

You are allowed to convert IRA investments into ROTH IRA investments, however, there are income restrictions for 2009. This changes in 2010. See our prior blog articles on Roth IRA conversions and Roth IRA planning for more details.

You can also open a ROLLOVER IRA, which is simply converting qualified retirement monies in a 401k, 403b or other retirement account, into an IRA that you now can control the investments in.

There are also SEP IRAs and SIMPLE IRA's for folks with their own businesses. They have various requirements, however, the SEP IRA allows up a contribution up to $49,000 and the SIMPLE IRA allows contributions up to $11,500 ($14,000 if over 50) The requirements and restrictions can seem daunting, however, T. Rowe Price, whose useful website I have included above, provides details for opening and funding each IRA. There are other helpful websites too: Charles Schwab and Company is excellent. Many of our clients' companies use Fidelity for their 401k or 403b plans. They have individual account services too. The lowest cost fund family is generally Vanguard. And, as we discussed in our earlier blog article on long term investment strategies, costs are critical because they create a drag on monies that are invested for the long term.

It should be noted that this article is not inclusive of all retirement plans. Many of our clients have Keough profit sharing plans, for example. This article is simply a reminder of the basic retirement vehicles out there for clients who don't have retirement plans at work. Nor is this article investment advice. We are simply reminding our clients to review their options with their tax investment professionals before April 15.

Many of our clients are worried about their retirement, their 401k accounts, and, of course, what to do about future investing. They are not alone. In a study undertaken by Wells Fargo, it was shown that workers are not saving sufficiently. Notwithstanding the significant loss of value of retirement accounts following the "crash" in 2008, according to their survey, only 23% of workers are saving more than they were a year ago, 57% are saving the same amount and 20% are saving less. On the other hand, 56% of pre-retirees are planning to work more years.

Continue reading "2010 Retirement News for Massachusetts Clients" »

We are advising our Massachusetts clients to look into a loophole in the tax code for Roth IRA conversions in 2010.

The tax code has been amended to allow folks to do a reverse Roth IRA conversion in 2010. Here is how it can be executed:

Continue reading "More Roth Planning for 2010 and 2011" »

When clients call and ask us if they need a will, we almost always reply in the affirmative. Why? Because without a will, your assets will not necessarily go to whom who wish. Further, the Court will appoint an "administrator" and this may not be the person you wanted to carry out your wishes. Finally, tax planning for your assets will be up to the state and the federal government for those without a will.

Some clients report that their assets are minimal. Nevertheless, they often fail to remember life insurance (which can pass outside the will, but should be factored into the plan) and personal injury and wrongful death actions. Some folks report that they have only two children and the Court would split their assets equally anyway. They fail to realize that there could be a fight about who should be the executor and how much that executor should get paid.

Continue reading "Do I Need A Will?" »

Increasingly, our Massachusetts clients have been asking about conversion strategies between the traditional IRA and the Roth IRA. All monies invested in a traditional IRA are taxable upon distribution to you. That is, whatever you take out of the IRA will be a taxable event and a 1099 will be issued. On the other hand, whatever you withdraw from a Roth IRA is not taxable; this is because you already paid taxes on the amount deposited in the year you made the contribution.

Now, however, there is a planning opportunity for folks with monies in a traditional IRA. If the "modified adjusted gross income" on your 2009 tax return will be less than $100,000, you can "convert" an unlimited amount of your investments in your traditional IRA to a Roth IRA. You will have to pay taxes on the "distribution" and most tax advisors recommend using separate funds to pay those taxes. Nevertheless, the monies can now be invested to grow, tax free to you and your heirs. Thus, as a tax planning mechanism, you can take distributions from the Roth IRA when the tax on traditional IRA would be prohibitive.

Continue reading "Roth IRA Conversions for 2010 Planning" »