Archives For financial planning

By Andrea Coombes, MarketWatch
Last Update: 4:02 PM ET Oct 20, 2006

This update clarifies that tax-free charitable distributions from IRAs for those 70 1/2 and older are not necessarily free of state taxes.
SAN FRANCISCO (MarketWatch) — Charitable giving got a lot easier for some taxpayers — and harder for others — thanks to some tax-law changes in the recent Pension Protection Act.

The good news is taxpayers who are 70 1/2 or older can take up to $100,000 out of their IRA tax-free this year and next, as long as they donate it to a qualified charity.

Meanwhile, taxpayers of all ages face slightly stricter rules when it comes to deducting charitable donations: Next year we’ll have to make sure we document any monetary donations, even if less than $250. And, starting this year, those donating clothing or household goods will need to make sure the items are of “good or better” quality.

The real windfall is for those charitable givers who are in their 70s and who’ve got hefty IRA assets. Now they can “take out up to $100,000 per year, give that to charity and not have to include that in income,” said Jere Doyle, senior vice president of wealth management for Mellon Financial’s private wealth management group, in Boston.

Plus, that charitable donation counts toward the required minimum distribution that qualified plans require of those 70 1/2 and older.
The perk exists only this year and next, and the limit each year is $100,000. To take full advantage of the new law, people need to hurry. “There’s only a limited period of time left in this year when you can do this,” Doyle said.

“This is not going to be a gift they can make on Dec. 31. Most [IRA firms] will have cut-off dates after which they will no longer cut a check from an IRA. I would expect most institutions will set a drop-dead date of no later than Dec. 15.”

Another possible restriction: Some IRA account managers may refuse to offer the perk for small donations, less than a few thousand dollars, to avoid the administrative costs of writing many checks.

“One of the concerns is, will the institution say, ‘We’ll only do it if the distribution is over a certain amount of money,'” Doyle said.

Other rules to consider:

Taxpayers should not take a distribution from their IRA and then write a check to the charity. To be tax-free, the distribution must go directly from the IRA to the charity.

The new rule applies only to IRAs, not other qualified plans.

You must already be 70 1/2 years old when you make the contribution.

The donation must be a made to a public charity, and in this case donor-advised funds do not count as a public charity.

If you use this perk to withdraw IRA funds tax-free, you can’t then also deduct that money on your tax return as a charitable donation.

Boon for high-income taxpayers

All taxpayers can benefit from the tax-free IRA distribution (assuming their donation is large enough for their IRA account manager to honor the request), but high-income taxpayers gain the greatest benefit, said Charles Pomo, a certified public accountant and director of the individual tax group at Geller Family Office Services, an investment advisory firm in New York.

That’s because taxpayers with high income often lose 2% of their itemized deductions due to income phase-outs. But under the new law they can tap as much as $100,000 of their required IRA distribution without that money counted in income, he said.

Thus, “their AGI would be reduced by $100,000 that would normally be considered taxable. Indirectly, it’s increasing the value of their deductions,” he said.

“If somebody has an IRA in the millions of dollars, the [required minimum] distribution itself could exceed $100,000. This really works for the charitably inclined person,” he said.
The new law helps those who donate less, such as $1,000 or $5,000, he said. “There’s still a benefit, but the reality is it works really, really well for the high-income taxpayer.”

Plus, taxpayers in states which don’t allow itemized deductions might have even more to gain, Pomo said. That’s because, before the change, an IRA distribution given to charity would get hit by state income tax with no off-setting charitable deduction on the state return. Under the new federal law, it’s possible that donation will be state-tax free as well. But it’s important to note: The tax free treatment of these IRA distributions may not be available for state income tax purposes in all states. Check with your tax expert or state tax department.

Note to self: Improve record-keeping

The Pension Protection Act also made changes related to how taxpayers document their cash and clothing donations.

Before the new law, taxpayers did not need to document monetary donations less than $250. Starting in 2007, taxpayers will need to keep receipts documenting all monetary donations they claim as a charitable deduction on their tax return.

“Now, for any monetary gift, you need a bank receipt or written acknowledgement from the charity, including charity’s name, the date of the gift, the amount of the gift,” Pomo said. A cancelled check or a credit card statement will also suffice, he said.

Taxpayers’ best bet is to avoid cash donations and instead focus on check or credit card payments, he said.

Taxpayers don’t send these receipts to the IRS, but simply keep with their records in case of an audit.

Only the best, or at least ‘good’

The new rule for clothing and other household donations goes into effect for 2006.

“The rules were tightened a bit to counteract what the IRS saw as somewhat heightened value claims,” Pomo said. Now, “clothing and household items must be in what they call good or better condition to qualify for that deduction.

The law does not specify what “good” or “better” means, but taxpayers might consider taking photos of the items or getting a written acknowledgment from the charity that the items are in such condition.

Pomo recommends making a detailed list of the items, such as “three pairs of pants, two shirts.” Then the charity can acknowledge the exact items were received in “good,” or better, condition.

Andrea Coombes is a reporter for MarketWatch in San Francisco.

Not everyone has the money to buy 10 properties a year with 10 to 20 percent down. Most subject-to deal’s requires at least 7,000 between walking money for the owner and reinstatement to the bank.

So how do I become the next Donald Trump? Maybe Donald Trump without the crazy hairdo would be better!

One way to do this is to buy a new owner-occupied house each year. These can be financed 100 percent with as low as a 580 credit score. Every 12 months trade up and rent the current house you are in. Imagine if you had started this, 5 years ago and had bought 5 houses in the Cape Coral Florida? There would be a quarter million in equity at a minimum.

The biggest leap would be buying the second one. It’s kind of like kids, after you are used to taking care of two. You can add as many as you want as you are already crazy! This should be an easy transition for a new investor. Its gives you time to acclimate after the purchase. Couple this with fee based bird-dogging for other investors and in 5 years you should have the cash to be one of the big-dogs.

I would look for undervalued markets to do this. Note, I did not say high crime, just undervalued. The 33917 market has seen a 100 percent jump in median home price in one year. Yet its still one of the lowest median home price markets in SWFL.

There are properties to be had on the MLS at 80 percent or so of market value. You have to jump right on those deals but, you can find some deals once in a while. Plus you could do this with per-foreclosures as well. Offer the buy the homeowner out and have him pay your closing costs

For most of you this should be a no-brainer but if this is new to you take the ball and run with it, the mark of a true investor is the ability to think outside the box, just think if we could spend as much time finding deals as we do circumventing the road blocks the mortgage industry puts in front of us.

Jeff Tumbarello
Allied Mortgage & Trust Inc

Real Estate: Not Your Father’s Retirement

Boomers are redefining the ‘golden years’ by buying into communities that feature Pilates over shuffleboard, moving back downtown—or even staying put.

By Daniel Mcginn and Andrew Murr


Oct. 23, 2006 issue – The 3,000-acre site west of Phoenix isn’t much to look at—not yet, anyway. Far from urbanity, past a highway sign warning no services next 38 miles and amid acres of saguaro cactus and creosote bushes, only a few streets have been built and a few foundations poured. But last week the Del Webb division of the homebuilding giant Pulte Homes Inc. closed on its first house here at the foot of the White Tank Mountains.

The company hopes 7,200 other “active adult” households will join this new neighborhood, called Sun City Festival. There will be no shuffleboard courts or bowling alleys, the hot amenities when retirees began coming to communities like this nearly a half century ago. Instead, there will be the accouterments better suited for modern-day retirees: Pilates classes, home offices, high ceilings and marble countertops. They’re all part of the plan builders are using to custom-build a lifestyle that calls out “Home Sweet Home” to aging baby boomers.

When it comes to housing, boomers have had a fabulous run. Consider: in 1950, when the first boomers were still preparing for kindergarten, the average newly built home measured just 963 square feet, one third of U.S. houses lacked complete indoor plumbing and 45 percent of Americans lived in rented dwellings. Today new homes average 2,434 square feet, the homeownership rate is nearly 70 percent and many baby-boomer homeowners lounge in spalike master baths, luxuriating beneath multiple shower heads and soaking in jetted tubs with horsepower rivaling the original Volkswagen Beetle’s.

Even today, as the great real-estate boom of the early 21st century shifts to a buyer’s market, baby boomers are still sitting atop trillions in equity generated by swollen home values. And as the oldest boomers hit 60, the real-estate industry stands ready to help this first wave cash in. Some boomers will follow the traditional route, retiring to updated versions of “age-restricted” sun-belt communities. Others will stay in their current locations, trading down to smaller houses or outfitting their existing homes to accommodate their aging bodies. Some of the wealthiest boomers will toggle between multiple homes—a lifestyle some are leading even before retirement.

Few companies are anticipating boomers’ evolving housing needs more than Pulte’s Del Webb division, the nation’s biggest builder of retirement homes. Its namesake founder was a colorful Phoenix developer who built the Flamingo Hotel in Las Vegas for mobster Bugsy Siegel in the 1940s. On Jan. 1, 1960, Webb opened the sun belt’s first retirement community, Sun City, which attracted 100,000 visitors (and 237 buyers) its first weekend.

To modern eyes—especially those conditioned by endless hours of real-estate porn on HGTV—the original Sun City abodes were anything but luxurious. They measured as small as 858 square feet with tiny one-window master bedrooms, no dining room and carports instead of garages. But despite the spartan layouts, Webb’s ability to sell the notion of a retirement lifestyle was a genuine innovation. “From 2006 it’s easy to mock all those Barcalounging, bingo-playing septuagenarians living around shuffleboard courts, but in fact it was not only a brilliant piece of marketing, it turned out to have a very positive effect on the kind of lifestyles people had,” says Marc Freedman, author of “Prime Time: How Baby Boomers Will Reinvent Retirement and Revolutionize America.” “Del Webb essentially summoned the older population off the porch and created the expectation that they’d lead a much more active life.”

It’s a marketing pitch that’s changed with the times. At Festival, Del Webb’s newest Phoenix-area community, the homes themselves have been reconfigured to suit boomers’ need to live large. The biggest houses will be 2,849 square feet, with stainless-steel appliances, 10-foot ceilings and granite countertops. At the Sage Center for Wellness and Higher Learning, the neighborhood’s clubhouse, there will be fitness equipment and swimming pools, but as at other recent Del Webb communities, much of the focus will be on “soft amenities”: cooking classes, yoga and core training sessions, and even “adventure programming” that includes white-water rafting and skydiving. To complement the physical activities, there will also be programs that target boomers’ brains, including extension courses offered on-site through a partnership with Arizona State University. As the new community fills up, residents will be able to choose from classes like Religion and Conflict, Beginning Guitar or Introduction to Murder, a course about trial strategy taught by a former homicide prosecutor and judge. It’s a sign that while 20th-century retirees obsessed over golf handicaps, next-gen oldsters are more focused on mental acuity. “People are concerned that their mind and body both reach the finish line at the same time,” says Deborah Blake, a Pulte’s Del Webb VP.

Not every resident will have free time for those activities. In the most dramatic shift from traditional retirement communities, 42 percent of today’s buyers plan to continue working. They’re people like Linda Jane Austen, 59, who plans to move in next year at Festival beside her sister Susan Pullen, 62. Austen is education director at the Scottsdale Center for the Performing Arts, and Pullen works at a behavioral health facility. Both are selling their existing homes and will use the proceeds to pay for their new ones, which will cost $235,000 and $280,000, respectively. (Like half of all Del Webb buyers, they will move in with little or no mortgage debt.) Buyers like them who plan to continue working ask different questions than traditional retirement-home buyers, such as “How’s the commute?” To beat traffic, Austen figures she’ll work at home each morning before heading to the office.

As builders pound together these new residences, industry watchers debate whether boomers will really buy in. “The age-old question in our business is, ‘Will the boomers truly be different, or will I become my father?’ ” says Dave Schreiner, who runs Pulte’s active-adult business. He cites company surveys that make him optimistic: 47 percent of boomers ages 51 to 60 said they “definitely or likely would consider moving to an active-adult community,” and outside data from groups like the National Association of Realtors show similar results. Still, there are doubters who figure baby boomers have spent a lifetime rejecting whatever their parents once embraced. Peter Francese, demographic-trends analyst at Ogilvy & Mather, says: “In my view those developments will hold vastly less appeal.”

One major change since previous generations retired is that people no longer have to move to Arizona or Florida to find an amenity-rich retirement community. Despite the popular image that great masses of retirees typically do so, says Wake Forest demographer Charles Longino, author of “Retirement Migration in America,” relatively small percentages—less than 5 percent—of people over 60 typically move out of state. Even though boomers are wealthier, healthier and better traveled—all key predictors of retirement relocation—so far there’s no evidence that they’ll move more or less than their parents did, he says. So to hedge their bets, builders have diversified, building active-adult communities in places far from the sun belt. Del Webb, for instance, will be selling homes in 20 states—including chilly locations like Michigan, Illinois and Massachusetts—by the year-end.

Even as retirement beckons, some boomers will not only want to stay in the same region but in their current house. For them, a key concern is how it will accommodate their aging bodies. Dave Heinlein, a 57-year-old retired builder in Portland, Ore., is about to begin a large renovation of his bathroom. Because he has bad knees, he’s ordered a more-accessible shower with a built-in seat (it can also accommodate grab bars and a wheelchair ramp someday), a less slippery floor and a “comfort-height” toilet. To do the job, he’s hired In Your Home, a Lake Oswego, Ore., business that specializes in remodeling homes for older people. Co-owner David Dickinson says bathrooms are the most popular revamp, but his team also widens doorways, builds ramps, installs lever doorknobs, enhances lighting (to help aging eyes), subcontracts for elevator installation and sells several versions of those “I’ve fallen and I can’t get up” alarm systems. While many clients call after a life-changing incident—like a broken hip—some, like Heinlein, are still relatively young but anticipate the frailties they’ll encounter in years to come. “They’re saying, ‘What do I need to do to this house to be happy here for the next 30 years?’ ” Dickinson says. As a result, the National Association of Home Builders says “aging-in-place” renovations may become a $20 billion-a-year business within a few years.

For boomers willing to leave their current digs, one popular move is to sell their suburban homes and relocate to smaller spaces downtown, which puts them closer to jobs, cultural and culinary offerings, as well as public transportation. With their third child off to college, this year Boston architect Peter Madsen, 61, and his wife, Betsy, 59, sold their home in suburban Brookline and moved into a Beacon Hill town house. Now they amble to the theater, walk or take the subway to work, and Peter bikes to the gym. Some weeks, he says, “the only time I’m in my car is to move it on Wednesday night for street cleaning.”

Plotting retirement-age relocations can be difficult—especially at a time when real-estate prices have begun to slide and homes in many markets are now taking months to sell. For boomers in once hot markets that have chilled, it may make sense to delay big moves until supply and demand get back into balance. But boomers can also take comfort in the fact that whatever they do, there’s no rule against changing your mind. Housing pros even have a well-developed lingo to describe these people: retirees who move to the sun belt, dislike it and move back home are called “fullbacks,” while folks who retreat to an in-between location (say, a Chicagoan who moves to Florida and then Tennessee) are called “halfbacks.” Then there are folks like Markie and Joe Cluff, who retired to an over-55 development in Chandler, Ariz., last year. Joe, 59 and a former building inspector, missed working, so he took a job as a quality-assurance inspector at the Phoenix airport. And they’re already trading up to a second retirement home, this time at Sun City Anthem at Merrill Ranch in nearby Florence. They’re proof of something that every golfer knows, and everyone planning retirement should remember: sometimes there’s no shame in taking a mulligan.

© 2006

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