What Is the Consumer Financial Protection Bureau?
The Consumer Financial Protection Bureau (CFPB) has been in the media due to the national political climate. Many may find themselves looking for more information about this federal agency and its role in protecting consumers.
Background
The 2007 credit and loan crisis is often viewed as being the direct result of faulty consumer lending practices. Subsequently, many saw the need to have one centralized federal agency that focused on the protection of consumers regarding financial products and services, such as mortgages, credit cards, and student loans. In 2010, the CFPB was established by Congress through the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The CFPB’s mission
The CFPB is charged with protecting consumers from unfavorable financial industry practices through the enforcement of federal consumer protection laws. In addition, the CFPB:
Supervises banks, credit unions, and other financial institutions
Educates consumers on how to avoid deceptive and unfair lending practices
Monitors financial industry developments
Issues regulations and guidelines for financial service providers
Collects and tracks consumer complaints in one centralized database
Recent headlines
the CFPB has taken action on a variety of consumer financial protection issues.
Some of the more high-profile headlines include:
Issuing a new mortgage rule that requires a lender to ensure a borrower’s ability to repay a mortgage loan
Releasing a report aimed at developing more affordable student loan repayment options for private student loans
Issuing a new rule that eases credit-card qualifications for stay-at-home spouses and partner
Where to get more information
For more information on how the CFPB works, visit the CFPB website at www.consumerfinance.gov.
Past performance
The Securities and Exchange Commission (SEC) requires a disclaimer “past performance does not guarantee future results” on when mutual performance is advertised. The SEC notes that the long-term investment performance of a fund will depend on factors such as: fund costs (charges, fees and expenses), your tax consequences, the fund’s risk, and operational changes.
Carl Richard equates “Investing based on past performance” with “Driving while looking in the rear view mirror”. Both “cause a lot of accidents”.
“Despite the SEC warning and pretty conclusive evidence that past performance has very little predictive value, most of us still use performance as the predominate factor in choosing our investments.
This is one of those times in investing when our experience in other areas of life works against us. “
“When it comes to mutual funds, however, the past has almost no predictive value. “ “It turns out that fees are the only factor that reliably predicts a fund’s performance. The higher the expense ratio –the cost of owning the fund-the worse the performance for shareholders. This is a case where you actually get what you don’t pay for.”
“Trying to figure out which fund will lead the pack…is a fool’s game. Focus instead on finding a low-cost investment that you can stick with over the long haul.”
The volume of articles and research studies showing that past performance promises nothing about future performance continues to grow. Understanding how an investment fits into your portfolio should be based on other factors, including those noted by the SEC. Understanding the investment’s characteristics and how they relate to the other investments in your portfolio are critical to building wealth.
There’s Still Time to Contribute to an IRA for 2012
There’s still time to make a regular IRA contribution for 2012! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2012 ($6,000 if you were age 50 by December 31, 2012). For most taxpayers, the contribution deadline for 2012 is April 15, 2013.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2012, even if your spouse didn’t have any 2012 income.
Traditional IRA
You can contribute to a traditional IRA for 2012 if you had taxable compensation and you were not age 70½ by December 31, 2012. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2012, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.
2012 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as:
a. Your IRA deduction is reduced if your MAGI is:
Single/Head of household: $58,000 to $68,000
Married filing jointly: $92,000 to $112,000
Married filing separately: $0 to $10,000
b. Your IRA deduction is eliminated if your MAGI is:
Single/Head of household: $68,000 or more
Married filing jointly$112,000 or more
Married filing separately: $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan
a. Your IRA deduction is reduced if your MAGI is: $173,000 to $183,000
b. Your IRA deduction is eliminated if your MAGI is: $183,000 or more
Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older).
For 2012, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $110,000 or less. Your maximum contribution is phased out if your income is between $110,000 and $125,000, and you can’t contribute at all if your income is $125,000 or more.
Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $173,000 or less. Your contribution is phased out if your income is between $173,000 and $183,000, and you can’t contribute at all if your income is $183,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion.
Finally, keep in mind that if you make a contribution to a Roth IRA for 2012–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2012.
A financial plan is essential for you to know how to invest your money.
To over simplify, financial planning is how you manage your finances and establish a path to reaching your goals. Investment management is one part of managing your finances. It is the part that determines how your savings will be invested.
Financial planning starts with your goals. The amount and timing are critical. Prioritizing your financial goals is necessary. You can assign a priority of 1 to 10 or categorize your goals by what is needed, what is wanted and what is wished for. This will be essential as you monitor your progress. Life and unanticipated events are not controllable and may require adjustments. Adjustments may result in changes to your goals, the timing of your goals, or your spending.
A reserve fund is needed to absorb unexpected events. Reserves should be held so that they are quickly assessable, that is, liquid. Six months of reserve are generally recommended. As you approach each goal, the reserve fund should be increased. This will avoid the impact of fluctuating investment values when the funds are needed. The amount of liquid assets should be increased as you near retirement. This minimizes the need to sell investments when the market is depressed. Two years of liquid funds are generally recommended for retirees. A portion of the funds for living expenses in retirement might be held in short-term bond funds or bonds.
Investments are purchased with the amount of your savings that exceed your reserves. The amount that is used for investments must be sufficient to reach your goals. Education expenses and health care are two categories of expenses that have exceeded what people anticipated. Many people underestimate the amount they will need in retirement. Because life expectancy has increased and people have retired early, many people will not be able meet their retirement goals.
The planning process needs to consider the above events and your ability to withstand losses.
The above has touched on cash planning, investment planning, education planning, risk assessment and retirement planning. All the planning areas need to fit together. How you manage your investments is dependent on the other areas of your financial plan.
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Did you realize how much you could have learned from “Downton Abbey”?
Kelly Greene’s March 1st article outlined some of the lessons from the British drama.
The timing and occurrence of future events require advanced planning. The planning should include: who should get the assets, the management of the assets and how the assets should be used.
Keeping the family informed of one’s intention is important. This is especially true for non-traditional and blended families. The importance of medical directives was vividly demonstrated in the series.
Providing for family members and business associates in the event of incapacity or death is evident from the events portrayed in this TV drama. Trusts, wills, powers of attorney and other agreements will see that the financial assets are used as intended. Well drafted documents will provide for how the assets will be used and managed. Experienced professionals can draft the documents to provide for the control of the assets and the flexibility in the case of future conflicts.
Change happens in life. We need to monitor what is happening. In the show an investment loss illustrated the importance of monitoring investments, the need for investment diversification and the need to change.
Involving the family early in the process can be very beneficial. This helps avoid misunderstandings and provides a mechanism for implementing the plan.
Do you know how much to save?
This is a question I am asked frequently. I respond with “it depends” followed by a series of questions. There are many rules of thumb used to answer this question. A “rule of thumb” is a rough and easy estimation. It is not based on a specific situation.
Following are some of the questions that should be asked. What is the purpose of the expenditure? How important is the expenditure? Is the expenditure something that is needed, wanted or just a wish? What are the alternatives? Is the cost known? When will the expenditure be made? An estimate can be calculated once the variables are identified.
The savings and the variables need to be monitored. Life is a journey with many twists and turns. There will be many unanticipated expenditures, opportunities and windfalls. You need to identify what you did not plan for so that you can identify when you need to change what you are doing
Financial cycles may impact your ability to meet your expectations. The available rates of returns will vary. If you anticipated too high of a rate of return, you will save less than you planned. If your earnings do not grow as much as you anticipated you will have less than you expected. If your living expenses increase more than your income you will not meet you goals. If the reverse happens you will save more than you planned. That is easier to deal with than not saving enough.
You should monitor your savings and review your goals at least annually. The sooner you adjust to adverse events, the easier it will be modify what you are doing and improve your ability to achieve your goals.
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Social Security has improved the information available online
“my Social Security” provides improved information applicable to you. Information and tasks available includes: your benefit verification letter, your benefit and payment information, your earnings record, ability to change your address and phone number. Start or change your direct deposit of your benefits,
This allows you to obtain information when you need it. It will save your time and eliminate the need to travel to a social security office to obtain this information. It avoids the delay of getting information that is helpful in your financial planning.
The website address is: http://www.socialsecurity.gov/myaccount/
Some people cannot receive or acknowledge LinkedIn endorsements
I am such a person. I greatly appreciate all the endorsements I have received. The current state of financial regulations prohibits testimonials. LinkedIn’s “Skills & Expertise” are endorsements that are considered testimonials. The spirit of these regulations is to prohibit comments about the conduct or performance of an adviser. The best information currently available is that making endorsements would also be prohibited.
I am permitted to have your endorsement in LinkedIn as long as it is hidden. When and if the regulations are changed I can quickly unhide them.
Increasingly people are using the new features available through social media. Those of us that are subject to the restriction are frustrated. A recent article in “Reuters” discusses this matter in more detail at http://www.reuters.com/article/2013/01/23/us-social-media-idUSBRE90M1G020130123
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The recent tax act impacts planning
The American Taxpayer Relief Act of 2012 ads a new dimension to tax planning. The tax rate brackets, thresholds, phase outs, etc. are different depending on the element involved. Some vary depending on the types of income. Types of income include: taxable income, earned income, alternative minimum taxable income, capital gains, net investment income, self employed earned income and adjusted gross income. Incomes for the phase outs of itemized deductions, exemptions and alternative minimum tax differ.
Planning will also be impacted by the timing of income and deductions. Defer income and accelerate income may no longer be a general approach. Changes in income and deduction and the nature of the income and deduction anticipated in the future will must be considered. The approach for each may vary from year to year.
Key numbers are provided on the web site under “Information of Interest” and “Newsletters” under “Resources”.
2013 FICA Tax Increase Surprises Some Taxpayers
With all the end-of-year hype surrounding the fiscal cliff and the relief that came with New Year’s legislation permanently extending most income tax rates, one change seems to have been veiled by the settling dust: the 2 percent increase in FICA (Federal Insurance Contributions Act) tax. That increase, the result of an expiring provision that was not extended, means that the vast majority of American workers are now receiving about 2 percent less in their take-home pay, an unwelcome surprise to some people.
Background
In the midst of the last recession a little more than two years ago, Congress passed and the president signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This new law included a 2 percent reduction in the Social Security (OASDI) portion of the FICA tax. The provision was designed to help put a little more money into the wallets of American workers during the challenging economic environment of 2011. While the employer portion of the OASDI contribution remained at 6.2 percent, the employee contribution was reduced from 6.2 percent to 4.2 percent. The provision was extended through 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011 and the Middle Class Tax Relief and Job Creation Act of 2012.
The reduction was never meant to be permanent, as it put additional financial pressure on the already stressed Social Security Trust Fund. So during the 2012 fiscal cliff negotiations, both Democrats and Republicans agreed that it should expire at the end of the year.
Impact of 2 percent
Despite media reports warning of the impending payroll tax increase, many Americans were caught off guard when they received their first paychecks in 2013. How much of an impact might the additional withholding have? A family earning $60,000 a year will see their pay cut by about $1,200, or $100 per month, during 2013. Those earning $100,000 will receive about $2,000, or about $167 per month, less. (The maximum amount of an individual’s earnings that is subject to Social Security tax in 2013 is $113,700.)
While most experts believe the decrease in take-home pay won’t be enough to cause major economic damage, it may encourage families to cut back on spending enough to slightly dampen the nation’s overall growth. For example, the 2 percent decrease could represent a family’s monthly utility bill, an investment in a college savings account, or a week’s worth of groceries.
Medicare taxes for high earners
Also consider that high earners will need to pay a bit more in Medicare taxes beginning in 2013. Taxpayers will pay an additional 0.9 percent Medicare tax on wages exceeding $200,000 for single/head of household, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately. Taxpayers whose modified adjusted gross income exceeds those same threshold amounts will also pay a 3.8 percent Medicare tax on some or all of their unearned income. These provisions were part of the Patient Protection and Affordable Care Act of 2010, and like the expiration of the FICA reduction, were not affected by the 2012 fiscal cliff legislation. When combined with the 2 percent Social Security increase, the total hit could mean a difference of several thousand dollars a year to some higher-earning taxpayers.
Questions?
If you have questions about your FICA withholding, your human resources department or personnel manager might be a good place to start. These representatives are typically prepared to answer such questions and can help you confirm that your withholding is correct.
