STA Wealth Management, LLC
Partner and Executive VP of Financial Planning
Scott Bishop is a Partner and is Exec. Vice President of Financial Planning at STA Wealth, a Houston based RIA Firm. In this role, Scott guides clients through the process of identifying and realizing their personal financial planning goals while working with them to help develop, implement and monitor strategies to help assure the long-term coordination of their overall financial, retirement, business planning.
Scott is also the host of STA's radio show, "Financial Planning Fridays" on The STA Money Hour, on 950AM KPRC Radio in Houston at 12pm Central where he frequently discusses tax and financial planning topics and hosts interviews of industry experts.
Scott graduated from the University of Texas at Austin with a Bachelor of Business Administration in Accounting and received his Master of Business Administration from the University of St. Thomas.
Currently, Scott is a CFP® and a CPA and also holds a PFS® designation. Scott has been active as a member of the American Institute of Certified Public Accountants (AICPA), the Texas Society of Certified Public Accountants (TSCPA) and its Houston CPA Society as a member of its Board of Directors. He has also been recognized for excellence by being named the Young CPA of the Year for 2002-2003 by the Houston CPA Society, one of the largest and most prominent CPA chapters in the United States.
In addition, Scott has both authored and has been interviewed for numerous articles in financial related publications and websites such as the Wall Street Journal, MarketWatch, CNBC, USA Today, Washington Post, The New York Times, Investopedia, Houston Chronicle, Investment News, Kiplinger, The AICPA Tax Section, BankRate.com, the Houston Business Journal and the CPA Forum. Scott is also a member of the Houston Business and Estate Planning Council.
BBA - Accounting, University of Texas at Austin
MBA - Finance, University of St. Thomas
Assets Under Management:
AUM information provide is for the firm STA Wealth Management, LLC of which Scott Bishop is a partner/shareholder. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. STA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
STA Wealth Planning Process - Scott Bishop
CFA and CFP are both related to finance. With all the designations and acronyms in the financial services industry, it is not surprised that you can be confused by these similar sounding terms. I am a CFP® and it stands for Certified Financial PlannerTM, and CFA stands for Certified Financial Analyst. Well, one can see that there is a difference, as one is a planner (think financial planning) and the other is an analyst (think portfolio management and constitution).
First of all, let us see how one gets a CFP and a CFA title. Both are difficult, take continuing education to keep the designation and required time, experience and coursework. They each have a rigorous exam that needs to be passed before they can use the designation.
A person gets a CFP title after they passes an examination conducted by the International Board of Standards and Practices For Certified Financial Planners. On the other hand, for getting a CFA title, one would have to take three examinations, which cover subjects like economics, accounting, money management, ethics and security analysis. The Association for Investment Management and Research confers the title.
The Certified Financial Planners mainly give advise to individuals (but some like me give advance to small business owners as well). On the other hand, the Certified Financial Analysts give advise to various institutions, like banks, mutual funds, pension funds, insurance companies and security firms in addition to individuals when putting together portfolio allocations for them.
Certified Financial Planners help with retirement planning, stock investing and other financial planning. On the contrary, Certified Financial Analysts focus on stocks and market analysis, helping the various companies and institutions to make the correct investment decisions. Some that are also CPAs can give tax advice (the AICPA also offers CPAs that specialize in financial planning the option of testing to become a Personal Financial Specialist – PFS…only offered to CPAs that specialize in and have experience in financial planing).
An Internal Revenue Code Section 1035 "Like-Kind" Exchange (the name is the section of the tax code) is a financial transaction in which a life insurance or annuity policy is replaced for a new one without any taxable event. There are many rules to know in order to successfully make an exchange tax free via Section 1035 of the Internal Revenue Code. FYI - Internal Revenue Code Section 1030 lists a group of exchanges in a series of tax codes that applies to the tax free situations (such as a 1031 Tax Free Exchanges for Real Estate Transaction).
The following exchanges of insurance contracts are considered tax-free by the IRS under Section 1035 such as (most typical):
- Replacing one annuity contract for another annuity contract with identical annuitants.
- Replacing one life insurance policy for another life insurance policy or annuity contract (where the insureds/annuitants are the same).
Any other variants are NOT allowed by the IRS. As an example, you cannot do a 1035 exchange from an annuity to a life insurance contract. Also, the exchange must be DIRECTLY between the insurance/annuity companies, you can NOT receive any of the cash directly.
Why do this? Typically when you cash out a cash value insurance policy and/or an annuity, you have to pay taxes (and possibly IRS Penalties if under gate 59 1/2) on the value received that is greater than the tax or cost basis on the policy that is surrendered. With a 1035 Exchange, you pay no taxes on any gain as the cost basis of the new contract/policy is the basis in the surrendered/exchanged contract (the basis would NOT be the amount deposited into the new policy/contract).
Thus in a 1035 Exchange you are able to move funds (with rules) between Insurance and annuity contracts without having to pay any taxes or penalties on gains.
Again, the rules are strict. Any other variation from those acceptable exchanges listed above (such as an exchange from an annuity contract to a life insurance policy) will not be considered a tax-free exchange. The IRS has provided strict guidelines that the owner, insured and annuitant must be the same on the new contract as listed on the old in order to qualify for the tax-free treatment. The contract must also exchange directly between the insurance companies to retain the tax-free status. The IRS has ruled in several previous cases that if an owner cashes out of a current contract and immediately applies the proceeds to a new contract it will not be treated as a tax-free event or Section 1035 Exchange.
Why do a 1035 Exchange?
Typically you want to do an exchange as you no longer need the insurance policy or annuity, that you want to change insurance/annuity compnies for a "newer model" or a "better deal" (such as lower costs or provisions that meet your needs now vs. when you purchased the original contract, etc.).
I am assuming that by “Company Shares”, you mean that you have company stock in your 401(k) and that is what you are talking about. If that is the case, and if you are worried about the tax and/or loss in value in those shares, here are your options:
- Sell the shares while still in your 401(k) - that addresses risk and there will be no tax on the sale.
- Roll the shares over to your IRA...depending on what you want to do (and which company it is, you can sell, put in stop/limit orders or use some options (put options and collars) to hedge the position.
- Know the rules on Net Unrealized Appreciation (NUA) before doing either #1 or #2 above. If you sell the shares or roll them over, you lose the ability to get the special tax break of having a capital gains treatment under the NUA rules.
To help in this decision, check out two of my articles:
I also talk about this in my Retirement Survival Guide.
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
How do I qualify for this tax break?
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
- Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
- Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you're married and want to use the $500,000 exclusion:
- You must file a joint return.
- At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.
Even if you don't meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:
- If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the two-out-of-five-years test.
- To meet the use requirement, you are allowed to count short temporary absences as time lived in the home, even if you rented the home to others during these absences. If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn't live in the home can still count the days of use that the other spouse lives in that home. This can come into play if one spouse moves out of the house, but continues to own part or all of it until it is sold.
- If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test.
First off, congratulations for starting your financial planning early! The best way to start saving for retirement is NOW (and the earlier the better).
In my financial planning practice (I have been doing it for 20 years), I use a software package called eMoney that has both cash flow based AND goals based AND dynamic programming built into the software. Here are my thoughts:
- Cash Flow: I find that for complex cases dealing with significant tax, estate, business and asset sales, the cash flow works best. It allows me as a CPA/PFS and CFP to be very particular on how all cash flows, asset sales, account types are used and taxed. Bottom line, if you have a complex situation, cash flow based allows me to give you the best detailed tax advice. I also find that cash flow based helps me when a client enters retirement to look more into minimizing taxes, tax-based distribution strategies and tax placement (which assets should be in which type of account.
- Goals Based: If you are trying to determine how much to save for a particular goal (like a long-term retirement goal as you describe), then Goals Based might be best as it visually keys you into how much to save and what it means in retirement. For those that like easy to read visual charges, goals based programs like eMoney has, but also like Money Guide Pro work well.
- Dynamic Programming: I like this type of software for cases like #2, but where you want to see the dynamic images of what small changes would mean. That type of program can show you visually what it looks like when you save a little more, earns little more in return, retire a little later/earlier, etc. It is a great illustrator, but NOT as good in the particulars. I love #3 with very young clients when they want to see the impact of what it means to be a good saver.
The most important thing for you is to find an advisor you can trust and that will truly help you:
- visualize and write down your goals
- set up a savings plan (hopefully looking at different account types like IRAs, Roth IRAs, 401k's, after-tax accounts - I like diversity) to help you meet your goals,
- Keep you accountable to your goals, and
- meet with you periodically to keep you on track.
I hope this helps! Here is an article I wrote on the topic called: