Articles

How Does the Stimulus Plan Affect You?

Tue, 21 Apr 2009 16:49:48 -0700

The biggest benefit from the $787.2 billion federal stimulus package will hopefully be a noticeable improvement in the nation’s economy. However, on an individual level, it’s wise to determine if you might be eligible for benefits relating to tax credits, housing, education, unemployment and health care.

It’s always a good idea to review your financial plan, but it’s even more important in an uncertain economy because:

a) As much as it might hurt to look at the performance of your current retirement accounts and other investments, the economy will recover. When an upturn comes, it’s critical to have your holdings positioned to take full advantage of the recovery.

a) If you fear your job might be in danger in the coming months or you might be facing pay or benefit cuts, it’s important to evaluate your personal finances before any such changes occur. The best time to prepare for a job loss or benefit reduction is while you’re still earning a salary.

a) Taking advantage of short-term stimulus provisions should be part of your long-term plan.

Here is a summary of some of the stimulus plan provisions that may affect your finances.

Tax credit provisions:

One more cap for the Alternative Minimum Tax (AMT): Lawmakers put one more patch on the AMT to protect a wider number of people from getting hit. This latest break for potential AMT targets increases the exemption amounts to $46,700 ($70,950 for married couples). The bill would also exclude interest on all private activity bonds issued in 2009 and 2010 from the AMT.

“Making Work Pay” Tax Credits: This is the refundable tax credit of up to $400 for individuals and $800 for families for 2009 and 2010 that would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples). This isn’t a lump sum payment, but instead is reflected in reduced payroll taxes.

Car Buyers Tax Credit: This allows a deduction for state and local sales and excise taxes paid on the purchase of a new vehicle through 2009. This deduction is phased out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).

Expanded Child Credit: This increases the eligibility for the refundable child tax credit in 2009 and 2010 by reducing the minimum income for eligibility to $3,000.

Earned Income Tax Credit: This provision will create a temporary tax credit increase for working families with three or more children.

Housing provisions:

Refundable First-Time Homebuyer Credit: First-time buyers can claim a credit worth $8,000 - or 10 percent of the home's value, whichever is less - on their 2008 or 2009 taxes. The added bonus is that the credit is refundable, which means that filers will see a refund of the full $8,000 even if their total tax bill was less than that amount.

Educational provisions:

College student aid: The package awards $15.6 billion to increase maximum individual student Pell grants by $500.

American Opportunity Tax Credit: This credit temporarily provides taxpayers with a new tax credit of up to $2,500 of the cost of tuition and related expenses, though it phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the available credit is refundable.

529 Plans: The scope of allowable education expenses expands to include computers and computer technology.

Unemployment and healthcare provisions:

Extension of Unemployment Benefits: The package provides 33 weeks of extended benefits through Dec. 31, 2009.

Unemployment Compensation: The first $2,400 a person receives in unemployment compensation benefits in 2009 won’t be taxed.

Short-Term COBRA Subsidy for Involuntarily Terminated Workers: This provides a 65 percent subsidy for COBRA premiums for up to 9 months, which will put a dent in the considerable cost of COBRA health benefits for the unemployed.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Sierra Wealth Advisors, a member of FPA.

As Worker Shortage Increases So Will Incentives to Keep Boomers on the Job

Tue, 3 Feb 2009 16:08:43 -0800

For several years now, various agencies and academics have predicted a systemic labor shortage over the next 25-30 years as the gap between Baby Boomers and entrants of college-educated workers widens due to the Boomers’ mass retirements.

There are plenty of arguments over this theory, but employers are acting now to keep older workers in their jobs just a little longer. Some Boomers are finding out their bosses don’t want them to retire or are willing to make interesting compromises to give them an incentive to stay on full- or part-time. In a survey of older workers in the July 2008 EBRI Issue Brief, published by the nonpartisan Employee Benefit Research Institute (EBRI), 29 percent of workers said that feeling truly needed for an assignment was one of the top three most effective draws for staying on the job. Other incentives that ranked highly include:

• Receiving a full pension while working part time
• A pay increase
• Continuing company-subsidized health insurance at the same level as full-time workers
• Receiving a partial pension while working part time

So what would convince you to stay on the job or un-retire if your employer comes calling again? No matter what the incentives put in front of you, there are key issues to consider:

Envision how a phased retirement or return to your workplace would affect your life: If you’re reviewing your retirement planning at any age, it makes sense to ask yourself under what conditions you’d leave the workplace or return to it. If you were offered phased retirement, how would you deal with the cutback in responsibility and hours? Some people thrive on work relationships and might not know what to do with significant time outside the office. You obviously need to know based on current projections how much income you’re likely to have from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income.

How will it affect your retirement income?: Early retirement transitions can have some adverse effects particularly where pensions are involved. But, if the place where you spent your career comes calling, you might get some attractive pension incentives. If you are planning to work, consider how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. You may want to consider delaying receipt of those benefits for as long as you can.

How will it affect your taxes?: Many retirees find that it doesn’t take much post-retirement, work-related income to tip them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using other sources of income to fill the gap until you reach the age when full Social Security benefits can be drawn without an offset for employment income.

Look at all the incentives: The top incentives luring experienced workers back to the workplace may be very attractive to you, or not attractive at all. Do some thinking about this. If you get the call, be prepared with a counterproposal of what would really convince you to come back. If you’re investigating post-retirement employers, including your own, see what benefits you’ll qualify for, and take a close look at educational benefits. If your company will pay you to go to school and give you the time to actually work on a degree, that might be a very nice incentive indeed.

Consider insurance issues: If you are a retiree returning to the workforce and you’re already receiving Medicare or covered by a “Medigap” policy, you may be able to lower your costs or improve your coverage by accepting group coverage as primary underwriter of your medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, medical coverage issues can be particularly important.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Sierra Wealth Advisors, a member of FPA.

Be Careful When Picking Beneficiaries for Your Retirement Accounts

Tue, 20 Jan 2009 16:38:00 -0800

Inheriting IRA or 401(k) proceeds from a friend or relative can be a potentially huge windfall, but it can also be a sizable tax headache. For both the giver and the recipient, it’s worth very careful consideration and in some cases professional advice.

Bank accounts, stocks, real estate and life insurance proceeds generally pass to heirs free of income tax. However, inherited retirement benefits can be a different story. Beneficiaries have to pay ordinary income tax on distributions from 401(k) plans and traditional IRAs after they are inherited. (Roth IRAs don’t have the same issues since their benefits can be free of income tax to your heirs if all tax requirements are met.)

Here are some general guidelines:

Spouses are the first stop: Federal law dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan unless your spouse signs a waiver to redirect those funds. Even with a traditional IRA, naming the spouse as the primary beneficiary may be an appropriate option. Should the surviving spouse have his or her own IRA, this approach would allow them to simply roll over the assets from the decedent’s IRA into their own. Furthermore, if the surviving spouse is significantly younger than the deceased, the surviving spouse would receive the added benefit of stretching out distributions from the IRA until he or she turns 70 1/2. The stretch-out allows the assets to continue to grow on a tax- deferred basis, thereby maximizing asset value and delaying any income tax due.

When might you want to rethink a spousal beneficiary? When the surviving spouse’s estate is expected to be large enough to exceed the applicable exclusion amount for federal and state estate taxes. The applicable exclusion amount after allowable expenses is $3.5 million in 2009. It should also be noted that in addition to federal estate tax, many states impose a tax on estates with considerably lower asset levels (often anything over $1,000,000). Proper estate planning may alleviate this issue.

What about non-spousal beneficiaries? Today, non-spousal beneficiaries may be able to roll over all or a part of inherited 401(k) benefits to an inherited IRA. A recent change in IRS regulations still requires non-spousal heirs to withdraw a minimum amount from inherited IRA assets every year, but it’s based on the age of the recipient rather than the age of the decedent.

Establishing a Stretch IRA: Due to recent changes in the minimum distribution law, taxpayers may now establish IRAs designed to stretch out the time period over which a non-spousal beneficiary (i.e. child) is required to take minimum distributions from an inherited IRA. Proper use of this vehicle may potentially allow for continued growth of tax-deferred earnings over multiple generations and can have a substantial impact on the future value of the family portfolio.

Naming trusts or charities as beneficiaries. Placing IRA assets in trust can have substantial advantages but can be complex and should only be considered after receiving tax advice from a competent professional. Even though naming a charity as your primary beneficiary will not affect distributions in your lifetime, it could affect the tax consequences for non-charitable beneficiaries who are sharing the same asset upon your death.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Sierra Wealth Advisors, a member of FPA.

A Tough Market is a Good Time for Roth IRA Conversions

Fri, 9 Jan 2009 14:09:58 -0800

Most of us will not start the New Year happy about our investments. But if you are looking for a bright spot, it’s not a particularly bad time to consider converting a traditional IRA to a Roth IRA.
Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).

Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your tax professional about doing a full or partial Roth IRA conversion.

Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. However, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them.
Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status.
The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. But anyone considering such a move —regardless of his or her income status— should first review their current retirement asset strategy with their financial advisor.

Things to consider:

The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59 1/2 to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains.

Time to retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them.

Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes.

A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Sierra Wealth Advisors, a member of FPA.

Taking Steps to a Financially Safer 2009

Tue, 30 Dec 2008 17:09:25 -0800

It’s impossible to know in advance everything that investors might be able to do in order to preserve their assets in 2009, particularly with unprecedented government intervention in world markets. However, there are some general strategies to employ as markets and economies hopefully stabilize in the New Year:

Create a plan – or review an existing one: If you’ve worked with a good financial planner, you should be able to articulate your long-term investment goals by yourself. Much of the riskiest investing behavior, such as overbuying and panic selling, could be avoided if individual investors work with a levelheaded fee-only advisor in order to achieve long-term goals such as retirement or college education.

Check all your assets in banks: As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Stay invested: Stock downturns are always filled with panic selling – and buying. If your financial plan is sound, be prepared to stay the course, but work with your advisor to make sure you have your priorities covered. While times are tough, it’s wise to examine all your investment choices but, if they make sense, definitely continue to invest as much as you can afford. You’ll reap rewards when the market returns.

Check your credit: No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information in your credit reports is truly your own.

Pay attention to your cash: You should have an emergency fund of three to six months of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, so if you have more cash on hand than you need for your emergency fund, you’ll be positioned to capitalize on opportunities.

Re-budget: It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart and your debt low so you can set savings and investment priorities that will do you the most good when the economy and the market come back.

Review your retirement plan: How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-averse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Sierra Wealth Advisors, a member of FPA.