What could that money do for you?

Is a tax refund coming your way? If you have already received your refund for 2012 or are about to receive it, you might want to think about the destiny of that money. Here are some possibilities.

• Start (or add to) an emergency fund. Many people don’t have a dedicated rainy day fund, only the presumption that they might have enough cash in case of a financial tight spot.
• Invest in yourself. You could put the money toward education, career training, personal improvement, or some sort of personal experience with the potential to enhance your life.
• Use it for a down payment on a car or truck or real property. Real property represents the better financial choice, but updating your vehicle may have merit – cars do wear out, and while a truck also ages, it can help you make money.
• Put it into an IRA or workplace retirement account. If you haven’t maxed out your IRA this year or have a chance to get an employer match, why not?
• Help your child open up a Roth IRA. Has your under-18 son or daughter worked and earned money this year? He or she can open a Roth IRA. Your child’s contribution limit is $5,000 or the amount of his or her earned income for 2012 (whichever is lower). You can actually make this Roth IRA contribution with your own money if your child has spent his or her earnings.²
• Buy some warehouse memberships. If you have a large family or own a small service business, why not sign up to save regularly?
• Pay down debt. Always a smart choice.
• Establish a financial strategy. Some financial advisors work on a fee-only basis. They can perform a review of your current financial situation and give you pointers for the future for roughly $1,000 with no further obligation.¹
• Pay for that trip in advance. Instead of racking up a bigger credit card bill, consider pre-paying some costs or taking an all-inclusive trip (some are not as pricey as you might think).
• Get your home ready for the market. A four-figure refund may give you the cash to spruce up the yard and/or exterior of your residence. Or, it could help you pay a professional who can assist you with staging it.
• Improve your home with energy-saving appliances. Or windows, or weatherstripping, or solar panels – just to name a few options.
• Create your own food bank. What if a hurricane or an earthquake hits? Where would your food and water come from? Worth thinking about.
• Write a proper will. Your refund could pay the attorney fee, and the will you create might end up more ironclad.
• See a doctor, optometrist, dentist or physical therapist. If you haven’t been able to see these professionals due to your insurance situation or your personal cash flow, the refund might provide a way.
• Give yourself a de facto raise. Adjust your withholding to boost your take-home pay.
• Pick up some more insurance coverage for cheap. The typical flood insurance policy in a low-to-medium risk area costs less than $1,000 (and sometimes less than $500). A $1 million personal liability umbrella policy can usually be bought for $400 or less.²
• Pay it forward. Your refund could turn into a charitable contribution (deductible on your 2012 federal tax return if you itemize deductions).

In the past two years, federal tax refunds have averaged about $3,000. That’s a nice chunk of change – and it could be used to bring some positive change to your financial life and the lives of others.²

Citations

1. www.dailyfinance.com/2012/03/23/tax-refund-surprising-smart-ideas/#photo-1 [3/23/12]
2. www.kiplinger.com/slideshow/10usesforyourrefund/1.html [3/12]

Is there much we can do besides wait?

Could $5 gas arrive with summer? As of April 6, U.S. retail gasoline prices were up 20.15% YTD; on that date, AAA’s national survey had the price of regular unleaded averaging $3.94 per gallon. So what happens this spring and summer – traditionally when Americans tend to hit the road?¹

A new Christian Science Monitor/TIPP survey of 900+ adults finds that the average American expects pump prices of around $4.75 a gallon come July. That’s about 20% above where prices are now.²

Is that perception cynical, or realistic? It depends on whether you think the latest price spike will eventually moderate according to the historical pattern.

Will the classic pattern hold? Short-term price jumps in retail gasoline are often partly tempered by lessening demand. That is, the price of gas climbs to a certain point where consumers simply decide to cut back on their driving. As demand drops, prices finally follow.

This could easily happen; it may happen soon. Yet when we look at the macro view, we have not been following the classic pattern. American consumer demand for gasoline has declined slightly in every year since 2007. (Before the recession, sales of big SUVs represented 20% of U.S. auto buying; now they account for 5% of it.) In fact, the federal government’s Energy Information Administration (EIA) believes that U.S. gasoline consumption will drop by another 7% over the next 25 years.³

Who is to blame for the soaring prices? The Christian Science Monitor/TIPP survey asked for opinions. Close to a quarter of those polled put the blame on the oil industry; about 20% pinned the blame on speculators in the commodities market. Coming in third and fourth: the Obama administration (14%) and Congress (9%).²

As the world is a global village, our gas prices are most influenced by the world oil market. Recently, the factor exerting the biggest influence has been the threat of supply disruption in the Middle East – but that’s not the only factor weighing on the market. We are using less oil and gasoline, but China and India and other emerging economies are using more – in fact, 10 million more cars hit the roads in China during 2010 alone.⁴

In addition, the U.S. has become a net gasoline exporter for the first time in more than five decades as a consequence of key oil refineries along the east coast and in the Caribbean ceasing production. Also, many of our refineries can now produce gasoline for less than it would cost at Latin American or European supply points.⁴

Basically, we are competing with the world for our gasoline – and the world oil market causes the big ripples in the equilibrium. This is why boycotting gas stations in your area for a day has little more than symbolic effect.

What could America do? The Obama administration could try some quick fixes, but some might not be popular. Releasing some of the inventory in the Strategic Petroleum Reserve could help – and in fact, announcing the release after the fact could potentially affect oil prices more than publicizing it beforehand.

To crimp speculators, the government could request that the New York Mercantile Exchange and Intercontinental Exchange (on which NYMEX crude and Brent crude get traded daily) boost margin requirements, a regulatory move which would discourage speculators from working with borrowed money. It could ask states to strictly enforce a more fuel-efficient, 55-mph speed limit on our nation’s highways, which would not please the trucking industry or the typical driver.

It seems every year we are tested by spikes in gas prices. As we transition (however gradually) from fossil fuels to other forms of energy, we may still have several of these episodes in our lifetimes.

Citations

1. money.msn.com/market-news/post.aspx?post=d8808e5a-07d2-477c-aa6e-0497b6d7402b [4/5/12]
2. www.csmonitor.com/USA/Politics/2012/0406/Americans-spread-blame-for-high-gas-prices-foresee-4.75-a-gallon [4/6/12]
3. www.npr.org/2012/03/22/149061105/whats-making-americans-less-hungry-for-gasoline [3/22/12]
4. www.npr.org/blogs/thetwo-way/2012/03/23/149220383/why-gas-prices-are-rising-even-as-demand-is-down [3/23/12]

There are other risks we sometimes don’t think about.

When an investor or financial advisor thinks about diversification, it is generally with market risk in mind. It’s worth remembering that there are other potential risks to your money – and diversification can be valuable in helping you cope with them.

Business risk. Even today, there are people who have worked for one company for many years and who own great amounts of corporate stock, perhaps as a significant portion of their 401(k) investments or overall portfolio. Are you one of them? Here’s a word for you: Enron. It is risky to link your financial future to the health and viability of one company.

Advisor risk. We can be thankful, as investors and as a society, that Bernie Madoff represents an unfortunate aberration in the financial services industry. Financial advisors, investment advisors representatives, money managers – hundreds of thousands of them work by strict legal, ethical, and moral standards. If they don’t, they risk losing their livelihoods, or worse. But, very rarely, you do read stories of financial services professionals who have proved charlatans. One way to combat this risk is to check out the advisor. You can do it through the free Broker Check record search offered by the Financial Industry Regulatory Authority (finra.org/brokercheck), and through your state securities administrator. This risk, although thankfully rare, does give one pause to think about the value of having a strong cash position and diversification beyond the standard investment vehicles.

Brokerage risk. At mid-decade, if you had walked around Manhattan saying Lehman Brothers would go bankrupt, few would have paid you any mind. But it happened – not just because of the financial climate, but because of decisions management made.

Of course, brokerages only handle your investments; they are prohibited from tapping into your assets or lending them out when they get in a jam. The Securities Investor Protection Corporation protects up to $500,000 of your assets at a brokerage – including stocks, bonds, money market funds, and cash up to $100,000.¹ In the 39-year history of the SIPC, just 349 brokerage account holders have failed to get their entire portfolios back.² But SIPC coverage doesn’t cover everything – fixed annuity contracts, commodity futures contracts, and certain investment contracts such as limited partnerships aren’t protected.¹ SIPC does not cover market lose either. Additionally, there have been a few brokerages that have lost their SIPC membership, for a variety of reasons. Again, it pays to be vigilant, and to diversify.

Political risk. Americans don’t always link politics and financial pressures, except when it comes to oil and gas prices. Yet earlier this decade – I don’t have to tell you the date – the financial markets were rocked by an unimaginable human tragedy and a new kind of global threat. The plunge was temporary, and it was a bear market at the time. But the DJIA fell 685 points in a day and 14.26% across the succeeding week.³ These risks, too, make you think about the value of diversification.

Currency risk. Many investors don’t incorporate this factor into risk assumptions. But fluctuating exchange rates do present a risk element. If you have stocks in Canada that gain 6% but the Canadian dollar loses 6% of its value relative to the U.S. dollar, so much for that return.

Inflation risk. Inflation – even moderate inflation – effectively reduces your purchasing power over time. This is why growth investing is a priority in retirement.

Bottom line: be diversified. Have many baskets, not one. Speak to a qualified financial advisor to examine the financial options before you. There may be many more ways to invest your assets than you realize.

Citations

1. sipc.org/pdf/SIPC_English_2008.pdf [2008]
2. money.cnn.com/2008/09/15/pf/broker_leak.moneymag/index.htm?postversion=2008091513 [9/15/08]
3. the-privateer.com/chart/dow-long.html [12/31/08]

A0178_10

Originally posted. March 22, 2010

“One of the dominant themes from our research is that breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another.” – Jim Collins, Author of Good to Great

At Rainstone Financial we create plans designed to help clients make good decisions and accumulate them one on top of another.  The challenge has always been how to make good decisions to begin with, especially when there is so much uncertainty in the future.  We work off of four first principles that seem to stand the test of time.  Regardless of fluctuations in the financial markets, recessions, how old someone is or what type of work they do, these principles still hold true.

Principle 1: Think long term regarding goals and investments.
Principle 2:  Spend less than is earned.
Principle 3:  Maintain liquidity, a.k.a. Emergency Savings.
Principle 4:  Minimize the use of debt.

Out of all the first principles, only number one involves a mental exercise to create.  It makes the probability of sticking to the remaining principles more likely. Using conclusions found in “Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making” by Katherin L. Milkman, Todd Rogers and Max H. Bazerman.

The central theme is the internal conflict in our heads.  Imagine a cartoon character with a whispering angel (the should) on one shoulder and a fiery devil (the want) on the other offering competing recommendations.  The metaphor illustrates that we behave as if we are two people:

1. A want self, fighting for whatever will bring more short-term pleasure and
2. A should self, representing an individual’s long-term interests.

We will explore short sightedness in decision making and how to overcome these potentially devastating financial decisions. We have five techniques to help squelch the want and promote the should.

1.  Make the Choice in Advance

One of the best ways to silence the want is to make the decision in advance.  When we work out a decision prior to having to choose, it is the should that is in charge.  If you plan out your meals in advanced it is less likely you will end up eating pizza every night.  Developing a Financial Plan maps out these should decisions in advance, decreasing the chances of detrimental outcomes based on wants.

2.  Compare Similar Options

The study finds that when people choose without comparing options, the want easily gets out of control.  Without comparison it is easier to justify bad decisions.  Direct comparisons force us to rationally weigh the costs and benefits of a choice.  By way of testing alternate scenarios in a financial plan, clients are able to make the choices that lead to the highest probability of achieving their goals.

3.  Avoid Decisions Under Pressure

Spur of the moment decisions enable our basic desires to take over.  When our minds are occupied by time constraints or other distractions, less brain function gets dedicated to the task at hand.  Next time you go to a car dealership, put off you decision until you get home and can think without the salesman putting the tight shoes on you.  Given the proper time and environment you are more likely to make the right decision.  Having a Financial Plan helps diminish the desire for short term investment gains or panic when the markets head in the wrong direction.  We can also include major purchases such as vehicles or home improvements to avoid impulse spending when cash flow is inadequate.

4.  Make One-Shot Decisions

Have you ever told yourself, “I’ll have cake today, then I’ll eat healthy the rest of the week.”  How likely is it that you will eat healthy for a whole week if it can’t be done right now?  All sorts of strange things happen when we imagine the choices we are making now as one in a series.  There are no guarantees the remaining decisions will ever come into being.  It really needs to come down to “Am I going to be good or bad right now?”  The key to a Financial Plan is assistance from the trusted advisor in carrying out the plan, someone to hold us accountable for the remaining actions that still need to be completed to achieve your goals.

5.  Use Commitment Devices

Can we stop ourselves acting on impulse by committing to a course of action that is in our long term interests? Of course we can, we just need to take the choice away from the want.  In personal financial planning, putting money in a 401k or IRA is a device to save for the future.  Withdrawing funds pre-maturely from these qualified retirement plans will impose pain in the form of taxes and penalties. The childhood equivalent might be a piggy bank that needs to be smashed to access the funds inside.  It is always important to make sure there is an adequate emergency fund before tying funds up in a long term investment or account.

Conclusion

A Financial Plan that is tailored to your goals, assets and cash flow is the best way to utilize these techniques.  May we all be able to ignore the devil on our shoulders and do what we should.

Visit the Financial Planning section of Rainstone Financial

Originally posted. June 28, 2011

September is National Life Insurance Awareness Month

When was the last time you looked at your life insurance coverage? Why not do it now? September is as good a time as any – in fact, this is National Life Insurance Awareness Month. The non-profit Life and Health Insurance Foundation for Education (LIFE) wants to awaken Americans to the need for life insurance, and its remarkable utility as an estate planning and tax-saving tool.

What? You don’t have insurance? You’re not alone. According to LIFE, 68 million adult Americans have no life insurance coverage. (That means about 30% of us.) In September 2008, a LIFE poll found that 27% of adult Americans would be willing to cancel their life insurance coverage to save money in hard times.^1,2

Watch a life insurance commercial, and you’re likely to see a young or maturing family. However, this is hardly the only context in which life insurance matters.

• It can be a vital part of a financial strategy for empty-nesters who want to retire to a comfortable lifestyle.
• A buy-sell agreement funded with life insurance allows a surviving business owner to buy the company interest of a deceased owner at a previously established price. Key-person insurance can aid a business if a core employee passes away. (It is possible for a business to fund a buy-sell agreement and key-person insurance with pre-tax dollars, making these moves truly tax-efficient.)

Your only way to send money to the future on a tax-free basis. Some people buy a life insurance policy and name a son or daughter as a beneficiary. This thoughtful decision has one little downside. If you own the policy, the death benefit is included in your taxable estate.³

You have an alternative here. You don’t have to own your life insurance policy. Your children (or other beneficiaries) can own it. If they do, they will receive a large payout free from federal estate and income taxes when you pass away.³

You can make gifts to your kids to acquire the insurance, and your kids can pool their money and buy policies on Mom and Dad. The more kids you have, the less the premium burden. Not only that, some policies can build up cash value (tax-free growth within the policy).

Here’s another way to remove life insurance proceeds from your taxable estate: an irrevocable life insurance trust. You can have the trust own the policy, and you can periodically fund the policy through gifts made to the trust. The trust will get the proceeds from your policy when you die, and those proceeds can be distributed according to your wishes – they can go to your loved ones or charity, they can be used to pay estate taxes.³

A way to help you as you plan to build wealth. There are cash-rich life insurance policies with tax-advantaged savings features that offer you the potential to earn interest based on the gains of an equity index. Others permit you to direct a percentage of your premiums to investment sub-accounts which may generate tax-free earnings. These policies can be useful when it comes to business continuation and employee benefits, retirement planning, education planning and estate planning.

Insuring yourself may be cheaper than you think. Let’s say you just want term life, just basic life insurance without the capability to accumulate cash value. Well, good news: the Insurance Information Institute found that premiums for standard-risk term life insurance fell 50% between 1994 and 2007, corresponding to reduced mortality rates.⁴ Not only that, the Institute says term insurance premiums have fallen by more than 4% per year since 2000. (For the record, premiums on cash value policies are about 5% lower today compared to a decade ago.)⁵

Are you adequately insured? Are you using life insurance smartly? Life insurance is like the Swiss Army knife of estate planning: there are so many ways you can use it as you plan to pursue your goals. Whether you simply need to insure yourself or need to protect your estate through sophisticated planning, September is the month to think about life insurance – and all the ways it can potentially help you financially.

Citations

1. lifehappens.org/content/view/655/479/ [9/1/09]
2. lifehappens.org/content/view/522/479/ [9/18/08]
3. wellsfargoadvisors.com/financial-services/estate-planning/estate-taxes.htm [9/3/09]
4. msnbc.msn.com/id/18926723/ [5/29/07]
5. registeredrep.com/wealthmanagement/insurance/people_living_longer_0819/ [8/19/08]

A0812/09

Originally posted. November 4, 2009

A noted economist disputes that generalization.

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”
Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.¹

Examining this Labor Department finding, the Post feature referenced longevity and the loss of traditional pension plans as contributing factors. It presented stories of older workers who didn’t think they could easily retire, and quoted respected commentators such as Alicia Munell, director of the Center for Retirement Research at Boston College, who remarked that “some of these people are just clinging by their fingernails to jobs.”¹

But is there more to the story? It turns out that Americans were trending toward staying in the workforce longer even before the recession. In 1994, Orszag notes, 43% of Americans aged 60-64 were working; in 2006, it was 51%. Nearly half of 62-year-olds went and claimed Social Security benefits in 1994, but 12 years later, less than 40% of 62-year-olds followed suit.²

Orszag mentions another factor that may have kept older employees working during the recession: declining home equity. Put that alongside diminished IRA and 401(k) balances, and there was every reason to stay on the job these last few years.

However, just because older Americans wanted to keep working didn’t mean that they could.

In the 2011 edition of its respected Retirement Confidence Survey, the Employee Benefit Research Institute found that 45% of retirees ended their careers earlier than they wanted to, in many cases due to layoffs and health issues.³

The Post article noted that the jobless rate for workers older than 55 was just 3.2% in December 2007 when the downturn began. In December 2011, it was up to 6.2%.¹

The percentage of employed Americans aged 60-64, which had steadily risen during the 1990s and early 2000s, has remained at roughly 51% for the past five years.²

That brings us to Orszag’s central point: “The bottom line is that people’s retirement decisions aren’t always entirely voluntary.”²

How about your retirement decision? Do you think you will retire when you want to retire? Are you prepared for retirement financially? A new year is a good time for a new look at the state of your finances and your retirement readiness. With astute planning, you might be able to retire sooner than you think.

Citations.

1. www.usatoday.com/USCP/PNI/NEWS/2012-01-17-PNI0117biz-older-workersART_ST_U.htm [1/11/12]
2. mobile.bloomberg.com/news/2012-01-18/look-at-jobs-before-leap-on-older-retirement-commentary-by-peter-orszag [1/18/12]
3. www.ebri.org/pdf/briefspdf/EBRI_03-2011_No355_RCS-2011.pdf [3/15/11]

Originally posted. January 23, 2012

Little details worth paying attention to as April approaches.

Every year, the IRS institutes big and little changes – and some don’t get as much notice as they should. This year is no exception. Here is a rundown of some of alterations and asterisks affecting taxpayers this year.

Don’t forget Form 8949. If you are reporting capital gains or losses for 2011, you must file this new form along with your return. Speaking of new paperwork, if you own foreign financial assets whose total value exceeds the applicable reporting threshold, you will need the new Form 8938.¹

Be sure to report Roth rollovers. Back in 2010, did you convert or roll over a traditional IRA to a Roth IRA or other Roth account? If you didn’t report the amount of the rollover on your 2010 federal return, you can report half the amount on your 2011 return and the remaining half in 2012.¹

A select few can still take the first-time homebuyer credit. By 2011, the credit had disappeared for just about everybody … but select military personnel and intelligence agents are still able to claim the credit for 2011.¹

If you’re deducting mileage, rates changed in the middle of 2011. The IRS is giving taxpayers a better break given the recent hikes in gas prices. So, if you’re deducting mileage driven while operating an automobile for business, the rate for the first six months of 2011 is $0.51 per mile, and the rate for the last six months of 2011 is $0.555 per mile. The standard deduction rate for medical or moving mileage was also raised: $0.19 a mile from January 1-June 30, $0.235 a mile from July 1-December 31. The mileage deduction rate for providing services for charitable organizations got no boost – for all of 2011, it is $0.14 per mile.²

Fewer cars qualified for the alternative motor vehicle credit last year. Only new fuel cell motor vehicles qualified for the tax break in 2011.¹

Three healthcare changes to note. If you qualify for the health coverage tax credit (HCTC), that credit might be larger for 2011 thanks to recent law changes. Did you receive the 65% tax credit in any of the last 10 months of 2011? If so, you get to claim an additional 7.5% retroactive credit on your 2011 federal return – the HCTC was bumped up to 72.5% from 65%.³

The range of qualified medical expenses was reduced for HSAs & MSAs last year. In 2011, only prescription drugs and insulin counted as qualified medical expenses for these accounts. Another asterisk worth noting: if you took a distribution from an HSA or MSA in 2011 that wasn’t used for a qualified medical expense, the tax penalty for that increased to 20% last year.¹

Lastly, take the self-employed health insurance deduction on your Form 1040 for 2011. If you are looking at Schedule SE and wondering where it went, it has migrated over to line 29 of Form 1040.¹

The AMT exemption amount got another COLA. Thanks to this adjustment, you are subject to the AMT for tax year 2011 only if you earned more than $48,450 as a single filer, $37,225 if married filing separately, or $74,450 if filing jointly.¹

Don’t send your return to an obsolete filing address. Some of the filing locations for federal tax returns have recently changed. Visit www.irs.gov to see where you should send your return this year – it is probably the same address as always, but check and see as it may be different.¹

Finally, you get two extra days. Procrastinators, take heart: once again, the federal filing deadline this year falls on Tuesday, April 17. That’s because April 15 is a Sunday and April 16 is a holiday within the District of Columbia (Emancipation Day).¹

This material is for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. JW Cole Financial, Inc.(JWC) and its Representatives do not provide or offer tax/legal advice.  

Citations

1. www.advisorone.com/2012/03/05/irs-top-12-tax-law-changes-for-2012 [3/5/12]
2. www.irs.gov/newsroom/article/0,,id=240903,00.html [6/23/11]
3. www.irs.gov/individuals/article/0,,id=109960,00.html [2/24/12]

The Need to Attract and Retain Employees

Employers have increasing been the providers of retirement plans for employees and this has created a dilemma for many small businesses¹. When competing for talent with larger rivals, not having a plan might make it difficult to attract or retain quality employees. However, the fixed costs of administrating a plan weigh heavier on the small employer, for instance a $1,500 annual fee breaks down to  $150 per employee for a 10 person firm. A larger organization with 100 employees may have a lower per employee cost of $15, making the expenditure a more attractive employee benefit. In addition, the investment provider and third party administrator might discount the administrative costs based on the assets in the plan, another advantage for larger employers.

The Need to Reduce Costs

Businesses of all shapes and sizes are looking for ways to boost the bottom line, finding cost savings is currently at a premium. We have seen a wave of employers migrating away from plans purchased through a payroll providers and transferring them to a micro 401(k) provider. At Rainstone Financial we recently reviewed one of our Small Business Client’s qualified retirement plan and recommended they make a change to their 401(k). The Client has 8 employees in a 401(k) through Paychex with an administrative cost of $125 monthly. After reviewing the employer’s needs it was determined a micro 401(k) with an administrative cost of $250 annually was more appropriate². This continues to provide the employer with all the same features as the payroll provided plans with a reduced cost. It is important to ensure the new plan has adequate investment options, flexible plan design and is easy for the employer to submit contributions.

Flexible Plan Design

Micro 401(k) plans offer small business a flexible way to invest for their retirement and allow retirement
savings for their employees through:

• Discretionary salary deferral contributions including catch-up contributions for employees over 50.
• Roth Contributions without the phase-out present in Roth Individual Retirement Accounts (optional).
• Loans may be permitted if allowed by the plan sponsor subject to certain limitations (optional).
• Safe Harbor matching (optional).
• Profit Sharing (optional).

The flexible nature of micro 401(k) plans allows business owners to start, stop or later alter their salary deferral. The Safe Harbor matching contributions plan design eliminates otherwise standard non-discrimination testing requirements (provided all requirements are satisfied).

Flexible Distribution Options

Subject to certain distribution requirements, business owners and their employees have access to their 401(k) account based on certain common distribution triggers. Distributions are generally available upon:

• Reaching age 59½
• Separation from service
• Death or Total disability
• Termination of the plan
• A qualified financial hardship

The plan document will define the options for each 401(k) plan. Distributions are subject to ordinary income taxes and could also be subject to a 10% penalty if made before reaching 59½.

Consolidation

New tax laws now make it possible for plan participants to consolidate all of their retirement accounts by rolling over or transferring their assets in their 401(k) account.

Safe Harbor Design Eases Administration

Since micro 401(k) plans are geared toward very small business, they elect to use a Safe Harbor design to avoid complex and sometimes costly testing requirements. Administration services are offered through micro 401(k) providers or third party administrators.

Who may be a likely candidate for a micro 401(k)?

1. Small Businesses with 10 participating employees or less.
2. Business owners looking for a plan that offers higher salary deferral contribution limits over Traditional , SEP and SIMPLE IRAs³.
3. Small business owners who previously declined 401(k) setup due to administrative and cost concerns.
4. Businesses with employees who desire to defer for their retirement savings.

Who may not be a likely candidate for a micro 401(k)?

1. Small Business with more than 10 participating employees.
2. Businesses that have contributed to a SIMPLE IRA already in 2011 or have had the SIMPLE IRA for less than two years⁴.
3. Small Business where the only employees are owners or owners’ spouses, a Solo-401(k) may be more appropriate⁴.

Citation

1. Employee Benefit Research Institute. Retirement Plan Participation: Survey of Income and Program Participation (SIPP) Data, 2006. February 2009, Vol. 30, No. 2: pp 16.
2. Hartford Emerging Business Platform with Dyatech EB Plan Link as the Third Party Administrator. Setup fee $0, annual administration $250.
3. U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. Choosing a Retirement Solution for Your Small Business. Washington D.C.: 2007.
4. Department of the Treasury and the Internal Revenue Service. Publication 560: Retirement Plans for Small Business (Sep, SIMPLE and Qualified Plans). January 15 2009, pp 21.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete

Joseph Regenstein IV, a Financial Planner, offers advisory services through Jonathan Roberts Advisory Group, Inc.  He offers securities through J.W. Cole Financial, Inc. Member FINRA/SIPC.  To contact email jregenstein@rainstonefinancial.com, call Rainstone Financial at 407-412-7028  or mail to 3731 Safflower Terrace, Oviedo, FL 32766

Originally posted. August 12, 2010

There is more than one way to save for college.

Today, some parents are wondering if they should convert Coverdell Education Savings Accounts to 529 college savings plans. With that mind, here is a brief look at how both of these accounts work.

Why have Coverdell ESAs been so popular? Imagine a Roth IRA used only for college savings. That’s basically the concept behind a Coverdell. In fact, the Coverdell ESA evolved from the Education IRA.¹¹

Contributions to a Coverdell ESA aren’t deductible, but you get tax-deferred growth. Contributions must be made in cash. Withdrawals from Coverdells are (currently) tax-free if used for qualified educational expenses such as tuition, fees and books. The funds can also pay for certain K-12 education costs.^1,2

You can allocate Coverdell account assets among many different kinds of investment vehicles, and many banks, credit unions offer these accounts. However, Coverdells have some drawbacks. The annual contribution limit to a Coverdell is $2,000, and an individual taxpayer with modified adjusted gross income above $110,000 cannot contribute to a Coverdell (the MAGI limit is $220,000 for joint filers, with phase-outs kicking in at $190,000).^2,3

Aside from a limit on annual contributions, there are also some age requirements. The Coverdell ESA beneficiary must be younger than 18 when the account is set up and the money in the account must be spent or transferred before the beneficiary turns 30. At that point, the funds will have to be withdrawn and taxes and a 10% penalty may be assessed on the withdrawal. (If a beneficiary has special needs, contributions after age 18 and retention of the account assets after age 30 may be allowed; see IRS Publication 970 for details.)^1,2

Big changes are scheduled for Coverdells in 2013. Unless Congress intervenes, these accounts will be a lot less attractive next year. Beginning in 2013:

• The annual contribution limit will drop from $2,000 down to $500.
• Distributions will be tax-free only if you don’t claim a Hope or Lifetime Learning Credit in the same tax year.
• No withdrawals may be used to pay for K-12 education expenses.⁴

All this has many parents thinking about shifting their Coverdell funds to a 529 plan.

Thinking of moving Coverdell assets into a 529? You can do a rollover from a Coverdell ESA to a 529 plan without incurring any tax penalties as long as the 529 plan will have the same beneficiary as the present Coverdell account.⁵

Earnings from a 529 plan can be distributed tax-free (assuming they are used for qualified education expenses). Contributions are taxed.⁶

You can go one of two ways with a 529:

• You can prepay tuition at today’s rates (at a qualifying college or university) through a 529 prepaid tuition program.
• You can save to pay tomorrow’s college tuition through a 529 savings plan which gives you tax-deferred growth. Most people prefer this option for its flexibility and asset accumulation potential.⁷

You can put much more money into a 529 annually than a Coverdell. Many 529 plans allow annual contributions of more than $200,000. Some do have “lifetime” limits on total contributions. Regular contributions must be in cash.^8,9

A 529 plan has no phase-outs. You will never be too rich to put money into a 529 plan. There are no income restrictions affecting plan contributions.⁶

Need to remove some money from your taxable estate? A 529 plan gives you an option to do just that. In 2012, a contribution of $13,000 a year or less to a 529 plan qualifies for the annual federal gift tax exclusion. So you and your spouse can take advantage of this, andso can your relatives. So can anyone. In fact, any taxpayer can contribute up to five times the annual gift tax exclusion to a 529 plan (in 2012, $13,000 x 5 = $65,000) without incurring gift taxes or eating into the unified credit, as long as that taxpayer refrains from making other cash gifts to the 529 plan’s designated beneficiary for the next five years. (For married couples filing jointly, this limit is $65,000 x 2 = $130,000.) This $65,000 will only be included in the donor’s taxable estate if the donor dies within the aforementioned five-year period.^6,8

Other nice features. As the owner of a 529 plan, you retain control of the assets and have the power to change the designated beneficiary (each 529 plan may only have one). ^6,8,10

You may wish to move assets from a Coverdell ESA to a 529 plan. You certainly will want to keep up with developments affecting these accounts and other education savings options. Your financial professional can help you stay informed.

Citations.

1. irs.gov/newsroom/article/0,,id=107636,00.html [10/5/11]
2. irs.gov/pub/irs-pdf/p970.pdf [2/14/12]
3. personal.vanguard.com/us/insights/article/coverdell-esa-extend-03012011 [3/1/11]
4. https://www.edwardjones.com/en_US/products/education_saving/coverdell/index.html [6/28/11]
5. law.cornell.edu/uscode/search/display.html?terms=529&url=/uscode/html/uscode26/usc_sec_26_00000530—-000-.html [2/16/12]
6. irs.gov/newsroom/article/0,,id=213043,00.html [6/15/11]
7. smartmoney.com/spending/deals/the-529-basics-10676/ [2/3/10]
8. learn.bankofamerica.com/articles/money-management/529-college-savings-plans-explained.html [6/28/11]
9. investopedia.com/university/retirementplans/529plan/529plan1.asp [9/28/10]
10. schwab.com/public/schwab/planning/college_planning/529_plan/faqs [9/7/10]
11. www.fool.com/money/allaboutiras/allaboutirasglossary.htm   [2/16/12]

What does it mean for people and companies?

Is 70 the new 65? It may be, for many Americans are electing to postpone retirement as an effect of the recent volatility in the financial markets. If 70 is the new 65, some workplace changes are worth noting – these trends may be affecting you, your employer, and your financial future.

Retirement will increasingly be a process, not an event. In the years ahead, more and more people will probably leave the workplace gradually. For baby boomers that want to stay active and engaged, this isn’t necessarily a bad thing. A vice-president who worked 50 hours a week may become a consultant or a coach working three days a week. Or he or she might simply want to work less, for less pay, or make a lateral move within a company that would allow an exit on his or her terms.

Boomers will have the opportunity to shape their exit. If gradual retirement becomes more common (and today’s financial pressures would seem to make it so), expect more and more mature employees to negotiate the terms of their retirement – how many hours they will work on their way out, how accessible they will be, if they will work from home or the office, and who will take the reins in their hands someday. If a boomer offers a personal exit plan of sorts that will help a business to cut labor costs without losing a valued employee, isn’t that a favor to management?

Businesses and non-profits face a tough question. The 2009 Retirement Survey from the Employee Benefit Research Institute found that 51% of Americans age 25 and older now think they will retire at age 66 or older. In June 2009, the Bureau of Labor Statistics estimated that 23% of Americans employed or seeking work were age 55-64.¹

This is problematic for businesses, who in this economy might want to pay older workers to retire so that they can stay profitable. Universities, state and local governments and public agencies will probably not see the same kind of retirement turnover they did in the past. Should they stop recruiting new managers, new faculty, or new administrators for the near future? Organizationally, what is the economic value of retaining wisdom and experience?

Will we see a wave of “retirement”? In the EBRI survey, 20% of the roughly 1,200 respondents felt they would never retire, compared to 11% in the 2007 poll.¹ Part of that increase obviously reflects what happened in the stock market, but it also may represent a perception shift in progress. Baby boomers are doers, proud contributors to society who are tearing up the old retirement template. It could be that two distinct phases of American life are emerging – one in which you work for a living, followed by another in which you work for meaning. It may lead to a wave of mature employees, professionals and entrepreneurs – a zeitgeist of sorts, the likes of which this country has never seen.

A0736/09

Originally posted. November 12, 2009

1. online.wsj.com/article/SB124744102811929845.html [7/13/09]