PLJ Advisors

You're in the Money! Now What?

2011-05-23T10:00:00.000-07:00

If you're the beneficiary of a large inheritance, you may find yourself suddenly wealthy. Even if you expected the inheritance, you may be surprised by the size of the bequest or the diverse assets you've inherited. You'll need to evaluate your new financial position, learn to manage your sizable assets, and consider the tax consequences of your inheritance, among other issues.

Issues that arise in connection with an inheritance
If you've recently received a bequest, consider the possibility that the will may be contested if your inheritance was large in comparison with that received by other beneficiaries. Or, you may decide to contest the will if you feel slighted.

If you're the spouse of the decedent, you may elect to take against the will. Taking against the will means that you're exercising your right under probate law (governed by the statutes of your state) to take a share of your spouse's estate, rather than what your spouse left you in the will, because this is more beneficial to you. Another possibility is that you may disclaim the bequest if you're in a high income or estate tax bracket, or don't need or want the bequest.

Tip: If you've inherited assets from your spouse or a family member, you may be in charge of settling the estate, claiming survivor's benefits, and dealing with other financial and emotional issues at a time when you're grieving. For more information on these issues, see Loss of a Spouse/Family Member.

Caution: Some states allow no-contest clauses to be included in wills. If a will has such a clause and someone contests the will and loses, he or she gets nothing.

Evaluating your new financial position
It's important to determine how wealthy you are once you receive your inheritance. Before you spend or give away any money or assets, decide to move, or leave your job, you should do a cash flow analysis and determine your net worth as a first step toward planning your financial strategy. Your strategy will partly depend on whether you have immediate access to, and total control over, the assets, or if they're being held in trust for you. In addition, you need to know what types of assets you've inherited (e.g., cash, property, or a portfolio of stocks).

Inheriting assets through a trust vs. inheriting assets outright
When you inherit money and assets through a trust, you'll receive distributions according to the terms of the trust. This means that you won't have total control over your inheritance as you would if you inherited the assets outright. With a trust, a trustee will be in charge of the trust. A trustee is the person who manages the trust for the benefit of the beneficiary or beneficiaries. The initial trustee was named by the individual who set up the trust. The trustee will likely be your parent or other family member, a close family friend or advisor, an attorney, or a bank representative. The trust document may spell out how the trust assets will be managed and how and when trust income and assets will be paid to you, and it will outline the duties of the trustee.

Know the terms of the trust
If you're the beneficiary of a trust, the following should be done to ensure that your interests are protected:

* Read the trust document carefully. You have the right to see the document, so if you can't get a copy, hire an attorney to get it. Go over the document yourself or with the help of a legal or financial professional, making sure you understand the language of the trust and how its income and principal will be distributed to you. You may be the beneficiary of an irrevocable trust (can't be changed), or you may be the beneficiary of a revocable trust (can be changed). In addition, determine whether certain practices are allowed or prohibited. For example, one common trust provision prohibits a beneficiary from borrowing against the trust. Another can prevent the beneficiary from paying creditors with assets of the trust. An additional provision usually prohibits creditors from attaching a beneficiary's share of the trust.

* Determine if the trust income is sufficient to meet your needs. Is the trust heavily invested in long-term growth stocks or non-rental real estate? Or, is the trust invested in things that provide income to you now, such as rental real estate or money market funds? From your agent (e.g., attorney, accountant) or trustee, get the income statements used to calculate how much income will be distributed to you.

* Get to know your trust officers (if any) and find out how much the trustee fees are. Then, compare the fee with the average in your state or county (you might ask your local bank for this information). You may be able to negotiate the fee if it is too high, especially if the estate is large.

Working with a trustee
In some trusts, the trustee must distribute all of the income to the beneficiary every year. This type of trust may be simple to administer and relatively conflict free. You may want to work with the trustee or other professionals to ensure that the annual trust distribution is adequate to meet your needs.

In other trusts, the trustee may decide when to distribute trust income and how much to distribute. If this is the case, open communication with the trustee is important. You'll need to set up a sound budget or financial plan and carefully prepare your request for a trust distribution if it is out of the ordinary. It's in your best interests to find a way to work with the trustee. In most states, trustees are difficult to replace, and although they're not supposed to lose money on investments, they're not usually penalized if the trust performs poorly. If you decide to sue the trustee for mismanaging the trust, his or her legal fees may be paid for from the trust.

Caution: No matter how trust funds are distributed, pay close attention to how the trustee handles the trust investments. Have your lawyer, accountant, or financial advisor look over the trustee's investment strategy. If your advisor determines that the trustee's investment strategy doesn't meet your needs or, worse, is unsound, discuss this strategy with the trustee or possibly ask the trustee to change his or her strategy.

Inheriting a lump sum of cash
When you inherit a large lump sum of cash, you'll be responsible for managing the money yourself (or hiring professionals to do so). Even if you're used to handling your own finances, becoming suddenly wealthy can turn even the most cautious individual into a spendthrift, at least in the short run. Carefully watch your spending. Although you may want to quit your job, move, gift assets to family members or to charity, or buy a car, a house, or luxury items, this may not be in your best interest. You must consider your future needs, as well, if you want your wealth to last. It's a good idea to wait a few months or a year after inheriting money to formulate a financial plan. You'll want to consider your current lifestyle, consider your future goals, formulate a financial strategy to meet those goals, and determine how taxes may reduce your estate.

Inheriting stock
You may inherit stock either through a trust or outright. The major question to consider is whether you should sell the stock. This depends on your overall investment strategy and what type of stock you've acquired. If you acquire stock in a company, for example, and you now own a controlling interest, you'll need to look at how actively you want to be involved in the company or how much you know about the company. If you inherit stock and find that it doesn't fit your portfolio, you may consider selling it, depending on the market conditions.

Inheriting real estate
If you inherit real estate, such as a house or land, you'll probably have to decide whether to keep it or sell it. If you keep it, will you live there or rent it out? Do you hope that the house will appreciate in value, or are you keeping it for sentimental reasons? If you decide to sell or rent the house, you'll need to consider the tax consequences, as well. For more information, see Personal Residence and Vacation Home Tax Planning.
Tip: It's possible that you may inherit real estate or other assets together with others, and sales may require the other owners' assent or court action to sever the property.

Short-term and long-term needs and goals
Once you've done a cash flow analysis and determined what type of assets you've inherited, you need to evaluate your short-term and long-term needs and goals. For example, in the short term, you may want to pay off consumer debt such as high-interest loans or credit cards. Your long-term planning needs and goals may be more complex. You may want to fund your child's college education, put more money into a retirement account, invest, plan to minimize taxes, or travel.

Use the following questions to begin evaluating your financial needs and goals, then seek advice on implementing your own financial strategy:

* Do you have outstanding consumer debt that you would like to pay off?
* Do you have children you need to put through college?
* Do you need to bolster your retirement savings?
* Do you want to buy a home?
* Are there charities that are important to you and whom you wish to benefit?
* Would you like to give money to your friends and family?
* Do you need more income currently?
* Do you need to find ways to minimize income and estate taxes?

Tax consequences of an inheritance
Income tax considerations
In general, you won't directly owe income tax on assets you inherit. However, a large inheritance may mean that your income tax liability will eventually increase. Any income that is generated by those assets may be subject to income tax, and if the inherited assets produce a substantial amount of income, your tax bracket may increase. Once you increase your wealth, you should look at ways to minimize your overall tax liability, such as shifting income, giving money to individuals or charity, utilizing other income tax reduction strategies, and investing for growth rather than income. You may also need to re-evaluate your income tax withholding or begin paying estimated tax. For more information, see Tax Planning for Income.

Estate tax considerations
If you're wealthy, you'll need to consider not only your current income tax obligations but also the amount of potential federal estate taxes and state death taxes that your beneficiaries may have to pay upon your death. If your estate will be worth more than the applicable exclusion amount ($3.5 million in 2009), consider looking at ways to minimize potential estate taxes. Four common ways to minimize potential estate taxes are to (1) set up a marital trust, (2) set up an irrevocable life insurance trust, (3) set up a charitable trust, or (4) make gifts to individuals and/or to charities. For more information, see Federal Gift and Estate Taxes (the Unified Transfer Tax System) and State Death Taxes.
Tip: The estate tax applicable exclusion amount is $3.5 million in 2009. The estate tax is scheduled to be repealed in 2010. (Also, in 2010, the current rule allowing a basis step-up at death will be replaced with carryover cost basis.) The estate tax is scheduled to be reinstated in 2011, with the applicable exclusion amount decreasing to $1 million.

Impact on investing
Inheriting an estate can completely change your investment strategy. You will need to figure out what to do with your new assets. In doing so, you'll need to ask yourself several questions:

* Is your cash flow OK? Do you have enough money to pay your bills and your taxes? If not, consider investments that can increase your cash flow.
* Have you considered how investing may increase or decrease your taxes?
* Do you have enough liquidity? If you need money in a hurry, do you have assets you could quickly sell? If not, you may want to consider short-term, rather than long-term, investments.
* Are your investments growing enough to keep up with or beat inflation? Will you have enough money to meet your retirement needs and other long-term goals?
* How risky are your investments? Often, the more risk you take, the higher your return in the long run. However, consider your tolerance for risk. Are you willing to risk losing part or all of the inheritance you've invested?
* How diversified are your investments? Don't put all your eggs in one basket. If you diversity your investments, you decrease your risk.

For example, suppose you inherit an assortment of high-tech stocks. If the computer industry has a bad year, all of your stocks may decline in value. But if you diversify by selling some high-tech stocks and investing some of that money in utilities, some in international stocks, and some in blue chip stocks, you have decreased the likelihood that all of your stocks will perform poorly at the same time.

Once you've considered these questions, you can formulate a new investment strategy. However, if you've just inherited money, remember that there's no rush. If you want to let your head clear, put your funds in an accessible interest-bearing account such as a savings account, money market account, or a short-term certificate of deposit until you can make a wise decision with the help of advisors.
Impact on insurance

When you inherit wealth, you'll need to re-evaluate your insurance coverage. Now, you may be able to self-insure against risk and potentially reduce your property/casualty, disability, and medical insurance coverage. (However, you might actually consider increasing your coverages to protect all that you've inherited.) You may want to keep your insurance policies in force, however, to protect yourself by sharing risk with the insurance company. In addition, your additional wealth results in your having more at risk in the event of a lawsuit, and you may want to purchase an umbrella liability policy that will protect you against actual loss, large judgments, and the cost of legal representation. If you purchase expensive items such as jewelry or artwork, you may need more property/casualty insurance to protect yourself in the event these items are stolen. You may also need to recalculate the amount of life insurance you need. You may need more life insurance to cover your estate tax liability, so your beneficiaries receive more of your estate after taxes. For more information, see Tax Planning with Life Insurance.
Impact on estate planning
Re-evaluating your estate plan

When you increase your wealth, it's probably time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your exposure to potential taxes and creating financial security for your family and other intended beneficiaries. For more information, see Introduction to Estate Planning.

Passing along your assets
If you have a will, it is the document that determines how your assets will be distributed after your death. You'll want to make sure that your current will reflects your wishes. If your inheritance makes it necessary to significantly change your will, you should meet with your attorney. You may want to make a new will and destroy the old one instead of adding codicils. Some things you should consider are whom your estate will be distributed to, whether the beneficiary(ies) of your estate are capable of managing the inheritance on their own, and how you can best shield your estate from estate taxes. If you have minor children, you may want to protect them from asset mismanagement by nominating an appropriate guardian or setting up a trust for them.

Using trusts to ensure proper management of your estate and minimize taxes
If you feel that your beneficiaries will be unable to manage their inheritance, you may want to set up trusts for them. You can also use trusts for tax planning purposes. For example, setting up an irrevocable life insurance trust may minimize federal and state estate taxes on the proceeds. For more information, see Trusts.
Impact on education planning

You may want to use part of your inheritance to pay off your student loans or to pay for the education of someone else (e.g., a child or grandchild). Before you do so, consider the following points:

* Pay off outstanding consumer debt first if the interest rate on your consumer debt is higher than it is on your student loans (interest rates on student loans are often relatively low).
* Paying part of the cost of someone else's education may impact his or her ability to get financial aid. For more information, see Gifting for Education Savings.
* You can make gifts to pay for tuition expenses without having to pay federal gift tax if you pay the school directly. For more information, see Implementing Other Creative Solutions to Cover Higher Education Costs and Make Tax-Free Gifts of Tuition.

Giving all or part of your inheritance away
Giving money or property to individuals
Once you claim your inheritance, you may want to give gifts of cash or property to your children, friends, or other family members. Or, they may come to you asking for a loan or a cash gift. It's a good idea to wait until you've come up with a financial plan before giving or lending money to anyone, even family members. If you decide to loan money, make sure that the loan agreement is in writing to protect your legal rights to seek repayment and to avoid hurt feelings down the road, even if this is uncomfortable. If you end up forgiving the debt, you may owe gift tax on the transaction. The gift tax may also affect you if you decide to give someone a gift of money or property or a loan with a below-market interest rate. The general rule is that you can give a certain amount each calendar year to an unlimited number of individuals without incurring gift tax liability. If you're married, you and your spouse can make a split gift, doubling the annual gift tax exclusion amount per recipient per year without incurring gift tax liability, as long as you and your spouse are U.S. citizens, sign and file a gift tax return (IRS Form 709), and your spouse consents to splitting the gift. Giving gifts to individuals can also be a useful estate planning strategy. For more information, see Federal Gift and Estate Taxes (the Unified Transfer Tax System) and Lifetime (Non-charitable) Gifting.

Giving money or property to charity
If you make a gift to charity during your lifetime, you may be able to deduct the amount of the charitable gift on your income tax return. Income tax deductions for gifts to charities are limited to 50 percent of your contribution base (generally equal to adjusted gross income) and may be further limited if the gift you make consists of certain appreciated property or if the gift is given to certain charities and private foundations. However, excess deductions can usually be carried over for five years, subject to the same limitations. For estate planning purposes, you may want to make a charitable bequest that can reduce the amount of estate tax your estate may owe. Or you may want to make gifts to a charitable remainder trust. Such gifts may provide you with a tax deduction, while at the same time providing an income stream for you, your family, or a charity (with the remainder interest being held by the charity). For more information, see Charitable Gifting.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield Inc. is protected by copyright. PLJ Advisors is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Working During Retirement: The Great Debate

2011-05-20T10:00:00.000-07:00

Planning on working during retirement? If so, you're not alone. An increasing number of employees nearing retirement plan to work at least some period of time during their retirement years.

Why work during retirement?
Obviously, if you work during retirement, you'll be earning money and relying less on your retirement savings--leaving more to potentially grow for the future and making your savings last longer.

If you continue to work, you may also have access to affordable health care, as more and more employers are offering this important benefit to part-time employees.
But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment--to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new--the reasons are as varied as the number of retirees.

How working affects Social Security
If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.
But working may also cause a reduction in your current benefit. If you've reached full retirement age (65 to 67, depending on when you were born), you don't need to worry about this-- you can earn as much as you want without affecting your Social Security retirement benefit.

If you haven't yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($14,160 in 2011). A special rule applies in your first year of Social Security retirement--you'll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit ($37,680 in 2011), $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age--then you'll get your full benefit no matter how much you earn. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)

Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you've earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won't reduce your benefit.

Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.

One last important point to consider: in general, your Social Security benefit won't be subject to federal income tax if that's the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit is subject to federal income tax.

How working affects your pension
If you work for someone other than your original employer, your pension benefit won't be impacted at all--you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer. But if you continue to work past your normal retirement date for the same employer, or if you retire and then return to work for that employer, you need to understand how your pension will be impacted.

Some plans will allow you to start receiving your pension benefit once you reach the plan's normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actually increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase--in effect, you'll forfeit your benefit for any month you work more than 40 hours.

Some plans provide yet another option--"phased retirement." These programs allow you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you're still working and haven't yet reached the plan's normal retirement age.
If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected by the decision to work part-time. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received.

How working affects health benefits
Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it's important that you fully understand how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. But other employers don't, or require that you work a minimum number of hours to be benefits eligible. If your employer doesn't offer medical benefits to part-time employees, you'll need to look for coverage elsewhere. If you're married, the obvious option is coverage under your spouse's health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA.

COBRA is a federal law that allows you to continue receiving medical benefits under your employer's plan for some period of time, usually for 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it's expensive--you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn't apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will also be very expensive.

Of course, once you turn 65, you'll be eligible for Medicare. You'll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield Inc. is protected by copyright. PLJ Advisors is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Common Investment Mistakes

2011-05-18T10:43:00.000-07:00

* Making investment decisions based on emotions and not on facts

* Choosing investments that are not suited to your goals or investment time horizon

* Failing to diversify, putting all your eggs in one basket

* Reacting to short-term events and not to long-term trends

* Trying to time the market

* Buying "hot" investments with no sound basis for your decision

* Allowing fees, expenses, and/or commissions to become the major factors in making an investment decision

* Allowing fear or greed to drive your investment decisions

PLJ Advisors and Forefield Inc. do not provide legal, tax or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

How Earnings Affect Social Security?

2011-05-11T09:19:00.000-07:00

If you begin to receive Social Security retirement (or survivor's) benefits before you reach full retirement age, money you earn over a certain limit will reduce the amount of your Social Security benefit. In 2011, your benefit will be reduced by $1 for every $2 of earnings in excess of $14,160.*

The chart below shows the effect of annual earnings of $10,000, $20,000 and $30,000 on a $12,000 annual Social Security benefit ($1,000 monthly) for someone who hasn't yet reached full retirement.

Source: Social Security Administration, 2011
*Special rules apply in both the year you reach full retirement age and the year you retire if you have not reached full retirement age.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Should You Pay Off Your Mortgage or Invest?

2011-05-04T11:24:00.000-07:00

What Every Homeowner Should Know

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child's college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost
Deciding between prepaying your mortgage and investing your extra cash isn't easy, because each option has advantages and disadvantages. But you can start by weighing what you'll gain financially by choosing one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.

Here's an example. Let's assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you're paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you'll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so--the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you're paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you've calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you'll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider
While evaluating the opportunity cost is important, you'll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

•What's your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
•Does your mortgage have a prepayment penalty? Most mortgages don't, but check before making extra payments.
•How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there's less value in putting more money toward your mortgage.
•Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
•Do you have an emergency account to cover unexpected expenses? It doesn't make sense to make extra mortgage payments now if you'll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change--if you lose your job or suffer a disability, for example--you may have more trouble borrowing against your home equity.
•How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
•Are you saddled with high balances on credit cards or personal loans? If so, it's often better to pay off those debts first. The interest rate on consumer debt isn't tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you're likely to receive on your investments.
•Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you've gained at least 20% equity in your home may make sense.
•How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you're likely to be paying more in interest).
•Have you saved enough for retirement? If you haven't, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
•How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The Middle Ground
If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there's no reason you can't do both. It's as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield Inc. is protected by copyright. PLJ Advisors is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Steps To Estate Planning Success

2011-04-29T09:59:00.000-07:00

Estate planning is often something that's avoided. It can often seem overwhelming or unnecessary for the average American. But it's actually easier than you think. We've provided this easy to understand step by step guide to help you understand what you need to do to begin estate planning and how you can be prepared for whatever life throws your way.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield is protected by copyright. PLJ Advisors is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Health Savings Accounts: Are They Just What the Doctor Ordered?

2011-04-19T09:18:00.000-07:00

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How does this health-care option work?
An HSA is a tax-advantaged account that's paired with a high-deductible health plan (HDHP). Let's look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is "catastrophic" health coverage that pays benefits only after you've satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible.) For 2010 and 2011, the annual deductible for an HSA-qualified HDHP must be at least $1,200 for individual coverage and $2,400 for family coverage. However, your deductible may be higher, depending on the plan.

Once you've satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan's annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $5,950 for individual coverage and $11,900 for family coverage for 2010 and 2011. Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you're shouldering a greater portion of your health-care costs, you'll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you're saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there's no "use it or lose it" provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren't foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you've built up a balance), you could deplete your HSA or even face a shortfall.

How can an HSA help you save on taxes??
HSAs offer several valuable tax benefits:

•You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
•If you make contributions on your own using after-tax dollars, they're deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
•Contributions to your HSA, and any interest or earnings, grow tax deferred.
•Contributions and any earnings you withdraw will be tax free if they're used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA.

Can anyone open an HSA?
Any individual with qualifying HDHP coverage can open an HSA. However, you won't be eligible to open an HSA if you're already covered by another health plan (although some specialized health plans are exempt from this provision). You're also out of luck if you're 65 and enrolled in Medicare or if you can be claimed as a dependent on someone else's tax return.

How much can you contribute to an HSA?
For 2010 and 2011, you can contribute up to $3,050 for individual coverage and $6,150 for family coverage. This annual limit applies to all contributions, whether they're made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2010 contributions up to April 15, 2011). If you're 55 or older, you may also be eligible to make "catch-up contributions" to your HSA, but you can't contribute anything once you reach age 65 and enroll in Medicare.

Note: You may be able to make a one-time tax-free rollover of funds to your HSA from a health flexible spending account (FSA), a health reimbursement arrangement (HRA), or a traditional IRA (certain limits apply).

Can you invest your HSA funds?
HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How can you use your HSA funds?
You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can't use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There's no rule against using your HSA funds for expenses that aren't health-care related, but watch out--you'll pay a 10% penalty if you withdraw money and use it for nonqualified expenses, and you'll owe income taxes as well (in 2011, the penalty increases to 20%). Once you reach age 65, however, this penalty no longer applies, though you'll owe income taxes on any money you withdraw that isn't used for qualified medical expenses.

Questions to consider when weighing your options
•How much will you save on your health insurance premium by enrolling in an HDHP? If you're currently paying a high premium for individual health insurance (perhaps because you're self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
•What will your annual out-of-pocket costs be under the HDHP you're considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
•How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
•Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you're assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
•Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
•How does the coverage provided by the HDHP compare with your current health plan? Don't sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.
•What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.
PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield Inc is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Save Today: Enjoy Tomorrow

2011-04-14T12:05:00.000-07:00

A question that's often asked by people who are looking towards retirement is how do I reduce my spending? It may seem like a daunting task to cut back but it's actually quite simple.

To reduce your spending, you first need to know where your money goes. Start out by keeping track of all of your expenses for a month. None are too small or insignificant: the daily newspaper, coffee on the way to work, an extra gallon of milk, that burger at the fast-food outlet. Next, categorize the expenses so you can see what you spend and where you spend it. Be sure to factor into your monthly expenses a prorated portion of the annual cost of your irregular expenses (e.g., clothes, gifts, car maintenance, insurance premiums).

Expenses generally fall into two categories. Essential expenses are ones you can't avoid (e.g., rent, utilities, groceries, car insurance). Discretionary expenses are ones you choose to incur (e.g., eating out, entertainment, gifts, cigarettes, videos). Discretionary expenses are the ones over which you will have the most control. Do you buy a lot of books? Try the library instead. Take coffee or lunch to work rather than buy it once you get there. Limit eating out to once a week rather than twice. Quit smoking, or at least begin to cut back on the number of packs you smoke each week.

Although essential expenses are fixed, there may be ways to reduce them. Make sure you shut off the lights and TV when you leave the room. E-mail your distant friends and relatives rather than call them long-distance. Change the oil in your car on a regular basis to avoid more costly repairs due to neglect. Review your insurance policies: Can you save on your premiums by taking a nonsmoker discount or increasing your deductibles? Clip the grocery store coupons, always shop from a list, and avoid the impulse items at the end of the aisles.

Pick a realistic goal for your monthly spending reduction and try not to make too many changes all at once. To see how big a difference this can make, do the math. If you start by committing to reduce your spending by $2 a day, that's $730 a year! Set the saved money aside, perhaps in a savings account for your planned vacation, or use it for a specific purpose, such as reducing debt faster.

If you're interested in reducing your spending and tracking your expenses, we're offering you a copy of your own Personal Money Diary, (retailed at $34.95) for FREE. Fill out the form below to receive your copy.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield is protected by copyright.PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources..

Family Matters: Caring for your Loved Ones

2011-04-13T10:00:00.000-07:00

Caring for Your Aging Parents
Caring for your aging parents is something you hope you can handle when the time comes, but it's the last thing you want to think about. Whether the time is now or somewhere down the road, there are steps that you can take to make your life (and theirs) a little easier. Some people live their entire lives with little or no assistance from family and friends, but today Americans are living longer than ever before. It's always better to be prepared.

Mom? Dad? We need to talk
The first step you need to take is talking to your parents. Find out what their needs and wishes are. In some cases, however, they may be unwilling or unable to talk about their future. This can happen for a number of reasons, including:

•Incapacity
•Fear of becoming dependent
•Resentment toward you for interfering
•Reluctance to burden you with their problems

If such is the case with your parents, you may need to do as much planning as you can without them. If their safety or health is in danger, however, you may need to step in as caregiver. The bottom line is that you need to have a plan. If you're nervous about talking to your parents, make a list of topics that you need to discuss. That way, you'll be less likely to forget anything. Here are some things that you may need to talk about:

•Long-term care insurance: Do they have it? If not, should they buy it?
•Living arrangements: Can they still live alone, or is it time to explore other options?
•Medical care decisions: What are their wishes, and who will carry them out?
•Financial planning: How can you protect their assets?
•Estate planning: Do they have all of the necessary documents (e.g., wills, trusts)?
•Expectations: What do you expect from your parents, and what do they expect from you?

Preparing a personal data record
Once you've opened the lines of communication, your next step is to prepare a personal data record. This document lists information that you might need in case your parents become incapacitated or die. Here's some information that should be included:

•Financial information: Bank accounts, investment accounts, real estate holdings
•Legal information: Wills, durable power of attorneys, health-care directives
•Funeral and burial plans: Prepayment information, final wishes
•Medical information: Health-care providers, medication, medical history
•Insurance information: Policy numbers, company names
•Advisor information: Names and phone numbers of any professional service providers
•Location of other important records: Keys to safe-deposit boxes, real estate deeds

Be sure to write down the location of documents and any relevant account numbers. It's a good idea to make copies of all of the documents you've gathered and keep them in a safe place. This is especially important if you live far away, because you'll want the information readily available in the event of an emergency

Where will your parents live?
If your parents are like many older folks, where they live will depend on how healthy they are. As your parents grow older, their health may deteriorate so much that they can no longer live on their own. At this point, you may need to find them in-home health care or health care within a retirement community or nursing home. Or, you may insist that they come to live with you. If money is an issue, moving in with you may be the best (or only) option, but you'll want to give this decision serious thought. This decision will impact your entire family, so talk about it as a family first. A lot of help is out there, including friends and extended family. Don't be afraid to ask.

Evaluating your parents' abilities
If you're concerned about your parents' mental or physical capabilities, ask their doctor(s) to recommend a facility for a geriatric assessment. These assessments can be done at hospitals or clinics. The evaluation determines your parents' capabilities for day-to-day activities (e.g., cooking, housework, personal hygiene, taking medications, making phone calls). The facility can then refer you and your parents to organizations that provide support.

If you can't be there to care for your parents, or if you just need some guidance to oversee your parents' care, a geriatric care manager (GCM) can also help. Typically, GCMs are nurses or social workers with experience in geriatric care. They can assess your parents' ability to live on their own, coordinate round-the-clock care if necessary, or recommend home health care and other agencies that can help your parents remain independent.

Get support and advice
Don't try to care for your parents alone. Many local and national caregiver support groups and community services are available to help you cope with caring for your aging parents. If you don't know where to find help, contact your state's department of eldercare services. Or, call (800) 677-1116 to reach the Eldercare Locator, an information and referral service sponsored by the federal government that can direct you to resources available nationally or in your area. Some of the services available in your community may include:

•Caregiver support groups and training
•Adult day care
•Respite care
•Guidelines on how to choose a nursing home
•Free or low-cost legal advice

Once you've gathered all of the necessary information, you may find some gaps. Perhaps your mother doesn't have a health-care directive, or her will is outdated. You may wish to consult an attorney or other financial professional whose advice both you and your parents can trust.

APLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield is protected by copyright.PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Investment Terms and Concepts...What you Should Know

2011-04-08T10:00:00.000-07:00

Understanding Investment Terms and Concepts
Below are summaries of some basic principles you should understand when evaluating an investment opportunity or making an investment decision. Rest assured, this is not rocket science. In fact, you'll see that the most important principle on which to base your investment education is simply good common sense. You've decided to start investing. If you've had little or no experience, you're probably apprehensive about how to begin. Even after you've found a trusted financial advisor, it's wise to educate yourself, so you can evaluate his or her advice and ask good questions. The better you understand the advice you get, the more comfortable you will be with the course you've chosen.

Don't be intimidated by jargon
Don't worry if you can't understand the experts in the financial media right away. Much of what they say is jargon that is actually less complicated than it sounds. Don't hesitate to ask questions; when it comes to your money, the only dumb question is the one you don't ask. Don't wait to invest until you feel you know everything.

IRAs hold investments--they aren't investments themselves
Let's address a source of confusion that immediately throws many new investors off: If you have an individual retirement account (IRA), a 401(k), or other retirement plan at work, you should recognize the difference between that account or plan, and the actual investments you own within that account or plan. Your IRA or 401(k) is really just a container that holds investments and has special tax advantages. Some investments are best held in a tax-advantaged account; others may be more appropriate for a taxable account.

Understand stocks and bonds
Almost every portfolio contains one or both of these kinds of assets.

If you buy stock in a company, you are literally buying a share of the company's earnings. You become an owner, or shareholder, of the company. As such, you take a stake in the company's future; you are said to have equity in the company. If the company prospers, there's no limit to how much your share can increase in value. If the company fails, you can lose every dollar of your investment.

If you buy bonds, you're lending money to the company (or governmental body) that issued the bonds. You become a creditor, not an owner, of the bond issuer. The bond is in effect the issuer's IOU. You can lose the amount of the loan (your investment) if the company or governmental body fails, but the risk of loss to creditors (bondholders) is generally less than the risk for owners (shareholders). This is because, to stay in business and continue to finance its growth, a company must maintain as good a credit rating as possible, so creditors will usually pay on time if there is any way at all to do so. In addition, the law favors a company's bondholders over its shareholders if it goes bankrupt.

Stocks are often referred to as equity investments, while bonds are considered debt instruments or income investments. A mutual fund may invest in stocks, bonds, or a combination.

Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.

Don't put all your eggs in one basket

This is one of the most important of all investment principles, as well as the most familiar and sensible.

Consider including several different types of investments in your portfolio. Examples of investment types (sometimes called asset classes) include stocks, bonds, commodities, art, and precious metals. Cash also is considered an asset class, and includes not only currency but cash alternatives such as money market instruments, (for example, very short-term loans). Individual asset classes are often further broken down according to more precise investment characteristics (e.g., stocks of small companies, stocks of large companies, bonds issued by cities, or bonds issued by the U.S. Treasury).

Investment classes often rise and fall at different rates and times. Ideally, in a diversified portfolio of investments, if some are losing value during a particular period, others will be gaining value at the same time. The gainers may help offset the losers, which can help minimize the impact of loss from a single type of investment. The goal is to find the right balance of different assets for your portfolio given your investing goals, risk tolerance and time horizon. This process is called asset allocation.

Within each class you choose, consider diversifying further among several individual investment options within that class. For example, if you've decided to invest in the drug industry but are concerned about putting your entire investment into a single company, you could make smaller investments in Company A, Company B, and Company C, rather than put all your chips on one of them. Diversification alone can't guarantee a profit or ensure against the possibility of loss, but it can help you manage the types and level of risk you take.

Recognize the trade-off between an investment's risk and return
For present purposes, we define risk as the possibility that you might lose money, or that your investments will produce lower returns than expected. Return, of course, is your reward for making the investment. Return can be measured by an increase in the value of your initial investment principal, by cash payments directly to you during the life of the investment, or by a combination of the two.

There is a direct relationship between investment risk and return; the lowest-risk investments typically offer the lowest return at any given time (e.g., a federally guaranteed bank certificate of deposit). The highest-risk investments will generally offer the chance for the highest returns (e.g., stock in an Internet start-up company that may go from $12 per share to $150, then down to $3). A higher return is your potential reward for taking greater risk.

Between the extremes, every investor searches to find a level of risk--and corresponding expected return--that he or she feels comfortable with. When someone proposes an investment with a high return and suggests that it's risk-free, remember the old adage that "If something sounds too good to be true, it probably is."

Understand the difference between investing for growth and investing for income

As an investor, you face an immediate choice: Do you want growth in the value of your original investment over time, or is your goal to produce predictable, spendable current income--or a little of both?

Consistent with this investor choice, investments are frequently classified or marketed as either growth or income oriented. U.S. Treasury bills, for example, provide regular interest payments, but the value of your original investment will typically be more stable than an investment in, for example, a new software company, which will typically produce no immediate income. New companies generally reinvest any income in the business to make it grow. However, if a company is successful, the value of your stake in the company should likewise grow over time; this is known as capital appreciation.

There is no right or wrong answer to the "growth or income" question. Your decision should depend on your individual circumstances and needs (for example, your need, if any, for income today, or your need to accumulate a college fund you don't plan to tap for 15 years). Also, each type may have its own role to play in your portfolio, for different reasons

Understand the power of compounding on your investment returns
Compounding occurs when you "let your money ride." When you reinvest your investment returns, you begin to earn a "return on the returns."

A simple example of compounding occurs with a bank certificate of deposit that is allowed to roll over and be reinvested each time it matures. Interest earned in one period becomes part of the investment itself during the next period, and earns interest in subsequent periods. In the early years of an investment, the benefit of compounding on overall return is not exciting. As the years go by, however, a "rolling snowball" effect kicks in, and compounding's long-term boost to the value of your investment becomes dramatic.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Feng Shui Your Finances

2011-04-06T10:00:00.000-07:00

Organizing Your Financial History
A well-designed and maintained record-keeping system offers several important advantages

The advantages of such a record-keeping system are as follows:

You know where things are when you need them

You have a place to put bills, receipts, guarantees, and other important papers as they arrive

The time saved paying bills and doing paperwork is substantial

You avoid the frustration of misplaced documents

Others can find important records should you become incapacitated

Create a record-keeping system that fits your own unique needs and lifestyle
A record-keeping system that is ill-adapted to your household's specific needs and preferences is bound to fail, because you're unlikely to maintain it over time. Your systems may be simple or elaborate. How you organize files depends on your needs, your circumstances, and your budget. If you have children or other dependents, you'll want to create separate files for their expenses, medical records, etc.

Tip: Many income and expense items have tax implications. When you make a tax-deductible payment, you can record it in a special log labeled "Taxable Expenses" or note it with a "T" in your checkbook.

Example(s): Hal has three children, one of whom is exceptionally gifted and attends a private school. Hal's elderly mother suffered a debilitating stroke and now lives with his family, who tends her frequent needs. Hal keeps separate files for his son's special educational expenses and for his mother's medical and other tax-deductible items.

Set aside time for filing records
For many households, bills and other important documents often pile up fast. Trying to file items the moment they arrive may seem like a great idea on a slow day, but it just doesn't work when things are hectic. Handling, recording, paying, and filing are chores far better left to a regularly designated time when you can give it full attention. Assuming you do this reasonably often, there is little worry of missing a critical payment, filing, or response date. But make sure you check the due date on all bills before filing them for later payment.

Tip: Create a folder labeled "Bills to Be Paid" and another labeled "To Be Filed." These provide handy places to keep items as they come in to avoid their misplacement.

Check your "pile up" file on a periodic basis to assure ready access and avoid misplaced documents
Regular filing of records and documents is essential to maintaining a record-keeping system. Business travel, vacations, family crises, and other events are likely to disrupt a record-keeping routine, so getting back on track quickly is important. Once you have established a record-keeping system, it is far easier to do routine maintenance than to restore a system that is out of control.

You can often find great organizational tools at office supply stores
Large office supplies stores carry everything you can imagine for filing and organization. Special file boxes for checks are a handy item often overlooked. In addition to traditional file folders, you might also find three-ring binders or accordion files with index tabs. These are ideal for filing things you refer to frequently.
PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

How Safe Are you? Protecting Yourself Against Identity Theft

2011-04-05T09:29:00.000-07:00

Whether they're snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they're out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don't show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You'll get the headache and expense of cleaning up the mess they leave behind.

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check yourself out
It's important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

1.Equifax: www.equifax.com
(800) 685-1111

2.Experian: www.experian.com
(888) 397-3742

3.TransUnion: www.transunion.com
(800) 916-8800

Secure your number
Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you'll need it. The same goes for other forms of identification (for example, health insurance cards) that display your SSN. If your state uses your SSN as your driver's license number, request an alternate number.

Don't have your SSN pre-printed on your checks, and don't let merchants write it on your checks. Don't give it out over the phone unless you initiate the call to an organization you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it on employment applications; offer instead to provide it during a job interview.

Don't leave home with it
Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That's a bad idea; if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you'll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place--at home.

Keep your receipts
When you make a purchase with a credit or debit card, you're given a receipt. Don't throw it away or leave it behind; it may contain your credit or debit card number. And don't leave it in the shopping bag inside your car while you continue shopping; if your car is broken into and the item you bought is stolen, your identity may be as well.

Save your receipts until you can check them against your monthly credit card and bank statements, and watch your statements for purchases you didn't make.

When you toss it, shred it
Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit you receive in the mail, shred the documents, preferably with a cross-cut shredder. If you don't, you may find the panhandler going through your dumpster was looking for more than discarded leftovers.

Keep a low profile
The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don't need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

•To stop telephone calls from national telemarketers, list your telephone number with the Federal Trade Commission's National Do Not Call Registry by calling (888) 382-1222 or registering online at www.donotcall.gov
•To remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.dmachoice.org
•To remove your name from marketing lists prepared by the three national consumer reporting agencies, call (888) 567-8688 or register online at www.optoutprescreen.com
•When given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations
•You may even want to consider having your name and address removed from the telephone book and reverse directories

Take a byte out of crime
Whatever else you may want your computer to do, you don't want it to inadvertently reveal your personal information to others. Take steps to help assure that this won't happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the Internet. Moreover, install virus protection software and update it on a regular basis.

Try to avoid storing personal and financial information on a laptop; if it's stolen, the thief may obtain more than your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password--one that's six to eight characters long, and that contains letters (upper and lower case), numbers, and symbols.

"If a stranger calls, don't answer." Opening e-mails from people you don't know, especially if you download attached files or click on hyperlinks within the message, can expose you to viruses, infect your computer with "spyware" that captures information by recording your keystrokes, or lead you to "spoofs" (websites that replicate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business's legitimate website, use your stored bookmark or type the URL address directly into the browser. If you provide personal or financial information about yourself over the Internet, do so only at secure websites; to determine if a site is secure, look for a URL that begins with "https" (instead of "http") or a lock icon on the browser's status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the "delete" function isn't sufficient to do the job; overwrite the hard drive by using a "wipe" utility program. The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Be diligent
As the grizzled duty sergeant used to say on a televised police drama, "Be careful out there." The identity you save may be your own.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

Long Term Care: What You Should Know

2011-03-23T09:34:00.000-07:00

What is long-term care??
Long-term care refers to the ongoing services and support needed by people who have chronic health conditions or disabilities. There are three levels of long-term care:

* Skilled care: Generally round-the-clock care that's given by professional health care providers such as nurses, therapists, or aides under a doctor's supervision.
* Intermediate care: Also provided by professional health care providers but on a less frequent basis than skilled care.
* Custodial care: Personal care that's often given by family caregivers, nurses' aides, or home health workers who provide assistance with what are called "activities of daily living" such as bathing, eating, and dressing.

Long-term care is not just provided in nursing homes--in fact, the most common type of long-term care is home-based care. Long-term care services may also be provided in a variety of other settings, such as assisted living facilities and adult day care centers.

2. Why is it important to plan for long-term care?
No one expects to need long-term care, but it's important to plan for it nonetheless. Here are two important reasons why:

The odds of needing long-term care are high:
* Approximately 40% of people will need long-term care at some point during their lifetimes after reaching age 65*
* Approximately 14% of people age 71 and older have Alzheimer's disease, a disorder that often leads to the need for nursing home care**
* Younger people may need long-term care too, as a result of a disabling accident or illness

The cost of long-term care is rising:
Currently, the average annual cost of a 1-year nursing home stay is $72,270* and in many states the cost is much higher. In the future, long-term care is likely to be even more expensive. If costs rise at just 3% a year (a conservative estimate), in 20 years, a 1-year nursing home stay will cost approximately $130,528.

*National Clearinghouse for Long-Term Care Information, U.S. Department of Health and Human Services, 2009

**Alzheimer's Association, 2010

3.Doesn't Medicare pay for long-term care??
A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits. The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies
The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time (subject to the claims paying ability of the insurer). If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force (subject to the claims-paying ability of the insurer). Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policy owner discontinue the policy, this reserve, known as the cash value, is returned to the policy owner, subject to applicable surrender or early withdrawal charges. Permanent life insurance can be further broken down into the following basic categories:

Whole life: You make level (equal) premium payments for life. The death benefit and minimum cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.
Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.

Your beneficiaries
You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance?
You can often get insurance coverage from your employer (i.e., through a group life insurance plan) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

Note: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield Inc. are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Paying the Bills: Potential Sources of Retirement Income

2011-03-20T10:00:00.000-07:00

Although you may personally handle many of your financial affairs, sometimes you may need the services of a financial professional. Financial professionals include financial planners, attorneys, securities brokers, and other specialists. Selecting the right financial professional means evaluating the services they can offer and their credentials, and finding someone whom you can rely on to give you good advice and/or service when you don't have the time or expertise to completely handle your financial affairs.

Social Security
According to the Social Security Administration (SSA), more than 9 of 10 people aged 65 or older receive Social Security benefits. However, most retirees also rely on other sources of income.
The SSA sends you an estimate of your benefits each year. The closer you are to full retirement age, the more accurate that estimate will be. For a rough estimate, you can use the calculator on the Social Security website (www.ssa.gov).

Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be 20% to 30% less than if you waited until full retirement age (65 to 67, depending on the year you
were born).

As you're planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system's solvency indicate that there's likely to be a change in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security's role as part of your overall long-term retirement income picture, and put additional emphasis on other potential income sources.

Pensions
If you are entitled to receive a traditional pension, you're lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation, and if so, how that increase is calculated.

Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker's death; a joint and survivor annuity provides reduced benefits that last until the survivor's death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.

Major Sources of Retirement Income

Note: Data may not total 100% due to rounding.
Source: Fast Facts and Figures About Social Security, 2010, Social Security Administration

Work or other income-producing activities
Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you're continuing to earn, you'll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.

Be aware that if you're receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.

If you're covered by a pension plan, you may be able to retire, then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you've reached retirement age, while you continue to work part-time for the same employer.

Other possible resources include rental property income and royalties from existing assets, such as intellectual property.

Retirement savings/investments
Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.

Some of the factors you'll need to consider when planning how to tap your retirement savings include:

* How much you can afford to withdraw each year without exhausting your nest egg. You'll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income, or income alone.
* The order in which you will tap various accounts. Tax considerations can affect which account you should use first, and which you should defer using.
* How you'll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 70½, if you withdraw less than your RMD, you'll pay a penalty tax equal to 50% of the amount you failed to withdraw.

Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.

Inheritance
One widely cited study by economists John Havens and Paul Schervish forecasts that by 2052, at least $41 trillion will have been transferred from World War II's Greatest Generation to their descendants. (Source: Why the $41 Trillion Wealth Transfer Is Still Valid) An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can minimize the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial planning advice that can integrate your income needs with a future bequest.

Equity in your home or business
If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region, and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing. A useful publication titled "Reverse Mortgages: Avoiding a Reversal of Fortune" is available online from the Financial Industry Regulatory Authority.)

If you're hoping to convert an existing business into retirement income, you may benefit from careful financial planning to minimize the tax impact of a sale. Also, if you have partners, you'll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you'll be compensated for your interest.

With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

Understanding Reverse Mortgages

2011-03-18T10:00:00.000-07:00

What are Reverse Mortgages?

Older individuals who own their homes often find themselves "house rich and cash poor." Developed to address this dilemma, a reverse mortgage provides funds--all at once or over time--to an older homeowner by drawing against the equity built up in the residence. Unlike "forward" mortgages, reverse mortgages are not repaid on a monthly basis. The total loan (including the accumulated interest) is repaid when the last surviving borrower sells the home, permanently vacates the property, or dies.

In most cases, the funds the homeowner receives may be used for any purpose: to supplement a fixed income, to pay for at-home medical care, or to see the world. For an individual facing a retirement income shortage or an increased dependency on medical care, reducing home equity with a reverse mortgage may be preferable to selling the home to raise much-needed cash.

A reverse mortgage can have drawbacks, however. The closing costs normally exceed those for a conventional mortgage, which can make the loan expensive if the homeowner remains in the home for only a few years. Additionally, under certain circumstances, the proceeds from a reverse mortgage could affect the homeowner's eligibility for some public-assistance programs such as Supplemental Security Income (SSI) or Medicaid. The reduction in home equity could also reduce the homeowner's estate.

There are three basic types of reverse mortgages: single-purpose, federally insured, and proprietary reverse mortgages.

Single-purpose reverse mortgages
As the name suggests, a single-purpose reverse mortgage is designed to provide funds for a specific use. Such uses may include:

Repairing the home

Making home modifications that are necessary to accommodate a disability

Paying property taxes or special assessments

In most cases, these loans are offered through state or local government agencies and/or nonprofit organizations. They are often earmarked for low- or moderate-income homeowners and/or for residences of limited value. Many do not charge any fees or mortgage insurance premiums, and the closing costs (if any) are usually minimal. If the mortgage charges interest (some don't), it's often at a low, fixed rate calculated on a simple, not compound, basis. In some cases, the loans need not be repaid at all if the homeowner remains in the residence beyond a specified term.

Caution: Single-purpose reverse mortgages aren't available in all states, or in all areas within a state. For information about what's available, contact the local agency on aging, community development agency, or housing department.

Federally insured reverse mortgages
Available since 1989, the oldest and most popular reverse mortgage is the Home Equity Conversion Mortgage (HECM) which is offered through banks, mortgage companies, and other financial institutions. The federal government insures HECMs through the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). The HECM program guarantees that, as long as they remain in their homes, homeowners will receive the loan advances initially promised them, even if their homes decline in value or the financial institutions that make the loans go out of business.

Eligibility requirements
To be eligible for a HECM, all parties to the property's deed must be age 62 or older, and at least one homeowner must use the property as a principal residence. The homeowners must receive reverse mortgage counseling from an agency that is approved by HUD. This counseling is designed to make sure that the borrowers have explored their housing options and understand the details and ramifications of the HECM program.

It's possible for a homeowner who has little or no income and a blemished credit report to qualify for a HECM. Because they are not repaid in the same way as other loans, homeowners are not required to have income to qualify for a HECM. Moreover, credit report reviews are limited to making sure that the borrower has not defaulted on any other debt owed to the federal government.

The property itself must also be a qualified property. It must:

Be a single-family residence, part of a 2- to 4-unit dwelling, part of a condominium or planned unit development approved by HUD, or a manufactured home (not a mobile home) built after June 1976
Meet minimum property maintenance standards established by HUD (proceeds from the HECM may be used to make any required repairs)
Be free of other liens (proceeds from the reverse mortgage may be used to repay them), unless the holders of those liens are willing to subordinate the debts they represent to the HECM.

Principle Limits
The principal limit is the maximum amount a homeowner may receive from a loan made under the HECM program. This limit is affected by four factors:

Age--While all borrowers must be age 62 or over, the amount a homeowner may receive is determined in part by the age of the youngest borrower. Older borrowers will receive higher principal limits.

Home value--The greater the value of the home, the greater the maximum principal limit, subject to the other determining factors.

FHA loan limits--Set by the FHA, these loan limits provide a "ceiling" on property valuations for HECMs. Beginning January 1, 2010, Fannie Mae's general mortgage limit for a single-family home is $625,500.

HECM interest rates--The principal limit is affected by an amount estimated to be sufficient to cover the anticipated accumulating unpaid interest. Higher rates will mean lower principal limits.

Expenses
Although obtaining a HECM does not require much money up front from the homeowner, these reverse mortgages can be expensive.

An application fee covers an appraisal of the residence and the minimal credit check mentioned above. This is often the only expense the homeowner must pay in cash. The remaining HECM fees are usually financed as part of the loan.

An origination fee covers the lender's expense to prepare and process the HECM. The fee is based on the home's valuation, subject to the limitations of the general mortgage limit. The loan origination fee limit is the greater of $2,500 or two percent of the first $200,000 of the home's valuation, plus an additional one percent of any portion of the valuation above $200,000. The total origination fee is also limited to $6,000.

The insurance that guarantees HECM loan disbursements is financed by a premium charged to all HECM borrowers. The borrower will be charged an initial fee of two percent of the lesser of the home's value or the HECM limit, and a monthly fee equal to one-half of one percent of the mortgage balance.

Other closing costs may vary by state or area, and by the value of the property. All these fees are most often financed, adding to the original outstanding mortgage balance (and reducing the principal amount that remains available to the homeowner).

The lender may also charge a monthly service fee. If this fee is financed as part of the loan, the lender initially reduces the principal limit available to the homeowner by a predetermined amount. As the fee is earned, the monthly amount is added to the homeowner's outstanding loan balance.

And of course there's the interest. A HECM may be taken with a fixed or an adjustable rate. Lenders are required to offer an interest rate that's adjusted annually. This rate can't increase more than 2 percentage points a year or more than 5 percentage points over the life of the loan. Lenders may also offer a (generally lower) monthly adjustable rate. This monthly rate is not limited over the loan's duration.

Payment options
A HECM offers a variety of payment options. The borrower may elect any one option, or a combination of them. These options include:

A lump sum payment

A growing line of credit that may be drawn on at the borrower's discretion

Monthly cash advances for a predetermined number of years (the term option)

Monthly cash advances for as long as the homeowner occupies the residence (the tenure option)

CAUTION:A HECM may be structured as a reverse annuity mortgage, where an initial lump-sum payment is used to purchase an annuity that will provide a monthly income for the remainder of the homeowner's life even if he or she no longer lives in the property. In addition to being a relatively expensive choice, however, the income provided by a reverse annuity mortgage option might jeopardize a borrower's eligibility for Supplemental Security Income and/or Medicaid.

The HECM regulations allow a borrower to switch options at any time, providing the outstanding mortgage balance is less than the original principal limit. Homeowners considering a reverse mortgage may wish to explore their payment options before making a choice by using the loan calculator located at the AARP web site (www.aarp.org).

Repayment
A reverse mortgage usually becomes due when the last surviving borrower either vacates the property for 12 consecutive months (as might be the case if the borrower enters a nursing home) or dies. At such a time, the borrower (or the borrower's estate) can repay the reverse mortgage with funds from another source in order to keep the property. If this isn't done, the lender will require the sale of the property to secure repayment.

When a HECM is repaid, the lender receives the total amount of principal advanced to the borrowers, including any financed expenses or payments made on the borrowers' behalf, as well as the accumulated interest. If the proceeds from the sale of the property are greater than what's needed to repay the HECM, the remaining funds are remitted to the borrower or the borrower's estate. However, the repayment obligation is limited by the property's value; if the sale of the property doesn't bring in enough to repay the HECM in full, the borrower (or the borrower's estate) is not responsible for the difference.

Any reverse mortgage may become due and payable on demand if the borrower, either by action or inaction, undermines the value of the property that secures the loan. Some conditions of acceleration and/or default include:

Not maintaining and/or repairing the home

Failing to pay property taxes

Failing to insure the property

Adding a new owner to the property's title

Incurring new debt that uses the home as collateral for the loan

Proprietary reverse mortgages
Proprietary reverse mortgages are private mortgage instruments offered (and owned) by the financial institutions that develop them. Generally speaking, the eligibility requirements, payment options, and repayment obligations for proprietary reverse mortgages are similar to those for HECMs. Because they are not subject to the same regulations, proprietary reverse mortgages can often provide higher principal limits than those possible under the HECM program. However, proprietary mortgages are not federally insured, and they often are more costly to obtain and service than HECMs.

CAUTION: Proprietary reverse mortgages may only be suitable for homeowners whose homes are valued substantially higher than their county's average home value, and who are willing to pay higher fees to obtain the greater benefits that may come with higher principal limits.

Make careful comparisons before you decide
Comparing reverse mortgage products can be complicated. Lenders who offer HECMs can analyze the projected costs of these loans. HECMs require reverse mortgage counseling through HUD-approved agencies; the mortgage counselors at these agencies can also help homeowners decide which type of reverse mortgage is best for their circumstances.

PLJ Advisors and Forefield Inc.do not provide legal, tax, or investment advice. All content provided by PLJ Advisors protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Will Your Money Outlive You?

2011-03-16T12:00:00.000-07:00

Before you retire, take the time to figure out just how much money you'll need for retirement. If you've planned well and in advance, it's possible that you'll have plenty of money to last throughout your retirement years. In fact, you may discover that your retirement savings actually exceed your retirement income needs. But, before you get too excited, you should realize that there are unique challenges that can arise when your money will outlive you. Estate planning is an essential tool for dealing with the money and property you leave when you pass away. Estate planning is a complex process, and you will need to consult additional resources to ensure yours is done properly.

You've got more than enough money for retirement. Why is this a problem?

Having more money than you need for retirement is not a problem, but it does mean you'll have to do some estate planning to make sure everything goes smoothly when you pass away. First, you'll want to make sure all your hard-earned money doesn't end up in the hands of the federal government when you die. You may also want to be sure that your heirs are provided for and that whatever is left at the end of your life is distributed according to your wishes.

Estate and other taxes

Various state and federal estate, death, inheritance, and income taxes can eat up a substantial portion of your estate. And the more you have when you die, the greater the potential tax liability. You worked hard throughout your life to earn that money--do you really want to hand it over to the government when you die? Estate planning can minimize this tax bite and leave more of your estate for your heirs.

Distribution of your estate

If you have money and property left when you die, it will pass to someone. However, it may not be distributed according to your wishes unless you plan ahead. Maybe you have specific ideas about how much you want your heirs to receive. Perhaps you want specific property to go to your children, your grandchildren, or certain charitable organizations. You may even need to provide for the continuing operation of the family business. Estate planning can ensure that your money and property are distributed according to your wishes.

So, what can you do about it?

Spend more money

If you have more money than you could possibly need for retirement, you are in an enviable position. You won't need to worry about saving or minimizing your expenses. Go ahead--take that trip around the world! Buy the retirement home you've always dreamed of! You deserve to reap the rewards of a lifetime of hard work.

Tip:Before taking on more expenses, remember to reanalyze your situation, including the assumed new expenses. Leave a buffer to insure your peace of mind.

Give it away

You might begin distributing your property during your lifetime. This will allow you to reduce the size of your estate and, at the same time, to experience the joy of giving your heirs things they truly want or need. You might also consider making gifts to your favorite charities. Keep in mind, however, that federal gift tax may be imposed if you give more than $13,000 (in 2011 and 2010) to any one individual in a given year. However, gift tax owed may be offset by your $1 million gift tax applicable exclusion amount, if it is available. You may also owe state gift tax.

Consider different forms of property ownership

Most of your property is probably owned by you alone or jointly with your spouse. There are many forms of property ownership, and the form of ownership may dictate how your property is distributed when you die. Proper ownership may simplify the process of distributing your estate at death, so you may want to consult an attorney.

Put property in trust

Trusts are another way to transfer ownership and control of your property. There are many types of trusts that can be used for many purposes. You will generally need an experienced attorney's help to properly set up a trust.

Choose beneficiaries carefully

You can choose a beneficiary for many of your assets, such as life insurance, IRAs, and other retirement plans. The beneficiary typically receives the proceeds directly from these vehicles when you die, subject to special situations (e.g., estate taxes or other estate obligations). Thus, it is important that you choose these beneficiaries carefully.

Make a will

Regardless of how much or how little you own, it is wise to have a will. Your will controls the distribution of any property that is not distributed through other avenues, such as form of ownership or designation of beneficiary. You can change or revoke your will at any time before your death. Anyone can draft a will, but only a qualified attorney should be trusted with this important task.

PLJ Advisors and Forefield Inc.do not provide legal, tax, or investment advice. All content provided by PLJ Advisors protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Introduction to Estate Planning

2011-03-09T09:43:00.000-08:00

What is estate planning?

Simply stated, estate planning is a method for determining how to distribute your property during your life and at your death. It is the process of developing and implementing a master plan that facilitates the distribution of your property after your death and according to your goals and objectives.

At your death, you leave behind the people that you love and all your worldly goods. Without advance planning, you have no say about who gets what, and more of your property may go to others, like the federal government, instead of your loved ones. If you care about (1) how and to whom your property is distributed, and (2) ensuring that your property is preserved for your loved ones, you need to know more about estate planning.

As a process, estate planning requires a little effort on your part. First, you'll want to come to terms with dying, at least to a degree that you can deal with the necessary planning. Understandably, your death can be a very uncomfortable subject, but unfortunately, the discussions in this area are full of references to your death, so it really can't be avoided. Some statements may seem too businesslike and unfeeling, but tiptoeing around the subject of dying will only make the planning process more difficult. You will understand the process more easily and implement a more successful master plan if you approach it in a straightforward manner.

Who needs estate planning?

Not just for the wealthy

Estate planning may be important to individuals with a wide range of financial situations. In fact, it may be more important if you have a smaller estate because the final expenses will have a much greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from a lack of financial resources.

Your master plan can consist of strategies that are simple and inexpensive to implement (e.g., a will or life insurance). If your estate is larger, the estate planning process can be more complex and expensive.

Implementing most strategies will probably require you to hire professional help of some kind, an attorney, an accountant, a trust officer, or an insurance agent, for example. If your estate is large or complex, you should consult with an estate planning expert such as a tax attorney or financial planner for advice before the implementation stage.

In deciding on your course of action, you should always consider whether the benefit of the strategy outweighs the cost of its implementation.

May be especially needed under certain circumstances

You may need to plan your estate especially if:

Your estate is valued at more than the federal estate tax applicable exclusion amount (formerly known as the unified credit) (see tip below) or your state's death death exclusion amount
Your income tax bracket is in excess of 10 percent
You have children who are minors or who have special needs
Your spouse is uncomfortable with or incapable of handling financial matters
You're a business owner
You have property in more than one state
You intend to contribute to charity
You have special property, such as artwork or collectibles
You have strong feelings about health-care decisions You have privacy concerns or want to avoid probate

Tip: The federal estate tax is repealed for 2010, unless Congress acts to reinstate the tax retroactively. In 2011 the tax will return with an applicable exclusion amount of $1 million. So, estates over $1 million may actually want to make appropriate plans to be on the safe side.

How to do it

Designing a plan is a process that is unique to each estate owner. Don't be intimidated or overwhelmed at the prospect. Even the most complex plan can be achieved if you proceed step by step. Remember, the peace of mind that comes with developing a successful estate plan is worth the time, trouble, and expense.

Understand your particular circumstances

Begin the estate planning process by understanding your particular circumstances, such as your age, health, wealth, etc.

Understand the factors that will affect your estate

You will also need to have some understanding of the factors that may affect the distribution of your estate, such as taxes, probate, liquidity, and incapacity.

Clarify your goals and objectives

When your particular circumstances and the factors that may affect your estate are clear, your goals and objectives should come into focus.

Understand the strategies that are available

With these goals and objectives now clear, you can begin to consider the different estate planning strategies that are available to you.

Seek professional help

Seeking professional help (an attorney or financial advisor) will help you understand the strategies that are available and formulate and implement your master plan.

Formulate and implement a plan

Finally, after following these steps, you can formulate and implement a plan that works for you. Here are a few basic tips: (1) make sure you understand your plan, (2) rely on people you trust, and (3) keep your documents and information organized and within easy reach.

Perform periodic reviews

When you have implemented your master plan, be sure to perform a periodic review and, if necessary, make revisions that reflect any changing circumstances and tax laws.

How do you begin?

There are many estate planning strategies, including some that are implemented inter vivos (during life), such as making gifts, and others post-mortem (after death), such as disclaimers. Before you choose which strategies are right for you, you need to understand your particular circumstances.

Gather and analyze the facts

Understanding your particular circumstances results from gathering and analyzing the facts. The following questions may help you to accomplish this. If they are not easy to answer, you may have to make some estimates based on reasonable assumptions and expectations.

Information regarding your financial condition

What is your current income?
What is your income likely to be in the future?
How much do you spend each year?
What are your expenses likely to be in the future?
What are your current assets and debts?
Are your assets currently owned solely or jointly?
What estate planning strategies have you already implemented?

Family information

Who are the family members you intend to benefit?
What are the needs of each family member?

What other factors need to be considered?

Decide what your goals and objectives are in light of your particular circumstances and in light of the factors that may affect your estate. The primary factors that may affect your estate are your beneficiaries, taxes, probate, liquidity, and incapacity.

Taxes

One of the largest potential expenses your estate may have to pay is taxes, which may include federal transfer taxes, state death taxes, and federal income taxes.

Federal transfer taxes - The federal transfer taxes include (1) the federal gift tax and federal estate tax and (2) the federal generation-skipping transfer tax (GSTT).

Federal gift tax - Gift tax is imposed on property you transfer to others while you are living. You need a basic understanding of how the gift tax system works to minimize gift tax liability. Under the gift tax system, you are allowed a $1 million lifetime gift tax applicable exclusion amount that reduces your gift tax liability (any gift tax applicable exclusion amount you use during life effectively reduces the applicable exclusion amount that will be available at your death). Also, you are currently allowed to give $13,000 per donee gift tax free under the annual gift tax exclusion. Further, certain other types of transfers can be made gift tax free. You need to understand what these types of transfer are and how they work to take full advantage of them.
Federal estate tax - Generally speaking, estate tax is imposed on property you transfer to others at the time of your death. You need a basic understanding of how the estate tax system works for several reasons: Saving your property for your beneficiaries - Estate tax rates could reach as high as 55 percent in 2011, which means that an enormous chunk of your estate may go to the federal government instead of your beneficiaries. If you want to preserve your estate for your beneficiaries, you'll need to know how to minimize estate tax with respect to your property.
Reducing estate tax liability - Under the estate tax system, you are allowed an applicable exclusion amount (formerly referred to as the unified credit) that reduces your estate tax liability. Also, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate
tax free. You need to understand what these exclusions, deductions, and credits are and how they work to take full advantage of them.
Providing for the payment of estate tax - Generally, estate tax must be paid within nine months after your death. To avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. In addition, these assets should be sufficiently liquid to pay these expenses when they are due.
Planning for estate tax expense - Although calculating estate tax can be complex, you should estimate what the amount of your estate tax may be (if any), so that you can arrange to replace that wealth.
GSTT - Another federal transfer you need to understand is the federal generation-skipping transfer tax (GSTT). The GSTT is imposed on property you transfer to an individual who is two or more generations below you (e.g., a grandchild or great-nephew). Not surprisingly, the IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep individuals from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax then in effect is imposed on every generation-skipping transfer you make over a certain amount. Currently, some states also impose their own GSTT. Check with an attorney or your state to find out what may be subject to your state's GSTT, and how and when to file a state GSTT return.

State death taxes - States also impose their own death taxes. You should be aware of what the death tax laws are in your state and how they may affect your estate. There are three types of state death taxes: (1) estate tax, (2) inheritance tax, and (3) credit estate tax (also called a sponge tax or pickup tax). Some states also impose their own gift tax and/or generation skipping transfer tax.

Estate tax - State estate tax is imposed on property you transfer to others at your death, much like federal estate tax. The state estate tax calculation for most states is similar to the federal calculation.
Inheritance tax - Unlike estate tax, the inheritance tax is imposed on your beneficiary's right to receive your property. Tax is due on each beneficiary's share of your estate. Beneficiaries are grouped into classes (generally based upon their familial relationship to you) and are taxed accordingly. Although inheritance tax is due on each heir's share of your estate, it's your personal representative who writes the check from your estate to pay it.
Credit estate tax - Some states impose a credit estate tax (also referred to as a sponge tax or pickup tax).

Tip: Most states that imposed a credit estate tax have "decoupled" from the federal system (i.e., they're imposing some form of stand-alone estate tax.)

Tip: The federal system allows a deduction for state death taxes for the estates of persons dying in 2005 through 2009. Prior to 2005, a credit was available, which will be reinstated in 2011.

Federal income taxes - In the estate planning context, you should be aware of three federal income tax considerations:

Income taxation of trusts - If your estate plan includes the use of a trust, you need to know that a trust may be an income tax-paying entity. The trustee may be required to file an annual return and pay income taxes on trust income.
Decedent's final income tax return - Your personal representative or surviving spouse has the duty of filing your last income tax return that covers the tax year ending on the date of your death.
Income taxation of your estate - Your estate is considered a separate income taxpaying entity. Your personal representative must file and pay income taxes on any income your estate receives (e.g., interest from bonds, or dividends from stock).

Probate

Probate is the court-supervised process of proving, allowing, and administering your will. The probate process can be time-consuming, expensive, and open to public scrutiny. Avoiding probate may be one of your most important goals. To develop a successful avoidance strategy, you'll need to understand how the probate process works, how to estimate probate costs, and what is subject to probate.

Liquidity

Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death from cash and cash alternatives. If your property is mostly nonliquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due. This could result in an economic loss, or your family selling assets that you intended for them to keep. Therefore, planning for estate liquidity should be one of your most important estate planning objectives.

Incapacity

Planning for incapacity is a vital yet often overlooked aspect of estate planning. Who will manage your property and make health-care decisions for you when you can no longer handle these responsibilities? You need to ask and answer this question because the consequences of being unprepared may have a devastating effect on your estate and loved ones. You should include plans for incapacity as a part of your overall estate plan.

What are your goals and objectives?

Your goals and objectives are personal, but you can't formulate a successful plan without a clear and precise understanding of what they are. They can be based on your particular circumstances and the factors that may affect your estate, as discussed earlier, but your feelings and desires are just as important. The following are some goals and objectives you might consider:

Provide financial security for your family
Ensure that your property is preserved and passed on to your beneficiaries
Avoid disputes among family members, business owners, or with third parties (such as the IRS)
Provide for your children's or grandchildren's education
Provide for your favorite charity
Maintain control over or ensure the competent management of your property in case of incapacity
Minimize estate taxes and other costs
Avoid probate
Provide adequate liquidity for the settlement of your estate
Transfer ownership of your business to your beneficiaries

What are estate planning strategies?

An estate planning strategy is any method that facilitates the distribution of your assets and the settlement of your estate according to your wishes. There are several estate planning strategies available to you.

Intestate succession

Intestate succession is a strategy by default and is a means of transferring your property to your heirs if you have failed to make other plans such as a will or trust. State law controls how and to whom your property is distributed, who administers your estate, and who takes care of your minor children. Without directions, your opinions and feelings are not considered. Indeed, one of your primary goals in planning your estate may be to avoid intestate succession.

Last will and testament

A will is a legal document that lets you state how you want your property distributed after you die, who shall administer your estate, and who will care for your minor children. This is probably the most important tool available to you. Anyone with property or minor children should have a will.

Will substitutes

A will substitute, for example, Totten Trust and payable on death bank accounts, allows you to designate a beneficiary of certain property that will automatically pass to that beneficiary after you die and avoids passing through probate.

Trusts

A trust is a separate legal entity that holds your assets that are then used for the benefit of one or more people (e.g., you, your spouse, or your children). There are different types of trusts, each serving a different purpose, and include marital trusts and charitable trusts. You will need an attorney to create a trust.

Joint ownership

Joint ownership is holding property in concert with one or more persons or entities. There are different types of joint ownership, such as tenancy in common and community property, each with different legal definitions, requirements, and consequences.

Life insurance

Life insurance is a contract under which proceeds are paid to a designated beneficiary at your death. Life insurance plays a part in most estate plans.

Gifts

A gift is a transfer of property, not a bona fide sale, that you make during your life to family, friends, or charity. Making gifts can be personally gratifying as well as an effective estate planning tool.

Tax exclusions, deductions, and credits

There are several important estate planning tools you can use that are offered by the federal government. These include the annual gift tax exclusion, the applicable exclusion amount, the unlimited marital deduction, split gifts, and the charitable deduction.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Getting Started: Establishing a Financial Safety Net

2011-03-08T09:31:00.000-08:00

In times of crisis, you don't want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you're protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?

Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child's orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.

Building your cash reserve

If you haven't established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:

Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)

A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn't consider lenders as a primary source for your cash reserve.

Where to keep your cash reserve

You'll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn't your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.

Don't confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Note: When considering a money market mutual fund, be sure to obtain and read the fund's prospectus, which is available from the fund or your financial advisor, and outlines the fund's investment objectives, risks, fees, expenses. Carefully consider those factors before investing.

It's important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you're going to use fixed-term investments as part of your cash reserve, you'll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.

Review your cash reserve periodically

Your personal and financial circumstances change often - a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors and Forefield is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

The 411 on Life Insurance

2011-02-21T13:32:00.000-08:00

Life insurance is an agreement between you (the insured) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance

One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
How much of your salary is devoted to current expenses and future needs?
How long would your dependents need support if you were to die tomorrow?
How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?

How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract?

A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits. The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time (subject to the claims paying ability of the insurer). If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force (subject to the claims-paying ability of the insurer). Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policy owner discontinue the policy, this reserve, known as the cash value, is returned to the policy owner, subject to applicable surrender or early withdrawal charges. Permanent life insurance can be further broken down into the following basic categories:

Whole life: You make level (equal) premium payments for life. The death benefit and minimum cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.
Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.

Your beneficiaries

You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance?

You can often get insurance coverage from your employer (i.e., through a group life insurance plan) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

Note: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

PLJ Advisors and Forefield Inc. does not provide legal, tax, or investment advice. All content provided by PLJ Advisors protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

Charity and Your Financial Future

2011-02-21T13:31:00.001-08:00

When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes.

A few words about transfer taxes

The federal government taxes transfers of wealth you make to others, both during your life and at your death. In 2011, generally, the federal gift and estate tax is imposed on transfers in excess of $5 million and at a top rate of 35 percent. There is also a separate generation-skipping transfer (GST) tax that is imposed on transfers made to grandchildren and lower generations. For 2011, there is a $5 million exemption and the top rate is 35 percent. In 2012, the top tax rates for both taxes will remain the same (35 percent), but the $5 million exemptions will be
indexed for inflation.
Note: In 2013, unless Congress enacts further legislation, the top tax rates will increase to 55 percent and the exemptions will generally drop to
$1 million.

You may also be subject to state transfer taxes.

Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in your estate plan. By leaving money to charity the full amount of your charitable gift may be deducted from the value of your gift or taxable estate.

Make an outright bequest in your will

The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.

Make a charity the beneficiary of an IRA or retirement plan

If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.

Use a charitable trust

Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.

A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.

Why use a charitable lead trust?

The charitable lead trust is an excellent estate planning vehicle if you are optimistic about the future performance of the investments in the trust. If created properly, a charitable lead trust allows you to keep an asset in the family while being an effective tax-minimization device.

For example, you create a $1 million charitable lead trust. The trust provides for fixed annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal goes outright to your beneficiaries. To figure the amount of the charitable deduction, you have to value the 25-year income interest going to ABC Charity. To do this, you use IRS tables. Based on these tables, the value of the income interest can be high - for example, $900,000. This means that your estate gets a $900,000 charitable deduction when you die, and only $100,000 of the $1 million gift is subject to estate tax.

Why use a charitable remainder trust?

A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving. A donation to a charitable remainder trust has the same estate tax effect as a bequest because, at your death, the donated asset has been removed from your estate. Be aware, however, that a portion of the donation is brought back into your estate through the charitable income tax deduction.

Also, a charitable remainder trust can be beneficial because it provides your family members with a stream of current income - a desirable feature if your family members won't have enough income from other sources.

For example, you create a $1 million charitable remainder trust. The trust provides that a fixed annual payment be paid to your beneficiaries for a period not to exceed 20 years. At the end of that period, the entire trust principal goes outright to ABC Charity. To figure the amount of the charitable deduction, you have to value the remainder interest going to ABC Charity, using IRS tables. This is a complicated numbers game. Trial computations are needed to see what combination of the annual payment amount and the duration of annual payments will produce the desired charitable deduction and income stream to the family.

PLJ Advisors and Forefield Inc. do not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

Choosing the Right Financial Planner

2011-02-21T13:31:00.000-08:00

What is it?

Although you may personally handle many of your financial affairs, sometimes you may need the services of a financial professional. Financial professionals include financial planners, attorneys, securities brokers, and other specialists. Selecting the right financial professional means evaluating the services they can offer and their credentials, and finding someone whom you can rely on to give you good advice and/or service when you don't have the time or expertise to completely handle your financial affairs.

Choosing a financial planner

What a financial planner does

A financial planner is a professional advisor who can help you set financial goals and who can write and implement an objective and comprehensive plan to manage all aspects of your financial picture, including investing, retirement planning, estate planning, and protection planning. A financial planner can give you information and advice on a wide range of other topics as well. These are too numerous to mention but include managing your cash, obtaining credit, buying a home, and paying for a college education. If the planner doesn't have the specialized knowledge required to handle certain areas, such as tax planning or estate laws, he or she can coordinate a team of experts who can help you. Although he or she can help you with a single issue, a financial planner, unlike other financial advisors, looks at your finances as an interrelated whole and helps you plan accordingly.

What credentials to look for

When choosing a financial planner, you should be aware that some financial professionals who use this title are not truly qualified to give comprehensive financial planning advice. They may be trained in only one area, or they may be primarily salespeople marketing themselves as planners. Although some states heavily regulate planners, others do not. Because anyone can call himself or herself a financial planner without being educated or licensed in the area, you should choose a financial planner carefully. Make sure you understand what services the planner will provide you and what his or her qualifications are. In general, a financial planner will have one or more of the following credentials:

CERTIFIED FINANCIAL PLANNER™ professional (CFP®)--CFP® professionals must have a college undergraduate degree, have three years of related experience, and have completed a course of study registered with and approved by the Certified Financial Planner Board of Standards, Inc. (CFP Board). They must pass a two-day 10-hour exam that covers all aspects of financial planning. In addition, they must adhere to a professional code of ethics and fulfill 30 hours of continuing education every two years. Many also belong to the Financial Planning Association, a professional organization. If a planner says that he or she is a CFP® licensee, ask to see the planner's CFP Board license or call (888) CFP-MARK to check.
Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter® (CLU®)--Some financial planners are members of the Society of Financial Service Professionals, a professional association for life insurance agents. To receive either designation, planners must have at least three years of experience and complete a course of study through the American College in Bryn Mawr, Pennsylvania. Certification is rigorous and prestigious, and planners earning these designations must adhere to certain ethical standards.
Accredited Personal Financial Specialist (PFS) - The PFS designation is granted to CPAs who are members of the American Institute of Certified Public Accountants, and who earn a minimum of 80 hours of personal financial planning education, successfully pass a PFP-related exam, and have at least two years of full-time business or teaching experience.
Registered Financial Consultant (RFC®) - This designation is awarded by the International Association of Registered Financial Consultants (IARFC) to advisors who have a college or graduate degree in financial services, or who have earned an IARFC-approved designation or professional degree. The RFC® also must have a minimum of four years experience as a full-time practitioner or educator in the field of financial planning or financial services. He or she must also meet licensing requirements, and they must complete continuing education courses, and adhere to a code of ethics.

Many financial planners are also specialists in certain fields or can refer you to the type of specialist you need. Although you may need the help of a specialist in their area of expertise, you should not rely on them to provide general financial planning advice unless they are also qualified financial planners. Specialists include the following:

Accountants - Accountants prepare financial statements and tax returns and give tax advice, something many financial planners may not do. Accountants are often Certified Public Accountants (CPAs) or Public Accountants (PAs). Accountants may also be Personal Financial Specialists (PFSs).
Estate planners--Estate planners help you plan your estate and give advice on transferring and managing your assets before and after your death. If the estate planner is an attorney, he or she can give legal advice and prepare necessary legal documents. An estate planner may be an Accredited Estate Planner (AEP).
Insurance agents--Insurance agents sell various insurance products, something financial planners can't do unless they are insurance agents licensed in the state in which they practice. Insurance agents often hold the Chartered Life Underwriter® (CLU®) designation.
Investment advisors--Investment advisors give you advice about investments and help you plan a strategy to manage your investment funds. They are not primarily salespeople. In fact, they cannot sell securities without a license. They must be registered with either the Securities and Exchange Commission or a state securities agency. Financial planners may or may not be licensed to sell securities, but they are often Registered Investment Advisors (RIAs).
Securities brokers--Securities brokers (stockbrokers) are primarily salespeople who buy and sell stocks, bonds, and mutual funds. They must be licensed by the state and be registered with a company that is a member of the Financial Industry Regulatory Authority (FINRA).

How to find a financial planner

Ask friends, relatives, business associates, your attorney, or other professionals who share your financial values to recommend a financial planner. If you can't get a personal recommendation, call the Financial Planning Association. Check your local telephone directory, or check their website at www.fpanet.org.

How a financial planner is compensated

You may pay your financial planner a fee to develop a financial plan - either an hourly rate or a flat fee - with no asset management or commissions required. If the planner is managing your assets, then his or her fee may be equivalent to a small percentage of your assets and/or income. Or your financial planner may earn his or her living by receiving commissions from products he or she sells to you. Some planners use a combination fee-and-commission structure whereby you pay a fee for development of a financial plan and the planner also receives a commission from selling you products. You should ask the planner you are considering about his or her fee structure and ask for an estimate of what it might cost to use his or her services.

Tip: When calculating how much it will cost to use the services of a financial planner, consider fees, commissions, and related expenses such as transaction fees and management fees related to the products they recommend.

Interviewing and evaluating a financial planner

It's a good idea to interview more than one financial planner. Personality styles, financial planning philosophies, qualifications, and fee structures may vary widely. When interviewing a financial planner, start by asking the following questions:

What are your qualifications and professional credentials? How long have you been in practice, and in what areas do you specialize? How many clients do you have? Are you a member of any professional associations?
How would you describe your financial planning philosophy? How will you help me assess my goals? Will you give me a written plan? Sell me investment and/or insurance products?
How are you compensated? Can you estimate how much using your services will cost me?
Have you ever been disciplined or had any professional licenses or designations revoked or suspended?
Do you foresee any conflicts of interest from working with me? Are you affiliated with any company whose products and services you might recommend to me? Do you plan on referring me to other professionals, or can you handle all my planning needs? If so, can you provide me with a list of names of these individuals?
How do you keep yourself abreast of new developments in the field of financial planning?

Before deciding to work with a planner, thoroughly check out his or her credentials and licenses. To do so, ask the planner to provide you with a list of credentials and licenses he or she holds, and find out what organizations he or she is regulated by. Your planner should provide you with written disclosure documents that contain this and other information. CFP® professionals and other planners who follow ethical guidelines are required to give these disclosures to you. Then call the organizations listed and check out the information the planner gave you. Evaluate the answers the planners have given you, and choose the qualified professional who can best give you the advice and services you need. Make sure that you feel comfortable with his or her financial planning philosophy and that you trust him or her to manage your finances.

PLJ Advisors and Forefield Inc. does not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

The Cost of Aging: Health-Care Reform Changes Affecting Seniors

2011-02-01T16:05:00.000-08:00

Health-care reform legislation, enacted in 2010, contains some provisions that directly affect our nation's elder population. If you're a retiree or a senior, you may be concerned about how these reforms may affect your access to health care and insurance benefits. The following is an overview of health-care reform legislation provisions you should be aware of.

Medicare spending cuts

Not surprisingly, the concerns of retirees and seniors generally center on potential cuts in Medicare benefits. At the outset, the new legislation does not affect Medicare's guaranteed benefits. However, two goals of the new health-care legislation are to slow the increasing cost of Medicare premiums paid by beneficiaries, and to ensure that Medicare will not run out of funds.

To help achieve these goals, cuts in Medicare spending will occur over a ten-year period, beginning in 2011, particularly targeting Medicare Advantage programs--Medicare benefits provided through private insurers but subsidized by the federal government. These cuts are intended to bring the cost of federal subsidies for Medicare Advantage plans in line with costs for comparable benefits for Medicare beneficiaries. If you participate in a Medicare Advantage plan, these cuts could reduce or eliminate some of the extra benefits your plan may offer, such as dental or vision care, and your premiums may increase. But Medicare Advantage plans cannot reduce primary Medicare benefits, nor can they impose deductibles and co-payments that are greater than what is allowed under the traditional Medicare program for comparable benefits.

According to a report from the Centers for Medicare & Medicaid Services, The Patient Protection and Affordable Care Act (health-care legislation) will extend the Medicare Part A trust fund for an additional ten years, to 2027.

Benefits added to Medicare

The legislation also improves some traditional Medicare benefits. For example, prior to the new legislation, traditional Medicare paid 80% of the cost for a one-time physical for new enrollees within the first 12 months of enrollment. But beginning in 2011, you will receive free annual wellness exams; preventive care tests such as screenings for high blood pressure, diabetes, and certain forms of cancer; and a personalized prevention assessment and plan to address particular health risk factors you may encounter.

Medicare Part D drug program changes

If you are a Medicare Part D beneficiary, you may be surprised to find that you have to pay for the entire cost of prescription drugs out-of-pocket after reaching a gap in your annual coverage, referred to as the "donut hole." Currently, you may pay up to an additional $3,610 out-of-pocket for medicines after reaching an initial threshold of $2,830 in total prescription drug costs (including Part D payments, beneficiary co-pays, and deductibles). But, in 2010, if you fall in the donut hole, you will receive a $250 rebate, and, in 2011, you will receive a 50% discount on brand-name drugs. Also beginning in 2011, a reduction in co-payments for generic drugs within the donut hole will be phased in, as well as a phased-in reduction in co-payments for brand-name drugs, starting in 2013. Essentially, by 2020, a combination of federal subsidies and a reduction in co-payments will reduce your out-of-pocket costs for medications in the gap from 100% to 25%. However, individuals with annual incomes greater than $85,000 and couples with incomes exceeding $170,000, will see their Part D premiums increase as the federal subsidy offsetting some of the cost of Medicare Part D premiums is reduced.

If you are a full-benefit dual eligible beneficiary (eligible for both Medicaid and Medicare) receiving institutional care, such as in a nursing home facility, you do not owe any co-payments for Part D-covered prescriptions. However, if you're dually eligible and receiving long-term care services at home or in a day-care community-based setting, you are subject to Part D drug co-payments. Beginning in 2012, the new legislation removes this imbalance by eliminating co-payments for individuals receiving services at home or in a community setting.

Also, beginning in 2011, the time period during which Part D and Medicare Advantage beneficiaries can make changes to their coverage is extended and runs from October 15 to December 7. This extension should provide more time for you to consider your options while ensuring that all changes are properly incorporated into the plan for the following year.

Coverage for those under age 65

You may be between the ages of 55 and 65 and do not have health insurance provided by your employer, or if covered, find that your cost for insurance is substantial. If you're in this predicament, the health-care legislation provides you with opportunities for affordable health insurance.

By 2014, state-based American Health Benefit Exchanges will be created, through which you can purchase affordable health insurance coverage. The Exchanges will serve as a conduit for health insurance providers to offer health plans with different benefits, co-insurance limits, and premium costs. You can then compare the costs of various plans and benefits. If you can't afford an Exchange plan, you may be eligible for a government subsidy based on income and family size.

Increased access to home-based care

Often, people with disabilities or illnesses would rather receive care at home instead of at a nursing home. The health-care reform law provides for programs and incentives for greater access to in-home care. The Community Living Assistance Services and Support program (CLASS) will be established sometime after 2011 (depending on when final regulations are published) as a voluntary insurance program, financed through payroll deductions and available to all working adults who choose to participate. This national program helps participants with functional limitations to maintain their personal and financial independence and live in the community by providing a cash benefit of at least $50 per day (after a five-year vesting period) for nonmedical services, such as home-care services, family caregiver support, and adult day-care or residential-care services. In order to qualify, you must need help with at least two activities of daily living, such as eating, bathing, or dressing.

Also in 2011, the Community First Choice Option will be available for states to add to their Medicaid programs. This option provides benefits to Medicaid-eligible individuals for community-based care instead of placement in a nursing home.

In addition, the State Balancing Incentive Program, to be established in 2011 and running through October 2015, provides increased federal funds to qualifying states that offer Medicaid benefits to disabled individuals seeking long-term care services at home, or in the community, instead of in a nursing home. In order to be eligible, a state must spend less than 50% of its total Medicaid expenditures for at-home or community-based long-term care services and supports. The state must also agree to use the additional federal funds to provide new or expanded non-institutionally-based long-term care services.

Nursing home transparency

The Independence at Home demonstration program, available in 2012, is a test program that provides Medicare beneficiaries with chronic conditions the opportunity to receive primary care services at home. This is intended to reduce costs associated with emergency room visits and hospital readmissions, and generally improve the efficiency of care.

While in-home care may be a preference, often a nursing facility is the better or only alternative. In the past, consumers had very little information available in order to compare nursing homes. The health-care legislation addresses the need for more transparency regarding nursing facilities. For example, nursing homes are required to disclose their owners, operators, and financers. The government will also collect and report information about how well a particular nursing home is staffed, including the number of hours of nursing care residents receive, staff turnover rates, and how much facilities spend on wages and benefits.

PLJ Advisors and Forefield Inc. does not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

Understanding IRA's: What You Need to Know

2011-01-31T14:03:00.000-08:00

What is an individual retirement account (IRA)?

An individual retirement account (IRA) is a personal savings plan that offers specific tax incentives to encourage you to save for retirement. Currently, there are two types of retirement IRAs. Traditional IRAs allow for tax-deductible contributions under certain conditions. Roth IRAs (created by the Taxpayer Relief Act of 1997) are funded with after-tax dollars, but may allow for tax-free withdrawals under certain conditions.

It is important to realize that an IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. You need to decide how to invest your IRA dollars based on your own tolerance for risk and investment philosophy. How fast your IRA dollars grow is largely a function of the investments that you choose.

Tip: The term "IRA" can refer either to an individual retirement account or an individual retirement annuity. An individual retirement annuity is an annuity or endowment contract that you purchase from a life insurance company. The contract must not be transferable, and the premiums must be flexible so that if your compensation changes, your premium payments can also change. In general, the same rules that apply to individual retirement accounts also apply to individual retirement annuities.

Overview of IRA types

Traditional IRAs

In general Prior to 1997, there was only one type of IRA. Because it was the only type, it didn't have a special name--it was simply called an IRA. However, as a result of the Taxpayer Relief Act of 1997, this "original" IRA came to be called the "traditional" IRA to distinguish it from the newly created Roth IRA.

A traditional IRA is a special type of personal savings plan that provides certain tax advantages to encourage you to save money for retirement. For 2010 and 2011, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a traditional IRA. You may also be able to contribute up to the same amounts to a traditional IRA for your spouse. Funds in a traditional IRA grow tax deferred until they are paid out to you.

Deductible Versus Nondeductible Contributions

There are two types of contributions that you can make to a traditional IRA: deductible contributions and nondeductible contributions. When you make deductible contributions, you reduce your taxable income for the year, so the dollars that you contribute are pretax. Those dollars will not be taxed until you withdraw them from the IRA. When you make nondeductible contributions, you contribute after-tax dollars that will not be taxed again later when you withdraw them from the IRA. The portion of any withdrawal that represents investment earnings is always taxed.

Your ability to make a deductible contributions to a traditional IRA depends on your annual income, your income tax filing status, and whether you (or, in some cases, your spouse) are covered by an employer-sponsored retirement plan.

Roth IRAs

As mentioned, the Roth IRA is a product of the Taxpayer Relief Act of 1997. Like traditional IRA funds, funds held in a Roth IRA enjoy tax-deferred growth. But the Roth IRA is often described as the opposite of a traditional IRA because other key features differ. Roth IRA contributions are never tax deductible (you can contribute only after-tax dollars), but withdrawals may be completely tax free if you meet the requirements for qualifying withdrawals. For 2010 and 2011, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to a Roth IRA. You may also be able to contribute up to the same amounts to a Roth IRA for your spouse.

You may or may not qualify to establish a Roth IRA. Even if you do, you may not qualify to contribute up to the annual maximum. Whether or not you can contribute to a Roth IRA depends on your annual income and your income tax filing status. Finally, if you qualify, you can convert funds from a traditional IRA to a Roth IRA (see below).

Spousal IRAs

If you file your federal income tax return as married filing jointly and meet certain other conditions, you can contribute to an IRA (traditional or Roth) for your spouse even if he or she has little or no taxable compensation of his or her own for the year of the contribution. This is usually described as making a contribution to a spousal IRA. A spousal IRA is not, however, a special type of IRA. It is merely a way of describing the fact that you are making a contribution to your spouse's traditional or Roth IRA.

SEP IRAs and SIMPLE IRAs

A Simplified Employee Pension Plan (SEP) is a retirement plan an employer can establish for employees (self-employed individuals can also adopt a SEP plan). Employer SEP contributions, which can be as high as $49,000 a year for each employee (in 2011), are made to employee traditional IRAs (usually called SEP IRAs). All of the rules applicable to traditional IRAs apply to SEP IRAs. In addition, employees can make their own traditional (but not Roth) IRA contributions to their SEP IRAs, subject to regular traditional IRA rules and contribution limits.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA plan) is also an employer-sponsored retirement plan. With a SIMPLE IRA, both the employer and the employees make contributions to SIMPLE IRAs established for the employees (employees can defer up to $11,500 in 2011, $14,000 if age 50 or older). SIMPLE IRAs are different from traditional IRAs-- employees can't make regular IRA contributions to SIMPLE IRAs. After an employee participates in the SIMPLE plan for 2 years, however, the employee can roll the SIMPLE IRA assets into a traditional IRA.

Deemed IRAs

Employers who maintain certain retirement plans (like 401(k), 403(b), or 457(b) plans) can allow employees to make regular IRA contributions--traditional or Roth--to special accounts set up under their retirement plan. These accounts, called "deemed IRAs," function just like regular IRAs. Advantages include the fact that your retirement assets can be consolidated in one place, contributions can be made automatically through payroll deduction, the employee can take advantage of any special investment opportunities offered in the employer's plan, and protection from creditors may be greater than that available in a standalone IRA. The downside is that investment choices in an employer's plan may be very limited in comparison to the universe of investment options available through a separate IRA. Also, the distribution options available to employees and their beneficiaries in a deemed IRA may be more limited than in a standalone IRA. Because of the administrative complexity involved, most employers have so far been reluctant to offer these arrangements under their retirement plans.

Rollovers and Transfers

You can shift funds from one traditional IRA to another traditional IRA or from one Roth IRA to another Roth IRA. You can do this by having the trustee or custodian of one IRA transfer the funds directly to the trustee or custodian of a second IRA without ever distributing the funds to you. You can also arrange for the trustee or custodian of your IRA to distribute your funds to you. To avoid taxes and penalty, you then roll the funds over into another IRA (of the same type) by contributing the funds to that IRA within 60 days after receiving the distribution from the first IRA (the IRS can waive this 60-day rule under limited circumstances, such as proven hardship). Shifting funds from a traditional IRA to a Roth IRA is considerably more complicated (see below).

Tip: You can also roll over funds from an employer's qualified retirement plan to a traditional IRA or Roth IRA. (Roth 401(k) and Roth 403(b) funds can be rolled over only to a Roth IRA, not to a traditional IRA).

Converting or Rolling Over Funds From Traditional IRAs and Employer Plans to Roth IRAs

You can convert or roll over all or a portion of the funds in your traditional IRA to a Roth IRA. Similarly, you can generally roll over (convert) eligible distributions of non-Roth funds from an employer-sponsored retirement plan (like a 401(k)) to a Roth IRA. If you do so, those funds will be included in your taxable income for the year (to the extent that the funds consist of pre-tax or deductible contributions and investment earnings). The decision whether to convert funds is complicated and should not be made without consulting a professional advisor.

Premature Distribution Tax

You decide when and how much to withdraw from your traditional and Roth IRAs, but taxes and penalties imposed by the federal government will likely influence your decision-making process. A 10 percent premature distribution tax is generally assessed on the taxable portion of any distribution you take from a traditional or Roth IRA prior to age 59½. This tax is over and above regular federal income tax. There are a number of exceptions to the tax, however.

Caution: Special rules may apply if you convert or roll over funds from a traditional IRA to a Roth IRA and then withdraw funds from that Roth IRA within five years of the conversion.

Required Minimum Distributions

Like many people, you may want to keep your funds in your IRAs for as long as possible to maximize tax-deferred growth and/or preserve the funds for your beneficiaries. Unfortunately, the federal government does not allow you to do this. The required minimum distribution rule states that when you reach age 70½, you must begin taking minimum annual withdrawals from your traditional IRAs (this rule does not apply to Roth IRAs). These annual withdrawals are based on a life expectancy calculation and are intended to dispose of your traditional IRA balance over a given period of time. You can always withdraw more than the required minimum in any year, but if you withdraw less, you will be subject to a 50 percent penalty on the shortfall.

The Importance of Beneficiary Choice

When you open a traditional or Roth IRA, you have to designate a beneficiary. This is the person or entity that will receive the funds remaining in your IRA after you die. It can be your spouse, a child or grandchild, a friend or other relative, a trust, a charity, your estate, or some combination of these (you can have more than one designated beneficiary). Obviously, your beneficiary should be someone you wish to provide for financially. What you may not realize is that choosing a beneficiary involves other important considerations. Your choice will determine how quickly the IRA funds must be distributed after your death, and could even impact the required minimum distributions that you must take from a traditional IRA during your life (if you choose a spouse who is more than 10 years younger than you). For a detailed discussion, see our separate topic discussions, Beneficiary Designations for Traditional IRAs and Employer-Sponsored Retirement Plans and Beneficiary Designations for Roth IRAs.

Investment Choices Appropriate for IRAs

Remember that an IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. Choosing specific investments to fund your IRAs is an important decision. Here are some points to keep in mind:

· You need to decide how to invest your IRA dollars based on your own retirement goals, tolerance for risk, investment philosophy, and other personal factors

· How fast your IRA dollars grow is largely a function of the investments that you choose, as well as tax deferral

· There are specific types of investments that you cannot use to fund your IRAs (such as collectibles), and there are some choices that usually make more sense as IRA investments than others (e.g., mutual funds, CDs)

· If you're unhappy with your IRA investment choices, you can typically move your money to other investments offered by the same financial institution, or to a different institution

· You should consider any fees associated with opening and maintaining your IRA

Caution: The IRS has ruled that the wash sales rules apply if you sell stock or other securities outside of your IRA for a loss, and purchase substantially identical stock or securities in your IRA (traditional or Roth) within 30 days before or after the sale. The result is that you cannot take a deduction for your loss on the sale of the stock or securities. In addition, your basis in your IRA is not increased by the amount of the disallowed loss.

You should talk to a financial professional about choosing appropriate investments for your IRAs.

Choosing the Right Type of IRA

How do you decide which type of IRA is right for you? As a general rule, there is no advantage to making nondeductible contributions to a traditional IRA if you qualify to make either deductible contributions to a traditional IRA or after-tax contributions to a Roth IRA. The question is: Assuming that you qualify for both, do you contribute to a traditional IRA with deductible contributions, or to a Roth IRA? There is no easy answer. You have to analyze your situation and determine which type of IRA offers the best fit for you. Read the our separate topic discussions on Traditional IRAs and Roth IRAs, and use our Decision Tools. You should also consult a financial planner, tax advisor, or other professional.

PLJ Advisors and Forefield Inc. does not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.

Social Security: What Should You Do at Age 62?

2011-01-29T10:35:00.000-08:00

Is 62 your lucky number? If you're eligible, that's the earliest age you can start receiving Social Security retirement benefits. If you decide to start collecting benefits before your full retirement age (which ranges from 65 to 67, depending on the year you were born), you'll be in good company. According to the Social Security Administration (SSA), approximately 74% of Americans elect to receive their Social Security benefits early. (Source: SSA Annual Statistical Supplement, April 2009)

Although collecting early retirement benefits makes sense for many people, there's a major drawback to consider: if you start collecting benefits early, your monthly retirement benefit will be permanently reduced. So before you put down the tools of your trade and pick up your first Social Security check, there are some factors you'll need to weigh before deciding whether to start collecting benefits early.

What will your retirement benefit be?

The exact amount of your Social Security retirement benefit is based on the number of years you've been working and the amount you've earned. Your benefit is calculated using a formula that takes into account your 35 highest earnings years. If you earned little or nothing in several of those years (if you left the workforce to raise a family, for instance), it may be to your advantage to work as long as possible, because you'll have the opportunity to replace a year of lower earnings with a higher one, potentially resulting in a higher retirement benefit.

Each year, you'll receive a Social Security Statement from the SSA that summarizes your earnings history, and estimates the benefits you may receive based on those earnings.

If you begin collecting retirement benefits at age 62, each monthly benefit check will be 20% to 30% less than it would be at full retirement age. The exact amount of the reduction will depend on the year you were born. (Conversely, you can get a higher payout by delaying retirement past your full retirement
age--the government increases your payout every month that you delay retirement, up to age 70.)

However, even though your monthly benefit will be 20% to 30% less if you begin collecting retirement benefits at age 62, you might receive the same or more total lifetime Social Security benefits as you would have had you waited until full retirement age to start collecting benefits. That's because even though you'll receive less money per month, you might receive more benefit checks.

The following chart shows how much an estimated $1,000 monthly benefit at full retirement age would be worth if you started taking a reduced benefit at age 62.

Birth Year	Full Retirement Age	Benefit
1937 and earlier	65 years	$800
1938	65 years, 2 months	$791
1939	65 years, 4 months	$783
1940	65 years, 6 months	$775
1941	65 years, 8 months	$766
1942	65 years, 10 months	$758
1943-1954	66 years	$750
1955	66 years, 2 months	$741
1956	66 years, 4 months	$733
1957	66 years, 6 months	$725
1958	66 years, 8 months	$716
1959	66 years, 10 months	$708
1960	67 years	$700
Source: Social Security Administration

Have you thought about your longevity?

Is it better to take reduced benefits at age 62 or full benefits later? The answer depends, in part, on how long you live. If you live longer than your "break-even age," the overall value of your retirement benefits taken at full retirement age will begin to outweigh the value of reduced benefits taken at age 62.

You'll generally reach your break-even age about 12 years from your full retirement age. For example, if your full retirement age is 66, you should reach your break-even age at 78. If you live past this age, you'll end up with higher total lifetime benefits by waiting until full retirement age to start collecting; otherwise, collecting benefits at age 62 may be better.

Of course, no one can predict exactly how long they'll live. But by taking into account your current health, diet, exercise level, access to quality medical care, and family health history, you might be able to make a reasonable assumption.

How much income will you need?

Another important piece of the puzzle is to look at how much retirement income you'll need, based partly on an estimate of your retirement expenses. If there is a large gap between your projected expenses and your anticipated income, waiting a few years to retire and start collecting Social Security benefits may improve your financial outlook.

If you continue to work and wait until your full retirement age to start collecting benefits, your Social Security monthly benefit will be larger. What's more, the longer you stay in the workforce, the greater the amount of money you will earn and have available to put into your overall retirement savings. Another plus is that Social Security's annual cost-of-living increases are calculated using your initial year's benefits as a base--the higher the base, the greater your annual increase.

Do you plan on working after age 62?

Another key factor in your decision is whether you plan to continue working after you start collecting Social Security benefits at age 62. That's because income you earn before full retirement age may reduce your Social Security retirement benefit. Specifically, if you are under full retirement age for the entire year, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($14,160 in 2010).

Example: You start collecting Social Security benefits at age 62. You continue working, and your job pays $30,000 in 2010. Your annual benefit would be reduced by $7,920 ($30,000 minus $14,160, divided by 2).

A higher earnings limit applies in the year you reach full retirement age, and the calculation is different too--$1 in benefits is withheld for every $3 you earn over $37,680 (in 2010). Once you reach full retirement age, you don't need to worry about your earnings. You can earn as much as you want without affecting your Social Security benefit.

Note: If your monthly benefit is reduced in the short term due to your earnings, you'll receive a higher monthly benefit later. That's because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.

Are you eligible for retiree health benefits?

Even if you start collecting Social Security benefits at age 62, keep in mind that you still won't be eligible for Medicare until you reach age 65. So unless you're eligible for retiree health benefits through your former employer or your spouse's health plan at work, you'll probably want to pay for a private health policy until Medicare kicks in.

Other considerations

In addition to the factors discussed here, other personal considerations may influence whether you start collecting Social Security benefits at age 62. Is your spouse already retired or planning to retire early too? Do you plan on traveling, volunteering, going back to school, starting your own business, pursuing hobbies, or moving to a new location? Do you have grandchildren or elderly parents whom you want to help take care of? Every person's situation is different.

For more information

The nuances of Social Security can be complex. For more information about Social Security benefits, visit the Social Security Administration website at www.ssa.gov, or call (800) 772-1213 to speak with a representative. You may also call or visit
your local Social Security office.

Disclosure Information -- Important -- Please Review
PLJ Advisors and Forefield Inc. does not provide legal, tax, or investment advice. All content provided by PLJ Advisors is protected by copyright. PLJ Advisors and Forefield are not responsible for any modifications made to their materials, or for the accuracy of information provided by other sources.