Unforgettable Birthdays

Birthdays may seem less important as you grow older. They may not offer the impact of watershed moments, such as getting a driver’s license at 16 and voting at 18. But beginning at age 59, there are several key birthdays that can affect your tax situation, health-care eligibility, and retirement benefits.

 

59½ — You can start taking penalty-free withdrawals from IRAs and qualified retirement plans, provided certain conditions are met. Ordinary income taxes generally apply to these distributions. (Withdrawals taken prior to age 59½ are subject to a 10% federal income tax penalty.)

 

62 — You are eligible to start collecting Social Security benefits, although your benefit will be reduced by up to 30%. To receive full benefits, you must wait until “full retirement age,” which ranges from 65 to 67, depending on the year you were born.

 

65 — You are eligible to enroll in Medicare. Medicare Part A Hospital Insurance benefits are automatic for those eligible for Social Security. Part B Medical Insurance ­ben­efits are voluntary and have a monthly premium. To obtain ­coverage at the ­earliest possible date, you should generally enroll about two to three months before turning 65.¹

 

70½ — You must start taking minimum distributions from most tax-deferred retirement plans or face a 50% penalty on the amount that should have been withdrawn. Annual required minimum distributions are calculated according to life expectancies determined by the federal government.

 

Source:  1) Medicare & You 2011, U.S. Department of Health and Human Services

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

This material was written and prepared by Emerald.
© 2011 Emerald Connect, Inc.

Santa Barbara Financial Consultant, Janet L. Barr

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SANTA BARBARA 206 East Victoria Street

Phone: 805-965-0101

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Fax: 805-965-0199

www.collaborativefinancialsolutions.com

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Janet@JanetBarrCFS.com

 

LPL Financial (formerly Linsco / Private Ledger Corp.) has ranked first among independent Broker/Dealers
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Is Inflation a real threat?

How Does Inflation Affect Me?
Are you saving for retirement? For your children’s education? For any other long-term goal? If so, you’ll want to know about a sometimes subtle, yet very real threat to your savings: inflation.
Inflation is the increase in the price of products over time. Inflation rates have fluctuated over the years. Sometimes inflation runs high, and other times it is hardly noticeable. The short-term changes aren’t the real issue. The real issue is the effects of long-term inflation.
Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. And those who put off saving and investing will be even deeper in the hole. 

What Can You Do About Inflation?
The effects of inflation can’t be denied — yet there are ways to fight them.
Historically, one of the best ways has been to utilize growth-oriented alternatives. Stocks, stock mutual funds, variable annuities, and variable universal life insurance may be options to consider. These alternatives provide the potential for returns that exceed inflation over the long term.
 
Growth-oriented alternatives carry more risk than other types of investments. Over the long term, however, they may help you stave off the effects of inflation and realize your financial goals.
As you focus on growth, remember that prudent investing calls for diversification. Don’t risk all your wealth in aggressive investments. Consider other alternatives to balance your portfolio, and choose all your investments with an eye toward your tolerance for investment risk.
The return and principal value of stocks and stock mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges plus a 10 percent federal income tax penalty if made prior to age 59 1/2. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.


The cash value of a variable universal life insurance policy is not guaranteed. The investment return and principal value of the variable subaccounts will fluctuate. Your cash value, and perhaps the death benefit, will be determined by the performance of the chosen subaccounts. Withdrawals may be subject to surrender charges and are taxable if you withdraw more than your basis in the policy. Policy loans or withdrawals will reduce the policy’s cash value and death benefit , and may require additional premium payments to keep the policy in force.


Mutual funds, variable annuities, and variable universal life insurance are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

This material was written and prepared by Emerald.
© 2011 Emerald Connect, Inc.

Member FINRA/SIPC

LPL Financial

Tax-Free Charitable Contributions from IRAs Extended Once Again

Background

The Pension Protection Act of 2006 first allowed taxpayers age 70½ or older to exclude from gross income otherwise taxable distributions ("qualified charitable distributions," or QCDs) from their IRA that were paid directly to a qualified charity. Taxpayers were able to exclude up to $100,000 in both 2006 and 2007. The law was extended through 2009 by the Emergency Economic Stabilization Act of 2008, and has just been extended again, through 2011, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act).

How QCDs work for 2011You must be 70½ or older in order to make QCDs. You direct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income in 2011. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs in 2011. Note: You don't get to deduct QCDs as a charitable contribution on your federal income tax return--that would be double dipping.

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.

Example: Assume that your RMD for 2011, which you're required to take no later than December 31, 2011, is $25,000. You receive a $5,000 cash distribution in February 2011, which you then contribute to Charity A. In June 2011, you also make a $15,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2011 gross income (but you may be entitled to a charitable deduction if you itemize your deductions). You exclude the $15,000 of QCDs from your 2011 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD. You'll need to withdraw another $5,000 no later than December 31, 2011, to avoid a penalty.

Example: Assume you turned 70½ in 2010. You must take your first RMD (for 2010) no later than April 1, 2011. You must take your second RMD (for 2011) no later than December 31, 2011. Assume each RMD is $25,000. You don't take any actual distributions from your IRA in 2011. Prior to April 1 you make a $25,000 QCD to Charity B. Because the QCD is made prior to April 1, it satisfies your $25,000 RMD for 2010. Prior to December 31 you make a $75,000 QCD to Charity C. Because the QCD is made prior to December 31, it satisfies your $25,000 RMD for 2011. You can exclude the $100,000 of QCDs from your 2011 gross income.

As indicated above, a QCD must be an otherwise taxable distribution from your IRA. If you've made nondeductible contributions, then normally each distribution carries with it a pro-rata amount of taxable and nontaxable dollars. However, a special rule applies to QCDs--the pro-rata rule is ignored and your taxable dollars are treated as distributed first. (If you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA. RMDs are calculated separately for each IRA you own, but may be taken from any of your IRAs.)

Why are QCDs important?

Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive. You would need to request a distribution from the IRA, and then make the contribution to the charity. You'd receive a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to the limits that apply to charitable contributions under Internal Revenue Code Section 170. QCDs avoid all this, by providing an exclusion from income for the amount paid directly from your IRA to the charity--you don't report the IRS distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions.

QCDs in 2010

As indicated earlier, the Tax Relief Act also allowed QCDs to be made for 2010, but the deadline for making 2010 QCDs (January 31, 2011) has passed. If you made QCDs in 2011 that you elected to apply to 2010, you must subtract those QCDs from your December 31, 2010, IRA balance when calculating your RMD for 2011.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Securities offered through LPL Financial, Member FINRA/SIPC

Prepared by Forefield Inc. Copyright 2011.

Retirement Plan and IRA Limits for 2011!

Many retirement plan and IRA limits are indexed for inflation each year. Some of the key numbers for 2011 are discussed below. Elective deferrals If you're lucky enough to be eligible to participate in a 401(k), 403(b), 457(b), or SAR-SEP plan, you can make elective deferrals of up to $16,500 in 2011, unchanged from 2010. If you're age 50 or older, you also can make a catch-up contribution of up to $5,500 to these plans in 2011 (also unchanged from 2010). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.) If your 401(k) or 403(b) plan allows Roth contributions, your total elective contributions, pretax and Roth, can't exceed $16,500 ($22,000 with catch-up contributions). You can split your contribution any way you wish. For example, you can make $9,500 of Roth contributions and $7,000 of pretax 401(k) contributions. It's up to you. If you participate in a SIMPLE IRA or SIMPLE 401(k) plan, you can contribute up to $11,500 in 2011 (unchanged from 2010). If you're age 50 or older, the maximum catch-up contribution to a SIMPLE IRA or SIMPLE 401(k) plan in 2011 is $2,500 (unchanged from 2010). IRA limits remain the same for 2011 The amount you can contribute to a traditional or Roth IRA remains at $5,000 (or 100% of your earned income, if less) for 2011, and the maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to an IRA in addition to an employer-sponsored retirement plan. But if you (or your spouse) participate in an employer-sponsored plan, your ability to deduct Contribution limits: 2011 tax year* Plan type Annual dollar limit Catch-up limit 401(k), 403(b), govt. 457(b) plans $16,500 $5,500 SIMPLE plans $11,500 $2,500 Traditional and Roth IRAs $5,000 $1,000 *Contributions can't exceed 100% of your income. Special catch-up rules apply to 403(b) and governmental 457(b) plans. traditional IRA contributions may be limited, depending on your income. Roth contributions are also subject to income limits. Some other key numbers for 2011 For 2011, the maximum amount of compensation your employer can take into account when calculating contributions and benefits in qualified plans (and certain other plans) is $245,000 (unchanged from 2010). The maximum annual benefit you can receive from a defined benefit pension plan is limited to $195,000 in 2011 (unchanged from 2010). And the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2011 is $49,000 (also unchanged from 2010), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.) Income phaseout range for determining deductibility of traditional IRA contributions in 2011 1. Covered by an employer plan Single/head of household $56,000-$66,000 (same for 2010) Married filing jointly $90,000-$110,000 ($89,000-$109,000 for 2010) Married filing separately $0-$10,000 2. Not covered by an employer plan, but filing joint return with a spouse who is covered $169,000-$179,000 ($167,000-$177,000 for 2010) Income phaseout range for determining ability to fund Roth IRA in 2011 Single/head of household $107,000-$122,000 ($105,000-$120,000 for 2010) Married filing jointly $169,000-$179,000 ($167,000-$177,000 for 2010) Married filing separately $0-$10,000

Many retirement plan and IRA limits are indexed for inflation each year. Most of the limits for 2011 are unchanged from 2010. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor. Securities offered through LPL Financial, Member FINRA/SIPC Prepared by Forefield Inc. Copyright 2011.

A new year and a new chapter for retirement!

A New Chapter for Retirement

 

John F. Kennedy once said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” This is certainly true of preparing for retirement. If we continue to expect that the ways of the past will see us through to our futures, we will be left behind. The methods that helped prepare us for retirement are quickly disappearing, and we must start using others.

 

Today’s companies are rewriting the retirement rules for working Americans. Traditional pension plans, which gained prominence in the 20th century, are rapidly disappearing because of the high costs involved in funding them. Some corporations are defaulting on their plans, and an increasing number of companies have underfunded or at-risk plans.

 

To help protect employees with corporate pensions, the federal government has enacted laws requiring employers to meet a 100% funding target for their defined-benefit plans. Companies that sponsor pension plans are also required to pay higher insurance premiums to the Pension Benefit Guaranty Corporation (PBGC), which was created by Congress in 1974 to help protect American workers from the risk of pension default.  Premiums have increased because the PBGC itself is facing a deficit as a result of more companies defaulting on their pension plans.

 

Because of these costly requirements, it is becoming less and less attractive for companies to provide traditional pensions to retirees. Employers with underfunded plans may simply choose to eliminate them, and even companies with healthy plans may decide that defined-benefit plans are not worth the cost. As a result, it is likely that more companies will offer defined-contribution plans like the 401(k) to attract new employees and to help employees fund their own retirements.

 

Thus, it is important to be aware that you may have less help from your employer and will probably have to rely more on your own savings and investments to fund your retirement.

 

The government has tried to help by raising contribution limits to most employer-sponsored retirement plans. You can contribute money to these plans on a pre-tax basis. Your contributions and any earnings accumulate on a tax-deferred basis. Of course, remember that distributions from most employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% federal income tax penalty.

 

A number of companies are taking steps to help workers fund retirement. Many have instituted automatic-enrollment in their defined-contribution plans to encourage more employees to participate. Some are enhancing the benefits of their plans by increasing the amount they contribute to employee accounts and/or enhancing matching contributions.

 

Many companies that still have traditional pension plans should be able to pay their promised benefits. But in light of recent trends, it would be wise to consider all possible sources of retirement income when reviewing your retirement strategy. With the changing retirement landscape, there may be no better time than now to size up your current situation. Your company-sponsored retirement plan will be just one piece of your retirement funding pie.  

 

This material was written and prepared by Emerald.
© 2010 Emerald

What is Diversification?

What Is Diversification?

Virtually every investment has some type of risk associated with it. The stock market rises and falls. An increase in interest rates can cause a decline in the bond market. No matter what you decide to invest in, risk is something you must consider.

 

The key to successful investing is managing risk while maintaining the potential for adequate returns on your investments. One of the most effective ways to help manage your investment risk is to diversify. Diversification is an investment strategy aimed at managing risk by spreading your money across a variety of investments such as stocks, bonds, real estate, and cash alternatives.

 

The main philosophy behind diversification is really quite simple: “Don’t put all your eggs in one basket.” Spreading the risk among a number of different investment categories, as well as over several different industries, can help offset a loss in any one investment.

 

Likewise, the power of diversification may help smooth your returns over time. As one investment increases, it may offset the decreases in another. This may allow your portfolio to ride out market fluctuations, providing a more steady performance under various economic conditions. By reducing the impact of market ups and downs, diversification can go far in enhancing your comfort level with investing.

 

Diversification is one of the main reasons why mutual funds are so attractive for both experienced and novice investors. Many non-institutional investors have a limited investment budget and may find it challenging to construct a portfolio that is sufficiently diversified.

 

For a modest initial investment, you can purchase shares in a diversified portfolio of securities. You have “built-in” diversification. Depending on the objectives of the fund, it may contain a variety of stocks, bonds, and cash vehicles, or a combination of them.

 

Whether you are investing in mutual funds or are putting together your own combination of stocks, bonds, and other investment vehicles, it is a good idea to keep in mind the importance of diversifying. Diversification does not eliminate or guarantee against the risk of investment loss; it is a method used to help manage investment risk. The value of stocks, bonds, and mutual funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost.

 

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

This material was written and prepared by Emerald.
© 2010 Emerald

The 529 Lesson Plan!

529 Lesson Plan: High Scores for 529 College Savings Program
Looking for a tax-advantaged college savings plan that has no age restrictions, no income phaseout limits, no residency requirements — and one you can use to pay for more than just tuition?
Consider the 529 savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades — with annual costs of more than $35,000 per year for the average private four-year college.¹ Named after the section of the tax code that authorized them, 529 plans (also known as qualified state tuition programs) are now offered in almost every state. 

Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today's rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. It's practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state's eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).
The newer variety of 529 is the savings plan. It's similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.
In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers — many well-known investment firms — to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. In 48 states, earnings are exempt from taxes.² And there are even new consumer-friendly reward programs popping up that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.
Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone — even non-relatives — can contribute up to $13,000 per year (in 2010) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner's estate, therefore avoiding estate taxes upon the owner's death.

Major Benefits
These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn — and, if desired, can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary. A 529 plan is also extremely simple when it comes to tax reporting — the sponsoring state, not you, is responsible for all income tax record keeping. At the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student's tax return. 

Benefits for Grandparents
The 529 plan is a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student's college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a grandparent — as well as anyone, for that matter — could elect to use five years' worth of annual exclusions by making a single contribution of as much as $65,000 per beneficiary in 2010 (or a couple could contribute $130,000 in 2010), as long as no other contributions are made for that beneficiary for five years.*  If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.
As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing. 
By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.
* If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor's estate.

Sources:
1) The College Board, 2009
2) SavingForCollege.com

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. 

This material was written and prepared by Emerald.
© 2010 Emerald