tag:blogger.com,1999:blog-92227737562938687032024-02-08T06:47:28.902-08:00Financially Speaking....Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.comBlogger31125tag:blogger.com,1999:blog-9222773756293868703.post-24582575931602797992014-01-14T12:11:00.000-08:002014-01-14T12:16:54.673-08:00When it comes to New Year's resolutions, more Americans are including financial goals.<!--[if gte mso 9]><xml>
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<br />
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">This year, more than half of Americans will make New Year's resolutions affecting their financial lives. That is an increase of 54% since 2009. </span></span><br />
<span style="font-size: small;"><br /></span>
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">The
annual <i>Fidelity New Year Financial Resolutions Study</i> found that although
long-term financial goals are still the top financial priority of Americans,
short-term goals gained significant traction among survey respondents this
year.</span></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><br /></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">In
general, more than half (54%) of Americans said they typically consider making
resolutions that affect their finances -- up from 35% who reported this in
2009. And for the third year in a row, the top three financial resolutions
among those who are considering making a financial resolution for 2014 are
saving more (54%), paying off debt (24%), and spending less (19%).</span></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><br /></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">Among
those who indicated that saving more was one of their goals for 2014, long-term
financial goals continued to lead short-term goals, however the gap between the
two narrowed considerably this year (53% versus 39%.) The top long-term savings
goal was saving for retirement in a tax-deferred account (55%), followed by saving
for college (35%) and saving for retiree health care costs (28%).</span></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><br /></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">The top
short-term savings goals included building an emergency fund (57%) and paying
down debt (46%), while saving for luxury items, such as a boat or vehicle has
dropped dramatically over the past few years from 19% in 2010 to 6% this year.</span></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><br /></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">Nearly
half of Americans said that ongoing uncertainty around the economy, the debt
ceiling battles, and the potential of higher interest rates may deter their
efforts to keep their 2014 financial resolutions; 39% of those polled believe
that financial resolutions are easier to keep than other common resolutions
(e.g., stop smoking, lose weight, find a new job) -- up from 28% in 2012.</span></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><br /></span></div>
<div style="background: none repeat scroll 0% 0% white; margin: 0in;">
<span style="font-family: Times,"Times New Roman",serif; font-size: small;"><span style="color: #333333;">Among
other notable survey findings, 48% of Americans feel their taxes will be higher
in 2014 as a result of the fiscal cliff tax law that was passed earlier this
year.</span></span></div>
Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-36984294172871722022013-01-08T14:12:00.000-08:002013-01-08T14:12:21.388-08:00A New Year - A New Financial You<!--[if gte mso 9]><xml>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">When it comes to making New Year's
resolutions, getting into good shape financially ranks right up there with
losing weight and eating healthier. All three goals require discipline and
planning; and, as you've no doubt experienced, it's not unusual to encounter
setbacks along the way. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Don't let losing a minor battle here
or there convince you to surrender on the bigger war. You'll probably have more
success if you start out taking small steps, learning from your mistakes and
gaining momentum as you go. </span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Here are a few suggestions for
better managing your personal finances in the New Year:</span></div>
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<br /></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The first step on the road to
financial health is to create a budget you can live with. If you're new to
budgeting or haven't been successful in the past, start slowly. For a few
months write down every cent you spend: mortgage/rent, utilities, food, gas,
medical copayments, credit cards – the works. You'll be surprised where your
money goes.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">At the same time, compare money
coming in (income) to money going out (expenses). If you're just breaking even
or losing money each month, you need to boost your income and/or aggressively
trim spending (or both!). Try these strategies: </span></div>
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<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Pay non-mortgage debt bills on time and send at least
the minimum amount due. You'll avoid late fees and related interest rate
increases; plus, you'll improve your credit score.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Balance your checking account regularly and use
in-network ATMs to avoid overdrafts and fees.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">If your employer offers flexible spending accounts, use
them to pay health and/or dependent care expenses with pretax dollars.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Raise insurance deductibles and shop around for better
rates.</span></li>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Once you start reducing expenses,
use the savings to pay down debts more quickly. Try making a table of all
outstanding credit card and loan balances and their corresponding interest
rates. Then, each month pay the minimum amount due on each – except pay as much
as possible on the account with the <u>lowest balance</u>. Once that one's paid
off, move to the next-highest account balance and so on. This method goes
against other financial planners, who recommend ranking your non-mortgage debt
from highest interest rate to lowest.<span style="mso-spacerun: yes;"> </span>By
following the ‘lowest balance to higher balance’ methodology you achieve
financial victory quicker – by eliminating a debt sooner – and therefore achieving
emotional victory as well.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Another smart move is to have an
emergency fund in case of financial upheaval (layoff, medical emergency,
unexpected car repairs, etc.). <span style="mso-spacerun: yes;"> </span>Ideally
you should save enough to cover six months' of expenses, but don't be
discouraged if that sounds insurmountable: Start slowly by saving a few dollars
each week. You won't miss it and your little nest egg might just save you from
needing an expensive short-term loan to cover an unplanned bill.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">If something terrible happened to
you, would your family be protected financially? Make sure you have a valid
will, durable power of attorney, health care proxy and living will. Numerous
books, online articles and sample forms are available if you want to draft them
yourself, but you should probably review your documents with a financial
advisor or attorney to avoid potential legal problems. Also, make sure you have
adequate life and disability insurance, both in amount and type.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">Sticking to resolutions is never easy – if it
were, we'd already be doing them. But striving to improve your financial
situation now will pay off big-time down the road. </span>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-1156620491618221072011-07-08T11:18:00.000-07:002011-07-08T11:18:41.361-07:00Are You There Yet?<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;"><span style="font-family: inherit;">For U.S. investors, 2010 came in well above the long-term historical averages, with the broad-based Wilshire 5000 Composite Index up 17.7% on a total return (dividends and appreciation) basis. As usual, some categories did better than others, with diversified international stocks returning 7.8% and intermediate domestic bonds delivering 6.5%.</span><br style="font-family: inherit;" /><span style="font-family: inherit;"> </span><br />
But how did your portfolio do? And more importantly, what progress did you make toward your long-term financial goals? While investment performance is important, long-term financial success depends on a lot more than what "the market" does from year to year. Below, I will walk through four key steps to help you get a handle on just how you're doing vis-à-vis the market and your financial goals.<br />
<br />
<b style="mso-bidi-font-weight: normal;">Step 1: Benchmark your portfolio's performance<br />
</b>To get an idea of how your portfolio performed relative to the market, compare the benchmark return to your portfolio's actual return (if you use an investment advisor, hopefully this is all done for you). Chances are some areas of your portfolio did better than others, which is fine. It's not likely every area will do well at the same time—that's why it's critical to be well diversified across (and within) asset classes.<span style="mso-spacerun: yes;"> </span>For instance, if in 2010 your domestic large-cap stocks did worse than your small-cap holdings, that doesn't mean you should give up on domestic large-cap. The important thing is that each part of your portfolio did well relative to its appropriate market benchmark. If that is not the case, step two will help address the performance problem.<a href="" name="1"></a></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">This is also a good time to rebalance your asset allocation back to your long-term target if you didn't get around to it at year end. With the tax-law changes we've seen over the past few years, you may be able to give yourself an additional edge by being tax-smart about how you implement your asset allocation between taxable vs. tax-advantaged accounts.<br />
<br />
<b style="mso-bidi-font-weight: normal;">Step 2: Measure the performance of individual investments<br />
</b>Of course, you'll want to see how each of your stocks, bonds and mutual funds performed in 2010 relative to their appropriate peer group and index. <span style="mso-spacerun: yes;"> </span>But no matter what led you to purchase a particular stock, bond or mutual fund in the first place, you need to answer one key question: If you didn't already own it, would you purchase it today? </span></div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;"><br />
<b style="mso-bidi-font-weight: normal;">Step 3: Assess your personal net worth<br />
</b>Now let's take a look at the bigger—and more important—picture by updating your <a href="http://www.schwab.com/public/schwab/nn/gw/mi?mipath=financial_goals/financial_planning/how_much_are_you_really_worth.html"><span style="color: windowtext; text-decoration: none; text-underline: none;">personal net worth statement</span></a>. This is similar to what a business does with its balance sheet at the end of the year. Start calculating your personal net worth by totaling up all your assets (what you own, including your taxable and tax-advantaged investment accounts, your home, other property, equity in your business, etc.) and all your liabilities (what you owe).<span style="mso-spacerun: yes;"> </span>If you did all this for 2009, you can compare how your finances performed since last year. Did your bottom-line net worth increase in 2010? <span style="mso-spacerun: yes;"> </span>With financial statements in hand, you can see what portion came from the return on your portfolio vs. other factors, such as changes in the value of your home or other real estate, paying off debt, and so on. <br />
<br />
<b style="mso-bidi-font-weight: normal;">Step 4: Make or update your plan<br />
</b>Measuring progress toward your goals is difficult, if not impossible, when you don't have a plan. Putting one in place involves assessing your current situation, identifying your goals—retirement, college, and so on—then formulating a savings and investment plan to help you reach them, as well as a distribution plan to fulfill your goals. Of course, no matter how good your plan is, it won't be of much help unless you take action.<span style="mso-spacerun: yes;"> </span>A sound plan, properly implemented and monitored along the way, can help you achieve the ultimate goal—peace of mind—as you find the right balance between working toward your future goals, including a secure retirement, and enjoying the here and now.<br />
<br />
Remember, measuring progress toward your goals involves much more than simply focusing on the performance of your investments. <span style="mso-spacerun: yes;"> </span>It's a comprehensive look at your spending and saving habits, debt management, tax and estate planning, gifting and more—all within the context of the economic, financial and market environment. Remember, too, planning is not a one-time event, but an ongoing, lifelong discipline.<span style="mso-spacerun: yes;"> </span></span></div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-43608553409702233682011-05-05T06:13:00.000-07:002011-05-05T06:13:02.706-07:00Teach Your Children Well<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Proverbs 22:6 instructs us “Train a child in the way he should go, and when he is old he will not depart from it”.<span style="mso-spacerun: yes;"> </span>This holds true for all aspects of life’s lessons – including how to effectively manage personal finances.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">The Problem</span></u></b></div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">The National Endowment for Financial Education (NEFE) administers personal financial literacy tests nationwide every few years.<span style="mso-spacerun: yes;"> </span>The tests cover all areas of personal finance, including investments, debt, credit, and saving.<span style="mso-spacerun: yes;"> </span>The most recent test was performed in 2008 and the results were quite surprising.<span style="mso-spacerun: yes;"> </span>Of the 6,856 high school seniors given the test, the mean score was a dismal 47.5%.<span style="mso-spacerun: yes;"> </span>The same test was given to 1,030 full-time college students and the results were somewhat higher, with a mean score of 62.2%.<span style="mso-spacerun: yes;"> </span>Additionally, numerous studies and surveys are conducted every year by various financial institutions and consumer advocate groups.<span style="mso-spacerun: yes;"> </span>Some of the results are startling:<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l1 level1 lfo1; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">More college students withdraw from college due to personal debt problems than they do for academic problems.</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l1 level1 lfo1; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">31% of college students polled do not worry about debt, believing that they can pay it back once they are out of school and earning a regular paycheck.</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l1 level1 lfo1; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">More than 25% of students think it is reasonable to run up a debt to splurge on a special celebration with friends at a restaurant or to use a credit card as a way to “raise cash”</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l1 level1 lfo1; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Less than half (46%) of students always keep records of their spending and receipts.</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l1 level1 lfo1; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">23% of students choose to ignore overdraft penalties and the prospect of months or years of paying off a debt incurred for a moment of fun.</span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">As grim as these statistics are, it is by no means a reflection of parents not attempting to provide guidance for their children.<span style="mso-spacerun: yes;"> </span>Nearly all parents (97%) surveyed in a recent study by Charles Schwab believe it is important to teach their teens to budget and save and invest for retirement.<span style="mso-spacerun: yes;"> </span>A similar survey in 2008 by The Hartford Group found that 72% of parents acknowledged that they are their children’s primary source of personal finance education, although<span style="mso-spacerun: yes;"> </span>44% admit to needing more guidance on how to best teach their children the skills necessary to become financially responsible and successful adults.<span style="mso-spacerun: yes;"> </span>However, 16% report never talking to their children about using money wisely.<span style="mso-spacerun: yes;"> </span>So what is a parent to do?</span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">The Solution</span></u></b></div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">One option is a program being offered this summer by Lone Star College–Kingwood called Discovery College.<span style="mso-spacerun: yes;"> </span>Discovery College is a summer youth program that was started over 26 years ago and offers over 50 one-week courses for kids aging from 8-17 years old, including two courses in financial literacy.<span style="mso-spacerun: yes;"> </span>“Relating With Money – Financial Literacy For Youth” is a program designed for children between the ages of 12-14.<span style="mso-spacerun: yes;"> </span>In this class the students will learn the importance of developing personal financial skills.<span style="mso-spacerun: yes;"> </span>This includes: identifying wants vs. needs; writing checks and balancing checkbooks; building a personal budget; and introducing investments, credit, and debt.<span style="mso-spacerun: yes;"> </span>A class for 15-17 year olds, “Money, College, and Me”, will also be offered.<span style="mso-spacerun: yes;"> </span>In addition to covering some of the topics discussed in “Relating With Money”, this course will expand into other areas of personal finance including insurance, taxes, estate planning, and the different types of retirement plans typical for those entering the work force.<span style="mso-spacerun: yes;"> </span>Both courses will prepare the students for financial independence, whether going off to college, joining the military, or getting a job after graduation.</span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">The Results</span></u></b></div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">For the most part, students taking financial literacy programs produce more appealing statistics.<span style="mso-spacerun: yes;"> </span>A 2008 study by the Charles Schwab Foundation of teens participating in any type of financial education program revealed that:</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo2; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Those who reported learning about saving money were more likely to save regularly (72% vs. 57%), participate more often in retirement programs, make larger contributions to the program and have a much higher savings rate than others.</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo2; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Youth who reported learning how to create and maintain a budget were more likely to report actually developing one (50% vs. 30%),</span></div><div class="MsoNoSpacing" style="margin-left: .5in; mso-list: l0 level1 lfo2; text-indent: -.25in;"><span style="font-family: Symbol; font-size: 10.0pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Teens who learned to track spending were more likely to having developed a budget (50%) vs. those who learned little or nothing (29%) and also more likely to save money to purchase something (80% vs. 60%).</span></div><div class="MsoNoSpacing" style="margin-left: .5in;"><br />
</div><div class="MsoNoSpacing"><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt;">Discovery College begins June 6<sup>th</sup> and ends August 4<sup>th</sup>.<span style="mso-spacerun: yes;"> </span>For more information on Discovery College, including costs and dates for all courses being offered, visit their website at www.lonestar.edu/kingwood-discovery-college.htm.<span style="mso-spacerun: yes;"> </span></span></div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-46221025925923525082011-02-24T09:18:00.000-08:002011-02-24T09:18:46.084-08:00Benefits of Long-Term Investing<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNoSpacing" style="font-family: Times,"Times New Roman",serif;"><span style="font-size: small;"><span>Imagine a cross-country car race that starts in downtown Houston during rush hour. One racer sees bicycle messengers speeding by in the stop-and-go traffic. Becoming impatient, he jumps out of his car, trading it for a bicycle. Once out of Houston, as other racers still in their cars pass him, he quickly realizes his short-term decision was unwise in light of his long-term goal of winning the race. <br />
<br />
It may seem rather silly for this racer to trade in his car for a bike, yet investors do the same thing every day. They lose sight of the strategy that it will take to get their prize. Although many investors claim to understand the benefits of long-term investing, their actions often show a short-term focus.<br />
<br />
So, what is long-term investing? And why is it a tenet of MTR Financial's investing philosophy? <span> </span>Long-term investing is being committed to a sound investment plan—one that starts with a proper asset allocation appropriate to your risk tolerance—over a length of time, such as five to 20 years. <span> </span>More importantly, though, long-term investing is a mindset that gives you perspective and discipline as you work toward your financial goals—and can keep you from making costly mistakes based on short-term perceptions. </span></span></div><div class="MsoNoSpacing" style="font-family: Times,"Times New Roman",serif;"><span style="font-size: small;"><span><br />
<b>Benefit 1: Maximize your wealth</b> <br />
The wealth you can accumulate over your lifetime is determined by three factors: (1) the amount you save and invest, (2) the return you earn on your investments, and (3) how long your money compounds, generating earnings from previous earnings. The long-term mindset is key to this last point: how long your money compounds from reinvesting your investment earnings. This is something most investors have direct control over. The earlier you start and maintain the long-term outlook, the more time compounding has to work its magic. <br />
<br />
<b>Benefit 2: Prevent costly mistakes <br />
</b>Losing sight of the long term and thinking you can time the market by exiting at the peak and re-entering the market at the trough over the short term is a big mistake. Timing market shifts correctly is nearly impossible, although making modest adjustments to your strategic allocation based on current market analysis can add value. However, we continue to see investors making wholesale market timing bets. <br />
<br />
Why can market timing be so costly? Because returns are often concentrated in short periods. For example, in March 2009, US stocks were up 9%. Nearly 90% of the month's recovery came in just eight trading days following the low point of the stock market. <br />
<br />
Portfolio studies have been performed to see what happens when you miss the top days in the market. The research, looking at returns from 1990-2009 shows that missing the market's top 10 days cut the return by nearly half on a portfolio of stocks, represented by the S&P 500 index.<span> </span>Missing the top 20 days dropped the return below even Treasury bills (T-bills). And missing the top 40 days—that's 40 days out of 20 years, fewer than 1% of the trading days—produced a negative return. You can see how a small number of trading days can equate to large differences in return. <br />
<br />
<b>Benefit 3: Lower your risk <br />
</b>Having a long-term mindset and lengthening the time you hold investments can often reduce the probability of experiencing negative returns. <span> </span>Studies have been done on the highest return, lowest return and average annual return of the S&P 500 over various holding periods from 1926. The findings show that as you move from a one-year holding period to a three-year, 10-year, and finally to a 20-year holding period, the number of negative returns experienced goes down. In fact, there's never been a 20-year period with a negative return. <br />
<br />
<b>Stay focused <br />
</b>How can you keep your long-term state of mind the next time you're tempted by a short-term decision?<span> </span>Remember that keeping a long-term state of mind doesn't mean ignoring your portfolio. It means developing a plan based on long-term expectations, not short-term trends. Along the way there will undoubtedly be some fine-tuning. Investing for the long-term can help maximize wealth, prevent costly mistakes and lower the downside risk in your portfolio. <br />
<br />
Or, to quote legendary investor Warren Buffet: "Someone is sitting in the shade today because someone planted a tree a long time ago."</span></span></div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-13960782981007505182011-01-18T10:11:00.000-08:002011-01-18T10:11:50.717-08:00Use The New Year To Establish Strong Financial Habits<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">“We are what we repeatedly do. Excellence, then, is not an act but a habit.” Aristotle. This quote has profound meaning for your financial life. <span> </span>Even if your savings are up not to scratch or if your debt level is extremely high you can change the course of your financial future by changing your financial habits.</span></div><div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">The secret is to start implementing small changes into your life and work them into your routine. Repetition will help to make them your new habits and you can then start reaping the rewards of healthy financial practices. Take a look at these 4 financial habits you should strive to adopt.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNoSpacing"><strong>1. Start Budgeting Now </strong></div><div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">Creating a budget is not difficult. All you need to do is to identify your sources of income on one side and then list your fixed and variable expenses on the other. It is recommended to keep your fixed and variable expenses separate so it is easier to highlight possible areas for cutbacks. If you are not sure of where your money is spent you may need to do a little ground work to draw up your first budget. Start by making an effort to write down every time you spend money and start keeping your receipts. At the end of the month you can categorize your spending and then fill in your budget.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNoSpacing"><strong>2. Use Goal Setting to Improve Your Financial Scorecard </strong></div><div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">Goal setting is important for improving your finances because this act gives saving direction and purpose and thereby makes it easier to part with your money now, for some reward in the future. For instance, it may feel like punishment to tuck away $1,000 a month just because it is important to save; but if you were to attach a goal to this figure it would become logical. So you might rationalize that you need to put $500 towards an emergency fund while $500 should go towards your next vacation. All of a sudden, putting away $1,000 is easier.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNoSpacing"><strong>3. Save for Retirement </strong></div><div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">Everyone needs to plan for their golden years. If you haven’t yet started up some form of retirement savings, there is no time like the present. You should also note that it is never too early to start. You can check how much you are allowed to save tax-free and at least make sure you are maximizing this amount. If your employer gives a match for retirement savings, <u>always</u> take advantage of this.<span> </span>If you don’t, you are basically throwing away free money.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNoSpacing"><strong>4. Keep Your Debt Under Control </strong></div><div class="MsoNormal"><span style="font-family: "Times New Roman","serif";">If you have a problem with keeping your debt under control you should make this a priority. Start implementing measures to pay down outstanding debt, especially if that debt comes with extremely high interest rates. Allowing interest to accumulate even more interest is a sure-fire way to end up moving in the opposite direction of financial prosperity. To get a handle on your debt situation, make sure you have a strategic plan for pumping your available funds into making debt payments.</span></div><div class="MsoNormal"><br />
</div><span style="font-size: small;"><span style="font-family: Times,"Times New Roman",serif; line-height: 115%;">Bad habits form in good economies; and good habits form in bad economies. If you are wise, you will form good habits and keep them!<span> </span>It is never too late to implement some good financial habits. All it takes is the desire to change and the dedication to stay the course.</span></span>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-68992510664918481732010-11-17T19:31:00.000-08:002010-11-17T19:31:12.838-08:00Your Year-End Financial Checklist<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 10pt;">As we approach the end of 2010, Santa should not be the only one making a list and checking it twice.<span> </span>With all of the changes in income and estate taxes poised to take effect on January 1, 2011, it should come as no surprise that reviewing your family’s finances is even more critical this year-end.<span> </span>Below is a small sample of items to consider.</span></div><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><br />
</div><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><u><b><span style="font-size: 10pt;">In General</span></b><span style="font-size: 10pt;"><span><span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span></u></div><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span><span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">How is that Emergency Fund holding up?<span> </span>The general rule of thumb is you should have three to six months of living expenses saved in a very liquid, easily accessible account.<span> </span>Don’t have an emergency fund?<span> </span>Start devising a savings plan to start building one right away.</span></li>
</ul><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span><span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"></span></span></span><span style="font-size: 10pt;">Plan a holiday spending budget to avoid overspending as we enter the holiday season.<span> </span>Ideally, the spending budget you determine appropriate should be funded with cash rather than relying on credit cards.<span> </span>The best holidays are those that don’t have statements showing up in your mailbox in January.</span></li>
</ul><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span><span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"></span></span></span><span style="font-size: 10pt;">Review your credit report for inaccuracies and accounts that should be closed but which remain open.<span> </span>Everyone is entitled to one free report from the three major reporting agencies, Experian, Equifax, and TransUnion.<span> </span>Schedule to pull one every four months, and you’ll provide year-round monitoring for your family.</span></li>
</ul><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><u><b><span style="font-size: 10pt;">Investments</span></b></u></div><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">Be cautious about making additional investments in your non-retirement investment accounts, especially when dealing with mutual funds.<span> </span>Funds are required to distribute capital gains and dividends to shareholders by the end of the year.<span> </span>If you invest before the distribution date, you will receive your share of capital gains and dividends the fund recognized during all of 2010 – even if you only owned the fund for one day.<span> </span>And that could wreak havoc on your income taxes.</span></li>
</ul><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">Required Minimum Distributions (RMDs) are back for 2010.<span> </span>Failure to make your RMD results in a 50% penalty on any amount you did not take this year.<span> </span>Not sure if you’re required to take a RMD?<span> </span>Contact your tax advisor or MTR Financial Services for guidance.</span></li>
</ul><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><u><b><span style="font-size: 10pt;">Income Taxes</span></b></u></div><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">As it stands right now, income tax rates are set to increase to the pre-Bush Tax Cuts rates.<span> </span>Also increasing are the tax rates for capital gains and dividend income.<span> </span>As odd as it may sound, it may benefit you to accelerate income in 2010, including selling investments with large gains.<span> </span>Additionally, deferring certain itemized deductions such as charitable giving and real estate taxes into 2011 could result in a more efficient income tax scenario if the impending tax changes hold true.</span></li>
</ul><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">Check to see if you need to update your W-4 filing for 2011.<span> </span>A change in marital status or a birth of a child in 2010 will normally result in the need to update your W-4.<span> </span>Also, if you’re consistently getting large refunds with each tax filing, you may want to consider updating your W-4 as well.</span></li>
</ul><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><u><b><span style="font-size: 10pt;">Estate Issues</span></b></u></div><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">Unless Congress acts before year-end, the estate tax will re-appear in 2011.<span> </span>Each individual will have a $1 million exclusion, and the top tax rate on estates will go to 55%.<span> </span>Those who haven’t had to worry about estate taxes in the past may find themselves subject to larger than anticipated estate taxes due to the decreased exemptions.<span> </span>Consult with your estate planning attorney or MTR Financial Services for guidance on how to best address your potential need for new wills and estate documents.</span></li>
</ul><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">With the impending changes in the estate tax exclusion amounts for 2011, proper beneficiary designation for your retirement accounts and life insurance policies is critical.<span> </span>Failure to review your current beneficiary designations could create additional tax for your heirs.</span></li>
</ul><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><u><b><span style="font-size: 10pt;">Insurance</span></b></u></div><ul style="font-family: Arial,Helvetica,sans-serif;"><li><span style="font-size: 10pt;"><span></span></span><span style="font-size: 10pt;">If you have a Flexible Spending Account (FSA) you need to be aware of a key change in benefits that will begin January 1, 2011.<span> </span>Starting on this date, over-the-counter medication will only qualify for reimbursement if prescribed by a doctor.<span> </span>The only exception is for insulin bought without a prescription.</span></li>
</ul><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><br />
</div><div class="MsoNoSpacing" style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: 10pt;">We’ve all heard that a little planning can go a long ways.<span> </span>With all the changes facing us in 2011, this adage certainly holds true.<span> </span>Consider contacting MTR Financial Services for any guidance you may need in your overall financial plan.</span></div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-91575833677915210682010-11-02T11:06:00.000-07:002010-11-02T11:06:24.709-07:00Upcoming Tax Increases To Keep In Mind<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNormal">Regardless of how the elections turn out tonight, and barring any legislation before the end of the year, changes to our personal income taxes will automatically occur. <span> </span>I’m sure everyone is aware of the increasing marginal tax rates, as well as the increased capital gains tax rates.<span> </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal">I thought I would summarize some of the key changes that will automatically occur come January 1<sup>st</sup>: </div><ul><li>Personal income tax rates will rise.<span> </span>The top income tax rate will rise from 35% to 39.6%.<span> </span>The lowest rate will rise from 10% to 15%.<span> </span>The full list of marginal tax rate hikes is:</li>
</ul><div class="MsoNoSpacing" style="margin-left: 1in; text-indent: -0.25in;"><span style="font-family: "Courier New";"><span>o<span style="font: 7pt "Times New Roman";"> </span></span></span>10% bracket rises to an expanded 15% bracket</div><div class="MsoNoSpacing" style="margin-left: 1in; text-indent: -0.25in;"><span style="font-family: "Courier New";"><span>o<span style="font: 7pt "Times New Roman";"> </span></span></span>25% bracket rises to 28%</div><div class="MsoNoSpacing" style="margin-left: 1in; text-indent: -0.25in;"><span style="font-family: "Courier New";"><span>o<span style="font: 7pt "Times New Roman";"> </span></span></span>28% bracket rises to 31%</div><div class="MsoNoSpacing" style="margin-left: 1in; text-indent: -0.25in;"><span style="font-family: "Courier New";"><span>o<span style="font: 7pt "Times New Roman";"> </span></span></span>33% bracket rises to 36%</div><div class="MsoNoSpacing" style="margin-left: 1in; text-indent: -0.25in;"><span style="font-family: "Courier New";"><span>o<span style="font: 7pt "Times New Roman";"> </span></span></span>35% bracket rises to 39.6% </div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>The “marriage penalty” (reflected in standard deductions and tax brackets for married couples that are less than double the single amounts) will return.<span> </span>This change will cause many two-earner couples to owe more tax and may discourage couples from marrying.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li>The capital gains tax will rise from 15% (0% for taxpayers in the current 10% and 15% tax rate brackets) this year to 20% in 2011.<span> </span></li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"><span></span></div><ul><li>The dividends tax will rise from 15% this year to potentially 39.6% in 2011 – dividends will be taxed at ordinary income tax rates.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>Itemized deductions and personal exemptions will again be phased out (no phase out limits for 2010), which has the same mathematical effect as higher marginal tax rates.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li>The child tax credit will be cut in half from $1,000 per child to $500 per child.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>The dependent care credit will be calculated on $2,400 of expenditures (rather than $3,000) for one dependent and $4,800 (rather than $6,000) for two or more eligible dependents.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>Stepped up basis on inherited property returns along with a $1MM personal exemption and a top estate tax rate of 55% for estates over the $1MM level.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>The increased alternative minimum tax (AMT) exemption will expire, causing millions more taxpayers to owe AMT.</li>
</ul><div class="MsoNoSpacing" style="margin-left: 0.5in; text-indent: -0.25in;"></div><ul><li><span style="font-family: Symbol;"><span><span style="font: 7pt "Times New Roman";"></span></span></span>The $250,000 immediate expensing of business equipment provision will be reduced to $25,000, and 50% bonus depreciation will expire.</li>
</ul><div class="MsoNoSpacing"></div><div class="MsoNoSpacing">The best plan is a proactive plan, so if any of the changes listed above could adversely affect you it’s best to address the issues now rather than trying to be reactive come January 1.<span> </span>Any questions at all, just send me a message!</div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-12616392518847486082010-10-21T12:20:00.000-07:002010-10-21T12:20:20.604-07:00They're Baaaack......<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
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</style> <![endif]--> <div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">In response to the drastic stock market decline in 2008, Congress (as part of the Worker, Retiree, and Employer Recovery Act of 2008) suspended required minimum distributions (RMDs) from IRAs and defined contribution employer plans for the 2009 calendar year.<span> </span>As a result, individuals could avoid having to deplete retirement assets while the value of those assets was suddenly depressed.<span> </span>But RMDs are back as of January 1, 2010.<span> </span>If you’re out of practice – or making a required distribution from your IRA for the first time – here’s what you need to know:</span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-size: small;"><b><span style="font-family: "Times New Roman","serif";">When Do RMDs Have To Be Taken?</span></b></span></div><div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">According to IRS regulations, people aged 70 ½ and older must take their distributions by December 31 of each year, or when they separate from the employer sponsoring their retirement plan, whichever is later.<span> </span>There is one exception – if you turned 70 ½ in 2010 (and you are retired) you can wait until April 1, 2011 to take your first RMD.<span> </span>It is important to note, though, that the RMD taken is for the 2010 calendar year – you will still have to take the RMD for 2011 by December 31, 2011, thus creating two distributions for 2011.</span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-size: small;"><b><span style="font-family: "Times New Roman","serif";">How Much Do You Have To Take?</span></b></span></div><div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">Distributions are calculated by IRS rules, so you have to adhere to a very specific formula.<span> </span>Your 2010 distribution will be based on your retirement account’s value on December 31, 2009 and one of three IRS tables found in Appendix C of IRS Publication 590.<span> </span>Essentially, you are dividing your IRA balance by what the IRS has determined your life expectancy to be, depending on which table you are using.<span> </span><span> </span>If an individual has several IRAs, they can generally add the balances together and take the required distribution from just one account.<span> </span>This is not true for 401(k) and 403(b) plans.<span> </span>If an individual has money in several plans from previous employers, distributions must be taken from each plan – a good reason to combine them into a single IRA.<span> </span>If you are unsure which table applies to your situation please contact your tax professional or MTR Financial Services for guidance. <span> </span>It is important to remember that these calculations only determine your <u>required</u> distribution – you can always take more than the required distribution if you wish.</span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-size: small;"><b><span style="font-family: "Times New Roman","serif";">Consider The Taxation of Distributions</span></b></span></div><div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">The money taken from your retirement account is taxed as ordinary income in the year taken because you received a tax deduction when you contributed to it.<span> </span>With income tax rates widely expected to increase in 2011, the timing and amount of distributions you take need to be closely monitored.<span> </span>If you did turn 70 ½ in 2010, it may make sense to take your first RMD in 2010 rather than deferring it to April 1 of next year.</span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-size: small;"><b><span style="font-family: "Times New Roman","serif";">Who Else Is Required To Take Distributions?</span></b></span></div><div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">If you inherit an IRA (either a traditional or Roth) or employer-plan account from someone other than your spouse, you must begin taking RMDs over your life expectancy, starting with the year following the year of the account owner’s death.<span> </span>(Spousal beneficiaries can simply roll the inherited account into their own IRA, and will not be required to take distributions until age 70 ½.)<span> </span>Therefore, if you inherit an IRA from a parent, for example, and you are only 50 years old, you will be required to take annual distributions from that account each year for as long as you live.</span></span></div><div class="MsoNoSpacing"><br />
</div><div class="MsoNoSpacing"><span style="font-size: small;"><b><span style="font-family: "Times New Roman","serif";">Still Not Sure?</span></b></span></div><div class="MsoNoSpacing"><span style="font-size: small;"><span style="font-family: "Times New Roman","serif";">If you are still not sure if you have to make a required distribution by December 31, 2010 please consult your tax professional or MTR Financial Services for clarification.<span> </span>The penalties for not taking the required minimum distribution, or any distribution at all, are severe.<span> </span>You will be taxed 50% of the amount that you should have taken but did not.<span> </span>That is a pretty stiff penalty that you will want to avoid!</span></span></div><div class="MsoNoSpacing"><br />
</div>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-56217785426551015262010-10-04T08:32:00.000-07:002010-10-04T08:32:42.129-07:00Study on Lottery Players<h3 class="UIIntentionalStory_Message" style="font-family: Times,"Times New Roman",serif; font-weight: normal;"><span style="font-size: small;"><span class="UIStory_Message">A recent study conducted by Cornell University reports that lottery players who earn $13k per year spend an average of $1,100 of their income per year on tickets. They contribute 82% of all lottery revenue! That is a very sad and scary statistic. The lottery is simply a tax on the poor, in my opinion.</span></span></h3>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com2tag:blogger.com,1999:blog-9222773756293868703.post-46859311687292939372010-09-15T14:10:00.000-07:002010-09-15T14:10:26.988-07:00Are You Too Busy Tomorrow Night For This?<a href="http://www.philly.com/philly/business/personal_finance/091410_National_Money_Night.html"></a><br />
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Studies show that kids are looking for answers relating to money - how it works, how it's spent.....why they're getting so little of it! Take some time tomorrow and participate in National Money Night. Talk to your kids about your household's financial situation. Doing so will give them a deeper feeling of inclusion within the family unit. Who knows......maybe they'll actually make a suggestion that will benefit the family! <br />
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Read more about National Money Night here: <a href="http://www.philly.com/philly/business/personal_finance/091410_National_Money_Night.html">National Money Night</a>Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-46143140833443577772010-08-10T14:44:00.000-07:002010-08-10T14:44:01.013-07:0010 Questions To Ask When Picking A Financial AdvisorGreat article by Mark Miller I thought I'd share with everyone.....<br />
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The financial planning profession is growing explosively as millions of aging baby boomers confront the challenges of planning for retirement security. Readers of this column have been writing to ask if they need a planner-and how to go about hiring one.<br />
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Retirement planning poses complex challenges-and investing wisely is just one part of the picture; you also need to understand the roles of Social Security, taxes, mortgages, insurance, debt, health care and longevity. You should learn all you can about these topics, but professional assistance with decision making and timing can make all the difference in helping you to get ahead for the long run. More often than not, a financial planner is worth the expense.<br />
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But how do you go about finding a knowledgeable, trustworthy advisor? Financial planners aren’t regulated by state or federal government, so anyone can hang out a shingle and start peddling services.<br />
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It’s critically important that you shop rigorously and ask the right questions. Here, then, are the top 10 questions to take along when you interview a financial planner:<br />
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<strong>1. What are your credentials? </strong>Planners can earn a wide range of professional designations from various private professional associations. I’m able to identify at least nine of them, each with a different meaning. Among the most common designations is Certified Financial Planner (CFP)-someone who has passed an exam and is earning a certain amount of continuing education credit on a regular basis. Some designations indicate a specialty in a particular area of investment, such as Chartered Mutual Fund Counselor (CMFC).<br />
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The key thing to know is that these designations are earned voluntarily; an advisor isn’t required to have any of them in order to practice. When you interview planners, ask about their professional designations and don’t be afraid to ask them to explain what they mean.<br />
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<strong>2. How much experience do you have?</strong> Always ask how many years a planner has been practicing. Find someone with at least five years’ experience; if it’s less than 10, ask about other experience that may be relevant to their planning expertise.<br />
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<strong>3. How many other clients do you have?</strong> A large number isn’t necessarily better! If a planner works with too many clients, you may not have access when you need it. Find out whether you be working directly with the planner or with an assistant.<br />
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<strong>4. How do you get paid?</strong> Many financial planners charge an hourly or flat fee. Others charge a fee plus commission on the products they sell, and some earn product commission only. In addition, some planners charge an annual asset management fee ranging from 1 to 3 percent of your assets.<br />
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There’s no consensus on which approach is best, although many experts dislike commission-based selling, arguing that planners who earn their living solely from commissions on the investment products they sell have a built-in potential conflict of interest.<br />
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“Find an experienced certified financial planner (CFP) who will do the planning on an hourly or project basis, with no requirement that the client have their investment assets with the planner,” says Joel Larsen of Navigator Financial Advisers.<br />
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If you go the fee-only route, expect to pay an hourly rate of $100 to $250 per hour, or a flat fee. You’ll go elsewhere to implement your planner’s recommendations.<br />
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<strong>5. Who do you really work for? </strong>If you’re interviewing commission-compensated advisors, determine whether they work for a single company or represent a larger, balanced range of products. You need to make sure the advisor has your best interests at heart, not an employer’s.<br />
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<strong>6. Have you ever been in trouble?</strong> You want a planner with a spotless record. Ask planners if they have ever faced public discipline for any illegal or unethical professional actions. You can verify this yourself for free at Web sites such as the Financial Industry Regulatory Authority (FINRA), the National Association of Insurance Commissioners or the U.S. Securities & Exchange Commission. I’ve posted links to these watchdog pages below.<br />
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<strong>7. What’s your investment philosophy?</strong> How does the planner approach investment risk and how will your portfolio will be adjusted as you age? Will you receive a written statement about the investment policies that will be used in managing your money? Will you be granting the planner authority to make investment decisions without your prior approval?<br />
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<strong>8. What should I bring to our first meeting?</strong> Look for a planner who asks you to bring all of your financial information to the first meeting. Time is a valuable commodity. It’s imperative that both you and the planner make the most of what time you have together. If you decide to work together, you’ll be able to get started immediately.<br />
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<strong>9. Can I trust you? </strong>Do you feel comfortable with the person you’re considering? Says Cynthia Meyers of Foothill Securities: “Does the planner keep his or her promises to you? Is this person consistently on time for your meetings? Does the planner meet your standards for a trustworthy person?”<br />
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<strong>10. Do you understand me?</strong> Look for a planner who wants to understand what’s important to you. Says Laura Leavitt, a certified financial planner: “If the planner doesn’t care to know about what’s important to you, how can he or she give you advice that meets your goals?”Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-33989144464189515862010-04-05T13:10:00.000-07:002010-04-05T13:10:51.189-07:00April Is National Financial Literacy Month: Week # 1 Topic - The Dreaded 'B' Word....Budget<h1></h1>The basic cornerstone to any family's financial success is having, and adhering to, a working monthly budget. A budget is a plan, an outline of your future income and expenditures that you can use as a guideline for spending and saving.<br />
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Only 40 percent of Americans use a budget to plan their spending. But 60 percent of Americans routinely spend more than they can afford. A budget can help you pay your bills on time, cover unexpected emergencies, and reach your financial goals—now and in the future. Most of the information you need is already at your fingertips.<br />
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Start by following the simple steps outlined below to get a clear picture of your monthly finances.<br />
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<strong>1. Add Up Your Income </strong><br />
To set a monthly budget, you need to determine how much income you have. Make sure you include all sources of income such as salaries, interest, pension, and any other income sources, including a spouse’s income if you’re married. Using the worksheet below, write a dollar figure next to each relevant income source. Make sure that the figure you write down is the amount you receive from each income source on a monthly basis.<br />
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If you get a salary, be sure to use your take-home pay, not your gross pay. Taxes are usually taken out automatically, but if they’re not, remember to include them as another expense. If you receive money from somewhere not listed, enter the source of that money along with the amount under "other income."<br />
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<strong>2. Estimate Expenses </strong><br />
The best way to do this is to keep track of how much you spend each month. The worksheet should divide spending into two categories:<br />
<ul><li>Non-Discretionary - includes all mandatory expenses for the month (e.g. mortgage, food, utilities) </li>
<li>Discretionary - includes all non-mandatory expenses for the month (e.g. dining out, gym memberships)</li>
</ul>If some of your expenses for one or more category change significantly each month, take a three-month average for your total. <br />
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<strong>3. Figure Out The Difference</strong><br />
Once you’ve totaled up your monthly income and your monthly expenses (both discretionary and non-), subtract the expense total from the income total to get the difference. A positive number indicates that you’re spending less than you earn – well done! A negative number indicates that your expenses are greater than your income and gives you an idea of where you need to trim expenses and by how much. <br />
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It is during this exercise that you need to clearly define and understand the concept of 'wants' vs. 'needs'. If you're running into negative net cash flow each month, look at your expenses and see if some of your expenses are merely wants disguised as needs. If you are getting every cable channel under the sun, try going to just basic cable for a few months. If you have unlimited texting with your cell phones each month, look at reducing the number of texts allowed each month to free up some money (much to the chagrin of your teenager, I'm sure!). After going a few months without some of the luxury 'needs', you may just surprise yourself and realized that life isn't so bad without them!<br />
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Well done - you’ve created a budget. The next step is to track your budget over time and make sure you are still on target to achieving your financial goals.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-90248940598426989292010-04-01T18:18:00.000-07:002010-04-01T18:18:51.887-07:00April is National Financial Literacy Month: Time to Improve Your Finances and Your LifeI've been making a big push to get financial literacy into the spotlight not only for today's youth, but for their parents and grandparents as well. <br />
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Some of my efforts have been in the form of my book, establishing financial literacy courses this summer at Discovery College, getting articles out in the local papers, and continued facilitation of the Dave Ramsey Financial Peace course at my church. <br />
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Here are some sobering statistics illustrating why improving one's financial literacy is so critical: <br />
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<b>For adults: </b><br />
* 43% of working Americans have less than $10,000 saved for retirement. 27% have less than $1,000 saved. <br />
* Out of 100 Americans aged 65 and older, 97 cannot write a check for $600 on any given day of the month (a sign of living paycheck to paycheck) <br />
* 7 out of 10 households are currently living paycheck to paycheck <br />
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<b>For students: </b><br />
* 60% of college freshman with credit cards will max them out before the end of their first year of college. <br />
* The average monthly credit card balance for college students is $4,776 <br />
* One in every three college students graduate with at least $10,000 of credit card debt alone (not even counting any student loan debt) <br />
* More students are dropping out of college due to finances than academics <br />
* Overbearing debt/financial issues is the leading cause of suicide among college students. <br />
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I will be dedicating even more time during this month to get as much information, tips, and suggestions out in front of everyone. I will also be blogging throughout the month, so please don't hesitate signing up and following my blog so you can be notified when new posts are made <br />
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I will try to get the first tip/lesson out tomorrow. If there are any topics you would like to see discussed or explained please let me know. The more information I can get out in front of others the better! <br />
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I hope everyone has a safe and enjoyable Easter weekend! Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-482977897985199252010-03-31T07:43:00.000-07:002010-03-31T07:43:08.197-07:00A Little Hard Work Starting To Pay Off!Almost a year and a half ago, I made the best career decision to date - making the jump from the corporate world of financial planning to starting my own financial planning and investment management firm. The transition from being able to count on a steady salary to being completely reliant on building my own client base has not been an easy one. I have to constantly remind myself of the old adage "slow and steady wins the race every time". I knew going into this leap of faith that things would be different for a while, and they most certainly have!<br />
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Well, some of the hard work started to pay off recently when I had lunch with a reporter for one of the local newspapers. We talked about my new venture and all I have been doing to promote myself and my business. I didn't realize it would be made into a large article in this week's edition! <br />
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Here is the link to the article on the paper's website: <a href="http://www.hcnonline.com/articles/2010/03/30//kingwood_observer/news//13kofinancial.txt">Local Financial Planner Offers Classes, Releases Book</a><br />
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I would welcome any feedback, comments, questions, etc.!<br />
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It's been a while since I last blogged......rest assured, the month of April will be another active month here on my blog. Please check back later this week for more details!Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-48892303102673928532010-01-07T12:27:00.000-08:002010-01-07T12:30:32.900-08:00Potential Estate Planning Blunder For 2010I was assisting a client with reviewing their estate planning today, and I came across a potentially devastating clause in each of their wills. This clause is, for the most part, boiler-plate verbiage in all wills so I thought I’d bring it to everyone’s attention. It may or may not apply to you, but I wanted to put the word out regardless. What’s at issue: with the new estate planning laws that went into effect this year, the surviving spouse could end up with none of the deceased spouse’s half of the estate.<br />
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The clause in the spotlight is a clause that is normally very effective in transferring wealth to surviving spouses and children/charities. But, as I mentioned above, with the new estate tax laws that went into effect on January 1, 2010 the clause can actually do more harm than good. <br />
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Basically, what the clause says is something like this: “When I die, I direct that my surviving spouse is to receive my entire half of the estate, up to the annual exclusion amount. Everything over and above the exclusion amount should go to my children” (or other siblings, charities, etc.). For 2008 and 2009, the annual exclusion amount was $3.5 million. Therefore, in previous years this clause would take the first $3.5 million from the deceased spouse’s half of the estate, give it to the surviving spouse in trust, and everything else goes to the children/relatives/charities, etc. By doing this, couples can theoretically shelter $7 million of their estate ($3.5MM for each spouse) from estate taxes.<br />
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HOWEVER, in 2010 the ‘death tax’ (the estate taxes paid upon someone’s death) is repealed meaning there is no estate tax due on someone’s death regardless of how much money they have. Therefore, if Bill Gates or Warren Buffett died tomorrow, they would not have to pay a single dime in estate tax.<br />
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Here is where the problem could arise: since there is no estate tax due on a person’s death, there’s no need to have an annual exclusion amount peeled off the top to shelter it from estate taxes. In other words, the annual exclusion just went from $3.5 million to $0 for 2010. With the way the clause is written, the spouse will get $0 and everything else goes to the children. Not good!!<br />
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Now, it is highly unlikely that the government will allow this death tax repeal to exist for the rest of the year. From what I’ve read and heard, they will re-instate the $3.5 million exemption and 45% top tax rate later this year and make it retroactive to January 1, 2010. But that still should not preclude you from at least reviewing your estate plan to make sure it is set up to do what you want it to do.<br />
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If you have a will and have not reviewed it in the past four or five years, please do yourself a favor and read through it again. If you are not sure what everything means please do not hesitate in contacting me. I will be more than happy to read over it and explain what it is set up to do and make recommendations if I see any shortfalls in your estate plans.<br />
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If you don’t have a will…..you need to get one as soon as possible. I’ll be happy to discuss with you how to go about getting this done. I’ve heard of a lot of people who swear by online vendors (e.g. Legal Zoom), but I should stress that not everyone’s situation calls for online forms. More times than not, meeting with an attorney is well worth the added cost.<br />
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I’ll be happy to answer anyone’s questions……I simply wanted to make everyone aware of the potential loophole I’m seeing in other people’s estate documents.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-57611507799720263312010-01-06T14:39:00.000-08:002010-01-06T14:39:30.252-08:00Tips on Increasing Financial Aid EligibilityEven if you are still a few years away from the first college tuition bill, there are a few steps you can take, some seemingly counter-intuitive, to increase the chances of receiving some sort of financial aid.<br />
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About two years before your child is expected to attend college consider how you might reposition your assets so they are more favorably viewed on the applications for financial assistance. Why start so soon? The amount of aid you’re eligible for in a given year is based on the previous year’s income. Controlling your assets and the receipt of income will have a significant impact on your aid eligibility. For example, capital gains count both as an asset and income and could have a devastating impact on your eligibility. If you are able to defer income at work, consider doing so for the years your child is in college. Another option is to reduce your reportable assets. It may not make sense to pay off that car loan or credit card balance when tuition bills are on the horizon, but it may actually be a wise decision. Why? By paying off that car or credit card you simultaneously lower your reportable assets, such as stocks and cash holdings, and increase your financial need. Parents with $20,000 in the bank and a $10,000 credit card debt will appear to have more resources than parents with $10,000 in the bank and no credit card debt. In the end, the parents have the same amount of money, but to the financial aid people they have less.<br />
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Another strategy to increasing your aid eligibility is to pay attention to who owns what assets. Asset ownership is critical in determining how much financial aid a student receives. College-aid officials assess up to 35% of a student’s assets versus only 5.6% of a parent’s holdings. Therefore, make sure your 529 Plans, Coverdell plans, etc. are in the parent’s names. Prior to 2006, prepaid tuition plans, including the Independent 529 Plan, were considered an available resource to students and therefore had a more negative impact on financial aid eligibility than a 529 Savings Plan. However, recent laws passed by Congress treat all 529 plans as parental assets. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.<br />
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It always pays to save, but just be careful how you do it.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-83704087283713983082010-01-06T14:35:00.000-08:002010-01-06T14:36:37.089-08:00The Costs & Rewards of a College Education<b>Part 9 - The Basics of Financial Aid: Loans</b><br />
Unlike grants, financial aid in the form of loans is required to be repaid. However, students can take anywhere from 10 to 30 years to repay the loan depending on which loan is involved.<br />
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<b>Federal Perkins Loan</b><br />
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Perkins Loans are another first-come, first-served option. The federal government only guarantees each school a certain amount of Perkins Loan money each year. This program is yet another reason for students to fill out FAFSAs as early as possible. <br />
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A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school. Your school will either pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year. <br />
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You can borrow up to $5,500 for each year of undergraduate study (the total you can borrow as an undergraduate is $27,500). For graduate studies, you can borrow up to $8,000 per year (the total you can borrow as a graduate is $60,000 which includes amounts borrowed as an undergraduate). The amount you receive depends on when you apply, your financial need, and the funding level at the school.<br />
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If you are attending school at least half time, you have nine months after you graduate, leave school, or drop below half time status before you must begin repayment. This period of time is known as a grace period. At the end of your grace period, you must begin repaying your loan. You may be allowed up to 10 years to repay.<br />
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Perkins Loans also can be discharged or cancelled in full or in part for various reasons, including for graduates who are employed in specific teaching positions, certain public or non-profit family services jobs, and law enforcement or in military service in certain hostile areas. <br />
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<b>Federal Stafford Loan</b><br />
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In addition to Perkins Loans, the U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students) and PLUS Loans for parents and graduate and professional degree students; PLUS Loans will be explained later.<br />
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Schools generally participate in either the FFEL or Direct Loan program but sometimes participate in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Funds for your FFEL will come from a bank, credit union, or other lender that participates in the program. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.<br />
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Federal Stafford Loans are the backbone of the Department of Education's self-help aid program for students. The advantage of Stafford Loans is that their interest rate is lower than what students or parents could get through a private lender. However, it's usually higher than the rate for a Perkins Loan. Stafford Loans are available to students enrolled in an eligible program at least half time and carry variable interest rates that are adjusted each July 1 for the following 12 months. <br />
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A Stafford Loan may either be subsidized or unsubsidized. Subsidized loans are based on financial need, and the federal government pays interest on the loans while the student is in school. Students pick up the payments on loan interest and principal six months after they graduate. <br />
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Students who do not show financial need, according to the Department of Education's guidelines, but still need more money for school, may qualify for an unsubsidized Stafford Loan. This type of loan does not offer the interest grace period. The borrower is responsible for interest charges beginning the date the loan is disbursed. <br />
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Students may take from 10 to 30 years to pay off their Stafford Loans, depending on the amount they owe and the type of repayment plan they choose. Under certain conditions you can receive a deferment or discharge of the loan.<br />
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<i>Stafford Loan Interest Rates:</i><br />
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Academic Year Subsidized Rates Unsubsidized/Graduate Rates<br />
2009 – 2010 5.60% 6.80%<br />
2010 – 2011 4.50% 6.80%<br />
2011 – 2012 3.40% 6.80%<br />
2012 – 2013 6.80% 6.80%<br />
<br />
<br />
<i>New interest rate cap for Military Members</i><br />
<br />
Interest rate on a borrower’s loan may be changed to six percent during the borrower’s active duty military service. This applies to both FFEL and Direct loans. Additionally, this law applies to borrowers in military service as of August 14, 2008.<br />
<br />
Borrower must contact the creditor (loan holder) in writing to request the interest rate adjustment and provide a copy of the borrower’s military orders. <br />
<br />
<br />
<b><i>Stafford Loan Limits:</i></b><br />
<br />
<i>Dependent Students</i> <i>Annual Loan Limits</i><br />
First Year $5,500 ($3,500 subsidized / $2,000 unsubsidized)<br />
Second Year $6,500 ($4,500 subsidized / $2,000 unsubsidized)<br />
Third Year and Beyond $7,500 ($5,500 subsidized / $2,000 unsubsidized)<br />
<br />
<i>Independent Students</i> <i>Annual Loan Limits</i><br />
First Year $9,500 ($3,500 subsidized / $6,000 unsubsidized)<br />
Second Year $10,500 ($4,500 subsidized / $6,000 unsubsidized)<br />
Third Year and Beyond $12,500 ($5,500 subsidized / $7,000 unsubsidized)<br />
Graduate or Professional $20,500 ($8,500 subsidized / $12,000 unsubsidized)<br />
<br />
<br />
<i>Lifetime Limits</i><br />
Undergraduate Dependent $31,000 (Up to $23,000 may be subsidized)<br />
Undergraduate Independent $57,500<br />
Graduate or Professional $138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health Professionals)<br />
<br />
<br />
<b>PLUS Loans</b><br />
<br />
The Federal PLUS Loan is a loan borrowed by a parent on behalf of a child to help pay for tuition and school related expenses at an eligible college or university, or by a graduate student for graduate school. The student must be enrolled at least half time, and the parent or graduate student must pass a credit check in order to receive this loan. <br />
<br />
PLUS Loans are non-need based, which means you do not have to demonstrate financial need to qualify. Eligibility for the PLUS Loan depends on a modest credit check that determines whether the parent has adverse credit. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.<br />
<br />
The primary benefit of the PLUS Loan is that a parent can borrow a federally guaranteed low interest loan to help pay for their child's education. A Federal PLUS Loan allows a parent to borrow the total cost of undergraduate education including tuition, room and board, and any other eligible school expenses, minus any aid the child is receiving in their name. <br />
<br />
PLUS Loan interest rates are fixed for all new PLUS Loans at a rate of 8.5%. These loans will not have variable interest rates. You may receive a 0.25% repayment interest rate credit when payments are set up for automatic debit from a bank account. Interest may be tax deductible under the Hope Education Tax Credit. Repayment on a PLUS loan is 10 years; there is no penalty for early repayment, and consolidating your loans after each academic year is easy. It also lowers your monthly payment.<br />
<br />
The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive. For example, if your cost of attendance is $10,000 and you receive $8,000 in other financial aid, parents could borrow up to, but not more than, $2,000.<br />
<br />
The Grad PLUS Loan is a low interest, federally backed student loan guaranteed by the U.S. Government, specifically for students enrolled in a degree seeking graduate program. Like the Parent PLUS Loan, the Graduate PLUS Loan can be used to pay for the total cost of education less any aid already awarded. Also, like the Parent PLUS Loan, eligibility for the Graduate PLUS Loan is largely dependent on the borrower's credit rating and history, as opposed to the purely financial need-based Graduate Stafford Loan.<br />
<br />
Although many families prefer not to borrow money at all, it's important to remember that federal loans tend to have lower interest rates and more flexible repayment policies than other types of loans. Families who need to borrow money for college should be sure to exhaust all federal loan options before turning to private lenders.<br />
<br />
<b>Federal Work-Study</b><br />
<br />
Federal Work-Study (FWS) provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.<br />
<br />
Participants are paid by the hour if an undergraduate. No FWS student may be paid by commission or fee. The school must pay you directly (unless you direct otherwise) and at least monthly. Wages for the program must equal at least the current federal minimum wage but might be higher, depending on the type of work done and the skills required. The amount earned cannot exceed the total FWS award. When assigning work hours, the employer or financial aid administrator will consider the award amount, the student’s class schedule, and their academic progress.<br />
<br />
The school might have agreements with private for-profit employers for Federal Work-Study jobs. This type of job must be relevant to the student’s course of study (to the maximum extent possible). If the student is attending a career school, there might be further restrictions on the jobs you can be assigned.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-9405222437283697602009-12-29T14:32:00.000-08:002009-12-29T14:32:02.368-08:00The Costs & Rewards of a College Education<b>Part 8 - The Basics of Financial Aid: Grants</b><br />
<br />
As nervous as college freshmen may be, their cash-strapped parents are probably trembling more. Disciplined savings using any or a combination of the options mentioned above may not cover the full expense of a college education. As they have for the last ten years, college costs rose faster than inflation this year. For the 2009-10 school year, a college freshman can expect to pay anywhere between $15,000 and $60,000 for a full year of tuition, room and board, books, etc. <br />
<br />
But many college students don’t pay full sticker price. 63% of students receive some form of aid, either loans, grants, or both, according to the National Association of Student Financial Aid Administrators.<br />
<br />
This year's College Board data on financial aid show that almost $143 billion in student aid was distributed in academic year 2007-08—almost $10 billion more than the previous year. In addition, students borrowed almost $19 billion dollars from nonfederal sources to help finance their education. On average, undergraduate students received an average of $8,896 in aid in the form of grants and tax benefits. Graduate students received an average of $20,320 in aid.<br />
<br />
College financial aid departments will require the Department of Education's Free Application for Federal Student Aid (FAFSA) form, available at www.fafsa.ed.gov, which provides financial details of the parents and student. It is important to file the FAFSA form early as some grants are given on a first-come-first-serve basis. <br />
<br />
Financial aid is intended to make up the difference between what a family can afford and what college costs. The federal government and all public college financial aid offices use a “need formula” that analyzes a family’s financial circumstances and compares them with other families. The results will vary by college and by state, but the Expected Family Contribution (EFC) formula assumes family contributions are met with savings, income and borrowing. If a shortfall of college funds does exist, financial aid is awarded. This aid can be in the form of grants, loans, and work-study programs.<br />
<br />
<b>Grants</b><br />
<br />
Gift-aid programs include the Federal Pell Grant Program and the Federal Supplemental Educational Opportunity Grant (FSEOG) Program. These grants are generally available only to students who do not yet have bachelor's degrees. In some cases they might be awarded to students enrolled in post-baccalaureate teacher certification programs. <br />
<br />
<i><b>Pell Grants </b></i><br />
<br />
A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded usually only to undergraduate students who have not earned a bachelor's or a professional degree. (In some cases, however, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant.) Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and nonfederal sources might be added.<br />
<br />
Starting July 1, 2009, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began. It will increase again to $5,550 for the 2010-11 school year. The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board. The increased Pell grant doesn't just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.<br />
<br />
The maximum amount can change each award year and depends on program funding. The amount you get, though, will depend not only on your financial need, but also on your costs to attend school, your status as a full-time or part-time student, and your plans to attend school for a full academic year or less.<br />
<br />
The school the student is attending can apply Pell Grant funds to your school costs, pay you directly (usually by check), or combine these methods. The school must tell you in writing how much your award will be and how and when you'll be paid. Schools must disburse funds at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.<br />
<br />
<i><b>Federal Supplemental Educational Opportunity Grants (FSEOG) </b></i><br />
<br />
The Federal Supplemental Educational Opportunity Grant (FSEOG) program is for undergraduates with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. Just like Pell Grants, the FSEOG does not have to be repaid. <br />
<br />
You can receive between $100 and $4,000 a year, depending on when you apply, your financial need, the funding at the school you're attending, and the policies of the financial aid office at your school.<br />
<br />
If you're eligible, your school will credit your account, pay you directly (usually by check), or combine these methods. Your school must pay you at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.<br />
<br />
FSEOGs have a few limitations that Pell Grants don't. For one, the amount of your FSEOG can be reduced if you receive other forms of student aid. Also, each school receives a limited amount of FSEOG money; when it's gone, it's gone. That's why it's very important to apply for financial aid as early as you can. You'll have a better chance of obtaining FSEOG money if you're eligible for it. <br />
<br />
Next week I will discuss the other two options of financial aid - loans and work-study programs.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-36081854405226601232009-12-22T11:07:00.000-08:002009-12-22T11:07:27.542-08:00The Costs & Rewards of a College Education<b>Part 7 - Tax Incentives for Higher Education Expenses: The Lifetime Learning Credit</b><br />
<br />
The lifetime learning credit provides a tax credit of 20% of up to $10,000, or up to $2,000, of qualified expenses per taxpayer per year. It is available for all years of post-secondary education and for courses taken to acquire or improve job skills. This credit is available even if the student is enrolled in just one course at an eligible institution. There is no limit on the number of years the lifetime learning credit can be claimed for each student.<br />
<br />
Generally, the same expenses that either qualify or do not qualify for the Hope credit apply to the lifetime learning credit. See the summary of these expenses in the Hope credit summary above. Additionally, the same prohibited actions for the Hope credit applies to the lifetime learning credit.<br />
<br />
You cannot claim the Hope and the lifetime learning credit for the same student in the same year. To claim the Hope Credit or Lifetime Learning Credit, complete IRS Form 8863. <br />
<br />
<b>Comparison of Education Credits</b><br />
<br />
<i><b>Amount of Credit</b> </i> <br />
Hope Credit - Up to $1,800 credit per eligible student 1<br />
Lifetime Learning Credit - Up to $2,000 credit per return<br />
<br />
<i><b>When Available</b></i><br />
Hope Credit - Available ONLY until the first 2 years of post- secondary education are completed.1<br />
Lifetime Learning Credit - Available for all years of post-secondary education and for courses to acquire or improve job skills.<br />
<br />
<i><b>Educational Pursuit </b></i><br />
Hope Credit - Student must be pursuing an undergraduate degree or other recognized education credential.<br />
Lifetime Learning Credit - Student does not need to be pursuing a degree or other recognized education credential<br />
<br />
<i><b>Enrollment Requirements</b></i><br />
Hope Credit - Student must be enrolled at least half time for at least one academic period beginning during the year.<br />
Lifetime Learning Credit - Available for one or more courses<br />
<br />
<i><b>Prior Legal Issues</b></i><br />
Hope Credit - No felony drug conviction on student’s record.<br />
Lifetime Learning Credit - Felony drug conviction rule does not apply<br />
<br />
<span style="font-size: x-small;">1 For 2009 and 2010, these features fall under the provisions of the American Opportunity Tax Credit. Please refer to these features as described in the Hope Credit section of this report.</span><br />
<br />
<br />
Next week I will begin discussing the basics of financial aid, including discussions on grants, loans, and steps to take now to increase your chances of obtaining financial aid for yourself or your child.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-87998606110126833702009-12-15T07:47:00.000-08:002009-12-15T07:47:12.541-08:00The Costs & Rewards of a College Education<b>Part 6 - Tax Incentives for Higher Education Expenses: The Hope Tax Credit</b><br />
<br />
There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the Hope Credit and the Lifetime Learning Credit, also referred to as education credits. A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. This week, I will be focusing on the Hope Tax Credit<br />
<br />
<b>Hope Tax Credit</b><br />
<br />
Traditionally, the Hope credit provides a tax credit of up to 100% of the first $1,200 of qualified education expenses plus 50% of the next $1,200, per student per year. However, in February, 2009 the American Recovery and Reinvestment Act of 2009 was passed which modified the provisions of the Hope credit. These new provisions are explained in greater detail below and are applicable for 2009 and 2010 only.<br />
<br />
The credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Further, the Hope credit is only available for full-time students in the first two years of post-secondary education at an eligible institution.<br />
<br />
For purposes of the Hope credit, qualified education expenses include tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Expenses such as room and board, insurance, and medical expenses (including student health fees) do not qualify for the Hope credit.<br />
<br />
Generally, the credit is allowed for qualified education expenses paid in a calendar year for an academic period beginning in that year or in the first 3 months of the following year. For example, if you paid $2,000 in December 2008 for qualified tuition for the Spring 2009 semester beginning in January 2009, you may be able to use that $2,000 in figuring your 2008 credit. <br />
<br />
The amount of your Hope credit for 2008 is gradually reduced (phased out) if you are filing single and your modified adjusted gross income (MAGI) is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim a credit if your MAGI is $58,000 or more ($116,000 or more if you file a joint return). For most tax-payers, MAGI is simply their adjusted gross income (AGI) as figured on their federal income tax return.<br />
<br />
To claim the Hope tax credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements:<br />
<ul><li> The student did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.</li>
</ul><ul><li>The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before the current calendar year. </li>
</ul><ul><li>For at least one academic period beginning in the current calendar year, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. </li>
</ul><ul><li>The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of the current calendar year.</li>
</ul>Per IRS regulations, the following actions are prohibited with the Hope Credit:<br />
<ul><li>Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a Hope credit based on those same expenses.</li>
</ul><ul><li>Claim a Hope credit in the same year that you are claiming a tuition and fees deduction for the same student.</li>
</ul><ul><li>Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses.</li>
</ul><ul><li>Claim a Hope credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP), such as a 529 plan. </li>
</ul><ul><li>Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance. </li>
</ul><br />
As mentioned earlier in this section, the American Recovery and Reinvestment Act of 2009 temporarily modified some of the provisions of the Hope credit. For 2009 and 2010 the American Opportunity Tax Credit is the new name of the Hope credit program. The new law temporarily enhances the existing Hope education credit for 2009 and 2010 only in:<br />
<ul><li>Amount – The maximum amount of the Hope Credit increases from $1,800 to $2,500 per student.</li>
</ul><ul><li>Availability – The Hope Credit can now be claimed for the first four years of post-secondary education, and </li>
</ul><ul><li>Phase-out level – The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).</li>
</ul><br />
Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000). Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules. Further, forty percent (.40) of the Hope Credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.<br />
<br />
Next week, I will focus on the Lifetime Learning Credit and how it can be an additional benefit for college expenses.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-64627997917045030752009-12-07T11:11:00.000-08:002009-12-07T11:11:06.504-08:00The Costs & Rewards of a College Education<b>Part 5 - College Funding Options: IRAs, Insurance, and Rebate Programs</b><br />
<br />
There are other, less recommended, alternatives in funding a child’s education. Examples include taking distributions from your IRA accounts, variable life insurance policies, and using reward/rebating programs.<br />
<br />
<b>IRA Distributions</b><br />
<br />
Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. The part not subject to the additional tax is generally the amount of the distribution that is not more than the adjusted qualified education expenses for the year. <br />
<br />
For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the student is at least a half-time student, room and board are qualified education expenses.<br />
<br />
<br />
<b>Variable Life Insurance Policies</b><br />
<br />
Variable Life combines life insurance with a tax-deferred investment account, and provides tax-free access to the cash value of the policy. Some insurance companies promote variable life insurance policies as a college savings vehicle because the value of the policy is sheltered from financial aid need analysis formulas. <br />
<br />
The advantages of a variable life policy are as follows: <br />
<br />
§ The money is sheltered from the financial aid need analysis process and has no impact on financial aid. <br />
§ Very high limits on the amounts you can invest. <br />
§ The parent retains control over the money. <br />
§ One can withdraw or borrow contributions tax-free without penalty. <br />
<br />
The disadvantages to such policies are as follows: <br />
<br />
§ Variable life insurance products tend to be expensive, with high commissions and expenses. The total return after subtracting costs often makes such policies less attractive when compared with other college saving options. <br />
§ The premiums on a variable life insurance policy will eat into the gains you could make from the money you are paying. <br />
§ Premiums are not tax deductible. <br />
§ Withdrawals from a variable life policy will reduce the death benefit. <br />
§ If you withdraw more money than the premiums you paid into the policy, you will pay income taxes on the difference. <br />
§ Withdrawals from a variable life policy cause the insurer to move a portion of the remaining balance into a fixed-return account to minimize the company's risk. <br />
<br />
<b>Loyalty Reward / Rebating Programs </b><br />
<br />
Loyalty programs, also known as affinity programs, provide a rebate to the consumer in exchange for shopping at particular retailers or purchasing particular products or services.<br />
<br />
Typically, such programs do not require you to show a membership card to get the rebates. Instead, you register your credit cards with them and they track the purchases you make at participating merchants using the cards. You can also earn rebates by shopping online through the company web sites. This makes the programs a painless way to earn a little extra money for college. <br />
<br />
Affinity programs with a college savings emphasis include: <br />
<br />
BabyCenter: (http://www.babycenter.com/index.htm)<br />
BabyMint (https://www.babymint.com/)<br />
FutureTrust: (http://www.futuretrust.com/)<br />
LittleGrad: (http://www.littlegrad.com/)<br />
SAGE Tuition Rewards Program: (http://www.tuitionrewards.com/)<br />
Upromise: (http://www.upromise.com/)<br />
<br />
Of these, Upromise has the largest retailer network, followed by BabyMint. LittleGrad has the largest online retailer network, and all programs listed are completely free to the user.<br />
<br />
A key benefit of all of these programs is that you do not need to change your purchasing habits to earn rebates for college savings. The retailer networks associated with these programs are large enough that most families will earn some rebates without altering their spending patterns. Of course, by carefully targeting your purchases, you can maximize your rebates. <br />
<br />
Some of the loyalty programs allow one to redeem the rebates as cash instead of investing them in a section 529 college savings plan. Some also allow one to transfer the rebates to repay student loans. <br />
<br />
The rebates received from a loyalty program are not subject to income tax or sales tax. (Many states charge sales taxes on all gross receipts from sales, including rebates for which the retailer is reimbursed. However, the consumer already paid sales tax on the amount of the rebate when they purchased the product or service that generated the loyalty program rebate, so no additional sales tax is due when the rebate is received.) <br />
<br />
We do not recommend spending more money just to earn a rebate. If two products provide equivalent value, but the more expensive item offers a rebate, sometimes it is better to buy the less expensive item. Compare net prices after subtracting the amount of the rebate. The average rebate is between 4% and 5%.<br />
<br />
Over the next few weeks I will begin discussing the various income tax incentives for college savings and expenses. More specifically, I will be outlining how the Hope Tax Credit and the Lifetime Learning Credit can be utilized to give you a more advantageous tax liability each year.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-71322737781875082952009-11-24T12:26:00.000-08:002009-11-24T12:26:58.181-08:00The Costs & Rewards of a College Education<b>Part 4 - College Funding Options: Savings Bonds & UGMA/UTMA Accounts</b><br />
<br />
<b>Education Bond Program</b><br />
<br />
529 Plans and Coverdell Education Savings Accounts are good bets for some, but if you think your child may opt not to go to college, or if you just want more control over your investments, you may want to consider education bonds.<br />
<br />
EE bonds and Series I bonds are both part of the Education Bond Program created by the Treasury Department in 1990. A benefit of this program over the 529 plans is that with these investments you won't have to pay a penalty if you decide not to use them for your child's (or your own) education. If you do use them to pay for school, you will not be required to pay federal income tax on the interest you earn. Bonds are available in denominations from $50 to $10,000 for EE bonds, and from $50 to $5,000 for I bonds. <br />
<br />
EE bonds are purchased at 50% of their face value. Therefore, a $100 EE bond will cost $50 to purchase it. In contrast, I bonds are purchased at face value; therefore a $100 I bond will cost $100.<br />
<br />
The Department of the Treasury sets the fixed rate for Series EE Savings Bonds administratively. The rate is based on 10-year Treasury note yields and adjusted for features unique to savings bonds, such as the tax deferral feature and the option to redeem the savings bonds at any time after the initial holding period. Series EE Savings Bond rates are set every May 1st and November 1st, with each new rate effective for all bonds issued in the six months following the adjustment.<br />
<br />
Series EE Savings Bonds issue dated on or after May 1, 2005 will earn a fixed rate of interest for 20 years, at which time the bond should have reached its face value. If the bond has not reached its face value, the Treasury will make a one time adjustment up to the face value. These EE bonds will increase in value every month instead of every six months. Interest is compounded semiannually. After the initial 20 yr period an additional 10 year extension and rate update will be initiated, for a total of 30 years of interest earning.<br />
<br />
I bonds are inflation-indexed bonds with yields pegged to the inflation rate. You can learn more about these bonds online at www.savingsbonds.gov. The bonds come with their share of caveats, so be sure you meet the requirements before you make a purchase. <br />
<br />
Because of the $20,000 total bond limitation which began Jan. 2008 - you can now only purchase a maximum face value of $10,000 ($5,000 cash) in paper EE Savings Bonds a year. You may also purchase up to $5,000 in Electronic EE Savings Bonds, $5,000 in paper I Savings Bonds and $5,000 in Electronic I Savings Bonds - all in one calendar year.<br />
<br />
To qualify for the tax exclusion, you must meet certain income guidelines when you redeem the bonds. For the 2008 tax year, for example, a single taxpayer's modified adjusted gross income must be less than $67,100 to take full advantage of the exclusion. The exclusion begins to be reduced at that point, and is eliminated for adjusted gross incomes of $82,100 and above. For married taxpayers filing jointly, those two numbers are $100,650 and $130,650, respectively. The good news is that those numbers are adjusted annually, so the ceilings may be much higher when you redeem your bonds.<br />
Keep in mind that your adjusted gross income for the year you redeem your bonds includes all the interest earned on the bonds you cashed in. Ironically, this may actually push some families past the cut-offs, reducing or even eliminating their exclusion. <br />
<br />
You can use the proceeds for tuition and fees, but not for room and board or books. Qualified expenses must also take into account any scholarships, fellowships, or other forms of tuition reduction and you must incur the expenses the same year you redeem the bonds. <br />
<br />
If you redeem more cash in bonds than you use for educational expenses, the interest you earn will be taxed on a pro-rated basis. For example, if you have a $10,000 bond consisting of $8,000 principal and $2,000 interest, and have $6,000 in expenses, you could exclude 60 percent of the earned interest, or $1,200. The other $800 would be subject to taxes.<br />
<br />
<br />
<b>UGMA/UTMA Custodial Accounts</b><br />
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A custodial account provides a way for a donor (usually parents or grandparents) to gift cash and/or assets to a minor via a simple and cost effective account. The Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account enables the custodian to provide management of the account and to direct distributions for the benefit of the child until the child reaches the age in which they can control the account, usually age 18 or 21. For estate tax purposes, if the donor and the custodian is the same person and if they predecease the beneficiary before the age of majority, the gift amount will not be considered a completed gift. Specific terms of UGMA and UTMA accounts are determined by state statute. <br />
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Neither the donor nor the custodian can place any restrictions on the use of the money when the minor becomes an adult. At that time the child can use the money for any purpose whatsoever without requiring permission of the custodian, so there's no guarantee that the child will use the money for education purposes. Since UGMA and UTMA accounts are in the name of a single child, the funds are not transferable to another beneficiary. <br />
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The income from the custodial account must be reported on the child's tax return and is taxed at the child's rate. There is no special tax treatment for UGMA/UTMA accounts. <br />
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Uniform Transfer to Minors Act (UTMA) is the most common custodial account and allows for a minor to own securities and other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance. The Uniform Gift to Minors Act (UMGA) allows for a minor to own securities. UTMAs are slightly more flexible than UGMAs. For college financial aid purposes, custodial accounts are considered assets of the student. This means there is a high impact on financial aid eligibility.<br />
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Next week I will touch on some final, less popular, college funding options which include using your IRA accounts, using variable life insurance policies, and the loyalty/rebate programs.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-64827040942354990292009-11-12T08:25:00.000-08:002009-11-12T08:29:16.953-08:00The Costs & Rewards of a College Education<b>Part 3 - College Funding Options: Coverdell Education Savings Accounts</b><br />
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The Coverdell Education Savings Account is also referred to as an Education IRA, although it is important to note that a Coverdell Education Savings Account is <i><b>not</b></i> an IRA. It allows qualified taxpayers (usually parents and grandparents) to establish and contribute up to $2,000 per year for each designated beneficiary under the age of 18; current tax law prohibits contributions once the designated beneficiary reaches the age of 18. <br />
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Contributions are nondeductible but can be invested in any U.S. stock, bond or mutual fund. A contributor’s income could potentially limit the amount of contributions made in a given year. To contribute fully in 2009, a person must make no more than $95,000 if filing as a single taxpayer, $190,000 if married filing jointly. Limited contributions are allowed for single taxpayers earning up to $110,000 and married couples making up to $220,000. Beyond those higher income levels, a person cannot contribute. However, there are no requirements that contributions come from earned income. Therefore, if a parent or grandparent is not eligible to make a contribution due to their income they can simply gift the amount to the child who can then make a contribution into their account.<br />
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For members of the military and their families, if you received a military death gratuity or a payment from Servicemember's Group Life Insurance (SGLI) after October 6, 2001, you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family. Such payments are made to an eligible survivor upon the death of a member of the armed forces. This rollover contribution is subject to the contribution limits discussed earlier. The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. The contribution to a Coverdell ESA from survivor benefits received after June 16, 2008, cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. If you received survivor benefits before June 17, 2008, with respect to a death from injury occurring after October 6, 2001, you can contribute to a Coverdell ESA no later than June 17, 2009. The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment.<br />
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Coordination of contributions should be closely monitored. The annual exclusion for making gifts to any individual is $13,000 for 2009. If a parent is making contributions for a child to both a Coverdell Education Savings Account and, say, a state-sponsored 529 savings plan that parent needs to make sure they do not put more than the annual exclusion amount collectively into both plans. Unlike 529 plans, there is no 5-year averaging allowed for Coverdells.<br />
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Withdrawals are tax-free if the money is used for qualified higher education expenses. One of the main advantages of Coverdell Education Savings Accounts, as compared to other educations savings vehicles such as 529 plans, is that distributions can be used for educational expenses of any grade level; like parochial elementary, private high school or a public college. The educational expenses that qualify are broken into two categories: Qualified Elementary and Secondary Education Expenses, and Qualified Higher Education Expenses.<br />
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Qualified Elementary and Secondary Education Expenses are related to enrollment or attendance at an eligible elementary or secondary school. To be qualified, some of the expenses must be required or provided by the school. The following expenses must be incurred by a beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school: tuition and fees, books, supplies, and equipment, academic tutoring, and special needs services for a special needs beneficiary. Other qualified expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school: room and board, uniforms, transportation, and supplementary items and services (including extended day programs). The purchase of computer technology, equipment, or internet access and related services is also a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in elementary or secondary school.<br />
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Qualified Higher Education Expenses are expenses related to enrollment at an eligible postsecondary school. To be qualified, some expenses must be required by the school such as tuition and fees, books, supplies, and equipment and some must be incurred by students who are enrolled at least half-time, such as room and board. These expenses must be reduced by the amount of tax-free benefits received, such as scholarships, to determine how much can be distributed without incurring a taxable event.<br />
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There are a few key limitations of the Coverdell Education Savings Account. Any balances not used by a child’s 30th birthday must be distributed or transferred to another family member (can include niece and nephew). If not, the balance will go to the child and will be subject to income tax and a 10% penalty. Additionally, the $2,000 contribution limit is per beneficiary, regardless of the number of accounts opened for the child. Any excess contributions are subject to a 6% excise tax penalty. Excess contributions, and any earnings on the excess contributions, can be withdrawn before May 31st of the following year without incurring the 6% penalty. The earnings, however, will be subject to income tax.<br />
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In the past, distributions could not be used in conjunction with the Hope or Lifetime Credit, which are described in more detail below. The Internal Revenue Service now allows a distribution from the account in the same year that the Hope or Lifetime Learning Credits are claimed as long as the money is not used to pay for the same expenses.<br />
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As with 529 plans, if a parent owns the plan it is considered a parental asset and therefore has a minimal effect on the amount of financial aid available.<br />
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Please do not hesitate in contacting me with any questions you may have regarding the Coverdell Education Savings Account. I welcome any and all comments and suggestions!<br />
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Next week, I will discuss the basics of yet a few other college savings options - U.S. Savings Bonds and UTMA/UGMA Savings Accounts.Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0tag:blogger.com,1999:blog-9222773756293868703.post-61748325789376546612009-11-04T14:54:00.000-08:002009-11-04T14:54:43.039-08:00The Costs & Rewards of a College Education<b>Part 2 - College Funding Options: 529 Plans</b><br />
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Recognizing the economic and social benefits of promoting education, federal and state lawmakers have developed a number of investment plans, government programs, and tax incentives to make higher education financially accessible to more Americans. <br />
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Probably the most recognized savings vehicle for funding college educations today is the 529 Savings Plan. Named after the section of the federal tax code that allows them, they offer significant tax benefits. There are three basic types of 529 plans: the State-Sponsored 529 Savings Plan, the State-Sponsored 529 Prepaid Tuition Plan, and the Independent 529 Plan. <br />
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<b>State-Sponsored 529 Savings Plan</b><br />
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With a 529 Savings Plan, earnings accumulate tax-deferred and withdrawals can be made, tax-free, when it’s time to pay for a child’s college expenses including tuition, fees, room and board, and books. Investment minimums are low, as little as $25 per month, and there is no restriction on how much you can contribute every year unless the account is nearing the lifetime cap. For 2009 each individual is allowed to gift $13,000 per year to any individual gift-tax free. A special caveat to this applies to funding 529 plans: You may contribute as much as $65,000 in one year ($130,000 with your spouse) without incurring gift taxes, provided you do not make any further gifts for the following five years. Each state determines its own lifetime contribution limits, ranging from $100,000 to over $300,000. Contributions can only be made in cash; transfer of securities into plans is prohibited<br />
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Each program sponsored by a state offers an array of stock and bond funds for a participant to invest in. There is also an ‘age-based’ portfolio option given to investors. An aged-based portfolio will automatically adjust its allocation towards a more conservative position as your child grows older. Therefore, by the time your child is of college age, the portfolio will be almost exclusively in fixed income and cash positions. Under IRS rules, you may reallocate investments within a plan once a year. A special provision was created for the 2009 calendar year which allows an account owner to reallocate up to two times during the year. Unless extended, the original provision of one reallocation per year will return in 2010. Further, you can move from one state plan to another state plan with no tax consequences. As in the case of changing allocations, you can only move between state plans once a year. You will also want to pay attention to any fees you may incur by moving between state plans. <br />
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Many states do provide added benefits on their own in-state plans by providing state income tax deductions on contributions and exemption from state income tax for qualified plan distributions. Additionally, certain plans are provided asset protection from lawsuits and creditors. For example all 529 accounts, including out-of-state 529 accounts, having a Texas resident as owner or beneficiary is provided creditor protection by the Texas government.<br />
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What if your child does not go to college or doesn’t require the use of the funds set up for their benefit? You can get a full refund, but you’ll pay taxes plus a 10% penalty on your investment earnings. These penalties are waived if your child becomes disabled or dies. Further, if your child receives a scholarship, most plans will waive the penalties on withdrawals up to the scholarship amount. <br />
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An alternative to withdrawing the money is to change the plan’s beneficiary to another child or family member. A change of beneficiary must be to a first cousin or closer to the original beneficiary; otherwise, there may be adverse tax consequences. Each state has its own definition of ‘family member’ so be sure to contact your plan’s administrator if any clarification is needed.<br />
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<i><b>Suggested State-Sponsored 529 Savings Plans</b></i><br />
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The general selection criteria for a savings plan program is usually centered on (1) fees and expenses, (2) investment options, and (3) other incentives that may be offered to in-state residents. A few suggestions when reviewing plans are: avoid high annual expense ratios and loaded funds, review the quality of the fund selection by each asset class, review extra benefits like state income tax deductions and asset creditor protection.<br />
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The quality of each 529 plan, rules and regulations, may vary dramatically by each program sponsor and by state plan. Some of these limitations can include age contributions limits, required distribution for beneficiaries over a specified age, minimum contributions amounts, and additional fees for out of state residence. It is very important to review the program details to insure complete understanding of the plan agreement before applying. More information on 529 plans can be found at www.savingforcollege.com. <br />
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Other factors such as risk tolerance, time frame and family financial situation may affect what college savings vehicle or method is optimal for you. A prepaid tuition plan may offer features that provide greater advantages for your particular circumstances than a savings plan. Please contact MTR Financial Services for additional information and considerations.<br />
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Review established 529 plans periodically to evaluate investment performance, plan agreement changes, and to monitor your specific college-funding objective. <br />
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<b>State-Sponsored 529 Prepaid Tuition Plans</b><br />
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A Prepaid Tuition Plan lets you purchase units of tuition for any state college or university at today’s prices. A semester’s worth of prepaid tuition purchased at 2009 prices would pay for a semester’s worth of tuition at any future date, no matter what the cost of tuition is at that time. Prepaid plans are simple in design and offer better rates of return on investment than bank savings accounts and certificates of deposit. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state.<br />
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Prepaid plans are typically more restrictive than 529 Savings Plans in that (1) enrollment qualifications require the beneficiary or account owner be a resident of the state, (2) the enrollment period is only open during a limited time frame during the year, (3) the plan is only available to children within a certain age range or grade level (4) plan benefits must begin distributions prior to certain age and (5) prepaid plans are most beneficial for in-state tuition and undergraduate degrees. Also, due to market conditions in the past several years, some state’s are now charging a premium for their prepaid plans over current tuition prices or revamping in order to regain financial stability, due to lower investment returns over the past several years. <br />
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Prepaid tuition plans are most attractive to conservative investors since the plan guarantees to pay for their student's tuition. Similarly, prepaid tuition plans might be a wise choice for students who are three to seven years away from college since, with such a short investment time horizon, they should be playing it safe. Again, since the risk of being able to cover the rising costs of tuition is being assumed by the plan, you'll pay a premium; you can't expect someone to take on a financial risk for nothing. Also, keep in mind that most prepaid tuition plans do not allow enrollment of students beyond the 9th or 10th grades. <br />
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Some prepaid plans cover just tuition and fees; other plans will also pay for room and board. If you participate in a plan that does not cover room and board, you'll have to save separately for those expenses. Like the other college savings options, a prepaid tuition plan can be transferred to another family member. Review all plan details carefully, before taking any action.<br />
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<b>Independent 529 Plans</b><br />
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The Independent 529 Plan is a national prepaid tuition plan exclusively for a select list of private and independent colleges. Created in 1998 by a group of 18 southern colleges, it now has over 247 participating private colleges in 38 states and the District of Columbia. Its members include a wide range of institutions including large research institutions (Stanford, University of Chicago), traditional liberal arts colleges (Amherst, Middlebury), women’s colleges (Smith, Wellesley), historical black colleges (Spelman, Dillard), religiously-affiliated colleges (Notre Dame, SMU), and technically-oriented institutions (Rice, MIT). A full list of colleges and universities currently participating can be found at www.independent529plan.org. <br />
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The allure of Independent 529 Plans is that a parent or grandparent can lock in future tuition costs at less than today’s price. Member colleges offer discounts to current year tuition rates, typically between 0.5% and 1%. When an account is established, the account owner will ‘choose’ a college from the list of schools currently participating and base their contributions on that school’s current discount and tuition rate. The college chosen as a benchmark has no bearing on admission to that school. It simply establishes a starting point for future contributions. Account owners will have the opportunity to select up to five ‘sample’ colleges to monitor. Quarterly reports will be sent to the account owner displaying the value of the account in terms of the accumulated tuition benefit based on these ‘sample’ colleges.<br />
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To illustrate, if the account owner chooses to base their contributions on the current tuition of the University of Notre Dame, and Notre Dame currently offers a 0.5% annual discount through the Plan, then the account owner will know that a payment of $35,135 today will pay for one year’s tuition at Notre Dame 10 years from now ($36,847 ‘08-09 tuition less 0.5% discount annually over 10 years = $35,135). Assuming the annual increase in college tuition remains at 6%, one year’s tuition at Notre Dame ten years from now will be close to $66,000. Therefore, by prepaying $35,135 today, the account owner will realize a tax-free savings of almost $31,000.<br />
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This unique way of paying for college tuition offers the security of a guarantee against tuition inflation and the flexibility to choose from some of the nation’s top colleges. <br />
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There are certain contribution limits to Independent 529 Plans. The most that can be contributed in any given account is based on five years of undergraduate tuition at the highest-priced participating institution in the program today. For the 2008-09 program year the maximum lifetime contribution limit was $183,000. <br />
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As is the case with State-Sponsored 529 Plans and Prepaid Tuition Plans, the Independent 529 Plan offers potentially significant estate and gift tax benefits. For 2009, the annual gift tax exclusion is $13,000, meaning any individual is able to gift this amount to any number of individuals during the year without triggering a gift tax in that year. If you are married, your spouse may elect to split the gifts made to purchase a tuition certificate for a beneficiary, thereby doubling the amount of the annual gift tax exclusion from $13,000 to $26,000. All 529 Plans benefit from a 5-year averaging provision with contributions, meaning you can elect to treat up to $65,000 as having been made in 5 equal gifts of $13,000 over a 5-year period. If married and file a joint tax return, this amount can double to $130,000. Caution must be taken if you are able to take advantage of this provision – no additional contributions can be made by the account owner, and spouse if applicable, to the account over the next five years. Any additional contributions made during the five-year period by the account owner and/or spouse could result in gift taxes being owed in the year of excess contribution.<br />
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With the growing popularity of the Independent 529 Plan, more private colleges will be adding their names to the list of participating institutions in the years to come. These institutions, when added to the list, are obligated to honor all certificates purchased prior to its inclusion in the Plan, provided the beneficiary is admitted into the college or university. What happens when a college or university removes itself from the list of participants? If a college should ever withdraw from the Independent 529 Plan, it would still be obligated to honor all certificates that were purchased prior to its withdrawal. No certificates purchased after its withdrawal will be honored by that specific college.<br />
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Certificates purchased can only be redeemed for undergraduate tuition and mandatory fees at participating institutions. Mandatory fees are those fees required to be paid by all students attending the particular college as a condition of enrollment. Currently, costs for other expenses including room and board, text books, supplies, and miscellaneous expenses are not covered under the Independent 529 Plan. Once a certificate is purchased, it must be held for 36 months before it can be used. Further, the certificates must be used within 30 years from the date of purchase or else it will mature. Once a certificate matures the account owner has the following options:<br />
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1. Receive a refund, explained below, and retain all the tax benefits for the withdrawal portion if used for qualified higher education,<br />
2. You can change the beneficiary, or<br />
3. You can roll over an Independent 529 Plan account tax-free into a state-sponsored 529 plan.<br />
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A refund may be received at any time after the one-year (12 calendar months) anniversary of purchase, adjusted for fund performance. As with any 529 program, if you do not use the money for qualified higher education expenses, any increase in the value of your initial purchase amounts (the difference between your contribution amount and the amount refunded) will be subject to federal income tax as well as an additional 10% tax. If you take a refund, rather than redeem your certificates for its intended purpose, the refund will be adjusted based on the net performance of the Program Trust, subject to a maximum increase of 2% per year and a maximum loss of 2% per year.<br />
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What happens if the student receives a scholarship or decides not to attend college at all? If the student receives a scholarship that covers the costs of qualified expenses, you can withdraw the funds from your account up to the amount of the scholarship without penalty or additional tax. Earnings that are refunded due to scholarships are taxable income but are not subject to the 10% additional federal income tax. If the student decides not to go to college, you still have options:<br />
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1. You can leave the account open for future use – for up to 30 years,<br />
2. You can change the beneficiary to another ‘member of the family,’ within the federal 529 rules, or<br />
3. You can take a refund adjusted for fund performance.<br />
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Financial aid concerns must also be considered if you are not able to fully you’re your child’s education. Congress has passed a new law that significantly improves the financial aid rules governing prepaid 529 plans. Simply put, Independent 529 Plan accounts are now treated the same as any other parent asset, including 529 savings plans. This new law means that, beginning in 2006, prepaid 529 plans — such as the Independent 529 Plan — will no longer be treated as an available student resource when determining your potential financial aid award. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines. The impact 529 plans have on financial aid will be discussed in greater detail later in the report.<br />
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Please do not hesitate in contacting me with any questions you may have regarding the various 529 plans available to everyone. I welcome any and all comments and suggestions!<br />
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Next week, I will discuss the basics of another college savings option - the Coverdell Education Savings Account. Matthew T. Russell, CFP®http://www.blogger.com/profile/09084657421803203340noreply@blogger.com0