BOSTON (MarketWatch) -- After the recent death of his mother, James B. from Santa Barbara, Calif., had a sit-down talk with his father, covering family finances.
"My father doesn't need to change anything, he's set up for life," James said in an email, "but not changing anything means he wants to leave everything exactly as he had it with Mom. He says that his will sorts everything out, but I'm afraid we're missing something here."
What James' father is missing is a named beneficiary on his individual retirement account; his wife was the beneficiary, but her death and the absence of a contingent beneficiary means that the money will go the estate. While the will eventually will sort things out, the error could turn into a major headache.
The good news is that, unlike a poor investment, the situation is easily resolved and changed, with no potential negative consequences.
"It's not what you invest in, it's how much you keep after taxes," says Ed Slott of E. Slott & Co. in Rockville Centre, N.Y. "You spend a lifetime trying to build up an investment, and you know that one of the best ways to build wealth is to keep your money away from the government for as long as possible, so why do you then turn around and have the government get it as quickly as possible when you are gone."
Naming a beneficiary for an IRA is not the same as naming the heirs in your will. In fact, establishing the beneficiary designation is like having a special will to direct your IRA assets. That's much more important than most people recognize.
There are two key issues that come into play when an IRA passes to the estate rather than to a named beneficiary.
The first is that the IRA normally would go to the beneficiary without going through probate, the judicial process where a will is presented to the court for disposition. The probate process significantly slows the flow of the money. Even if the cash eventually gets where it is going -- assuming no creditor or other claimants to the estate successfully contest the will -- it won't get there for months, at a minimum.
The bigger issue involves what the recipients of the money can do with it.
Stretching benefits
The beneficiaries of an IRA -- so long as it is a named person or certain types of trusts -- can extend the tax benefits of the account, so that withdrawals are based on their own life expectancy. This creates what many in the industry call a "stretch IRA," where the benefits of IRA ownership can be extended by decades.
But if the money goes into an estate, even if it is destined to wind up with the same individual as a result of instructions in the will, the whole account must be distributed in short order. If the account owner died before turning 70 1/2, the whole account must be distributed by the end of the fifth year after death; if the owner died after that age, the IRA can be paid out through what would have been the owner's life expectancy, which could be more than five years but which will not be the same time frame as a member of the next generation.
"Paying it to your estate is kind of giving up, it's like saying 'The tax savings aren't worth it, so what the hell,'" says Stephen Ziobrowski, a partner in Day, Berry & Howard in Boston. "I haven't encountered a situation where paying an IRA to the estate is the right thing to do. I know it exists theoretically, but I haven't seen one case where it was the right thing to do."
Leaving an IRA to the estate is supposed to make sense in situations where account owners have no heirs and the money is earmarked for charity or where account owners have so many heirs -- or so little money -- that dividing the assets or tagging them for specific recipients creates a significant hassle.
For the average consumer, however, there's no question that naming a beneficiary is the right way to go.
Beyond setting it up, keeping it up to date is crucial. In the case of James' father, for example, having the mother as beneficiary was acceptable until her death; the lack of a secondary beneficiary became a problem upon her death.
Update forms
When investors open an IRA, they sign a custodial agreement with the firm they're investing with; in most cases, those agreements typically say that someone who dies without a beneficiary leaves the money to the estate. In some cases -- where the management firm has become proactive on the part of its customers -- the agreement says that in the absence of a named beneficiary, the money goes to a spouse, then to surviving children, before the estate could actually become beneficiary.
If you haven't read the custodial document to know the default case, check the beneficiary paperwork.
Phil Holthouse of Holthouse, Carlin & Van Trigt, an accounting firm in Long Beach, Calif., says that many people simply fail to pay attention to beneficiary forms.
"It's easy to fix, so long as you are alive and haven't lost competency," Holthouse says. "Call the company you have the IRA with and get new forms, and then fill them out. You can keep the beneficiary and contingent beneficiary up to date in about five minutes. ... If you don't, your heirs will face the cost of probate, they will lose flexibility on how to take money out of the IRA, and they suffer the practical damage of not being able to easily do what you actually wanted for that money."
Wednesday, October 24, 2007
Health Care Costs
SAN FRANCISCO (MarketWatch) -- Concerned about affordability and feeling the financial sting of higher cost-sharing in their health plans, more Americans are changing their personal health behavior in ways that are likely both good and bad, according to a new study.
More than six in 10 Americans with health insurance, or 63%, said they saw an increase in their health plans' out-of-pocket costs in the past year, according to a survey of 1,000 people 21 and older from the Employee Benefit Research Institute, a nonprofit, nonpartisan research group in Washington, and research firm Mathew Greenwald & Associates.
Among these people, 81% said their greater financial responsibility motivated them to try to take better care of themselves, up from 71% who said that in 2005. Two-thirds said they tried to talk to the doctor more carefully about treatment options and costs compared with 57% who did so two years ago.
The number of people being more discriminating about doctor visits also grew -- 64% reported they only went for more serious conditions or symptoms, up from 54% in 2005. Half delayed going to the doctor this year, compared with 40% who used that tactic two years ago. Twenty-eight percent skipped or passed on filling doses of their prescribed medications, up from 21% two years ago.
It's impossible to discern from the study what the outcomes of those behaviors were, but the overall trend suggests people are being more mindful of their care and its costs, said Paul Fronstin, director of EBRI's health research program.
"They're becoming engaged on some level, more so than they've been in the past," he said. "That's really the goal of what employers and insurers are trying to do -- to get them to think more about their decisions and be more active in their health care."
Employers typically have been cautious by transferring more of the costs at the point of service -- doctors' offices, hospitals and the like -- rather than charging workers a higher share of the premium that comes out of their paychecks, which could drive more people to skip coverage altogether, said Alwyn Cassil, director of public affairs for the Center for Studying Health System Change in Washington.
"You have a real mixed bag here," said Cassil, who wasn't involved in the EBRI study. "Increased cost-sharing that most people face is a very blunt instrument and applies to both care we might want to be encouraging [and] care we want to be discouraging."
Higher copays and coinsurance may result in people with more discretionary health-care usage patterns changing their habits and saving the system money, but lower-wage workers and the chronically ill are especially vulnerable to forgoing care they truly need, she said. "They're the ones that this increased cost-sharing is likely to deter most strongly from getting things you'd want them to get."
Another troubling finding was the growth in the number of people experiencing rising health costs who said those costs made it difficult to afford basic necessities of food, heat and housing. That figure jumped to 30% this year from 18% in 2004, according to the study. Another 30% said the burden of health costs caused them to reduce their contributions to a retirement plan, up from 25% three years ago.
Satisfied with quality, wellness programs
Americans generally are satisfied with the quality of their health care but are worried about its costs and want to see broad-based change, the study found. Half were extremely or very satisfied with health-care quality, but less than two in 10, or 18%, were satisfied with the cost of medical insurance. Only 16% were satisfied with costs not covered by insurance.
"Half the population's healthy, so you're always going to have a significant percentage of the population happy with what they've got because they don't need anything," Fronstin said. "But there's concern. They feel vulnerable, feel like may lose health-care coverage. They're concerned costs are going up and concerned about the future."
Consumers may be less aware of quality problems, Cassil said. "I'm not sure we've done a very good job of helping consumers really understand how to assess the value in health care."
"Everything we know about the quality of care provided in this country is that it's uneven at best," she said, pointing to a recent study of staph infections as an example.
Last week, the Centers for Disease Control and Prevention reported that one form, methicillin-resistant staph aureus, was more common than previously thought. MRSA caused more than 94,000 life-threatening infections and nearly 19,000 U.S. deaths in 2005, with the majority occurring in health-care settings, the CDC said.
"If you could get health-care workers to wash their hands you'd get a huge leap in quality in this country," Cassil said.
One bright spot in the survey was wellness programs, which a growing number of employers use to help workers identify their risk factors for disease and make lifestyle changes to lower their risk.
Eight in 10 said they were strongly or somewhat positive about such initiatives, though their comfort level dips when the programs become more managed and intrusive. For example, only half support a program that sends reminders when annual checkups, health screenings or prescriptions are due. Still, many said they'd participate in exchange for a break on premiums.
More than eight in 10 said wellness programs are beneficial for workers and three in four saw them as a reflection of employers' concern for their well-being. But some have reservations, with 45% concerned that such programs, which can include health risk assessments and coaching, impinge on worker privacy.
Employers need to assure workers that they comply with mandatory privacy protections, said Jerry Ripperger, national practice leader for consumer health at Principal Financial Group, a financial services and insurance company in Des Moines, Iowa. The firm, one of the study's underwriters, has 333 employer contracts for wellness programs this year.
"If you're a large employer, we aggregate that data together on a deidentified basis to say you have a greater preponderance of smokers or a greater preponderance of [people with high blood pressure] than the general population," Ripperger said. "But we never identify that back to an individual. We never want an employer to even inadvertently identify a participant."
For the most part, people were confident that their employers would continue to provide health insurance, and they recognized its value. Three in four of those with job-based coverage said they would prefer $7,500 in employer health benefits to an additional $7,500 in taxable income, the survey found. More than half, or 54%, were not too confident or not at all confident they could afford coverage on their own if their employer stopped offering it.
Almost half of Americans -- 47% -- believe the health-care system needs major changes despite having some good aspects, according to EBRI. Nearly one in four say drastic problems require a complete overhaul, while an equal portion maintains the system needs only minor changes because it works pretty well.
The survey's margin of error is plus or minus four percentage points. Funding was provided by AARP, American Express, BlueCross BlueShield Association, Buck Consultants, Deere & Company, General Dynamics, IBM, NRECA, Principal Financial Group, Procter and Gamble, Sanofi-Aventis, Schering-Plough Corp., Shell Oil Co., Society for Human Resources Management and the Commonwealth Fund.
More than six in 10 Americans with health insurance, or 63%, said they saw an increase in their health plans' out-of-pocket costs in the past year, according to a survey of 1,000 people 21 and older from the Employee Benefit Research Institute, a nonprofit, nonpartisan research group in Washington, and research firm Mathew Greenwald & Associates.
Among these people, 81% said their greater financial responsibility motivated them to try to take better care of themselves, up from 71% who said that in 2005. Two-thirds said they tried to talk to the doctor more carefully about treatment options and costs compared with 57% who did so two years ago.
The number of people being more discriminating about doctor visits also grew -- 64% reported they only went for more serious conditions or symptoms, up from 54% in 2005. Half delayed going to the doctor this year, compared with 40% who used that tactic two years ago. Twenty-eight percent skipped or passed on filling doses of their prescribed medications, up from 21% two years ago.
It's impossible to discern from the study what the outcomes of those behaviors were, but the overall trend suggests people are being more mindful of their care and its costs, said Paul Fronstin, director of EBRI's health research program.
"They're becoming engaged on some level, more so than they've been in the past," he said. "That's really the goal of what employers and insurers are trying to do -- to get them to think more about their decisions and be more active in their health care."
Employers typically have been cautious by transferring more of the costs at the point of service -- doctors' offices, hospitals and the like -- rather than charging workers a higher share of the premium that comes out of their paychecks, which could drive more people to skip coverage altogether, said Alwyn Cassil, director of public affairs for the Center for Studying Health System Change in Washington.
"You have a real mixed bag here," said Cassil, who wasn't involved in the EBRI study. "Increased cost-sharing that most people face is a very blunt instrument and applies to both care we might want to be encouraging [and] care we want to be discouraging."
Higher copays and coinsurance may result in people with more discretionary health-care usage patterns changing their habits and saving the system money, but lower-wage workers and the chronically ill are especially vulnerable to forgoing care they truly need, she said. "They're the ones that this increased cost-sharing is likely to deter most strongly from getting things you'd want them to get."
Another troubling finding was the growth in the number of people experiencing rising health costs who said those costs made it difficult to afford basic necessities of food, heat and housing. That figure jumped to 30% this year from 18% in 2004, according to the study. Another 30% said the burden of health costs caused them to reduce their contributions to a retirement plan, up from 25% three years ago.
Satisfied with quality, wellness programs
Americans generally are satisfied with the quality of their health care but are worried about its costs and want to see broad-based change, the study found. Half were extremely or very satisfied with health-care quality, but less than two in 10, or 18%, were satisfied with the cost of medical insurance. Only 16% were satisfied with costs not covered by insurance.
"Half the population's healthy, so you're always going to have a significant percentage of the population happy with what they've got because they don't need anything," Fronstin said. "But there's concern. They feel vulnerable, feel like may lose health-care coverage. They're concerned costs are going up and concerned about the future."
Consumers may be less aware of quality problems, Cassil said. "I'm not sure we've done a very good job of helping consumers really understand how to assess the value in health care."
"Everything we know about the quality of care provided in this country is that it's uneven at best," she said, pointing to a recent study of staph infections as an example.
Last week, the Centers for Disease Control and Prevention reported that one form, methicillin-resistant staph aureus, was more common than previously thought. MRSA caused more than 94,000 life-threatening infections and nearly 19,000 U.S. deaths in 2005, with the majority occurring in health-care settings, the CDC said.
"If you could get health-care workers to wash their hands you'd get a huge leap in quality in this country," Cassil said.
One bright spot in the survey was wellness programs, which a growing number of employers use to help workers identify their risk factors for disease and make lifestyle changes to lower their risk.
Eight in 10 said they were strongly or somewhat positive about such initiatives, though their comfort level dips when the programs become more managed and intrusive. For example, only half support a program that sends reminders when annual checkups, health screenings or prescriptions are due. Still, many said they'd participate in exchange for a break on premiums.
More than eight in 10 said wellness programs are beneficial for workers and three in four saw them as a reflection of employers' concern for their well-being. But some have reservations, with 45% concerned that such programs, which can include health risk assessments and coaching, impinge on worker privacy.
Employers need to assure workers that they comply with mandatory privacy protections, said Jerry Ripperger, national practice leader for consumer health at Principal Financial Group, a financial services and insurance company in Des Moines, Iowa. The firm, one of the study's underwriters, has 333 employer contracts for wellness programs this year.
"If you're a large employer, we aggregate that data together on a deidentified basis to say you have a greater preponderance of smokers or a greater preponderance of [people with high blood pressure] than the general population," Ripperger said. "But we never identify that back to an individual. We never want an employer to even inadvertently identify a participant."
For the most part, people were confident that their employers would continue to provide health insurance, and they recognized its value. Three in four of those with job-based coverage said they would prefer $7,500 in employer health benefits to an additional $7,500 in taxable income, the survey found. More than half, or 54%, were not too confident or not at all confident they could afford coverage on their own if their employer stopped offering it.
Almost half of Americans -- 47% -- believe the health-care system needs major changes despite having some good aspects, according to EBRI. Nearly one in four say drastic problems require a complete overhaul, while an equal portion maintains the system needs only minor changes because it works pretty well.
The survey's margin of error is plus or minus four percentage points. Funding was provided by AARP, American Express, BlueCross BlueShield Association, Buck Consultants, Deere & Company, General Dynamics, IBM, NRECA, Principal Financial Group, Procter and Gamble, Sanofi-Aventis, Schering-Plough Corp., Shell Oil Co., Society for Human Resources Management and the Commonwealth Fund.
Dividing possessions
NEW YORK (MarketWatch) -- Dividing up a beloved parent's possessions can bring up strong feelings even in the most-well-adjusted families. To avoid unnecessary friction, Jane Bennett Clark, associate editor of Kiplinger's Personal Finance, suggests the following five steps when deciding who gets what:
Agree on a strategy. Before anyone starts cherry-picking, family members should decide on a mutually agreeable strategy for divvying everything up. One method: group items according to their financial or sentimental value and then have everyone take turns choosing what they want.
Articulate your reasons. If more than one person has their heart set on a particular heirloom, ask them to write down why they feel they should get the item. Then, sit down and compare reasons. The keepsake should go to the person who offers up the most compelling or logical explanation.
Limit the number of people. Try to limit decision makers to people in the immediate family and don't include spouses or grandchildren unless absolutely necessary. The more family members involved in the process of choosing, the more complications are likely to arise.
Find out what it's worth. To ensure that no one gets short shrift, enlist the help of an appraiser to figure out exactly what things are worth, counsels Clark. After everything has been dispersed, tally up the value of the items chosen by each family member. If one person's take is worth significantly more than the rest, you may want to consider letting other family members take matching funds out of the estate. (To find an appraiser in your area, visit the American Society of Appraisers at www.appraisers.org.)
Commit to a peaceful resolution. If tensions bubble up during the decision-making process, try not to let your feelings run away with you. Remember: in the long run, getting what you want is less important the supporting one another during this difficult time.
Agree on a strategy. Before anyone starts cherry-picking, family members should decide on a mutually agreeable strategy for divvying everything up. One method: group items according to their financial or sentimental value and then have everyone take turns choosing what they want.
Articulate your reasons. If more than one person has their heart set on a particular heirloom, ask them to write down why they feel they should get the item. Then, sit down and compare reasons. The keepsake should go to the person who offers up the most compelling or logical explanation.
Limit the number of people. Try to limit decision makers to people in the immediate family and don't include spouses or grandchildren unless absolutely necessary. The more family members involved in the process of choosing, the more complications are likely to arise.
Find out what it's worth. To ensure that no one gets short shrift, enlist the help of an appraiser to figure out exactly what things are worth, counsels Clark. After everything has been dispersed, tally up the value of the items chosen by each family member. If one person's take is worth significantly more than the rest, you may want to consider letting other family members take matching funds out of the estate. (To find an appraiser in your area, visit the American Society of Appraisers at www.appraisers.org.)
Commit to a peaceful resolution. If tensions bubble up during the decision-making process, try not to let your feelings run away with you. Remember: in the long run, getting what you want is less important the supporting one another during this difficult time.
Tuesday, October 23, 2007
New Medicaid Planning Rules
The Crackdown on Medicaid PlanningNew government rules require creative strategies to protect your assets.By Mary Beth Franklin From Kiplinger's Personal Finance magazine, November 2007
Warning: Stricter Medicaid rules may derail your strategies for protecting your family's wealth. That's because Congress has stiffened the penalties for giving away money so that your parents are able to qualify for government-paid nursing-home care.
Opportunity: Take time now to review estate plans for both you and your parents. With proper preparation, you can ensure your plans are still effective despite longer waiting periods before Medicaid will pay for long-term care.
The back story: Medicaid, which is jointly funded by federal and state governments, is intended to provide health care for the poor. But it has also become the major source of financing for long-term care, paying nearly half of all nursing-home bills after residents run out of money. Most states require nursing-home residents to spend virtually all of their assets -- down to as little as $2,000 -- before they may qualify. Married couples have higher asset allowances as long as one spouse is healthy enough to remain at home.
A year in a nursing home costs about $75,000 nationwide (substantially more in the Northeast and California), so it's easy to wipe out a lifetime of savings. You can sidestep the Medicaid issue by buying long-term-care insurance if you or your parents are healthy enough to qualify for coverage and can afford the premiums. A policy that provides coverage for five years of care at $143 per day with inflation protection costs about $2,000 a year or more, depending on your age.
For some individuals, long-term-care insurance may not be an option. And some people give away their money and property in order to qualify for Medicaid help sooner, a practice known as Medicaid planning. One way to deal with both situations is to earmark funds sufficient to pay for care, then establish an irrevocable trust to remove remaining assets from the estate, says Barbara Culver, president of Resonate, a wealth advisory service in Cincinnati. But Medicaid planning, always a touchy subject, has become even dicier since Congress enacted new rules to crack down on such tactics.
Tougher restrictions. The government doesn't want to finance long-term care for people who are sheltering assets that could go toward paying their bills. So the new rules, which took effect in February 2006, extend the "look back" period from three years to five. If an individual gives away money or property during the five-year look-back, it triggers a penalty period during which he or she is ineligible for government aid.
The penalty period equals the amount given away divided by the average cost of nursing-home care in your area. So, for example, if you give $60,000 to family members and a nursing home costs $6,000 a month where you live, you can't qualify for Medicaid for ten months.
Under the old rules, the penalty period was less onerous because it began the day you transferred the assets. That meant it often expired before you were admitted to a nursing home, so you could still qualify for government aid when you applied.
Now, however, the penalty period begins the day you apply for Medicaid, which by definition means you have already spent virtually all of your money and need public assistance to pay the bills. (Asset transfers made before February 8, 2006, are grandfathered under the old rules.) That means the family members who receive your gifts may have to pay nursing-home bills during the penalty period until you qualify for Medicaid.
Creative solutions. Since the new rules took effect, Jennifer Cona, an elder-law lawyer in Melville, N.Y., says she has seen a stream of clients who are "kicking themselves because they didn't plan earlier." Says Cona, "We've had to become more creative."
Cona is setting up irrevocable trusts so that clients can shelter their assets and continue to live in their homes or receive income (but not principal) from the trust. Under the old Medicaid rules, trusts were subject to a five-year look-back period, compared with three years for other asset transfers. Now that the five-year look-back period applies across the board, the added protection of a trust is more appealing.
If the client needs long-term care before the five-year look-back ends, Cona explains, beneficiaries of the trust may take an advance on their inheritance or sell the house to raise cash. If the client doesn't need care until after the five-year window closes, the trust assets are protected and the client is eligible for Medicaid as soon as remaining unprotected assets are spent.
For those who need immediate care, Cona sometimes drafts a "caregiver agreement," under which a parent agrees to pay an adult child for caregiving services, such as driving to medical appointments, helping with household chores and coordinating or providing care. The payments help draw down the parent's assets closer to the point of Medicaid eligibility while passing cash on to a family member, who may have to take leave from his or her job to become a caregiver. Because the payments are considered wages rather than gifts, they avoid the restrictions on asset transfers. Such wages must reflect current rates for local home-health-care aides (the average wage is about $19 an hour nationwide), and the recipient must pay taxes on the income.
Don't jump in. Even though many adult children are willing (even eager) to help their parents deal with long-term-care bills, it's often better to wait, recommends James Ryan, of Lenox Advisors, in New York City. If you intervene too soon, all of your financial gifts will be considered your parent's assets and will go toward paying nursing-home bills.
And don't let your parent take out a home-equity loan to pay long-term-care bills, says Ryan. Up to $500,000 of home equity ($750,000 in New York and some other states) is excluded from assets used to calculate Medicaid eligibility. Once your parent qualifies for Medicaid, he says, you can be as generous as you like with gifts and cash.
Remember, though, that Medicaid is not an ideal solution even if you can protect some assets. "Medicaid comes up short in protecting your freedom of choice," says Ryan. You or your parent would probably have to go into a nursing home to receive government-financed care, rather than remain at home, which most people prefer. As a result of the tougher Medicaid rules, Ryan says, more people are interested in buying long-term-care insurance.
Warning: Stricter Medicaid rules may derail your strategies for protecting your family's wealth. That's because Congress has stiffened the penalties for giving away money so that your parents are able to qualify for government-paid nursing-home care.
Opportunity: Take time now to review estate plans for both you and your parents. With proper preparation, you can ensure your plans are still effective despite longer waiting periods before Medicaid will pay for long-term care.
The back story: Medicaid, which is jointly funded by federal and state governments, is intended to provide health care for the poor. But it has also become the major source of financing for long-term care, paying nearly half of all nursing-home bills after residents run out of money. Most states require nursing-home residents to spend virtually all of their assets -- down to as little as $2,000 -- before they may qualify. Married couples have higher asset allowances as long as one spouse is healthy enough to remain at home.
A year in a nursing home costs about $75,000 nationwide (substantially more in the Northeast and California), so it's easy to wipe out a lifetime of savings. You can sidestep the Medicaid issue by buying long-term-care insurance if you or your parents are healthy enough to qualify for coverage and can afford the premiums. A policy that provides coverage for five years of care at $143 per day with inflation protection costs about $2,000 a year or more, depending on your age.
For some individuals, long-term-care insurance may not be an option. And some people give away their money and property in order to qualify for Medicaid help sooner, a practice known as Medicaid planning. One way to deal with both situations is to earmark funds sufficient to pay for care, then establish an irrevocable trust to remove remaining assets from the estate, says Barbara Culver, president of Resonate, a wealth advisory service in Cincinnati. But Medicaid planning, always a touchy subject, has become even dicier since Congress enacted new rules to crack down on such tactics.
Tougher restrictions. The government doesn't want to finance long-term care for people who are sheltering assets that could go toward paying their bills. So the new rules, which took effect in February 2006, extend the "look back" period from three years to five. If an individual gives away money or property during the five-year look-back, it triggers a penalty period during which he or she is ineligible for government aid.
The penalty period equals the amount given away divided by the average cost of nursing-home care in your area. So, for example, if you give $60,000 to family members and a nursing home costs $6,000 a month where you live, you can't qualify for Medicaid for ten months.
Under the old rules, the penalty period was less onerous because it began the day you transferred the assets. That meant it often expired before you were admitted to a nursing home, so you could still qualify for government aid when you applied.
Now, however, the penalty period begins the day you apply for Medicaid, which by definition means you have already spent virtually all of your money and need public assistance to pay the bills. (Asset transfers made before February 8, 2006, are grandfathered under the old rules.) That means the family members who receive your gifts may have to pay nursing-home bills during the penalty period until you qualify for Medicaid.
Creative solutions. Since the new rules took effect, Jennifer Cona, an elder-law lawyer in Melville, N.Y., says she has seen a stream of clients who are "kicking themselves because they didn't plan earlier." Says Cona, "We've had to become more creative."
Cona is setting up irrevocable trusts so that clients can shelter their assets and continue to live in their homes or receive income (but not principal) from the trust. Under the old Medicaid rules, trusts were subject to a five-year look-back period, compared with three years for other asset transfers. Now that the five-year look-back period applies across the board, the added protection of a trust is more appealing.
If the client needs long-term care before the five-year look-back ends, Cona explains, beneficiaries of the trust may take an advance on their inheritance or sell the house to raise cash. If the client doesn't need care until after the five-year window closes, the trust assets are protected and the client is eligible for Medicaid as soon as remaining unprotected assets are spent.
For those who need immediate care, Cona sometimes drafts a "caregiver agreement," under which a parent agrees to pay an adult child for caregiving services, such as driving to medical appointments, helping with household chores and coordinating or providing care. The payments help draw down the parent's assets closer to the point of Medicaid eligibility while passing cash on to a family member, who may have to take leave from his or her job to become a caregiver. Because the payments are considered wages rather than gifts, they avoid the restrictions on asset transfers. Such wages must reflect current rates for local home-health-care aides (the average wage is about $19 an hour nationwide), and the recipient must pay taxes on the income.
Don't jump in. Even though many adult children are willing (even eager) to help their parents deal with long-term-care bills, it's often better to wait, recommends James Ryan, of Lenox Advisors, in New York City. If you intervene too soon, all of your financial gifts will be considered your parent's assets and will go toward paying nursing-home bills.
And don't let your parent take out a home-equity loan to pay long-term-care bills, says Ryan. Up to $500,000 of home equity ($750,000 in New York and some other states) is excluded from assets used to calculate Medicaid eligibility. Once your parent qualifies for Medicaid, he says, you can be as generous as you like with gifts and cash.
Remember, though, that Medicaid is not an ideal solution even if you can protect some assets. "Medicaid comes up short in protecting your freedom of choice," says Ryan. You or your parent would probably have to go into a nursing home to receive government-financed care, rather than remain at home, which most people prefer. As a result of the tougher Medicaid rules, Ryan says, more people are interested in buying long-term-care insurance.
5-minute estate planning guide
Use these 23 tips to help carry out your wishes, whether you're rich or just hanging on.
By MSN Money staff
Even though most estates won't owe Uncle Sam, estate planning is essential for protecting you and your loved ones.
Most important? Providing for minor children. Your will should name both a guardian and a financial trustee for your kids in case you and your spouse die. (See "14 mistakes not to make with your will.")
To provide checks and balances, the guardian and the trustee should not be the same person.
Don't name a couple as guardian. They could split up or disagree about what's right for your child. (See "Who will take care of your kids if you die?")
Your child's other parent, even if you're divorced, will get custody if you die, unless that person is unfit because of mental illness or addiction.
Your willWhat else should -- and shouldn't -- be in a will? If you don't designate beneficiaries, the state will decide how to split up your estate, which can be time-consuming.
A simultaneous death clause will pass your estate to your children if your spouse dies shortly after you do.
Many states require that a third or half of your estate goes to your spouse, even if your will specifies a smaller share.
If you want children from a prior marriage to benefit from your estate, don't leave everything to your current spouse. A bypass trust provides regular income for a surviving spouse until death. Then the assets go to the children.
If you want to disinherit a child, spell that out in the will.
Avoid tying bequests to an heir's behavior. (See "6 tips to ensure your last wishes.") A testamentary trust or spendthrift trust in the will can control how money is distributed so an irresponsible heir can't blow it all at once.
Keep current the designated beneficiaries on retirement and life insurance accounts so those assets don't become a part of your will. A 401(k) automatically passes to the surviving spouse unless that spouse has signed a waiver.
Consider simplifying your will by giving away assets before you die, holding them in joint tenancy or transferring ownership to a trust. You can gift as much as $12,000 annually to as many people as you want, and you can pay someone's education and medical expenses directly to the providing institution, without triggering federal gift tax. See IRS Publication 950 (.pdf file).
Review your will -- and life insurance -- after major life changes. (See "Remarriage means revising your estate plans.") If you remarry, consider a prenuptial agreement. (See "Late-in-life marriages worry heirs.") If you move, remember that estate laws vary from state to state.
Name an executor and a backup. (See "12 easy steps to preparing your estate plan.")
Fulfilling your final wishesAn executor is responsible for valuing assets, paying off debts and taxes, and distributing what's left in accordance with the will. (See "Executors can inherit an unholy mess.")
File the will for probate, which is a court review of the will, in a timely fashion, usually 30 days. (State laws vary on the timing, as well as the size of estate subject to probate.)
Search the decedent's home thoroughly. Important documents and valuables could be hidden in dresser drawers or old shoes. Hopefully, financial records, including computer passwords and PINs, are in one secure location. If they're in a safety-deposit box, you may need a court order to open it. (See "Don't take your passwords to the grave.")
Change the name on the homeowners insurance policy to the estate. (See "Clearing out Dad's house.") Pay the mortgage and utility bills, and change the locks.
Prepare the house for sale. The costs of improvements can offset taxable gains from the sale.
Get a receipt for donated items. Use the Salvation Army's valuation guide. The American Society of Appraisers accredits professional personal-property appraisers.
TaxesNow, more about taxes. In 2007 and 2008, only the portion of an estate over $2 million is subject to federal estate tax. The threshold rises to $3.5 million in 2009 before the tax disappears in 2010. It will return in 2011 with a $1 million threshold unless Congress decides otherwise.
According to the IRS, only the wealthiest 2% pay federal estate tax. Some states have an estate tax as well as inheritance tax paid by heirs. (See "The 'death tax' is far from dead.")
Assets left to a spouse aren't included in the taxable estate. Other deductions include charitable gifts, debt, funeral expenses and the cost of settling the estate. (See the IRS's Estate Tax Questions.)
Estate-tax obligations can be reduced in several ways, including a bypass trust, an irrevocable-living trust, a life insurance trust and a charitable-remainder trust. (See Fast Answers: Retirement & Wills.)
Still breathing?What if you're alive but unable to make decisions? (See "3 legal papers you shouldn't live without.")
Prepare a durable power of attorney for finances, a living will and, because living wills aren't always enforceable, a proxy for health care. (See "3 all-too-common flaws of living wills.") Also consider a living trust.
Finally, know your rights when you're planning a funeral.
Read the Federal Trade Commission's Funerals: A Consumer Guide (.pdf file) and visit the Funeral Consumers Alliance Web site.
Save on expenses with direct cremation. (See "Plan a funeral for $800 or less.")
Published Oct. 23, 2007
By MSN Money staff
Even though most estates won't owe Uncle Sam, estate planning is essential for protecting you and your loved ones.
Most important? Providing for minor children. Your will should name both a guardian and a financial trustee for your kids in case you and your spouse die. (See "14 mistakes not to make with your will.")
To provide checks and balances, the guardian and the trustee should not be the same person.
Don't name a couple as guardian. They could split up or disagree about what's right for your child. (See "Who will take care of your kids if you die?")
Your child's other parent, even if you're divorced, will get custody if you die, unless that person is unfit because of mental illness or addiction.
Your willWhat else should -- and shouldn't -- be in a will? If you don't designate beneficiaries, the state will decide how to split up your estate, which can be time-consuming.
A simultaneous death clause will pass your estate to your children if your spouse dies shortly after you do.
Many states require that a third or half of your estate goes to your spouse, even if your will specifies a smaller share.
If you want children from a prior marriage to benefit from your estate, don't leave everything to your current spouse. A bypass trust provides regular income for a surviving spouse until death. Then the assets go to the children.
If you want to disinherit a child, spell that out in the will.
Avoid tying bequests to an heir's behavior. (See "6 tips to ensure your last wishes.") A testamentary trust or spendthrift trust in the will can control how money is distributed so an irresponsible heir can't blow it all at once.
Keep current the designated beneficiaries on retirement and life insurance accounts so those assets don't become a part of your will. A 401(k) automatically passes to the surviving spouse unless that spouse has signed a waiver.
Consider simplifying your will by giving away assets before you die, holding them in joint tenancy or transferring ownership to a trust. You can gift as much as $12,000 annually to as many people as you want, and you can pay someone's education and medical expenses directly to the providing institution, without triggering federal gift tax. See IRS Publication 950 (.pdf file).
Review your will -- and life insurance -- after major life changes. (See "Remarriage means revising your estate plans.") If you remarry, consider a prenuptial agreement. (See "Late-in-life marriages worry heirs.") If you move, remember that estate laws vary from state to state.
Name an executor and a backup. (See "12 easy steps to preparing your estate plan.")
Fulfilling your final wishesAn executor is responsible for valuing assets, paying off debts and taxes, and distributing what's left in accordance with the will. (See "Executors can inherit an unholy mess.")
File the will for probate, which is a court review of the will, in a timely fashion, usually 30 days. (State laws vary on the timing, as well as the size of estate subject to probate.)
Search the decedent's home thoroughly. Important documents and valuables could be hidden in dresser drawers or old shoes. Hopefully, financial records, including computer passwords and PINs, are in one secure location. If they're in a safety-deposit box, you may need a court order to open it. (See "Don't take your passwords to the grave.")
Change the name on the homeowners insurance policy to the estate. (See "Clearing out Dad's house.") Pay the mortgage and utility bills, and change the locks.
Prepare the house for sale. The costs of improvements can offset taxable gains from the sale.
Get a receipt for donated items. Use the Salvation Army's valuation guide. The American Society of Appraisers accredits professional personal-property appraisers.
TaxesNow, more about taxes. In 2007 and 2008, only the portion of an estate over $2 million is subject to federal estate tax. The threshold rises to $3.5 million in 2009 before the tax disappears in 2010. It will return in 2011 with a $1 million threshold unless Congress decides otherwise.
According to the IRS, only the wealthiest 2% pay federal estate tax. Some states have an estate tax as well as inheritance tax paid by heirs. (See "The 'death tax' is far from dead.")
Assets left to a spouse aren't included in the taxable estate. Other deductions include charitable gifts, debt, funeral expenses and the cost of settling the estate. (See the IRS's Estate Tax Questions.)
Estate-tax obligations can be reduced in several ways, including a bypass trust, an irrevocable-living trust, a life insurance trust and a charitable-remainder trust. (See Fast Answers: Retirement & Wills.)
Still breathing?What if you're alive but unable to make decisions? (See "3 legal papers you shouldn't live without.")
Prepare a durable power of attorney for finances, a living will and, because living wills aren't always enforceable, a proxy for health care. (See "3 all-too-common flaws of living wills.") Also consider a living trust.
Finally, know your rights when you're planning a funeral.
Read the Federal Trade Commission's Funerals: A Consumer Guide (.pdf file) and visit the Funeral Consumers Alliance Web site.
Save on expenses with direct cremation. (See "Plan a funeral for $800 or less.")
Published Oct. 23, 2007
Saturday, October 13, 2007
The right IRA for you
The right IRA for you
A Roth seems like the obvious choice over a traditional IRA since it has tax-free withdrawals. Not always, says Walter Updegrave.
By Walter Updegrave, Money Magazine senior editor
October 8 2007: 4:12 PM EDT
Sign up for the Ask the Expert e-mail newsletter
NEW YORK (Money) -- Question: If you contribute to a traditional IRA, after many years most of your account value will be in the form of investment earnings, which are taxable when you withdraw them. With a Roth, on the other hand, your balance will be tax-free. So it seems to me that the advantage of tax-free withdrawals from the Roth in the future greatly outweighs any tax-deduction benefit you get from a traditional IRA. Doesn't that make the Roth a better deal? - Daniel Siroky
Answer: A lot of people aren't quite sure how to assess the value of contributing to a traditional IRA vs. doing a Roth. That's not surprising, given the number of factors that can affect which is the better choice for a given person in a given circumstance.
More from Money Magazine
Harvest a rich 401(k)
Retire Rich: 13 myths
Do it now: Get on track for retirement
Best Places to Live
Current Issue
Subscribe to Money
When do you need the money? 3 - 5 years5 - 10 years10+ years
How much risk can you handle? Not much at allA reasonable amountAs much as possible
How flexible are you? If I miss my goal by a year or two, I'll still be okay. I can't afford to miss my target.
During market sell-offs, do you See an opportunity to buy more stocks Sell stocks thinking things will only get worse Do nothing
Video
More video
Money Magazine's Walter Updegrave gives advice on things you can do right now to ensure you are saving enough for retirement.
Play video
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Generally, I think having at least some money in a Roth IRA (or Roth 401(k), if that option is available to you) is good idea for several reasons. But before I get to them, I'd like to step back and explain how both traditional and Roth IRAs work in a way that, I hope, will give you and others a better understanding of them and help you decide which type to fund.
I'll start by stating a premise that many people overlook or simply don't understand about traditional and Roth IRAs - namely, that theoretically at least, they're equal in terms of the tax advantages they offer. This isn't immediately apparent. And I've talked to many people, including advisers, who don't seem to get this. But I think a little example will show you what I mean.
Shopping for retirement funds
Let's say you've got $4,000 that you can put into either a traditional or Roth IRA. (The maximum IRA contribution for this year is $4,000, plus $1,000 if you're 50 or older; next year, the max goes to $5,000, plus $1,000). And let's assume that you'll earn 8 percent a year on your contribution for 20 years.
If you invest your four grand in the Roth, you'll have $18,644 in your account after 20 years. And, assuming you meet the withdrawal criteria, every cent of that money will be tax-free. If you put the $4,000 in a traditional IRA, you'll also have $18,644 after 20 years. But you'll owe tax on withdrawals. So if you're in the 25 percent tax bracket, your balance is worth only $13,983 after taxes, much less than the Roth.
But hold on. You also get a tax deduction with the traditional IRA. So to make the comparison even, you've got to factor in the value of that deduction. If you're in the 25 percent tax bracket, a $4,000 deduction saves you $1,000. If you invest that $1,000 and earn 8 percent for 20 years, you end up with $4,661. Add that to the traditional IRA's after-tax balance of $13,983, and you end up with $18,644 - exactly what you've got in the Roth.
Remember, though, I said the traditional IRA and Roth IRA are theoretically equal. In the real world, even if you were disciplined enough to invest your $1,000 savings from the traditional IRA's tax deduction, you would have to invest that money in a taxable account since you had already reached the annual IRA contribution limit.
So you won't get an 8 percent return a year after taxes. You'll get something less than that. Which means your $1,000 will grow into something less than $4,661. Which means that even after factoring in the value of your traditional IRA's deduction, the Roth IRA still comes out ahead.
So all things being equal, the Roth has an advantage. It effectively allows you to shelter more money from taxes. Congress could have adjusted for this by setting a lower contribution ceiling for Roths, essentially lowering the Roth limit as you move into higher tax brackets. But it didn't.
An IRA for you - and your spouse too
Ah, but let's not be so quick to assume that just because the Roth has this advantage that it's automatically the better deal. In fact, reality can intrude again in a way that can whittle down or even eliminate the Roth's advantage. How? Well, it comes down to tax rates.
When I compared a Roth to a traditional IRA in the example above, I assumed that you were in the same tax bracket, 25 percent, when you withdrew your money as you were when you contributed to it. But what if everything in the scenarios I described above remained the same, except that you dropped to, say, the 15 percent bracket in retirement when you were ready to dip into your IRA accounts?
Well, in that case, you would have $15,847 ($18,644 minus 15 percent, or $2,797 for taxes) after-tax in your traditional IRA, which is more than the $13,983 you had with a 25 percent tax rate. That would leave you just $2,797 short of the Roth.
That means as long you earned roughly 5.3 percent or more annually after-tax on your $1,000 tax-deduction savings - or, in other words, as long as you gave up less than a third of your annual return to taxes, which I think is doable if you invest in something reasonably tax-efficient like an index fund or tax-managed mutual fund - then you would come out ahead in the traditional IRA rather than the Roth.
In short, the tax rates you face prior to and at the time you withdraw your money can also determine whether a traditional IRA or Roth is a better deal.
Generally, if you expect to be in a lower tax bracket at retirement than you were when you made the contribution, then the traditional IRA is the better deal since you're effectively avoiding tax on your contribution and earnings when the tax rate is higher and paying it later when the rate is lower.
If you expect to be in a higher bracket when you withdraw the money, then Roth is the better choice because you're paying tax at a lower rate and avoiding tax when the rate would be higher.
Retirement savings doomed by high fees
And if you expect to stay in the same bracket, the Roth is the better choice because of its inherent advantage of effectively sheltering more money. As a practical matter, however, we can't always know whether we'll be in a higher, lower or the same tax bracket in the future.
Most people probably expect that their taxable income will fall in retirement, dropping them to a lower tax rate. But if you save like a demon and have tons of money in tax-deferred accounts like a 401(k), the withdrawals could push you into a higher bracket, at least in some years. And, of course, there's always the possibility that Congress could raise rates in the years ahead.
Which brings me back to my position that I think it's a good idea for most people to have at least some money in a Roth. Most people are likely to have the bulk of their retirement savings in a regular 401(k), which means withdrawals will be taxable (except, of course, any nondeductible contributions, if you made them). So a Roth provides a way of diversifying your tax exposure and gives you more flexibility for managing withdrawals (and your tax bill) in retirement.
If it appears you're about to move into a higher bracket in a given year in retirement, for example, you can pull tax-free money from your Roth. But there are also other reasons to do a Roth. Whether you want to or not, you've got to begin making required minimum draws from traditional IRAs after reaching age 70 1/2.
When to cash in your IRA
With a Roth, however, you can leave your money in there to compound tax free as long as you want - and even give the gift of tax-free returns to your heirs. And unlike withdrawals from IRAs and 401(k)s, the money you pull from a Roth isn't counted in determining whether any of your Social Security payments are taxed. So having access to a Roth could help keep the IRS's mitts off your Social Security benefits. (To see whether your Social Security benefits are likely to be taxed, click here.)
To sum up, it's tough to say whether a traditional IRA or Roth is always a better deal for a given person. But for the reasons I've laid out in this column, I believe it's a good idea for everyone to consider putting at least some money in a Roth, whether you do so through regular annual contributions, converting a regular IRA to a Roth or, if those routes are out, doing a nondeductible IRA that you later convert.
Even if it turns out in retrospect that the Roth wasn't the best deal, having access to a pot of tax-free cash can still give you peace of mind and a bit of maneuvering room in retirement.
A Roth seems like the obvious choice over a traditional IRA since it has tax-free withdrawals. Not always, says Walter Updegrave.
By Walter Updegrave, Money Magazine senior editor
October 8 2007: 4:12 PM EDT
Sign up for the Ask the Expert e-mail newsletter
NEW YORK (Money) -- Question: If you contribute to a traditional IRA, after many years most of your account value will be in the form of investment earnings, which are taxable when you withdraw them. With a Roth, on the other hand, your balance will be tax-free. So it seems to me that the advantage of tax-free withdrawals from the Roth in the future greatly outweighs any tax-deduction benefit you get from a traditional IRA. Doesn't that make the Roth a better deal? - Daniel Siroky
Answer: A lot of people aren't quite sure how to assess the value of contributing to a traditional IRA vs. doing a Roth. That's not surprising, given the number of factors that can affect which is the better choice for a given person in a given circumstance.
More from Money Magazine
Harvest a rich 401(k)
Retire Rich: 13 myths
Do it now: Get on track for retirement
Best Places to Live
Current Issue
Subscribe to Money
When do you need the money? 3 - 5 years5 - 10 years10+ years
How much risk can you handle? Not much at allA reasonable amountAs much as possible
How flexible are you? If I miss my goal by a year or two, I'll still be okay. I can't afford to miss my target.
During market sell-offs, do you See an opportunity to buy more stocks Sell stocks thinking things will only get worse Do nothing
Video
More video
Money Magazine's Walter Updegrave gives advice on things you can do right now to ensure you are saving enough for retirement.
Play video
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Generally, I think having at least some money in a Roth IRA (or Roth 401(k), if that option is available to you) is good idea for several reasons. But before I get to them, I'd like to step back and explain how both traditional and Roth IRAs work in a way that, I hope, will give you and others a better understanding of them and help you decide which type to fund.
I'll start by stating a premise that many people overlook or simply don't understand about traditional and Roth IRAs - namely, that theoretically at least, they're equal in terms of the tax advantages they offer. This isn't immediately apparent. And I've talked to many people, including advisers, who don't seem to get this. But I think a little example will show you what I mean.
Shopping for retirement funds
Let's say you've got $4,000 that you can put into either a traditional or Roth IRA. (The maximum IRA contribution for this year is $4,000, plus $1,000 if you're 50 or older; next year, the max goes to $5,000, plus $1,000). And let's assume that you'll earn 8 percent a year on your contribution for 20 years.
If you invest your four grand in the Roth, you'll have $18,644 in your account after 20 years. And, assuming you meet the withdrawal criteria, every cent of that money will be tax-free. If you put the $4,000 in a traditional IRA, you'll also have $18,644 after 20 years. But you'll owe tax on withdrawals. So if you're in the 25 percent tax bracket, your balance is worth only $13,983 after taxes, much less than the Roth.
But hold on. You also get a tax deduction with the traditional IRA. So to make the comparison even, you've got to factor in the value of that deduction. If you're in the 25 percent tax bracket, a $4,000 deduction saves you $1,000. If you invest that $1,000 and earn 8 percent for 20 years, you end up with $4,661. Add that to the traditional IRA's after-tax balance of $13,983, and you end up with $18,644 - exactly what you've got in the Roth.
Remember, though, I said the traditional IRA and Roth IRA are theoretically equal. In the real world, even if you were disciplined enough to invest your $1,000 savings from the traditional IRA's tax deduction, you would have to invest that money in a taxable account since you had already reached the annual IRA contribution limit.
So you won't get an 8 percent return a year after taxes. You'll get something less than that. Which means your $1,000 will grow into something less than $4,661. Which means that even after factoring in the value of your traditional IRA's deduction, the Roth IRA still comes out ahead.
So all things being equal, the Roth has an advantage. It effectively allows you to shelter more money from taxes. Congress could have adjusted for this by setting a lower contribution ceiling for Roths, essentially lowering the Roth limit as you move into higher tax brackets. But it didn't.
An IRA for you - and your spouse too
Ah, but let's not be so quick to assume that just because the Roth has this advantage that it's automatically the better deal. In fact, reality can intrude again in a way that can whittle down or even eliminate the Roth's advantage. How? Well, it comes down to tax rates.
When I compared a Roth to a traditional IRA in the example above, I assumed that you were in the same tax bracket, 25 percent, when you withdrew your money as you were when you contributed to it. But what if everything in the scenarios I described above remained the same, except that you dropped to, say, the 15 percent bracket in retirement when you were ready to dip into your IRA accounts?
Well, in that case, you would have $15,847 ($18,644 minus 15 percent, or $2,797 for taxes) after-tax in your traditional IRA, which is more than the $13,983 you had with a 25 percent tax rate. That would leave you just $2,797 short of the Roth.
That means as long you earned roughly 5.3 percent or more annually after-tax on your $1,000 tax-deduction savings - or, in other words, as long as you gave up less than a third of your annual return to taxes, which I think is doable if you invest in something reasonably tax-efficient like an index fund or tax-managed mutual fund - then you would come out ahead in the traditional IRA rather than the Roth.
In short, the tax rates you face prior to and at the time you withdraw your money can also determine whether a traditional IRA or Roth is a better deal.
Generally, if you expect to be in a lower tax bracket at retirement than you were when you made the contribution, then the traditional IRA is the better deal since you're effectively avoiding tax on your contribution and earnings when the tax rate is higher and paying it later when the rate is lower.
If you expect to be in a higher bracket when you withdraw the money, then Roth is the better choice because you're paying tax at a lower rate and avoiding tax when the rate would be higher.
Retirement savings doomed by high fees
And if you expect to stay in the same bracket, the Roth is the better choice because of its inherent advantage of effectively sheltering more money. As a practical matter, however, we can't always know whether we'll be in a higher, lower or the same tax bracket in the future.
Most people probably expect that their taxable income will fall in retirement, dropping them to a lower tax rate. But if you save like a demon and have tons of money in tax-deferred accounts like a 401(k), the withdrawals could push you into a higher bracket, at least in some years. And, of course, there's always the possibility that Congress could raise rates in the years ahead.
Which brings me back to my position that I think it's a good idea for most people to have at least some money in a Roth. Most people are likely to have the bulk of their retirement savings in a regular 401(k), which means withdrawals will be taxable (except, of course, any nondeductible contributions, if you made them). So a Roth provides a way of diversifying your tax exposure and gives you more flexibility for managing withdrawals (and your tax bill) in retirement.
If it appears you're about to move into a higher bracket in a given year in retirement, for example, you can pull tax-free money from your Roth. But there are also other reasons to do a Roth. Whether you want to or not, you've got to begin making required minimum draws from traditional IRAs after reaching age 70 1/2.
When to cash in your IRA
With a Roth, however, you can leave your money in there to compound tax free as long as you want - and even give the gift of tax-free returns to your heirs. And unlike withdrawals from IRAs and 401(k)s, the money you pull from a Roth isn't counted in determining whether any of your Social Security payments are taxed. So having access to a Roth could help keep the IRS's mitts off your Social Security benefits. (To see whether your Social Security benefits are likely to be taxed, click here.)
To sum up, it's tough to say whether a traditional IRA or Roth is always a better deal for a given person. But for the reasons I've laid out in this column, I believe it's a good idea for everyone to consider putting at least some money in a Roth, whether you do so through regular annual contributions, converting a regular IRA to a Roth or, if those routes are out, doing a nondeductible IRA that you later convert.
Even if it turns out in retrospect that the Roth wasn't the best deal, having access to a pot of tax-free cash can still give you peace of mind and a bit of maneuvering room in retirement.
Harvest a rich 401(k)
Harvest a rich 401(k)
Would you like your retirement income guaranteed or tax-free? That's the choice you get with two new 401(k) investment options.
By Janice Revell, Money Magazine senior writer
October 9 2007: 8:38 AM EDT
(Money Magazine) -- From the outset, the 401(k) plan has been all about accumulating money, and when you think about your plan during your working life, you concentrate on how much to contribute and what mutual funds to invest in.
Unless you're retired, you probably haven't a clue how you'll withdraw your money, and you've never been offered any official guidance on how to convert your savings into retirement income.
More from Money Magazine
Harvest a rich 401(k)
Retire Rich: 13 myths
Do it now: Get on track for retirement
Best Places to Live
Current Issue
Subscribe to Money
Retire Rich
13 retirement myths
Make your money last
Best places to retire
How to cash in your 401(k)
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Well, that's changing.
Recently it has been dawning on the folks who design 401(k)s that the ultimate goal of the plans is to provide a living income in retirement. And that the best time to start planning for that eventuality is when you put the money in. The result is two new 401(k) investment options that may show up in your plan soon.
A new chance for tax-free income
When you tap your 401(k), Uncle Sam gets the first bite: Your withdrawals are taxed at ordinary income rates, which today run as high as 35%.
The new Roth 401(k) changes that. Since Congress gave the Roth a permanent green light in 2006, a growing number of companies have started offering employees a choice between a regular 401(k) plan and a Roth.
Pamela Hess, director of retirement research at Hewitt Associates, estimates that about 25% of companies have already adopted the Roth 401(k), with more to come. "In a couple of years I think we'll see the majority of plans offering it," says Hess.
The Roth 401(k) is a mirror image of a regular 401(k). Instead of getting an up-front tax break on your contributions and an income tax bill on your withdrawals, you pay tax on the money you contribute but none on the money you take out.
You can contribute to both a regular and a Roth 401(k) in any given year, as long as your total contributions don't exceed the annual limit ($15,500 for 2007 or $20,500 if you are 50 or older).
Each version will come with the same investment choices, but if you decide to invest in both a Roth and a regular 401(k), your company will set up a separate account for each.
The Verdict It's pretty simple: For most people, the Roth 401(k) is the better choice. If you're just starting your career, it's practically a slam dunk, says Don Weigandt, an adviser at J.P. Morgan's private bank.
Yes, you'll forfeit the up-front tax savings. But when you retire decades from now, you'll almost certainly be in a higher bracket, making the Roth's tax-free withdrawals far more valuable than any deduction today.
Even if you're mid-career, the Roth is likely your best bet. Here's why: Suppose you're earning a low-six-figure income and you contribute $15,500 to your 401(k) this year. Assume further that you'll earn an 8% annual investment return and that you'll be in the 28% federal tax bracket both before and after retirement. Put your money in a Roth 401(k) and you'll end up with $72,245 tax-free in 20 years.
Now suppose that you put the same $15,500 in a regular 401(k) instead. In 20 years the plan will net you $52,016 after you've paid taxes on the withdrawal - or $20,229 less than you'd have in the Roth.
But when you contributed, you also got to shelter $15,500 from taxes, which in this case gave you $4,340 more in take-home pay. (The lack of that tax break is why you'll see your paycheck shrink if you switch to a Roth.) If you were disciplined enough to invest that extra money, you'd still fall short of the Roth's total. Why? Because to close the gap you'd need to earn 8% after taxes - a tall order over time.
Still, a regular 401(k) can win out in some cases. If you're close to retirement and fairly certain that your income will drop noticeably once you stop working, skip the Roth. Likewise, if you plan to move from a high-income-tax state like California or Minnesota to one with low (or no) income taxes, such as Florida or Nevada, nab the tax savings today.
Not sure where you'll stand? Use the Roth calculator at dinkytown.com. Or hedge your bets by splitting your money between a regular and a Roth 401(k). Bear in mind that your employer match will be in pretax dollars and taxed at withdrawal no matter which 401(k) you choose.
A way to collect a predictable paycheck
If you want guaranteed income in retirement, you can buy an immediate fixed annuity when you stop working and get a check a month for life. Or with a new 401(k) option known as a fixed deferred annuity, you can put together that check bit by bit throughout your career.
With these options - recently introduced by insurers like MetLife and The Hartford - each of your 401(k) contributions buys a dollar amount of retirement income, which varies based on your age and interest rates when you invest.
For every $100 a 40-year-old saves today in MetLife's Personal Pension Builder, for example, he would receive $26.40 a year for life starting at age 65. To date, only a handful of employers have rolled out such annuities, but they are expected to be widely available in a few years.
What's to like Converting 25% or so of your savings into a predictable income can keep you from outliving your money (for more on this strategy, see "Make Your Money Last a Lifetime"). Right now the only way to do that is to spend a hundred thousand dollars or more on an immediate annuity at retirement.
Only problem: It's psychologically impossible to do. When employers offer retiring workers the chance to buy an immediate annuity, according to Hewitt, only 1% take them up on it. That's understandable. "Who wants to part with $100,000 or $200,000?" says Jody Strakosch, national director for MetLife Institutional Income Annuities.
That's where these new deferred annuities come in. By letting you annuitize in small increments over time, they help you get over that psychological stumbling block.
Buying an annuity gradually can also add up to a better deal than you would get by annuitizing at age 65. "One of the advantages is that you lock in an income stream that might cost you a lot more later on," says Moshe Milevsky, an annuities expert at York University in Toronto.
The most important variable when you buy an annuity is interest rates: The higher rates are, the greater your eventual income will be, and vice versa. So building an annuity over time can blunt the risk of annuitizing all at once when interest rates might be low.
Annuities have also been getting more expensive in general because Americans are living longer. Milevsky estimates that increased life expectancies have boosted the cost by some 20% over the past two decades. Start buying now and you may pay less than you would when more longevity gains push prices up even more.
What's not to like The biggest glitch with fixed deferred annuities is that they aren't portable. If you change jobs, you can't roll them into an IRA and keep up contributions, thus defeating the advantage of investing gradually over time. And odds are good that your next employer's 401(k) doesn't offer the same annuity yet.
The verdict If you think you'll be staying with your employer for several more years and you don't have a traditional pension, 401(k) annuities are worth a look. Allocate no more than 20% to them, in lieu of some of your fixed-income holdings. Put the rest of your 401(k) to work in low-cost stock and bond funds. That way you'll be reaping the fruits of both growth and guaranteed income when 401(k) harvest time arrives.
Would you like your retirement income guaranteed or tax-free? That's the choice you get with two new 401(k) investment options.
By Janice Revell, Money Magazine senior writer
October 9 2007: 8:38 AM EDT
(Money Magazine) -- From the outset, the 401(k) plan has been all about accumulating money, and when you think about your plan during your working life, you concentrate on how much to contribute and what mutual funds to invest in.
Unless you're retired, you probably haven't a clue how you'll withdraw your money, and you've never been offered any official guidance on how to convert your savings into retirement income.
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Well, that's changing.
Recently it has been dawning on the folks who design 401(k)s that the ultimate goal of the plans is to provide a living income in retirement. And that the best time to start planning for that eventuality is when you put the money in. The result is two new 401(k) investment options that may show up in your plan soon.
A new chance for tax-free income
When you tap your 401(k), Uncle Sam gets the first bite: Your withdrawals are taxed at ordinary income rates, which today run as high as 35%.
The new Roth 401(k) changes that. Since Congress gave the Roth a permanent green light in 2006, a growing number of companies have started offering employees a choice between a regular 401(k) plan and a Roth.
Pamela Hess, director of retirement research at Hewitt Associates, estimates that about 25% of companies have already adopted the Roth 401(k), with more to come. "In a couple of years I think we'll see the majority of plans offering it," says Hess.
The Roth 401(k) is a mirror image of a regular 401(k). Instead of getting an up-front tax break on your contributions and an income tax bill on your withdrawals, you pay tax on the money you contribute but none on the money you take out.
You can contribute to both a regular and a Roth 401(k) in any given year, as long as your total contributions don't exceed the annual limit ($15,500 for 2007 or $20,500 if you are 50 or older).
Each version will come with the same investment choices, but if you decide to invest in both a Roth and a regular 401(k), your company will set up a separate account for each.
The Verdict It's pretty simple: For most people, the Roth 401(k) is the better choice. If you're just starting your career, it's practically a slam dunk, says Don Weigandt, an adviser at J.P. Morgan's private bank.
Yes, you'll forfeit the up-front tax savings. But when you retire decades from now, you'll almost certainly be in a higher bracket, making the Roth's tax-free withdrawals far more valuable than any deduction today.
Even if you're mid-career, the Roth is likely your best bet. Here's why: Suppose you're earning a low-six-figure income and you contribute $15,500 to your 401(k) this year. Assume further that you'll earn an 8% annual investment return and that you'll be in the 28% federal tax bracket both before and after retirement. Put your money in a Roth 401(k) and you'll end up with $72,245 tax-free in 20 years.
Now suppose that you put the same $15,500 in a regular 401(k) instead. In 20 years the plan will net you $52,016 after you've paid taxes on the withdrawal - or $20,229 less than you'd have in the Roth.
But when you contributed, you also got to shelter $15,500 from taxes, which in this case gave you $4,340 more in take-home pay. (The lack of that tax break is why you'll see your paycheck shrink if you switch to a Roth.) If you were disciplined enough to invest that extra money, you'd still fall short of the Roth's total. Why? Because to close the gap you'd need to earn 8% after taxes - a tall order over time.
Still, a regular 401(k) can win out in some cases. If you're close to retirement and fairly certain that your income will drop noticeably once you stop working, skip the Roth. Likewise, if you plan to move from a high-income-tax state like California or Minnesota to one with low (or no) income taxes, such as Florida or Nevada, nab the tax savings today.
Not sure where you'll stand? Use the Roth calculator at dinkytown.com. Or hedge your bets by splitting your money between a regular and a Roth 401(k). Bear in mind that your employer match will be in pretax dollars and taxed at withdrawal no matter which 401(k) you choose.
A way to collect a predictable paycheck
If you want guaranteed income in retirement, you can buy an immediate fixed annuity when you stop working and get a check a month for life. Or with a new 401(k) option known as a fixed deferred annuity, you can put together that check bit by bit throughout your career.
With these options - recently introduced by insurers like MetLife and The Hartford - each of your 401(k) contributions buys a dollar amount of retirement income, which varies based on your age and interest rates when you invest.
For every $100 a 40-year-old saves today in MetLife's Personal Pension Builder, for example, he would receive $26.40 a year for life starting at age 65. To date, only a handful of employers have rolled out such annuities, but they are expected to be widely available in a few years.
What's to like Converting 25% or so of your savings into a predictable income can keep you from outliving your money (for more on this strategy, see "Make Your Money Last a Lifetime"). Right now the only way to do that is to spend a hundred thousand dollars or more on an immediate annuity at retirement.
Only problem: It's psychologically impossible to do. When employers offer retiring workers the chance to buy an immediate annuity, according to Hewitt, only 1% take them up on it. That's understandable. "Who wants to part with $100,000 or $200,000?" says Jody Strakosch, national director for MetLife Institutional Income Annuities.
That's where these new deferred annuities come in. By letting you annuitize in small increments over time, they help you get over that psychological stumbling block.
Buying an annuity gradually can also add up to a better deal than you would get by annuitizing at age 65. "One of the advantages is that you lock in an income stream that might cost you a lot more later on," says Moshe Milevsky, an annuities expert at York University in Toronto.
The most important variable when you buy an annuity is interest rates: The higher rates are, the greater your eventual income will be, and vice versa. So building an annuity over time can blunt the risk of annuitizing all at once when interest rates might be low.
Annuities have also been getting more expensive in general because Americans are living longer. Milevsky estimates that increased life expectancies have boosted the cost by some 20% over the past two decades. Start buying now and you may pay less than you would when more longevity gains push prices up even more.
What's not to like The biggest glitch with fixed deferred annuities is that they aren't portable. If you change jobs, you can't roll them into an IRA and keep up contributions, thus defeating the advantage of investing gradually over time. And odds are good that your next employer's 401(k) doesn't offer the same annuity yet.
The verdict If you think you'll be staying with your employer for several more years and you don't have a traditional pension, 401(k) annuities are worth a look. Allocate no more than 20% to them, in lieu of some of your fixed-income holdings. Put the rest of your 401(k) to work in low-cost stock and bond funds. That way you'll be reaping the fruits of both growth and guaranteed income when 401(k) harvest time arrives.
Wednesday, October 3, 2007
Signs of high debt
Don't Let Debt Get You DownLook for the six telltale symptoms that your debt load may be reaching critical mass. Then, try these remedies to get on top of the problem.By Thomas M. Anderson October 2, 2007
EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.
Credit-card debt isn't all bad. A little can get you out of a tight financial jam -- but a lot can lead to its own money emergency.
How can you tell if your debt load is nearing a critical level? Look for these symptoms:
You're unable to make the minimum payments on your credit cards
You borrow from one card to pay another
You're frequently charged fees for late payments or going over your credit limit
You use plastic out of necessity rather than convenience
You forgo contributions to savings and retirement plans because of your debt
You devote more than 20% of your take-home pay to making payments on credit cards and loans other than your mortgage.
RELATED LINKS
How I Kicked the Credit-Card Debt Habit
VIDEO: Get Out of Debt Faster
What It'll Take to Pay Off Your Balance
If you find yourself in any of those situations, don't panic. Finding a cure may be as simple as working out better terms with your creditors, consolidating your debt on a credit card that carries a low interest rate or, if necessary, taking out a home-equity loan.
Need outside guidance? A reputable credit counselor can help you craft a debt-management plan that works for you. And if all else fails, you can declare bankruptcy.
For Juan Salazar, the remedy was credit counseling. Salazar, 33, owns First Choice Paint & Body Shop, in Terrell, Tex. When he and his wife, Elizabeth, had their second child in 2004, they had no health insurance and paid most of their medical bills with credit cards. Once their debt totaled $25,000, it became too much for them to handle alone.
In 2005 the Salazars enlisted the help of the Consumer Credit Counseling Service of Greater Dallas, which consolidated their debt and lowered their interest rate. The agency also helped the Salazars cut back on their expenses and stick to a budget. "We wanted to try credit counseling before taking an extreme measure like filing for bankruptcy," says Juan. Now he and Elizabeth plan to be debt-free by 2009.
Grab a 0% offer
You can give yourself a respite by moving your balances to a card that charges 0% or another low introductory rate on balance transfers. To play this game, however, you have to keep tabs on the interest rate, your balance and the calendar. If the account isn't paid in full by the end of the introductory period, you may have to transfer your balance again to dodge an interest-rate spike.
You may also be able to take advantage of an offer that gives you a low fixed rate for the life of the debt. You'll have to compare that choice with the possibility that you might receive a better deal in the future. But it's often best to go with the certainty of a fixed rate rather than waiting for an offer that may never come.
One caveat to switching your balance: Juggling various credit offers can cause your credit score to drop because lenders take note when you apply for or open a number of accounts within a short period of time. To limit the damage to your credit score, keep existing accounts open when you move a balance to a card that offers a better deal. Closing an account reduces the average age of your accounts and increases the ratio of your outstanding debt to your available credit. Both of those factors will have a negative impact on your score. (Learn more about building a good credit score.)
Even as the air wheezes out of the housing bubble, consolidating your debts with a home-equity loan will get you an attractive fixed rate. Recently, rates have averaged about 8% for a home-equity loan and 9% for a variable-rate home-equity line of credit. And borrowing against your house comes with a bonus: Interest on up to $100,000 in home-equity debt is tax-deductible. (Shop for the best home-equity loan rates.)
The downside, of course, is that your house is on the line. To keep your roof over your head, it behooves you to pay off your outstanding debt and stop the flow of red ink.
Find a pro
When the Salazars knew their debt was out of control, they sought help from a credit-counseling agency. But finding a trustworthy agency and avoiding the industry's sharks can be treacherous.
A good credit counselor should give you advice on how to rein in your spending, as well as being able to craft a debt-management plan for paying off your creditors. Under such a plan, the counselor works with creditors to lower your interest rates or work out better repayment terms. You make a single monthly payment to the agency, which then pays your creditors. A counselor's services should be free or cost no more than a nominal fee.
Credit counselors often face a conflict of interest because much of their income comes from the payments they collect on behalf of creditors. In many cases, unscrupulous agencies ignore the advice aspect of their business and push clients into debt-management plans they can't afford, which eventually leads to bankruptcy. In other cases, credit counselors advise clients to delay bankruptcy -- which might be in a client's best interest—so agencies can continue to collect fees.
The Salazars chose the Consumer Credit Counseling Service of Greater Dallas because the agency had successfully assisted some of their friends. "We make monthly payments to the agency, and it disburses the money to our creditors in a way that pays down our debt the fastest," says Juan.
To vet counseling agencies in your area, contact the National Foundation for Credit Counseling (www.nfcc.org) -- of which the Consumer Credit Counseling Service, which has offices nationwide, is a member -- or the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org). Interview a few agencies, ask for references, and screen your picks with the Better Business Bureau.
Ask creditors for a break
Before you look for a credit counselor, try the do-it-yourself approach. You might be able to get immediate relief simply by haggling over fees and interest rates with your creditors.
Scott Bilker, founder of DebtSmart.com, isn't shy about trying to cut deals with his lenders. He often calls credit-card issuers to ask them to reduce fees, lower interest rates or increase rewards, and he estimates that his efforts have saved him tens of thousands of dollars. "Your best deals will come from the cards you already have," Bilker says.
Bargaining requires preparation and persistence. Know how much you spend with a particular card issuer and what terms you'd like to propose before you make the call, then be ready to act on any offer made over the phone. That gives you leverage when you negotiate, Bilker says. Use low-interest-rate offers you've received in the mail as an incentive for card issuers to adjust your rate and keep you as a customer.
If the first person you talk to says no, ask to speak to a supervisor and stay on the line. "People give up too easily," Bilker says. Learn more strategies to help you gain control of your debt.
Bankruptcy: A last resort
When all else fails, declaring bankruptcy may be an option. But the bankruptcy law, which was revised in 2005, makes it tougher for individuals to travel this route without a lawyer. An initial consultation should be free. You'll need to bring information about your expenses and sources of income, including pay stubs, tax returns, mortgage papers and documents that detail any unusual health-care or business expenses.
Filing for bankruptcy should be a last resort. Most negative information on your credit report expires after seven years, but a bankruptcy filing stays on your record for a decade. That financial black mark can make it difficult to get credit at a reasonable rate, buy a home, purchase life insurance and sometimes even get a job. (Learn how to rebuild your credit after declaring bankruptcy.)
EDITOR'S NOTE: This article is from Kiplinger's Success With Your Money special issue. Order your copy today.
Credit-card debt isn't all bad. A little can get you out of a tight financial jam -- but a lot can lead to its own money emergency.
How can you tell if your debt load is nearing a critical level? Look for these symptoms:
You're unable to make the minimum payments on your credit cards
You borrow from one card to pay another
You're frequently charged fees for late payments or going over your credit limit
You use plastic out of necessity rather than convenience
You forgo contributions to savings and retirement plans because of your debt
You devote more than 20% of your take-home pay to making payments on credit cards and loans other than your mortgage.
RELATED LINKS
How I Kicked the Credit-Card Debt Habit
VIDEO: Get Out of Debt Faster
What It'll Take to Pay Off Your Balance
If you find yourself in any of those situations, don't panic. Finding a cure may be as simple as working out better terms with your creditors, consolidating your debt on a credit card that carries a low interest rate or, if necessary, taking out a home-equity loan.
Need outside guidance? A reputable credit counselor can help you craft a debt-management plan that works for you. And if all else fails, you can declare bankruptcy.
For Juan Salazar, the remedy was credit counseling. Salazar, 33, owns First Choice Paint & Body Shop, in Terrell, Tex. When he and his wife, Elizabeth, had their second child in 2004, they had no health insurance and paid most of their medical bills with credit cards. Once their debt totaled $25,000, it became too much for them to handle alone.
In 2005 the Salazars enlisted the help of the Consumer Credit Counseling Service of Greater Dallas, which consolidated their debt and lowered their interest rate. The agency also helped the Salazars cut back on their expenses and stick to a budget. "We wanted to try credit counseling before taking an extreme measure like filing for bankruptcy," says Juan. Now he and Elizabeth plan to be debt-free by 2009.
Grab a 0% offer
You can give yourself a respite by moving your balances to a card that charges 0% or another low introductory rate on balance transfers. To play this game, however, you have to keep tabs on the interest rate, your balance and the calendar. If the account isn't paid in full by the end of the introductory period, you may have to transfer your balance again to dodge an interest-rate spike.
You may also be able to take advantage of an offer that gives you a low fixed rate for the life of the debt. You'll have to compare that choice with the possibility that you might receive a better deal in the future. But it's often best to go with the certainty of a fixed rate rather than waiting for an offer that may never come.
One caveat to switching your balance: Juggling various credit offers can cause your credit score to drop because lenders take note when you apply for or open a number of accounts within a short period of time. To limit the damage to your credit score, keep existing accounts open when you move a balance to a card that offers a better deal. Closing an account reduces the average age of your accounts and increases the ratio of your outstanding debt to your available credit. Both of those factors will have a negative impact on your score. (Learn more about building a good credit score.)
Even as the air wheezes out of the housing bubble, consolidating your debts with a home-equity loan will get you an attractive fixed rate. Recently, rates have averaged about 8% for a home-equity loan and 9% for a variable-rate home-equity line of credit. And borrowing against your house comes with a bonus: Interest on up to $100,000 in home-equity debt is tax-deductible. (Shop for the best home-equity loan rates.)
The downside, of course, is that your house is on the line. To keep your roof over your head, it behooves you to pay off your outstanding debt and stop the flow of red ink.
Find a pro
When the Salazars knew their debt was out of control, they sought help from a credit-counseling agency. But finding a trustworthy agency and avoiding the industry's sharks can be treacherous.
A good credit counselor should give you advice on how to rein in your spending, as well as being able to craft a debt-management plan for paying off your creditors. Under such a plan, the counselor works with creditors to lower your interest rates or work out better repayment terms. You make a single monthly payment to the agency, which then pays your creditors. A counselor's services should be free or cost no more than a nominal fee.
Credit counselors often face a conflict of interest because much of their income comes from the payments they collect on behalf of creditors. In many cases, unscrupulous agencies ignore the advice aspect of their business and push clients into debt-management plans they can't afford, which eventually leads to bankruptcy. In other cases, credit counselors advise clients to delay bankruptcy -- which might be in a client's best interest—so agencies can continue to collect fees.
The Salazars chose the Consumer Credit Counseling Service of Greater Dallas because the agency had successfully assisted some of their friends. "We make monthly payments to the agency, and it disburses the money to our creditors in a way that pays down our debt the fastest," says Juan.
To vet counseling agencies in your area, contact the National Foundation for Credit Counseling (www.nfcc.org) -- of which the Consumer Credit Counseling Service, which has offices nationwide, is a member -- or the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org). Interview a few agencies, ask for references, and screen your picks with the Better Business Bureau.
Ask creditors for a break
Before you look for a credit counselor, try the do-it-yourself approach. You might be able to get immediate relief simply by haggling over fees and interest rates with your creditors.
Scott Bilker, founder of DebtSmart.com, isn't shy about trying to cut deals with his lenders. He often calls credit-card issuers to ask them to reduce fees, lower interest rates or increase rewards, and he estimates that his efforts have saved him tens of thousands of dollars. "Your best deals will come from the cards you already have," Bilker says.
Bargaining requires preparation and persistence. Know how much you spend with a particular card issuer and what terms you'd like to propose before you make the call, then be ready to act on any offer made over the phone. That gives you leverage when you negotiate, Bilker says. Use low-interest-rate offers you've received in the mail as an incentive for card issuers to adjust your rate and keep you as a customer.
If the first person you talk to says no, ask to speak to a supervisor and stay on the line. "People give up too easily," Bilker says. Learn more strategies to help you gain control of your debt.
Bankruptcy: A last resort
When all else fails, declaring bankruptcy may be an option. But the bankruptcy law, which was revised in 2005, makes it tougher for individuals to travel this route without a lawyer. An initial consultation should be free. You'll need to bring information about your expenses and sources of income, including pay stubs, tax returns, mortgage papers and documents that detail any unusual health-care or business expenses.
Filing for bankruptcy should be a last resort. Most negative information on your credit report expires after seven years, but a bankruptcy filing stays on your record for a decade. That financial black mark can make it difficult to get credit at a reasonable rate, buy a home, purchase life insurance and sometimes even get a job. (Learn how to rebuild your credit after declaring bankruptcy.)
Tuesday, October 2, 2007
Roth conversions - 2010
Income Limits on Roths to ChangeThe law will allow higher-income people to convert their traditional IRAs to a Roth in 2010 and spread the tax bill over two years.By Kimberly Lankford October 1, 2007
When is the IRS allowing people to take two years to pay the taxes on a rollover from a traditional IRA to a Roth IRA?
If you convert a traditional IRA to a Roth in 2010, you'll be able to spread the tax bill over 2011 and 2012. That's just one piece of a tax-law change that will give higher-income people a back door into a Roth IRA in 2010.
To contribute to a Roth in 2007, your adjusted gross income must be less than $166,000 if married filing jointly; $114,000 for single filers. At those income levels, you can make only a partial contribution. You can only contribute the full $4,000 -- or $5,000 if you're 50 or older -- if you earn less than $156,000 if married; or $99,000 if single.
The income limits are even lower if you want to roll over money from a traditional IRA to a Roth. Now, you can only convert to a Roth if your adjusted gross income is below $100,000 -- whether married or single.
The $100,000 limit, however, will disappear in 2010. At that point, anyone can convert a traditional IRA to a Roth -- regardless of their income.
The new rules provide a great opportunity for people who earn too much money to qualify for a Roth IRA. You can start contributing to a traditional IRA now, then in 2010 you'll be able to convert the traditional IRA to a Roth.
At that point, you'll have to pay income taxes on your earnings and any tax-deductible contributions at your top rate (you can spread the tax bill over 2011 and 2012), but any earnings after that will come out tax-free in retirement after age 59½. With a Roth, you also won't have to take required minimum distributions at age 70½, and your heirs will inherit the Roth money income-tax free.
For more information about this tax law, see Congress Opens the Door to Roth IRAs for Everyone. For more information on Roths, see Everything You Need to Know About Roth IRAs and IRS Publication 590 Individual Retirement Arrangements.
When is the IRS allowing people to take two years to pay the taxes on a rollover from a traditional IRA to a Roth IRA?
If you convert a traditional IRA to a Roth in 2010, you'll be able to spread the tax bill over 2011 and 2012. That's just one piece of a tax-law change that will give higher-income people a back door into a Roth IRA in 2010.
To contribute to a Roth in 2007, your adjusted gross income must be less than $166,000 if married filing jointly; $114,000 for single filers. At those income levels, you can make only a partial contribution. You can only contribute the full $4,000 -- or $5,000 if you're 50 or older -- if you earn less than $156,000 if married; or $99,000 if single.
The income limits are even lower if you want to roll over money from a traditional IRA to a Roth. Now, you can only convert to a Roth if your adjusted gross income is below $100,000 -- whether married or single.
The $100,000 limit, however, will disappear in 2010. At that point, anyone can convert a traditional IRA to a Roth -- regardless of their income.
The new rules provide a great opportunity for people who earn too much money to qualify for a Roth IRA. You can start contributing to a traditional IRA now, then in 2010 you'll be able to convert the traditional IRA to a Roth.
At that point, you'll have to pay income taxes on your earnings and any tax-deductible contributions at your top rate (you can spread the tax bill over 2011 and 2012), but any earnings after that will come out tax-free in retirement after age 59½. With a Roth, you also won't have to take required minimum distributions at age 70½, and your heirs will inherit the Roth money income-tax free.
For more information about this tax law, see Congress Opens the Door to Roth IRAs for Everyone. For more information on Roths, see Everything You Need to Know About Roth IRAs and IRS Publication 590 Individual Retirement Arrangements.
Managing your credit score
NEW YORK (MarketWatch) -- If you've been ignoring your credit score, it's time to get your head out of the sand. That three-digit number may seem like an airy abstraction, but it has a very real impact on your life: credit scores are used to determine how much you pay for everything from your car loan to your cell phone and your home loan.
Here are seven ways to boost your score:
Pay punctually. Roughly 35% of your credit score is based on whether or not you make regular, on-time payments, according to The Motley Fool's Dayana Yochim. If you're strapped for cash and simply can't cover all your bills, try to limit the amount of accounts in arrears to one. "A history of late payments on several accounts will cause more damage than late payments on a single account," reports Yochim.
Request a "good faith adjustment." If you're normally diligent about making punctual payments, but find you've inadvertently missed your due date on a bill, try asking for a free pass, advises MSN Money's Liz Pulliam Weston. After you've settled your debt, call the lender and ask it to remove the late-payment information from your files. Not every company will do this, but they may be willing to work with you if you've been a good customer.
Ask collection agencies to "disappear" debt. If you've fallen badly behind and the debt collectors are baying at your door, try negotiating. Some collection agencies will agree to remove references to the debt from the credit-bureau files if you pay them off, according to CBS News.
Hold onto older cards. Fully 15% of your score is contingent on the length of your credit history, so try to hold on to older accounts. Warning: Keep those old cards active! A dormant card won't necessarily improve your credit score, regardless of how long you've had it.
Keep a good mix. Just like your investment portfolio, your credit score benefits from diversification -- 10% of your score is based on what types of credit you use, so try to keep a healthy mix of credit cards, retail accounts and other types of loans.
Limit new accounts. If you open a bunch of new accounts in quick succession your credit score may suffer. Why? You begin to look like more of a risk. When your credit limit suddenly shoots up, lenders begin to worry that you'll be tempted to run up big debt.
Watch your spending. The closer you inch toward your limit, the more nervous your lenders will become. To keep your score healthy, try to limit yourself to using no more than 50% of your available credit. Hint: If you are in danger of going over the 50% mark, CBS News suggests spreading out your debt on cards with high credit limits and low interest rates.
Marshall Loeb, former editor of Fortune, Money, and the Columbia Journalism Review, writes for MarketWatch.
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Here are seven ways to boost your score:
Pay punctually. Roughly 35% of your credit score is based on whether or not you make regular, on-time payments, according to The Motley Fool's Dayana Yochim. If you're strapped for cash and simply can't cover all your bills, try to limit the amount of accounts in arrears to one. "A history of late payments on several accounts will cause more damage than late payments on a single account," reports Yochim.
Request a "good faith adjustment." If you're normally diligent about making punctual payments, but find you've inadvertently missed your due date on a bill, try asking for a free pass, advises MSN Money's Liz Pulliam Weston. After you've settled your debt, call the lender and ask it to remove the late-payment information from your files. Not every company will do this, but they may be willing to work with you if you've been a good customer.
Ask collection agencies to "disappear" debt. If you've fallen badly behind and the debt collectors are baying at your door, try negotiating. Some collection agencies will agree to remove references to the debt from the credit-bureau files if you pay them off, according to CBS News.
Hold onto older cards. Fully 15% of your score is contingent on the length of your credit history, so try to hold on to older accounts. Warning: Keep those old cards active! A dormant card won't necessarily improve your credit score, regardless of how long you've had it.
Keep a good mix. Just like your investment portfolio, your credit score benefits from diversification -- 10% of your score is based on what types of credit you use, so try to keep a healthy mix of credit cards, retail accounts and other types of loans.
Limit new accounts. If you open a bunch of new accounts in quick succession your credit score may suffer. Why? You begin to look like more of a risk. When your credit limit suddenly shoots up, lenders begin to worry that you'll be tempted to run up big debt.
Watch your spending. The closer you inch toward your limit, the more nervous your lenders will become. To keep your score healthy, try to limit yourself to using no more than 50% of your available credit. Hint: If you are in danger of going over the 50% mark, CBS News suggests spreading out your debt on cards with high credit limits and low interest rates.
Marshall Loeb, former editor of Fortune, Money, and the Columbia Journalism Review, writes for MarketWatch.
var tcdacmd="dt";
Behavioral Finance
Can investors' 'broken brains' ever be 'fixed?'
Take these 'courses' and learn how you can repair your mind, get rich
By Paul B. Farrell, MarketWatch
Last Update: 6:52 PM ET Oct 1, 2007
ARROYO GRANDE, Calif. (MarketWatch) -- Want to learn how to harness your brain power and get rich? Well, folks, there are two basic minicourses covering the mysterious world of the investor's brain, also known as behavioral finance or neuroeconomics or just plain investment psychology.
Here are the two courses: First for beginners: "Behavioral Finance 101: The Myth of the Rational Investor." Second, the graduate level course, "Behavioral Finance 602: The Secret to Beating America's 95 Million Irrational Investors."
Focus on funds, ETFs
MarketWatch offers complete coverage of mutual funds and exchange-traded funds. Highlights: • Big changes for large-cap stocks• Quality controls bond funds• Emerging markets race higher• China, oil cheer ETF buyers • Fund managers go for growth Get our free Mutual Funds weekly
Take one course or both. Your choice will depend on how you answer this quirky question: "Can you fix a broken machine with broken tools?" Stick with me because your answer will reveal your chances of becoming one of America's 8 million millionaires.
First off, here's Course 101 in a nutshell, using a key passage from Money magazine columnist Jason Zweig's brilliant new book, "Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich:"
"Your brain is a superbly functioning machine, steering you away from danger while guiding you toward basic rewards like food, shelter and love ... But that brilliant machine can lead you astray when it comes to investing. You buy high only to sell low. You try to time the market. You follow the crowd. You make the same mistakes again. And again. How come?"
Stop. Notice two crucial neuroeconomics definitions: First, your brain is a "machine." Second, when investing, your brain is a "broken machine."
That's right, your brain is a saboteur. So the goal of Course 101 is fixing your broken machine (your brain). Warning: The saboteur remains, so you end up with a "less-broken machine," not a rational investing "machine." Why? Because your emotions run the rational brain. At best, you're a little "less irrational," but not rational.
Investors place too much faith in neuroeconomics. As Zweig points out, this new science gained credibility when Princeton University psychologist Daniel Kahneman won the Nobel Prize in Economics five years ago. Today neuroscience is "making stunning discoveries about how the brain evaluates rewards, sizes up risks and calculates probabilities."
Actually, Kahneman and other neuroscientists have been making discoveries for several decades, disproving Wall Street's bogus "rational investor" theory, Zweig says ,thanks to:
"The wonders of imaging technology [with which] we can observe the precise neural circuitry that switches on and off in your brain when you invest. Those pictures make it clear that your investing brain often drives you to do things that make no logical sense, but make perfect emotional sense."
You, the saboteur
Today experts looking at brain-images see that "your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind."
When you invest "you stir up some profound emotions," and "understanding how those feelings -- as a matter of biology -- affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor."
In a nutshell that's Course 101: Once you realize what "makes you tick" you will behave "less irrational" and become a rich investor. The goals of Course 101 are: (1) Become fully aware of your sabotaging behavior; (2) Follow neuroscience's new rules; (3) Behave "less irrational;" (4) Make more money playing the market.
And so, dear students, I urge you to round out your understanding of Course 101 by reading these works:
"Investment Madness," by Prof. John Nofsinger (2001) of Washington State University, a behavioral-finance guru who has written several key books on the field including, "The Psychology of Investing," a widely used textbook for professionals, and "Investment Greed," about the stock market scandals and others.
"Mind Over Money," by John Schott (1998), a Harvard Medical School psychiatrist, behavioral-finance expert and portfolio manager.
"Investment Therapy," by Richard Geist (2003), another Harvard Medical School psychiatrist and president of the Institute of Psychology and Investing.
"Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing" (2000), by Prof. Hersh Shefrin of the Santa Clara Business School, also editor of the three volume collection "Behavioral Finance."
Graduate school
Now for the second course: "Behavioral Finance 602: The Secret to Beating America's 95 Million Irrational Investors." The popular text is Yale economist Robert Shiller's "Irrational Exuberance," which was published just as the 1990s insanity peaked and collapsed into a three-year bear/recession.
Shiller says "irrational exuberance" is "wishful thinking on the part of investors that blinds us to the truth of our situation." And you can't "fix" it. Bull/bear cycles will forever drive markets to extreme highs (greed) and extreme lows (fear). Why? Because emotions, not rational behavior, drive Main Street investors.
We'll never become "less irrational" because trying to fix a "broken machine" with neuroscientific rules is a "wishful thinking" strategy, to use Shiller's description
So now you know how neuroscience differs in 101 versus 602. Neuroscience is a "broken tool" when used to help individual investors become "less irrational," the goal of 101. However, neuroscience is an extremely powerful tool when used by Wall Street insiders (bankers, portfolio managers, brokers, quants and their friends) as a weapon against America's 95 million investors, to manipulate, dominate and control them. Shiller puts it in simple terms:
"Deep down, people know that the market is highly priced, and they are uncomfortable about it. Most people I meet ... are puzzled ...We are unsure whether the market levels make any sense. ... We are unsure whether the high levels of the stock market might reflect unjustified optimism, an optimism that might pervade our thinking and affect many of our life decisions. We are unsure ..."
Cashing in on irrationality
Flash forward. Today, Shiller sees the cycles of greed, fear, overoptimism and panic again peak and collapse in the recent housing/credit bubble. Endless cycles of irrational exuberance will repeat again and again and again, ad infinitum. Why? Because investors really don't want to or cannot fix their broken machines.
But there is an even more sinister reason 101 doesn't work. And that's also the force driving "Behavioral Finance 602. Get this: Wall Street's insiders have been "taking" Course 101 for decades. They already know America's irrational investors will never become "less irrational."
Instead, hotshot neuroeconomists are developing computer models describing the irrational behavior of irrational investors. And they're using knowledge to their advantage. As University of Chicago behavioral finance guru Richard Thaler says: Wall Street "needs investors who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets."
So the new gurus of behavioral finance who invented Course 602 are now working for Wall Street insiders against Main Street's irrational investors, and making big bucks. They want investors to stay irrational. They have no intention of helping investors become "less irrational."
They are using their new strategies and technologies to map out the behavior "coordinates" of irrational investors, so they can attack like a stealth bomber under the radar and take full advantage of irrational investors. Want more? Read all about how neuroeconomists are beating America's gene pool of 95 million irrational investors in:
"Capital Ideas Evolving," by Peter Bernstein
"Mean Markets and Lizard Brains," by Terry Burnham
"Fooled by Randomness," by Nassin Nicholas Taleb
Discover the magic of Course 602, if you build a career on it you'll be on your way to becoming a multimillionaire early. Learn the basics in Course 101 and maybe you'll become millionaire by the time you retire, maybe.
Take these 'courses' and learn how you can repair your mind, get rich
By Paul B. Farrell, MarketWatch
Last Update: 6:52 PM ET Oct 1, 2007
ARROYO GRANDE, Calif. (MarketWatch) -- Want to learn how to harness your brain power and get rich? Well, folks, there are two basic minicourses covering the mysterious world of the investor's brain, also known as behavioral finance or neuroeconomics or just plain investment psychology.
Here are the two courses: First for beginners: "Behavioral Finance 101: The Myth of the Rational Investor." Second, the graduate level course, "Behavioral Finance 602: The Secret to Beating America's 95 Million Irrational Investors."
Focus on funds, ETFs
MarketWatch offers complete coverage of mutual funds and exchange-traded funds. Highlights: • Big changes for large-cap stocks• Quality controls bond funds• Emerging markets race higher• China, oil cheer ETF buyers • Fund managers go for growth Get our free Mutual Funds weekly
Take one course or both. Your choice will depend on how you answer this quirky question: "Can you fix a broken machine with broken tools?" Stick with me because your answer will reveal your chances of becoming one of America's 8 million millionaires.
First off, here's Course 101 in a nutshell, using a key passage from Money magazine columnist Jason Zweig's brilliant new book, "Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich:"
"Your brain is a superbly functioning machine, steering you away from danger while guiding you toward basic rewards like food, shelter and love ... But that brilliant machine can lead you astray when it comes to investing. You buy high only to sell low. You try to time the market. You follow the crowd. You make the same mistakes again. And again. How come?"
Stop. Notice two crucial neuroeconomics definitions: First, your brain is a "machine." Second, when investing, your brain is a "broken machine."
That's right, your brain is a saboteur. So the goal of Course 101 is fixing your broken machine (your brain). Warning: The saboteur remains, so you end up with a "less-broken machine," not a rational investing "machine." Why? Because your emotions run the rational brain. At best, you're a little "less irrational," but not rational.
Investors place too much faith in neuroeconomics. As Zweig points out, this new science gained credibility when Princeton University psychologist Daniel Kahneman won the Nobel Prize in Economics five years ago. Today neuroscience is "making stunning discoveries about how the brain evaluates rewards, sizes up risks and calculates probabilities."
Actually, Kahneman and other neuroscientists have been making discoveries for several decades, disproving Wall Street's bogus "rational investor" theory, Zweig says ,thanks to:
"The wonders of imaging technology [with which] we can observe the precise neural circuitry that switches on and off in your brain when you invest. Those pictures make it clear that your investing brain often drives you to do things that make no logical sense, but make perfect emotional sense."
You, the saboteur
Today experts looking at brain-images see that "your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind."
When you invest "you stir up some profound emotions," and "understanding how those feelings -- as a matter of biology -- affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor."
In a nutshell that's Course 101: Once you realize what "makes you tick" you will behave "less irrational" and become a rich investor. The goals of Course 101 are: (1) Become fully aware of your sabotaging behavior; (2) Follow neuroscience's new rules; (3) Behave "less irrational;" (4) Make more money playing the market.
And so, dear students, I urge you to round out your understanding of Course 101 by reading these works:
"Investment Madness," by Prof. John Nofsinger (2001) of Washington State University, a behavioral-finance guru who has written several key books on the field including, "The Psychology of Investing," a widely used textbook for professionals, and "Investment Greed," about the stock market scandals and others.
"Mind Over Money," by John Schott (1998), a Harvard Medical School psychiatrist, behavioral-finance expert and portfolio manager.
"Investment Therapy," by Richard Geist (2003), another Harvard Medical School psychiatrist and president of the Institute of Psychology and Investing.
"Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing" (2000), by Prof. Hersh Shefrin of the Santa Clara Business School, also editor of the three volume collection "Behavioral Finance."
Graduate school
Now for the second course: "Behavioral Finance 602: The Secret to Beating America's 95 Million Irrational Investors." The popular text is Yale economist Robert Shiller's "Irrational Exuberance," which was published just as the 1990s insanity peaked and collapsed into a three-year bear/recession.
Shiller says "irrational exuberance" is "wishful thinking on the part of investors that blinds us to the truth of our situation." And you can't "fix" it. Bull/bear cycles will forever drive markets to extreme highs (greed) and extreme lows (fear). Why? Because emotions, not rational behavior, drive Main Street investors.
We'll never become "less irrational" because trying to fix a "broken machine" with neuroscientific rules is a "wishful thinking" strategy, to use Shiller's description
So now you know how neuroscience differs in 101 versus 602. Neuroscience is a "broken tool" when used to help individual investors become "less irrational," the goal of 101. However, neuroscience is an extremely powerful tool when used by Wall Street insiders (bankers, portfolio managers, brokers, quants and their friends) as a weapon against America's 95 million investors, to manipulate, dominate and control them. Shiller puts it in simple terms:
"Deep down, people know that the market is highly priced, and they are uncomfortable about it. Most people I meet ... are puzzled ...We are unsure whether the market levels make any sense. ... We are unsure whether the high levels of the stock market might reflect unjustified optimism, an optimism that might pervade our thinking and affect many of our life decisions. We are unsure ..."
Cashing in on irrationality
Flash forward. Today, Shiller sees the cycles of greed, fear, overoptimism and panic again peak and collapse in the recent housing/credit bubble. Endless cycles of irrational exuberance will repeat again and again and again, ad infinitum. Why? Because investors really don't want to or cannot fix their broken machines.
But there is an even more sinister reason 101 doesn't work. And that's also the force driving "Behavioral Finance 602. Get this: Wall Street's insiders have been "taking" Course 101 for decades. They already know America's irrational investors will never become "less irrational."
Instead, hotshot neuroeconomists are developing computer models describing the irrational behavior of irrational investors. And they're using knowledge to their advantage. As University of Chicago behavioral finance guru Richard Thaler says: Wall Street "needs investors who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets."
So the new gurus of behavioral finance who invented Course 602 are now working for Wall Street insiders against Main Street's irrational investors, and making big bucks. They want investors to stay irrational. They have no intention of helping investors become "less irrational."
They are using their new strategies and technologies to map out the behavior "coordinates" of irrational investors, so they can attack like a stealth bomber under the radar and take full advantage of irrational investors. Want more? Read all about how neuroeconomists are beating America's gene pool of 95 million irrational investors in:
"Capital Ideas Evolving," by Peter Bernstein
"Mean Markets and Lizard Brains," by Terry Burnham
"Fooled by Randomness," by Nassin Nicholas Taleb
Discover the magic of Course 602, if you build a career on it you'll be on your way to becoming a multimillionaire early. Learn the basics in Course 101 and maybe you'll become millionaire by the time you retire, maybe.
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