DACA Financial Group

The temporary repeal of the federal estate tax and the generation-skipping transfer (GST) tax in 2010 has created uncertainty for families that, in prior years, would have been unaffected by these taxes. Further adding to this dilemma is the likelihood that Congress will reinstate these taxes in 2010, possibly retroactive to January 1. Here is a brief recap of what we do and do not know, along with some issues and opportunities to consider.

What we know

• The federal estate tax and the GST tax (a separate tax on lifetime or at-death transfers to “skip” generations, such as grandchildren) are repealed for 2010, but are set to reappear in 2011 at pre-2001 rates. In 2011, the estate and GST tax exemption amounts will drop to $1 million (from $3.5 million in 2009) and the highest tax rate will jump to 55% (from 45% in 2009).
• The gift tax remains in place with a $1 million lifetime exemption and a tax rate of 35% (down from 45% in 2009).
• In prior years, inherited assets received a step-up in cost basis to the asset’s fair market value on the date of death. In 2010, inherited assets generally receive the lesser of the asset’s date-of-death fair market value or the decedent’s carryover basis. However, estates can exempt up to $1.3 million of gain for assets left to heirs, and an additional $3 million exemption can be allocated to assets specifically left to a surviving spouse.

What we don’t know

• Will Congress reinstate the estate and GST taxes at their 2009 levels, or will they create a new tax regime?
• Will any changes be retroactive to January 1?
• How will estates be expected to pay any retroactive taxes, especially if assets have already been distributed?
• What will individual states that link their own estate tax systems to the federal estate tax system do?

Issues and opportunities

It’s hard to know how to react to the uncertainty presented by the current estate tax situation. Should you change your estate plan and update your estate planning documents when it’s possible that your existing plan will once again be appropriate in 2011, or even sooner? For many, the answer is no, but for a few, the answer is definitely yes.

Generally, you should consult an estate planning attorney if:

• You are very old, very ill, or terminally ill
• You have a will or trust that allocates assets based on a “formula clause”
• You want to make gifts to individuals in the “skip generation”–those who are two or more generations below you
• You have assets with an appreciated value in excess of $1.3 million

Aged or ill need to review estate plans now

For those who are aged or terminally ill, if the repeal remains effective, your goal may shift from saving estate taxes to saving capital gains taxes. Thus, in response to the modified step-up in basis provision, you may want to reallocate the distribution of highly appreciated assets.

Your will or trust should authorize your executor or trustee to allocate the $1.3 million basis adjustment and the $3 million spousal basis adjustment in the most advantageous way, while allowing for the possibility of the reappearance of the estate tax. However, determining how to do so can vary greatly based on many different factors, including:

• Your cost basis in estate property and the amount of gain that would be realized if the property is sold in 2010
• The anticipated tax bracket of the beneficiary inheriting the property–the tax impact may not be as great for beneficiaries in a lower tax bracket
• Whether appreciated property placed in a bypass trust qualifies for the surviving spouse’s basis adjustment
• Whether property is expected to be retained by the beneficiary after it’s inherited, such as a farm or family business
• Whether capital gains tax can be avoided or minimized through other means, such as charitable gifting
• Whether the $250,000 federal income tax home sale exclusion applies to estate property that is a principal residence

Review documents for formula clauses

Your will or trust may provide that upon your death, a percentage or fraction of your estate, up to the applicable estate tax exclusion amount, will pass to a family trust (also referred to as a bypass or credit shelter trust) for the benefit of your children, with the balance going to a marital or residuary trust for the benefit of your surviving spouse.

If there is no estate tax at your death, such a formula clause may cause your entire estate to be transferred to your family trust, leaving nothing to the marital trust. If your surviving spouse is the beneficiary of both trusts, there may be no problem, but if your spouse has no right or access to assets in the family trust, then your surviving spouse could be unintentionally disinherited.

In light of these potential issues, it is best to review your estate planning documents with your attorney and make necessary revisions to ensure that your wishes are carried out. Your will or trust should be drafted to clearly reference what should happen if you die when there is no estate tax, or if the exclusion amount is greater or lesser than the 2009 amount ($3.5 million). Your documents will need to provide flexibility in their distribution provisions to accommodate the possibility of many varied scenarios.

If you’re inclined to make large gifts

The temporary repeal of the GST tax provides an opportunity to make gifts to skip beneficiaries free from the GST tax. You can make large gifts to grandchildren, subject only to the gift tax (at a 35% tax rate). If you don’t want to make a gift directly to your beneficiaries, you can gift to a dynasty trust which directs when beneficiaries are able to access their gifts. However, if the GST tax is imposed retroactively, some of those gifts may be subject to that tax after all. You’ll have to weigh this possibility against the potential tax savings of gifting without the GST tax to determine the best course of action for you.

If you’ve already begun a plan of gifting to grandchildren, either directly or through dynasty trusts, you should review your estate plan. If gifts to your grandchildren are based on your available GST tax exemption, those gifts may not be made if you die in 2010 when the GST tax is repealed. An estate planning professional may be able to amend your documents to include a different formula to account for the possibility that there is no GST tax exemption when allocating gifts to grandchildren.

What about state estate taxes?

Some states have their own estate tax, and many estate plans were drafted in contemplation of either or both a federal estate tax and a separate state estate tax. These plan documents also need to be reviewed in 2010. Your will or trust may direct that assets be allocated to a family or bypass trust to minimize the federal or state estate tax, when the capital gains tax is also a real possibility. How should assets be allocated now to take advantage of the repeal of the federal estate tax, to minimize any potential capital gains tax, or to utilize any state estate tax exemption? These questions require careful consideration and planning as there’s no “one size fits all” solution.

Conclusion

The tax law changes in 2010 have given rise to much confusion and many issues to consider. Inaction is the least favorable option. Keep abreast of the potential legislative changes that might occur in 2010 and work with your estate planning professional to update your plan documents to best carry out your wishes now and in the future.

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

Prepared by Forefield Inc. Copyright 2010.

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Health-Care Reform: Considerations for Seniors The enactment of the new health-care reform legislation contains some provisions that directly affect our nation’s older population. If you’re a senior, you may be concerned about how these reforms may affect your access to health care and the benefits you are currently receiving. Medicare spending cutsNot surprisingly, the concerns of retirees and seniors generally center on potential cuts in Medicare benefits. At the outset, the new legislation does not affect Medicare’s guaranteed benefits. However, a goal of the new health-care legislation is to slow the increasing cost of Medicare premiums paid by beneficiaries, and to ensure that Medicare will not run out of funds. To help achieve these goals, cuts in Medicare spending will occur over a ten-year period, beginning in 2011, particularly targeting Medicare Advantage programs––Medicare programs provided through private insurers but subsidized by the federal government. These cuts could reduce or eliminate some of the extra benefits Medicare Advantage plans may offer, such as dental or vision care, and some insurers may choose to increase premiums. But Medicare Advantage plans cannot reduce primary Medicare benefits, nor can they impose deductibles and co-payments that are greater than what is allowed under the traditional Medicare program for comparable benefits. And, some of the federal funds previously earmarked for Medicare will be reallocated to doctors and surgeons as an incentive to treat Medicare patients. Medicare Part D drug program changes Some Medicare Part D beneficiaries are surprised to find that they have to pay for the entire cost of prescription drugs out-of-pocket after reaching a gap in their annual coverage, referred to as the “donut hole.” Currently, if you’re a Medicare Part D beneficiary, you may pay up to an additional $3,610, out-of-pocket, for medicines after reaching an initial threshold of $2,830 in total prescription drug costs (including Part D payments, beneficiary co-pays, and deductibles). But, beginning in 2010, beneficiaries who fall in the donut hole will receive a $250 rebate, and, in 2011, they will receive a 50% discount on brand-name drugs. By 2020, a combination of federal subsidies and a reduction in co-payments will completely eliminate the donut hole. However, individuals with annual incomes greater than $85,000, and couples with incomes exceeding $170,000, will see their Part D premiums increase as the federal subsidy offsetting some of the cost of Medicare Part D premiums is reduced. Benefits added to Medicare The leglislation also improves some traditional Medicare benefits. For example, Medicare beneficiaries will receive free wellness and preventive care beginning in 2011. Increased access to home-based care Often, people with disabilities or illnesses would rather receive care at home instead of at a hospital or nursing home. The new health-care reform law provides for programs and incentives for greater access to in-home care. The Community Living Assistance Services and Support program (CLASS) will be established sometime after 2011 (depending on when final regulations are published) as a voluntary insurance program, financed through payroll deductions and available to all working adults who choose to participate. This national program allows participants with functional limitations to maintain their personal and financial independence and live in the community by providing a cash benefit of at least $50 per day (after a five-year vesting period) for nonmedical services, such as home-care services, family caregiver support, and adult day-care or residential-care services. In order to qualify, a participant must need help with at least two activities of daily living, such as eating, toileting, transferring, bathing, dressing, or continence. Also in 2011, the Community First Choice Option will be available to states to add to their Medicaid programs. This option will provide benefits to Medicaid-eligible individuals for community-based care instead of placement in a nursing home. In addition, the State Balancing Incentive Program, to be established in 2011, will provide increased federal funds to qualifying states that offer Medicaid benefits to disabled individuals seeking long-term care services at home, or in the community, instead of in a nursing home. The Independence at Home demonstration program, available in 2012, will be a test program that provides Medicare beneficiaries with chronic conditions the opportunity to receive primary care services at home. That is intended to reduce costs associated with emergency room visits and hospital readmissions, and generally improve the efficiency of care.

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

Prepared by Forefield Inc. Copyright 2010.

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It is important to choose a Financial Planner wisely.  As this video from CNN.com explains it is important to make sure your advisor is a CERTIFIED FINANCIAL PLANNER^TM

CNN.com Video – Choosing a Financial Planner

A CERTIFIED FINANCIAL PLANNER^TM professional or a CFP^® practitioner is a financial professional who meets the requirements established by the Certified Financial Planner Board of Standards, Inc. While others may call themselves financial planners, only those who demonstrate the requisite experience, education, and ethical standards are awarded the CFP^® mark.

What are the requirements?

In order to obtain the CFP^® mark, an applicant must:

• Hold a bachelor’s degree from an accredited college or university
• Complete a CFP^® Board-registered education program
• Pass the 10-hour CFP^® certification exam
• Have at least three years of qualifying full-time work experience in financial planning
• Pass a professional fitness standards and background check

Once appointed, a CFP^® professional must meet continuing education requirements every other year in order to maintain the certification.

What does a CFP^® professional do?

A CFP^® professional is trained to develop and implement comprehensive financial plans for individuals, businesses, and organizations. He or she has the knowledge and skills to objectively assess your current financial status, identify potential problem areas, and recommend appropriate options. You’re also working with someone who’s demonstrated expertise in multiple areas of financial planning, including income and estate tax, investment planning, risk management, and retirement planning.

How is a CFP^® professional compensated?

Typically, financial planners earn their living either from commissions or by charging hourly or flat rates for their services. A CFP^® professional may use a combination fee-and-commission structure: you pay a fee for development of a financial plan or for other services provided by the CFP^® professional, who also receives a commission from selling you products. A commission is a fee paid whenever someone buys or sells a stock or other investment, or when someone buys insurance (such as health, life, or long-term care insurance) or annuities.

When calculating the cost to employ the services of a financial planner, consider fees, commissions, and related expenses, such as transaction fees and management fees related to the products he or she recommends.

How can a CFP^® professional help you?

A CFP^® professional can help you create a personal budget, control expenses, and develop and implement plans for retirement, education, and/or wealth protection. A CFP^® professional can offer expertise in risk management, including strategies involving life and long-term care insurance, health insurance, and liability coverage. He or she often can help with your tax planning or manage your asset portfolio based on your goals.

Specifically, a CFP^® professional can help you:

• Establish financial and personal goals and create a plan to achieve them
• Evaluate your financial well-being with a thorough analysis of your assets, liabilities, income, taxes, investments, and insurance
• Identify areas of concern and help you address them by developing and implementing a financial plan that emphasizes your financial strengths while reducing your financial weaknesses
• Review your plan periodically to accommodate your changing personal circumstances and financial goals

How to choose a CFP^® professional

Selecting a CFP^® professinal is like choosing a doctor for your financial health. Working with a CFP^® professional involves sharing very personal information and you will want to feel comfortable with the professional you’ve chosen. He or she should be knowledgeable, have integrity, and demonstrate a commitment to the highest ethical standards in the industry. Also, a CFP^® professional may offer services to a particular clientele, such as small business owners, corporate executives, or retirees, so be sure the planner you select works with people whose interests and goals are similar to yours.

Before you choose someone to work with, ask around. You may know a family member, friend, or colleague who has worked with someone they’d recommend. Also, be prepared to interview the prospective CFP^® professional. At your meeting, request a copy of form ADV or the comparable state form. A CFP^® professional who offers investment advice for a fee is required to file form ADV with the U.S. Securities and Exchange Commission (SEC) or with the state of residence of the CFP^® professional (although some exceptions apply). Form ADV contains information about the professional’s education, business, disciplinary history, services offered, fees charged, and investment strategies. In addition to form ADV, ask for the disclosure document that contains other important information regarding the CFP^® professional. Even if you don’t ask for the disclosure document, it must be provided to you at the time you enter into an agreement for services, or soon thereafter. Be sure to read the disclosure document carefully as well as any written agreements you enter into.

Questions to ask

Here are some questions you may want to ask a CFP^® professional to help you find the right planner for you:

• What is your education? What schools did you attend and what degrees have you earned?
• What licenses do you hold? Are you registered with the SEC, FINRA, or the state?
• Are you affiliated with any professional groups or organizations? Do you execute securities trades through a broker-dealer? Who is it?
• Does your practice concentrate in a particular area? What types of clients do you work with?
• What type of products and services do you offer? Are you limited as to the products and services you can offer me?
• How are you compensated for your services? Do you receive a commission for products you may sell to me?
• Have you ever been disciplined by any government board or regulatory agency?

Is a CFP^® professional right for you?

The financial world has become a very complex place. Even if you’re used to handling your own financial affairs, the time may be right to consult a CFP^® professional who can review your financial health and offer suggestions that may help you reach your financial goals.

For example, are you familiar with all the different investment opportunities that might be available to you? Are you on track to meet your financial goals such as saving for your child’s college education, securing enough income for a comfortable retirement, or protecting your assets against risks and lawsuits? A CFP^® professional can offer the analysis you need to help answer these and other important financial questions.

Note: Certified Financial Board of Standards Inc. owns the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^TM and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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There are five estate planning documents you may need, regardless of your age, health, or wealth: Durable power of attorney Advanced medical directives Will Letter of instruction Living trust The last document, a living trust, isn’t always necessary, but it’s included here because it’s a vital component of many estate plans. Durable power of attorney A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is ready to look after your financial affairs when you can’t, your property may be wasted, abused, or lost. A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes. There are two types of DPOAs: (1) a standby DPOA, which is effective immediately (this is appropriate if you face a serious operation or illness), and (2) a springing DPOA, which is not effective unless you have become incapacitated. Note: A springing DPOA is not permitted in some states, so you’ll want to check with an attorney. Advanced medical directives Advanced medical directives let others know what medical treatment you would want, or allows someone to make medical decisions for you, in the event you can’t express your wishes yourself. If you don’t have an advanced medical directive, medical care providers must prolong your life using artificial means, if necessary. With today’s technology, physicians can sustain you for days and weeks (if not months or even years). There are three types of advanced medical directives. Each state allows only a certain type (or types). You may find that one, two, or all three types are necessary to carry out all of your wishes for medical treatment. (Just make sure all documents are consistent.) First, a living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, one can be used only to decline medical treatment that “serves only to postpone the moment of death.” In those states that do not allow living wills, you may still want to have one to serve as evidence of your wishes. Second, a durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will or won’t have. Finally, a Do Not Resuscitate order (DNR) is a doctor’s order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital. Will A will is often said to be the cornerstone of any estate plan. The main purpose of a will is to disburse property to heirs after your death. If you don’t leave a will, disbursements will be made according to state law, which might not be what you would want. There are two other equally important aspects of a will: You can name the person (executor) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose. You can name a legal guardian for minor children or dependents with special needs. If you don’t appoint a guardian, the state will appoint one for you. Keep in mind that a will is a legal document, and the courts are very reluctant to overturn any provisions within it. Therefore, it’s crucial that your will be well written and articulated, and properly executed under your state’s laws. It’s also important to keep your will up-to-date. Letter of instruction A letter of instruction (also called a testamentary letter or side letter) is an informal, nonlegal document that generally accompanies your will and is used to express your personal thoughts and directions regarding what is in the will (or about other things, such as your burial wishes or where to locate other documents). This can be the most helpful document you leave for your family members and your executor. Unlike your will, a letter of instruction remains private. Therefore, it is an opportunity to say the things you would rather not make public. A letter of instruction is not a substitute for a will. Any directions you include in the letter are only suggestions and are not binding. The people to whom you address the letter may follow or disregard any instructions. Living trust A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it’s meant to function while you’re alive. You control the property in the trust, and, whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether. Not everyone needs a living trust, but it can be used to accomplish various purposes. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate. Depending on your situation and your state’s laws, the probate process can be simple, easy, and inexpensive, or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas. Further, probate takes time, and your property generally won’t be distributed until the process is completed. A small family allowance is sometimes paid, but it may be insufficient to provide for a family’s ongoing needs. Transferring property through a living trust provides for a quicker, almost immediate transfer of property to those who need it. Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management. Finally, avoiding probate may be desirable if you’re concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not. Note: Although a living trust transfers property like a will, you should still also have a will because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children. Note: There are other ways to avoid the probate process besides creating a living trust, such as titling property jointly. Note: Living trusts do not generally minimize estate taxes or protect property from future creditors or ex-spouses.

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

Prepared by Forefield Inc. Copyright 2010.

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With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you’re a high-income taxpayer, chances are you haven’t been able to participate in the Roth revolution. Well, new rules apply in 2010 that may change all that.

What are the general rules for funding Roth IRAs?

There are three ways to fund a Roth IRA–you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later).

In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2010. If you’re age 50 or older, you can contribute up to $6,000 in 2010. (Note, though, that your contributions can’t exceed your earned income for the year.)

But your ability to contribute directly to a Roth IRA depends on your income level (“modified adjusted gross income,” or MAGI), as shown in the chart below:

If your federal filing status is:	Your 2010 Roth IRA contribution is reduced if your MAGI is:	You can’t contribute to a Roth IRA for 2010 if your MAGI is:
Single or head of household	More than $105,000 but less than $120,000	$120,000 or more
Married filing jointly or qualifying widow(er)	More than $167,000 but less than $177,000	$177,000 or more
Married filing separately	More than $0 but less than $10,000	$10,000 or more

What’s changed?

Prior to 2010, you couldn’t convert a traditional IRA to a Roth IRA (or roll over non-Roth funds from an employer plan to a Roth IRA) if your MAGI exceeded $100,000 or you were married and filed separate federal income tax returns.

In 2006, however, President Bush signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. TIPRA repealed the $100,000 income limit and marital status restriction, beginning in 2010. What this means is that, regardless of your filing status or how much you earn, you can now convert a traditional IRA to a Roth IRA. (There’s one exception–you generally can’t convert an inherited IRA to a Roth. Special rules apply to spouse beneficiaries.)

And don’t forget your SEP IRAs and SIMPLE IRAs. They can also be converted to Roth IRAs (for SIMPLE IRAs, you’ll need to participate in the plan for two years before you convert). You’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after you convert.

What hasn’t changed?

TIPRA did not repeal the income limits that may prevent you from making annual Roth contributions. But if your income exceeds these limits, and you want to make annual Roth contributions, there’s an easy workaround. You can make nondeductible contributions to a traditional IRA as long as you have earned income at least equal to the contribution, and you haven’t yet reached age 70½. You can simply make your annual contribution first to a traditional IRA, and then take advantage of the new liberal conversion rules and convert that traditional IRA to a Roth. There are no limits to the number of Roth conversions you can make. (You’ll need to aggregate all of your traditional IRAs when you calculate the taxable portion of the conversion–more on that below.)

Calculating the conversion tax

When you convert a traditional IRA to a Roth IRA, you’re taxed as if you received a distribution with one important difference–the 10% early distribution tax doesn’t apply, even if you’re under age 59½. (The IRS may recapture this penalty tax, however, if you make a nonqualified withdrawal from your Roth IRA within 5 years of your conversion.)

If you’ve made only nondeductible (after-tax) contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth. But if you’ve made both deductible and nondeductible IRA contributions to your traditional IRA, and you don’t plan on converting the entire amount, things can get complicated.

That’s because under IRS rules, you can’t just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist of a pro-rata portion of the taxable and nontaxable dollars in the IRA.

For example, assume that your traditional IRA contains $350,000 of taxable (deductible) contributions, $100,000 of taxable earnings, and $50,000 of nontaxable (nondeductible) contributions. You can’t convert only the $50,000 nondeductible (nontaxable) contributions to a Roth, and have a tax-free conversion. Instead, you’ll need to prorate the taxable and nontaxable portions of the account. So in the example above, 90% ($450,000/$500,000) of each distribution from the IRA in 2010 (including any conversion) will be taxable, and 10% will be nontaxable.

You can’t escape this result by using separate IRAs. Under IRS rules, you must aggregate all of your traditional IRAs (including SEPs and SIMPLEs) when you calculate the taxable income resulting from a distribution from (or conversion of) any of the IRAs.

Special deferral rule for 2010 conversions only

But even if you have to pay tax at conversion, TIPRA contains more good news–if you make a conversion in 2010, you can take advantage of a special deferral rule that applies only to 2010 conversions. You can report half the income from the conversion on your 2011 tax return and the other half on your 2012 return. Or you can instead elect to report all of the income from the conversion on your 2010 tax return.

For example, if your only traditional IRA contains $250,000 of taxable dollars (your deductible contributions and earnings) and you convert the entire amount to a Roth IRA in 2010, you can report half of the resulting income ($125,000) on your 2011 federal tax return, and the other half ($125,000) on your 2012 return. Or you can instead report the entire $250,000 on your 2010 tax return.

Should you use the special 2010 deferral rule? The answer depends in part on your tax rate in 2010 versus what you think your tax rates will be in 2011 and 2012. Keep in mind that tax rates are scheduled to increase in 2011, if the Bush tax cuts are allowed to expire. The top tax rate will increase to 39.6% in 2011, up from 35% in 2010.

And speaking of employer retirement plans…

You can also roll over non-Roth funds from an employer plan (like a 401(k)) to a Roth IRA. Prior to 2010, the income limits and marital status restrictions also applied to employer plan rollovers to Roth IRAs (commonly referred to as conversions). As with traditional IRA conversions, these restrictions have been removed beginning in 2010, and now anyone can roll over funds from an employer plan to a Roth, regardless of income level or marital status.

Like traditional IRA conversions, the amount you convert will be subject to income tax in the year of conversion (except for any after-tax contributions you’ve made). But the good news is that the special deferral rule discussed earlier also applies to amounts you roll over from an employer plan to a Roth IRA in 2010. You can report half of the conversion income on your 2011 tax return, and the other half on your 2012 return, or you can instead elect to report all of the income on your 2010 tax return. And even non-spouse beneficiaries can roll over inherited employer plan funds to a Roth IRA, as long as it’s done in a direct (not 60-day) rollover.

Is a Roth conversion right for you?

The answer to this question depends on many factors, including your current and projected future income tax rates, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state’s tax laws, and how you’ll pay the income taxes due at the time of the conversion.

And don’t forget–if you make a Roth conversion and it turns out not to be advantageous (for example, the value of your investments declines substantially), IRS rules allow you to “undo” the conversion. You generally have until your tax return due date (including extensions) to undo, or “recharacterize,” your conversion. For most taxpayers, this means you have until October 15, 2011, to undo a 2010 Roth conversion.

A financial professional can help you decide whether a Roth conversion is right for you, and whether you should take advantage of the special deferral rule for 2010 conversions.

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

Prepared by Forefield Inc. Copyright 2010.

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Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves. Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don’t show up for a court date, you may be subsequently arrested and jailed. And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind. You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim. Check yourself out It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity. You may get your credit report for free once a year. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228. If you need to correct any information or dispute any entries, contact the three national credit reporting agencies: Equifax: www.equifax.com (800) 685-1111 Experian: www.experian.com (888) 397-3742 TransUnion: www.transunion.com (800) 916-8800 Secure your number Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you’ll need it. The same goes for other forms of identification (for example, health insurance cards) that display your SSN. If your state uses your SSN as your driver’s license number, request an alternate number. Don’t have your SSN preprinted on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it on employment applications; offer instead to provide it during a job interview. Don’t leave home with it Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea; if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with. Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place–at home. Keep your receipts When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind; it may contain your credit or debit card number. And don’t leave it in the shopping bag inside your car while you continue shopping; if your car is broken into and the item you bought is stolen, your identity may be as well. Save your receipts until you can check them against your monthly credit card and bank statements, and watch your statements for purchases you didn’t make. When you toss it, shred it Before you throw out any financial records such as credit or debit card receipts and statements, cancelled checks, or even offers for credit you receive in the mail, shred the documents, preferably with a cross-cut shredder. If you don’t, you may find the panhandler going through your dumpster was looking for more than discarded leftovers. Keep a low profile The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure: To stop telephone calls from national telemarketers, list your telephone number with the Federal Trade Commission’s National Do Not Call Registry by calling (888) 382-1222 or registering online at www.donotcall.gov To remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists, write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.dmachoice.org To remove your name from marketing lists prepared by the three national consumer reporting agencies, call (888) 567-8688 or register online at www.optoutprescreen.com When given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations You may even want to consider having your name and address removed from the telephone book and reverse directories Take a byte out of crime Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen. Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the Internet. Moreover, install virus protection software and update it on a regular basis. Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain more than your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password–one that’s six to eight characters long, and that contains letters (upper and lower case), numbers, and symbols. “If a stranger calls, don’t answer.” Opening e-mails from people you don’t know, especially if you download attached files or click on hyperlinks within the message, can expose you to viruses, infect your computer with “spyware” that captures information by recording your keystrokes, or lead you to “spoofs” (websites that replicate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity. If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into the browser. If you provide personal or financial information about yourself over the Internet, do so only at secure websites; to determine if a site is secure, look for a URL that begins with “https” (instead of “http”) or a lock icon on the browser’s status bar. And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive by using a “wipe” utility program. The minimal cost of investing in this software may save you from being wiped out later by an identity thief. Be diligent As the grizzled duty sergeant used to say on a televised police drama, “Be careful out there.” The identity you save may be your own.

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

Prepared by Forefield Inc. Copyright 2010.

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Myth: Social Security will provide most of the income you need in retirement Fact: It’s likely that Social Security will provide a smaller portion of retirement income than you expect There’s no doubt about it–Social Security is an important source of retirement income for most Americans. According to the Social Security Administration, more than nine out of ten individuals age 65 and older receive Social Security benefits. But it may be unwise to rely too heavily on Social Security, because to keep the system solvent, some changes will have to be made to it. The younger and wealthier you are, the more likely these changes will affect you. But whether retirement is years away or just around the corner, keep in mind that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said, “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.” No matter what the future holds for Social Security, focus on saving as much for retirement as possible. You can do so by contributing to tax-deferred vehicles such as IRAs, 401(k)s, and other employer-sponsored plans, and by investing in stocks, bonds, and mutual funds. When combined with your future Social Security benefits, your retirement savings and pension benefits can help ensure that you’ll have enough income to see you through retirement. Myth: Social Security is only a retirement program Fact: Social Security also offers disability and survivor’s benefits With all the focus on retirement benefits, it’s easy to overlook the fact that Social Security also offers protection against long-term disability. And when you receive retirement or disability benefits, your family members may be eligible to receive benefits, too. Another valuable source of support for your family is Social Security survivor’s insurance. If you were to die, certain members of your family, including your spouse, children, and dependent parents, may be eligible for monthly survivor’s benefits that can help replace lost income. For specific information about the benefits you and your family members may receive, be sure to read your Social Security Statement, which you will receive every year from the Social Security Administration (SSA). You can also visit the SSA’s website at www.socialsecurity.gov, or call 800-772-1213 if you have questions. Myth: If you earn money after you retire, you’ll lose your Social Security benefit Fact: Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age Once you reach full retirement age (which ranges from age 65 to 67, depending on the year you were born), you can earn as much as you want without affecting your Social Security retirement benefit. But if you’re under full retirement age, any income that you earn may affect the amount of benefit you receive: If you’re under full retirement age, $1 in benefits will be deducted for every $2 you earn above a certain annual limit. For 2010, that limit is $14,160. In the year you reach full retirement age, $1 in benefits will be deducted for every $3 you earn above a certain annual limit until the month you reach full retirement age. If you reach full retirement age in 2010, that limit is $37,680. Myth: Social Security benefits are not taxable Fact: You may have to pay taxes on your Social Security benefits if you have other income If the only income you had during the year was Social Security income, then your benefit generally isn’t taxable. But if you earned income during the year (either from a job or from self-employment) or had substantial investment income, then you might have to pay federal income tax on a portion of your benefit. Up to 85% of your benefit may be taxable, depending on your tax filing status (e.g., single, married filing jointly) and the total amount of income you have. Once you begin receiving Social Security benefits, you’ll receive a Social Security Benefit Statement that shows the amount you received during the previous year. You can use this when you file your federal income taxes to find out if your benefits are subject to tax. For more information on this subject, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. What Is Your Full Retirement Age? If you were born in: Your full retirement age is: 1937 or earlier 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943-1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 Note: If you were born on January 1 of any year, refer to the previous year.

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

Prepared by Forefield Inc. Copyright 2010 Forefield Inc.

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What is a Build America Bond?

Investors have a new mechanism for investing in municipal bonds, courtesy of the American Recovery and Reinvestment Act of 2009. As part of the Obama administration’s economic stimulus program, the bill authorized a subsidy for local and state governments that issue what are known as Build America Bonds (BABs) to finance capital expenditures.

Unlike most municipal bonds issued by a state or local government, the interest payments on a Build America Bond are taxable on your federal income tax return. However, the federal government subsidizes 35% of the interest payments on a BAB, which typically have relatively long maturities and must be issued before January 1, 2011. Those subsidies enable state and local governments to offer a higher interest rate to attract investors while at the same time reducing the cost of borrowing money to fund construction and infrastructure projects. Because of the subsidies, many muni bonds issued over the next two years are expected to be BABs.

There are several types of BABs; the governmental body that issues one determines which it will be. A Tax Credit BAB offers the bondholder a 35% federal income tax credit on the net coupon interest. A Direct Payment BAB pays the 35% subsidy directly to the issuer. Still a third type, known as a Recovery Zone Economic Development Bond, is a Direct Payment BAB that provides a 45% refundable tax credit to the governmental issuer.

Why buy a Build America Bond?

A BAB may offer some advantages that ordinary taxable municipal bonds don’t. The most obvious benefit comes from a Tax Credit BAB. Even though a BAB is a taxable bond, the 35% tax credit means that your after-tax return could be higher than that of a comparable taxable bond. Your tax bracket will determine the extent to which you benefit from a Tax Credit BAB.

Even a BAB whose federal subsidy is paid to the issuer may provide benefits. The federal subsidy may enable an issuer to offer a higher coupon rate than it might otherwise have been able to afford. And though default is not impossible, munis have traditionally had a lower default rate than corporate bonds; the federal subsidies should enhance governments’ ability to meet their financial obligations.

Factors to consider

Before investing, make sure you understand whether a given BAB offers you the 35% tax credit and what that will mean given your tax bracket. Remember that both interest payments and the tax credit will be included as part of your taxable income, unlike most muni bonds. You may want to get assistance in determining whether a BAB makes sense for you.

New-issue BABs may be challenging for individuals to invest in. Some BAB auctions have focused on large institutional investors to the exclusion of individuals; it may be easier to find BABs being resold on the secondary market. As with any bond, BABs are affected by changes in interest rates. If interest rates rise, the value of an existing BAB with a lower coupon rate is likely to drop.

Prepared by Forefield Inc. Copyright © 2009 Forefield Inc.
Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

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