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Volume 15, Issue 5

New Legislation May Affect Your Retirement Savings

As a result of the recent economic downturn, you may have seen your retirement savings accounts lose significant value over the past year. In order to counter these losses, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008. Among other provisions that were designed to help struggling pension plans, the new legislation temporarily suspends the rules that govern distributions from retirement plan accounts.

Required Minimum Distribution Rules

Before delving into the new legislation, let’s start at the beginning. If you own a retirement plan account, such as a 401(k) or IRA, the Internal Revenue Service (IRS) governs the distribution of these savings during retirement with required minimum distribution (RMD) rules. The RMD is the minimum amount that you must withdraw from your account in a given year. RMDs must begin in the year you turn 70½, and your RMD amount is calculated according to the value of your account as of the last day of the previous year, your age, and the beneficiary arrangements of your account. If you fail to withdraw at least the minimum amount, the IRS may impose a 50% penalty annually on the amount that you failed to withdraw.

Due to the contracting economy, many retirement plan accounts lost significant value over the last year. Recognizing that many owners and beneficiaries will be required to take distributions from accounts with significantly reduced assets, the Worker, Retiree, and Employer Recovery Act of 2008 waives the rules concerning RMDs for the 2009 year only. This waiver essentially allows you to leave your retirement savings untouched for another year, so that they can continue to grow through tax deferral.

First-time Distributions

The waiver also applies to first-time distributions. The IRS rules contain a provision that
allows those who turn 70½ in a given year to postpone their first distribution until April 1st
of the following year. Here’s an example: If Amanda turned 70 on March 5, 2007 and 70½ on September 5, 2007, her first RMD was due to be taken by December 31, 2007. However, she also had the option of postponing her first RMD until the “required beginning date” of
April 1, 2008. Regardless of whether she chose to postpone her first RMD, her second RMD
was due on December 31, 2008.

With the new waiver, it is important to note that the law suspends 2009 RMDs only. If you turned 70½ in 2008 and chose to postpone your first RMD (the 2008 RMD), it was still due to be taken by April 1, 2009, and you may be required to pay the penalty tax on any RMD amount not taken by that date. However, you may waive the second distribution (the 2009 RMD) according to the new law.

If you turn 70½ in 2009, you may waive the first RMD, which you would have been required to take by April 1, 2010. The second RMD (the 2010 RMD) will still be required to be taken by December 31, 2010.

The current economic climate may create feelings of uncertainty about the future; however, Congress has taken action in an effort to support those with retirement plan accounts. For more information about the new law and how it may affect your retirement savings, contact your tax professional.

Becoming a Financially Savvy Single Mother

Raising children without a partner is an enormous challenge—emotionally, physically, and especially financially. Overwhelmed by the work involved in earning a living and caring for children, single mothers can sometimes feel that they will never be able to break the cycle of living paycheck to paycheck. But even if you are a single parent on a limited income, you may find that simply managing your money better can alleviate your financial problems and allow you to save for the future. Consider the following steps toward becoming a financially savvy single mother:

Step One: Analyze Your Expenses

The first step is to take stock of your situation. What are your fixed costs? How much do you pay for housing, utilities, transportation, and childcare? If these expenses alone eat up most of your income, leaving you with little money for groceries or discretionary spending,consider whether some of these costs can be reduced or eliminated entirely.

If your mortgage, property taxes, and utility bills are too much for you to reasonably handle, selling the house and moving to a smaller place may be your best option. It will likely be difficult for you and your children to leave the family home, but the prospect of having more money to spend on other things may make the move worthwhile. Similarly, it may make sense to trade in that late-model minivan for a more fuel-efficient or used vehicle.

If you need childcare while you are at work, there may be ways to reduce your costs. Daycare centers are often more expensive than programs offered by churches or the local YMCA. If your children only require after-school care, a stay-at-home mother may be willing to help out in exchange for your babysitting services at other times. You may also want to speak to your employer about working a flexible schedule or doing some of your work at home. If you must pay for childcare, be sure to claim all available tax deductions and credits.

Step Two: Control Spending, Start Saving

Next, assess areas where you can cut back on other forms of spending. By keeping a diary
of all expenditures over the course of a month, you will likely identify some fat that
could be trimmed from your budget. Simply replacing takeout with home-cooked meals
can save a bundle.

With your spending under control, you can start planning for the future. After establishing a fund for emergencies, think about your retirement and education goals. If your workplace offers a 401(k) plan, try to contribute at least enough to take advantage of your employer match. You may also want to consider putting money into an IRA. If paying for your children’s college education—or your own—is a priority, there are several tax-advantaged accounts that can help you save efficiently.

Step Three: Secure Insurance Protection

While money may continue to be tight, it is important not to overlook the need for adequate health, life, and disability income insurance. How would your children cope if you were gone or no longer able to work? Having some coverage in place to protect your family may be less expensive than you imagine, and it will ease your mind. All families need health insurance. If you do not receive benefits through your employer, look into a high-deductible catastrophic policy that covers the costs of serious illness or hospitalization. Depending on your income, your children may be eligible for public health insurance programs.

Despite all your efforts to cut costs and adhere to a budget, you may still find yourself with credit card debt. If possible, move the debt from higher-interest to lower-interest credit cards. It is usually best to resist the temptation to consolidate your debt, as many of these services charge high fees.

Sticking to a budget can sometimes feel like an exercise in deprivation, but it doesn’t have to be if you set aside money for a few treats, like a family pizza night. Even if you can only contribute small amounts, create a “fun fund” to be used for a vacation or a trip to the amusement park. Providing for a family on your own is a challenge—but one that may be met with careful planning.

Social Security: How Much Can You Expect?

When it comes to your retirement income, you may find that Social Security alone will not be sufficient. It is likely that you will be responsible for making up the difference between what Social Security will provide—and what you will need—for a financially independent retirement.

To gain a better understanding of the amount you can expect from Social Security, call
the Social Security Administration (SSA) at 1-800-772-1213 and ask for Form SSA-7004,
Request for Social Security Statement
. If you are hearing impaired, call the toll-free TTY number at 1-800-325-0778.

When you receive the form, fill it out and return it to the SSA. Shortly thereafter, you will receive a statement of the earnings credited to your Social Security account for the years you have worked thus far. You will also receive a projection of your Social Security retirement benefit based on what you’ve contributed so far and your future anticipated contributions
until retirement.

Once you know what you can expect to receive, you can begin a savings program to help close the gap.

You can download your Request for Social Security Statement directly from the Social Security Administration’s website. Log on to www.ssa.gov, and request your form today.

Plan Ahead for College Funding

In recent years, the cost of higher education has risen well ahead of inflation. At some private colleges and universities, the cost of one year’s education, including room and board, has reached $34,132 (Source: Trends in College Pricing—2008, The College Board). At these prices, the final cost of a bachelor’s degree can be nearly $137,000. And, with many professions requiring graduate degrees, it quickly becomes apparent that very few families may be able to cover education expenses with their current incomes. With only one child, the costs can be prohibitive; for families with three or more children, college and graduate school costs could easily be hundreds of thousands of dollars.

How can parents and grandparents build a fund for college? They need to look ahead and prepare a “blueprint” as early as possible, and there are a number of ways to do this. The best method will depend on the age of the child, the family’s resources and cash needs, and a number of other considerations.

No matter what the age of the child, there are legal techniques for placing money and property in a child’s name. Since it is generally inadvisable for minors to own property or have large bank accounts in their own names, gifts to minor children are usually made either to a custodian or to a trust.

The Custodial Account

While some of the tax advantages of a custodial arrangement have been affected by tax law changes, the technique is still worth investigating. It is the simplest method to give money or property to a child, involving very little paperwork, hassle, and legal fees.

All states have adopted either the Uniform Gift to Minors Act (UGMA), which authorizes a custodial arrangement for cash, bank accounts, and other savings vehicles, or the Uniform Transfer to Minors Act (UTMA), which allows the custodian to hold real estate and other property, including limited partnership interests. The laws of the state in which the minor lives will govern the account.

In most states, money or property held in custody must be transferred to the child at either age 18 or 21, depending on state law. Some states allow the custodian to designate the age at which the child may access the account, even beyond the age of majority. At the age that the child has full access to the custodial funds, he or she will be in sole control and can use the funds to buy a Porsche instead of paying tuition, should he or she so choose.

Trust Benefits

Setting up a trust for a child may be more cumbersome and expensive than the custodial arrangement, but it may be desirable in some situations. One important reason to transfer property to a trust for the benefit of a child is to avoid the “Porsche Syndrome.” The money in the trust, whether it’s principal or income, must be used solely for the purpose for which the creator of the trust intended—the child’s education.

The creator of the trust may wish to use the Federal annual gift tax exclusion that allows individuals to give $13,000 (in 2009) each year to as many donees as they wish (or $26,000 if a spouse joins in making the gift). This exclusion only applies if the trust is structured to create a “present interest” in the child beneficiary. The present interest requirement may be used in a number of ways, some prescribed by the Internal Revenue Code (IRC) and some by case law.

Discretionary trusts can be used. The trustee may accumulate income to take advantage of the trust’s 15% tax bracket or to distribute it to the beneficiary in a tax bracket that is lower than that of the trust.

Prior to making gifts or establishing trusts, the effects of either method on long-term financial goals and college savings programs should be thoroughly assessed. Providing the best education for the child, while preserving financial independence for the family, should be integral to any decision.

The information contained in this newsletter is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2009.



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