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February eMagazine

February 29th, 2016 | No Comments | Posted in eMagazine

February_2016

Building a College Fund

February 18th, 2016 | No Comments | Posted in Financial News

Do it smartly, without the all-too-common missteps.

shutterstock_3294796According to Sallie Mae, U.S. families with one or more college students spent an average of $24,164 on tuition, housing, and linked expenses in 2015. That was 16% more than in 2014.1

Statistics like these underline the importance of saving and investing to fund a university education, but that effort has become optional to many. In its annual How America Saves for College survey, Sallie Mae found that only 48% of U.S. families with at least one child younger than age 18 were saving for college at all. Among those that were saving, the average 2015 amount was $10,040 – the lowest figure in the 7-year history of the survey. It is little wonder that 22% of college costs are covered by either parent or student borrowing.1,2

If you want to build a college fund, what should you keep in mind? What should you do? What should you avoid doing?

First, save with realistic assumptions. Outdated perceptions of college expenses can linger, so be sure to replace them with current data and future projections.

Consider a tax-advantaged account. Remarkably, Sallie Mae’s 2015 survey found that just 27% of households saving for higher education had chosen 529 plans or similar vehicles. Nearly half of the households building college funds were simply directing the money into common savings accounts, giving those dollars no chance to significantly grow or compound through equity investment.2

If you open a tax-advantaged account, fund it adequately. Some states have established very low contribution minimums for their college savings plans. That does not mean your contribution should be at or near that level.3

Explore your options with regard to these accounts. You can participate in any number of state-operated college savings plans, not just the one in your state. Another state’s plan may offer you different tax breaks or incentives. Many of these plans now offer more investment choices than they once did, in addition to the traditional age-based options. You can also change the way you invest assets in these plans, sometimes as often as twice a year.3

Think twice about opening a custodial account. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts were fairly popular at one time. About 10% of parents saving for college still use them, but they have distinct drawbacks. They do not offer tax-advantaged growth, and until the child turns 24, account earnings above a certain threshold are taxed at the parents’ highest marginal rate instead of the child’s lower rate. The money inside the account is considered an irrevocable gift and an asset owned by the student – a real demerit when trying to claim financial aid. Also, when the student reaches the “age of majority” (typically 18 or 21), the money can be used for anything the student desires.4,5

Keep your retirement savings earmarked for retirement. In a 2014 Sallie Mae report, an alarming 30% of parents saving for higher education expenses said that their retirement savings would be their number one resource to pay college costs. Is this idea generous, or merely foolish? Sensibly speaking, eliminating your debt, starting a rainy day fund, and building up your retirement savings should all take precedence over amassing college savings.6

Set a specific savings goal – perhaps with certain schools in mind. Some parents build college savings without any real goal of how much to save, not knowing the university their children will attend. Defining the destination should be part of the strategy. It is perfectly okay to tell your children that you will be saving $X for college by the time they are 18, and that they may have to strive for scholarships and grants if they want to go to especially costly universities.6

The biggest blunder is not saving for college at all. As tuition costs continue to rise, getting any kind of head start on funding a university education is a must on a family’s financial to-do list. While financial aid is certainly available, it rarely absorbs 100% of college costs.3

If you save $300 per month for college for 10 years and that money earns 7% a year, your college fund will grow to $52,228 a decade from now. If you borrow that much in Stafford Loans, you will owe about $600 per month for the next ten years and pay about $20,000 in interest along the way. A notable contrast and an argument for building a college fund.6

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – news.salliemae.com/research-tools/america-pays-2015 [2/4/16]
2 – news.salliemae.com/research-tools/america-saves-2015 [2/4/16]
3 – tinyurl.com/hyroj6n [6/9/15]
4 – time.com/money/4155733/the-3-biggest-mistakes-parents-make-in-saving-for-college/ [12/22/15]
5 – franklintempleton.com/investor/products/goals/education/ugma-utma-accounts?role=investor [2/3/16]
6 – forbes.com/sites/learnvest/2015/02/24/4-common-college-savings-mistakes-many-parents-make/ [2/24/16]

Should You File Jointly, Or Not?

February 18th, 2016 | No Comments | Posted in Financial News

For many married couples, filing jointly is a good idea, but there are exceptions.

shutterstock_242374855Ninety-five percent of married couples file joint federal tax returns. Filing jointly can be convenient. Frequently, there’s a financial advantage, but that does not mean it should be done without consideration.1

Years ago, there was less incentive to file jointly. That was because the “marriage penalty” for doing so was effectively greater. There is no written “marriage penalty” in the Internal Revenue Code, but, in the past, income tax brackets were structured a bit differently and spouses having similar annual incomes sometimes paid more taxes by filing jointly than single taxpayers did.

There are many good reasons to file jointly. Nearly all of them involve saving money.

Joint filing may give you an effective tax break right off the bat. Currently, married taxpayers who file separately face the 28%, 33%, 35%, and 39.6% income tax brackets at lower income thresholds than other unmarried taxpayers.2

Joint filers can claim significant tax credits that marrieds filing separately cannot. If you want to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, the Elderly or Disabled Credit, or the Earned Income Tax Credit (EITC), you have to file jointly. Joint filing also gives you the potential to claim the full Child Tax Credit, rather than a reduced one.3

Deductions, too, decrease when you file separately as a married couple. Standard deductions fall significantly. Phase-out ranges affect itemized deductions, and some itemized deductions are unavailable for married couples who do not file jointly. Couples who file separate 1040s can only deduct 50% of the capital gains losses joint filers can. In addition, if one spouse elects to itemize deductions, so must the other (there must be a separate Schedule A for each spouse). The spouse with fewer deductions has no ability to use the standard deduction to lower his or her taxable income.2,3

Joint filing even helps you with regard to the Alternative Minimum Tax. When you file separately as a married couple, your AMT exemption falls by 50%. So you may be more susceptible to the AMT if you file separately. If the AMT affects you, you will find many federal tax deductions reduced or unavailable to you.3

Do you live in a community property state? If you do, you may know that state tax law defines what is considered separately held or jointly held property. If you want to itemize deductions in a community property state, the paperwork can be onerous.3

More of your Social Security benefits may be taxed if you file separately. Social Security gives you a “base exemption,” an income threshold above which Social Security benefits may be taxable. The base exemption for married couples filing jointly is $32,000, meaning that if 50% of the Social Security benefits you receive in a tax year plus your other income in a tax year exceeds $32,000, taxes may apply. The base exemption for married couples filing separately who live together at any time during the tax year is $0. It improves to $25,000 for married couples filing separately who live apart for an entire year.4

So why would you not file jointly when married? In certain circumstances, filing separately may be wiser.

Maybe you do not trust your spouse financially. If your spouse is a tax cheat or interprets federal tax law very loosely, filing jointly could prove hazardous in the case of an audit or other troubles. Both spouses must sign a joint return, meaning that both spouses are legally responsible for all taxes, penalties, and fines linked to that return. Yes, an innocent spouse may be offered tax protection by the IRS, but that innocence must be proven.2,3

Maybe you or your spouse have large out-of-pocket medical expenses. If so, and if the spouse contending with such bills earns much less than the other, there may be merit in filing separately. By doing so, the spouse with far less income might have an opportunity to meet the 10% AGI threshold needed to itemize medical expenses. (The 7.5% AGI threshold for itemizing these costs is still in place for taxpayers age 65 and older.)2

Maybe you are separating or divorcing. If that is the case, then it may seem only natural to begin filing separately while still married. Doing so now may lessen the chance of the two of you wading through tax issues in the aftermath of a split.

If you are unsure about whether to file jointly or singly, you can ask a tax professional for his or her opinion. Or, that professional can look at last year’s return and run the numbers for you. Most couples find that filing jointly works out best, but there are exceptions.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – forbes.com/sites/robertwood/2016/01/26/married-filing-joint-tax-returns-irs-helps-some-couples-with-offshore-accounts/ [2/6/16]
2 – abcnews.go.com/Business/filing-taxes-jointly-good-idea/story?id=22504248 [2/17/14]
3 – foxbusiness.com/features/2015/03/06/should-couples-file-taxes-separately-or-jointly-which-is-best-for.html [3/6/15]
4 – irs.com/articles/how-are-social-security-benefits-taxed [2/11/16]

In-Kind Distributions from IRAs

February 18th, 2016 | No Comments | Posted in Financial News

Yes, you can take an IRA distribution in the form of an investment.

shutterstock_180411068This may surprise you: you can take an IRA distribution in a form other than cash. This may seem unorthodox, but it can make financial sense for some older IRA owners as well as IRA heirs.

An in-kind distribution from a traditional IRA is fully taxable, just as a cash distribution from a traditional IRA becomes taxable income. Just how is the cash value of the in-kind withdrawal determined? The fair market value of the asset is reported to the IRS as a step in the distribution.1,2

Why would you want to make this type of IRA withdrawal? In certain cases, it may be preferable to withdrawing cash, especially when it comes to Required Minimum Distributions (RMDs) for traditional IRAs.

Maybe you want to keep shares instead of selling them. There are times when you may be reluctant to sell some or all of an investment to satisfy an RMD, because the investment is really performing well. An in-kind withdrawal is an alternative. The amount of the distribution will be treated just like taxable income, but you will still own that asset once it is outside of the IRA. Those shares now have a chance to appreciate further, and you can also elect to donate them to charity.2,3

Maybe you have a cashless IRA. If 0% of your IRA assets are sitting in cash, then one option is to take either a partial or full in-kind withdrawal to satisfy the RMD requirement. You will still retain ownership of the asset(s) distributed in-kind.2

Maybe you see a loser turning into a winner. You hold a poorly performing investment in your IRA, but you sense it will turn around, you suspect its value will soon rise. Rather than liquidate it, shares of it could be withdrawn from the IRA as an in-kind distribution. They will be taxed at their current value when distributed from the IRA as in-kind distributions are treated like taxable income, but in future years, they will only be subject to capital gains tax rates rather than (higher) income tax rates.4

Maybe the IRA has little value. Some “stray” IRAs are not worth very much. If an IRA holds an investment that has so little worth that it seems pointless to have the IRA in the first place, an in-kind distribution may offer a solution. If you own a traditional (or Roth) IRA and make this move before age 59½, you are likely looking at an early-withdrawal penalty as well as taxes. Even so, you may prefer that to keeping up the IRA for years, or carrying a loser investment in the IRA for any number of years while paying attached account fees.2

In-kind IRA distributions can be tricky, as they often involve shares. Share prices fluctuate, and if you are trying to precisely meet your RMD amount with a distribution of shares, there is the risk of coming up short or long. If you come up short, you will need another transaction to satisfy the RMD. If you come out long, that could increase the income tax attached to the RMD. This is the risk you take.5

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – tinyurl.com/hsdkwgn [1/19/14]
2 – newdirectionira.com/ira-info/distributions/what-is-a-distribution [2/3/16]
3 – azcentral.com/story/money/business/consumers/2015/12/22/right-size-your-portfolio-coming-year-nancy-tengler/77780344/ [12/22/15]
4 – time.com/money/2791159/how-are-stocks-taxed/ [2/3/16]
5 – marketwatch.com/story/should-you-take-stock-to-meet-required-minimum-distributions-2014-11-03 [11/3/14]

Insuring Your Personal Possessions

February 18th, 2016 | No Comments | Posted in Financial News

shutterstock_161784542When it comes to money matters, no one likes to be surprised by the feeling that they’ve been shortchanged. That’s why it’s important that you understand how your insurance policy responds to potential personal property losses.

When insuring your possessions on your homeowners or rental insurance policy, opting for replacement cost coverage provides you the best reimbursement option. Why? With replacement cost coverage, you collect the full cost to replace the item, less your deductible. Here’s an example to illustrate the benefit of replacement cost coverage:

The furniture you bought a few years ago for $650 is now worth only $100, but today costs $900 to replace. With replacement cost coverage, you would collect $900 to replace the furniture, minus your deductible. With actual cash value, you would get reimbursed $100, minus your deductible. Remember, the age and type of possession impacts the depreciated amount, which can be pennies on the dollar.

While your personal property is covered under your homeowners or renters insurance, policy limits do apply. To insure your valuable items—such as jewelry, fine art or antiques—consider scheduling these high-value items on an endorsement or policy floater.

For all endorsed items, an appraisal or sales receipt is typically required. This will help ensure that, in the event of a covered loss, the amount of insurance is enough to cover the replacement, repair or cash payment of the item. If you haven’t documented your possessions on a home inventory list, it may be hard to replace them.

While your homeowners or rental insurance policy will cover you in the event of a burglary or fire, up to the policy’s limits, you’ll still need a thorough inventory list, including photos or video. With insurance fraud on the rise, it’s important to have a home inventory list and to keep the information up to date. Storing this information in a safe place is highly recommended.

©Zywave, Inc. All Rights reserved.

February 2016 – Monthly Economic Update

February 18th, 2016 | No Comments | Posted in Monthly Economic Update

Weekly Economic Update

Why Is Tuition So High?

February 18th, 2016 | No Comments | Posted in Lifestyle

Ironically enough, student aid might be to blame.

shutterstock_321660074This article originally appeared in Inside Higher Ed.

College tuition has risen too quickly, and debt is unmanageable for increasing numbers of students; that much is clear. But to contain college prices, education leaders will need to answer a contentious question: Why does the price keep rising?

Higher education’s critics tend to blame high prices on overpaid professors or fancy climbing walls. At public colleges, lobbyists tend to blame reductions in state support. But a new study places the blame elsewhere: the ready availability of federal student aid.

Student aid accounts for most of the tuition increases between 1987 and 2010, according to a working paper from the National Bureau of Economic Research. The more money students can borrow, the idea goes, the more colleges can charge.

Over the last few decades, the amount of aid available to students has increased dramatically: Subsidized loans were expanded, while an unsubsidized loan program made its debut. But looking at the big picture, does that money always offset the costs to students?

The researchers say no. Instead, colleges increase tuition even more, because they know financial aid can cover the difference. Student aid may cover more of students’ tuition—but if the aid wasn’t available, tuition might not have gone up in the first place.

“You’ve got to somehow tie aid to lowered tuition if you want to give money to students,” said Grey Gordon, an assistant professor at Indiana University and co-author of the paper. “You have to somehow structure it so colleges can’t just increase tuition and capture that money.”

But the idea that increased student aid drives up tuition is contentious, as is the researchers’ model. The paper’s conclusions depend on a model of one hypothetical college, which is based on data from private and public nonprofit institutions.

quote1

“This is an atom bomb mathematical technique on a problem that requires much more nuance,” said David Feldman, economics professor at the College of William and Mary and author of the 2010 book Why Does College Cost So Much?.

Feldman said increasing federal aid will rarely change how high a college sets its tuition. A college’s sticker price is set by its wealthiest students’ ability to pay—and the wealthiest students never take out loans.

That doesn’t mean colleges never use federal aid to their advantage. Especially at private colleges, Feldman said, federal aid may replace existing scholarships. Take a student who would have gotten $20,000 from a college. If she gets an extra $1,000 in Pell Grants, she may get $19,000 from her college instead. The student pays the same, but the college pays less.

At public universities, increases in Pell Grants typically lower net tuition. “It’s a very different system,” Feldman said. “That’s the nuance that’s missing.” For-profits, on the other hand, are the one sector where the theory “applies in spades,” he said.

While the paper looks at nonprofit institutions, the idea that student aid increases tuition is perhaps most evident in for-profit colleges: In one study, for-profit institutions that participate in the federal aid program charged tuition that was 78 percent higher than those that didn’t.

Ronald Ehrenberg, a Cornell University professor of industrial and labor relations and economics and an expert on higher education governance, also cited the research on for-profits. “However,” he said in an email, “virtually everyone who has looked at public higher education and modeled it concludes that the major thing driving up tuition in public higher education is the withdrawal of state support.”

It’s a narrative that’s ingrained in the higher education landscape: State support is down, and students are covering the difference. This idea, too, is backed up by research—states that invest more in higher education see lower prices, said John Barnshaw, senior higher education researcher at the American Association of University Professors.

“As states increased their funding, the net price dropped,” he said, “and it was a statistically significant drop.”

But according to the NBER researchers’ model, changes in state appropriations didn’t contribute to tuition increases. “Even if appropriations have fallen, there are other sources of revenue that have offset that,” Gordon said. “Sports programs, hospitals, endowments. Endowments is the big one.”

The second, equally divisive finding of the paper has to do with what doesn’t drive up colleges’ price tags: faculty salaries.

The idea that faculty salaries increase tuition is popular, and the reason is something called Baumol’s cost disease. In the 1960s, the economist William Baumol noted that certain sectors become more productive over time, which allows them to cut labor costs and lower prices. But sectors that don’t see productivity increases still end up increasing their workers’ salaries, which drives up the cost for consumers.

Think of a string quartet, the example Baumol used in his original analysis. Even as time passes and technology improves, it will take the same number of people the same amount of time to play a piece of music as it did hundreds of years ago. Productivity isn’t increasing, but the cost of a string quartet will still rise—and the consumer has to pay the extra cost.

quote_2

Education, proponents argue, is the perfect example of Baumol’s theory. Instructors stand in front of lecture halls or seminar rooms, interacting directly with a manageable group of students. For centuries, the argument goes, nothing has changed about this model. Faculty members are expensive, and tuition goes up.

But according to the researchers, Baumol’s hypothesis doesn’t hold up. In the model, costs did rise—but instead of raising tuition, the model college responded to the higher costs by increasing enrollment.

“The cost is not a per-student cost,” Gordon said. “It has not become more costly to educate an additional student. It’s become more costly to educate all students in general.”

It’s a hard time to blame the faculty; many education analysts are sympathetic to the challenges faculty members face, and they’re happy to see more research that refutes Baumol’s hypothesis. Colleges rely more and more on part-time faculty members, who often work for low pay and no benefits. But it’s perhaps equally hard to blame student aid, often seen as the only way for most students to earn a degree.

“I go to college campuses almost every week and look at their expenses,” said Howard Bunsis, an accounting professor at Eastern Michigan University who does research for the AAUP. “It’s not student aid that’s getting a bigger share of the pie. In most places, it’s the administration.”

And then there’s the model itself. While based on real data, it doesn’t represent a real institution. And while the researchers plan to expand on their work in the future, the current model combines public and private data—a tactic many said was too simple a way to view a complex problem.

“You need to look at the incentives that different kinds of schools face and understand the process of tuition setting in order to have a good understanding of how those schools are likely to respond to small changes in federal grant and loan policies,” Feldman said.

Source: slate.com

3 Awful Things That Might Happen If You Don’t Update Your Phone

February 18th, 2016 | No Comments | Posted in Lifestyle

Apple’s newest iOS update is rumored to be coming out any day now. But what happens if you ignore those upgrade alerts? Aside from the annoying reminder message constantly pinging you and driving you crazy, there are some pretty good reasons to accept the prompts. (Just remember to back everything up first!) Here’s what might happen if you do nothing…

3 Awful Things That Might Happen If You Dont Update Your Phone

YOUR PHONE MIGHT GET HACKED

With each new iOS upgrade comes a slew of new security improvements called “patches” that will help protect your iPhone from digital bad guys like hackers and malware and memory corruption flaws. If you don’t upgrade, you won’t have the latest version, which means your phone is totally susceptible. Yikes.

YOUR APPS MIGHT ACT BUGGY

Instagram, Snapchat, even your calendar and email will start to under-perform and crash if you don’t have the latest iOS installed. Here’s why: When a new operating system comes out, mobile apps have to instantly adapt to new technical standards. If you don’t upgrade, eventually, your phone won’t be able to accommodate the new versions–which means you’ll be the dummy who can’t access the cool new emojis everyone else is using.

YOUR PHONE WILL EVENTUALLY SLOW WAYYY DOWN

The lag time from an old iOS may be minor, but it’s there. As long as you have a new(ish) phone, updating your operating system is the best way to ensure it’s working efficiently and at top speed.

Source: purewow.com

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