PlanFIRST™ encourages and promotes healthy financial living and has compiled a number of helpful financially related information and resources just for you. It’s our hope that you will find this site to be a valuable resource as you navigate your way through today’s turbulent financial waters.

Visit us often, as we continue to update this page regularly with new helpful information.

 

PlanFIRST's Answers to Frequently
Asked Questions.

— Moving Money Around in a 401(k)
— Difference Between 401(k) and IRA Distributions
— The Safety of Your Insurance Company
— Mortgage Modification
— Reverse Mortgages
— Other Saving Options Besides the Stock Market
— Fixed Annuities
— Variable Annuities
— How to Maintain a Higher FICO Credit Score
— The New Tax Credit for Homeowners
— How to Contact the ASA (American Seniors Association)

 

:: Moving Money Around in a 401(k)

You can move money around inside the 401(k) without paying taxes. This would allow you to transfer funds to something more conservative without worrying about the taxes. Taxes on traditional 401(k)s and IRAs are paid only on funds that are removed from the account (and not put back in within 60 days).

If you are over age 59½, you may be eligible for an “in-service” rollover. Some companies allow you to transfer at least a portion of your 401(k) to an IRA. You could open an IRA at a brokerage firm (e.g., Charles Schwab) or at your local bank. After the funds have been transferred, you can invest in virtually any investment they offer.

 

:: Difference Between 401(k) and IRA Distributions*

After you are age 59½, the distribution rules are very similar. However, if you retire or leave your company prior to age 59½, different rules apply.

IRA–Distributions from a traditional (not Roth) IRA taken prior to age 59½ are taxed at the individual’s personal ordinary income tax rate, plus a 10% penalty. There are several exceptions, such as distributions taken for certain medical expenses due to death or disability, for a first-time homebuyer, or if you follow the Reg. 72t rules.
Reg. 72t Rules–This regulation allows the owner who is under 59½ to avoid the 10% penalty (but not the income tax) if you take the distributions in “substantially equal periodic payments.” The payments must last for at least five years AND past age 59½. There are several formulas to choose from, so you should check with your IRA custodian or financial advisor to help you determine which option is best for you.

401(k)–You are permitted to withdraw funds from a 401(k) prior to age 59½ without penalty, provided you have left or retired from the company. You need to be old enough to be eligible for early retirement (usually age 55), and the company rules must allow distribution.

*This information is intended to be general in nature. You should consult with your tax advisor or financial planner prior to making any changes.

 

:: The Safety of Your Insurance Company

Many folks are concerned about the safety of their insurance company. AIG has received the most press, due to their size and the severity of their difficulties. Insurance companies belong to a State Guarantee Association in each state where they do business. Few insurance companies have ever gone bankrupt, but the ones that have were essentially bailed out by the company that bought them and the State Guarantee Association.

To check on the safety of your company, simply ask the company for a copy of their most recent A.M. Best rating brochure. You can also go to www.ambest.com to look up a current opinion. The SC Department of Insurance (www.doi.sc.gov) is another good place to check for the current status of a company doing business in SC.

 

:: Mortgage Modification

What should you do with your mortgage when you now owe more on the house than it is worth. The government recently passed two programs that may offer some help: Home Affordable Refinance and Home Affordable Modification.

www.makinghomeaffordable.gov

 

:: Reverse Mortgages*

Simply put, a reverse mortgage gives a senior citizen the opportunity to get equity out of their home without having to sell. The funds could come in the form of a lump sum, line of credit, monthly payments, or some combination.

You must be age 62 or older (both spouses, if the house is owned jointly). A recent change in the law stipulates that people getting federally backed reverse mortgages can no longer be required by the lender to also buy financial or insurance products, such as annuities.

However, you still need to be aware that reverse mortgages are very expensive compared to other loans. They are also very complex and difficult to understand. To help you understand the complexities, you will be required to meet with an independent mortgage counselor, which can cost up to $125.

Here is a summary of the fees associated with getting a reverse mortgage:

• 2% origination fee for the first $200,000
• 1% origination fee for any amount over $200,000, with a cap of $6,000
• You must buy mortgage insurance costing 2% of the house value (not loan value).
• Appraisal–typically $300 to $500

Note: Due to the high fees, I believe a reverse mortgage should be considered as a last resort.

 

:: Other Saving Options Besides the Stock Market*

The following savings options are listed in order of safety. Generally speaking, they are also in order of potential return–lowest to highest.

Certificate of Deposit–There are several strong local banks that you could consider. The two I mentioned on the program were Palmetto Bank and Pinnacle Bank. I think there is a good chance that interest rates will go up in the next few years so I would recommend keeping the term to two years or less.

Bank Ratings—If you would like to find out how a particular bank is rated, go to
http://www.bauerfinancial.com/btc_ratings.asp

Fixed Annuities–These are an insurance company’s equivalent of a CD. They are not FDIC insured but are backed by the full faith and credit of the issuing company. You can get their quality rating at www.ambest.com or by asking the company for a free A.M. Best report. The interest rate is typically higher than a CD, but the surrender charge period is generally much longer too. Check out the company’s track record on paying competitive interest rates.

Municipal Bonds–These are bonds that pay interest (or dividends) that are free from federal income taxes and possibly state income taxes. They can be purchased individually or through a mutual fund. Due to the higher cost of buying individual bonds, I generally recommend using a no-load mutual fund. You can find several choices at www.troweprice.com or at www.vanguard.com. Bonds do fluctuate in
price, so they are not considered as safe as a CD.

Corporate Bonds–These bonds are similar to municipal bonds, except they are not tax free. Since they are not tax free, they generally pay a higher interest/dividend than municipal bonds. You will need to calculate your after-tax return to determine which type of bond yields a higher after-tax yield. Corporate bonds fluctuate in price. Of course, any individual bond should return your original investment if you hold it to maturity.

 

:: Fixed Annuities

Fixed Annuities are purchased through an insurance company. The interest rate is typically determined each year by the company but the rate is never lower than the guaranteed minimum. It is important to understand how the minimum interest is calculated. Sometimes the guarantee is based on a percentage of the premium payment (e.g., 92% of the contribution times the minimum) and not the entire amount.

Other fixed annuity facts/features:

• Guarantee is dependent of the strength of the insurance company
• Earnings are tax-deferred until withdrawn.
• First withdrawals come from interest first and non-taxable return of premium last.
• Penalty for early withdrawal of earnings is the same as a traditional IRA.
• If annuity is in a traditional IRA, all withdrawals are taxed at ordinary income rates.
• Deferred sales/surrender charge. Be sure to ask how long the surrender charge period is and how much the charge is. Typically, the longer the surrender charge, the higher the commission and possibly the higher the guarantee will be.
• You name a beneficiary which avoids probate (unless the estate is the beneficiary).
• Can be converted to an immediate annuity. This provides a guaranteed lifetime income (don’t forget that this generally means your heirs will not inherit the balance in the account if you die before getting your accumulated balance out of the contract. For a reduced lifetime income, the company will usually offer a survivor benefit that will pay a benefit for at least 10 years to the survivor.

 

:: Variable Annuities

Variable Annuities are also purchased from an insurance company. However, the returns are based on the subaccount that you select, not a guaranteed interest rate. Many of today’s variable annuities offer guarantees, but they are generally not calculated the same way as a fixed annuity.

Here are some other facts/features:

• Fees vary, depending on the contract and any extra “riders” you select.
• Investigate any “guarantee” very carefully (see questions below).
• Deferred sales/surrender charge—similar to fixed annuities above.
• Tax penalties the same as fixed annuity.
• Can be converted to an immediate annuity or systematic withdrawals.

 

IMPORTANT QUESTIONS TO ASK BEFORE BUYING
A VARIABLE ANNUITY

Below are some questions to ask when considering the purchase of a variable annuity. These questions are general in nature and may or may not apply to the contract you are considering. This is not intended to be a complete list, but it should be helpful in making a good decision.

1. If I decide to take all of my money out (lump sum) of the contract in 10 years, how much interest will I be guaranteed to earn?

2. If I have to annuitize (take monthly payments in exchange for the lump sum) to get the interest rate guarantee, how long will the company guarantee to continue paying my survivors? Will my benefit be reduced if I have included my spouse as a contingent payee? Will my benefit be reduced if my children are contingent payees?

3. What is the guaranteed interest earned if my wife and I die and my children want to take a lump-sum payout? Note: in many cases, the only guarantee is the return of your net purchase payments.

4. Can you run a proposal that shows the results, given the above scenarios? I am interested only in the guaranteed payouts, not projected rates of return.

5. How strong financially is the company? If this company is purchased by another insurance company, could the new company charge me a higher rate for the optional riders I purchased?

6. Can you show me actual returns this product has earned? Since the stock market goes up most years, many contracts allow the company to switch out of stock funds and into bond funds whenever it thinks it is prudent. If this contract allows this, I want to know how that may affect returns. Actual returns vs. the general market returns would also give me an idea of how the fees will impact my returns.

7. If I take a distribution within, for example, 10 years (including any Required Minimum Distribution) will that affect my guaranteed return, including the guaranteed return of my account value or the Return of Principal Guarantee?

8. What is the total commission? How much of it do you receive? If the agent is a Certified Financial Planner™ professional and tells you that you do not pay the commission, that he receives his pay from the insurance company, he is in breach of the CFP® ethics standards.

Note: Be sure to read the marketing material carefully!

 

:: How to Maintain a Higher FICO Credit Score

Here are some tips to help you maintain a higher FICO credit score or to help improve a lower score:

• Pay bills on time—MOST IMPORTANT!!!
• Keep credit card balances below 30% of the maximum limit
• Keep the total balance on all cards low compared to the total available credit
• Don’t close account, unless you have more than 4 cards.
• If you do close accounts, don’t close them at the same time
• When you keep an account, be sure to still use it every now and then
• Keep the oldest account open

 

Are you trying to rebuild your credit after bankruptcy? Do this first:

• Get SECURED credit card from your bank
• Pay account on time for 12 months
• After 12 months the credit card becomes unsecured
• Follow the suggestions above regarding credit score

 

Need more help? Contact:
Greenville County Human Relations Commission
Greg Burgess
864-467-7223

 

:: The New Tax Credit for Homeowners

Expanded tax credits for home improvements are something nearly every homeowner can take advantage of.

Qualifying exterior doors, windows, insulation, roofs, air conditioners, heat pumps, and other home improvements are eligible for a federal income tax credit equal to 30% of the cost. The maximum total credit for all these items is $1,500 for the two-year period ending December 31, 2010.

Solar water heaters, photovoltaic systems, geothermal heat pumps, and wind energy systems are not subject to the $1,500 cap and qualify for the 30% tax credit through 2016.

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law extends the tax credits for energy efficiency into 2011, BUT at lower levels. The levels revert back to those in effect in 2006 and 2007, which were 10% of the cost of the improvement, up to $500, with a $200 max for windows, and several other set maximums.

2011 Highlights:

• $500 lifetime limit.  If you got over $500 in these tax credits from 2006-2010, you are not eligible for anything more.
• 10% up to $500 for insulation, roofs, and doors.
• Windows capped at $200, but qualification now ENERGY STAR
• Furnace and boilers capped at $150, and all furnaces and boilers must meet 95 AFUE
• $50 for advanced main air circulating fan
• $300 for air conditioners, air source heat pumps, water heaters, and biomass stoves

For complete information on qualifying improvements and products, visit www.energystar.gov/index.cfm?c=products.pr_tax_credits#s1.

 

:: How to Contact the ASA (American Seniors Association)

American Seniors Association
3700 Mansell Road, Suite 220
Alpharetta, Georgia 30022
1-800-951-0017
Americanseniors.org

 

Information contained herein is from sources believed to be reliable. We cannot guarantee the accuracy or completeness of such information and we assume no liability for damages resulting from or arising out of the use of such information. Additionally, because we do not render tax or legal advice, this report should not be regarded as such.