Financial Tips for Divorcees
If you are either getting divorced or thinking of doing so, there are a number of factors to consider when dividing up the marital assets. Generally speaking, the house, cars and retirement assets are the main items to be allocated in most divorce proceedings. However, income, child support and Social Security benefits will also play a role in the settlement process. While child custody may not be a key issue at this point in your lives, paying or receiving alimony can still have a substantial impact on either spouse's ability to plan for retirement.

Each spouse will need to create a separate budget and get their credit reports in order (quite often for the wife, this can mean establishing her own credit). If the husband has substantial retirement assets, then a QDRO (Qualified Domestic Relations Order) may need to be issued. This edict will dictate to the retirement plan custodian how to divide up the participant's assets in the plan. There are several different ways that QDROs can be administered; as a lump-sum cash settlement, an income stream paid at retirement or as a direct transfer from the retirement plan into an IRA.

If you have been married for at least 10 years and do not remarry, you can qualify for Social Security benefits based on your ex-spouse's earnings after you both turn 62, even if the primary wage-earner has remarried or has not retired, and is not receiving benefits yet. Therefore, it may be advantageous for the spouse that earns less to try and postpone proceedings until after 10 years of marriage (obviously, this may not be a viable strategy in many cases, such as those involving domestic abuse.)

Remember to file your tax return using the single or head-of-household status if your divorce is finalized by year-end. Also, alimony income may be considered earned income, so you may be able to use it to make IRA contributions. Updating insurance policies and beneficiaries is also important. Most modern divorce decrees mandate that children are covered under the higher wage earners life insurance policy. Who will carry the children under their health and disability insurance must also be decided? If you were covered under your spouse's group plan, then COBRA coverage will be available for 18 months after the divorce is finalized.

If you are unsure where you stand on any of these issues, please contact us. We will help you to determine what action needs to be taken both for you and your children, if necessary.

Deducting Losses in Your IRA
IRAs are tax sheltered retirement plans meant for long-term savings to be withdrawn in your retirement years. All untaxed contributions - i.e. tax-deductible contributions - and earnings will be taxed at your ordinary income rates when you finally begin withdrawals. Those who have only made tax-deductible contributions will have everything in their IRA liable to income taxation.

If you made any non-deductible contributions, only its earning would be taxed, but not those contributions since they were already taxed. Those contribution amounts give you a 'basis' in your IRA which will not be taxed. People who have only made tax-deductible contributions have no basis (i.e. 'zero' basis) in their IRA.

When you withdraw money from your IRA, each distribution is considered to be part taxable (your pre-tax distributions plus earnings) and part non-taxable (your post tax contributions, your basis).

Knowing that, under what circumstances can you deduct a loss?

First, you need to withdraw everything you have in all your traditional IRAs if your loss is in one of them. That ends your IRAs!

Second, what you have withdrawn must be greater than your current basis in your IRA.

Let's consider an example:

At the beginning of the tax year, Bill has an IRA with a balance of $24,000. His basis in it is $15,000. But during the year his IRA investment balance dropped by almost 50% to $13,000 after a severe crash in some stocks he was holding.

What can he deduct for losses?

Well, the $11,000 loss ate up $9,000 (= $24,000 - $15,000 basis) of his tax-deferred earnings as well as $2,000 into his basis of $15,000. So he could claim a $2,000 loss.

But to do that, he needs to withdraw all his IRA money. Assuming this IRA is all that he has, he will have to pull out the remaining $13,000. His loss is formally $2,000 (= $15,000 basis less $13,000 balance) according to Scenario 1 in the table. See the table for what happens when investment losses are less as in Scenarios 2 and 3.

Lastly, your IRA losses can be taken only as miscellaneous itemized deductions on Schedule A of Form 1040 and only to the extent they exceed 2% of adjusted grow income.

Give us a call or fill out the reply coupon so we can help you consider how you might better handle your IRA investments.

¹ IRS Pub 590.

Do Not Lose a Tax Break by Rolling Your ESOP Stock into Your IRA
When you retire, you may decide to rollover your company-related qualified plan holdings into an IRA. You got a tax deduction for your contribution to them, so you will pay ordinary income tax rates when you withdraw them from your IRA. However, if you bought your company stock through a qualified plan, you could be paying unnecessary taxes on it if you roll that over too.

If you bought your company's stock through an Employee Stock Ownership Plan (ESOP), through their 401(k) or other qualified retirement plan, and it has appreciated, you can pay reduced² taxes on it if you do not roll it over into an IRA. Here's how.

Request that the shares of your company stock be distributed to you. You will be required to pay tax on the amount you contributed to their purchase under the qualified plan. That amount is taxed at ordinary income and that 'purchased' amount so will become your tax basis in that stock.

Of course if the stocks have appreciated significantly beyond their cost to you, their market value will be higher than your tax basis. The difference between the stock's current market value and your tax basis in them is the "net unrealized appreciation" (NUA). This NUA is the gain you will have if you sold the stock right away. If you do, you will be taxed on it at the lower 'long-term' capital gains rate no matter how long you owned that stock, since it is treated as being held long term.

You are not obliged to sell the stock, though, so you can hold on to the stock as long as you want - perhaps selling off blocks of shares as money is needed, or over a period of years, to spread out the tax cost. You will always only pay the capital gains over and above your cost basis at the long-term capital gains rate.

If you simply rolled that stock into an IRA, you would be paying ordinary income tax rates as well on that portion that you can apply the long-term capital gains tax rate by taking the stock directly. So if you did that, you would be losing a tax break - and money.

Give us a call or fill out the reply coupon so we can show your how to handle your company stock plan distributions.

² IRS. Pub. 575 – Distributions from company plans.

Health Costs Can Take a Significant Fraction of Retirement Income
Those approaching or beginning retirement are sometimes told that they'll need only about 75% of their pre-retirement income to handle their retirement expenses. But undermining this projection is the growing cost of health care - a situation you must prepare to handle.

Two recent studies shows that retiree health poses a serious threat to their financial security - and that includes today's seniors and baby boomers. The studies show that health care expenses will consume huge portions of retirement resources in the years ahead.

The CRR at Boston College says³ that skyrocketing health care costs mean that 44 percent of Americans will not be able to maintain their standard of living in retirement, and projects that the average American couple retiring in 2010 at age 65 will need nearly $206,000 to cover health care over the rest of their lifetimes. A separate study⁴ projected similar results.

These cost estimates do not even include benefits from supplemental employer insurance, nor spending on over-the-counter medicines or long-term care.

The key expense components driving CRR's projections include (see table):

• Medicare Part B premiums for physician and outpatient hospital services
• Medicare Part D premiums for drug-related expenses
• Co-payments for Medicare-related services
• Health care services not covered by Medicare

CRR conservatively projects annual inflation in these costs at 5.9 percent for the next 20 years driven by:

• higher utilization rates for health care services,
• higher cost of new technologies, and
• an increase in certain chronic conditions such as diabetes.

Average Out-of Pocket Medicare Expenses for Retired Individuals, 2007
Medicare component	Amount
Part B: Premium Copayments	$1,122 969
Part D: Premium Copayments	264 1,142
HI Cost Sharing	287
Total Medicare Cost:	$3,783

Most American households do not have a clue what is about to hit them. The system is out of control. CRR calculates that the average household approaches retirement with just $60,000 in retirement savings. That means income from Social Security will be used to bear the brunt of health care costs. And that is money most of us hope will be available for other expenses.

What can you do?

Prepare for increased health costs by:

• Increasing your savings - ideally through tax -sheltered plans such as IRAs.
• Delay taking Social Security beyond your Full Retirement Age (65 or 66 for most) for the increased benefits for delaying - as much as 32% more if you wait until age 70.
• Stay healthy- through correct exercise and good dieting.

Be sure to consider long-term health care insurance too. Even if you manage to handle other health care expenses, long-term care cost can deplete much of your savings.

Give us a call so we can help you with health-related insurance options suitable to you.

³ Center for Retirement Research at Boston College, http://crr.bc.edu/briefs/health_care_costs_drive_up_the_national_retirement_risk.html.
⁴ Fidelity Investment study – see http://retirementrevised.com/health/retiree-health-costs-rising-fidelity-study-shows

Opportunities in ETFs for Retirement Income
Retirees seeking income investments will find more opportunities in ETFs. New ETFs are created each year to cover every conceivable market sector.

Exchange-traded funds (ETFs) are uniquely suited for individual investors because they offer a low cost and flexible ways to diversify within the sector they buy. Each represents shares in a portfolio of underlying investments (such as stocks, bonds, etc) that the ETF manager selects to achieve his ETF's purpose.

Income-based ETFs include:

• fixed-income ETFs and
• dividend-based ETFs

Fixed-income ETFs

Fixed-income ETFs are made up of short-, intermediate- and long-term Treasuries, corporate bonds, TIPS (Treasury inflation-protected securities) and municipal bonds.

Bond ETFs offer benefits similar to those of stock ETFs, such as low cost, diversification, the ability to trade shares throughout the day, as well as the ability to short them. As with bonds themselves, the prices of bond ETFs vary inversely with the level of interest rates - i.e. rising rates lead to falling bond ETF prices and vice versa. So an increasing fixed-income ETF portfolio value may reflect a declining income return.

Like most bond funds, fixed-income ETFs do not pay a fixed rate of return and do not guarantee that your investment will be recouped when you cash out. Bond ETFs pay monthly dividends in cash. Individuals interested in reinvesting their dividends should contact their brokers for further information, including any fees.

Many bond ETFs feature low expense ratios (expense to ETF value) - a major plus for fixed-income portfolios, particularly during times of low returns. But since you incur a commission charge on each ETF trade you make, trading too frequently will offset the benefit of a low expense ratio. Minimization of tax, which is an advantage for stock ETFs, is not relevant with bond ETFs because of their income orientation.

Like Treasury securities themselves, Treasury bond ETFs generate income that is subject to federal income tax, but should be exempt from state and local income taxes if the fund sponsor meets the state's administrative requirements to allow for this.

Dividend-based ETFs

New dividend-based ETFs provide you access to high-yielding preferred stocks. Such ETFs may focus on higher-yielding stocks, ADRs, REITs, master-limited partnerships, closed-end funds, and preferred stocks.

These would produce current taxable earnings, again, due to the nature of an income-generating investment.

Diversification does not guarantee a profit against loss. Shorting ETFs or other securities involves the use of a margin account and substantial risks. It is not a suitable strategy for many investors.

Give us a call so we can give you more information on ETFs relevant to your situation.

If You Are Married, a Bypass Trust Can Save a Lot on Eventual Estate Taxes
If you have been fortunate enough to have acquired a lot of wealth, you will want to preserve it for your spouse and children to enjoy. But at your death, the federal government imposes an estate tax on the wealth you own. It is a progressive tax that starts at 10% and rises to 45% for estate transfers over $3.5 million (2009) and disappears completely in 2010. But in 2011 it gets worse. In 2011, only the first $1 million of your estate is excluded from estate tax. You can see the tax would be quite significant for large estates - and all effort should be made to avoid paying it.

One exception to this transfer of wealth tax by death is called the 'marital deduction'. Any amount you leave to your spouse at your death is deductible from your taxable estate. So, you can leave all your wealth to your spouse and no estate tax is due.

This may sound like a good option, but when your spouse eventually dies, the estate tax will kick in on all her (or his) wealth. She will get to use her $2 million exclusion, but by then the wealth may have grown considerably, and a good junk – approaching 25% – of it will not go to your children but to the government.

If you are married you can significantly reduce (or avoid altogether - depending on the size of your estate) the estate tax on your wealth by using a Bypass Trust. It works by making use of your $1M exclusion (2011) that you would forgo by giving everything to your spouse as above. You simply arrange to transfer $1M (i.e. your exclusion amount) of your wealth to the Bypass Trust (BT) and leave the rest to your spouse.

That way when your spouse dies, the full $2 million (your exclusion amount at your death and her [or his] exclusion amount at her death) will have been excluded from your wealth rather than just $1M if you had transferred everything to her (him) at your death.

But the benefits can be better than just this. First, in addition to the children being the ultimate beneficiaries of the Bypass Trust, you can have its income used for your spouse during her (or his) remaining lifetime, so the money is not all lost to your spouse. Second, you should put those assets that will appreciate most in the Bypass Trust, so the increase of this portion of your wealth will not be subjected to Estate tax, as it would if left with your spouse.

The figure shows how a Husband and Wife of a $2M estate can use the Bypass Trust (BT) to transfer money eventually to the Children. In the figure the $1M transferred to the BT may grow to any amount while the wife's $1M might double to say $2M. The estate tax paid at the wife's death would be only on her estate for the $1M (= $2M - $1M exclusion). If the original $2M held had been transferred all to the wife (no use of Bypass Trust) and her estate doubled, at her death her estate would grown to $4M. In that case $3M (=$4M - $1M exclusion) would be subject to estate tax!

Of course, you could give your children (C) a share of your wealth while you are living or at your death - to use up your exclusion amount. But use of the Bypass Trust provides income protection for your spouse, as well as preservation attributes for your children.

Give us a call so we can help you decide if a bypass trust is an appropriate way for you to potentially maximize transfer of your wealth.

HSAs Can Offer Substantial Savings Benefits
If you do not qualify for group health insurance and are not drawing on Medicare, then you are probably eligible for an exciting new health savings plan that can double as a retirement savings vehicle. Created in 2003, these self-directed plans are called Health Savings Accounts (HSAs). They allow for annual tax-deductible contributions that can be invested in stocks, bonds, mutual funds, annuities, or virtually any other type of investment vehicle.

However, unlike IRAs or other types of retirement plans or accounts, you can withdraw the money from your HSA at any time (including before age 59½) in order to cover the cost of any type of qualified medical expense. "Qualified expenses" for HSAs include virtually any type of medical expense, including doctor's visits, hospital bills, lab fees, dental work, eyeglasses, medications, hearing aids, long-term care, etc.

But if luck is with you and no medical bills are incurred, or the amount spent on medical expenses is less than the account balance, then you can withdraw the remainder as retirement income. Best of all, there are no income or age limits for anyone wishing to make tax-deductible contributions, which are a huge benefit for high-income savers or those that also contribute to any other type of retirement plan. These plans do require the participant to be covered under a qualifying high-deductible health plan, which has a higher than normal deductible and tends to cover only the more catastrophic health issues. However, traditional health plans require payment of premiums (which are often higher than qualifying high-deductible policies) regardless of whether a claim is made or not. Therefore, for those who qualify these plans offer an advantage; the guarantee that the money they spend to cover medical costs will not go to waste, regardless of whether any medical bills are actually incurred or not. This feature effectively resolves a huge dilemma for those who are struggling with health or medical uncertainty, and are trying to decide whether to invest in more insurance or simply increase their liquid assets.

Furthermore you will not have to itemize deductions on your tax return in order to get the contribution deduction. Ultimately, these plans offer an enhancement to the traditional retirement savings income limitations if you are attempting to maximize your retirement savings. The contribution limits are indexed for inflation and vary according to whether you are single or have a spouse or family.

If you would like to know more about Health Savings Accounts, please call us.

Note that health savings accounts may have associated fees.