Volume 13, Issue12

Retirement Planning: ACTIONS YOU CAN TAKE NOW

Does your retirement seem light-years away? While it may appear a long way off, you owe it to yourself to look toward the future and begin giving some thought to what you can do today to help ensure a bright retirement tomorrow. Although time may be on your side, if you quiz some of the retirees you know, they will probably tell you that saving for retirement is not as simple as it may initially appear.

Here are four key factors that may ultimately influence the type of retirement you will enjoy:

  1. Inflation. You are probably aware that, over time, inflation can erode your savings. But, just how seriously do you take inflation? At 3% inflation, $100 today will be worth only $67.30 in 20 years—a loss of one-third of its value. Thus, it is important to seek retirement savings vehicles that have the best chance of outpacing inflation.
  2. Taxes. Your present income level, tax bracket, and the types of tax-deferred retirement savings plans that are available to you can all play an integral part in how much money you can amass for your retirement. By maximizing your pre-tax contributions to employer-sponsored plans and Individual Retirement Accounts (IRAs), you can help take advantage of the tax-deferred benefits of such plans.
  3. Discipline. Becoming a disciplined saver is one of the key components of retirement plan success. By making regular contributions to your employer-sponsored retirement plan and your IRA, you can maximize the power of compound interest (the interest earned not only on the initial principal, but also on the accumulated interest from prior periods). With a steady flow of contributions, your retirement savings have a greater chance of accumulating to meet your long-term goals.
  4. Personal Savings. Taking into account the effects of inflation and taxes, there is a distinct possibility that your retirement plan income may eventually fall short of your needs, especially during a long retirement. Also, Social Security generally provides only a percentage of most retirees’ income, and its future is in question. Thus, to avoid a potential shortfall, it is essential to start planning today to supplement traditional retirement income sources with your own personal savings.

Of course, understanding these principles alone is no guarantee of future success. However, the sooner you begin to recognize the effects that economic and financial forces can have on your retirement income, the more likely you will be to adopt current strategies that can help you achieve your long-term objectives. By taking action now, you can help increase your chances of brightening your “golden” years ahead.


Did you know that you can make a gift of a new or existing life insurance policy to your favorite charity? When properly designed, a charitable life insurance program can provide a powerful boost to your overall financial picture and offer substantial tax benefits, as well as play an important role in supporting a charitable interest

There are generally three methods used to gift a life insurance policy to a qualifying charity: a charitable bequest plan, a charitable gift plan, and a charity ownership plan. Regardless of the method, policy ownership and beneficiary arrangements play an important role in the planning process. A consultation with a qualified legal professional can solidify your goals and expectations, provide information on the limitations on charitable deductions, and help achieve the desired results while avoiding any unnecessary problems.

A Comparison of Gifting Strategies

A charitable bequest plan is ideal if you would like a charity to benefit from the proceeds of an existing life insurance policy but feel uncomfortable about surrendering control during your lifetime. By merely changing the beneficiary arrangement to a desired charity, you retain the ability to enjoy the usual benefits of owning a policy. There is no immediate income tax benefit for this type of charitable gift because you still have incidents of ownership in the policy. However, upon your death, even though the death proceeds will be included in your gross estate, a charitable deduction for the full value of the policy proceeds is allowed.

If you wish to receive an immediate income tax deduction for a gift of an existing policy, you may wish to consider a charitable gift plan. By simply changing the beneficiary and ownership designations on an existing policy to a favorite charity, you can enjoy an immediate gift tax charitable deduction for the policy. This deduction is based on the lesser of your (the policy owner’s) cost basis or the value of the policy. You may also qualify for an income tax deduction

If you make regular cash contributions to a charity, an opportunity to leverage smaller gifts into a larger endowment may exist. Under a charity ownership plan, a life insurance policy—where permitted by state law—is purchased by and made payable to a charity of your choice. Policy premiums are technically paid by the charity. To offset this cost, you can make annual cash gifts to the charity, and as a result, you may be eligible to deduct a portion of your charitable donations from your income taxes. A gift tax charitable deduction for the full value of the annual cash gift is allowed. As such, this method is truly a “win-win” situation for you and the recipient charity.

Watch Out for Insurable Interest Laws

Regardless of your gifting strategy, an important planning consideration will be the insurable interest laws in the state where the policy was originally purchased. Although the donor makes contributions to the charity in cash and the cash is then used by the charity to pay premiums on the life insurance policy, the life insurance policy insures the donor’s life. Because insurable interest is typically considered to be an interest based on family, marriage, or financial obligation, the charity’s insurable interest in the policy may be called into question, thereby jeopardizing the tax benefit and placing the policy proceeds as part of the donor’s estate. A case for insurable interest can be anticipated and incorporated into the trust documents.

The Best of Both Worlds

If you are charitably inclined and are seeking tax advantages, the gifting of life insurance can offer unique planning opportunities. The potential for charitable income tax deductions or a considerable estate tax reduction, coupled with satisfying your charitable inclination, may make this type of gift particularly attractive. Such charitable life insurance gifts can typically be achieved with minimal amounts of legal challenges and publicity. However, careful planning under the guidance of a qualified legal professional is necessary to help ensure your charitable intentions are properly executed.

Keep Debt IN CHECK

Everyone has, at some point in their lives, accumulated personal debt. Whether debt is a cause for concern depends upon a number of factors, including how the economy is functioning, your particular earning and economic prospects for the near and long term, and the type of debt you incur. By being conscious of spending habits, including credit card use and large purchase habits, you can better understand ways to control debt—before it starts to control you.

Debt Management Simplified

In order to properly manage debt, it is important to distinguish between “good debt” and “bad debt.” From a purely financial perspective, good debt is borrowing in order to purchase an asset that is likely to appreciate in value (e.g., a home or business). In some cases, good debt may become “better” if, for instance, you itemize certain repayments (e.g., home mortgage interest) on your tax return and, as a result, qualify for certain tax deductions.

On the other hand, bad debt is borrowing in order to purchase an asset that is likely to depreciate in value (e.g., an automobile) or borrowing for nonasset consumption (e.g., a vacation). And, bad debt has been made “worse” now that the government has limited tax deductions for certain kinds of debts (e.g., interest on personal loans and credit card debt is no longer tax deductible).

In order to manage your debt effectively, it is helpful to consider the following points:

Get a “Snapshot” of Your Debt. Ask yourself how much “good” and “bad” debt you have. Then, categorize your debts as short-term (e.g., credit card), intermediate-term (e.g., car loans), and long-term (e.g., mortgage and home equity).

Pay Off the “Right” Debt First. It generally makes sense to pay off high interest debt first, particularly if the interest is not tax deductible. Stretching out payments is most appropriate for intermediate- and long-term debt. For short-term debt, you ideally should have enough money in savings to pay it off, if necessary.

Limit Your Credit Card Use. Credit cards make life easy, but they can also tempt you to live beyond your means. If you tend to use credit cards to purchase consumables, rather than assets that appreciate, you may want to reduce your dependence on them. It is also best to try to avoid the minimum payment trap. By making only the minimum monthly payment, the interest that accumulates as you stretch out payments can make even “bargain” purchases costly in the long run.

Control Impulse Spending. If you have a tendency toward impulse spending, avoid shopping unless you have a specific purpose. Or, try delaying your impulse purchases for 24 hours. You may find the need will pass once you’ve had a chance to sleep on it.

Being Realistic

Spending is not always based on purely financial considerations. It can be complicated by emotional factors that can cause confusion between things we think we need and things we really do need. Nevertheless, the reality of living in the modern world leaves most of us with little choice but to amass some “bad debt.” However, common sense strategies (such as the ones outlined above) can help you control your debt, making it manageable within your means. Asking yourself the right questions won’t cost you anything and may help you save money.


“Taxing Issues” IN EDUCATION

The rising cost of education is a national concern. The federal government provides certain tax benefits to help taxpayers manage the financial burden. However, with legislative changes and inflation adjustments, staying on top of the opportunities available to you can be challenging. For 2007, the Internal Revenue Service (IRS) provides the following student loan deductions, education credits, and college tuition deductions.

Federal Student Loan Deductions

In 2007, up to $2,500 of interest paid on student loans is tax deductible both for taxpayers who take the standard deduction and for those who itemize; however, certain income limits apply. Single taxpayers with
modified adjusted gross incomes (MAGIs)
of $55,000 or less ($110,000 for married couples filing jointly) are eligible to deduct up to $2,500 of interest paid on a student loan that covered qualified education expenses, such as tuition, room, and board. Single filers with MAGIs less than $70,000 and joint filers with MAGIs less than $140,000 qualify for partial deductions. Prior to tax year 2002, only interest payments made within the first 60 months of loan repayment qualified for the deduction, but the IRS has eliminated this limitation.

Education Credits

If you are currently paying higher education expenses, two federal tax credits may help lessen your tax bill: the Hope Scholarship Credit and the Lifetime Learning Credit. For 2007, eligibility phases out for married couples filing jointly with modified adjusted gross incomes of $94,000 ($47,000 for single filers). The Hope Credit provides a $1,650 tax credit for college education expenses during a student’s first two years. The Lifetime Learning Credit, which applies not only to undergraduate study, but also to graduate and professional education pursuits, could be worth up to $2,000. If a student qualifies for both credits in the same year, you may claim either credit but not both.

College Tuition Deductions

Through 2007, an above-the-line deduction worth $4,000 is available to individuals paying qualified higher education expenses. To qualify, single filers must have adjusted gross incomes (AGIs) of $65,000 or less, while joint filers must have AGIs of $130,000 or less. A $2,000 deduction is available to single filers with AGIs under $80,000 and to joint filers with AGIs under $160,000. If you claim either the Hope Credit or Lifetime Learning Credit, you may not take this deduction.

Take Time to Plan

Whether it’s your child’s education or your own, proper planning can help fund the search for knowledge. A tax professional can help you develop a strategy that targets your needs and opportunities. Higher education may be a distant dream you hold for a child or a financial imperative staring you in the face. Either way, you can take immediate steps to begin meeting this challenge.

This information provides a brief summary of certain tax benefits for higher education. As always, you must consult with your own tax professional to determine if you are eligible for any of the tax benefits listed above.

The information provided is not written or intended as tax or legal 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 published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2007.