Radio interview with Chicago’s Money Smart Radio program and host Matthew Sapaula – Interview starts at 9:59 and runs about 10 minutes. To hear the entire interview click on the logo below:

(Note the interview date is 6.11.2009 – make sure you click the right date.)

Interview Summary –

Not sure how to salvage what you have left in your retirement accounts? Find out how you can keep more of what you have and position yourself NEVER to lose another penny in the future ahead. Ryan Pinney (TheProAdvisor) articulates specific financial strategies that keep you ahead of the economy AND Uncle Sam’s income taxes!

My last article focused on tax savings tips, unfortunately, I haven’t even started on my 2009 tax return.  Needless to say, I’ll be filing for an extension instead of rushing to finish and file my 2009 tax return by April 15^th.

If you’re in a similar situation, you may want to file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns.  Particularly if you need more time to do a thorough job preparing your tax return.  This has affected a lot of tax filers this year who have had to deal with many of the new tax issues/changes that took effect in 2009.

Another reason to file an extension is that many financial institutions are still sending corrected form 1099s with revised amounts for qualified dividends and foreign taxes. Taxpayers with investment income may want to file an extension if they typically receive a corrected form 1099.

Filing an extension is pretty easy to do and gives you a huge advantage – an additional six months (until October 15^th, 2010) to file your final 2009 tax return.  Not to mention it will save you time and money later.  This is because you will owe the IRS penalties and interest if you don’t file a tax return or at least an extension by April 15th.

One commonly overlooked and costly mistake faced by many who may consider filing or do file an extension – the need to file an extension for your state tax return as well.  This is an easily avoided, yet costly error, so don’t do it.

Even though filing an extension gives you an additional six months to finalize your taxes, it does NOT give you an extension to pay the taxes you owe. If you think that you may owe taxes, then you will still need to calculate a reasonable estimate of the taxes owed and submit a payment with your Form 4868.

Be sure to pay at least 90 percent of what you think you owe to avoid any late payment penalties.  Additionally, if you want to avoid paying any additional interest for paying late, you have to pay the full amount of the tax liability owed.  (NOTE: Currently the IRS interest rate for late payments is 4 percent, so maybe it isn’t a big deal, but I hate having to pay one cent more than I need to.)  This is one area where it pays to error on the side of caution – READ AS “it is better to overpay versus underpay” to avoid a hefty penalty.

Lastly, don’t worry — according to the IRS, filing for an extension does not make your return any more likely to be the target of an IRS audit.

As always, I recommend that you work with a “Financial Professional”, in this case a CPA or tax professional.  Specifically a CPA or tax professional that understands the business of taxes and finances and can provide trusted advice and services during the tax season and throughout the year to come.

Finally, don’t feel bad about trying to save money on your taxes – don’t cheat, but definitely do everything legally in your power to avoid them.  As a little motivation, a quote from Judge Learned Hand – “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Good Luck!

TheProAdvisor

As tax day 2010 approaches, here are a few tips that will help you file saving as much as you can, with as little effort as possible and on time.  For those of you new to this blog – I hate taxes.  Income Tax, Estate Tax, Sales Tax, Gas Tax, You-name-it Tax – I loathe them all equally.

With that, your best strategy for minimizing tax liability and bolstering your financial position is to stay current on tax law. However, in a time of sweeping change, new legislation and regulations, continuing economic uncertainties, doing so can be a challenge.

In 2009, tax law changes ranged from tax credits for employees and undergraduate students to tax breaks for first-time homebuyers and unemployment assistance for workers involuntarily terminated. Yet, what remains constant is the need for in-depth knowledge when preparing your taxes. Tax Saving Tips for 2009 provides an overview of key tax law changes that may affect your return and the latest information and practical strategies for minimizing your tax bill.

Should you have any questions or concerns, a CPA tax professional can review your overall financial picture to help you identify winning tax strategies.

Filing Basics

Filing Status Taxpayers can file as single, married filing jointly, married filing separately, head of household or qualifying widow(er). If you are married and filing jointly, you can take advantage of tax credits and benefits not available to couples filing separately. Unmarried taxpayers may file as single or, if they qualify, as head of household. If more than one filing status applies to you, you may want to choose the one that result in the lowest tax obligation.

Exemptions

You may claim a personal exemption for yourself, your spouse and each of your dependents. A dependent child includes children born to your family, stepchildren, foster children and adopted children. Each exemption reduces taxable income by $3,650 in 2009. However, the exemption benefit is lost if your adjusted gross income (AGI) is above the amounts indicated below:

Deductions

The basic standard deduction for 2009 is $5,700 if single or married filing separately, $11,400 for married filing jointly or qualifying widow(er) and $8,350 for head of household. Taxpayers age 65 and older and/or blind receive an additional standard deduction of $1,100, and $1,400 if the individual is also unmarried and does not have a surviving spouse. In addition to above-the-line deductions, you can claim the standard deduction or choose to itemize your deductions. Itemized deductions include specific state and local taxes, mortgage interest, and charitable contributions.

Even if you do not itemize, some deductions are still available, including traditional IRA, SEP and qualified plan contributions and contributions to Health Savings Accounts. In general, you should itemize if your total allowable itemized deductions are more than the standard deduction, although there are exceptions. Keep in mind that the value of some of your itemized deductions will be reduced if your AGI is above $166,800 ($83,400 if married filing separately). This reduction will be eliminated in 2010.

Tax Breaks for Homeowners

First-Time Homebuyer Credit

The First-Time Homebuyer Credit increased to $8,000 in 2009 and is generally available for purchases made between January 1, 2009, and May 1, 2010, provided the home is occupied as the buyer’s principal residence within 24 months of the purchase. (Note: A first-time homebuyer is defined as someone who has not owned a principal residence in the three years before the purchase.) For purchases made after November 6, 2009, no credit is allowed if the purchase price exceeds $800,000. The credit only needs to be repaid if the home is sold within 36 months of the purchase date. For purchases made on or before November 6, 2009, the credit phases out for taxpayers with modified AGIs in excess of $75,000 ($150,000 for joint returns). The credit is refundable and recaptured if the home is sold within 36 months of the purchase date. For purchases made after November 6, 2009, the phase out starts at modified AGI of $225,000 for married taxpayers and $125,000 for all other taxpayers. The credit is completely phased out at modified AGI of $245,000 for married taxpayers and $145,000 for all other taxpayers.

Interest and Property Taxes

Home mortgage interest on up to $1 million ($500,000 if married filing separately) of home acquisition loans secured by your principal residence and/or second home is fully deductible. You also may deduct mortgage interest on a home equity loan or line of credit up to $100,000 ($50,000 if married filing separately). Therefore, you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

Mortgage Debt Forgiveness

If you still have mortgage liability after foreclosure, any amount forgiven by the lender is generally ordinary income. However, for debt discharged on or after January 1, 2007, and before January 1, 2013, the debt forgiveness is treated as tax free if the property is your primary residence. The limit on qualifying debt is $2 million ($1 million for a married person filing separately).

Tax Exclusion of the Sale of a Principal Residence

When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married and filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). To qualify, you must have owned and used your home as a principal residence for at least two years during the five-year period ending on the date of sale.

Retirement Strategies

Retirement Savings Tax Breaks

Tax-advantaged retirement plans can help you lower your current tax bill and achieve a secure retirement. Recent legislation makes permanent higher IRA and 401(k) contribution limits.

Individual Retirement Account (IRA )

You may contribute up to $5,000 to fund a traditional or Roth IRA in 2009. Individuals age 50 or older by the end of 2009 can make an additional catch-up contribution of $1,000. If your spouse does not work for compensation, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your own earnings, with the same dollar limits applying. However, the maximum aggregate that can be contributed to a Roth IRA is reduced by contributions made to other IRAs.

Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Roth IRA contributions are not deductible, but the earnings accumulate tax deferred and may be withdrawn tax free if you meet the qualified distribution requirements.

For 2009, eligibility to contribute to a Roth IRA is phased out as modified AGI rises from $105,000 to $120,000 if single, head of household or married filing separately and not living with spouse at any time in 2009; and $166,000 to $176,000 if married filing jointly or qualifying widow(er). Married taxpayers who file separately and lived with a spouse at any time in 2009 cannot contribute to a Roth IRA if their income is $10,000 or more. Qualified dividend income from a domestic or qualified foreign company is taxed at a top rate of 15% (zero for taxpayers in the 10% or 15% tax brackets in 2009).

Offset Capital Gains with Losses

Net capital losses are fully deductible against capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 in net capital losses against ordinary income ($1,500 if married filing separately) or your total net loss as shown in 1040 Schedule D, Capital Gains and Losses, whichever is less. Any remaining capital losses may be carried over to future years.

Other Recent Tax Law Changes

The Making Work Pay Credit

The Making Work Pay Credit provides employees, including the self employed, with up to a $400 tax credit ($800 for married people filing jointly). The credit is 6.2% of earned income and phases out at modified AGI of $75,000 to $95,000 for singles or $150,000 to $190,000 for married people filing jointly. In 2009, taxpayers will receive the credit through a reduction in employee withholding and self-employed required estimated tax payments.

Economic Recovery Payments

People receiving social security, SSI, railroad retirement and veteran’s disability compensation benefits also receive a one-time $250 payment, offset by any Making Work Pay Credit.

COBRA Premium Assistance

The federal government is subsidizing 65% of COBRA premiums for employees who are involuntarily terminated between September 1, 2008, and February 28, 2010. The premium subsidy is in effect for any premium for a period of coverage beginning on or after February 17, 2009, for 15 months. The tax-free element of this subsidy is reduced for singles with modified AGI between $125,000 and $145,000, and joint filers with modified AGI between $250,000 and $290,000. For singles with modified AGI above $145,000 and joint filers with modified AGI above $290,000, the subsidy is treated as gross income. If you are laid off, your employer should notify you about this rule.

Unemployment Compensation

Usually, state unemployment benefits paid to laid-off employees are taxed in full. However, in 2009, the first $2,400 of unemployment compensation you received is excluded from your gross income and not subject to tax.

Alternative Minimum Tax (AM T) Patch

Among the provisions included in the Emergency Economic Stabilization Act of 2008 is the AMT patch, which protects most middle-income taxpayers by increasing the AMT exemption amounts. The 2009 exempt amounts are: $46,700 for single filers and heads of household, $70,950 for married taxpayers filing jointly or qualifying widow(er)s and $35,475 for married taxpayers filing separately.

Employer-Sponsored 401(k)

Pre-tax contributions to employer-sponsored retirement plans reduce your taxable wages. Matching contributions and income earned within your plan also are tax deferred. The employee contribution limit for 2009 is $16,500. Employees age 50 or older by the end of 2009 may make an additional catch-up contribution of $5,500 for 2009. Also, there is no minimum distribution required in 2009 from your 401(k).

Child and Education-Related Tax Credits

Child Tax Credit

For 2009, the Child Tax Credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent. The Child Tax Credit is in addition to the child’s dependency exemption. The credit begins to phase out when modified AGI exceeds $110,000 for married couples filing jointly; $55,000 for married taxpayers filing separately; and $75,000 for single filers, heads of households and qualified widow(er)s.

Dependent Care Credit

Parents who must pay for the care of a dependent under age 13, who they also claim as a dependent, while they work or look for work may be eligible for a tax credit of between 20% and 35% of qualifying expenses (up to $2,100). You must have earned income to receive the credit. For 2009, the maximum amount of expenses on which the credit can be claimed is $3,000 for the care of one dependent or $6,000 for two or more. This credit is not restricted to child-related care costs.

If you pay someone to look after an incapacitated dependent of any age, such as a parent or disabled family member, you may be eligible for this tax break.

The American Opportunity Tax Credit

This credit replaces the Hope Scholarship Credit. It is available for the first four years of college or other post-secondary school that leads to a degree (the Hope credit was only for the first two years of undergraduate school). The maximum credit is $2,500 per student for each year and 40% of the credit is refundable – that is, it can reduce the taxpayer’s liability below zero. It phases out at modified AGI levels between $160,000 and $180,000 (married filing jointly), and $80,000 and $90,000 (other filers). This credit is allowed against the Alternative Minimum Tax (discussed later).

Tax Considerations for Investors

Long-Term Capital Gains and Dividends

The maximum tax rate on net long-term capital gains remains at 15% for 2009. For taxpayers in the 10% or 15% tax brackets, the tax rate on long-term capital gains is zero. Capital gains on investments held for one year or less are taxed at regular income tax rates.

Health Coverage Tax Credit

As of May 1, 2009, the Health Coverage Tax Credit increased from 65% to 80% of the person’s premiums for the qualified health insurance of specific family members. This credit expires in 2011.

Some important numbers and items for 2010:

2009 Exemption

Phaseout Begins at:

• Single – $166,800 up to $289,300
• Married filing jointly/Qualifying widow(er) – $250,200 up to $372,700
• Married filing separately – $125,100 up to $186,350
• Head of household – $208,500 up to $331,000
• For 2009, even with an AGI in excess of the phaseout maximum, you still may take a $2,433 personal exemption. The personal exemption reduction is being phased out and will be fully repealed by 2010.

Common Deductions

Above the Line Deductions

• Teacher classroom expenses
• Student loan interest
• Alimony expenses
• One-half of self-employment tax
• IRA contributions and one-half of contributions to SEP, SIMPLE and qualified plans
• Health savings account contributions
• Moving expenses
• Penalties on early withdrawals from savings accounts
• Tuition and fees deductions

Itemized Deductions

• Mortgage interest including interest on equity loans up to $100,000
• Points paid for mortgage or refinancing
• State and local income taxes and personal property taxes
• Sales taxes in states with no income tax
• Health insurance costs and medical expenses in excess of 7.5% of adjusted gross income (AGI)
  • Prescription eyeglasses, contacts and hearing aids§
  • Crutches, canes and orthopedic shoes§
  • Medical transportation §
  • Cost of alcohol or drug abuse treatment§
• Charitable contributions – cash, property, donated clothing or household items and appreciated long-term assets
• Mileage and expenses associated with volunteer work
• Unreimbursed casualty and theft losses
• Income-tax preparation software and fees*
• Job-search expenses*
• Investment expenses*
• Unreimbursed employee business expenses*
• Professional investment advisory fees*

§ Deductible to the extent the total of all medical and dental expenses exceeds 7.5% of AGI

* Deductible as miscellaneous itemized deductions to the extent the total exceeds 2% of AGI

Obtain Professional Advice

This information is current as of January 1, 2010 – however, I always recommend that you work with a “Financial Professional”, in this case a CPA or tax professional.  Specifically a CPA or tax professional that understands the business of taxes and finances and can provide trusted advice and services during the tax season and throughout the year to come.

Finally, don’t feel bad about trying to save money on your taxes – don’t cheat, but definitely do everything legally in your power to avoid them.  As a little motivation, a quote from Judge Learned Hand in the case of Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935):

“A transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Good Luck!

TheProAdvisor

Capital Gains Tax – The amount of tax charged on the earnings of an investment.  Normally gains are classified as short-term (less than one) or long-term (more than one year) based on how long you had the investment.  As of September 2009, Capital Gains Tax is charged at 15% by the federal government for long-term investments and at normal income tax rates for short-term investments.  Some states charge an additional tax on Capital Gains.

Tax Deduction - An expense or loss that can be deducted against your income for purposes of determining income taxes.

Tax - A fee charged by a government on a product, income, or activity.  If tax is charged directly to a person or business based on income, then it is a direct tax.  If tax is charged on the price of a good or service, then it is called an indirect tax.  Taxes are used to finance government spending.

When it comes to investments, there are generally two types – Qualified and Non-qualified.  So what exactly do these two terms mean?  They specifically relate to the tax treatment of the investment, or in simpler language, how the investment is taxed.

A Qualified investment is one where the taxes on the invested dollars and interest earned have NOT been paid yet.  The most common examples of this would be your 401k, 403b, Individual Retirement Account (IRA), or an employer profit sharing plan. All of these plans work in the same basic way – money earned by you is invested into a qualified account on a pre-tax basis.  This means that no taxes have been paid and the investment earns interest over time on a tax-deferred basis.

Several important notes to consider before using a qualified investment account.  First, the money is intended specifically for retirement and as such has very strict guidelines surrounding its use – specifically, a ten percent penalty tax for withdrawing money prior to age 59 ½.  Additionally, there is a prerequisite for mandatory withdrawals, called Required Minimum Distributions or RMD’s from the account starting at age 70 ½ with HUGE (up to 50 percent!) penalties if you do not comply.  Finally, there are annual contributions limits to all qualified accounts and there may be income limitations based on your plans design.

The advantage of using a qualified investment account is that you are able to utilize more of your money for your investment, because no taxes have been paid thereby leaving a larger amount of your earnings available.  Furthermore, the tax-deferral on future earnings means that the account grows at a faster pace versus investments that have to pay taxes as interest is earned or prior to the investment being made.  Additionally, many qualified accounts – specifically 401k and profit sharing plans may include an employer matching contribution or additional investment provided by the employer as part of the qualified plan.

With a Non-qualified investment, taxes are paid prior to the investment being made.  The advantage of these plans is that the post-tax money invested is considered the cost basis of the investment.  The cost basis of the investment is the portion that will not be taxed again as interest is earned or withdrawals are made. 

How and when taxes are paid on non-qualified accounts can be tricky.  Like qualified investments, the money in some non-qualified accounts can earn interest on a tax-deferred basis.  This tax-deferral allows the investment to grow on a compounding basis, allowing the money to accumulate faster.  This is most common on annuity and cash value life insurance products.  Other non-qualified investments like stocks and mutual funds don’t pay taxes until the underlying investment asset is sold.  Non-qualified investments like Bonds, CD’s, and savings accounts pay taxes annually on the interest they earned during the previous year.

Several key benefits to non-qualified plans are their open design, lack of income or contributions limitations, and general ease of use.  Additionally, there are no requirements for minimum distributions or tax penalties for withdrawals prior to age 59 ½.

There is one other category of investment account – the ROTH.  A ROTH account is technically a qualified investment, but it acts more like a non-qualified asset in many ways.  First, an investment in a ROTH account is made with post-tax dollars.  Second the money is allowed to grow tax-deferred.  And finally and most important, all subsequent gains are tax-free.  I know, it almost sounds too good to be true, and in some ways it is.  The biggest drawback to the ROTH account is the ROTH contribution and income limits that affect its use.

Obviously this is only a broad overview of the different investment options and account types available.  It is however a good place to start on your financial planning and education.  More importantly, because there are so many options when investing, it is vital to work with a true  “Financial Professional” who can help you determine which type of investment meets your needs best.  Don’t delay; there is never a good reason to wait on improving your financial future.

So when did life insurance become a retirement account?  With the recent decline of the stock and real estate markets, many are rethinking insurance as an asset class.  Products like whole life, universal life, and indexed universal life have maintained their values when other assets like, stocks, mutual funds, variable annuities, and real estate haven’t.

So, why wouldn’t you consider investing in life insurance?  Insurance has several key advantages over other investments.  First, insurance can provide a guaranteed death benefit.  The death benefit can ensure a positive return for your family on your investment, made via your premium payments.  At life expectancy this return is often in the 6-8% range and is income tax free to the beneficiaries.  That would be the equivalent of a 7.5-11% taxable return at a 28% tax bracket.

Second, like annuities and retirement accounts, the cash accumulation inside of a life insurance policy grows tax-deferred.  This tax-deferral allows the money to grow faster due to the effects of compounding interest on the premiums and the subsequent gains.

Finally, similar to a ROTH account, income produced from an insurance policy can be received tax-free.  So why not just use a ROTH account?  Well, it isn’t insured and the growth isn’t guaranteed.  ROTH’s also have contribution and income limitations, where cash value life insurance doesn’t.  Basically, a life insurance policy has the same advantages as a ROTH without the limitations, plus it offers a minimum guaranteed interest rate and a death benefit.

Let’s recap – life insurance, while not technically an investment, provides all of the following:

1. Long-term protection via a death benefit.
2. Income tax-free return on your investment (premiums) at death.
3. Tax-deferred growth on the internal cash values of the policy.
4. Potential for tax-free income from the policies cash values.
5. No contribution or income limitations.
6. A minimum guaranteed interest rate on the policies cash values.

That’s a pretty nice list of benefits for any “investment”, especially when it’s not considered one by most people.  I know what you’re thinking – if permanent life insurance does all that, why do prominent advisors like Suze Orman and Dave Ramsey tell you to never use it?  The simple truth is that many “old school” advisors – especially those that no longer actively practice their profession, have lost touch with current products, capabilities, and in many cases, laws and regulations that pertain to insurance and investment products.

Additionally, the advice offered by most prominent advisors is intended for “mom and pop” middle America.  As such, it is often generic in nature and focuses on families with median incomes of under $50,000 per year – plus it doesn’t hurt that by making dramatic statement like “never” or “always” creates media attention and provides an audience for their message.  This isn’t wrong; it is just the facts of the situation and should be heard as a word of caution for those needing more specific advice or one-on-one help.

To learn more about augmenting your current assets or investments with cash value life insurance, find a true “Financial Professional”.  He or she will be able to discuss the pros and cons of using life insurance as an asset in your current investment portfolio.  Don’t wait – there is never a good reason to delay making your financial future better.

Life insurance is one of the most commonly misunderstood and under-used financial products available.  Why is that?  Most people don’t understand how, why, or when to use life insurance.  Life insurance has two main benefits.

First, life insurance like all types of insurance is designed to protect against economic loss.  With life insurance the loss protected against is the economic value of a human life.  This life or “Capital” can be defined as the future earnings, current debt obligations, or intellectual value of a person.  In essence, life insurance is a hedge for human capital.

Second, it provides a tax free death benefit that replaces the human capital value of the insured at death.  Obviously it doesn’t replace the person or make up for your loss, but it does ensure that an economic loss isn’t added to the physical and emotional loss already suffered.

Whether you are a newlywed, empty-nesters, or retiree just about everyone has a need for life insurance.  In determining how to use life insurance it is important to remember two specific questions.  First, how much insurance do you need?  Second, how long do you need it?

Many people assume that you can never have too much insurance.  Unfortunately many in the life insurance industry would like you to believe the same thing.  The reality is that there are two primary methods that can be used to determine how much life insurance you need.  The first is the Income approach and the second is a Needs or Expense approach.  Neither is perfect, but they will both give you a very good estimate.

The Income approach uses your current income and an assumed inflation rate to determine how much insurance you need to protect that income level over a specific time period.  The Needs approach uses your current expenses and an assumed inflation rate to determine a minimum income level needed to meet those debts over a specific period of time.  Both can be further influenced with the need for future savings, investments, college tuition, and

Are there any folks in particular careers or life stages who should buy this insurance?  Most people need life insurance.  The question is how much and how long.  This will determine how much needs to be temporary and permanent.

Just like buying anything else, it is important to be informed.  There are three specific tips you should follow when purchasing life insurance.

First, you need to know is that not all insurance agents are created equal.  Some agents are required to sell only one company’s products.  This type of an agent is called a “captive” agent, because they can only offer their companies products. As such, they tend to see everything as it relates to their products, not necessarily your needs.  Although many of these agents are honorable, ethical, and educated in there filed, it is normally easier to just avoid captive agents as much as possible.

Second, you need to know is that there are two basic types of insurance – temporary and permanent.  Another name for temporary life insurance is term insurance.  It is important to know what kind you need and how much you need of each type.  Most people need a lot of term and a small amount of permanent insurance.  This need tends to shift over time and may move completely to one side of the spectrum or the other.

Finally, you need to understand is that the amount of insurance you need changes often.  Things like losing a job or getting a pay raise, marriage, divorce, births, deaths, and having children all affect the amount and types of insurance you need.  It is important to get regular reviews to ensure that you aren’t over or under insured.

Two things that may surprise you about life insurance, one you may be surprised to learn is that insurance products all have different features, called riders that provide different benefits beyond the death benefit.  Some of these riders are disability income, waiver of premium, return of premium, and accelerated death benefits.  The riders can be free or add to the overall cost of the insurance and may not be needed by everyone, but they should at least be presented and considered during your selection process.

Two, it is important to make sure that you are dealing with a true “Financial Professional” and not just a salesperson.  You can do this by checking the license status and any complaints your agent may have had on your states department of insurance website.

You should also ask your advisor what professional designations hold, what specialized training they’ve received, and what professional organizations they belong to.  Ideally, they will have a CLU, ChFC, CFP® or other similar designation.  This shows that they have taken the time to receive extra training and education about the products and services they offer.  They should be attending regular Continuing Education (CE), seminars, and industry events to stay up-to-date on laws, products, and services available.

Your advisor should also be a member of a professional organization like the National Association of Insurance and Financial Advisors (NAIFA), Association of Advanced Life Underwriting (AALU), or the Million Dollar Round Table (MDRT).  These organizations require their members to adhere to stringent codes of conduct, receive additional training and CE, and participation in peer reviews or mentoring programs.

So what should you do?  First, find a “Financial Professional” and conduct an interview with them.  Not sure how to do that – read my earlier post on “Asking the tough questions – how to interview a financial advisor.” Second, don’t delay – there is never a reason to wait on making your financial future better.

Qualified retirement accounts like IRA’s, 401k’s, and 403b’s have been gaining in popularity over the last 30 years.  They have almost entirely replaced corporate pension and defined benefit plans, with the few exceptions being government employers and union workers.  While all of the plans are technically different, they do have several major similarities.

First, qualified retirement accounts allow an investor to contribute money on a tax-deferred basis.  Second, they allow the investor to earn interest or gains tax-deferred.  And finally, they require minimum distributions of the accumulated funds starting at age 70 ½.  So let’s address these items in order. 

Tax-deferred contributions

The fact that an “employee” can contribute to their own retirement savings on a tax-deferred basis is a great advantage over many other similar investments.  This tax deferral provides two distinct advantages over other investments.  First, it effectively reduces the tax bracket of the employee which allows them to save money on current taxes.  This is an important planning tool if used correctly; unfortunately it is often over-looked or misunderstood.  To provide an example of how it does this, consider the following:

• An employee earns $3,000 per month and is in a 15% income tax bracket. Normally the employee would pay $450 per month in income tax. However, if the employee were to put 10% of their monthly income into a qualified plan, their “effective” tax bracket would only be 13.5%. This is determined be first reducing the monthly income by the amount of the 10% contribution to the qualified plan – $300 in our example. This reduces the taxable income to just $2,700 which is then taxed at the original 15% – $405 in our example. That means that the employee was able to put $300 into their retirement account, but it only cost them $265 to do it because of the $45 per month tax savings.

Second, it can be used to reduce the employees overall tax bracket.  Basically this works the same way as the above example, but it would be looked at from a total income perspective.  As an example:

• An employee earns $37,000 per year which puts them into the 25% tax bracket for the 2009 tax year. If the employee were to make a 10% contribution to their qualified plan – $3,700, it would reduce their overall tax bracket to 15%. This is because the 15% tax bracket for 2009 ends at $33,950. This allows the employee to save $3,700 at a reduced or effective cost of only $2,840 because of the difference in the tax brackets – an $860 savings.

With a little understanding and planning the tax-deferred savings to an employee’s income can make a huge difference.  These tax savings would be further increased with any type of employer match that your plan may offer.

Tax-deferred gains

Tax-deferred gains are probably the most commonly understood part of a qualified plan.  In essence, all interest or gains are earned without any current tax liability – meaning that the employee doesn’t have to pay any taxes until the money is withdrawn.  Ideally this is done at retirement or after age 59 ½ to avoid penalties.

Unfortunately, for many, this is where the ticking time-bomb starts.  Because the gains are initially tax-deferred they tend to grow over time into large pools of cash reserves.  Sounds like a good problem to have, but the reality is that many retirees will never be able to spend down these pools of money.  Even worse, it isn’t uncommon to see retirees in a higher tax bracket then they were in during their working careers. 

How is that possible?  The simplest answer is that most retirees who have accumulated a good retirement nest egg also do well at paying down debt, eliminating mortgages, and saving money in other non-qualified accounts like their ROTH’s, stocks, mutual funds, annuities, cash-value life insurance, and bank CD’s or money markets.  This effectively eliminates any major tax deductions while simultaneously increases the retirees income and subsequent tax bracket.

Required Minimum Distributions (RMD’s)

For those with money in a qualified plan, RMD’s can be the biggest problem they will face.  Retirees that have done well and saved additional money, are receiving social security, and have other sources of income like rental properties or other business interests, RMD’s are a big problem. 

At age 70 ½ the money that has been growing tax-deferred in a qualified plan is required to be withdrawn.  All of the money doesn’t have to be withdrawn, but the government mandates that annual minimum amounts be removed from the plan and taxed whether the retiree needs the money or not.  If the retiree fails to comply with these rules they will incur large penalties – up to 50% of the accounts value, and be forced to take the RMD’s.

Obviously, the problems associated with RMD’s may not apply to all retirees.  Some of these issues can be mitigated by proper planning and a structured spend-down plan for all qualified and non-qualified accounts.  A “Financial Professional” can easily help a retiree with a structured spend-down plan, but there is still a ticking time-bomb in all qualified plans. 

The ticking time-bomb

So what is the ticking time-bomb that faces all qualified accounts?  In one word – Taxes!  Not just income tax while you’re alive, but income tax called Income in Respect of a Decedent or IRD for your heirs, and possible estate taxes.  Depending on the state you live in and the current estate tax limits, these taxes can combine to provide an effective rate of 60, 70, even 80%.  No, that isn’t a misprint – 80%.  That means that a $1 million qualified plan would only be worth $200,000 to your heirs if you also exceeded the estate tax limits.  Even if you don’t meet the estate tax limits, the tax rate could still reach 50% or more just in income tax to your heirs.

So what should you do?  First, don’t panic.  You have options and there are multiple solutions that can alleviate, minimize, or completely eliminate these problems.  Second, schedule an appointment with a “Financial Professional”.  Not sure how to do that – read my earlier post on “How to find a qualified “Financial Professional”.  Finally, don’t delay – there is never a reason to wait on making your financial future better.