What is a Multi-Generational IRA plan?  A Multi-Generation IRA or “Stretch” IRA has administrative provisions allowing the non-spousal beneficiary or beneficiaries to continue tax-deferral of the account over the beneficiary’s life expectancy.

Recent IRA changes allow each beneficiary to establish a required minimum distribution plan based on his or her own life expectancy.  These distributions must begin by December 31 of the year following the participant’s death.  At any time, the beneficiary may elect to take a greater distribution than the minimum.  The technique of passing an IRA from one generation to another involves proper elections by the plan participant and proper identification of beneficiaries.  Beyond correctly identifying the beneficiaries, the trustee, custodian, or insurance company must have the systems for maintaining these accounts over long periods of time and the ability to administer this new opportunity in estate planning. 

The Multi-Generational IRA plan is designed to allow for a much greater time period of tax deferral and compounding of earnings.  Depending on the ages of the beneficiaries and/or rates of return, a stretch IRA can grow to many times the balance originally inherited.  With a Multi-Generational IRA plan you can truly create financial security for your children or grandchildren.  If you are interested in learning more about making your IRA a Multigenerational IRA, please call or email us.

The Financial Planning Association of San Diego is answering financial questions for the readers of the UT.  Nate was choosen to write an article about helping a family take control of their finances after the loss of a loved one.

If you missed this article published Sunday, November 21st, you can read it at the link below:

http://www.signonsandiego.com/news/2010/nov/21/how-help-surviving-spouse-regoup-financially/

Staying at Home

As the old saying goes, Home is Where the Heart Is.  One of the most preferred places for retirees to live is in their comfortable and familiar home, which is usually paid for.  However, factoring in the cost of vital services like health care and transportation, and more emotional factors like having a spouse or family member serve as a primary caregiver can make this one of the most challenging options.  In recent years products, such as reverse mortgages, have made living at home a little more affordable for retirees on a fixed income sources like pensions, social security and personal savings.

All in the Family

According to recent statistics, the typical caregiver is a 46 year old Baby Boomer woman with a college education who works and spends more than 20 hours per week caring for her aging mother.  The average length of caregiving last 4.3 years and typically lowers the caregiver’s life expectancy by 3 to 10 years.  There are many emotional and relational considerations when discussing this option, most likely resulting in compromises and coordination by both the elder and the caregiver.  Adult daycare and other community services can help ease these pressures.  One idea that can provide support to both the elder and the caregiver would be to rent out the elder’s home.  This strategy can provide tax benefits while preserving the value of the home for future needs or planned giving.

Retirement Communities

An increasingly popular option, retirement communities can provide independence, a sense of community with other seniors, and in some cases a total solution for future assisted and nursing care needs.  Costs for retirement communities can vary from a few hundred dollars to a few thousand per month depending on the type of community (non-profit, board and care, assisted-living, continuing-care, etc.), amenities, and experience of the staff.  In the case of continuing-care retirement communities (CCRCs), everything a senior could need is located under one roof, including a private room, various amenities and specialized health care.  CCRC’s operate more as a private senior club with entry fees ranging from $20,000 to $500,000 and caring monthly fees averaging $1,600 per month.

There are many different solutions to having the most fulfilling retirement imaginable.  The key, like any financial decision, is to have your goal clear in your mind and do the proper planning.  Let us help you develop your living plan that will endure throughout your retirement.

Key Findings from Caregiving in the U.S.  National Alliance for Caregiving and AARP, April 2004.

As the legal debate rages on in California about the right to marry, I wanted to address a common question in regards to titling of property, specifically the homes of married couples in California.  Ask an attorney, accountant or financial professional how to title your home, and you’ll likely get the dreaded, “It depends.”  While it truly does depend on your objectives and you should consult with an attorney prior to making any titling decisions, in California there are some potentially large tax differences between the two most common forms of ownership for married couples: community property with right of survivorship or joint tenants with right of survivorship.

While both forms of ownership transfer the decedent’s ownership share directly to the surviving spouse as an operation of the law thus avoiding costly probate, the similarities end at how they are treated for tax purposes.  The main difference lies in how the property’s tax basis is affect at the passing of a spouse.  When titling your home as community property with right of survivorship the surviving spouse receives a full step-up in basis on the property, while just the decedent’s share (50%) under joint with right of survivorship receives a step-up in basis.  This can be especially costly for couples owning highly appreciated property or older couples that have lived in their home for many years.

Please consult with your tax and legal advisor prior to making any titling decisions.  If you would like to review how your estate plan affects your overall financial plan, please call us and we’ll be happy to schedule a review.

Our Nathaniel Ritchison, Certified Financial Planner™, recently collaborated on an article in the San Diego UT!

Carol Kenney, a local San Diegan, volunteered for a “Money Makeover”, sponsored by the newspaper and the San Diego chapter of the Financial Planning Association.  Nate was then chosen by the FPA to analyze Kenney’s financial situation and make recommendations.

If you missed this article published Sunday, August 8th, you can read it at the link below:

http://www.signonsandiego.com/news/2010/aug/07/newly-divorced-woman-is-planning-retirement/

With the recession and subsequent recovery, investors are focused on how the markets have affected one of their largest financial goals—retirement.  Seemingly right on queue, many financial companies have tailored their advertisements to soon-to-be retirees.  A message that’s recently gained popularity is: do you know your retirement number?  You may have seen the commercials showing people carrying their retirement number around with them.  The numbers go through all sorts of daily abuse (very timely no doubt but it also makes for dramatic TV) – getting run over, burned and even bitten by a dog.  At the end of the day, everyone replaces their number in a case where in the morning the number is returned to its original condition.  Commercials like these illustrate two questions that we have been answering for years as financial planners and investment managers: Do I have enough saved to retire? How will the market changes affect me during retirement?

The advertisement tries to simplify the answer to those questions, suggesting that you achieve retirement by accumulating a certain account value.  Generally speaking, it’s hard to think of retirement as anything but the value in your portfolio.  As you work and save, monitoring your portfolio value can serve as a useful benchmark towards accomplishing a very abstract concept, like retirement.  But anyone who has had investments over the years recognizes it’s nearly impossible to time your retirement with the apex of your investment portfolio.  And in fact, very rarely are retirement decisions based chiefly on passing a certain account threshold.  Most of the time the decision to retire is based on a life event, like: turning a certain age, becoming eligible for benefits, changes at the workplace or a health event.  It’s at this time that most retirees find that they shift their focus from monitoring account values…to focusing on another number—their income.  Retirement isn’t a number or an account value for most retirees.  It’s a lifestyle filled with daily activities.

Our focus leading up to retirement is on identifying your income sources and developing a plan to maximize those sources, allowing you to enjoy retirement without worrying about changes in the economy.  In this month’s Planning Perspective, we talk about the three main sources of income in retirement and ways of maximizing them.  If you have any questions about your retirement plan or how those account values relate to your retirement income plan, give us a call and we’ll make sure that you understand “your number.”

One of the foundational tasks of building a sound financial future is preparing for retirement.   That means developing an income stream or streams that will cover all living expenses regardless of whether there is earned income.  In this letter, I would like to address some of the preconceived notions about retirement income that are prevalent in this country,  whether or not they are valid, and how they can be used to help prepare for retirement.   There are three main places from which people could receive a retirement income:  personal savings and investments, employer sponsored plans, and Social Security.  Every retiree should address each of these three areas and make sure they receive retirement income from each one at the age that is going to work best for their income needs.   We’ll start with the retirement income you have the least control over (Social Security) and finish with what you have the most control over (personal savings and investments).

PRECONCEIVED NOTIONS

The first preconceived notion some retirees have is that “Social Security will take care of my retirement needs.”   As most people know today, Social Security is meant only as a supplement and that is why workers have only 6.2% drawn out of their paychecks to provide for it.  At most, it should be planned to provide about a third of retirement income for a family.  There are two main pieces to Social Security that are under each person’s control.  One is the life-time income on which their Social Security income is based and second is the age at which Social Security is received.  The latter has to be planned very carefully as it will impact retirement income for a lifetime.  Taken too early, a retiree might end up sacrificing retirement income that could be retained.

The second preconceived notion is that “my employer will take care of my retirement.”  While that may have been the case fifty years ago, today’s retirement marketplace and shifting economy places the burden for saving for retirement firmly on the employee’s shoulders.  Most companies will offer a plan to employees but require the employees to make contributions from their own paychecks  in a 401k type plan and may or may not (depending on business conditions),  make a partial matching contribution.   At most, this should be about a third of retirement income as well.

THIRD, AND MOST IMPORTANT

The final piece is personal saving and investment and this is where pre-retirees have the most control but also can get the most confused.   The common preconceived notion is that “I’ll always have more time to save.”   From the very first day that someone starts working, a three part-plan needs to be in place that addresses Social Security, the employer-sponsored plan, and a personal savings plan that can be ramped up as income increases from year to year.  Because of its higher growth potential and tax efficiency, the personal savings and investment income should comprise 50% of your retirement income.  It is a daunting task to put a personal savings plan into place that is tax-efficient, has good long-term growth, and is manageable by the pre-retiree.  That is why having a qualified “coach” like a Certified Financial Planner™ can be invaluable in helping to structure the right retirement income plan and integrating all three retirement income sources.

The government’s aim to cap the ever increasing cost of healthcare at no more than 10% of disposable income, which in 2007 stood at 16.6% compared to less than 10% in 1981, is a highly controversial one.  I’m going to discuss the points of the act that will have significant impact on planning for your financial independence.  For a detailed look at the law visit the Kaiser Family Foundation at http://www.kff.org/healthreform/basics.cfm, or schedule a time with us to go over in detail how the changes will affect your financial plan specifically.

Who will be affected this year…

Uninsured individuals and children with pre-existing conditions will have access to a temporary high-risk pool of insurance with subsidized premiums until state insurance exchanges are established in 2014.
Dependents can be included on their custodian’s health plan up to age 26.
Insurers will no longer be permitted to impose lifetime benefit limits on plans and will begin to be subject to restrictions on their use of annual limits until 2014 when limits will be entirely removed.  In addition, the act also outlaws the practice of rescission- finding a reason to revoke coverage after you get sick.
Medicare recipients will receive a $250 rebate check if they enter the Part D “donut hole”- a coverage gap between $2,830 and $6,440 in total drug spending- until it is eliminated in 2020.  Beginning in 2011, generics will begin to be covered and brand-name drugs will be subject to a 50% discount in the donut hole.  Also, beginning in 2011 some Medicare Advantage plans (for-profit Medicare supplement plans) will see their government subsidy disappear- forcing plans to leave the market and seniors to switch.
Voluntary options for long-term care insurance will be available beginning in 2011.  Funded by payroll deductions, this program provides a $50/day cash reimbursement for qualified long-term expenses after you’ve participated in the plan for at least 5 years.

2013, The year of the tax increase…

Increases to the Medicare payroll tax will bring the rate to 2.35%- an increase of 0.9%- for taxpayers with wages and earnings over $200,000 ($250,000 for married filing jointly).
A new tax on investment income will be assessed at 3.8% for taxpayers with an AGI over $200,000 ($250,000 for married filing jointly).
Contribution limits on Flexible Savings Account will be capped out at $2,500 and indexed for inflation in subsequent years.
Increases to the medical expense threshold for itemized deductions will lift the rate from 7.5% to 10% of AGI.  The threshold will be increased for those over 65 in 2016.

In 2014 and beyond…

Health Insurance Exchanges are established in each state, or geographic region, allowing people to comparison shop for standardized health packages.  Tax credits will be available for people with income above the Medicaid eligibility and below 400% of poverty who are not eligible for or offered other acceptable coverage.  Credits will be applied to monthly premiums to ensure that people can obtain affordable coverage.  The health packages will limit the insurer’s ability to charge higher rates due to gender or other factors.  Premiums will instead be based on age (no more than 3:1), geography, family size, and tobacco use.
Penalties for not having health care coverage will be phased-in beginning 2014 and fully in force by 2016.  The penalty- aimed at bringing younger, healthier participants into the plans to bring down the risk pool for the insurers- will be capped at $695 per person and $2,250 per family (not to exceed 2.5% of income) and indexed for inflation in subsequent years.  Individuals will not be penalized if affordable coverage is not available.

Spread, Don’t Cancel

Maybe you were planning on making a large cash donation this year to your favorite charity, say for $5,000, but now doesn’t seem the right time to commit that amount of money. Why not spread that donation over the next five years in $1,000 increments.

Donate Items, Not Just Money

By donating items such as artwork, collectibles, appreciated stock or real estate, you are able to realize an immediate income tax deduction, while allowing the charity to hold assets that can be sold at a later date allowing them to appreciate.

Update Your Bequests

Since assets in estates have shrunk over the last few years, some people with existing estate plans are reconsidering the amount they want to commit to their favorite charities. By making changes to your bequests, you can specify the maximum amount you would like to  pass to your beneficiaries, while any amount over that can go to your charity.

Give and Get with a CRT

A charitable remainder trust (CRT) allows you to donate property or money to a charity, and in return you receive an income tax deduction in the year the gift was made and income (or use) of the property usually until you pass away, at which time the charity will receive the asset. Although a more complex estate planning tool, the CRT can be a great fit for anyone that is looking to lower their income and estate taxes while receiving a steady income in retirement.

Using Donor Advised Funds

The fastest growing charitable giving vehicle in the US, donor advised funds, affords you all the benefits of your own private foundation without having to establish and administer one. Because the fund is housed by a specific public charity, donations made to the fund receive the maximum tax deduction.

Establish a Lasting Legacy

The ultimate in planned giving is the private foundation. By establishing and administering a private foundation, you are able to directly help the causes or individuals you care about most with your donations. However, with increased control comes an increase in cost and administration.

No matter where you find yourself on the spectrum of planned giving, with a little creativity you can develop a plan that meets both your current goals while working within your overall Financial Plan. If you would like more help in developing your Giving Plan and understanding how it fits into your overall Financial Plan, please give us a call and I would be happy to set up a meeting focused on helping you give back to the causes that mean the most to you. As always, be sure to discuss any gifting with your tax preparer and attorney to make sure your gifting plan is right for your particular situation.