Setting Up Your Own Pension

A Gallup poll taken in April 2010 found that 63% of Americans expected their taxes to go up within a year’s time. Perhaps unsurprisingly, the expectation of higher taxes tended to increase with income: 74% of taxpayers with $75,000 or more in household income expected higher taxes within the year.1

Business owners may have more options for sheltering income from current taxes than ordinary wage earners. One option is setting up a solo defined-benefit plan. This plan offers self-employed individuals and some business owners a tax-advantaged opportunity to target an annual retirement benefit that is comparable with their pre-retirement incomes.

Like the Big Guys

A solo defined-benefit (DB) plan is not unlike the pension plans offered by large corporations. The participant chooses a retirement income target and then an actuary calculates the annual contributions that would be required to meet the target. In 2010, the target benefit amount may not exceed the lesser of $195,000 or 100% of the participant’s average annual income for the past three years.

Once the plan is in place, the participant is required to make the annual contributions until the plan is fully funded. Contributions are generally tax deductible, and any earnings accumulate on a tax-deferred basis. It wouldn’t be unusual for a business owner to put $100,000 a year in a solo DB plan.

There are some rules and drawbacks, as well. Although there is some leeway for a participant to secure a temporary waiver of his or her contribution for a plan year if paying the full amount would cause a “substantial business hardship,” failing to meet the funding requirements typically results in an excise tax.2 Also, the tax code generally requires a company offering a DB plan to make contributions for all employees. There are exceptions for employees younger than 21 and those who have not worked at least 1,000 hours during any 12-month period. Before you take any specific action, be sure to consult with your Naperville Accountant.

As with most other retirement plans, there are fees associated with setting up and maintaining a solo defined-benefit plan. There is an initial plan setup fee and an annual fee for actuarial services, which are required to ensure that the investments are on track to reach the funding requirements.

1) Gallup, 2010
2) CCH, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Charitable Giving Strategies That May Pay You Back

It appears that American generosity is built to withstand adversity. Although total U.S. charitable giving fell by nearly 4% in 2009 — perhaps the most economically difficult year since the Great Depression — individuals cut back on their giving by less than one-half of 1%.1

This says a lot about what is important to charitable givers. During a time when many consumers and organizations were looking for ways to cut expenses, individual donors apparently decided that giving was not an expense worth cutting. In a survey of wealthy individuals from around the world, Americans were more likely than Europeans or Asians to say that the ability to give to charity was one of the benefits of wealth.2

Where do Americans get their penchant for philanthropy? Although Americans may indeed be generous, it would be an oversimplification to say that they lead the world in philanthropy because they are more generous. U.S. tax law treats charitable giving more favorably than do tax laws in many nations. One example is the way in which certain types of charitable trusts can be used to help reap even greater tax benefits.

Charitable Remainder Trust

A properly structured charitable remainder trust provides the opportunity to receive tax benefits and a potential income from an asset donated to charity. A grantor who places money, securities, property, and/or other assets in a charitable remainder trust can designate an income beneficiary, even if it is the grantor himself (or herself), to receive payment of a specified amount (at least annually) from the trust. Upon the grantor’s death, the trust assets are transferred to the designated charity and won’t be counted as part of the grantor’s estate for estate tax purposes. The grantor may also qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.

Charitable Lead Trust

A charitable lead trust takes a nearly opposite tack. The grantor places an asset in an irrevocable trust on behalf of a designated charity, and any income generated by the asset during the trust period goes to the charity. After the trust period, the remaining trust assets are passed to the grantor or the grantor’s designated beneficiaries. This eliminates current capital gains taxes on the donated assets, a valuable benefit when the donated assets have experienced high appreciation. This strategy also could potentially reduce estate taxes because the trust assets are no longer considered part of the grantor’s estate.

Keep in mind that donations to both types of charitable trusts are irrevocable; therefore, the assets cannot be withdrawn once the trusts are formed. Also, some charitable organizations may not be able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate conservation professional and your legal and Naperville tax advisors before implementing such strategies.

Giving to a good cause and benefiting your family’s financial situation are not necessarily mutually exclusive. An examination of your charitable giving desires and financial situation may reveal some overlooked opportunities.

1) Giving USA Foundation, 2010
2) The Wall Street Journal, May 24, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Looking Back to See the Present

With the unemployment rate remaining persistently high, it might be easy to become discouraged over the progress of the economic recovery. But if you are looking for signs of a recovery, the employment situation is the last place to look — literally.

Employment is typical of a class of economic indicators, called lagging indicators, that are poor at predicting how the economy will perform in the near future. However, when it comes to providing confirmation that a particular trend is in place — whether it be a recovery or a recession — lagging indicators can play a vital role. Here’s a roundup of some common lagging indicators and why they can provide useful information for investment decisions.

Employment

Rising unemployment is usually one of the final signals that a recession has begun, and rising employment is among the last indications that an economy is recovering. In both situations, it’s difficult to miss the influence of human emotion in the business cycle. During a slowdown or a recession, employers may cut back on other expenses in order to avoid layoffs for as long as possible. And when conditions begin to improve, employers may avoid hiring until they are confident that the recovery is sufficient to justify additional labor costs.

Corporate Earnings

Earnings are a lagging indicator because they reveal past performance. Most publicly traded companies release their quarterly earnings one month or more after the quarter has ended. So even though stock prices are technically a leading indicator, actual corporate earnings performance may say little about what to expect in the future. However, if economic activity seems to be faltering, yet no recession has been officially declared, economists may look at earnings and other measurements of business revenue for confirmation.

The Conference Board Lagging Index®

Perhaps the most important lagging indicator, which actually gets little attention, is The Conference Board Lagging Economic Index. As with other lagging indicators, this index is most useful when compared with leading and coincident indicators. Coincidentally, The Conference Board also produces coincident and leading indexes, which makes comparisons convenient.

The lagging index tracks average duration of unemployment, manufacturing and trade inventories to sales ratio, labor cost per unit of manufacturing output, the average prime rate, outstanding commercial and industrial loans, ratio of consumer credit outstanding to personal income, and the consumer price index for services.1 Changes in these seven variables are averaged to arrive at an index value.

Although some experts consider the lagging index to be a lackluster source of information, economists tend to pay close attention when it shows something other than a confirmation of the direction of the leading and coincident measures. A divergence suggests that the stock market may have misinterpreted the direction of the economy.

Lagging indicators rarely make headline news, but they are an important source of information. We can help you keep an eye on these and other indicators.

Please contact me at 630-548-9600 regarding our Naperville Investment Services

1) The Conference Board, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Understanding the Sacrifices of Family Caregivers

About 44 million people, roughly 19% of the U.S. adult population, provide unpaid care to someone who is age 50 or older. The average age of caregivers is 50 and the average age of care recipients is 77. Most caregivers assist family members, usually their mothers.1

Although many caregivers help their family members out of love, there is overwhelming evidence that caregivers pay a dear price for their compassion. Nearly half reported increased financial worries and having to use sick time or vacation hours to provide care. 2

One especially telling statistic: More than four in 10 caregivers said they felt as though they had no choice about whether to assume the role of caregiver.3 This may indicate that little or no preparation took place before caregiving began. Yet when it comes to their own potential need for long-term care, 55% of Americans say that their greatest concern is becoming a burden to family members.4

Fortunately, you can start developing a strategy today that could help you provide for your own care and avoid becoming a burden to your loved ones.

Recalculate Retirement Needs

The obvious reason for having to turn to family members for care is money — or, more accurately, a lack of money. The national average cost for nursing-home care is $74,208 per year.5 How likely are you to need specialized care? Forty-three percent of people who reach age 65 will eventually spend time in a nursing home.6

If your retirement-needs calculations don’t take the potential need for long-term care into account, it may be time to evaluate your options for covering the potential costs. If you have a family member who may need care, the earlier you begin to prepare, the greater the possibility that you may be able to reduce the effect on your own finances and lifestyle.

Talk About It

Whether you are a caregiver or a care recipient, a financial professional can open a dialogue that helps preserve dignity and harmony while also coordinating decisions about common concerns, such as which care options are appropriate, whether the care recipient should move, how to manage property and possessions, and how to handle legacy issues.

Because it could be years before you find out whether you need living assistance, the most prudent approach could be to assume that you will and to begin preparing now. If it turns out that you don’t need care, there’s no penalty for being prepared.





Please feel free to contact me at 630-548-9600 to discuss your Naperville Financial Planning needs.

1, 3) National Alliance for Caregiving, 2009
2) Money, September 2010
4) Journal of Financial Planning, June 2010
5–6) 2010 Field Guide, National Underwriter (2009 costs, latest year for which data was available)

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Everyone Procrastinates, But Why?

When it comes to procrastination, doing it now may mean having to do it later, too. In 2010, 24% of workers planned to postpone retirement. The poor economy and a change in employment situation were the most common reasons for workers to stay on the job.1

We can’t know whether any of these people postponed their retirement dates because they got a late start on their saving goals.

Everyone knows that procrastination is the enemy, yet not only do we all do it, sometimes we have no choice. Effective time management often requires us to put off one task until another is finished. Rather than wrestle with the inevitability of procrastination, a more useful exercise might be to examine why we procrastinate.

Not Knowing What to Do

Many people correctly assume that they don’t know much about finances, but one of the benefits of working with a Naperville Retirement Planning professional is access to strategies and education. Although there is no assurance that working with a financial professional will improve investment results, a professional who focuses on your overall objectives can help you consider options that could have a substantial effect on your long-term financial situation.

Afraid to Act

Waiting until your fears subside before deciding to act could be the stepping stone to two classic mistakes: basing your investment decisions on emotion and failing to recognize the opportunity cost of waiting. Risk is an inherent aspect of investing, and few people can assume risk without at least some fear. But inaction is also risky because time is one of the key ingredients to financial success. Procrastination can carry a high opportunity cost by decreasing the amount of time that your investments have available for compounding.

Life Happens

The day-to-day demands of having a career, raising a family, and caring for a home often take precedence over investment needs. Most people schedule time to get the oil changed, visit the dentist, and get their hair done. Why not then schedule regular appointments to review investment matters and measure progress toward financial goals?

Squandering time is one mistake that many people may never recover from. If you’ve been meaning to get around to some aspect of preparing for your financial future, now is the best time to get started.

1) Employee Benefit Research Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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