Emergency Fund
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?
You need to have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child’s orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.
Building your cash reserve
If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
- Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
- Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
- Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn’t consider lenders as a primary source for your cash reserve.
Where to keep your cash reserve
You’ll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn’t your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.
Don’t confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. However, as of September 29, 2008, a money market fund may have backing from the U.S. Treasury if it has chosen to participate in the Treasury’s temporary guarantee program. For a participating fund, the Treasury will guarantee the $1 per share value of a fund if its net asset value (NAV) drops below a certain level. You can contact your fund to find out whether it has the Treasury guarantee. Also, a fund may have arranged for private insurance, though that protection may be subject to the claims-paying ability of the insurer.
Note: When considering a money market mutual fund, be sure to obtain and read the fund’s prospectus, which is available from the fund or your financial advisor, and outlines the fund’s investment objectives, risks, fees, expenses. Carefully consider those factors before investing.
It’s important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you’re going to use fixed-term investments as part of your cash reserve, you’ll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.
Review your cash reserve periodically
Your personal and financial circumstances change often–a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.
How to get a free copy of your credit report
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances:
- A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)
- You’re unemployed and plan to look for a job within the next 60 days
- You’re on welfare
- Your report is inaccurate because of fraud, including identity theft
If you are not eligible for a free report, you can buy a copy from each of the three credit bureaus. You may be charged up to $9.50 for each copy.
How do you order your free annual report?
You can order your free annual report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Alternatively, you can contact each of the three credit bureaus:
- Experian National Consumer Assistance Center, www.experian.com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742
- Trans Union LLC, Consumer Disclosure Center, www.transunion.com, P.O. Box 1000, Chester, PA 19022, (800) 916-8800
- Equifax, Inc., www.equifax.com, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111
If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.
What information will you need?
Whether you go online, call, or write for a copy of your credit report, you will have to provide certain information so that your file can be located, and your identity can be verified. If you order by phone, you will be asked to speak, spell, or key information into the phone. Generally, the information requested includes:
- Name
- Address
- Spouse’s name (if applicable)
- Previous address
- Social Security number
- Home phone number
- Name of employer past and present
- Date of birth
Tip: If you write to a credit bureau for a copy of your credit report or for any other reason, you should include the same information in the letter.
Will you be able to ask questions about your report if you call?
When you call to order a copy of your credit report, you will not speak to a real person. You will hear a series of recorded messages. You will be given prompts and asked to respond by speaking or keying your response into the phone. It is very simple and self-explanatory. In most cases, your credit report will be processed within 48 hours.
Why would you want to get a copy of your credit report?
Your credit report is important because it can affect whether you get a mortgage or other type of loan, insurance, or employment. You should review your credit report to make sure it is accurate, complete, and up to date. Reviewing your report can also help you guard against identity theft.
2009 contribution limits announced
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
On October 16, 2008, the IRS issued news release IR-2008-118 announcing cost-of-living adjustments to dollar limitations for pension plans. Items addressed for 2009 include:
Elective deferrals
* The annual elective deferral limit for 401(k) plans, 403(b) plans, 457(b) plans, SAR-SEPs, and the federal government’s Thrift Savings Plan increases from $15,500 to $16,500
* The annual elective deferral limit for SIMPLE plans is increased from $10,500 to $11,500
Employee “catch-up” contributions for individuals age 50 or older
* The annual limit on additional catch-up contributions to 401(k), 403(b), and Section 457(b) plans is increased from $5,000 to $5,500
* The annual limit on additional catch-up contributions to a SIMPLE plan remains unchanged at $2,500
Other key figures
* The dollar limit on annual additions to a defined contribution plan increases from $46,000 to $49,000
* The dollar limit on the annual benefit under a defined benefit plan increases from $185,000 to $195,000
* The annual compensation limit for qualified retirement plan purposes increases from $230,000 to $245,000
* The annual compensation amount used in the definition of a highly compensated employee increases from $105,000 to $110,000
* The annual compensation amount used in the definition of a key employee in a top-heavy plan increases from $150,000 to $160,000
* For purposes of determining a qualifying employee under a simplified employee pension (SEP) plan, the minimum amount of annual compensation is increased from $500 to $550
College Board releases 08/09 cost figures
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
Public colleges (in-state students):
* Tuition and fees increased an average of 6.4 percent
* Room and board increased an average of 5.2 percent
* Total average cost for 2008/2009 is $18,326
Public colleges (out-of-state students):
* Tuition and fees increased an average of 5.2 percent
* Room and board increased an average of 5.2 percent
* Total average cost for 2008/2009 is $29,193
Private colleges:
* Tuition and fees increased an average of 5.9 percent
* Room and board increased an average of 4.8 percent
* Total average cost for 2008/2009 is $37,390
For more details go to CollegeBoard.com.
Tax Credits and Deductions for Higher Education
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
What are the tax credits and deductions relating to higher education?
There are two education tax credits–the Hope credit and the Lifetime Learning credit–that provide some relief to families in the midst of financing their children’s college education. There is also a federal income tax deduction for certain taxpayers who pay qualified higher education expenses, as well as a deduction for certain individuals who pay student loans. As a general rule, a tax credit is a dollar-for-dollar reduction against taxes owed, and it is therefore more valuable than a tax deduction of the same dollar amount.
Hope credit
The first tax credit is called the Hope credit. In 2008, it’s worth a maximum $1,800($1,650 in 2007) per student in tax savings for the first two years of your child’s post-secondary education. The credit is calculated as 100 percent of the first $1,200 of qualified tuition and related expenses, plus 50 percent of the next $1,200 of expenses.
As one would expect, Congress has placed restrictions on the use of the Hope credit. First, the credit applies only to undergraduate students who are enrolled in college on at least a half-time basis. Second, the ability of parents to take the credit depends on their modified adjusted gross income (MAGI). In 2008, for married couples filing jointly, MAGI must be below $96,000 ($94,000 in 2007) to take advantage of the full credit. A limited credit is available to those in the $96,000 to $116,000 range ($94,000 to $114,000 in 2008). For single filers, your MAGI must be below $48,000 ($47,000 in 2007) to take the full credit. A limited credit is available to those in the $48,000 to $58,000 range ($47,000 to $57,000 in 2007).
One distinct advantage of the Hope credit is that there is no limit on the number of credits that may be claimed on a single tax return in a given year (provided each person qualifies independently). For example, if Mom and Dad have triplets who are in their freshman year of college, then Mom and Dad can claim a total of $5,400 ($1,800 x 3) in Hope credits for that year. However, the Hope credit and Lifetime Learning credit are mutually exclusive; they cannot be taken in the same year.
Lifetime Learning credit
The second tax credit is called the Lifetime Learning credit. This credit is worth a maximum yearly tax savings of $2,000. The credit is calculated as 20 percent of the first $10,000 of qualified tuition and related expenses.
As the name implies, the Lifetime Learning credit is intended to apply to higher education courses taken throughout your lifetime, whether to acquire or improve job skills. As such, it is less restrictive on the type and level of enrollment than the Hope credit. For example, the Lifetime Learning credit is available to graduate students as well as to undergraduate students. It is also available to students enrolled on less than a half-time basis. So, a single word processing course taken by a lawyer at his or her local community college will qualify for the credit.
As with the Hope credit, there are restrictions on the Lifetime Learning credit. The same MAGI limits that apply to the Hope credit also apply to the Lifetime Learning credit. One particular disadvantage of the Lifetime Learning credit is that it is limited to a total of $2,000 per tax return per year, regardless of the number of people who qualify in a family in a given year. So, in the example with the triplets, Mom and Dad would be able to take a total credit of $2,000, not $6,000. Yet on the plus side, the Lifetime Learning credit is available for an unlimited number of years, whereas the Hope credit is limited to the first two years of a child’s post-secondary education.
Deduction for qualified higher education expenses
For tax year 2007, you may also be able to deduct at least part of the qualified higher education expenses you paid during the tax year. These expenses include the tuition and fees you’ve paid for enrollment in a degree or certificate program at an accredited post-secondary educational institution. Congress has not passed legislation extending this tax deduction to subsequent years.
Student loan interest deduction
You can deduct up to $2,500 of the interest you pay on qualified student loans each year, provided you meet the income limits. In 2008, for single filers, a full deduction is available with a modified adjusted gross income (MAGI) up to $55,000; a partial deduction is available for a MAGI between $55,000 and $70,000. For joint filers, a full deduction is available with a MAGI up to $115,000; a partial deduction is available with a MAGI between $115,000 and $145,000.
This is a quick overview of education tax credits and should not be considered tax advice for your specific situation.
October 2008 Newsletter
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
View our October 2008 Newsletter.
Free Seminar — Are You Saving Enough for Retirement?
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · 1 Comment
Where: Keller Public Library (640 Johnson Rd., Keller, TX)
When: Monday, December 1, 2008, 6:30 to 8:00 p.m.
Limited Space. Reservations Recommended. Call (817) 743-4840 to reserve your seat.
Take a realistic look at your progress toward a secure retirement. Get the tools to build a solid plan and the peace of knowing you’re taking care of this important part of your future. Presented by: Jean Keener
See all Seminars where I’m speaking here.
FDIC limits changed as of October 3, 2008
November 2, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
October 7, 2008
The bail-out bill that passed congress last week included a provision to increase the FDIC coverage limits from $100,000 to $250,000 per individual per bank.
This increase went into effect immediately, but it’s important to note that it’s only valid through the end of 2009. For that reason, if you are keeping deposits in different banks to ensure FDIC coverage, you may not want to consolidate them now because you would likely just need to move everything around again next year.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects against the loss of insured deposits if an FDIC-insured bank or savings association fails. FDIC deposit insurance is backed by the full faith and credit of the United States government. Since the FDIC was established, no depositor has ever lost a single penny of FDIC-insured funds.
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
There is no need for depositors to apply for FDIC insurance or even to request it. Coverage is automatic.
To ensure funds are fully protected, depositors should understand their deposit insurance coverage limits. The FDIC provides separate insurance coverage for deposits held in different ownership categories such as single accounts, joint accounts, Individual Retirement Accounts (IRAs) and trust accounts.
Basic FDIC Deposit Insurance Coverage Limits*
Single Accounts (owned by one person)
$250,000 per owner**
Joint Accounts (two or more persons) $250,000 per co-owner**
IRAs and certain other retirement accounts $250,000 per owner
Trust Accounts $250,000 per owner per beneficiary subject to specific limitations and requirements**
*These deposit insurance coverage limits refer to the total of all deposits that an accountholder (or accountholders) has at each FDIC-insured bank. The listing above shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.
**The legislation authorizing the increase in deposit insurance coverage limits makes the change effective October 3, 2008, through December 31, 2009.
For more information on FDIC insurance, visit www.fdic.gov.