Don't Bank Your Retirement on Your Business

Investing in your own business makes sense. Many businesses achieve significant growth each year. However, when you consider that many small businesses fold every year, it becomes clear that banking your retirement solely on the success of your business might not be the best idea. There is no guarantee that your business will continue to grow or even maintain its current value. If your business is worth less than you were counting on at the time you planned to retire, you could be forced to continue working or sell it for less than what you were expecting.

Business owners often assume that their businesses will be their main source of retirement funds, but that strategy can be riskier than you think. It's generally not wise to put all your eggs in one basket. Broadly diversifying your assets may help protect against risk.

Diversification involves dividing your assets among many types of investments. Putting all your money into a single investment is risky because you could lose everything if the investment performs poorly - even if that investment is your own business. Of course, diversification is a method used to help manage investment risk; it does not guarantee against the risk of investment loss.

Consider what would happen if you were planning to rely solely on the sale of your business to fund your retirement, only to have the U.S. economy fall into a recession about the time you planned to retire. If one occurred when you planned to retire, it could affect the sale of your business or the income it generates for you.

Likewise, there is no assurance that a larger competitor won't overtake your market, or that demand for your business's goods and services won't weaken because of new technology, rising energy prices, consumer trends, or other variables over which you have no control.

Your business is almost certain to provide some of the money you need to retire. By building a portfolio outside your business, you are helping to insulate your retirement from the risks and market conditions that can affect your business.

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.

How Should I Manage My Retirement Plan?

Employer-sponsored retirement plans are more valuable than ever. The money in them grows tax-deferred until it is withdrawn at retirement. Distributions from a tax-deferred retirement plan, such as a 401(k) plan, are taxed as ordinary income and may be subject to an additional 10-percent federal tax penalty if withdrawn prior to age 59.5. And contributions to a 401(k) plan actually reduce your taxable income.

But figuring out how to manage the assets in your retirement plan can be confusing, particularly in times of financial uncertainty.

Conventional wisdom says if you have several years until retirement, you should put the majority of your holdings in stocks. Stocks have historically outperformed other investments over the long term. That has made stocks attractive for staying ahead of inflation. Of course, past performance does not guarantee future results.

The stock market has the potential to be extremely volatile. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Is it a safe place for your retirement money? Or should you shift more into a money market fund offering a stable but lower return?

And will the instability in the markets affect the investments that the sponsoring insurance company uses to fund its guaranteed interest contract?

If you're participating in an employer-sponsored retirement plan, you probably have the option of shifting the money in your plan from one fund to another. You can reallocate your retirement savings to reflect the changes you see in the marketplace. Here are a few guidelines to help you make this important decision.

Consider Keeping a Portion in Stocks

In spite of its volatility, the stock market may still be an appropriate place for your investment dollars - particularly over the long term. And retirement planning is a long-term proposition.

Since most retirement plans are funded by automatic payroll deductions, they achieve a concept known as dollar cost averaging. Dollar cost averaging can take some of the sting out of a descending market.

Dollar cost averaging does not ensure a profit or prevent a loss. Such plans involve continuous investments in securities regardless of the fluctuating prices of such securities. You should consider your financial ability to continue making purchases through periods of low price levels. Dollar cost averaging can be an effective way for investors to accumulate shares to help meet long-term goals.

Diversify

Diversification is a basic principle of investing. Spreading your holdings among several different investments (stocks, bonds, etc.) may lessen your potential loss in any one investment. Do the same for the assets in your retirement plan.

Keep in mind, however, that diversification does not guarantee against investment loss; it is a method used to manage investment risk.

Find Out About the Guaranteed Interest Contract

A guaranteed interest contract offers a set rate of return for a specific period of time, and it is typically backed by an insurance company. Generally, these contracts are very safe, but they still depend on the security of the company that issues them.

If you're worried, take a look at that company's rating. The four main insurance company rating agencies are A.M. Best, Moody's, Standard & Poor's, and Fitch Ratings. A.M. Best ratings are based on financial conditions and operating performance; Fitch Ratings, Moody's, and Standard & Poor's ratings are based on claims-paying ability. You should be able to find copies of these guides at your local library.

Periodically Review Your Plan's Performance

You are likely to have the chance to shift assets from one fund to another. Use these opportunities to review your plan's performance. The markets change. You may want to adjust your investments based on your particular situation.

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.

What Is a Self-Employed Retirement Plan?

A self-employed retirement plan is a tax-deferred retirement savings program for self-employed individuals. In the past, the terms "Keogh plan" or "H.R. 10 plan" were used to distinguish a retirement plan established by a self-employed individual from a plan established by a corporation or other entity. However, self-employed retirement plans are now generally referred to by the name that is used for the particular type of plan such as, SEP IRA, SIMPLE 401(k), or self-employed 401(k).

Self-employed plans can be established by any individual who is self-employed on a part-time or full-time basis, as well as by sole proprietorships and partnerships (who are considered "employees" for the purpose of participating in these plans).

Unlike IRAs, which limit tax-deductible contributions to $5,000 per year (in 2010), Keoghs allow you to save as much as $49,000 of your net self-employment income in 2010, depending on the type of self-employed plan you adopt.

Contributions to a self-employed plan may be tax deductible up to certain limits. These contributions, along with any gains made on the investments within the fund, will accumulate tax deferred until you withdraw them.

Withdrawal rules mirror those of other qualified retirement plans. Distributions are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to age 59.5. Self-employed plans can typically be rolled over to another qualified retirement plan or to an IRA. Annual minimum distributions are required after the age of 70.5. Unlike the case with other qualified retirement plans, hardship distributions are not permitted with a self-employed plan.

You can open a self-employed plan account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balance, most institutions set their own, usually between $250 and $1,000. The deadline for setting up a self-employed plan is earlier than it is for an IRA. You must open a self-employed by December 31 of the year for which you wish to claim a deduction.

However, you don't have to come up with your entire contribution by then. As with an IRA, you have until the day you file your tax return to make your contribution. That gives most taxpayers until April 15 to deposit their annual retirement savings into a self-employed plan account.

Each tax year, plan holders are required to fill out Form 5500, for which they may need the assistance of an accountant or tax advisor, incurring extra costs.

If you earn self-employment income, a self-employed plan could be a valuable addition to your retirement strategy. And the potential payoff - a comfortable retirement - may far outweigh any extra costs or paperwork.

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.

Life Insurance for Business Owners

If you own your own business, chances are you've at least thought about the conditions under which you will make your departure from the business and who is going to take over after you leave. Business continuation is difficult enough under normal circumstances, but if it has to take place following the unexpected death of a key person or owner, the complications can increase exponentially.

Company-owned life insurance is one way to help protect a business from financial problems caused by the unexpected death of a key employee, partner, or co-owner. If the covered individual dies, the proceeds from this type of insurance can help in several ways. Here are some examples.

Fund a Buy-Sell Agreement

A buy-sell agreement typically specifies in advance what will happen if an owner or a key person leaves the company, either through a personal decision or because of death or disability. The death benefit from a company-owned life insurance policy can be used to purchase the decedent's interest in the company from his or her heirs.

Keep the Business Going

If a decision is made to continue the business, there may be a period when operations cease while the survivors develop a plan to move forward. The death benefit can be used to help replace lost revenue or to pay costs associated with keeping the doors open, including rent, utilities, lease payments, and payroll. It may also help the surviving owners avoid borrowing money or selling assets.

Replace Lost Income

If a business owner has family members who depend on the income from a business, which simply could not continue if he or she were suddenly gone, the proceeds from company-owned life insurance could help replace the lost income and help protect the family's quality of life while they adjust and move on.

The appropriate coverage amount will depend on several factors. It could be a multiple of the business owner's annual salary or the company's operating budget. Don't forget to factor in such details as the cost of hiring and training a successor, where applicable, and any debts that the family may have to repay.

Remember that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individual is insurable.

As with most financial decisions, there are associated expenses with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges. Most have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the policy; plus, there could be income tax implications. Any guarantees are contingent on the claims-paying ability of the issuing company. Life insurance policies are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

The loss of an owner can be devastating to a small business. A company-owned life insurance policy may help reduce the financial consequences if such a loss were to occur.

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.

What Key Estate Planning Tools Should I Know About?

By taking steps in advance, you have a greater say in how these questions are answered. And isn't that how it should be?

Wills and trusts are two of the most popular estate planning tools. Both allow you to spell out how you would like your property to be distributed, but they also go far beyond that.

Just about everyone needs a will. Besides enabling you to determine the distribution of your property, a will gives you the opportunity to nominate your executor and guardians for your minor children. If you fail to make such designations through your will, the decisions will probably be left to the courts. Bear in mind that property distributed through your will is subject to probate, which can be a time-consuming and costly process.

Trusts differ from wills in that they are actual legal entities. Like a will, trusts spell out how you want your property distributed. Trusts let you customize the distribution of your estate with the added advantages of property management and probate avoidance.

Wills and trusts are not mutually exclusive. While not everyone with a will needs a trust, all those with trusts should have a will as well.

Incapacity poses almost as much of a threat to your financial well-being as death does. Fortunately, there are tools that can help you cope with this threat.

A durable power of attorney is a legal agreement that avoids the need for a conservatorship and enables you to designate who will make your legal and financial decisions if you become incapacitated. Unlike the standard power of attorney, durable powers remain valid if you become incapacitated.

Similar to the durable power of attorney, a health care proxy is a document in which you designate someone to make your health care decisions for you if you are incapacitated. The person you designate can generally make decisions regarding medical facilities, medical treatments, surgery, and a variety of other health care issues. Much like the durable power of attorney, the health care proxy involves some important decisions. Take the utmost care when choosing who will make them.

A related document, the living will, also known as a directive to physicians or a health care directive, spells out the kinds of life-sustaining treatment you will permit in the event of your incapacity. The directive creates an agreement between you and the attending physician. The decision for or against life support is one that only you can make. That makes the living will a valuable estate planning tool. And you may use a living will in conjunction with a durable health care power of attorney. Bear in mind that laws governing the recognition and treatment of living wills may vary from state to state.

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.

How Can a Living Trust Help Me Control My Estate?

Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.

A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.

When you set up a living trust, you transfer ownership of all the assets you'd like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.

Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn't anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.

There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.

When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor's trust, or "A" trust, and the decedent's trust, or "B" trust.

This will create two taxable entities, each of which will be entitled to use a personal exemption. The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse's trust and can even withdraw principal from it when necessary for health, support, or maintenance.

On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.

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.

What Gifting Strategies Are Available to Me?

There are a number of different gifting strategies available for planned giving. Each has its advantages and disadvantages.

Instead of making an outright gift, you could choose to use a charitable lead trust. With a charitable lead trust, your gift is placed in a trust. The recipient of the gift draws the income from this trust. Upon your death, your heirs will receive the principal with little or no estate tax.

If you prefer to retain an income interest in your gift, you could use a pooled income fund, a charitable remainder unitrust, or a charitable remainder annuity trust. With each of these strategies, you receive the income generated by your gift, and the recipient receives the principal upon your death. Finally, you could purchase a life insurance policy and name the charitable organization as the owner and beneficiary of the policy. This would enable you to make a large future gift at a potentially low current cost.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

As with most financial decisions, there are associated expenses with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges. Most have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the policy; plus, there could be income tax implications. Any guarantees are contingent on the claims-paying ability of the issuing company. Life insurance is not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

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.

How Can I Benefit from a Charitable Remainder Trust?

Sometimes it takes tough economic times and natural disasters to unite and bring out the best in people. Natural disasters such as hurricanes and earthquakes have served to bring communities together and impact the nation as a whole. Americans have given generously to rebuild communities and help local residents through these difficult situations.

Many people have also responded to tragedies worldwide or have made donations to wildlife and environmental charities. And when we give, most of us simply give from the heart and do not always consider the financial implications.

In many instances, there are ways to increase your gifts. The charity can receive a more substantial gift and you can increase your tax benefits. The charitable remainder trust is a popular estate-planning strategy that could enable you to gift an appreciated property or security and retain an interest income for you and your family.

Once your gift is put in a charitable trust, you may qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity. Neither party will owe taxes on this transfer or upon the appreciation of the asset. The trust will usually sell the asset and reinvest the proceeds in an income-producing investment. You can receive this income in exchange for gifting the ownership of the asset to the charity.

You will then need to decide how you would like to receive income. You can receive either a percentage of the value of the trust or a fixed amount. With a percentage allocation, your income will vary based on the current value of the trust. Some even offer a "make-up" clause. If the trust is not able to provide the designated income for one year, the shortfall will be added to the following year's distribution.

Trusts that provide a fixed amount each year will not be able to take advantage of future growth or higher earnings of the asset, but they do offer consistent income even in a stagnating market.

Choosing a trustee and clearly stating your intentions in the trust document and to the trustee are of vital importance. Once the trust is in place, it is an irrevocable instrument. Even if the charity does not receive any benefit for several decades, it will eventually assume ownership. In the meantime, the trustee is in charge of controlling the assets in the trust. Choose someone who knows how to handle financial matters and who will carry out your intentions.

A charitable remainder trust may allow you to make a substantial gift to charity, avoid capital gains tax, and provide regular income for you and your family.

The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate-planning professional before implementing such sophisticated strategies.

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.

What Types of Health Coverage Are Available?

Rising health-care costs have driven the demand for, and the price of, medical insurance sky-high. The availability of group coverage through employment has helped many Americans face such costs. However, people who are not currently covered by their employers have few affordable sources for group coverage. If you are not covered at work, inquire about coverage through your religious affiliation, professional organizations, or alumni association.

Individuals seeking medical coverage on their own can explore purchasing an individual health insurance policy. And those aged 65 and older may qualify for Medicare coverage.

There are three general classifications of medical insurance plans: fee-for-service (indemnity), managed care (e.g., HMOs and PPOs), and high-deductible health plan (HDHP). Older persons may be eligible for Medicare coverage.

Fee for Service

With a basic fee-for-service (indemnity) insurance plan, doctors and hospitals are paid a fee for each service provided to insured patients.

Indemnity plans normally cover hospitalization, outpatient care, and physician services in or out of the hospital. You select the service provider (physician) for consultation or treatment. You are then billed for the service and reimbursed by the insurance company, or you can "assign" direct payment to the provider from the insurance company. Indemnity plans typically require the payment of premiums, deductibles, and coinsurance. Limits on certain coverage or exclusions may apply. Because many policies have lifetime limits on benefits that the insurance company will pay, you should look for a policy with a lifetime limit of at least $1 million.

Managed Care

Managed-care plans became popular in the 1990s as a way to help rein in rising medical costs. In managed-care plans, insurance companies contract with a network of doctors and hospitals to provide cost-effective health care. Managed-care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.

Health maintenance organization. An HMO operates as a prepaid health-care plan. You normally pay a monthly premium in addition to a small copayment for a visit to a physician, who may be on staff or contracted by the HMO. Copayments for visits to specialists may be higher. The insurance company typically covers the amount over the patient copayment amount.

Each covered member chooses or is assigned a primary-care physician from doctors in the plan. This person acts as a gatekeeper for his or her patients and, if deemed necessary, can refer patients to specialists who are on the HMO's list of providers. Because HMOs contract with doctors and physicians, costs are typically lower than in indemnity plans.

Preferred provider organization. A PPO is a managed-care organization of physicians, hospitals, clinics, and other health-care providers who contract with an insurance company to provide health care at reduced rates to individuals insured in the plan. The insurance company uses actuarial tables to determine "reasonable and customary" fees for each type of service, and health-care providers accept the PPO's fee schedule and guidelines.

The insured can see any doctor or hospital within a preferred network of providers and pays a copayment for each visit. Insured individuals have to meet an annual deductible before the insurance company will start covering health-care services. Typically, the insurance company will pay a high percentage (often 80%) of the costs to the plan's health-care providers after the deductible has been met, and patients pay the balance.

Although insured individuals can choose physicians or providers outside the plan without permission, patient out-of-pocket costs will be higher; for example, the initial deductible for each visit is higher and the percentage of covered costs by the insurance company will be lower. Because PPOs provide more patient flexibility than HMOs, they may cost a little more.

Point-of-service plan. A POS health-care plan mixes aspects of an HMO and a PPO to allow greater patient autonomy. POS plans also use a network of preferred providers whom patients must turn to first and from whom patients receive referrals to other providers if deemed necessary. POS plans recommend that patients choose a personal physician from inside the network. The personal physician can refer patients to other physicians and specialists who are inside or outside the network.

Insurance companies have a national network of approved providers, so insured individuals can receive services throughout the United States. Copays tend to be lower for a POS plan than for a PPO plan.

High-Deductible Health Plan

An HDHP provides comprehensive coverage for high-cost medical bills and is usually combined with a health-reimbursement arrangement that enables participants to build savings to pay for future medical expenses. HDHP plans generally cover preventive care in full with a small (or no) deductible or copayment. However, these plans have higher annual deductibles and out-of-pocket limits than other insurance plans.

Participants enrolled in an HDHP can open a health savings account (HSA) to save money that can be used for current and future medical expenses. There are annual limits on how much can be invested in an HSA. The funds can be invested as you choose, and any interest and earnings accumulate tax deferred. HSA funds can be withdrawn free of income tax and penalties provided the money is spent on qualified health-care expenses for the participant and his or her spouse and dependent children.

Remember that the cost and availability of an individual health insurance policy can depend on factors such as age, health (pre-existing conditions), and the type of insurance purchased. In addition, a physical examination may be required.

Medicare

Medicare is the U.S. government's health-care insurance program for the elderly. It is available to eligible people aged 65 and older as well as certain disabled persons. Part A provides basic coverage for hospital care as well as limited skilled nursing care, home health care, and hospice care. Part B covers physicians' services, inpatient and outpatient medical services, and diagnostic tests. Part D prescription drug coverage is also available.

Medicare Advantage is a type of privately run insurance plan that includes Medicare-approved HMOs, PPOs, fee-for-service plans, and special needs plans. Some plans offer prescription drug coverage. To join a Medicare Advantage plan, you must have Medicare Part A and Part B and you have to pay the monthly Medicare Part B premium to Medicare, as well as the Medicare Advantage premium.

Medicare Supplement Insurance, or Medigap, is sold by private insurance companies and is designed to cover the deductibles and copayments that Medicare doesn't cover. At one point, there were more than 200 different policies available. Then the National Association of Insurance Commissioners stepped in and created 10 standard packages of coverage, designated by the letters A through J.

Starting in June 2010, plans E, H, I, and J will no longer be sold, although you can keep your plan if you already had one of these plans before June 2010. There are also two new policies (plans M and N) that offer different benefits and premiums. Plans D and G bought on or after June 1, 2010, have different benefits than D and G plans bought before June 1, 2010 (although the benefits won't change for those who participated in these plans prior to June 1). Only Medigap insurers are able to offer these plans. Although each standardized plan is identical from insurer to insurer, prices may differ and all these plans may not be available in every state.

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.

What Is the Difference Between an HMO and a PPO?

Selecting health insurance is often one of the most important decisions you will make. Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are types of managed health-care plans and can cost much less than comprehensive individual policies.

Through the use of managed care, HMOs and PPOs are able to reduce the costs of hospitals and physicians. Managed care is a set of incentives and disincentives for physicians to limit what the HMOs and PPOs consider unnecessary tests and procedures. Managed care generally requires the consent of a primary-care physician before a patient can see a specialist.

An HMO provides comprehensive health-care services to the insured for a fixed periodic payment. There may also be a nominal fee paid for each visit to a health-care provider. Unlike traditional insurance, HMOs actually provide the health care rather than just making payments to health-care providers. HMOs can have a variety of relationships with hospitals and physicians. Plan physicians may be salaried employees, members of an independent multi-specialty group, part of a network of independent multi-specialty groups, or part of an individual practice association.

Because HMOs integrate health-care providers with insurance, they are able to provide improved health-care delivery. This unique relationship often allows HMOs to maintain a lower cost of service from plan providers. Because the HMO is both a provider and an insurer, this allows for lower administrative costs and paperwork for the patient.

HMOs also try to reduce costs by providing preventive care. Because visits to primary-care physicians are inexpensive for patients, the chance of early detection and care increases.

Preferred provider organizations have also contracted with hospitals and physicians to provide health-care services. Unlike the case with an HMO, you do not have to go to these physicians.

However, you will pay more if you go outside the list of preferred providers. PPO plans usually have a deductible, which is the amount that the insured must pay before the PPO begins to pay. When the PPO plan does start to pay, it will usually pay a percentage of the bill and you have to pay the remainder, which is called "coinsurance." Most plans have an out-of-pocket maximum. This helps protect you from paying more than a certain amount per year. After you exceed the out-of-pocket maximum, the coinsurance percentage paid by the PPO increases to 100%.

The out-of-pocket maximum, deductible, and coinsurance will each affect the cost of the PPO insurance coverage. You can help lower your premiums by having as high a deductible as you can afford to pay.

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.

How Health-Care Expenses Could Affect Your Retirement Lifestyle

Given all the discussion and debate over the future of U.S. health care, is it time to recalculate how much money you will need to pay for medical insurance and related costs in retirement? Here are some numbers to consider. See whether they line up with your expectations. In 2010, the present value of lifetime benefits from Medicare was about $376,000 for a 65-year-old married couple. Because Medicare covers about half of a beneficiary's medical costs in retirement, on average, does this mean you'll need $376,000 to pay for your share?(1)

As large as this estimate might seem, there's evidence to suggest that many people will need even more savings to cover medical expenses in retirement, especially people who don't expect to retire for at least another decade.

How Certain Do You Want to Be?

The Employee Benefit Research Institute estimates that a man will need between $144,000 and $290,000 and a woman will need between $210,000 and $406,000 in savings to have a 50% chance of affording health care in retirement, assuming retirement at age 65 in 2019.(2)

These estimates are for the projected median savings needed to pay premiums for Medigap, Medicare Part B and Part D, and out-of-pocket prescription drug expenses. Since half of the population would be above the median, half could need more than these amounts. Some people may need to save even more if they live longer than the average life expectancy, have above-average prescription drug costs, or want greater certainty that they will be able to pay for health care.

The estimates tend to be higher for women because they have longer life expectancies. In fact, a woman who wants to be 90% certain that she will be able to afford her health-care expenses in retirement would need an estimated $370,000 in savings (again, assuming retirement in 2019 at age 65). If her prescription drug costs are above the median, she could need even more.(3)

You might be wondering whether the health reform legislation that became law in March 2010 will reduce the amount that tomorrow's retirees will need to pay for health care. Because the law relies on $415 billion in cuts to Medicare, it's entirely possible that the percentage of medical expenses covered by Medicare benefits could fall in the future.(4)

Of course, your situation is likely to be different. What do these estimates mean if you know that you are almost certain to retire at a different age and/or in a different year? In that case, these numbers might make a good starting point for calculating how much money you may need to accumulate.

(1-3) Employee Benefit Research Institute, 2010
(4) Tax Foundation, 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.

What About Financial Aid for College?

Is the financial aid game worth playing? There's a tremendous amount of paperwork involved. The rules are obscure and often don't seem to make sense. And it takes time.

But make no mistake, the game is definitely worth playing. Financial aid can be a valuable source of funds to help finance your child's college education.

And you don't necessarily have to be "poor" to qualify. In some circumstances, families with incomes of $75,000 or more can qualify.

U.S. Government Grants

The federal government provides student aid through a variety of programs. The most prominent of these are Pell Grants and Federal Supplemental Educational Opportunity Grants (FSEOGs).

Pell Grants are administered by the U.S. government. They are awarded on the basis of college costs and a financial aid eligibility index. The eligibility index takes into account factors such as family income and assets, family size, and the number of college students in the family.

By law, Pell Grants can provide up to $4,731 per student in the 2008-2009 award year.(1) Due to financial constraints, however, Pell Grants generally don't exceed $2,900 per year. Students must reapply every year to receive aid.

Most colleges will not process applications for Stafford loans until needy students have applied for Pell Grants. Students with Pell Grants also receive priority consideration for FSEOGs.

Students who can demonstrate severe financial need may also receive a Federal Supplemental Educational Opportunity Grant. FSEOGs award up to $4,000 per year per student.

State Grants

Many states offer grant programs as well. Each state's grant program is different, but they do tend to award grants exclusively to state residents who are planning to attend an in-state school. Many give special preference to students planning to attend a state school.

College Grants

Finally, many colleges and universities offer specialized grant programs. This is particularly true of older schools with many alumni and large endowments. These grants are usually based on need or scholastic ability. Consult the college or university's financial aid office for full details.

(1) Studentaid.ed.gov

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.

What College Investment Options Do I Have?

As tax laws change, college investment planning becomes increasingly complex. The most beneficial strategies for creating a college fund are quite similar to other investment tactics. Investment products that are tax deferred, tax exempt, or transferable without tax consequences can be especially advantageous.

This is even more effective if you do your planning early.

One important aspect of an investment is its balance of yield and risk. Determine the amount of risk you can tolerate, given the amount of time you have to recover from any potential losses.

Take the time to familiarize yourself with the financial aid formulas. This will help you determine whether assets and income should be in your name or your child's name. Structuring your investments ahead of time can have a significant effect on the net amount of funds available for your child's education.

There are a number of funding options available for your college investment plan. This list contains a few of the more common.

Certificates of Deposit

CDs offer a reasonable return with a relatively high degree of safety. They are FDIC insured to $250,000* and offer a fixed rate of return, whereas the principal and yield of investment securities will fluctuate with changes in market conditions.

The interest earned on a CD is taxed as ordinary income. And CDs are not very liquid. You will pay a significant interest penalty for withdrawing money before it reaches maturity.

Bonds

Many people consider U.S. government bonds to be among the least risky investments available. They are guaranteed by the U.S. government as to the timely payment of principal and interest. The interest on Series EE bonds is tax-free to low- and middle-income families if the proceeds are used to fund a college education. This benefit phases out for individuals and couples in the upper middle class and above.

Zero-coupon bonds are purchased at a substantial discount and pay their face value upon maturity. The value of these bonds is subject to market fluctuation. Because they do not pay interest until maturity, their prices tend to be more volatile than bonds paying interest regularly. Thus zero-coupon bonds make it possible to buy high-quality bonds for far less money up front. Interest income is subject to taxes annually as ordinary income, even though no income is being paid to the investor.

Stocks and Mutual Funds

Many people who use stocks to fund a college investment program invest in mutual funds.

Mutual funds are professionally managed. They buy and sell securities to meet the specific goals of their fund, weighing risk against security, yield against quality. They can be an effective addition to a college investment plan. Investment return and principal value of these investments will fluctuate. An investor's shares, when redeemed, may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Making Choices

There are college investment options to fit almost any investor. No matter how modest or how ample your income, careful planning is the best way to "find" the money for college. The key is to start early and remain consistent.

*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.

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.

529 Lesson Plan: High Scores for 529 College Savings Program

Looking for a tax-advantaged college savings plan that has no age restrictions, no income phaseout limits, no residency requirements - and one you can use to pay for more than just tuition?

Consider the 529 savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades - with annual costs of more than $35,000 per year for the average private four-year college.(1) Named after the section of the tax code that authorized them, 529 plans (also known as qualified state tuition programs) are now offered in almost every state.

Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today's rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. It's practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state's eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).

The newer variety of 529 is the savings plan. It's similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.

In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers - many well-known investment firms - to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. In 48 states, earnings are exempt from taxes.(2) And there are even new consumer-friendly reward programs popping up that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.

Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone - even non-relatives - can contribute up to $13,000 per year (in 2010) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner's estate, therefore avoiding estate taxes upon the owner's death.

Major Benefits

These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn - and, if desired, can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary. A 529 plan is also extremely simple when it comes to tax reporting - the sponsoring state, not you, is responsible for all income tax record keeping. At the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student's tax return.

Benefits for Grandparents

The 529 plan is a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student's college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a grandparent - as well as anyone, for that matter - could elect to use five years' worth of annual exclusions by making a single contribution of as much as $65,000 per beneficiary in 2010 (or a couple could contribute $130,000 in 2010), as long as no other contributions are made for that beneficiary for five years.* If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.

As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.

By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.

* If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor's estate.

Sources:

(1) The College Board, 2009
(2) SavingForCollege.com

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.

How Can I Save for My Child's College Education?

Once you've determined how much it will cost to send your children to college, your next prudent step is to develop a systematic investment plan that will enable you to accumulate the necessary funds.

What are your funding options? Which would be best for your situation? We've listed several below, along with a brief description of each.

UNIVERSAL LIFE INSURANCE

Universal life insurance policies build cash value through regular premiums and grow at competitive rates. These policies carry a death benefit. In addition to providing cash to your heirs in the event of your death, this death benefit gives universal life insurance policies their tax-free status. Money can usually be withdrawn from these contracts through policy loans, often at no interest. These withdrawals may reduce the policy's death benefit.

ZERO-COUPON BONDS

Zero-coupon bonds represent the ownership of principal payments on U.S. government notes or bonds. Unlike traditional bonds, zero-coupon bonds make no periodic interest payments. Instead, they are purchased at a substantial discount and pay face value at maturity. The value of these bonds is subject to market fluctuation. Their prices tend to be more volatile than bonds that pay interest regularly. And even though no income is paid, the inherent interest is still taxable annually as ordinary income.

MUTUAL FUNDS

Mutual funds are established by an investment company by pooling the monies of many different investors and then investing that money in a diversified portfolio of securities. These securities are selected to meet the specific goals of the fund. The value of mutual fund shares fluctuates with market conditions so that, when sold, shares may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

INDEPENDENT COLLEGE 500-INDEXED CERTIFICATES OF DEPOSIT

The I.C. 500 is the College Board's index of college inflation based on a survey of the costs at 500 independent colleges and universities. I.C. 500-indexed Certificates of Deposit are a relatively new funding vehicle offered by a few savings institutions. Their rate of return is directly linked to the I.C. 500 index.

SECTION 529 PLANS

Section 529 Plans are also known as Qualified State Tuition Programs. These plans are sponsored by individual states and offer higher contributions than Coverdell IRAs along with tax-deferred accumulation. Once withdrawals begin, they are tax exempt as long as the funds are used to pay for qualified higher education expenses.

As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.

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.

Keeping Up with College Costs

The cost of a college education continues to rise rapidly, reaching new highs along the way. Universities such as Brown, Duke, Harvard, and Stanford report that their combined tuition, fees, room, and board will break $50,000 for the first time in the 2010-11 school year.(1)

This worksheet can help you prepare for these mounting costs. Enter a child's name and age. Estimate the current annual college cost and multiply it by the future cost factor listed in the table. The result is the estimated future cost. Multiply that figure by the savings factor to estimate the annual savings required to help fund the child's education.

If you have already started saving, you're a step ahead. Call today to review your college savings goals.

(1) The Wall Street Journal, March 27, 2012

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.

How Much Do I Need to Save?

Many Americans realize the importance of saving for retirement, but knowing exactly how much they need to save is another issue altogether. With all the information available about retirement, it is sometimes difficult to decipher what is appropriate for your specific situation.

One rule of thumb is that retirees will need approximately 80% of their pre-retirement salaries to maintain their lifestyles in retirement. However, depending on your own situation and the type of retirement you hope to have, that number may be higher or lower.

Fortunately, there are several factors that can help you work toward a retirement savings goal.

Retirement Age

The first factor to consider is the age at which you expect to retire. In reality, many people anticipate that they will retire later than they actually do; unexpected issues, such as health problems or workplace changes (downsizing, etc.), tend to stand in their way. Of course, the earlier you retire, the more money you will need to last throughout retirement. It's important to prepare for unanticipated occurrences that could force you into an early retirement.

Life Expectancy

Although you can't know what the duration of your life will be, there are a few factors that may give you a hint.

You should take into account your family history-how long your relatives have lived and diseases that are common in your family-as well as your own past and present health issues. Also consider that life spans are becoming longer with recent medical developments. More people will be living to age 100, or perhaps even longer. When calculating how much you need to save, you need to factor in the number of years you will spend in retirement.

Future Health-Care Needs

Another factor to consider is the cost of health care. Health-care costs have been rising much faster than general inflation, and fewer employers are offering health benefits to retirees. Long-term care is another consideration. These costs could severely dip into your savings and even result in your filing for bankruptcy if the need for care is prolonged.

Factoring in higher costs for health care during retirement is vital, and you might want to consider purchasing long-term-care insurance to help protect your assets.

Lifestyle

Another important consideration is your desired retirement lifestyle. Do you want to travel? Are you planning to be involved in philanthropic endeavors? Will you have an expensive country club membership? Are there any hobbies you would like to pursue? The answers to these questions can help you decide what additional costs your ideal retirement will require.

Many baby boomers expect that they will work part-time in retirement. However, if this is your intention and you find that working longer becomes impossible, you will still need the appropriate funds to support your retirement lifestyle.

Inflation

If you think you have accounted for every possibility when constructing a savings goal but forget this vital component, your savings could be far from sufficient. Inflation has the potential to lower the value of your savings from year to year, significantly reducing your purchasing power over time. It is important for your savings to keep pace with or exceed inflation.

Social Security

Many retirees believe that they can rely on their future Social Security benefits. However, this may not be true for you. The Social Security system is under increasing strain as more baby boomers are retiring and fewer workers are available to pay their benefits. And the reality is that Social Security currently provides only 27% of the total income of Americans aged 65 and older with at least $50,000 in annual household income.1 That leaves 73% to be covered in other ways.

And the Total Is...

After considering all these factors, you should have a much better idea of how much you need to save for retirement.

For example, let's assume you believe that you will retire when you are 65 and spend a total of 20 years in retirement, living to age 85. Your annual income is currently $80,000, and you think that 75% of your pre-retirement income ($60,000) will be enough to cover the costs of your ideal retirement, including some travel you intend to do and potential health-care expenses. After factoring in the $12,000 annual Social Security benefit you expect to receive, a $10,000 annual pension from your employer, and 4% potential inflation, you end up with a total retirement savings amount of $760,000. (For your own situation, you can use a retirement savings calculator from your retirement plan provider or from a financial site on the Internet.)

The estimated total for this hypothetical example may seem daunting. But after determining your retirement savings goal and factoring in how much you have saved already, you will be able to determine how much you need to save each year to reach your destination. The important thing is to come up with a goal and then develop a strategy to help reach it. You don't want to spend your retirement years wishing you had planned ahead when you had the time. The sooner you start saving and investing to reach your goal, the closer you will be to realizing your retirement dreams.

Source:

(1) Income of the Population 55 or Older, 2006, Social Security Administration, 2009. Breakdown based on people aged 65 and older with at least $50,000 in annual household income.

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.

Profit-Sharing Plans

David Wray, the president of the Profit Sharing/401(k) Council of America, once said that the purpose of profit-sharing plans is "to generate goodwill and a feeling of partnership" between employer and employee. Profit-sharing plans give employees a share in the profits of a company each year and can help to fund their retirements.

All funds contributed to a profit-sharing plan accumulate tax deferred, as with other defined-contribution retirement plans, but employer contributions are tax deductible only if the plan is defined as an elective deferral plan, which means that instead of accepting their profit shares as cash, employees defer the assets into retirement funds.

Profit sharing is attractive to business owners because of its flexibility. Employers can choose how much to allot to employees each year based on the amount of revenue taken in. There is no required minimum. If the company has a bad year, the employer has the option of giving very little or nothing at all to employee accounts.

Employees are usually enrolled automatically in profit sharing once they become eligible. Companies can choose eligibility requirements based on age and length of service. In 2010, a company is allowed to contribute up to 25% of an employee's salary or $49,000 (whichever is less). This amount is indexed annually for inflation.

Typically, companies set up vesting schedules that dictate how long workers must be employed in order to claim profit-sharing contributions when they move to another job or retire. Once employees are fully vested, they can take the entire amount contributed on their behalf and roll it over to an IRA or to a new employer's qualified retirement plan.

If you participate in a profit-sharing plan, you may begin withdrawing funds after age 59.5 without incurring a 10% income tax penalty. Withdrawals are taxed as ordinary income. Some plans may allow early withdrawals. Profit-sharing providers have greater flexibility when it comes to deciding the terms of early withdrawal than do administrators of other plans, such as 401(k)s. However, the trend has been to permit no early withdrawals.

As with other retirement plans, you must begin taking required minimum distributions after reaching age 70.5. You can elect to withdraw the assets as a lump sum and be taxed on the entire value of the fund or you can set up a minimum distribution schedule based on your life expectancy. Some companies offer a combination arrangement with both a profit-sharing plan and a 401(k). A conjoined plan allows employers to contribute as much or as little as they would like each year, while giving employees a way to supplement their retirement funds.

If you are a business owner, profit sharing may be a way to attract high-caliber employees. It provides retirement funds for your employees, yet allows you the freedom to choose how much you wish to contribute each year.

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.

What Is a 401(k) Plan?

A 401(k) plan is self-directed, qualified retirement plan established by an employer to provide future retirement benefits for employees. Employee contributions are made on a pre-tax basis, and employer contributions are often tax deductible. (Roth 401(k) contributions are made after-tax, but qualified withdrawals in retirement are free of federal income tax.) Many employers are now enrolling new hires automatically in 401(k) plans, allowing them to opt out later if they choose not to participate. This is done in the hope that more employees will participate and will start saving for retirement at an earlier age.

If you elect to participate in a 401(k) plan, you can allocate a percentage of your salary to your plan every month. The maximum annual contribution is $16,500 in 2010. If you will be 50 or older before the end of the tax year, you can contribute an additional $5,500. Contribution limits are indexed annually for inflation. The funds in your account will accumulate tax deferred until you begin taking distributions in retirement.

Employer contributions are often subject to vesting requirements. Employers can determine their own vesting schedules, making employees partially vested over time and fully vested after a specific number of years. When an employee is fully vested, he or she is entitled to all the contributions made by the employer when separating from service.

In plans that offer loans, you may also be allowed to borrow money from your account (up to 50% of the account value or $50,000, whichever is less) with a five-year repayment period. Of course, if you leave your job, the loan may have to be repaid immediately.

The funds in a 401(k) plan are portable. When you leave your job or retire, you can move your funds or take a taxable distribution. However, if you leave a company before you are fully vested, you will be allowed to take only the funds that you contributed yourself plus any vested funds, as well as any earnings that have accumulated on those contributions.

Within certain limits, the funds in your 401(k) plan can be rolled over directly to your new employer's retirement plan without penalty. Alternatively, you can roll your funds directly to an individual retirement account (IRA) instead.

You must begin taking required minimum distributions from 401(k) plans no later than April 1 of the year after you reach age 70.5. Distributions from regular 401(k) plans are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn before age 59.5, except in special circumstances such as disability or death.

A 401(k) plan can be a great way to save for retirement, especially if your employer offers matching contributions. If you are eligible to participate in a 401(k) plan, you should take advantage of the opportunity, even if you have to start by contributing a small percentage of your salary. This type of plan can form the basis for a sound retirement funding strategy.

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.

What Is a Traditional IRA?

Traditional individual retirement accounts (IRAs) can be a good way to save for retirement. If you do not participate in an employer-sponsored retirement plan or would like to supplement that plan, then a traditional IRA could work for you.

A traditional IRA is simply a tax-deferred savings account that is set up through an investment institution and has several investing options. For instance, an IRA can include stocks, bonds, mutual funds, cash equivalents, real estate, and other investment vehicles.

One of the benefits of a traditional IRA is the potential for tax-deductible contributions. In 2010, you may be eligible to make a tax-deductible contribution of up to $5,000 ($6,000 if you are 50 or older). Contribution limits are indexed annually for inflation.

You can contribute directly to a traditional IRA or you can transfer assets directly from another type of qualified plan, such as a SEP or a SIMPLE IRA. Rollovers may also be made from a qualified employer-sponsored plan, such as a 401(k) or 403(b), after you change jobs or retire.

Not everyone contributing to a traditional IRA is eligible for a tax deduction. If you are an active participant in a qualified workplace retirement plan - such as a 401(k) or a simplified employee pension plan - your IRA deduction may be reduced or eliminated, based on your income.

For example, if your modified adjusted gross income (AGI) is $56,000 or less as a single filer ($89,000 or less for married couples), you can receive the full tax deduction. On the other hand, if your AGI is more than $66,000 as a single filer ($109,000 for married couples), you are not eligible for a tax deduction. Partial deductions are allowed for single filers whose incomes are between $56,000 and $66,000 (or between $89,000 and $109,000 for married couples filing jointly). If you are not an active participant in an employer-sponsored retirement plan, you are eligible for a full tax deduction.

Nondeductible contributions may necessitate some very complicated paperwork when you begin withdrawals from your account. If your contributions are not tax deductible, you may be better served by another retirement plan, such as a Roth IRA.

The funds in a traditional IRA accumulate tax deferred, which means you do not have to pay taxes until you start receiving distributions in retirement, a time when you might be in a lower tax bracket. Withdrawals are taxed as ordinary income. If taken prior to age 59.5, withdrawals may also be subject to a 10% federal income tax penalty. Exceptions to this early-withdrawal penalty include distributions resulting from disability, unemployment, and qualified first home expenses ($10,000 lifetime limit), as well as distributions used to pay higher-education expenses.

You must begin taking annual required minimum distributions (RMDs) from a traditional IRA after you turn 70.5(starting no later than April 1 of the year after the year you reach 70.5), or you will be subject to a 50% income tax penalty on the amount that should have been withdrawn. Of course, you can always withdraw more than the required minimum amount, or even withdraw the entire balance as a lump sum.

An IRA can be a valuable addition to your retirement and tax management efforts. By working with a financial advisor, you can determine whether a traditional IRA would be appropriate for you.

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.

What Is a Roth IRA?

Roth IRAs are tax-favored financial vehicles that enable investors to save money for retirement. They differ from traditional IRAs in that taxpayers cannot deduct contributions made to a Roth.

However, qualified Roth IRA distributions in retirement are free of federal income tax and aren't included in a taxpayer's gross income. That can be advantageous, especially if the account owner is in a higher tax bracket in retirement or taxes are higher in the future.

A Roth IRA is subject to the same contribution limits as a traditional IRA ($5,000 in 2010). Special "catch-up" contributions enable those nearing retirement (age 50 and older) to save at an accelerated rate by contributing $1,000 more than the regular annual limits.

Another way in which Roth IRAs can be advantageous is that investors can contribute to a Roth after age 70.5 as long as they have earned income, and they don't have to begin taking mandatory distributions due to age, as they do with traditional IRAs.

Roth IRA withdrawals of contributions (not earnings) can be made at any time and for any reason; they are tax-free and not subject to the 10% federal income tax penalty for early withdrawals. In order to make a qualified tax-free and penalty free distribution of earnings, the account must have been in place for at least five tax years and you must be age 59.5 or older. Otherwise, these withdrawals are subject to the 10 percent federal income tax penalty with certain exceptions which include death, disability, medical expenses in excess of 7.5 percent of adjusted gross income, higher education expenses, and to purchase a first home (up to a $10,000 lifetime cap). However, these withdrawals would be subject to ordinary income tax.

To qualify for a tax-free and penalty-free withdrawal of earnings in retirement (after age 59.5), a Roth IRA must have been in place for at least five tax years. Keep in mind that even though qualified Roth IRA distributions are free of federal income tax, they may be subject to state and/or local income taxes. Eligibility to contribute to a Roth IRA phases out for taxpayers with higher incomes.

If you're looking for a retirement savings vehicle with some distinct tax advantages, the Roth IRA could be appropriate for you.

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.

How Are Mutual Funds Taxed?

Many people have heard the Benjamin Franklin quote, "In this world nothing is certain but death and taxes." Mutual fund taxes can be onerous. However, if you understand the complexities of mutual fund taxes and are prepared when tax season comes around, you may be able to lessen the blow.

Dividends and Capital Gains

The first thing to remember is that you generally must report any mutual fund distributions as income. Even if you reinvest your profits, the federal government still views this as personal income. Your mutual fund will send you a Form 1099-DIV describing what earnings to report on your income tax return. There are two main ways that mutual funds are taxed: dividends and capital gains.

Dividends represent the net earnings of the fund and will have a low tax rate of 15 percent (0 percent for those in the 10 percent and 15 percent tax brackets in 2010) if they are qualified. Qualified dividends, with some exceptions, are dividends received from domestic and foreign corporations after 2002 and before 2011. Foreign dividends must be securities that are traded on U.S. exchanges or have IRS approval.

Capital gains are profits from investor trading or distributions given to shareholders after revenue is taken in from the fund manager's sales of securities. Provisions in the tax law allow you to pay lower capital gains taxes on the sale of assets held more than one year. These are referred to as "long-term" capital gains.

The maximum long-term capital gains tax rate is 15 percent (0 percent for individuals in the 10 percent and 25 percent tax brackets in 2010). Short-term gains - those resulting from the sale of assets held less than one year - are taxed at your highest federal income tax rate. This means that if you've been buying shares in a stock or mutual funds over the years and are considering selling part of your holdings, your tax liability could be significantly impacted by the timing of your sale.

After 2010, the low tax rates on long-term capital gains and dividends are set to expire and return to the rates in effect prior to the 2003 tax law.

Tax-Exempt Funds

One way to potentially protect yourself from high mutual fund taxes is by utilizing a tax-exempt bond fund. Distributions from these types of funds are attributable to interest from state and local municipal bonds, so they are exempt from federal income tax (not necessarily state tax). If a bond was issued by a municipality outside the state in which you reside, the interest could be subject to state and local income taxes. Some municipal bond interest could be subject to the federal alternative minimum tax.

Investing in tax-exempt bond funds can lessen the blow of taxes, but it's important to remember that they may offer lower yields than comparable taxable funds. If you are in a high tax bracket, the tax benefits may make it advantageous for you to invest in lower-yielding tax-exempt funds. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance. If you sell a tax-exempt bond fund at a profit, you could incur capital gains taxes.

Mutual fund taxes can be cumbersome, but there are ways to make sure you are paying as little as possible. Remember that there are always tax-advantaged accounts that you can utilize, such as IRAs or 401(k)s, to defer taxes until you withdraw funds in retirement. You may want to consider tax-deferred accounts for high-income funds that come with lofty tax rates. Regardless of how you handle your mutual funds, be sure to consult with a tax professional.

The value of mutual fund shares may fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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.

What Is the Difference Between a Fixed Annuity and a Variable Annuity?

An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select. Because you do not have to pay taxes on any growth in your annuity until it is withdrawn, this financial vehicle has become an attractive way to accumulate funds for retirement.

Annuities can be immediate or deferred, and they can provide fixed returns or variable returns.

FIXED ANNUITY

A fixed annuity is an insurance-based contract that can be funded either with a lump sum or through regular payments over time. In exchange, the insurance company will pay an income that can last for a specific period of time or for life.

Fixed annuity contracts are issued with guaranteed minimum interest rates. Although the rate may be adjusted, it will never fall below a guaranteed minimum rate specified in the contract. This guaranteed rate acts as a "floor" to protect a contract owner from periods of low interest rates. Fixed annuities provide an option for an income stream that can last a lifetime. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Immediate Fixed Annuity

Typically, an immediate annuity is funded with a lump-sum premium to the insurance company, and payments begin within 30 days or can be deferred up to 12 months. Payments can be paid monthly, quarterly, annually, or semi-annually for a guaranteed period of time or for life, whichever is specified in the contract. Only the interest portion of each payment is considered taxable income. The rest is considered a return of principal and is free of income taxes.

Deferred Fixed Annuity

With a deferred annuity, you make regular premium payments to an insurance company over a period of time and allow the funds to build and earn interest during the accumulation phase. By postponing taxes while your funds accumulate, you keep more of your money working and growing for you instead of paying current taxes. This means an annuity may help you accumulate more over the long term than a taxable investment. Any earnings are not taxed until they are withdrawn, at which time they are considered ordinary income.

VARIABLE ANNUITY

A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company. Thus, you decide how much risk you want to take and you also bear the investment risk.

Most variable annuity contracts offer a variety of professionally managed portfolios called "subaccounts" that invest in stocks, bonds, and money market instruments, as well as balanced investments. Some of your contributions can be placed in an account that offers a fixed rate of return. Your premiums will be allocated among the subaccounts that you select.

Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select. These subaccounts will fluctuate in value and the principal may be worth more or less than the original cost when redeemed.

Variable annuities provide the dual advantages of investment flexibility and the potential for tax deferral. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made.

When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout. The earnings portion of the annuity will be subject to ordinary income taxes when you begin receiving income.

Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59.5. Surrender charges may also apply during the contract's early years. Variable annuity subaccounts fluctuate with changes in market conditions and, when surrendered, the principal may be worth more or less than the original amount invested.

Variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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.

What Is Dollar-Cost Averaging?

Every investor dreams of buying into the market at a low point, just before it hits an upswing, and garnering a large profit from selling at the market's peak. But trying to predict market highs and lows is a feat no one has ever fully mastered, despite the claims by some that they have just the right strategy that enables them to buy and sell at the most opportune times.

Attempting to predict which direction the market will go or investing merely on intuition can get you in trouble, or at the very least may cause you a great deal of frustration. One strategy that may help you avoid these investing pitfalls is dollar-cost averaging.

Dollar-cost averaging involves investing a set amount of money in an investment vehicle at regular intervals for an extended period of time, regardless of the price. Let's say you have $6,000 to invest. Instead of investing it all at once, you decide to use a dollar-cost averaging strategy and contribute $500 each month, regardless of share price, until your money is completely invested. You would end up purchasing more shares when prices are low and fewer shares when prices are high. For example, you might end up buying 20 shares when the price is low, but only 10 when the price is higher.

This strategy has the potential to reduce the risk of investing a large amount in a single investment when the cost per share is inflated. It also helps protect an investor who tends to pull out of the market when it takes a dip, potentially causing an inopportune loss in profit.

The average cost per share may also be reduced, which has the possibility to help you gain better overall profits from the market. Utilizing a dollar-cost averaging program, the bottom line is that the average share price has the potential to be higher than your average share cost. This occurs because you purchased fewer shares when the stock was priced high and more shares when the price was low. Dollar-cost averaging can also help you to avoid the annoyance and stress of continually monitoring the market in an attempt to buy and sell at "fortuitous" moments.

Dollar-cost averaging is a long-range plan, as implied by the word "averaging." In other words, the technique's best use comes only after you've stuck with it for a while, despite any nerve-racking swings in the market. When other panicky investors are scrambling to get out of the market because it has declined and to get back into it when the market has risen, you'll keep investing a specific amount based on the interval you've set.

Note: Dollar-cost averaging does not ensure a profit in rising markets or protect against a loss in declining markets. This type of investment program involves continuous investment in securities regardless of the fluctuating price levels of such securities. Investors should consider their financial ability to continue making purchases through periods of low and high price levels. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

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.

Is a Home Equity Loan Right for Me?

Taxes are becoming an ever-increasing burden to Americans. Through the Tax Reform Act of 1986, Congress reduced or eliminated many of the ways that taxpayers can lower their taxes. Interest deduction is one of the areas that has been strongly affected by this tax reform legislation. Since tax year 1991, interest on consumer debt has not been deductible for income tax purposes.

In order to minimize the impact of these limitations, it may prove advantageous for you to shift your debt by means of a home equity loan - borrowing money using your home as collateral. The law allows your interest payments on these home equity loans to be fully deductible up to $100,000.

You are not even compelled to use the money for home improvements. It may be used to clear personal debts, to fund a college education, to pay medical expenses, or to purchase items on a cash rather than a credit basis. The real benefit to you is the deductibility of the interest payments.

Bear in mind that home equity loans are generally repayable over 15 years. Other types of debt tend to have a shorter repayment period. As a result, the total amount of interest paid may be higher with home equity loans. However, the interest rates on a home equity loan, including origination fees, tend to be significantly lower than other consumer debt.

If you do not require a large sum, you may be interested in establishing a "home equity line of credit." You only withdraw the money as you need it, so your interest payments are reduced. You must examine these options carefully, however, recognizing that these loans are secured by your home.

Also, if you use a home equity loan to pay off credit card debt, consider canceling most of your credit cards to avoid the temptation to build new debt.

Before moving ahead, determine whether this shifting of debt is in your best interest, and seek professional advice on whether it will subject you to the alternative minimum tax.

If debt-shifting is suitable for you, consider taking advantage of these cost-effective means to borrow money.

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.

What Advantages Does a Biweekly Mortgage Offer?

One of the most precious assets that you are likely to possess as you progress through life is your home. Owning their own homes is something that most Americans strive for.

Unfortunately, for the vast majority of people, one of the major drawbacks in owning a home is the long-term mortgage that must be paid off. Mortgages often stretch out 30 years with interest and principal repayments.

Most mortgage repayments are made on a monthly basis. However, arranging to make payments biweekly can have a dramatic effect on the amount of money you have to pay and the time frame before it is all paid off.

Under a biweekly mortgage, instead of making the payments once a month, you make half the payment every two weeks. If your mortgage is $1,000 per month, under a biweekly system it would be $500 every two weeks.

You make 26 payments per year, which is the equivalent of 13 monthly payments rather than 12. The extra payment should be taken directly off the principal, reducing the payment schedule accordingly.

The effect of biweekly mortgage payments can be dramatic. For example, if you currently have a $150,000 loan at 8 percent fixed interest, you will have paid approximately $396,233 at the end of 30 years.

However, if you use a biweekly payment system, you will pay $331,859 and have it completely paid off in 21.6 years. You save $64,374 and pay the loan off 8.4 years earlier!

The savings you realize using a biweekly payment schedule can save you nearly half of what it cost to buy the house in the first place.

An increasing number of mortgage companies are now offering a biweekly payment option. It is even possible to convert your current monthly payments into a biweekly schedule.

Some companies will attempt to charge you to refinance the loan. However, this is not always the case and shopping around can save you money in refinancing charges.

Be wary of independent companies offering to do this for you for a fee - you can do it for yourself for free.

You should receive professional financial advice when considering switching to a biweekly mortgage payment schedule.

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.

What Are Some Smart Ways to Refinance?

Recently, fixed mortgages were near their lowest rates in almost 30 years. And if you are one of the many people who took out mortgages in the few years prior to that, you may be wondering if you should look into refinancing.

If your mortgage was taken out within the past five years, it may be worthwhile to refinance if you can get financing that is at least one to two points lower than your current interest rate. You should plan on staying in the house long enough to pay off the loan transaction charges (points, title insurance, attorney's fees, etc.).

A fixed-rate mortgage could be your best bet in a rising interest rate environment, if you plan to stay in the house for several years. An adjustable mortgage may suit you if you will be moving within a few years, but you need to ensure that you will be able to handle increasingly higher payments should interest rates rise.

One way to use mortgage refinancing to your advantage is to take out a new mortgage for the same duration as your old mortgage. The lower interest rate will result in lower monthly payments.

For example, if you took out a $150,000 30-year fixed-rate mortgage at 7.5 percent (including transaction charges), your monthly payment is now $1,049. Refinance at 6 percent with a 30-year fixed-rate mortgage of $150,000 (including transaction fees), and your payment will be $899 per month. That's a savings of $150 per month, which you can then use to invest, add to your retirement fund, or do with it whatever you please.

Another option is to exchange your old mortgage for a shorter-term loan. Your 30-year fixed-rate payment on a $150,000 loan was $1,049 per month. If you refinance with a 15-year fixed mortgage for $150,000 - including transaction costs - at 6 percent, your monthly payment will be $1,266. This payment is only $217 more than your previous mortgage, but your home will be fully paid for several years sooner, for a savings of more than $150,000! And some banks around the country are beginning to offer 10- and 20-year mortgages.

Either way you look at it, it's an attractive idea.

If you're considering refinancing your mortgage, consult your financial advisor and determine whether refinancing your home would be a good move for you.

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.

What Tax Deductions Are Still Available to Me?

Tax reform measures are enacted frequently by Congress, which makes it hard for U.S. taxpayers to know which deductions are currently available to help lower their tax liability. In fact, the head of the IRS once said that millions of taxpayers overpay their taxes every year because they overlook one of the many key tax deductions that are available to them.(1)

One of the most overlooked deductions is state and local sales taxes.(2)

Taxpayers may be able to take deductions for student-loan interest, out-of-pocket charitable contributions, moving expenses to take a first job, the child care tax credit, new points on home refinancing, health insurance premiums, home mortgage interest, tax-preparation services, and contributions to a traditional IRA.

Of course, some tax deductions disappear as adjusted gross income increases. And some deductions are subject to sunset provisions, which your tax professional can help you navigate.

Another key deduction is unreimbursed medical and dental expenses. For medical and dental bills paid during the past year that weren't covered by insurance, a household may be able to deduct the amount that is greater than 7.5% of its adjusted gross income when calculating income taxes.

Remember that you may only deduct medical and dental expenses to the extent that they exceed 7.5% of your adjusted gross income and were not reimbursed by your insurance company or employer.

In addition to medical and dental expenses, certain miscellaneous expenses - primarily unreimbursed employee business expenses - can be written off if they exceed 2% of adjusted gross income. Some of the expenses that qualify for this deduction are union dues, small tools, uniforms, employment agency fees, home-office expenses, tax preparation fees, safe-deposit box fees, and investment expenses. Your tax advisor will be able to tell you exactly what's deductible for you.

The end of the year is the time to take one last good look to determine whether you qualify for a tax credit or deduction or whether you're close to the cutoff point.

If you're not close, you may opt to postpone incurring some medical or other expenses until the following year, when you may be able to deduct them.

On the other hand, if you're only a little short of the threshold amount, you may want to incur additional expenses in the current tax year.

With a little preparation and some help from a qualified tax professional, you may be able to lower your income taxes this year. You just have to plan ahead.

(1-2) Kiplinger.com, November 2009

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.

What Is Tax Deferral?

"Tax deferral" is a method of postponing the payment of income tax on currently earned investment income until the investor withdraws funds from the account. Tax deferral is encouraged by the government to stimulate long-term saving and investment, especially for retirement.

Only investment vehicles designated as "tax deferred," such as IRAs, plans covering self-employed persons, and 401(k)s, allow taxes to be deferred. In addition, many insurance-related vehicles, such as deferred annuities and certain life insurance contracts, provide tax-deferred benefits.

There is a substantial benefit to deferring taxes as long as possible, because this allows the entire principal and any accumulated earnings to compound tax deferred. The compounding effect can be dramatic over an extended period of time and can make a big difference in the accumulation of a retirement nest egg.

Additionally, tax-deferred investments are often made when you are earning a higher income and are therefore taxed at a higher rate. When you reach retirement and begin taking distributions from your tax-deferred accounts, there is the possibility that you will be in a lower tax bracket.

One note of caution: When formulating your tax plan, recognize that most tax-deferred investments do incur penalties for early withdrawals prior to age 59.5. All withdrawals are subject to ordinary income tax, but early withdrawals are subject to an additional 10% federal income tax penalty. Once again, the government is encouraging a long-term outlook.

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.

What Tax-Advantaged Alternatives Do I Have?

A strong savings program is essential for any sound financial strategy.

We take Benjamin Franklin's saying to heart, "A penny saved is a penny earned," and we save our spare cash in savings accounts and certificates of deposit.

Investors who've accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing.

You see, many investors simply put their savings into the most convenient and secure financial instrument they can find. Often, that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per institution*) and generally provide a fixed rate of return.

Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill.

In an effort to ensure security, some investors inadvertently produce a liability. It's a bit like turning on all the taps in your house just to make certain the water's still running. Sure, you'll know that the water's still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps.

A number of very secure financial instruments enable you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you, and turn off the taps that hamper your money's growth.

You can consider a number of tax-advantaged investments for at least a portion of your savings portfolio.

One possibility is a fixed-annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning.

Fixed-annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. Most annuities have surrender charges that are assessed in the early years of the contract if the contract owner surrenders the annuity before the insurance company has had the opportunity to recover the cost of issuing the contract. Also, withdrawals made from an annuity prior to age 59.5 may be subject to a 10 percent federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued.

Municipal bonds can be purchased individually, through a mutual fund, or as part of a unit investment trust. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Bonds mutual funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond mutual fund's performance.

A number of other tax-advantaged investments are available. Consult with your financial professional to determine which types of tax-advantaged investments may be appropriate for you.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.

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.

Is There Such a Thing as a Tax-Free Investment?

The simple answer to this question is "yes." There are two main types: (1) municipal bonds and municipal bond mutual funds and (2) tax-free money market funds.

Municipal bonds are issued by state and local governments in order to finance capital expenditures; typically, municipal bond funds invest in municipal bonds. Municipal bonds are typically free of federal tax because the interest generated by bonds issued by a state, municipality, or other local entity is exempt from federal taxation.

As an added benefit, most states will allow a state tax exemption if the owner of the bond resides in the state of issue. However, if you purchase a bond outside your area of residency, it may be subject to both state and local taxes.

If you buy shares of a municipal bond fund that invests in bonds issued by other states, you will have to pay income tax. In addition, while some municipal bonds that are in the fund may not be subject to ordinary income tax, they may be subject to federal, state, or local alternative minimum tax. If you sell a tax-exempt bond fund at a profit, there are capital gains taxes to consider. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.

Municipal bonds come in a variety of forms and should be selected by strict criteria based predominantly on the state's or municipality's ability to service the debt. It's important to remember that the principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

Tax-free money market funds invest in short-term notes of state and local governments and can provide a high amount of liquidity. Money market funds can be invested in a wide range of securities, so it is important to analyze your options carefully before investing.

Money market funds are not insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds attempt to preserve the value of your investment at $1.00 per share, it is possibele to lose money by investing in a fund.

If you decide to invest in either type of tax-exempt security, consider the different options carefully. You can purchase individual bonds, which come in denominations of $1,000. Or you might consider investing in a municipal bond mutual fund, a portfolio of bonds in which you can invest for as little as $500. Municipal bonds can also be purchased through a unit investment trust, a closed-end portfolio of bonds with minimums of $1,000.

Often tax-exempt securities are the most favorable for those in higher tax brackets, so it's important to determine whether buying them would be an advantageous move for you. To decide whether municipal bonds or money market funds would be an asset to your portfolio, calculate the taxable equivalent yield, which enables you to compare the expected yield of the tax-exempt investment with its taxable equivalent.

For instance, if you are in the 28% marginal income tax bracket and invest in a municipal bond yielding 5%, this is equivalent to investing in a taxable investment yielding 6.94%. If you are in the 35% tax bracket and invest in the same bond, it would be the equivalent of investing in a taxable investment yielding 7.69%.

Also, be aware that tax-exempt income is included in the formula for determining taxes on Social Security benefits. In some instances, it may be necessary to limit your tax-exempt income by shifting to other tax-advantaged investment areas.

If they're in line with your investment objectives, tax-exempt securities can be an excellent means of reducing taxable income. Check your options with your tax advisor.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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.