By Steven Joshua Samuel JD, MBA, AIF® (January 2013)

The American Taxpayer Relief Act of 2012 was passed by Congress on January 1, 2013. The act provides a mixed bag for taxpayers, extending or modifying many of the tax provisions that were set to expire on December 31, 20121, while letting others terminate. Where do we stand now? Let’s take a closer look at some of the changes that have occurred and how you may take advantage of them.

Individual income tax rates
For taxpayers with annual income less than $400,000 (individual) and $450,000 (married filing jointly), the act made permanent the current marginal income tax rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. For taxpayers with taxable income over these thresholds, the act restores the 39.6-percent tax bracket.

Planning tip: Business owners may wish to examine their current entity structure to determine whether or not it remains beneficial under this new legislation. S corporations and LLCs historically have been favored over C corporations due to the ability for the business owner to report business profits on his or her own personal return. Now, however, the C corporation’s highest tax bracket is lower than the highest personal tax bracket. The spread may provide opportunities to defer compensation.

Capital gains and qualified dividends
Taxpayers with income above the $400,000 (individual) and $450,000 (married filing jointly) thresholds will see an increase in the long-term capital gain and qualified dividend tax rate from 15 percent to 20 percent. The 15-percent rate will remain in place for taxpayers below these income thresholds. (For taxpayers in the 15-percent or lower tax bracket, the 0-percent capital gain rate will remain in place.)

Important note: The new Medicare surtax resulting from the 2010 Patient Protection and Affordable Care Act will also play an important role for higher-income taxpayers in 2013. Starting January 1, certain taxpayers will be subject to a 3.8-percent surtax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 (individual) and $250,000 (married filing jointly). This is on top of regular capital gain taxes. The following types of investment income will be affected: taxable interest, capital gains, dividends, nonqualified annuity distributions, royalties, and rental income. Exceptions include distributions from retirement accounts, pensions, 401(k), IRAs, and municipal bonds, although these distributions will impact the MAGI calculation.

As a result, the effective top rate for net long-term capital gains for many higher-income taxpayers is now 23.8 percent.

Federal estate, gift, and generation-skipping transfer (GST) tax
The act retains the annual inflation-adjusted $5 million estate tax exclusion but increases the maximum estate tax rate to 40 percent. The lifetime gift tax exemption remains unified with the $5 million exemption. Portability between spouses also becomes permanent, and the act extends the GST tax-related provisions, including the inflation-adjusted $5 million exemption.

Portability allows the surviving spouse to apply any unused exclusion of the deceased spouse to his or her own transfers during life and at death (if the proper elections are made). Portability should bring with it flexible planning strategies for high-net-worth estates.

Planning tip: The $5 million exemption amounts offer greater flexibility for high-net-worth individuals to transfer assets during life or at death—potentially gift and estate tax-free. With the “permanency” of these provisions, taxpayers are encouraged to take time to execute well-thought-out estate plans, instead of trying to implement changes at the last minute, before legislation expires.

Qualified charitable tax-free IRA distributions
Congress restored the Qualified Charitable Distribution (QCD) provision for 2012 and 2013. The QCD allows taxpayers age 70½ and older to transfer up to $100,000 from an IRA directly to a qualified charity to avoid recognition of the income and to partially or fully satisfy the required minimum distribution (RMD) requirement. For 2013, the QCD must be made prior to December 31, 2013.

Planning tip: A QCD may still be made for the 2012 tax year under the following conditions:

1.An individual may make a direct transfer from the IRA to charity prior to February 1, 2013, and characterize it as made on December 31, 2012.

2.If an individual took an RMD after November 1, 2012, and before January 1, 2013, the individual may treat the distribution as a QCD if the amount (up to $100,000) is transferred to charity prior to February 1, 2013. Please note: RMDs taken prior to November 1, 2012, are not eligible.

Education incentives
The American Opportunity Tax Credit is extended through 2017. This provides for a 100-percent tax credit of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a maximum credit of $2,500 per eligible student. The credit applies to the first four years of a student’s post-secondary education.

The Qualified Tuition and Related Expenses “above the line” deduction (meaning you don’t need to itemize to claim it) is extended until December 31, 2013, and was retroactively extended for 2012.

The Student Loan Interest Deduction is a $2,500 “above the line” deduction. The act makes permanent the suspension of the 60-month time limit.

Coverdell Education Savings Accounts received a permanent maximum contribution limit of $2,000. Distributions must be used for qualified higher education expenses while attending elementary, secondary, or post-secondary educational institutions.

Planning tip: A taxpayer cannot claim the Qualified Tuition deduction in the same year as he or she claims the American Opportunity Tax Credit or the Lifetime Learning Credit. Nor can the tuition deduction be claimed for a student in the same tax year if anyone else claims the American Opportunity Tax Credit or Lifetime Learning Credit for the same student in the same year.

Alternative minimum tax (AMT)
The last AMT “patch” expired at the end of 2011. The 2012 act permanently extends AMT amounts to $50,600 for individuals and $78,750 for married filing jointly. These amounts are retroactive for the 2012 tax year. The exemption will be adjusted for inflation in 2013.

Planning tip: In previous years, the AMT patch was not released until the year after the previous tax year, making it difficult to plan without knowing the exemption amounts. Now that the AMT has been given a more permanent fix, planning should be easier.

Itemized deductions and personal exemptions
For tax years 2010–2012, itemized deductions and personal exemptions were not subject to phase-out. The new legislation revives phase-out rules for 2013 at these applicable thresholds:

•$300,000 for married filing jointly
•$275,000 for heads of household
•$250,000 for single filers
•$150,000 for married filing separately

The itemized deduction rules reduce the allowable itemized deductions by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds the applicable threshold. The itemized deduction cannot be reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, casualty, wagering, and theft losses, are excluded.

The total amount of personal exemptions that may be claimed by a taxpayer is reduced by 2 percent for each $2,500 or portion thereof (2 percent for each $1,250 for married filing separately) by which the taxpayer’s adjusted gross income exceeds the applicable thresholds listed above.

Planning tip: For taxpayers with a higher income and larger deductions, the itemized deduction and personal exemption limitations may create a “stealth” tax on tax liability, effectively increasing the marginal rate. Taxpayers may wish to recognize income or deductions in certain tax years to help minimize the impact.

Payroll tax cut
The act did not extend the 2-percent payroll tax cut, which temporarily reduced the social security tax withholding rate from 6.2 percent to 4.2 percent for tax years 2011 and 2012. The tax withholding rate will return to 6.2 percent for wage bases under $113,700, which will have an immediate impact on take-home pay.

On the whole, although Congress did act to stop the sweeping tax increases that were set to take effect as a result of the fiscal cliff, taxes may go up for some taxpayers. We will continue to work with you—as well as with your legal and tax advisors—to help you pursue your financial and legacy goals in this new tax environment.

1Bush-era Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Act of 2003 (JGTRRA), both of which were extended under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Commonwealth Financial Network® does not provide legal or tax advice.

IRS CIRCULAR 230 DISCLOSURE:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Steven J. Samuel is a financial consultant located at Samuel Financial LLC, 858 Washington Street, Suite 202, Dedham, MA 02026. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at (781) 461-6886 or at steve@samuelfinancial.com.

© 2013 Commonwealth Financial Network®

By Steven Joshua Samuel JD, MBA, AIF® (April 2012)

Annuities are getting a great deal of attention in the media, especially with baby boomers who are retired or nearing retirement and seeking guaranteed investments. While annuities can be appropriate for some investors, some annuities involve complex limitations that can harm a retiree and should be examined with the assistance of a trusted financial professional before investing. Practical consumer information about these investments is scarce, as insurance industry materials are often and unfortunately too biased to offer a balanced view regarding whom and when annuities are a good choice. To make it more confusing, the materials that are available to the consumers consist mainly of warnings about high costs and misleading sales tactics.

Immediate annuities are the simpler of the two main types available. An investor makes a one-time payment to an insurance company in exchange for a monthly payment based on life expectancy, beginning immediately and guaranteed by the insurance company to continue until the investor’s death. Tax deferred annuities, the second kind of annuity, allow tax deferrals of the investment until money is withdrawn. Within the tax deferred annuity category, investors can choose either fixed annuities, which offer fixed interest rate investment accounts, or variable annuities, which offer a range of investment options. Variable annuities are long-term, tax deferred investment vehicles designed for retirement purposes.

Variable annuities allow a range of investment options and involve risk. The insurance industry has developed variable annuities that address risk with “living benefits,” which guarantee lifetime income and/or principal even if the investments lose money. Here are five facts you should know about annuities, focused mainly on “living benefit guarantees.”

1. Risk Tolerance

Some investors think annuity guarantees are a license to invest more aggressively and are entirely without risk. It’s important to understand that living benefit guarantees do not refer to or protect the value of the investment account. The guarantees refer only to calculations on a hypothetical account, called a “benefit base.”

The “benefit base” account is not real money. The guaranteed amounts refer to annual withdrawals calculated on the “benefit base” account. It takes a long time just to get your own money back, even at the 5 or 6 percent guaranteed annual withdrawal or growth rates now offered. For example, a 60 year old investing $100,000 today will likely be in her 80’s before she gets back the $100,000 she invested, at today’s guaranteed rates; and, guaranteed principal generally is a benefit only for her heirs after her lifetime.

The investment risk assumed by the investor remains very real. The only actual large lump sum of money an investor in a guaranteed annuity can freely withdraw is in the cash account, and that is subject to surrender charges. This may well be less than the original amount invested, depending on how the actual investments perform, notwithstanding the guarantees.

All guarantees are based on the claims paying ability of the issuer.

2. Complexity

The sales pitch for variable annuities with living guarantees is often oversimplified to: “You get to invest in the stock market with no risk because the insurance company guarantees your ability to withdraw a stable amount or have stable income growth every year no matter how your investments perform.” That’s true, but it’s not the whole truth, and it’s important to fully understand what this means.

Insurance companies accept some risk and offer some guarantees, but even with specific, written income guarantees as high as 5 or 6 percent per year, an investor still has to ask, “What can I realistically expect for income and are there any limitations or exceptions on the guarantees?”

All guarantees are based on the claims paying ability of the issuer.

Here’s why:

Annuities with living benefits can limit (hedge) the company’s risk by requiring 50 percent or more of the invested money to be in low or no-risk fixed income investments. Hedging can prevent stock market losses, but also limit gains when the stock is performing well. In addition, insurance company guarantees of income or principle protection are almost always subject to a bewildering array of conditions on the amount and timing of withdrawals, the performance of the actual investments and other considerations. Make sure you understand them with explanations from sources not selling the annuity.

3. Cost

With rare exception, the cost of the living benefit guarantees is charged against the above referenced hypothetical “benefit base.” This creates a predictable revenue stream for the insurance company, but it also creates a rising cost to the investor if the actual cash balance account declines. A charge of 1.25 percent per year on a $100,000 investment is $1,250 for the first year. If,10 years later the actual investment account value has dropped to $50,000, that same $1,250 fee represents 2.5 percent, double the rate. Guaranteed annuities also have the standard annuity fees for mortality, administrative and underlying fund management expenses; therefore, the total cost to an investor can be over 4 percent per year. Once withdrawals begin, the cost burdening these contracts can exceed 8 percent.

4. Liquidity

Once an investor begins withdrawals, there is a limit on the amount that can be taken each year without serious consequences. Taking a withdrawal in excess of the amount guaranteed may be permissible, but this “excess” withdrawal can sharply reduce future withdrawal amounts, even for those which appear to have been guaranteed. An investor opting for an annuity with living benefits must be sure to have other investments outside the annuity to supplement income and for emergencies. Also, investors should be mindful of surrender charges and consider the IRS 10 percent penalty for pre-age 59 1/2 distributions from any annuity in addition to any gain taxed as ordinary income.

5. Don’t Pay For Insurance You Will Never Use

Income guarantees are available to investors up to age 85. But are they worth buying? Even with a guaranteed withdrawal rate as high as 7 percent per year, an investor in her late 70’s or 80’s is very unlikely to spend down to zero during her lifetime. Remember, until you’ve withdrawn the entire amount you invested and recovered the fees for the guarantee, you have not received a nickel in investment gain from the insurance company. Make sure that if you are paying for any insurance that you’re transferring real risk. Buying a lifetime income guarantee if you are in your 70’s or 80’s and your name isn’t Yoda is like paying for insurance on a mountain top retreat to protect against a flood.

Investors who feel they must have guarantees and are willing to pay for them should get help from their trusted financial advisor in order to understand their choices and focus on:

* annuities from the most reputable company that offers a decent cost and benefit value proposition

* mitigating costs by utilizing low-cost investment options within the annuities and learning the difference between A, B and other annuity share costs

* avoiding paying for insurance that isn’t likely to be used

* fully understanding how guarantees work and how they are limited

* making certain you leave money outside the annuity in case you need additional income

Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity, or from your financial professional. You should read the prospectus carefully before you invest.

Samuel Financial, Inc. is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781)461-6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. www.samuelfinancial.com

By Steven Joshua Samuel JD, MBA, AIF® (April 2012)

About half of US households own mutual funds, according to MarketWatch (April 12, 2012, Kirk Spano). Although mutual funds are a good choice for many investors, some buy mutual funds for their retirement plan, college savings or personal accounts before understanding even the basics of how they work and what they cost. Each investment vehicle is different and may or may not be appropriate for various kinds of investors for various reasons. Here are answers to five commonly asked questions about mutual funds. Please be sure to talk to your advisor about your situation, as this is not intended to be advice and is offered as general information only.

1. What is a Mutual Fund?

A mutual fund is an investment account that pools money from a large number of investors and hires professional managers to buy and sell stocks or bonds or other investments. Having a much larger amount of money than each individual investor, the professionally managed mutual fund can help reduce risk by buying many different stocks, bonds or other investments. Also, with pooled money, the professional managers can afford a staff of analysts to assist in selecting investments. Each mutual fund has a board of directors and officers responsible for administering the fund and is overseen by the Securities and Exchange Commission (SEC), a federal government agency.

Mutual funds typically invest in four basic different investments: money market, bonds (also called “fixed income”), stock (also called “equity) and hybrid, meaning combinations of the other categories. There are many subcategories of these basic four investments that are related to the fund’s investment objectives (i.e. dividend income; aggressive growth) or the fund’s investment focus (large or small company, US or non-US companies).

2. How Do the Basic Types of Mutual Funds Differ: Open End and Closed End and ETFs?

Most mutual funds are “Open End,” meaning they are willing to sell and buy fund shares from investors. Their share price is determined only once a day, after the investment markets close, based on each day’s closing market price of the investments the fund owns. When a new investor wants shares, an Open End fund issues new mutual fund shares and the fund’s professional managers use the new investor’s money to buy more investments for the fund. In 2010, there were about 7,600 Open End mutual funds in the US holding nearly $12 trillion (Investment Company Institute Fact Book, www.icifactbook.org, 2011).

“Closed End” funds, also professionally managed, issue their shares to the public just once (when the fund is created) and do not repurchase shares from investors. Investors may sell their shares to other investors, at a price determined by the market, whether it is more or less than the value of the fund’s investments. In 2010 there were 624 Closed End funds with about $241 billion of investments (Investment Company institute fact Book, www.icifactbook.org, 2011).

Exchange Traded Funds (ETFs) combine attributes of open and closed end funds. Like open end funds, ETFs are priced based on the value of the investments they own and buy and sell their shares to and from investors. Like closed end funds, ETFs trade at market prices throughout the day. Most ETFs are also Index Funds (see below).

ETF investing involves principal risk—the chance that you won’t get all the money back that you originally invested—market risk, underlying securities risk, and secondary market price. ETF Shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income ETF, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). Moreover, the overall depth and liquidity of the secondary market may also fluctuate. Therefore, value of the shares, when redeemed, may be worth more or less than their original cost.

3. What are Index Funds and Managed Funds?

An Index Mutual Fund tries to mimic a particular index (representation of a collection of companies based on size, geographical location, and or industry among other criteria) rather than cherry pick individual stocks or bonds. For example, an Index Fund seeking to duplicate the Standard & Poor Index of Largest 500 US companies (S&P 500) buys an equal (or sometimes, weighted) share in each of the 500 companies comprising the Index. The fund manager’s role is to match the index holdings and performance, not beat the index performance. In addition to the S&P 500, there are many other index funds that track other investment categories. For example the MSCI EAFE and MSCI Emerging Markets cover European, Australian, Asian, South American and other non-US company stock, and the Barclay’s Capital Aggregate Bond Index covers US government and corporate bonds.

Managed Mutual Funds pick only investments that the fund professional managers believe will beat its applicable index in the future.

Although exchange traded index funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors. An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

4. What are the Advantages and Disadvantages of Index Funds and Managed Mutual Funds?

As for investment performance, advocates of Managed Mutual Funds believe that a staff of research analysts can identify individual investments and regularly beat the performance of the fund’s relevant index. Warren Buffet, though not necessarily an advocate of Managed Mutual Funds, is perhaps the best example of someone who has successfully picked high performing individual companies based on research and analysis, so it can be done. Advocates of Index Mutual Funds argue that identifying winning stocks and winning individual professional managers in advance is very, very difficult. About one half to two thirds of all Managed Mutual funds outperform their relevant index in any particular year but over longer time periods, especially the 20-plus year time horizon of retirement investments, very few Managed Funds beat their index.

As for costs, Managed Funds employ research staff and pay brokers to buy and sell securities much more frequently than Index Funds. Index Funds, not burdened by big research staff and frequent trading, are usually less expensive Managed Funds. As for tax consequences, Managed Mutual funds trade frequently. When they generate a profit, they must pass along that profit to investors who must then pay capital gain tax, even in a year in which the overall performance of the same Managed Mutual Fund was negative. Index Funds generally do not buy and sell as much and are generally less likely to cause tax problems for investors. This does not affect funds held in tax deferred accounts such as IRAs and 401ks.

5. What do Mutual Funds Cost?

Investors must pay all fees and expenses of the mutual fund in which they invest. Total mutual fund expenses (not including sales charges) range from less than 1 percent to more than 3 percent per year. Consequently, understanding and comparing one fund’s expenses to another is important.

Industry regulations require all mutual fund companies to uniformly compute and disclose some (but not all) fees and expenses. Expense ratio and Share Class are terms that describe the fees and expenses to which the disclosure rules apply. Expense ratios include the mutual fund’s annual recurring fees and expenses; for example: payments to Boards of Directors and professional management, as well as custody, filing, audit, and legal fees. For some funds, the expense ratio may include marketing expenses (called 12-b1 fees for the SEC rule). Annual expense ratios range from less than 1/10 of 1 percent for some Index Funds to more than 2 percent per year for some Managed Funds.

Share Class is the term the mutual fund industry uses to describe the conditions in which an investor must pay a sales charge. A single mutual fund typically offers at least this array of choices:

Class A: sales charge of 4 percent – 5.75 percent of the investment amount, combined with a relatively low recurring annual expense ratio; (or sales charge waived if purchased through a fee for service financial advisor);
Class B: sales charge only on withdrawals for several years after the initial investment is made and then converting to Class A, combined with a higher than Class A annual expense ratio while it is Class B;
Class C: a sales charge for one or two years after the initial investment is made, never converting to another Class, combined with a higher than Class A annual expense ratio;
Class I: no sales charge and lower than Class A annual expense ratio, but with very high minimum investment amounts (minimums sometimes waived if purchased through an investment advisor);
Class R: applicable to retirement plan accounts with widely varying annual expense ratios.

Fortunately, the Financial Industry National Regulatory Authority (FINRA, the industry self-regulatory agency) website offers a tool allowing comparison of the above fees and expenses, www.finra.org/fundanalyzer. Unfortunately, there are additional costs that industry regulators have so far not required mutual funds to disclose in meaningful ways and are not included in the FINRA software tool.

Managed funds, in particular, buy and sell large quantities of securities and pay significant payments to brokers and traders for these transactions. These expenses are simply deducted from the mutual fund share value and not included in expense ratios or share classes, so they are not identified in any meaningful way to investors. Studies conducted in 2007 and 2009 and reported in the Wall Street Journal (March 1, 2010) estimated that undisclosed expenses for buying and selling securities ranged from 1/10 of 1 percent to almost 3 percent annually for mutual funds, in addition to the reported expense ratios of the funds.

While mutual funds offer many advantages, the prudent investor is well advised to understand how they work and what they cost before investing. For those able to spend the time to gain understanding, there are many free resources in public libraries and online; and, consulting a reputable financial professional is another good choice.

Additional Considerations and Information About Risk

All indices are unmanaged and investors cannot invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is no guarantee of future results. International, global and asset allocation funds invest in varying degrees in foreign investments, which are subject to certain risks, such as currency fluctuations, economic instability, and political developments, not present with domestic investments. Bond funds are subject to a number of investment risks including credit risk, interest rate risk, and prepayment risk.

Investors should consider the investment objectives, risks and charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read the prospectus carefully before investing.

Samuel Financial, Inc. is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781)461-6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. www.samuelfinancial.com

By Steven Joshua Samuel (October 2011)

With the aging of the baby boomer generation, planning for long-term care illness has become of increasing concern. U.S. Department of Health and Human Services statistics show that 70 percent of people over 65 will require some long-term care services, primarily for one to five years of care. In 2010, the national average annual costs of long-term care were $ 40,428 for assisted living, $78,840 for private room nursing home and $1,135 per week for one eight-hour home care aid shift. Furthermore, long-term care costs in Massachusetts are higher than the national averages. Many questions arise when a family member needs long term care. Having a plan already in place may ease the emotional and financial stress on the rest of the family. We have provided answers to the most frequently asked questions when it comes to key planning issues. The good news is there are some new insurance alternatives that give families added flexibility in planning ahead.

What costs are covered by government programs?

Medicare covers medical care costs for illness or injury and provides very little for custodial care. Medicaid, the joint federal and state welfare program, pays for nursing home care but only after almost all of your own money has been spent. Although Medicaid pays for some home care services for people who have very little income or assets, finding and paying for caregivers with Medicaid funds is extremely difficult. Consequently, government programs do not effectively cover the really burdensome long-term care costs for middle class families, which have to be paid by either personal money or long-term care insurance.

What location for care do most people choose?

Most people prefer to remain in their own homes and most who start receiving care in their own homes are able to remain there. Coverage for long-term care in assisted living facilities, nursing homes, and in the insured person’s home are offered in most currently available long-term care insurance policies.

How much insurance coverage is enough?

For people who can afford insurance, the decision of how much of it is needed is usually made in consultation with an experienced professional. Key considerations include family and personal health history, as well as the local costs of care and affordability of annual premium. Seventy percent of recent buyers of long-term care coverage purchased between three and five years of benefits; 8.5 percent bought two years or less and 21.5 percent purchased six years or longer.

New choices in Long-Term Care insurance: Linked Life-Long Term Care Insurance Policies

Paying annual premiums to provide insurance for long-term care that may not be necessary is one reason some middle class consumers with considerable resources still have not acquired LTC insurance. New choices have become available to address this concern. One new choice is a policy that combines a death benefit and long-term care insurance, with all benefits income tax free; and, if long-term care is not needed, a refund of the premium is distributed. Here’s one example:

A retired woman, age 65, is married and in average (“standard” in insurance industry language) health and has not purchased long-term care insurance because of the annual premium. To address the possibility of long-term care needs, she has set aside $100,000 among her retirement investment holdings. In consultation with her financial advisor, she realizes that the amount set aside will cover little more than one year of care.

If instead she repositions the $100,000 into a “linked life-long term care policy,” offered by one of several financially solid insurance companies, she would have these benefits:

•$600,000 available to pay for long-term care costs (six times what she had without the policy);

•$200,000 death benefit if she does not have a long-term care need; and, $20,000 in death benefits even if she uses all the long-term care fund money described above;

•both the death benefit and long-term care moneys are income tax free;

•If she changes her mind about wanting the policy, the premium is refunded minus only loans she has taken and benefits which were paid to her.

Other versions of linked life-long term care policies are available with slightly different features. They are worth investigating, as always, in consultation with a qualified financial advisor.

Helpful consumer resources used in this article:

Department of Health & Human Services, National Clearinghouse for Long-Term Care Information, September, 2008, www.longtermcare.gov.

Life Plans Long Term Care Market Summary: Cost of Care Update 2010, www.LincolnFinancial.com.

American Association of Long Term Care Insurance, 2010 LTCI Sourcebook.

Samuel Financial, Inc. is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781)461-6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Fixed Insurance products and services offered by Samuel Financial, Inc. is separate and unrelated to Commonwealth. www.samuelfinancial.com

By Steven Joshua Samuel (February 2011)

You may be able to reduce some of your most challenging 2010 education and health expenses with help from The American Recovery and Reinvestment Act of 2009 (the “Stimulus Plan”) and other recent tax changes. Here’s a summary of six examples and how to obtain more information for each.

Education Expenses
The American Opportunity Credit, the former Hope Credit, has been expanded to include more benefits for 2010 education expenses. Individuals with adjusted gross income of up to $80,000 ($16,000 for joint filers) are now eligible for the full tax credit of up to $2,500. A tax credit directly reduces the amount of tax you owe and is more valuable than a tax deduction, which reduces the amount of income subject to taxation. Tuition, books, supplies and equipment are eligible expenses and a computer may now qualify in some cases. Use IRS form 8863 to claim the tax credit.

The Lifetime Learning Credit allows eligible taxpayers a lifetime total of a $2,000 tax credit for undergraduate, graduate and professional degree courses, including continuing education programs and any classes designed to improve job skills. Education expenses for a spouse and dependent child qualify and there is no limit to the number of years the education program may run. There are some limits regarding income and eligibility, and only one kind of credit may be taken for a student in the same tax year.

529 College Plan changes expand the definition of qualified higher education expenses to include, for example, computer equipment and internet access. You’ll find these and eleven other ways to offset college and post-graduate education costs explained in IRS Publication 970 “Tax Benefits for Education” at www.irs.gov.

Health Care Expenses
Small Business Health Care Tax Credit is included in the Affordable Care Act, which became effective March 23, 2010. A tax credit of up to 35 percent of health insurance premiums paid is available to small businesses with 25 or fewer full- time employees. To be eligible, the company must pay at least 50 percent of individual coverage for each employee who must have average earnings under $50,000 per year. Locate IRS Form 8971 or news release IR-2010-96 at www.irs.gov for more details.

Employer Coverage for Employee’s Children Under Age 27 is now generally tax free to employees. Employers with * cafeteria health plans may permit employees to make pre-tax contributions to cover this expanded benefit. This also applies to self-employed persons who qualify for a health insurance deduction on their federal income tax returns. See IRS news release IR-2010-53 for more information.

Medicare Part D Prescription “Donut Hole ” Rebate of $ 250 is provided by the Affordable Care Act for Medicare recipients who have reached their drug plan coverage gap. The rebate is not taxable. For information about how to obtain the rebate, see www.medicare.gov.

Remember to consult a qualified tax and financial advisor before making any important financial or tax decisions. For additional timely and helpful financial and investment information, visit www.samuelfinancial.com.

* A cafeteria plan is an employer-written plan complying with Section 125 of the Internal Revenue Code, which enables employees to pay for certain benefits such as health and child care with pre-tax dollars.

Samuel Financial, Inc. is located at 858 Washington St. Dedham, MA 02026 and can be reached at (781)461-6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Neither Samuel Financial, Inc. nor Commonwealth Financial Network offer tax or legal advice.

By Steven Joshua Samuel, JD, MBA, AIF® (October 2010)

Recent changes in the law and U.S. Department of Labor (DOL) rules about 401k plans provide opportunities and more information for employees. Companies offering 401k plans will soon be required to provide more easy-to-understand information about 401k plan fees, investment choices, and investment expenses to their employees. Accountability of 401k Plan fiduciaries and investment advisers is being increased. New types of investments are being offered within 401k plans with the goal of making investment decisions easier.

Here are five facts you should know about these changes and other 401k matters. As with all other important investment decisions, review all options with your investment and tax advisers as they relate to your particular situation.

1. Transfer of 401k Funds to Roth 401k Now Available

Most people are familiar with Roth IRA accounts. While a Roth IRA does not provide a tax deduction for contributions, the gain in the account is not taxed and all withdrawals are tax free.

Until 2006, the advantages of a Roth were available only in an IRA account and not in a 410k plan. In 2006, employers were given the choice of adding a Roth 401k to traditional 401k plans. The Small Business Jobs Act of 2010 allows employees to move money from their 401k into a Roth 401k account, even if they are younger than 59 ½. Previously, IRS rules allowed only people who were over 59 ½, disabled, deceased or who changed employers to move money from a 401k to a Roth.

2. Plan Fiduciaries Now Must Disclose 401k Fees and Expenses

Until recently, employees were given very little information about 401k plan fees and investment expenses. On October 14, 2010, the DOL, which is responsible for regulating 401k plans, issued new disclosure rules.

DOL regulations now require that 401k plan fiduciaries (the people in the company who are responsible for decisions about the plan) provide employees with quarterly statements showing the amount and nature of fees and expenses deducted from the employee’s 401k account. Basic information (and access to more comprehensive information) about each investment offered by the plan and the cost of each must also be provided in a format that allows employees to compare the investments available under the plan.

3. Company Officials and 401k Plan Advisers Are More Accountable

In recent years the Courts and the DOL have placed more responsibility on company officers and 401k advisers for ensuring that employees who participate in 401k plans are treated fairly. Until recently, employees could take legal action only against the company sponsoring the plan if they believed that 401k fees were excessive or investment choices inadequate. A 2008 US Supreme Court case expanded the rights of employees by permitting an employee to sue not just his company, but also to sue plan fiduciaries personally.

Employers are generally accountable for providing employees with education about their 401k investment choices. Proposed DOL regulations would hold investment advisers delivering this information for a fee to a “fiduciary” standard, meaning they must avoid conflicts of interest and place the employees’ interests ahead of their own. Advisers who are paid by commission may be subject to a lower standard of responsibility.

4. Target Date Funds: A Cautionary Note

Several investment companies now offer a type of mutual fund, known as a Target Date or Life Cycle fund, in 401k plans. These funds automatically shift investment funds between stocks and bonds on some periodic basis, with the goal of managing risk, increasing return, and becoming more conservative as the target date for the goal nears. According to DOL, about 7% of all money in 401k plans in 2009 was in a Target Date or similar fund.

However, funds with the same target date for retirement, say the year 2030, may invest in very different ways. Some Target Date funds may target “to retirement” and reach their final conservative retirement allocation in 2030. Other 2030 Target Date funds may target “through retirement” and not reach their final conservative allocation until as long as 10 years or more after the target retirement date. The risk and performance of these two different 2030 Target Date retirement funds could be very different.

Before investing in a Target Date fund within your 401k, be sure to obtain information about where the fund invests your money, understand how the fund will change the allocation among investments as time passes, consider how the fund fits with your other investments, and review the fees charged.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Target Date funds. This and other important information is contained in each fund’s summary prospectus, which can be obtained from your financial professional and should be read carefully before investing.

5. 401k Loans and Withdrawals: Know the Rules

Hard times in investment markets and rising unemployment have forced many people to resort to loans or withdrawals from their 401k accounts. According to an Investment Company Institute report, 17.5% of defined contribution plan (e.g. 401k) participants had outstanding loans as of June 2010. For those who have no better alternative than a loan or withdrawal from a 401k, a review of some applicable rules is worthwhile:

If you leave or lose your job you must repay your loan in full or the loan will be treated as a taxable distribution. In addition, a 10% penalty will be imposed if you are under age 59 ½.
If you have no other source for money for a critical need, a loan is better than a withdrawal if you expect to be able to repay.
If you are still working and under age 59 ½, you will have to qualify for a hardship in order to obtain a withdrawal.
As with all other important investment decisions, consult with tax and investment professionals before taking action.

Steven Joshua Samuel, JD, MBA, AIF® is the founder of the Dedham law firm Samuel, Sayward & Baler LLC and the financial services firm Samuel Financial, Inc. located at 858 Washington Street, Suite 202 in Dedham (781) 461-6886. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. For more information, visit www.samuelfinancial.com.

By Steven Joshua Samuel, JD MBA, AIF® (June 2010)

With the economy still struggling to gain momentum, the stock market often fluctuating dramatically day to day, and people leading increasingly complex lives, it’s more important than ever to plan carefully for retirement.

Over the past several years it’s become challenging for many families to set aside enough money to live comfortably later on in life; however, there are planning mistakes you can avoid to help increase the long-term effectiveness of your retirement savings.
Here are five of the most common avoidable mistakes when planning for your future:

1. Underestimating the amount you will need during your retirement years
Estimating how much money is needed for a decent retirement lifestyle can seem so daunting that many people don’t even try. Start with a few basic steps by creating a rough estimate of your current expenses by dividing them into two broad categories:

Necessities: Home payment, utilities, taxes, health, auto and home insurance, food, clothing and medical basics and auto related;
Discretionary: Gifts, dining out, travel, recreation, hobbies and luxury items.
After you have created these lists, adjust your estimate for retirement lifestyle changes based on what expenses you know will significantly increase or decrease over the next several years. Otherwise, adjust only for some inflation over a likely 20 to 30 years of retirement. Life expectancy for American men aged 65 is now about 82, and for women it’s age 85, according to the National Center for Health Statistics. Next, read on to review your retirement resources for whether they can sustain the expenses you need.

2. Taking Social Security too early or too late
Social security benefits are at least a part of most people’s retirement resources. There is no mandatory time to take benefits, and many people are uncertain about whether to start receiving social security benefits at early retirement (age 62) or waiting until full retirement (ages 65-67 or later). While there is no single choice that fits everyone, you can make the best decision based on your life expectancy, health, retirement needs, and other retirement savings.

A key factor in determining when to start social security benefits is how much of annual retirement expenses can be met by withdrawals from other retirement resources – pensions and 401k or other savings. For example, a widely used financial industry estimate is 4 to 6 percent per year of total retirement resources that can be withdrawn, so $500,000 could allow for $20-$30,000 per year toward retirement expenses before considering social security.

Consult a trusted financial advisor to help determine when to begin social security benefits and how and when to make withdrawals from other retirement accounts.

3. Making poor choices about which accounts or assets to draw from, when and in what order.
Deciding which assets to sell and when to sell them is both an art and a science. The science is in considering current tax consequences, investment yields and cash flow; and the art is in projecting these issues into future years. For example, withdrawing money first from traditional, taxable IRA accounts has advantages for some people, but taking first from non-taxable Roth IRA accounts may have advantages for others.

For some protection against having to sell investments when prices are low, cash flow projection helps. Cash flow projection of expenses at its simplest is a rough estimate of how much money may be necessary to meet your monthly needs and what is needed for one-time expenses likely to occur during the next five years. It’s best to seek qualified professional advice on planning the timing of withdrawals and related issues.

4. Mistaking diversification for asset allocation
While there is no sure way to protect against market fluctuations or the damage of inflation to purchasing power, asset allocation has proven to be a useful tool. Asset allocation is not simply owning a large number of investments, but rather investing in different asset classes, which tend to react differently to market events – such as large, medium and small companies, US and international, growth and value companies, bonds of various maturities and risk, real estate, cash, and others. Allocations require monitoring from time to time and here again, professional advice is warranted.

5. Being too influenced by news events
Good and bad news, as delivered and often sensationalized by the media, tends to influence high and low swings in financial markets. The inevitable ups and downs in investment markets often compel some investors to make rash decisions. Investing and managing withdrawals to meet the needs of a 20-30 year retirement strategy requires discipline, even during market turmoil, which seems all the more frequent in the past several years. Advice from competent, independent advisors — not biased by how they are paid — will help keep an investor focused on the steps most likely to achieve financial security.

Steven Joshua Samuel JD MBA, AIF® is the founder of the Dedham law firm Samuel, Sayward & Baler LLC and the financial services firm Samuel Financial, Inc. located at 858 Washington Street, Suite 202 in Dedham (781) 461-6886. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. For more information, visit www.samuelfinancial.com.