| May 16, 2011 | Vol 4, Issue 5 |
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| Greetings! | |
 Good morning.
April was a great month in the stock market with the S&P 500 ending the month on a new year-to-date high. International stocks were also up, although they still lag U.S. indices. The first few weeks of May have been tougher with the S&P 500 now down about 2% from its April 29 high. Bonds, as measured by the Vanguard Total Bond Market fund, were also up in April.
In this month's newsletter, we have articles on long-term care planning, mid-year tax considerations, a link to a great article on money and happiness, and more. As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world. Thanks, and Live Well. |
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| 8 Ways to Buy More Happiness | |
 Those of you who follow Keener Financial Planning on Facebook or me on Twitter (@jeankeener) know that I really enjoyed one of Smart Money's articles this month -- 8 Ways to Buy More Happiness. The article summarizes a recent study in the Journal of Consumer Psychology about ways to spend money that result in greater enjoyment and satisfaction.
All 8 findings are great, so you should definitely take 5 minutes to follow the link. But one really stands out to me as we get ready to move into summer vacation time. Tip #5: Save for the scuba lessons and then pay cash.
So many times, vacations end up costing more than anticipated and people end up with a credit card bill that haunts them for months after the fun of the vacation is long past. And sometimes even during the vacation the realization of mounting bills detracts from the enjoyment and creates stress during a time that's supposed to be relaxing.
The study suggests that saving up for the vacation in advance gives people increased enjoyment because of the pleasure of anticipation (kind of double the vacation fun). And that paying cash for the vacation allows them to get rid of stress and guilt about the costs of the vacation. Sometimes less is more -- and taking a vacation that matches funds saved in advance will likely provide much more pleasure and better memories long-term.
This article inspired me to refocus on gaining as much joy from my spending as possible. I hope it inspires you too, especially as you contemplate summer vacations or other spending decisions that are relevant to you. |
| Deciphering Health Savings Vehicles | |
 Health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and flexible spending arrangements (FSAs) are all personal health accounts that may help you control your health-care costs. But trying to figure out what's what can be confusing. Here's a brief description of each type of account, including some of their major features and benefits.
MSAs/HSAs
As of January 1, 2008, the MSA program expired and no new MSAs can be established, although if you already participate in an MSA, you can continue to receive contributions. HSAs have generally taken the place of MSAs because of their greater flexibility and options. In fact, in most instances you can roll over an existing MSA into an HSA. MSAs and HSAs are set up in a trust account with a financial entity. Contributions made through your employer are pretax dollars (or you can contribute to the account directly and deduct the contribution), no tax is due on funds in the account, or on any earnings until withdrawn, and if funds are used for qualified medical expenses, the withdrawals are not taxed. However, account withdrawals that aren't used for qualified medical expenses are subject to a tax penalty of 20%, in addition to regular income tax. Your account is portable, meaning if you change employers or leave the workforce, you can keep the account. To be eligible, you must be insured by a high deductible health plan (HDHP) that you maintain (if self-employed) or that's provided through your employer.
However, there are also differences between MSAs and HSAs. Generally, anyone with an HDHP can participate in an HSA. But to qualify for an MSA, you must have been either an employee of a company that employs 50 or fewer people, or be self-employed (or the spouse of such an employee or self-employed person). With an HSA, contributions can be made by you, your employer, or anyone else on your behalf within the same plan year. But MSA contributions can only be made by either your employer or yourself, but not both, in the same plan year. Contribution amounts also differ. In 2011, maximum HSA contributions are limited to $3,050 for single HDHP coverage and $6,150 for family HDHP coverage. MSA contributions can be up to 75% (65% if you participate in a self-only plan) of the annual deductible of your HDHP, but no more than your annual earnings from employment.
FSAs
If you don't participate in an HDHP, you still can set money aside for uninsured medical expenses through an employer-established FSA. Unlike an HSA, you must be an employee of the employer providing the FSA in order to participate (self-employed persons are not eligible and certain limitations may apply if you are a highly compensated participant or key employee). Pretax contributions can be made by either you, your employer, or both of you (except employer contributions used to pay long-term care premiums must be included in income). You determine how much money you want deposited each year up to the plan's maximum dollar amount or percentage of compensation; funds in the account are not subject to tax; and distributions are tax free if used to pay for qualified, unreimbursed medical expenses you've incurred (no advance payments for anticipated expenses). Unlike HSAs, if you leave your employer, you can't keep the money in the account or take it with you to another employer (it's not portable). Also, what you don't spend on medical expenses by the end of the plan year is forfeited and not available the following year (i.e., you must use it or lose it).
HRAs
Like FSAs, HRAs are only available to employees, not to self-employed individuals. And HRAs must be funded solely by an employer; you can't contribute directly to the account. The terms of the HRA are generally determined by the employer. For example, your employer's plan may or may not require you to have health insurance in order to participate. The plan sets the maximum amount of contributions, and determines whether a credit balance in the account can be rolled over from year to year, and if so, how much of the account can be rolled over. But contributions and reimbursements for qualified medical expenses are tax free. Reimbursements can be made to current and former employees, including spouses and dependents of employees and deceased employees. However, if the plan allows for any distribution to you or anyone else (e.g., spouse, dependent, estate at your death) for other than reimbursement for qualified medical expenses, then any distribution, whether for qualified medical expenses or not, is included in gross income. |
| Long Term Care Planning | |
 This months's Journal of Financial Planning included an in-depth article on the challenges of long-term care planning. For those of you who have faced this issue either yourself or with a family member, you are acutely aware of the financial drain that long-term care costs can have on a retirement plan.
Long term care insurance isn't recommended for everyone. As part of the financial planning process, we look at different scenarios for possible care needs and how funding that care might be accomplished. For some, self-insuring is best. For others, relying on public social safety nets is the only realistic option. For many, purchasing insurance is at least part of the solution that mitigates the financial risk.
In the situations where we determine that insurance is the right choice, sometimes people still don't follow through. This can occur because of procrastination, the belief that "it won't happen to me," the desire to avoid any additional insurance bills, and many other reasons. Whatever the cause, the risks are the same. The Journal's article included some updated statistics that were striking to me. I share them with you in case you find yourself or a family member in the position of knowing they need to apply for the insurance, but still putting it off.
The Ability to Qualify for Long Term Care Insurance Diminishes with Age
| Age of Applicant | Applicants Declined for Health Reasons | | 50 -59 | 14% | | 60 -69 | 23% | | 70 -79 | 45% | | 80+ | 66% | | Source: American Association for Long-Term Care Insurance |
The cost of long-term care insurance also increases the longer you wait to apply.
Rates for long-term care insurance are permanently based on your age at which you start the policy. Applying earlier reduces your premium over your whole life. While rates vary substantially based on the amount of coverage purchased, the Journal article shows an example of the type of increases that occur by waiting. "A 55-year-old couple purchasing long-term care insurance protection can expect to pay $2,350 a year (combined) for about $338,000 of combined current benefits, which will grow to about $800,000 of combined coverage when the couple turns age 80. If a couple (assuming preferred health discount) age 60 or 65 applied for the same insurance protection, annual premiums would increase to $3,395 and $4,075, respectively."
If you have questions on this issue or would like to discuss your situation, please feel free to give me a call. The full article is available for a limited time at www.fpanet.com. (Only current issue is available to the public, so this link will only work for a few weeks.) |
| Mid-Year Tax Considerations | |
 Though it may seem as if the ink has barely dried on your 2010 federal income tax return, the end of 2011 is now visible on the horizon. Here are some things to consider as you take stock of your current tax situation.
The 2% difference
If you're an employee, 6.2% of your wages (up to the taxable wage base--$106,800 in 2011) would normally be withheld for your portion of the Social Security retirement component of FICA employment tax. But legislation passed in December 2010 included a temporary one-year 2% reduction in this tax. That means for 2011, you're paying the tax at a rate of 4.2%. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your self-employment tax is reduced to 10.4%.
Have you earmarked the resulting extra dollars in your paycheck efficiently by, for example, paying down high-interest debt or saving for retirement? If you haven't, consider making up for it by contributing an extra 4% of your income to your 401(k) or an IRA for the remainder of the year. By applying the extra money toward a long-term goal, the potential benefit of the temporary tax reduction can extend beyond 2011.
Tax rates
The same federal income tax rates that applied in 2010 continue to apply in 2011 and 2012 (depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket). And, as in 2010, long-term capital gains and qualifying dividends in 2011 and 2012 continue to be taxed at a maximum rate of 15%; if you're in the 10% or 15% marginal income tax brackets, a special 0% rate will generally apply. So, unlike this time last year, you don't have to contend with the uncertainty of not knowing what next year's tax rates will be.
That consistency, however, does not apply to the alternative minimum tax (AMT)--essentially a parallel federal income tax system, with its own rates and rules. While the December legislation extended regular income tax rates through 2012, it only extended AMT relief (in the form of increased AMT exemption amounts) through 2011. You can probably expect another AMT fix in legislation later this year, since without it there would be a dramatic increase in the number of individuals subject to AMT in 2012. But that leaves a fair degree of uncertainty today, however, as you consider your overall tax situation.
Also worth noting
Small business stock: Generally, individuals may exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided they meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2012, however, 100% of any capital gain may be excluded from income if the stock is held for at least five years and all other requirements are met.
IRA qualified charitable distributions: Absent additional legislation, 2011 will be the last year that you'll be able to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you're age 70� or older. Such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA in 2011.
Depreciation and IRC Section 179 expensing: If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011 (the "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012). For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $125,000. |
| Investing Workshop |
 I am conducting a free investment basics workshop at the Keller Public Library tomorrow, Tuesday, May 16.
This workshop will cover the fundamentals of successful long-term, goals-based investing. Effective investing doesn't have to be complicated, but with so much information available, it can be difficult to tell fact from fiction. This workshop will reveal common pitfalls and investing myths and share information on how to avoid them. You will learn:
- The importance of keeping your investment costs low
- How to build a diversified, balanced portfolio
- How to know when to rebalance
- The relationship between risk and return
Registration is encouraged for planning purposes to [email protected].
Upcoming topics:
- June: Basics of disability and life insurance
- July: Social Security Planning for Baby Boomers
Workshops are always the 3rd Tuesday of the month at 6:30 pm. Please mark your calendars and tell your friends about ones that interest you. The Keller Public Library is located at 640 Johnson Road. |
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I hope you found this newsletter informative. KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients. To learn more or schedule a time, call 817-993-0401 or e-mail [email protected]. Sincerely,
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Jean Keener, CRPC, CFDP
Keener Financial Planning
Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content Copyright �2011, Keener Financial Planning, LLC. |
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