| November 14, 2011 | Vol 4, Issue 11 |
|
|
|
|
|
|
| Greetings! | |
 Good morning, happy Monday.
The market volatility continues, with plus and minus swings greater than 1% on many days as traders react to economic reports or the latest negotiations on European debt. That said, I'm happy to report that for the past month these swings have been more up than down. The S&P 500 is back into positive territory for the year, and October saw the S&P's biggest single-month increase since 1991.
This is the time of year where we get updates on all of the inflation-adjusted changes for next year. You have full details below in a couple of different sections, but the major headline changes for 2012 are:
- 401k contribution limit goes to $17,000
- social security tax caps out at $110,100 in income
- social security recipients get a 3.6% cost of living increase
In this month's newsletter, we also have tips on planning for required minimum distributions, an update on college cost increases, and more. As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.
I hope you have a wonderful Thanksgiving with friends and family and find great richness in the spirit of the holiday. Thanks, and Live Well. |
|
 |
|
|
| IRA and Retirement Plan Contributions Limits for 2012 |
 The maximum amount you can contribute to a traditional IRA or Roth IRA in 2012 remains at $5,000 (or 100% of your earned income, if less), unchanged from 2011. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2012, but your total contributions can't exceed this annual limit.)
Traditional IRA deduction limits for 2012
While the maximum contribution hasn't changed, the income limits for determining the deductibility of traditional IRA contributions have increased (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income ("modified adjusted gross income," or MAGI) is $58,000 or less (up from $56,000 in 2011). If you're married filing a joint return, you can fully deduct your IRA contribution if your MAGI is $92,000 or less (up from $90,000 in 2011). If you're not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $173,000 or less (up from $169,000 in 2011).
|
If your 2012 federal income tax filing status is: |
Your IRA deduction is reduced if your MAGI is between: |
Your deduction is eliminated if your MAGI is: |
|---|
|
Single or head of household |
$58,000 - $68,000 |
$68,000 or more |
|---|
|
Married filing jointly or qualifying widow(er)* |
$92,000 - $112,000 (combined) |
$112,000 or more (combined) |
|---|
|
Married filing separately |
$0 - $10,000 |
$10,000 or more |
|---|
*If you're not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $173,000 to $183,000, and eliminated if your MAGI exceeds $183,000.
Roth IRA contribution income limits for 2012
The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,000 to a Roth IRA in 2012 if your MAGI is $110,000 or less (up from $107,000 in 2011). And if you're married filing a joint return, you can make a full contribution if your MAGI is $173,000 or less (up from $169,000 in 2011). (Again, contributions can't exceed 100% of your earned income.)
|
If your 2012 federal income tax filing status is: |
Your Roth IRA contribution is reduced if your MAGI is: |
You cannot contribute to a Roth IRA if your MAGI is: |
|---|
|
Single or head of household |
More than $110,000 but less than $125,000 |
$125,000 or more |
|---|
|
Married filing jointly or qualifying widow(er) |
More than $173,000 but less than $183,000 (combined) |
$183,000 or more (combined) |
|---|
|
Married filing separately |
More than $0 but less than $10,000 |
$10,000 or more |
|---|
Employer retirement plans The maximum amount you can contribute (your "elective deferrals") to a 401(k) plan has increased for 2012. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans) is $17,000 in 2012 (up from $16,500 in 2011). If you're age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2012 (unchanged from 2011). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.) If you participate in more than one retirement plan, your total elective deferrals can't exceed the annual limit ($17,000 in 2012 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan--a total of $34,000 in 2012 (plus any catch-up contributions). The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2012 remains at $11,500 ($14,000 if you're age 50 or older), unchanged from 2011. Finally, the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2012 is $50,000 (up from $49,000 in 2011), plus age-50 catch-up contributions. (This includes both your contributions and your employer's contributions. Special rules apply if your employer sponsors more than one retirement plan.) |
Plan type: |
Annual dollar limit: |
Catch-up limit: |
|---|
|
401(k), 403(b), govt. 457(b), SAR-SEP |
$17,000 |
$5,500 |
|---|
|
SIMPLE plans |
$11,500 |
$2,500 |
|---|
Note: Contributions can't exceed 100% of your income. |
| Social Security and Medicare figures for 2012 |
 If you receive Social Security or SSI benefits, here's some good news--the Social Security Administration has announced that for the first time since 2009, a cost-of-living adjustment (COLA) will be paid. Monthly benefits will increase 3.6% starting in January 2012 for Social Security beneficiaries and starting on December 30, 2011, for SSI recipients. According to the Social Security Administration, the average increase in monthly benefits will be approximately $43.
If you're covered by Medicare, you won't be seeing a large premium increase next year. Despite media reports predicting that the COLA increase would be offset by higher Medicare Part B premiums, the Centers for Medicare & Medicaid Services (CMS) has announced that the standard monthly Medicare Part B premium will be $99.90 in 2012, $15.50 less than in 2011. However, because the premium for most Medicare beneficiaries has been frozen for the past three years at $96.40 (the premium rate in 2008), most beneficiaries will pay $3.50 more per month in 2012. Beneficiaries with higher incomes (individuals with taxable incomes of more than $85,000 and couples with taxable incomes of more than $170,000) will pay more than $99.90 per month because they must pay an income-related surcharge.
While costs vary, the average monthly premium for a Medicare Part D prescription drug plan in 2012 is estimated at around $30, approximately the same as in 2011. And Medicare Advantage premiums will be 4% lower, on average, in 2012 than in 2011, according to CMS.
Other important Social Security figures
- The amount of taxable earnings subject to the Social Security tax (called the maximum taxable earnings limit) will increase to $110,100 from $106,800 in 2011.
- The retirement earnings test exempt amount for beneficiaries under full retirement age will increase to $14,640 per year from $14,160 per year in 2011. If earnings exceed this amount, $1 in benefits will be withheld for every $2 in earnings above this limit.
- The retirement earnings test exempt amount that applies during the year a beneficiary reaches full retirement age will increase to $38,880 from $37,680 per year in 2011. If earnings exceed this amount, $1 will be withheld for every $3 in earnings above this limit.
- The amount of earnings needed to earn one Social Security credit will increase to $1,130 from $1,120.
Note also that the OASDI payroll tax that was reduced by 2% for wages and salaries paid in 2011 and for self-employment income in 2011 will revert to its normal rate of 6.2% for 2012.
Other important Medicare figures
- The Medicare Part B deductible will be $140, down from $162 in 2011.
- The monthly Medicare Part A premium for those with fewer than 30 quarters of coverage will be $451, up from $450 in 2011 (most people do not pay a premium for Medicare Part A).
- The monthly Medicare Part A premium for those who have between 30 and 39 quarters of coverage will be $248, the same as in 2011.
- The Medicare Part A deductible for inpatient hospitalization will be $1,156, up from $1,132 in 2011. Beneficiaries will pay an additional $289 per day for days 61 through 90, up from $283 in 2011, and $578 per day for stays beyond 90 days, up from $566 in 2011.
- Beneficiaries in skilled nursing facilities will pay a daily co-insurance amount of $144.50 for days 21 through 100 in a benefit period, up from $141.50 in 2011.
|
|
Planning for a Silly Rule -- Required Minimum Distributions |
 One of the strangest laws on the books, when you think about it, is the rule that at an arbitrary age--when you reach age 70 1/2--you have to start taking mandatory distributions from your IRA accounts. Of course, that also means you have to stop the tax-free compounding on those distributions and pay taxes on the money you take out, even if you don't need it to pay expenses. Why that age and not some other, like 80 or 90--or why not have your estate pay taxes on however much is left over when you die? And in any case, what was the point of that extra half year?
It's a silly rule, and tax specialists and financial advisors spend a lot of time thinking about how to make it less of a burden on our clients. Planning ahead can have a big impact. To take perhaps the simplest example, consider a person with $1 million in various IRA accounts who turns 70 1/2 next year. The rules say that she would have to take the first required minimum distribution (RMD) by April 1 of 2013, based on the IRA balance at the end of 2011. Based on the Uniform Lifetime Table, her RMD would be around $36,500. But she also has to take her second distribution by December 31, 2013, based on the total IRA balance as of the end of 2012--which, depending on what the markets do, could be as much or more than her first distribution.
If she does what instinct tells us to do, and delays taking her first distribution until April 1, 2013, she would end up receiving two distributions in the same year, creating taxable income of somewhere close to $80,000 in addition to her other income or distributions. This double distribution might trigger a cascade of unwanted tax consequences. It would shoot her into a higher tax bracket, put a higher tax rate on her Social Security check, potentially cause her to pay more for Medicare Parts B and D, and expose more income to the 3.8% Medicare tax that will take effect in 2013. For many people, it makes a lot more sense to take that first distribution at the end of 2012, and keep the tax rate lower.
Planning ahead also means looking at taking some money out of the IRA long before the distributions are required. A retired couple in their 60s could take just enough out of their IRA to fill up their 15% or 25% tax bracket, and use that money to pay for living expenses. That way, they control the taxes on those distributions and prevent the situation where the future RMDs are so high that they (and Social Security) are taxed at elevated rates. This also allows stocks in the taxable portfolio to continue to appreciate; their gains are only taxed when you sell.
There are, of course, other planning options. The law (for now) allows people to gift up to $100,000 of their IRA distributions to their favorite qualified charity without any increase in the IRA owner's gross income.
Another solution is to convert some of the IRA money to a Roth RIA, which never has to take distributions, and whose distributions are never taxed again. This controls the size of the required distributions and the taxes imposed by this dumb rule, and the additional impact of taxes on Social Security payments and the Medicare tax. Yes, you have to add the amount of the conversion to your total income and pay taxes on it in the year of the conversion, but there are ways to control the damage.
The bottom line is that RMDs are a pain in the neck, but we all have to live with them. Millions of people will fail to plan for the involuntary distributions lurking in their future, and end up paying a windfall of taxes to the government. Those who do a little planning will come out ahead.
|
|
College Cost Figures |
 Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases for the current academic year and trends in the world of higher education. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country. To read the Trends in College Pricing 2011 report, visit www.collegeboard.com/trends.
Note that the "total average cost" figure includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses. This figure is often referred to as the "cost of attendance."
Public colleges (in-state students)
- Tuition and fees increased an average of 8.3% from last year to $8,244
- Room-and-board costs increased an average of 4.0% to $8,887
- Total average cost for 2011/2012 is $21,447
Public colleges (out-of-state students)
- Tuition and fees increased an average of 5.7% from last year to $20,770
- Room-and-board costs increased an average 4.0% to $8,887
- Total average cost for 2011/2012 is $33,973
Private colleges
- Tuition and fees increased an average of 4.5% from last year to $28,500
- Room-and-board costs increased an average of 3.9% to $10,089
- Total average cost for the 2011/2012 year is $42,224
Student aid trends
The College Board also publishes an accompanying report every October called Trends in Student Aid that examines financial aid in more detail. To read the report, visit www.collegeboard.com/trends.
The College Board noted that last year, approximately 46% of all grant aid came from the federal government, 36% came from colleges, 9% came from state governments, and about 9% came from employers and other private sources. Grant aid is the most desirable type of financial aid because it doesn't need to be paid back. |
|
Long Term Care Planning Especially Important for Women |
 The prospect of needing long-term care is an important, yet sometimes overlooked, part of financial and retirement planning. Yet it may be especially vital for women to consider as they often face the need for long-term care as both a caregiver and recipient.
Women as caregivers
While you may think most long-term care is received in a nursing home setting, the National Clearinghouse for Long-Term Care Information (National Clearinghouse) estimates that about 80% of care is provided at home by informal (unpaid) family caregivers. Of those caregivers, about 60% are women (www.longtermcare.gov).
In many instances, the care provided for chronically disabled older adults is quite intensive and time-consuming. Women who act as family caregivers of older people with high levels of personal-care needs may face considerable financial, emotional, and physical strain. For instance, caregivers may face financial challenges due to lost wages from reduced work hours, time out of the workforce, extended family leave, or early retirement. Reduced work hours or extended time out of work may also affect the ability to contribute toward retirement savings, potentially resulting in a loss of retirement income.
Caregivers also may face emotional strains and poor health related to their caregiving responsibilities. This may be especially true for older women caregivers and younger women who may be caring for an older family member in addition to managing their own household.
Women as long-term care recipients
According to the Centers for Disease Control and Prevention (CDC), women outlive men by an average of 6 years (www.cdc.gov). Because they tend to live longer, women are at a higher risk than men of needing long-term care (source: National Clearinghouse). And the National Clearinghouse reports that women, on average, need care over a longer time than men (3.7 years vs. 2.2 years). With a longer life expectancy and a greater likelihood of needing long-term care, women often must confront their long-term care needs without the help of their spouse or other family members.
Paying for long-term care
Long-term care can be expensive. An important part of planning is deciding how to pay for these services.
Buying long-term care (LTC) insurance is an option. Many LTC insurance policies pay for the cost of care provided in a nursing home, assisted-living facility, or at home, but the premium paid generally depends on the age of the insured and the policy benefits and options purchased. And premiums can increase if the insurer raises its overall rates. Even with LTC insurance, you still may have some out-of-pocket contributions in addition to premium payments. For example:
- Not all policies provide coverage for care in your home, even though that's where most care is provided. While the cost of in-home care may be less than the cost of care provided in a nursing home, it can still be quite expensive.
- Most policies allow for the selection of an elimination period of between 10 days and 1 year, during which time the insured is responsible for payment of care.
- The LTC insurance benefit is often paid based on a daily or monthly maximum amount, which may not be enough to cover all of the costs of care.
- While lifetime coverage may be selected, it can increase the premium cost significantly, and some policies may not offer that option. Most common LTC insurance benefit periods last from 1 year to 5 years, after which time the insurance coverage generally ends regardless of whether care is still being provided.
Government benefits provided primarily through a state's Medicaid program may be used to pay for long-term care. To qualify for Medicaid, however, assets and income must fall below certain limits, which vary from state to state. Often, this requires spending down assets, which may mean using savings to pay for care before qualifying for Medicaid.
Women may have to confront particular challenges when planning for long-term care. A financial professional can help with some of the complex issues you may face when preparing for the possibility of long-term care, both as a caregiver and a receiver of care. |
| Long Term Care Insurance Workshop | |
This month's workshop focuses on long term care insurance -- should you buy it? If so, when, what, and how much. We'll discuss various strategies to consider. All are welcome, and it will likely be most helpful for those in their mid 40s and up.
The workshop is at 6:30 pm on Tuesday, November 15. Registration is encouraged for planning purposes to library@cityofkeller.com.
Topics for the rest of the year:
- December: Structuring your retirement income (designed for those in or very near retirement)
Workshops are usually on 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.
I'm planning topics now for 2012. If you have suggestions, I would love to hear them! Thank you. |
|
|
|
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 jean@keenerfinancial.com.
Sincerely,
|
|
Jean Keener, CFP®, CRPC®, CFDS
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 except where otherwsie credited Copyright ©2011, Keener Financial Planning, LLC. |
|
|
|
|
|
