During times of economic uncertainty, fixed annuities gain popularity. In fact, during the first quarter of 2009, the sale of fixed annuities increase 74%, according to a research association called LIMRA. Fixed annuities give people tax-deferred growth at fixed rates that are typically higher than certificate of deposits now. They also give the owners the ability to turn their fixed annuity into guaranteed income for life. Sounds too good to be true, right? A fixed annuity has a number of advantages – but it may cause you to miss opportunities that would result in earning more money.
Fixed annuities are often called “deferred annuity”. These are different from immediate annuities, in which you give a lump sum of money to an insurer and then begin receiving payments from the immediate annuity within a year’s time. Fixed, or deferred annuities operate more like a certificate of deposit in that you deposit your money under a teaser interest rate that can readjust annually based on the current economic and market conditions, but with a guaranteed minimum rate. People like this because they know their interest rate will not go below this guaranteed minimum rate, and that it could readjust for a higher rate in some cases.
Fixed annuities do not have a set time period that you must leave your money alone, however, you would pay a 7% surrender fee if you withdraw your money before five or seven years in most cases. This makes fixed annuities extremely difficult to back out of – which means if you find a higher interest rate somewhere else, you can’t just pull out your money and re-invest to benefit from the interest rates. Some fixed annuities are more flexible in that they allow you to withdraw up to 10% of the balance once per year without paying a fee.
As many experts predict, we will soon be entering an inflationary period. So locking in your money in a 4% fixed annuity could be financially devastating for you in terms of what you could have gained with other investments.
Where as money saved in a certificate of deposit is subject to taxable income, the money in fixed annuities will grow tax-deferred. Unfortunately, if you withdraw the money before you are 59 you will pay a 10% tax penalty, just as if it was a standard retirement fund. When you withdraw cash from a fixed annuity, you’ll also pay ordinary income tax on the interest you’ve earned.
Most annuities give you the option to “annuitize”, which is to turn the balance of your annuity into lifetime payments sometime after the first year. Many people with annuities choose not to do this though, because they use the annuity to grow their money tax-deferred.
If your goal is to find a safe growth for your money, you might consider putting your money in short or intermediate-term corporate and municipal bonds instead of annuities. They still offer interest rates that are higher than current CD rates, and have fewer restrictions than what fixed annuities offer. If the idea of the guaranteed income for life has tempted you toward a fixed annuity, you might want to look at immediate annuities which gives you pay outs within a year – the payment amounts will be greater than if you annuitize a deferred annuity later.
Estate planning is not reserved for people who have a lot of money or assets. This is a common misconception which
often leads to inaction on the part of people who feel they do not qualify or need an estate plan. To put it simply, estate planning is basically making arrangements today to ensure your family doesn’t have the added responsibility of managing your property or finances after your death. To avoid making common mistakes, consider the following tips to get your affairs in order.
- Understand the need for a plan. The first mistake people make has already been mentioned at the beginning of this article. If you don’t have an estate plan, you must know that any arrangements you fail to make prior to your death will fall on the shoulders of those you love the most at a time when they least equipped to be making important decisions.
- Know what estate planning entails. Once you understand the need for an estate plan, the next step is knowing what is involved in the process. You will have to draw up a will, decide on a power of attorney to handle your affairs if you are unable to do so, and a living will or medical power of attorney to make sure your wishes are heeded regarding end-of-life situations.
- Think twice before initiating joint ownership. People often decide the best way to pass assets to their heirs is by adding them as a joint owner. The possible negative consequences of joint ownership often outweigh the benefits. Not only do you lose absolute control of your property or assets, you run the risk of losing your assets should the person added fall on financial difficulty.
- Saving the best for last is not always the best option. When it comes to leaving money or other assets to your heirs, there are certain benefits to giving away some of your money while you are still here to see them enjoy it. You can gift up to $13,000 per year ($26,000 to your spouse) tax free plus contribute to medical or educational bills if paid to the institution itself.
- Enlist the help of a proven professional to help set up your estate. There is a lot to consider when setting up an estate, much of which is not necessarily easy to understand for a layman. There are Federal and State laws that must be considered as well as tax consequences that may turn a good dead into a financial hardship for your heirs. Before you begin planning your estate take the time to research and find a professional that can help you navigate certain areas where you lack familiarity.
Depending on the size of your estate, a little planning and forethought can make life easier for your family during a difficult time. Take the time to make your wishes known, legally and rest assured that your financial affairs are in order.
While Americans are watching their medical premiums rise each year, we keep hearing about options that once we thought were not good ideas. Now, that has all changed because of the continued spiraling of costs and lowering of benefits coverage for those who are insured.
What is a Health Savings Account (HSA) and how can it benefit me?
Consumers have always had to shoulder a portion of the costs of their health care plans in the form of premiums, deductibles and things like co-pays for doctor visits. Now an HSA can be set up to help pay for costs associated with high deductible health care plans and do so from a tax-advantaged position.
Since 2003 when HSA legislation was signed into law, these health accounts have steadily taken hold. The intention was to develop a plan that allowed anyone in any tax bracket to participate and put money into a savings account that could accumulate interest and have tax benefits not unlike an IRA. The consensus is that the more financial responsibility is shouldered by the consumer, then the more concern will be towards costs of health care.
You can establish an HSA on your own or through your employer. Most major health insurance companies participate in the offering of HSA options. Along with a Consumer Driven Health Program, a HSA will help bridge the gap between what you owe as a consumer vs. what is paid for by your health care plan.
Money can be deducted from your weekly paycheck in order to fund your account. The amount is up to the consumer and the goal is to reach the high annual deductible of your health care plan.
You are allowed to make withdrawals from your HSA for non-medical reasons, but those are treated much like a withdrawal from an IRA and are taxed upon their distribution.
One difference in a HSA is that you do not have to use the money on an annual basis or lose it, but it continues to grow in the account as long as you place it there on a regular basis.
While there is some controversy over the HSA and whether they help or hurt health care coverage for consumers, they have enough advantages to be worth considering. If you are in poor health, you might find them restrictive. But if you are in generally good health, they can be a good way to save long-term for medical expenses. A HSA provides a security blanket against future events, much like any other investment plan affords to those who take part in them.
Being a wealthy person isn’t always about having a lot of money. It has a lot to do with how you think about your money and the other things of value in your life you often overlook. Your mindset has a lot to do with your money. Your mindset about what you do with your money and how you manage it has a lot to do with how much money you really have.
Here is some insight as to how the mind and money work together:
Overspending is a Habit
If you are not working on a budget, the propensity to overspend will likely always be there. You need to have control over you money. This habit of overspending can lead to debt without a doubt. It is up to you to change your mindset about how you handle your money. No matter how much cash you have or don’t have, you need to keep it in check at all times by using a workable budget. With a budgeting system (whatever works for you) in place, you will know what bills you need to pay, when you have to pay them, and just how much money you will have left over for saving and for spending.
Recognizing Needs and Wants
You can “want” to get new living room furniture because you are bored with the stuff you have currently or you can “need” to get new furniture because your current set is broken or non-existent. When you want something, there is less of a chance that you will wait and save up properly. Most people who want will go out and buy. Those who need will likely formulate a plan to save up for it. These wants and needs can be as simple as a new pair of $15 shoes or a $1,000 living room set but it’s often the little things we buy impulsively that leads us to overspending on things we rarely need. Listen to yourself the next time you are at the store. Do you see something and think “I really want that!”? If so, commit to waiting at least 3 days before making the purchase. Chances are good after the first day or so, you’ll no longer “:have to have it”.
Live Frugally
Many rich people are rich because they live a frugal life. Since many of them are comfortable about the money they have in the bank, they may not succumb to many of the same worries as the average consumer, such as “Can I buy groceries this week?, but they still want to ensure the money they do have isn’t going anywhere. It may seem like the 
rich spend recklessly and in some cases that may be true but the rich certainly do control their spending and tend to make frugal choices. Those who are in debt may get too excited about extra cash in their pockets and rather than save it wisely, they spend fast without much consideration for building up a nest egg.
Mind Over Matter
All too often, people will feel the need to “keep up the with the Jones’, or the Millers’ or the O’Malley’s. No matter how well other people seem to be doing, there should be no comparison between your finances and anyone else’s. You need to focus on your finances and what you can afford and not feel the pressure to go out and buy something just because the neighbors did. No two financial situations are the same. Do what you need to do for you.
Remember the term “passbook savings account?” Remember taking your passbook to the bank with you and when you made a transaction, the teller would place your book into the machine which would type in the amount of your deposit or withdrawal? That passbook had a funny smell, too. How things have changed. Who would have thought that in just a few years, financial accounts would be accessed from home with a personal computer?
There is one thing that hasn’t changed: Tax-free municipal bonds. These are also called ‘muni’ bonds.
There are two types of municipal bonds: General Obligation and Revenue. These bonds are attractive investments because they offer tax-free interest on a federal level and maybe locally, too.
General Obligation bonds are those that are issued by local government to pay for new schools or sewer systems. The interest that is paid on GO bonds comes from the ability of the local government to tax the citizens.
Revenue bonds are those that are issued by a state or local government backed agency such as a utility company. The interest paid on these bonds is generated by the services that the company provides which is billed to the customers that they support.
The comparison to a regular savings account finds that tax-free municipal bonds offer a better return on your money because of their tax-free status and because they have higher yields that a passbook savings account. In fact, they are much better than most savings options at your local bank.
The other reasons to consider tax-free municipal bonds include:
- Solid principal preservation. These are considered to be a high credit quality investment vehicle, which means that they are considered very safe.
- Insurability. Municipal bond issuers insure these bonds on a large-scale basis.
- Liquidity. Muni bonds can be sold through a network of over 1,000 broker-dealer, and dealer-bankers across the nation. Market conditions dictate the maturity value of the bonds.
- Flexibility. There are over 6,000 insurers which can give you a varied selection of bonds from which to make a selection that will help you meet your financial investment goals.
This is just another avenue that is available to investors to get more for their money. Is this something you should look into? Check with your financial adviser to be sure.
There’s probably not anyone in the world that would enjoy owing debt to the Internal Revenue Service. Most people would rather owe money to just about anywhere else. Because of special provisions in Federal Law, the IRS can seize your property and even send you to jail if you don’t pay them the money that they say that you owe.
Fortunately, those who owe the IRS money have one thing going for them. The IRS is somewhat slow and inefficient, so it’s fairly easy to avoid them for several years on an unpaid debt. Eventually they will get around to finding the people that they are owed money to and it’s usually not a pleasant situation. When an individual owing back taxes approaches the IRS through a CPA, they are usually pretty lenient in setting up payment plans and waving some fees. When they find an individual that’s owed back taxes for some time, no mercy is given in the fees that are owed and jail time is sometimes discussed.
A couple of years ago, the IRS decided that they wanted to find a more efficient way to collect the debts that they were owed. The organization came up with a program that would allow them to outsource the collection of certain types of debts to private companies based on the notion that private industry would naturally be more efficient at collecting debt than the IRS would. Most financial advisors recommended to consumers who owed back taxes to opt out of the program because the private collectors were likely to be much more aggressive than their federal counterparts.
It turns out that collecting tax debt is one situation that didn’t quite work out so well to outsource to private industry. The National Taxpayer Advocate recently reported that the amount of money that third party bill collectors are paid is actually more than the total amount of money that they were able to collect. Because of this failure, the IRS has decided to cancel the program and hire more federal collectors to go after individuals who have not paid their back taxes.
If you are self-employed, are an independent contractor or own a small business, it’s very tempting not to file federal income taxes when you don’t think you can pay the total amount paid. Even if you can’t pay the full amount of your tax bill, you should still file. Individuals that do file and fail to pay for financial or economic reasons are treated much more favorable in fees and interest than those who fail to file a tax return.
Most of people end up paying hundreds of dollars per year too much in Federal Income Taxes because they aren’t aware of what deductions that they qualify for. The Federal tax code has become so complicated that it’s extremely difficult for individuals to figure out how to minimize their tax burden without paying hundreds of dollars to a CPA to navigate the tax code for them. One deduction that almost everyone will qualify for, but very few people take advantage of, is the deduction for paid state and local sales taxes.
If your city, county, or state collects any sort of sales tax, you will qualify for this deduction. You don’t even need to keep receipts for the sales taxes that you pay. The IRS provides a calculator which will determine a dollar amount based upon your locality’s sales-tax rate of how much that you can deduct. The city which I live in collects a 6% sales tax (4% state, 2% local). For my 2009 taxes, I was able to deduct $780.00 without collecting any receipts at all.
For most people, not collecting the receipts and taking the average based on the IRS’s calculator is the way to go. If you have made a few large purchases in the year, you can instead specify the sales taxes that you’ve paid for the deduction instead. For Example, if I bought a $20,000 item and had a receipt for that, I would have paid $1,200 in sales taxes on that item alone, meaning that I could deduct that much rather than the $780 average that the IRS will let me deduct without any receipts at all.
In order to qualify for this deduction, you do need to itemize your deductions. Usually it’s a good idea to calculate and determine if your itemized deductions are greater than what your standard deduction would be, and then itemize your deductions if it results in a greater refund. If you’re a college student, own a home or do a large amount of charitable giving you will almost certainly come out ahead by itemizing your deductions.
There are other types of taxes that you can deduct from your Federal income taxes as well. You can deduct any local, state, or foreign income taxes that you paid in much the same manner. You can also deduct any real estate taxes, such as property taxes, from your return. The IRS has a publication on what taxes you can deduct. If you go to their website, you’ll want to look for “Topic 503. – Deductible Taxes.”
You know that feeling. The sinking in your stomach when you think about one of the worst things that can happen to you in your personal finances: You owe the IRS money for back taxes.
You keep asking yourself how you got into this situation. But all you get is ugly facts surrounding a situation of desperation. It is not all that difficult of a place in which to find yourself. A failed business, marriage or other personal calamity contributes to financial pressures and before you know it, you are in debt to the US Government.
Here are some things that you can do to help your situation and hopefully calm your nerves.
The IRS is like you. Believe it or not, the people at the IRS are not monsters. In fact, they are more open to speaking with you about your situation than you realize. They deal with situations like yours (and far worse) every day. So, do not think that your contacting them will cause them to faint or become angry with you. They do not operate that way, and will help you get through this issue.
Communicate right now. Do not put off calling or contacting them about your situation. The more you put it off, the more it will cost you in interest and penalties on what you owe. They will appreciate your forth-right attitude, also, in coming to them to work something out. This will not be the end of you. You will not go to jail. But, neither should you shirk your responsibility, because that can and will get you into deep trouble with them.
Work out a payment. The IRS will sit down with you and work out payment arrangements to which you will have to adhere in order to pay back what you owe them plus interest and any penalties. Sometimes they do this via the mail and phone. You might not even have to visit an IRS office. They are aware of what you owe, and will give you the opportunity to begin to make payments to them.
Stick to you payments. Do not fail to make your payments on time to the IRS. This is one organization that has the teeth to get their money. If you violate the terms of your payment arrangements, they will begin to attach and seize property that you own, including bank accounts, etc. However, if you speak with them in the event that you are having problems making your payments, you will be able to work through it.
Beware of bad advice. We have all seen those television commercials where someone who claims to having once been an IRS employee can get your IRS debt settled for pennies on the dollar. Each person’s circumstances are different and just because someone else had a major portion of their back taxes wiped from their record does not mean that you will have the same experience. If you choose to contact one of these businesses, you might want to contact the IRS first concerning that company. They know what they are willing to do and who they are willing to work with. Besides, it is YOU who owes the money to the IRS, not some talking head on television.
There is only one thing worse than paying taxes at all and that is paying for back taxes owed. It is not a fun place in which to be found but neither is it an impossible situation. Work through it with patience and persistence and it will be a distant memory before you know it.
If you don’t do your own taxes and take them to a preparation service such as H&R block, you will probably be asked if you’d like to get your refund money through one of their “easy refund loans.” Essentially, you are borrowing money against the proceeds of your tax refund check whenever it arrives in the mail. The idea of getting one’s refund money right away sounds nice, but in practicality, they are one of the biggest rip-offs that one can sign up for.
If you sign up for a refund loan, you’ll pay a fee, probably somewhere from $10.00 to $30.00 so that you can get the money right away. The fee itself doesn’t sound too unreasonable, but if you were to calculate the interest rate that you would be paying on the loan, you would find out that you’re paying over 700% in annual interest on the loan
H&R block was recently sued because of the refund loans that they offer. The complaint said that the loans were deceptive, because the refund loans were only a few days faster than getting an e-file return, which takes about 7 days to return. Why would anyone pay 700% interest on a loan just to get their refund loans a few days earlier? H&R block eventually reached a $5 million settlement with the state of California in the suit. If you’re offered a refund loan, just say no.
If you’re getting a refund, there’s a bigger issue at hand. You really don’t want to be getting a big refund. By paying too much in taxes to begin with and getting money back from the IRS, you are essentially giving the government a tax free loan on your money. Instead you should adjust your W-2 forms or the amount that you send in through quarterly estimates so that the size of your refund is as close to zero as possible.
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