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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Financial & Wealth

Financial & Wealth :: What Is the Gift Tax?


Gift_Taxes~001The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual gift tax exclusion for that calendar year. The exclusion amount ($14,000 in 2014) is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made during the tax year that exceed the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

The 2010 Tax Relief Act reunified the estate and gift tax exclusions at $5 million (indexed for inflation), and the American Taxpayer Relief Act of 2012 made the higher exemption amount permanent while increasing the estate and gift tax rate to 40% (up from 35% in 2012). Because of inflation, the estate and gift tax exemption is $5.34 million in 2014. This enables individuals to make lifetime gifts up to $5.34 million in 2014 before the gift tax is imposed.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC.

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Financial & Wealth :: What Is the Difference Between a Fixed Annuity and a Variable Annuity?

 

fixed_vs_variable~001An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select. Because you do not have to pay taxes on any growth in your annuity until it is withdrawn, this financial vehicle has become an attractive way to accumulate funds for retirement.

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

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

Fixed annuity contracts are issued with guaranteed minimum interest rates. Although the rate may be adjusted, it should never fall below a guaranteed minimum rate specified in the contract. This guaranteed rate acts as a “floor” to potentially protect a contract owner from periods of low interest rates.

Fixed annuities provide an option for an income stream that could last a lifetime. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

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

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

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

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

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

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

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

Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply during the contract’s early years.

Annuities have contract limitations, fees, and charges, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.

 


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

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC.

 

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Financial & Wealth :: How Much Do I Need to Save?

how_much_do_i_need_to_save

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

 

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

 

Here are some factors to consider
when determining a retirement savings goal.


Retirement Age

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


Life Expectancy

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

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


Future Health-Care Needs

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


Lifestyle

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

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


Inflation

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


Social Security

Many retirees believe that they can rely on their future Social Security benefits. However, this may not be true for you. The Social Security system is under increasing strain as more baby boomers are retiring and fewer workers are available to pay their benefits. And the reality is that Social Security currently provides only 42% of the total income of Americans aged 65 and older with at least $57,957 in annual household income.1 That leaves 58% to be covered in other ways.


And the Total Is…

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

For example, let’s assume you will retire when you are 65 and spend a total of 20 years in retirement, living to age 85. Your annual income is currently $80,000, and you think that 75% of your pre-retirement income ($60,000) will be enough to cover the costs of your ideal retirement, including some travel you intend to do and potential health-care expenses. After factoring in the $12,000 annual Social Security benefit you expect to receive, a $10,000 annual pension from your employer, and 4% potential inflation, you end up with a total retirement savings amount of $760,000. (For your own situation, you can use a retirement savings calculator from your retirement plan provider or from a financial site on the Internet.) This hypothetical example is used for illustrative purposes only and does not represent the performance of any specific investment.

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

Source: 1) Income of the Population 55 or Older, 2010, Social Security Administration, 2012

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved.

 

For more information about Planning For Retirement or for Long Term Care Insurance Information, contact G.R. Reid.

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Accounting & Tax :: Saving for Higher Education: Investing in Your Child’s Future


Saving money for college is one of the most important investments most people will make in their lifetime. Fortunately, there are many investment options for college savings, with particular merits, and certain caveats to bear in mind. Investing parameters to consider include the length of time set aside for savings, the financial return on the investment, whether your child will choose college for his future, and perhaps most importantly, the tax ramifications of the investment choices.

529 Plans

A popular college savings vehicle, known as a 529 Plan, is essentially a qualified tuition plan sponsored by a state or educational institutions that is authorized by Section 529 of the Internal Revenue Service. An account holder may either invest in a prepaid tuition plan, or a college savings plan. A prepaid tuition plan allows the account holder to purchase units or credits at participating colleges and universities for future tuition (and possibly room and board), while an account holder of a college savings plan can use the withdrawals at any college or university. All 50 states and the District of Columbia offer some type of 529 plan.
The tax advantages to 529 plans are that the earnings are not subject to state or federal tax if used to cover the cost of higher education and some states allow a deduction for contributions to 529 plans. An additional benefit is that 529 plans can be funded by parents, grandparents, aunts & uncles, etc.  There is a special gift tax rule that allows five years of 529 plan contributions to be made at one time without gift tax consequences provided that no other gifts are made to that donee during those 5 years. For 2014, $70,000 ($14,000 annual exclusion times 5 years) can be deposited in a 529 plan by each donor. If the 529 investment is withdrawn and not used for college, the owners will be subject to income tax on the earnings plus a 10% federal tax penalty. Some states impose rules limiting annual portfolio allocations. Market risk must also be considered. If you have a child with a 529 plan who decides college is not for them, the account may be transferred to another family member.

Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (formerly called an “Education IRA”) differ from 529 plans in that the funds can be used for primary and secondary education in addition to higher education. They are similar to 529 plans because the earnings are not taxable when used for qualified education expenses but are taxable with a 10% penalty on earnings if not. A contribution to a Coverdell Education Savings Account and a 529 plan can be made in the same year, but the contribution to the Coverdell Education Savings Account is limited to $2,000 each year. In addition, there are income limitations on the contributor to be eligible to make contributions. When the beneficiary reaches age 18, contributions can no longer be made and at age 30, the account has to be closed. Another disadvantage is that state tax deductions are not allowed for these contributions.
Custodial Accounts
Custodial accounts created under the Uniform Gifts/Transfers to Minors Act allow funds to grow in your child’s name. Gifts to these accounts are subject to the annual gift limits. Advantages of UGMA/UTMA gifts are that investment decisions are more flexible and there are no restrictions on the withdrawals. Disadvantages are that the earnings may be subject to the kiddie tax, meaning that they are taxed at the parent’s rate rather than the child’s rate. The parent also loses control of the funds once the child reaches the age of majority, which may differ on a state by state basis.

Mutual Funds            

Mutual funds provide flexibility through diversification of assets. Depending on the firm or firms managing the funds, these investment vehicles can offer great returns. Investors will be subject to taxes on gains from their dividends; however they have the advantage of being able to manage risks by balancing stocks and bonds in one portfolio. To some investors it may seem frightening that someone else is managing their money, but historically mutual funds, especially those in stocks, have proven to show great returns. So risk management and diversification may appeal to some, but don’t expect to find the income tax breaks of IRAs or 529s here.

Savings Bonds and Stock Investments

Other college saving options include the basics, such as government savings bonds or individual stock investments. These alternatives can represent the polarity of investment risk. Saving for college with bonds requires a long time of accruing interest and the investments are limited at $10,000 face value annually. Savings bonds are not taxed on their accrued interest, but their annual cap and slow growth limit their utility. Interest earned on certain Series EE or I bonds is tax free is used for qualified higher-education purposes.  Investing in stocks without a broker can be risky, and land any investor in a situation of fast gain or sharp losses. Investments in stocks are taxed on capital gains and dividend income, so even if you do make some money, don’t expect to get off scot free.

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Financial & Wealth :: How Can I Keep My Money from Slipping Away?

cash_management_basics

As with virtually all financial matters, the easiest way to be successful with a cash management program is to develop a systematic and disciplined approach.

By spending a few minutes each week to maintain your cash management program, you not only have the opportunity to enhance your current financial position, but you can save yourself some money in tax preparation, time, and fees.

Any good cash management system revolves around the four As — Accounting, Analysis, Allocation, and Adjustment.

Accounting quite simply involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as mortgage payments, credit card statements, and auto loans — and listing it systematically will give you a clear picture of your overall situation.

Analysis boils down to reviewing the situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. One of the key elements in analyzing your financial situation is to look for ways to reduce your expenses. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.

For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off 10 years early and save you thousands of dollars in interest payments.

Allocation involves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. For example, you may want a new home entertainment center, but your real need may be to reduce outstanding credit card debt.

Adjustment involves reviewing your income and expenses periodically and making the changes that your situation demands. For example, as a new parent, you might be wise to shift some assets in order to start a college education fund for your child.

Using the four As is an excellent way to help you monitor your financial situation to ensure that you are on the right track to meet your long-term goals.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved.

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Financial & Wealth :: What Is the Capital Gains Tax?

capital_gains_taxCapital gains are the profits realized from the sale of capital assets such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor. However, mutual fund investors could be charged capital gains on investments in the fund that are sold by the fund during the year.

There are two types of capital gains: long term and short term; each is subject to different tax rates. Long-term gains are profits on assets held longer than 12 months before they are sold. The American Taxpayer Relief Act of 2012 instituted a 20% long-term capital gains tax rate for taxpayers in the 39.6% income tax bracket and extended both the 0% capital gains tax rate for individuals in the 10% and 15% tax brackets and the 15% capital gains tax rate for all other tax brackets. Short-term gains (on assets held for 12 months or less) are taxed as ordinary income at the seller’s marginal income tax rate.

The taxable amount of each gain is determined by a “cost basis” — in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. In addition, any capital losses incurred in the current tax year or previous years can be used to offset taxes on current-year capital gains. Losses of up to $3,000 a year may be claimed as a tax deduction.

If you have been purchasing shares in a mutual fund over several years and want to sell some holdings, instruct your financial professional to sell shares that you purchased for the highest amount of money, because this will reduce your capital gains. Also, be sure to specify which shares you are selling so that you can take advantage of the lower rate on long-term gains. The IRS may assume that you are selling shares you have held for a shorter time and tax you using short-term rates.

Capital gains distributions for the prior year are reported to you by January 31, and any taxes that must be paid on gains are due on the date of your tax return.

Higher-income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers). This is an outcome of the Patient Protection and Affordable Care Act.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved.

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Financial & Wealth :: What Is a Bond?

When you invest in bonds, you are investing in the debt of a government entity or a corporation. A bond is simply evidence of a debt and represents a long-term IOU.
Bonds are issued by federal, state, and local governments; agencies of the U.S. government; and corporations. By selling debt with a promise to pay it back with interest, the issuing agency can raise capital to finance its operations. The issuing company or government entity will outline how much money it would like to borrow, for what length of time, and the interest it is willing to pay. Investors who buy bonds are lending their money to the issuer and thus become the issuer’s creditors. Bonds are sold at “par” or “face” value, which is the price at which the bond is issued, usually in denominations of $1,000.

 

“If you are considering buying a bond,
remember that the market value of a bond
is at risk when interest rates fluctuate.”

By purchasing a bond, you are lending the debtor money. In exchange, you receive a note stating the amount loaned, the interest rate (the “coupon” or “coupon rate”), how often the interest will be paid, and the term of the loan. The principal (the amount initially paid for the bond) must be repaid on the stipulated maturity date. Before that date, you (as lender) receive regular interest, usually every six months. The interest payments on a bond are usually fixed. Before 1983, bondholders would receive coupons that they would clip and mail in semi-annually to receive the interest payments. Presently, all bonds are issued electronically in book-entry form only.

If you are considering buying a bond, remember that the market value of a bond is at risk when interest rates fluctuate. As interest rates rise, the value of existing bonds typically falls because the interest rate on new bonds would be higher. The opposite can also happen as well. Of course, this phenomenon applies only if you decide to sell a bond before it reaches maturity. If you hold a bond to maturity, you will receive the interest payments due plus your original principal, barring default by the issuer. Additional considerations are a bond’s maturity date and credit quality. Investments seeking to achieve higher yields also involve a higher degree of risk.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved.

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Accounting & Tax :: Estate Tax Savings Opportunity for New York Residents

Governor Cuomo introduced his Executive Budget for 2014-2015 on January 21, 2014 to the New York State Legislature. The Bill provided a number of changes impacting Estates of New York Residents.

 

“…clients who have significant estates and,
who are considering making gifts of their
remaining federal estate tax exemption amount
(the maximum federal exemption is
currently $5.34 million per person)
may wish to complete such gifts
during the small window of opportunity
which may close on April 1, 2014.

New York Estate Tax Exemption Increased and Estate Tax Rates Decreased  



The Bill includes a proposal to:
1. Increase the New York State estate tax exemption amount (presently $1 million) to $5.25 million over the next four years, and indexing future levels to inflation, and

2. Lower the top New York estate rate from 16% to 10% by 2017.
Please be advised that New York does not have portability provisions, which for federal estate tax purposes would permit a surviving spouse to inherit the decedent spouse’s unused estate tax exclusion amount (DSUE).

Window of Opportunity May Be Closing
Starting in 2011, when the federal estate and gift tax exemption began increasing from $5 million dollars to $5.34 million dollars in 2014, many New York residents began making large lifetime gifts which resulted in the reduction of their New York State estate tax. This reduction occurs because New York State does not have a gift tax and because New York State does not currently add back gifts to the New York taxable estate at death. The Bill proposes to include gifts made after March 31, 2014 in a New York resident decedent’s estate for New York estate tax purposes, if the decedent was a New York resident at the time of the gift.

Therefore, clients who have significant estates and, who are considering making gifts of their remaining federal estate tax exemption amount (the maximum federal exemption is currently $5.34 million per person) may wish to complete such gifts during the small window of opportunity which may close on April 1, 2014.

The Bill is complex and the potential estate tax savings from using lifetime gifts described above must be balanced against several issues, including the potential loss of a “step-up” in basis at death if making a gift of an appreciated asset. However, if passed, it is clear that the Bill will result in potential tax saving benefits to New York residents making lifetime gifts prior to April 1, 2014.

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529 Lesson Plan: High Scores for 529 College Savings Program

529_plan-image

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

Consider the 529 college savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades — with annual costs (for tuition and fees, and room and board) of more than $39,500 per year for the average private four-year college.1 Named after the section of the tax code that authorized them, 529 plans (also known as qualified tuition plans) are now offered in almost every state.

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

The newer variety of 529 is the savings plan. It’s similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Many states also exempt withdrawals from state income tax for qualified higher education expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers — many well-known investment firms — to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. Earnings from 529 plans are not taxed when used to pay for eligible college expenses. And there are even new consumer-friendly reward programs popping up that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.  2 

Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone — even non-relatives — can contribute up to $14,000 per year (in 2013) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner’s estate, therefore avoiding estate taxes upon the owner’s death.

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

Benefits for Grandparents
The 529 plan could be a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student’s college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a grandparent — as well as anyone, for that matter — could elect to use five years’ worth of annual exclusions by making a single contribution of as much as $70,000 per beneficiary in 2013 (or a couple could contribute $140,000 in 2013), as long as no other contributions are made for that beneficiary for five years.*  If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.

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

Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and investment company — can be obtained by contacting your financial professional. You should read these materials carefully before investing. By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.

 

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

Sources:
1) The College Board, 2012
2) College Savings Plan Network, 2012.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. 

This material was written and prepared by Emerald. 
© 2014 Emerald Connect, LLC All rights reserved.
Jason Reid Saladino and George G. Elkin are Registered Representatives offering Securities through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory products/services are offered through American Portfolios Advisors Inc., a SEC Registered Investment Advisor. G.R. Reid Wealth Management Services, LLC is not a registered investment advisor and is independent of American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. Independent Portfolio Consultants is an independent financial consulting firm and is not affiliated with American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. does not offer tax advice. Please consult with your tax advisor.

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Wealth Management :: What Is an Annuity?

An annuity is a contract with an insurance company that is funded by the purchaser and designed to generate an income stream in retirement. It is a flexible financial vehicle that can help protect against the risk of living a long time because it provides an option for a lifetime income.

 
Two advantages of annuities are that the funds accumulate tax deferred and they can be distributed in a variety of ways to the contract owner.

There are many different types of annuities. Immediate annuities are designed to provide income right away, whereas deferred annuities are designed for long-term accumulation. Some annuities offer a guaranteed rate of interest, whereas others do not. Generally, annuities have contract limitations, fees, and charges, which can include mortality and expense charges, account fees, underlying investment management fees, administrative fees, and charges for optional benefits. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges, plus a 10 percent federal income tax penalty if made prior to age 59 1/2. Withdrawals reduce annuity contract benefits and values. Any guarantees are contingent on the claims-paying ability of the issuing company. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. For variable annuities, the investment return and principal value of an investment option are not guaranteed. Variable annuity subaccounts fluctuate with changes in market conditions; thus, the principal may be worth more or less than the original amount invested when the annuity is surrendered. Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

 

This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved.

 

Jason Reid Saladino and George G. Elkin are Registered Representatives offering Securities through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory products/services are offered through American Portfolios Advisors Inc., a SEC Registered Investment Advisor. G.R. Reid Wealth Management Services, LLC is not a registered investment advisor and is independent of American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. Independent Portfolio Consultants is an independent financial consulting firm and is not affiliated with
American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. does not offer tax advice. Please consult with your tax advisor.

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