AUGUST 2012
Khaas Baat : A Publication for Indian Americans in Florida

Finance

10 Things Professional Women Should Know About Their Financial Future

By SEEMA RAMROOP

  1. Anticipate that you are likely to live a long life. And plan accordingly. In fact, according to U.S. Census Bureau statistics, a woman who reaches age 50 today without serious health problems can anticipate celebrating her 92nd birthday. Women in the United States, on average, will live to reach 81.1 years of age, compared with men’s life expectancy of just 76.2.1 So if you’ve always left money matters to your husband, start learning why you need to know how to manage on your own.

  1. Beware of being overly conservative in your investments. While there is a correlation between your age and the amount of risk you should assume when investing, being too conservative can seriously erode the value of a retirement account. You may need to rely on this money for 30 years or more. That’s why you should think of retirement as a long-term investment. Consider keeping a significant portion of your portfolio in stocks, as long as possible.

  1. Pay yourself first. Invest for your future now. By investing systematically over a period of time, you will be surprised how fast your nest egg can grow. Hypothetically, if at age 25 you began investing about $5,000 per year ($417 per month) and earned an 8 percent return, you could build a nest egg of about $1.3 million at age 65.

  1. Choose an IRA that’s right for you. Take advantage of complimentary IRA and pension calculators, or ask your financial advisor to run a calculator for you, to compare the projected results of contributing to different types of accounts, including transferring assets from a traditional IRA to a Roth IRA.

  1. Fund your IRA, 401(k) or other employer-sponsored program to the maximum. You can build up a good portion of your retirement savings if you contribute the maximum allowable amount into deferred income plans, such as a 401(k). You will you reduce your current taxable income, and the tax-deferred compounding feature of these plans allows you to accumulate more than you would in a comparable account that taxes earnings each year.

  1. Remember this special Social Security tip: Even if you are divorced, you are entitled to half of your ex-spouse’s Social Security benefits if you are 62 or older, were married for at least 10 years and have not remarried.2 A widow, as long as she doesn’t remarry before age 60, is entitled to at least 71.5 percent of her husband’s Social Security benefits. If she waits until full retirement age, she is entitled to 100 percent. For more information on your particular circumstances, call the Social Security Administration at 1-800-772-1213.

  1. If you are employed and decide to switch jobs, check your complete benefits package, including the portability and vesting rules of your retirement plan. The U.S. Bureau of Labor Statistics reports that, on average, working women over age 25 switch jobs every 4.8 years.3 This job-change frequency often limits the growth of retirement plan assets due to vesting requirements typically set at five years.

  1. Investigate your employer’s tuition reimbursement benefits. In the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey, 74 percent of workers said they expected to work for pay in retirement.4 Going back to school to develop “secondary employment skills” or to learn a new field can be a tremendous benefit if you choose to make a career or job change at a later date.

  1. Consider long-term care health insurance. Since the cost of spending a year in a nursing home can exceed $100,000 in some parts of the country,5 and the average duration of care is about three years,6 you could face unplanned expenses of at least $300,000 in retirement.

  1. Plan ahead to make sure you don’t leave everything to Uncle Sam. If you expect to leave something to your heirs, establish an appropriate estate plan. Without proper planning, estate taxes, state taxes and income taxes on retirement plan distributions could reduce your estate substantially. Essentially, your heirs may receive only a fraction of what you’ve worked so hard to accumulate.

  1. Call your financial advisor to discuss your goals. To put build a financial strategy that will help you achieve your ideal retirement, consult with your legal, tax and financial experts regularly.*

1 The World Bank, life expectancy charts, http://search.worldbank.org/data?qterm=life%20expectancy&language=EN.

2 Age 60 if your ex-spouse is deceased, 50 if you are disabled. Dana Anspach, “Key Things to Know About the Social Security Spouse Benefit,” About.com, http://moneyover55.about.com/od/socialsecuritybenefits/a/socialsecurityspousebenefit.htm.

3 Bureau of Labor Statistics of the U.S. Department of Labor, “Number of Jobs Held, Labor Market Activity, and Earnings Growth Among the Youngest Baby Boomers: Results From a Longitudinal Survey,” Sept. 2010. PDF available at http://www.bls.gov/news.release/pdf/nlsoy.pdf.

4 Retirement Confidence Survey, Employee Benefit Research Institute, 2011,

http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4772.

5 Genworth 2009 Cost of Care Survey, page 6. PDF available at http://www.genworth.com/content/genworth/us/en/products/long_term_care/long_term_care/cost_of_care.html.

6 Ibid.

* Bonus step.

Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at Seema.Ramroop@morganstanleysmithbarney.com or call (727) 773-4629.


Accounting

SUPREME COURT UPHOLDS HEALTH CARE LAW

By Kamlesh H. Patel, CPA

In a landmark decision, the U.S. Supreme Court generally upheld the constitutionality of the controversial 2010 health care law. In addition to preserving mandates for health insurance coverage, certain tax provisions will take effect as scheduled in 2013, barring any subsequent legislation. Here’s a summary of the main tax changes for 2013.

Medicare surtaxes: The health care law includes the following two Medicare surtaxes that could affect individual taxpayers:

Flexible spending accounts: Currently, there’s a $5,000 limit on pre-tax contributions to a flexible spending account (FSA) used for dependent care expenses, but there’s no such limit on health care FSAs. The law caps health care FSA contributions at $2,500 starting in 2013.

Medical deductions: For 2012, you may deduct unreimbursed medical expenses in excess of 7.5 percent of your adjusted gross income (AGI). The law raises this AGI floor in 2013 to 10 percent for taxpayers under age 65.

KNOW YOUR TOP TAX BRACKET

Even before completing the forms, you probably have an idea of whether you’ll owe money or can expect a refund when you file your federal income tax return.

But do you know your top tax bracket? If not, you might want to find out. Knowing the rate assessed on your last dollar of taxable income can help you make better financial decisions.

Illustration: You’re wondering how much you’ll save by increasing the pre-tax contribution to your retirement plan. The additional amount invested times your top tax rate provides a quick estimate.

For your personal return, your taxable income will fall into one of six brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. The highest rate that applies to any of your income is called your top tax bracket.

Example: For 2012, a married couple filing a joint federal return with taxable income of $145,000 has a top tax bracket of 28 percent.

Keep in mind, however, that this couple would not owe $40,600 in taxes ($145,000 multiplied by 0.28). That’s because this rate only applies to the income in that bracket. Since the 28 percent bracket starts at income of $142,701 for 2012, the rate is applied to $2,299 of income ($145,000 minus $142,701). Their income below $142,701 is taxed in the three lower brackets – some at 10 percent, some at 15 percent and some at 25 percent.

Why should you care? Because planning might allow you to cut your tax bill. In the above example, strategies such as bunching itemized deductions to reduce your taxable income could save you about $643 ($2,299 multiplied by 0.28) by keeping you out of the 28 percent tax bracket.

CONSIDER GIFTING YOUR WAY TO LOWER TAXES

Congress may eventually agree on what to do with estate taxes. In the meantime, a lifetime gifting program might trim both your estate and income taxes.

The basics. Getting assets out of your estate lowers your estate’s value for estate tax purposes. In general, the rules allow you to give away up to $13,000 per year to any individual free from gift tax. You can make gifts to as many different people as you choose.

Income tax benefit. Once you give property away, the recipient of your gift pays income tax on any income that property generates. Shifting income to family members in a lower income tax bracket than yours reduces income taxes.

Higher limits. The rules let you give away more than the annual $13,000 limit in certain cases.

Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail kpaccounting@verizon.net or kpinsurance@verizon.net

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