Khaas Baat : A Publication for Indian Americans in Florida



There are several reasons why people buy annuities. This insurance-based financial vehicle can provide many benefits that retirement investors might want. Deferral of taxes is a big benefit, and so is the ability to put large sums of money into an annuity, more than allowed annually in a 401(k) plan or an IRA. Annuities offer flexible payout options that can help retirees meet their cash-flow needs. They also offer a death benefit; generally if the contract owner or annuitant dies before the annuitization stage, the beneficiary will receive a death benefit at least equal to the net premiums paid. Annuities can help an estate avoid probate; beneficiaries receive the annuity proceeds without time delays and probate expenses. One of the most appealing benefits of an annuity is the option for a guaranteed lifetime income stream.

When you purchase an annuity contract, your annuity accumulates tax deferred until you start taking withdrawals in retirement. Distributions of earnings are taxed as ordinary income and may be subject to tax penalties if taken prior to reaching age 59½.

In Florida, annuities are considered an exempt asset under bankruptcy proceedings and creditor collections. This means that creditors may not attach liens or attempt collections on assets or income created by an annuity contract.

Fixed annuities pay a fixed rate of return that can start right away (with an immediate fixed annuity) or can be postponed to a future date (with a deferred fixed annuity). Although the rate on a fixed annuity may be adjusted, it will never fall below a guaranteed minimum rate specified in the annuity contract. This guaranteed rate protects owners from periods of low interest rates. A fixed annuity also offers protection from lawsuits. In Florida, fixed annuities are generally not liable to attachment in favor of any creditor of the person insured under the contract.

A fixed-indexed annuity might be worth considering if you want to participate in the potential returns of a market-driven investment. The performance of fixed-indexed annuities is tied to an index (for example, the Standard & Poor’s 500). They provide investors with an opportunity to earn interest based on the performance of the index. If the index rises during a specified period in the accumulation phase, the investor participates in the gain. In the event that the market falls and the index posts a loss, the contract value is not affected. The annuity also has a guaranteed minimum rate of return, which is contingent upon holding it until the end of the term.

Variable annuities offer fluctuating returns. The owner of a variable annuity allocates premiums among his or her choice of investment subaccounts, which can range from low risk to very high risk. The return on a variable annuity is based on the performance of the subaccounts that are selected. These subaccounts fluctuate with changes in market conditions. Any guarantees are based on the claims-paying ability of the issuing insurance company. The investment return and principal value of an investment option are NOT guaranteed. When a variable annuity is surrendered, the principal may be worth more or less than the original amount invested.

Gaining FDIC-like protection for annuities
Recent legislation in Florida raises the FLAHIGA (FLAHIGA is the state mechanism for taking over life, health, or annuity claims of insolvent insurers) limits on cash values of annuities from $100,000 to $250,000. This levels the playing field for investors who want alternatives to putting their money in the bank. Investors of deferred annuity contracts now have the same protection as they would when depositing money in an FDIC-insured bank.

Satya Shaw, CPA, MBA, of Shaw Tax Advisory Group is an investment advisor representative. He can be reached at (o) 813-960-7429, (c) 901-550-2920 or email satyashawcpa@aol.com


Check your mutual funds for real DIVERSIFICATION

By Kamlesh H. Patel, CPA

Even if you aren’t an investment expert, you probably know that one of the main benefits of owning a mutual fund is “diversification.” And like many financial terms, there’s more to “diversification” than first meets the eye.

For example, many mutual fund investors believe that they are well-diversified, even though they aren’t. Consider Pat, who owns a U.S. large-cap value fund, a technology fund, and a worldwide fund.

At first glance, these appear to be three distinct funds in three unrelated categories. Yet underneath the surface, there could be some big surprises. Many “worldwide” funds are heavily invested in U.S. stocks, while technology funds can have significant foreign holdings.

To further complicate matters, the definition of a “value” fund can be quite fuzzy, and it wouldn't be surprising to find several high-flying technology stocks in Pat’s large-cap value fund. In other words, it’s possible that all three funds own many of the same stocks or similar stocks in the same industries. What looks like a diversified portfolio could actually suffer from a serious case of fund “overlap.”

What is the best protection against fund overlap? Whether you are thinking about buying a fund for the first time or you already own several of them, it pays to do a little digging. All mutual funds are required to publish a list of their complete holdings at least twice a year. Get the most recent portfolio list for each fund that you’re interested in, and compare them for overlap. Although published information can sometimes be several months old, it’s still the best way to determine just how much diversification your fund portfolio really has.

DON’T OVERLOOK THE health care credit for 2010
Under the new health care legislation, the Patient Protection and Affordable Care Act of 2010, a small business may be entitled to a special tax credit to offset rising health care costs. Unlike most other provisions in the new law, the credit is available to qualified employers this year. The IRS recently issued guidance on the methodology for claiming the credit.

Current rules. For tax years beginning in 2010, a small employer is eligible for the credit if it makes contributions to purchase health insurance for its employees. A “small employer” is generally defined as an employer with fewer than 25 full-time employees with annual wages averaging less than $50,000. The employer must cover at least half of the cost of health care coverage for workers based on its single rate.

The credit is equal to 35 percent of the employer’s contributions (25 percent for tax-exempt organizations) in any tax year beginning in 2010, 2011, 2012 or 2013. But the full credit may be claimed only if the employer has ten or fewer full-time employees with average annual wages of no more than $25,000. Otherwise, the credit amount is gradually phased out.

According to the new IRS guidance, the maximum health insurance credit is reduced by 6.667 percent for each full-time employee over 10 employees. The credit is also reduced by 4 percent for each $1,000 that average annual wages paid to full-time employees exceeds $25,000.

In the future. For tax years beginning after 2013, the credit will be available for just a two-year period and only if the health insurance is purchased through a state-operated exchange. However, the credit percentage is increased to 50 percent of a qualified employer’s contributions (35 percent for tax-exempt organizations).

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



By Dev Goswami, CFP®

Make sure your health care directives work where you’re going: A health care directive – also called an advance directive – specifies your medical wishes in case you’re incapacitated. They come in two forms: the living will and the power of attorney for health care. The living will indicates specific wishes about medication and life-support treatment if you’re incapacitated, and you need to refer to your own state laws on how these documents need to be written. The power of attorney for health care – also called a durable power of attorney for health care – also specifies your wishes for treatment but allows you to designate a specific person to act in your stead if you are incapacitated. You should check with the hospital where you’ll be doing the procedure as well as your attorney about what documentation will be effective where you’re going.

Pick your representatives wisely: Your health care power of attorney may or may not be the person with the power to disburse your assets if you’re incapacitated, but that person should have their name on a joint checking account in case bills need to be paid. Also, make sure you have a line of credit established that your designated representative can access in case of emergency. Make sure all these sources of cash can flow easily to the foreign country where you’re recovering.

Update your estate matters: No one expects they’ll die in the hospital, but it’s necessary that your will be up to date so your spouse or designated executor can step in immediately to handle your affairs. Again, it makes sense to see whether anything needs to be amended based on out-of-country care.

Have an up-to-date disaster plan: If you are incapacitated or die, it makes sense to have all critical papers and data in one place so your health care power of attorney, your executor or a trusted friend or family member can access them. Include the following with an index:

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