The Jacobs Financial Group

Tax Tips for 2012



When reviewing the impact of taxes on your investments, it is important to understand that many items currently in the federal tax code are scheduled to expire after December 31, 2012. Although future actions to amend tax rules are anyone’s guess, keeping abreast of developments in this area may be to your advantage. Consider the following when making decisions about your investments during 2012.

• When taking capital gains, make them long term. Legislation passed by Congress in 2010 continues the 15% tax rate on long-term investment gains, those generated on investments held for more than one year, through December 31, 2012. In contrast, short-term capital gains on investments held for one year or less are taxed as ordinary income, where marginal tax rates currently can be as high as 35%, depending on how much you earn.

• Tax rates on qualified dividends are subject to change. Current tax rules maintain the favorable 15% tax rate on qualified dividends through December 31, 2012. Although dividends are not guaranteed, an allocation to dividend-paying investments may provide an ongoing source of income that can cushion the ups and downs of capital gains and losses. The opportunities are plentiful: As of February 2012, 395 of the 500 companies within the S&P 500 paid a dividend.

• Accelerate activities that generate higher taxes. The top four federal income tax rates will be maintained at 25%, 28%, 33%, and 35% through December 31, 2012. If you are considering an activity that is likely to result in a bump in your income or a federal tax payment, you may want to complete it while the lower rates remain in effect. Examples could include converting a traditional IRA to a Roth IRA and selling real estate or a business that has appreciated significantly in value.

• Escalate gifting strategies. Through December 31, 2012, estates valued at more than $5.12 million are subject to a federal estate tax rate of 35%. In addition, the tax code “unified” the estate tax and the gift tax, permitting an individual to gift $5.12 million between now and December 31, 2012, without triggering the federal gift tax. Rules relating to estate planning are complex, so be sure to seek counsel from a qualified attorney before taking action.

• Capitalize on tax-advantaged accounts. By contributing regularly to an IRA, and keeping the money invested until qualified withdrawals are made, you can benefit from tax-free compounding. With a traditional IRA, qualified withdrawals after age 70½ are taxed as income. In certain instances, if investors adhere to income thresholds established by the Internal Revenue Service, contributions may be tax deductible. With a Roth IRA, contributions are never tax deductible but qualified withdrawals after age 59½ are tax free. Maximum contributions for either the 2011 tax year (must be made by April 15, 2012) or the 2012 tax year (must be made by April 15, 2013) are $5,000 per taxpayer, plus an additional $1,000 catch-up contribution for those aged 50 and older.

There may be additional items unique to your situation, but these tax moves can help you make the most of your hard-earned dollars during 2012.

April 2012 — This column is produced and is provided by The Jacobs Financial Group. (03-12)

Understanding Your Fiduciary Responsibilities: An ERISA Primer

Regulatory complexity and increased scrutiny on compliance arguably has made the task of retirement plan fiduciaries harder today than ever before. Many employers and their delegates may not have a full understanding of their roles and responsibilities to the plan and its participants. For those newly stepping into a role of plan governance or for those who need a refresher on how their plan should be administered, here is an overview of key considerations.

ERISA: The Letters of the Law
Qualified workplace retirement plans — such as 401(k) plans — are governed by the Employee Retirement Income Security Act (ERISA). ERISA mandates that a plan fiduciary must fulfill four primary responsibilities:

• To act solely in the interests of plan participants and beneficiaries.
• To do so with the care, skill, and diligence characteristic of a “prudent” person familiar with such matters.
• To diversify plan investments, with exceptions for investments in company stock.
• To comply with the written plan document.

Focus on Investments

Implicit in the ERISA guidelines is the need for sponsors to monitor all investment options, not just company stock. While ERISA does not specifically define what type of monitoring practices should be employed, many experts recommend that plan fiduciaries should review each investment option at least once per quarter to make sure that it remains a potentially appropriate option for participant contributions. Details of such monitoring procedures should be spelled out in the plan’s investment policy documents. The ongoing review should typically resemble the process employed for investment selection and take into account the following considerations.

• A comparison of recent and rolling performance data, relative to an appropriate peer group and industry index.
• A comparison of fees and expenses, relative to an appropriate peer group.
• An assessment of risk-adjusted performance relative to a relevant peer group.
• The significance of changes to a portfolio management team.
• The significance of changes to investment strategy (e.g., has style drift occurred?).
• Whether investment options offered by the plan complement the plan’s stated investment strategy.
• Whether there has been a significant increase or decrease in the plan’s fees and/or assets under management.

Of course, these initiatives may prove relatively useless in court if they remain undocumented. For that reason, the individuals or committees responsible for such tasks should make every effort to keep detailed minutes of their discussions and decisions.

Make Participant Communication a Priority

In addition to “back office” oversight, plan sponsors are also advised to communicate clearly, honestly, and frequently with plan participants. Under normal circumstances, those communications might address a wide array of topics — such as how the plan works, how to calculate a savings goal, and how to arrive at realistic investment expectations — as well as basic educational themes, such as understanding asset allocation and investment risk.

But when volatility negatively influences the value of specific investment options — particularly employer stock — it may be appropriate to issue a message from company management explaining the current situation and reinforcing the need to maintain a long-term, diversified investment strategy.

Keep in mind that a company cannot give participants more information about a specific security than they would be allowed to give to other shareholders. Also, make sure that participant communications do not contain any information that could be perceived as erroneous, inconsistent, or promissory in nature.
April 2012 — This column is produced and is provided by The Jacobs Financial Group. (02-12)

Make a Plan to Reduce Your Debt


The recession — and subsequent slow recovery — has caused millions of Americans to focus even more closely on living within their means. If you are ready to face up to your own financial realities, one crucial step is to set out a plan of action. Here are some key considerations to keep in mind.

Keep Track of Your Spending
It’s hard to reduce your spending if you don’t have a good idea of how much you are spending. Keep track of your typical monthly expenses for three months to find out where your money is going. To get an even more realistic idea, factor in some unexpected expenses — such as auto and home repairs. Once you have a record of your spending, compare your average monthly outlay with your monthly income. If you have a surplus, this is the amount you can apply each month to paying down debt and building savings. If you have a shortfall, you’ll need to examine your expenses more closely to see what you can potentially cut back or cut out.

Keep Saving
One way to establish good saving habits is to make saving even easier than spending. A handy tip is to set up separate savings accounts with separate goals attached to them. Here are three suggestions that can help you better allocate your savings.

• Emergency Account: Your goal for this account should be to build up at least three to six months of living expenses. This way, if you lose your job or need a lump sum to pay for a significant expense, you may not have to tap into your other savings or ring up more debt.

• Family Account: This account can help fund your children’s school expenses (such as class trips and team uniforms) or vacations.

• Investment Account: This account should be reserved for general or long-term saving goals. Hopefully, you already have a retirement savings account (either through your workplace or on your own) and perhaps a college savings plan. But having another account to save for other longer-term goals — maybe to start your own business or remodel your home — can be a smart move.

Keep a Tight Watch on Your Credit Cards
If you’ve accumulated significant credit card debt, you’ve first got to stop the bad behavior. Paying off debt is easier once you stop using your credit cards.

• Pay off your highest interest credit card debt first, making sure you avoid the “minimum balance trap.”  Paying more than the minimum can make a big difference.

• Consolidate your debt by transferring outstanding balances to lower-rate cards. If you don’t want to transfer your balances, you may be able to get your current credit card company to match the interest rate of a competitor.

• Cancel all cards except for the one that offers the lowest interest rate.

Finally, set up a realistic payment timetable and stick with it. If you have trouble keeping pace, talk to a professional. The counselors at the nonprofit National Foundation for Credit Counseling can help develop a more structured plan for you. To find the nearest location, call 800-388-2227 or visit http://www.nfcc.org.

April 2012 — This column is produced and is provided by The Jacobs Financial Group. (01-12)

Finding Benefits Without an Employer

Although employment trends have improved recently, there remain millions of people who work part time, are employed in temporary jobs, or are self-employed, frequently without employer-sponsored benefits.  This situation presents a challenge when planning for retirement, health insurance, and other areas. But with careful planning, you may be able to continue investing for your later years, paying for medical expenses, and making progress in other areas of your financial life.

Medical Matters

If you find yourself without employer-sponsored insurance, consider whether you may be able to explore the following options. Keep in mind that your health status and your age will influence whether certain plans are available to you and how much you will pay. Regardless of where you obtain insurance, you are likely to pay more when compared with an employer-sponsored plan and your coverage may be less comprehensive.

Arrange to go on a partner’s plan if you are in a long-term relationship. Increasingly, coverage is made available to unmarried partners as well as to spouses.

• Explore whether your state makes a plan available to individuals who meet certain qualifications, such as income thresholds.

• If you are a union member, contact your union to find out about medical insurance options.

• www.aarp.com/healthinsurance presents insurance options and potential discounts on medical services for members aged 50 and older. Note that the insurance products are not available in all states.

• If you are self-employed, consider joining a chamber of commerce or other business organization that offers a group plan to members.

Retirement
You can continue investing for retirement even if you do not have access to an employer-sponsored plan.

• Maintain an IRA. The maximum annual contribution is $5,000, plus an additional $1,000 for those aged 50 and older. Anyone with earned income can contribute to a traditional IRA. But you must begin taking required minimum distributions (RMDs), which are taxable, after age 70½. To contribute to a Roth IRA, you are required to meet income thresholds established by the IRS, but RMDs are not mandatory.2

• When launching a small business, such as yourself and one other employee, consider contacting a financial advisor who markets independent 401(k) plans. This strategy may help you stay on track when building a retirement nest egg.

• Review assets in retirement plans you may have with former employers. When deciding how to manage these assets, be sure you understand the rules associated with the plan. By law, you are able to roll over assets from a 401(k) plan to a rollover IRA. A direct rollover, in which the money goes directly to the firm managing the rollover IRA, preserves the tax-deferred status of your assets. Try to avoid a nonqualified withdrawal, which is taxable and may impact your ability to save for retirement. Rules associated with a defined benefit plan, such as a pension, may differ.

You may have to do a bit of research to find medical and retirement benefits that are suitable for your situation. With some legwork, you may encounter success.

April 2012 — This column is produced and is provided by The Jacobs Financial Group. (03-12)