The Jacobs Financial Group

Strategies for Smart Retirement Planning

A study conducted by the Employee Benefit Research Institute estimated that the average American worker will face a retirement savings shortfall of more than $47,000.  How can you avoid a similar fate?

Some factors that influence your retirement savings results, such as the types of investments available to you through your plan and the performance of the financial markets, can’t always be controlled. But there are some factors you can influence that can help keep your portfolio on track.

Step 1: Stay invested.
It’s not easy to see your account value decrease after a decline in the stock market, particularly after a steep, sudden drop of 10% or more. But one of the dangers of cashing out is missing a potential market rebound. Trying to “time” the market is a strategy even the most-seasoned financial professionals have difficulty mastering. It can also lead investors into the trap of “chasing gains”; that is, moving your money from one investment that’s lagging into another one that’s currently achieving better performance.

Step 2: Regularly monitor your investment mix.
One of the benefits of a diversified portfolio is balance. If one type of investment is experiencing losses, another type may be earning gains. Over time, these gains and losses may cause your asset allocation to skew away from your target mix.  Or your tolerance for risk may evolve over time. Lifestyle changes can also necessitate a readjustment to your allocation. That’s why it’s important to monitor your mix and make adjustments when necessary.

Step 3: Increase your savings rate.
Perhaps the most important way to help fund your future is to sock away as much as possible. Finding the extra money to invest can be tough — you’ve got plenty of expenses to worry about today without the added anxiety of worrying about tomorrow. But every dollar you can spare can make a difference. Whether retirement is just around the corner or 30 to 40 years away, regularly setting money aside — particularly in a tax-deferred vehicle such as a 401(k) or tax-exempt account like a Roth IRA — can often be the smartest move you can make.

2012 Retirement Plan Account Limits

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

Inheriting a Loved One’s Retirement Assets

If you recently inherited retirement assets from a deceased loved one, it is important to pay attention to IRS rules that govern this type of bequest. Your options in managing this money typically depend on your relationship to the deceased and the type of retirement account (401(k) or 403(b) plan, IRA, or annuity) that you inherited.

Employer-Sponsored Plans
When inheriting a deceased spouse’s assets within an employer-sponsored plan, you are not required to pay federal estate or income taxes if the assets are left intact within the estate. After age 70½, you must begin required minimum distributions (RMDs) based on your life expectancy. The formula for calculating the RMDs, which are taxed as ordinary income, is available in IRS Publication 590. This withdrawal schedule typically is preferred to cashing out the entire bequest at once, which is likely to trigger higher tax payments.

If the deceased was not your spouse, the plan’s rules generally determine your course of action. Depending on the plan, you may have one or more of the following options: Leave the money in the plan, transfer the money to an IRA created for this purpose, or elect a cash distribution.

Some employer plans offer nonspousal beneficiaries the option of completing a trustee-to-trustee transfer from an employer-sponsored plan to an IRA established for this purpose. The nonspousal beneficiary is required to take annual distributions based on the beneficiary’s life expectancy. Note that in this type of scenario, the IRA is opened in the decedent’s name for the beneficiary’s benefit, and assets transferred to the IRA cannot be comingled with other IRAs that the beneficiary may have established.

In other instances, employer plans can default to a five-year payout rule and require nonspousal beneficiaries to empty the account within five years of the death of the deceased. Distributions taken by nonspousal heirs are taxed as ordinary income.

Before taking any action, it is critical to determine the rules of the deceased’s retirement plan and consult a financial advisor or a tax advisor to make sure that you avoid unnecessary taxes.

IRAs
When inheriting a traditional IRA from a deceased spouse, you may designate yourself as the account owner and treat an inherited IRA as your own. This means you can transfer the assets to an existing IRA. These transfers typically do not trigger tax payments as long as you follow the rules for trustee-to-trustee transfers. You may also begin taking distributions, which are taxed as ordinary income. With a traditional IRA, after age 70½, you are mandated to take annual RMDs, which are based on your life expectancy and are taxed as ordinary income.

If the deceased was not your spouse, you cannot transfer assets within an inherited IRA to your own existing IRA. Instead, you have two options: You may take all distributions within five years of the decedent’s death or take annual distributions determined by the life expectancy of you or the decedent, whichever is longer.

Annuities
If you receive a survivor annuity, the tax status of periodic payments to you is determined by how much the decedent paid for the annuity contract, which is known as the cost basis. If the decedent did not pay for the contract (for example, if it was provided by an employer), periodic payments to you are taxable. Assuming the deceased had a cost basis, the amount up to the cost of the contract is not taxable, but amounts in excess of the deceased’s cost are taxed as ordinary income.

Because determining the tax status of annuities and other inherited retirement assets can be complicated, you may want to consult an estate planning attorney or a financial advisor to answer any questions you may have.

July 2012 — This column is produced and is provided by The Jacobs Financial Group. (06-12)

Analyzing Your Cash Flow

As any small-business owner knows, maintaining a positive cash flow is the essence of staying on course with your objectives. Conducting a periodic cash flow analysis will help you determine whether your business generates enough cash to meet your obligations and how cash outflow compares to incoming revenue from sales. Cash flow analysis also is used to forecast changes in your receipts and disbursements and to gauge the effects of those changes on future cash requirements.

The Cash Flow Statement
The cash flow statement reports your business’s sources and uses of cash during a specified accounting period (e.g., monthly, semiannually, or annually). When used in conjunction with an income statement and balance sheet, the cash flow statement provides a comprehensive picture of your company’s liquidity. The cash flow statement adheres to Generally Accepted Accounting Principles (GAAP) and is divided into three fixed categories:

• Operating Activities: The change in cash resulting from routine activities that either generate or require cash. This includes incoming receipts (cash and checks) from the sale of goods and/or services, as well as interest and dividend income. Operating activities also include outgoing payments for materials, employee salaries, taxes, insurance, loan repayments, and rent. The net amount of cash from (or used by) operating activities is the most important figure on the cash flow statement.

• Investing Activities: The change in cash resulting from actions or events that involve the purchase or sale of company assets (e.g., securities, land, buildings, or equipment). Investing activities also include paying or collecting on loans.

• Financing Activities: The change in cash resulting from payments to or receipts from suppliers of money to the company. For instance, money borrowed in the form of a loan represents cash receipts, while the repayment of loans or dividends to investors represents cash payments.

What Do the Numbers Mean?
When examining a cash flow statement, there are a few questions to examine closely:

• Has the company generated cash from operating activities? If not, look at which components of your working capital ( current assets minus current liabilities) are using the most cash and try to determine what might be happening. For instance, if your company recently bought out another company’s inventory, the acquisition would explain the additional cash needed. While cash expenditures such as this are not negatives, it is critical to monitor where cash is going.

• Has there been a significant change in incoming or outgoing cash flow from investing activities? Do the numbers shed light on problems that may be developing within the business? For example, if capital expenditures have been reduced, might it be the result of bank constraints or pressure from creditors?

• How much debt has been paid or borrowed? This question reveals unusual financing activities that have not been highlighted elsewhere in the analysis.

In the final analysis, the cash flow statement provides a valuable perspective on your overall financial picture.

July 2012 — This column is produced and is provided by The Jacobs Financial Group. (06-12)

Divorce and Your Finances

Divorce can be a complicated and challenging process in which details are easily overlooked. It is important to know the laws that shape divorce proceedings and to understand the impact they have on your assets.

Dividing the Assets
Typically, everything you and your spouse acquired from the day you were married is subject to division. Exceptions include individual inheritances, gifts to an individual spouse, and assets acquired before marriage. When assets are divided, the court considers each spouse’s earning potential, the length of the marriage, and each spouse’s contribution to building household assets.

The exception to this are the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Under the laws of these states, almost all assets are divided equally.

Dealing with Debt
Do not assume that a divorce will erase any debt. If you live in a community property state, debt, like your assets, will be divided with your former partner. You will be responsible for half of all debt in jointly held accounts and, in some cases, half of a former spouse’s debt as well.

If you do not live in a community property state, you remain responsible for your individual debt (but not your spouse’s) and any debt in jointly held accounts. Many couples include debt payment as part of the settlement. You may want to consider taking on the responsibility for a portion of the debt yourself, and using your portion of the divorce settlement to reduce it.

If you and your spouse own a home that has appreciated in value, consider whether you want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.

Your Retirement Assets
Money in your 401(k) or pension plan may legally be divided during a divorce. The divisible amount begins to accumulate on the day you are married and ends on the day you are divorced.

To claim a share of a spouse’s 401(k) or pension plan benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse’s plan sponsor before distributions are completed. You and your spouse have the option of deciding to not divide retirement plan assets. If you and your spouse elect this option, it may be beneficial to make this agreement in writing and include it as part of the settlement to prevent the courts from declaring the money divisible.

Estate Planning
You may want to review your will, or have one created if you currently do not have a will. It may be beneficial to review and amend your estate plan at the same time you commence a divorce proceeding. Also review beneficiary designations for pensions, 401(k) plans, and life insurance policies. Federal law requires a spouse to be the sole beneficiary of pension or 401(k) benefits unless the spouse waives that right in writing.

If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you will not need to revisit the proceeding at a later time.

July 2012 — This column is produced and is provided by The Jacobs Financial Group. (06-12)