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February 28, 2006

"The 2006 Entertainment Book" is Half Price in March

The Entertainment Book is offering half-price off for the entire month of March, 2006. This coupon book has long been one of our favorite ways to save money but now it just got even better. If you dine out at all, sit-down or fast-food restaurants, you will get your initial purchase price back and then start showing a profit after the first couple of times you use it. The coupon deals offered are zip code specific so you will definitely find places to use it in your area. In addition to restaurant savings, you can also save money on entertainment such as movie tickets, shopping deals, and even travel savings. We always keep the book in our car so it is readily available for those unplanned dining, entertainment, or shopping excursions. Saving money on your everyday purchases is just as important as making money, so give it a try now! To find other coupon deals and ways to save money, visit our Expenses Center at ManagingMoney.com.

February 17, 2006

Countrywide Bank Raises Money Market Rates

Countrywide Bank raised their Money Market Interest Rate today to 4.25% APY for balances of $50,000 or more and to 4.01% APY for smaller balances. This interest rate increase follows the leads of ING Direct and Emigrant Bank who both raised their rates earlier this month. In addition to competitive Money Market rates, Countrywide also offers competitive Certificates of Deposit. They currently have a $10,000 minimum 4.65% 6-Month CD and a 5% 24-Month Certificate.

February 14, 2006

The Basics of Credit Scores

When lenders evaluate a credit application, they usually request both your credit report and your credit score, which is a mathematical calculation based on information on your credit report. The score is intended to rate your credit risk, although other factors, such as your income, length of employment, and years resided in your home are also considered.

Credit scores are often referred to as FICO scores, since they are produced from software developed by Fair, Isaac and Company (FICO). While all of the major credit reporting agencies use FICO scores, your score from each agency can differ because information on your credit report differs by agency.

FICO scores range from 300 to 850, with higher scores indicating lower levels of credit risk. A score over 620 is considered creditworthy, while a score of 670 or higher is considered excellent. Often, the interest rate offered by lenders will be tied to your FICO score, with a higher score receiving a lower interest rate. The major factors affecting your FICO score include:

Payment track record — This is the largest component of your score, comprising 35% of the total. Lenders like to see that you’ve paid all your bills on time for the past seven years.

Outstanding credit — Comprising 30% of your score, this is a measure of your credit utilization ratio, or how much of your available credit is outstanding.

Credit history — This relates to how long a credit history you have with various lenders and accounts for 15% of your score.

Credit inquiries — Approximately 10% of your score is based on the number of credit inquiries by lenders in recent months.

Debt mix — The remaining 10% of your score is based on whether you have incurred and made timely payments on a variety of types of debt, such as credit card debt, a car loan, or a mortgage.

Typically, scores of 720 and above receive the best deals on interest rates. Based on the way the FICO score is calculated, there are strategies to improve your score if you’re not at that level:

Make sure to pay all your bills on time. Check your credit report to see if there are any late notices. If so, and you have a good credit record, ask the lender to remove the notice.

Reduce your credit utilization ratio. You receive a better score when your outstanding debt as a percentage of your available debt is lower. Make sure your credit utilization never goes over 50%. If you can’t pay down your debt, ask your lender to increase your available credit. This will have the same result as paying down your debt, but make sure you aren’t tempted to use that additional credit.

Don’t close every credit card you don’t use. This has the result of increasing your credit utilization ratio because you have less available debt. However, if you have too many credit cards, typically over five, close the newest ones. Too many credit cards make lenders uneasy.

Minimize requests for additional credit. Inquiries regarding additional debt appear in your credit file and hurt your credit score.

For further information on managing your personal credit, from understanding your credit scores to purchasing your credit report, go to ManagingMoney.com’s Loans and Credit Center. Our Loans and Credit Center has an excellent selection of items to help you manage your credit such as: Free credit information, Credit Scores and Reports available for purchase, Credit Counseling Services, and Credit Repair.

Should You Elect Early Social Security Benefits?

One of the most critical decisions regarding Social Security benefits is deciding when to start those benefits. The age for full Social Security benefits is increasing from 65 to 67 for individuals born after 1937. You can still elect benefits at age 62, but the permanent reduction in benefits is higher.

For someone who dies at their normal life expectancy, these reductions would result in the same dollar amount of benefits as someone who starts benefits at full retirement age. However, if you live beyond your normal life expectancy, you will receive less in total benefits by retiring at age 62. Also, since your later earning years are typically higher than your earlier earning years, working those extra three to five years will likely increase the amount of your Social Security benefits.

Carefully consider the advantages and disadvantages before electing benefits at age 62. While it may seem attractive to start retirement at age 62, you are taking a substantial, permanent reduction in your Social Security benefits to do so. And since Social Security benefits probably won’t be sufficient to maintain your current standard of living, you should first decide whether you have sufficient retirement resources to even consider retiring at age 62. If you will need to continue working, keep in mind that between the ages of 62 and full retirement age, you lose $1 in benefits for every $2 earned over $12,480 in 2006. Thus, if you expect to earn wages substantially over this limit, you may want to delay your Social Security benefits.

Another consideration is whether your spouse’s Social Security benefits will be based on your benefits, especially if your spouse is much younger. While you are alive, your spouse is entitled to the larger of 100% of his/her benefit based on his/her earnings or 50% of your benefit at full retirement age. However, if you elect benefits before full retirement age, your spouse’s benefit will be reduced by a higher percentage than your benefits were reduced. After your death, your spouse receives 100% of your benefit providing he/she is over the full retirement age. If not, your spouse receives between 71.5% and 100% of your benefits. Thus, the larger your benefit is, the larger your spouse’s benefit will be after your death.

February 13, 2006

How Useful Are Financial Rules of Thumb?

Financial rules of thumb are designed to give you quick guidelines for your finances. However, you shouldn’t follow them without giving some thought to your personal circumstances. Some of the more common financial rules of thumb include:

Save 10% of your gross income. While this will give you a good start, it’s typically the minimum, not the maximum, you should be saving. Analyze how much you’ll need for your financial goals, and then decide how much to save every year.

Plan on spending 80% of your preretirement income during retirement. This may be true if you don’t plan to be very active during retirement, but more and more people expect retirement to include extensive travel and expensive hobbies. On the other hand, if you’ve paid off your mortgage and your children have finished college, you may need less than this. Review your individual situation and desires for retirement to determine how much you’ll need.

Set the percentage of stocks in your portfolio to 100 minus your age. With increased life expectancies, this can result in your portfolio being too heavily weighted in income investments. Set your asset allocation based on your risk tolerance and time horizon for investing. Even after retirement, stocks may comprise a significant portion of your portfolio.

Keep three to six months of income in an emergency fund. While an emergency fund is a good idea, how much to keep in that fund will depend on your circumstances. You may need a larger reserve if you are the sole wage earner in the family, work at a seasonal job, own your own company, or rely on commissions or bonuses. A smaller reserve may be required if you have more than one source of income, can borrow significant sums quickly, or carry insurance to cover many emergencies.

Pay no more than 20% of your take-home pay toward short-term debt. Once considered a firm rule by lenders, you can obtain loans even if you exceed this amount. However, don’t become complacent if you meet this rule of thumb, since a large percentage of your income is still going to pay debt. Try to reduce your debt, or at least reduce the interest rates on that debt.

Keep your mortgage or rent payment to no more than 30% of your gross income. While you can obtain a mortgage for more than that, staying within this rule will help ensure you have money to devote to other financial goals.

Obtain life insurance equal to six times your annual income. Different individuals require vastly different amounts of insurance, depending on whether one or both spouses work, whether minor children are part of the family, or whether insurance is being obtained for other needs, such as to fund a buy/sell agreement or to help pay estate taxes. Thus, you should determine your precise needs before purchasing insurance.

Most financial rules of thumb should not be followed without first considering your individual circumstances.

Estate Planning for Retirement Accounts

For many people, retirement accounts, including 401(k) plans and Individual Retirement Accounts (IRAs), are their most significant assets. While you may think you’ll need every bit of money in those accounts for your retirement, what would happen if you die at an early age? You should include them in your estate plan so heirs inherit them with minimum estate and income tax effects. Some strategies to consider include:

Review your beneficiary designations. These assets are distributed based on beneficiary designations, not your will or other estate planning documents. Thus, you should name primary as well as contingent beneficiaries. Make sure you understand how your assets will be distributed if a primary beneficiary dies before you do. For instance, if your primary beneficiaries are your children and one child dies before you, do you want that child’s share to go to that child’s children or to your remaining children? Review your beneficiary designations after major life changes such as: marriage, divorce, or the birth of a child.

Consider rolling your 401(k) plan assets over to an IRA. Your heirs have more flexibility when making withdrawals from an IRA. With a 401(k) plan, heirs typically must withdraw all funds within five years, while withdrawals can be made over their life expectancy with an IRA. As long as the rollover is handled properly, there are no income tax ramifications of the rollover.

Split an IRA when there are multiple beneficiaries. When there is more than one non-spousal beneficiary for an inherited IRA, distributions must be taken over the oldest beneficiary’s life expectancy. By splitting the IRA into separate accounts, each beneficiary can take distributions over his/her life expectancy. Separating accounts is especially important when one of the beneficiaries is not an individual or qualifying trust, such as a charitable organization. If you die before required distributions begin at age 70 ½, the entire balance must be paid out in five years. If you die after required distributions begin, the balance must be paid out over your remaining life expectancy. When the account is split, each individual beneficiary can take distributions over his/her life expectancy.

Make sure your spouse understands the rules for inheriting your IRA. Your spouse should be careful not to roll the balance over to a spousal IRA too quickly. Once the balance is rolled over, some planning opportunities are lost. For instance, spouses under age 59 ½ can make withdrawals from the original IRA without paying the 10% federal income tax penalty. Once the account is rolled over, withdrawals before age 59 ½ would result in a 10% federal income tax penalty. Also, spouses who are older than the original owner can delay distributions by retaining the IRA. The surviving spouse does not have to take distributions until the deceased spouse would have attained age 70 ½, even if the surviving spouse is past that age. The spouse may want to disclaim a portion of the IRA, which must be done within nine months of the original owner’s death. If the account is rolled over, that disclaimer can’t be made. Thus, it is usually best for the surviving spouse to determine his/her financial needs before rolling over the IRA balance.

Consider rolling your traditional IRA balances over to a Roth IRA. While you must meet income eligibility requirements to do so and pay income taxes on the taxable amount of the conversion, those taxes can be paid with funds outside the IRA. That preserves the IRA’s value and reduces your taxable estate. Then, your heirs will receive qualified distributions free from income taxes, including any future appreciation on the balance.

Teach your heirs the benefits of stretching out withdrawals from inherited IRAs. After an IRA is inherited, a traditional deductible IRA still retains its tax-deferred growth and a Roth IRA retains its tax-free growth. Your heirs should extend this growth for as long as possible. If the IRA has a designated beneficiary, which includes individuals and certain trusts, the balance can be paid out over the beneficiary’s life expectancy. Spouses have additional options which can stretch payments even longer. Your heirs can also elect to take the entire balance immediately, paying any income taxes due. Make sure to stress to heirs the importance of taking withdrawals as slowly as possible.

February 12, 2006

Dealing with Asset Basis

Deciding whether you should give a significant asset to an heir during your life or after your death has typically involved weighing potential estate tax costs against capital gains taxes that would be due when the asset is sold.

You can make annual gifts, up to $12,000 in 2006 ($24,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. There is also a lifetime gift exemption of $1,000,000 ($2,000,000 if the gift is split with your spouse). The basis of any gift made during your lifetime equals your basis plus any gift taxes paid on the gift.

The estate tax exclusion increased from $1,500,000 in 2005 to $2,000,000 in 2006 and will increase again to $3,500,000 in 2009. The estate tax rate is 46% in 2006 and will drop to 45% in 2007. The basis of any asset distributed to heirs after your death is stepped up to fair market value on the date of your death. The significant increase in the exclusion amount means that assets with fairly significant values can be transferred to heirs without paying estate taxes, while still stepping the basis up to fair market value. However, keep in mind that the estate tax will be repealed in 2010, with special rules in effect for basis adjustments for that year. In 2011, the estate tax will be reinstated based on 2001 tax laws.

Thus, when making gifts, you have historically needed to evaluate whether it was better to make the gift after death so your estate will pay estate taxes or during your lifetime so your heirs will pay capital gains taxes when the asset is sold. Now that the estate tax exclusion amount is so high ($2,000,000 in 2006), many individuals do not need to focus on estate taxes. Instead, gifts should be made in a manner that will reduce overall income and capital gains taxes for the family. Some strategies to consider that may help accomplish this objective include:

Transfer low-basis assets after death. When heirs receive an asset that has increased significantly in value after your death, its basis is stepped up to market value. They retain your basis when it is received during your lifetime, so significant capital gains taxes may be due when the asset is sold. However, if you plan to sell the asset in the near future, you should consider the tax impact if you own the asset or your heirs own the asset. Especially if you are going to use the proceeds for your heirs’ benefit anyway, there may be a lower capital gains tax bill if your heirs sell the asset. Capital gains taxes are currently 15%, but taxpayers in the 10% or 15% tax bracket only pay 5%.

Consider using an estate defective trust (EDT) to transfer significant low-basis assets. Once the asset is placed in trust, any income from the asset is allocated to the trust or the trust beneficiaries, who will typically be in a lower tax bracket. However, the asset is still considered part of your estate, so heirs will receive a step-up in basis after your death.

Reevaluate buy-sell agreements for businesses. Often, buy-sell agreements are funded with life insurance. If one owner dies, the other owners use the life insurance proceeds to purchase the deceased owner’s shares. If the life insurance is owned by the company, the proceeds are paid to the company and the remaining owners do not receive a step-up in basis. If each owner owns life insurance on the other owners, the proceeds will be paid to each remaining owner. Those owners can then use the proceeds to purchase shares from the company at fair market value, in essence receiving a step-up in basis.

Review discounting techniques carefully. Many estate planning strategies have involved the use of discounts to reduce the fair market value of the transferred assets. For instance, individuals who transfer noncontrolling interests in businesses, farms, real estate, and other assets may be able to assign a minority interest discount to the gift’s value. Now, as long as the gift won’t result in the payment of gift or estate taxes, your primary goal will be to increase the basis as much as possible.

 

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