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The Inside Story

Fourth Quarter Meeting
The Fourth Quarter of 2005 meeting is our usual year end tax planning meeting. For this session, it is really important that I have a copy of your 2004 Income Tax Return—both Federal and State. It is helpful to have it before the meeting so feel free to send it anytime.

Also, for this meeting please bring the following: most recent pay stubs, information on investments held outside of Schwab, any IRA, pension, or annuity distributions, quarterly taxes paid, charitable gifts, property tax, mortgage interest, auto registration fees, medical expenses, settlement papers on home financing for 2005, any refunds from AZ tax, self-employment expenses and income, and K-1 projections, income from any other sources. Also anything else that may effect your tax situation this year. If there is a question, please bring it!

Saving For Children (and Grandchildren)

Coverdell Education Savings Account – formerly Education IRA
·    Offers investment flexibility, tax deferral and tax exemption.
·    The funds can be used for elementary and secondary school expenses as well as college.
·    The beneficiary can be changed to other family members (including cousins, nieces, nephews or grandchildren) and therefore it is not considered the property of the child.
·    The annual contribution limit is very low - $2,000. (adjusted gross income of $95,000 for a single parent and $190,000 for married parents).

Roth IRA
·    Can be used only if your child has reportable earned income.
·    The Roth can be funded up to the amount of the income or $4,000, whichever is less.
·    The contribution does not have to be the actual money earned; a parent can make a gift of the contribution and the child can use the money for themselves.
·    Withdrawals can be made without penalty from a Roth to pay for educational expenses and although any gains would be taxed as income, the student’s income tax rate would be very low.
·    If the Roth is not needed for college expenses, the child will have a head start on retirement.
·    The contribution amounts can be withdrawn without tax after five years.

Segregated account
·    Save for a child’s benefit in a separate account in the parents’ names.
·    The parents retain full control, have broad investment flexibility, dictate the use of the funds, and have the funds available for other family emergencies.
·    There are no tax benefits and the ability to use the funds for other purposes can be dangerous if the parents do not have financial discipline.

Uniform Transfers to Minors Act (UTMA)
·    The funds are irrevocably gifted to the minor and an adult custodian has the responsibility to prudently invest the assets and see that they are used for the benefit of the minor.
·    The account is transferred to the minor at the age of majority (now 21 in Arizona) and the tax advantages can be a bit confusing. (Up to age 14, the first $800 of a child’s investment income, including capital gains, is tax-free; the next $800 is taxed at the child’s rate, and income
over $1600 is taxed at the parent’s rate. At age 14 the child files his/her own tax return.)
·    Since the gift is irrevocable the assets are considered the property of the child and can have an impact on college financial aid qualification.

529 Plans
·    These plans are sponsored by states to allow families to save for college expenses.
·    They have very high contribution limits, no income limits and tax deferral.
·    The beneficiary can be changed to another family member; hence, it is not considered to be owned by the child.
·    No taxes are due if the funds are used for qualified college expenses but this feature expires in 2011 and it is unclear whether it will be extended.
·    Investments are limited to the choices in the state-sponsored plan, specific features vary by state, and there are typically some additional administrative fees.
·    Since Arizona does not allow a state tax deduction for 529 plan contributions, as some other states do, Arizona residents are best served by using another state’s plan that has low expenses and attractive investment choices. If not used for college expenses, the funds can be recovered and income taxes, plus a penalty, will be levied.

Prepaid tuition plans
·    Tuitions have increased much faster than inflation over the past 20 years, so in return for sacrificing the flexibility of the other options, you are protected from the risk that tuition will increase faster than the portfolio value.
·    These plans also offer features to deal with a beneficiary child that doesn’t attend college. Several states have had to revamp their plans when faced with funding shortfalls.

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With hurricane Katrina having devastated New Orleans and other areas, some of our clients have asked what and how to be sure they have the documents they need. I would suggest that copies or the originals of important papers be kept is a fireproof safe or a safe deposit box. Also, computer back ups can be kept there and in another location.

Estate Plans, Insurance information, contact people, a list of accounts and assets and liabilities would be information that would be helpful to have handy after a disaster.

Financial Freedom Associates keeps a copy of all Estate Planning documents for our full service clients. We also have information on all of your insurance policies. During the first two quarters of next year, we will make sure that we have complete and accurate information including agents names and names, phone numbers, and addresses of companies. And we have information of your assets and liabilities on your pyramid that we do annually, usually in the third quarter. We will work on getting full names and addresses of your assets outside of our management so they would be in your file.

Also, some clients have given us a list of contact people and copies of what is held in their safe deposit boxes. We would be glad to keep these with your files. There is no guarantee that our files would not be ruined in a disaster and by doing this at least we have another layer of protection.

-Sylvia

PS Sylvia will be taking a mini-vacation to San Diego from November 13-15th. Bill will be available during this time.