Skin in the Game: Getting Kids Involved in College

Getting kids involved in college planning may be an excellent way to teach responsibility to young people — a lesson that could reap benefits well beyond their college years. Children can earn money, learn about sources of financial aid, research potential colleges and take other steps that may relieve their parents of some of the responsibility of college planning.
Starting Early
According to the U.S. Department of Education, the best time to introduce children to college planning is when they are in middle school, typically grades six through eight.
You may want to initiate discussions about college, explaining the importance of developing good study habits and instilling the idea that your family supports higher education.
You may also want to encourage your children to begin thinking about the career they would like to pursue, which is likely to influence their choice of college, as well as to establish a savings account that could be earmarked for education expenses. In addition, you can teach basic lessons about compounding, investing and other money management issues.
When students are in the latter part of middle school, they can also start planning to make the most of high school experiences with an eye toward college. Remind your budding scholar that success in high school depends on skills and attitudes that are developed in middle school or earlier. You can help your child plan for college by assisting him or her with developing a realistic budget.
The chart below gives a general idea of the average current annual cost of attending a four-year public versus four-year private college.
Kids in College
Match Involvement to Age, Grade Level
Young people can assume varying levels of responsibility for college planning depending on their age and interests.
Consider the following if you are looking to get a middle or high school student involved.
6th to 8th Grades
• Continue good study habits
• Enhance computer and Internet skills
• Participate in arts activities or sports
• Start saving money
9th to 10th Grades
• Enroll in college-preparatory classes
• Establish high academic standards
• Research careers that match personal aptitudes
• Learn about college costs
• Identify prospective colleges
• Research financial aid and scholarships
• Set aside money from babysitting, yard work, or other odd jobs for college expenses
11th to 12th Grades
• Get a part-time job and continue saving for college
• Visit colleges of potential interest
• Take the Scholastic Aptitude Test and/or the ACT® assessment
• Enroll in advanced placement classes, if available
• Apply to colleges and for financial aid
This article was prepared by Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

Company stock in your 401(k)? What Retirement Investors Need to Know

Owning company stock in your employer-sponsored retirement plan is not necessarily a bad thing. Company stock can potentially help employees profit from a company’s success and even provide tax benefits. But holding company stock can present unique risks, particularly if the stock allocation represents a large percentage of your total retirement plan assets.
Let’s consider the case of Enron which, although occurring long ago, still raises some valid points. Enron filed for bankruptcy late in 2001 after struggling for months with mounting losses and debts–as well as questions about its accounting practices. At the time, it was the largest corporate bankruptcy in U.S. history. Because more than half of the assets in Enron’s retirement plan were invested in the firm’s stock, the result was devastating. As the share price sank, so did the balance in many employees’ retirement plan accounts. An estimated $1 billion was lost among about 15,000 accounts.
Additionally, the collapse of companies like Lehman Brothers in 2008 caught the attention of millions of American workers who have company stock in their retirement plan accounts. With their own futures in mind, they have started asking some important questions.
What Can I Do?
Following are some steps each of us can take to evaluate our own situation.
Know your plan–Brush up on the rules that govern your employer-sponsored retirement plan. Is company stock an investment option? Does your employer make matching contributions in the form of company stock? Are there rules governing management of the stock within your account? You can request a Summary Plan Description, which details the rules. Ask your employer to clarify any rules you don’t understand.
Consider your share of company stock–If you do own company stock through your employer-sponsored retirement plan, what percentage of your total assets does it represent? The ideal allocation for you will depend on your goals, time horizon and risk tolerance, factors you may want to review with a financial professional.
Review your overall investment strategy–Take a look at your strategy for investing through your company plan. How much do you contribute and what investment options are you using? If your employer already matches your contributions with company stock, you may not want to invest additional money in it.
You also might want to consider investments with holdings that differ from your company’s stock–a strategy called diversification.1 If your company stock is a growth stock, for example, you might want to think about a fund that invests in value stocks. Or if your company is a retail company, you might want to look for funds that invest in other industries and sectors that may perform differently. The benefit of diversifying is that if one investment declines in value, others can potentially increase in value and help offset potential losses.
Consider your other investments. Do you invest in an individual retirement account (IRA) or other retirement savings account? Does your spouse have a retirement plan of his or her own? It’s important to look at the investments in those vehicles and determine whether they complement your plan investments. If you can’t control the level of diversification in your own plan as much as you’d like, you may be able to enhance your level of diversification elsewhere.
Evaluate your options
While Enron and other company collapses have raised valid questions about owning company stock, you may still want to consider taking advantage of your plan. A matching contribution of company stock may be better than no matching contribution at all. Conduct a comprehensive review of your plan assets, your investment strategy and your investments outside of your plan. And given the important role these assets are likely to play in your financial future, be sure to consult a professional before taking action.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Amounts in mutual funds are subject to fluctuations in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

Your Piece of the American Dream: Buying a First Home

buying a homeFor many people, buying their first home represents the biggest financial commitment they’ll ever make. Before making such an important decision, you should consider a variety of factors starting with whether home ownership is right for you.
When considering this question, it may help to view the ownership decision as a lifestyle choice first, and a financial decision second. While over time, buying a home can potentially be a good way to build equity, history has shown that, like many other investments, real estate prices can fluctuate considerably. If you aren’t ready to settle down in one spot for a few years, you may want to defer buying a home until you are. But if you are ready to take the plunge, you’ll need to determine how much you can afford to spend.
How Much House Can You Afford?
Most people, especially first-time buyers, must take out a mortgage to buy a home. To qualify for a mortgage, the borrower generally needs to meet two industry-standard ratio requirements: the housing expense ratio and the total debt ratio.

  • The housing expense ratio compares basic monthly housing costs to the buyer’s gross monthly income (before taxes and other deductions). Basic costs include mortgage payments, insurance and property taxes. Income includes any steady cash flow, including salary, child support or alimony payments. For a conventional loan, your monthly housing cost generally should not exceed 28% of your monthly gross income.
  • The total debt ratio is the percentage of income required to service all of your monthly debt payments. Monthly payments on student loans, installment loans and credit card balances, for instance, are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, generally should not exceed 36%.

In addition to qualifying for a mortgage, you will likely need a down payment. Down payment requirements generally vary from a minimum of 3% to 20% or more depending on individual factors. Down payments greater than 20% generally exempt you from buying private mortgage insurance and may help you secure a lower interest rate. Mortgages available to some military veterans and active duty military personnel through the Veterans Administration (VA) may require no down payment.
Closing Costs
Closing costs vary considerably, but typically add between 2% and 7% to your purchase price. Such costs can include–but are not limited to–a home inspection, loan origination fees, up-front “points” (prepaid interest), application fees, an appraisal fee, title search and title insurance, homeowner’s insurance, recording fees and attorney’s fees.
Operating Costs
In addition to mortgage payments, there are other costs associated with home ownership. Home association fees, utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping and replacement of appliances are some of the more common costs incurred. Check the actual expenses of the previous owners and make sure you know how much you are willing and able to spend on such items.
Once you’ve determined a price range and location, you’re ready to look at individual homes. Remember that much of a home’s value is derived from the values of those surrounding it. In addition to “comparables,” consider the neighborhood, schools and other qualities that may be attractive to future buyers as well as those attractive to you. The more research you do today, the better your decision will look in the years to come.

Comparing Apples to Apples: Understanding Common Market Benchmarks

Stock-Market-watchThe dictionary defines the word benchmark as “a point of reference from which measurements may be made.” In investing, benchmarks–or market indexes–are used by investors, portfolio managers and market watchers to track how a particular asset class or sector performs and to compare relevant investments to that measurement.

Each market index tracks a representative sampling of stocks, bonds or other securities that may be similar to the holdings in a given investment portfolio. In order to use benchmarks accurately, you should always compare apples to apples. It helps to be familiar with a variety of benchmarks and the sectors and asset classes they track.

A Variety of Measures

Following are some of the more popular and widely used indexes:

  • The Bloomberg Barclays U.S. Aggregate Bond Index tracks the investment grade, U.S. dollar- denominated, fixed-rate taxable bond market.
  • The 10-Year U.S. Treasury bond is issued by the Treasury Department with a 10-year maturity. It is the most popular type of U.S. Treasury debt and is often used as a barometer for the overall U.S. economy.
  • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities.
  • The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies.
  • The NASDAQ Composite Index measures all domestic and international common stocks listed on the NASDAQ Stock Market. Launched in 1971, the index today includes over 3,000 securities.
  • Morgan Stanley Capital International’s Europe, Australasia, Far East (EAFE) Index represents the performance of large- and midcap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada


Many benchmarks, including those listed above, are reported regularly on major financial websites and in the business section of local newspapers; national publications such as The Wall Street Journal and Investor’s Business Daily; and, internationally, in the Financial Times.

Using Benchmarks to Target Expected Return

Benchmarks can be used to assess the types of investments that may be most suitable to an individual’s goals and investment time frame. By looking at the past performance of a market index, you can gauge the relative return potential of a particular asset class, as well as its risk characteristics. Keep in mind, however, that past performance is not a guarantee of future results and these unmanaged indexes cannot be invested into directly.

Also, be careful to use the right benchmark. For example, you wouldn’t want to invest in corporate bonds maturing in five years based on the benchmark performance of 10-year U.S. Treasury bonds. Your financial advisor can help you assess which benchmarks to use in evaluating the performance and risk of a given market.

Finally, when using market indexes, keep in mind that even though an investment vehicle performs well in relation to its market benchmark that does not necessarily mean it’s an appropriate vehicle for your money. Investments should be made based upon a number of criteria, including your objectives, time horizon and risk tolerance.

Your financial advisor can help you determine which benchmarks to use when evaluating investment vehicles.

IRA or 401(k)?

inflationKnow the key differences between these two popular retirement plans to ensure your clients are saving in the right account.

IRAs and 401(k)s share a lot of similarities. They are both retirement plans. They both can help you lower your tax bill today, provide tax-deferred growth, and help provide an income source in retirement. That said, there are also many differences between IRAs and 401(k)s. Some are relatively benign and probably won’t impact you very much, but other differences can make one type of account far superior to the other in particular situations. With that in mind, today we explore five things you can do with an IRA that you can’t with a 401(k).

  1. Make a qualified charitable distribution


Qualified charitable distributions (QCDs) allow IRA owners and IRA beneficiaries age 70½ or older to send up to $100,000 from their IRA account directly to a charity without including any of that amount in their income. If you make a QCD, you won’t get a charitable deduction, but by never adding the income to your tax return in the first place, it often still results in a lower tax bill than if you had taken a “normal” IRA distribution and made a “regular” charitable contribution. In no case would your tax bill be higher. As an added bonus, your QCD can be used to offset all or a portion of your required minimum distribution.

  1. Take a penalty-free distribution for higher education expenses


In general, distributions taken from a retirement account prior to age 59½ are subject to income tax and an additional 10% early distribution penalty. The law does, however, provide for a number of exceptions to this rule. One such exception is available if you use your IRA to pay for higher education expenses (i.e. college tuition, books, required supplies, a computer for school) for yourself or for certain other family members, such as your children. Note that this exception is only available if you take money out of an IRA prior to age 59½.

If you try to do the same thing from a 401(k), you’re going to wind up with a tax bill bigger than you had bargained for. Some very smart and well educated people, including lawyers and CPAs, have gone to tax court to argue this point, and none of them has walked away the victor. Don’t make the same mistake.

  1. Take a distribution whenever you want


They call it a retirement account for a reason. It’s supposed to be for your retirement! That said, life happens and sometimes people need to access their funds sooner than had been planned. If you are still working for the company sponsoring your 401(k) and you need some additional funds, you’re at the mercy of your plan’s rules and, to an extent, the Tax Code, when it comes to being able to access your money. Typically, access to funds is extremely limited, especially if you’re still under age 59½. In such cases, you may be able to take a loan from your 401(k) and you may be able to take a hardship distribution, but neither of those options is guaranteed to you under the law.

In contrast, if you have an IRA, you can typically take a distribution from your account whenever you want. There are no restrictions under the law whatsoever. Of course, as noted above, if you take a distribution from your plan or your IRA prior to age 59½, you will generally owe income tax and a penalty, but if you really need those funds and there is nowhere else to turn, what choice do you really have?

  1. Aggregate RMDs between multiple accounts


Today, it’s not uncommon for people to have several 401(k)s or similar plans accumulated over time through work with different employers. Similarly, many retirees have more than one IRA account. Some even have 10 or more! If you happen to have more than one 401(k) and you’re age 70½ or older, you must calculate the RMD for each of those 401(k) plans separately and you must take those RMDs separately from each plan.

In contrast, if you have more than one IRA and you’re 70½ or older, an RMD must be calculated for each IRA, but if you want to, you can combine (or aggregate) the RMDs and take them from any one IRA or combination of IRAs you choose without a penalty.

If you accidentally took the same approach with your 401(k) plans, you’d find yourself subject to a 50% penalty—yes, you read that right—for each plan from which you did not take the appropriate distribution.

  1. Avoid withholding


Paying your taxes is not optional. It’s a requirement. You may, however, have a very low, or even non-existent tax bill after applying all of your available deductions, exemptions, and credits, etc. Alternatively, you may have withholding from other sources, such as a pension, or make estimated tax payments, that are sufficient to cover your tax bill. In such cases, there’s no reason to have any further amounts withheld from your retirement account distributions. Doing so would just be giving the government a tax-free loan until you filed your taxes and received your refund.

If you have an IRA, you’d be able to avoid this because, when you take a distribution from your IRA, you can opt-out entirely of withholding. This, however, would not be the case if you had a 401(k). In general, distributions from 401(k)s that are eligible for rollover are subject to mandatory withholding of 20%. There is no opt-out provision. After all, it isn’t called “strongly suggested withholding.”

So there you have it: five things you can do with an IRA that you can’t do with a 401(k)! Does that mean IRAs are better than 401(k)s? No, of course not. They’re different. For some people, IRAs are better, while others will benefit more from a 401(k). Could we, for instance, find five things you can do with a 401(k) that you can’t do with an IRA? Absolutely. Who knows, you might even see something like that here in the near future!

Everything You Need to Know About a Will, but Haven’t Thought to Ask

Questions and answersEveryone knows the importance of preparing and maintaining a will, yet many people have never written one. To those who haven’t, take note: If you die intestate (without a will), the intestacy laws of the state where you reside will determine how your assets will be distributed. And if minor children are involved, a judge may decide with whom they will live.

On the other hand, if you take the time to prepare a will, you’ll be the one who determines how your property is distributed and who will care for your minor children when you’re gone. Simply put, a will is one way that provides peace of mind and the immense satisfaction of knowing that you have taken the necessary steps to pass on the fruits of your life’s labor to your loved ones.

What Is a Will?

A will is a legal declaration that enables you to direct the disposition of your assets upon your death. You can divide your assets any way you want, as long as guidelines are presented clearly in writing. While wills generally address the bulk of your assets, there are a variety of items that are not covered by the instructions in a will. These items include community property, proceeds from life insurance policy payouts, retirement assets, assets owned as joint tenants with rights of survivorship, and investment accounts that are designated as “transfer on death.”

Types of Wills

Following are some of the more common types of wills and their intended uses.

  • A simple will provides for the outright distribution of assets to beneficiaries. This type of will is best for individuals with small, uncomplicated estates.
  • A pour-over will passes assets into an existing trust or trusts.
  • A living will expresses an individual’s last wishes regarding whether and how the person wishes his or her life to be sustained under specific circumstances.


Drafting a Will

Ideally your will should be drawn up by a lawyer, and you (and your heirs, if possible) should be familiar with its general form and contents. Although it’s your legal right to do so, it’s usually not a good idea to draft your own will. You may not be aware of the statutory requirements that exist in your particular state for establishing a valid will. State requirements vary and some states may have different standards for witnessing a will, or require specific language that must be included for the will to be considered valid. Having your will at least reviewed by a lawyer can safeguard against potential problems down the road.

When meeting with a lawyer to draft your will, bring the proper information. Such a list typically includes proof of your real property, such as your home, along with documentation that shows how much you paid for it. Also bring a list of intangible property such as your bank and investment accounts along with your latest statements for each; a copy of any life insurance policies; and a list of your debts.

One item that individuals often overlook when drafting their will is a list of professionals they want contacted, such as a financial advisor, insurance agent, banker, or lawyer. Also bring the names of any executor or guardian named for your children.

Key Decision Points

Husbands and wives can write their wills jointly or separately, although most legal professionals recommend the latter. One reason is that joint wills generally bind the surviving spouse to dispose of property per the will’s terms despite future changes in circumstances (including tax law changes).

Also, if you have young children, an important provision is the selection of a guardian who would raise your children in the event of your death and the death of your spouse. If you die without a will and have minor children, a judge may appoint a guardian for them, and there is no guarantee that the court’s appointment will coincide with your own wishes.

The Post-Will Process

Once your will is completed, keep an original copy on hand, although it’s perfectly fine to make photocopies for family members and friends. Keep the original in a secure place, such as a home or business fireproof safe. If that can’t be arranged, keep it in your lawyer’s office or with the clerk at your local probate court, who will hold it for safekeeping in a sealed envelope. Wherever you decide to keep your will, make sure that its location is known by family members or close friends.

It’s also a good idea to review your will every five years. Your family circumstances or financial fortunes may change, as may federal and state laws. When things do change, periodically reviewing your will with your lawyer (and revising it if necessary) will help to ensure that its contents conform to current laws and regulations and that it reflects your current status and desires.

A Post Election Letter to Our Valued Clients

will and estate planningDonald Trump has completed his landmark quest and will become the nation’s 45th President after a contentious and often divisive campaign. In addition, the Republican Party has retained control of both houses of Congress. This outcome marks a significant reversal from just a few weeks ago when a Hillary Clinton presidency was highly probable and even a Democratic party sweep of Congress was possible.

While this outcome is certainly a shock to many, it is important to remember that the result isn’t a surprise to the plurality of American voters that spoke their collective will at the ballot boxes yesterday. The strength of a democracy is not in whether we like the outcome, but rather in how we accept the result as the voice and will of our republic.

While many things are promised on the campaign trail, all newly elected Presidents enter with a constrained ability to enact their agenda unilaterally. As a result, immediate and sweeping political changes are a process, which give markets and the American public time to digest and react. Although often derided by partisans, the inability of a President to swiftly change policies is a strength of our political system, not a weakness of it.

Moreover, the current market volatility is not because Trump was elected President, as markets do not have political affiliations. Rather, it reflects the market’s adjustment to a surprise presidential winner and the market’s tentativeness regarding the vast uncertainty over which of President-elect Trump’s stated policies he will be able to enact. The first major step towards clarity will come with Trump’s choices for key administration officials; his selections will give a better sense of the priorities for the Trump administration. This should provide some path to further understanding and calm markets.


For the first time in 10 years, one party has control of the Presidency and both houses of Congress. As in all things, this may solve some problems, and perhaps exacerbate others. For example, potentially divisive upcoming issues, such as the necessary expansion of the debt ceiling and reforms to the corporate tax code, could be easier to navigate. There is a common perception that the markets like divided government. While that may often be correct, it is not necessarily true at every point in time.


Most importantly, however, over time we have witnessed corporations and financial markets adapting smoothly to new political environments. The uncertainty surrounding the Trump presidency could be greater than a typical transition; therefore, the markets may take additional time to process any changes. However, the uncertainty itself is not unusual.


Separating political views and emotions from investment decisions is difficult. Whether this election result was your favored outcome or not, what we have learned over the years is that although Presidents can set an overall tone for the markets, over the long term, it is the underlying fundamentals of the economy and the strength of corporate profits that matter more. Overall, we continue to be encouraged by the underlying fundamentals in the economy and the related resilience of the stock market. Recently, encouraging economic data, including a record 73 consecutive months of private sector jobs growth, high consumer confidence, and an increase in manufacturing activity, all suggest a recession in the next year is unlikely. And, although the stock market has been essentially flat over the past three months, the S&P 500 has returned 5.2% year to date (through market close on November 8, 2016).


As this historic election cycle comes to a close, we suggest casting a “vote of confidence” for the U.S. economy and markets. While uncertainty will certainly be prevalent over the short-run, our political and economic systems are resilient and can, after a period of adjustment, adapt to new realities. As investors, we all need to try and put this election into perspective, as our investment horizons extend far beyond yesterday’s votes or any political cycle. And, the keys to your investment success of relying on independent investment advice and sticking to your long-term investment strategies should not change, regardless of who is in office.


As always, if you have questions, I encourage you to contact our office.


Sincerely, John Stevens, Wealth Advisor


Doing Your Homework: What You Need to Know About Home Mortgages

Luxury HomeBuying your first home can be a learning experience, especially when it comes to getting a mortgage. The myriad financing options can leave you wondering if owning a home is really worth the trouble. But finding the best solution for your needs is not so hard if you know some of the basics.


Put Your Own Financial House in Order


Before you go house shopping, you should evaluate your own financial situation and assess your ability to take on a mortgage. Most lenders will prequalify you to borrow up to a certain amount. Prequalification allows you to focus in on a realistic price range and makes you a more attractive buyer. Whether or not you want to prequalify, eventually you’ll be required to complete a loan application and it may take some time to gather and assemble the required information.


It’s also a good idea to review your credit status. You can request a free copy of your credit report from each of the three major national credit bureaus — Equifax, Experian and TransUnion — once every 12 months, as well as under certain other circumstances, such as if you’ve been denied credit. To order your free annual report, go to www.AnnualCreditReport.com or call toll-free (877) 322-8228.


Review your report to ensure that all information is correct. If your report indicates past credit problems, don’t lose hope. Be prepared to present a rationale for each incident with your prospective lender, and demonstrate an improvement in your ability to pay bills on time.


How Much Mortgage Can You Afford?


Your next step is to get specific about how much mortgage you can afford. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Fannie Mae has established two standard requirements for conventional mortgages. The first is that monthly mortgage principal and interest payments (P&I), plus homeowners insurance and property taxes, cannot exceed 28% of the buyer’s gross monthly income (some exceptions may apply to increase this limit to 33%). The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition to these requirements, you may have to pay 20% down on the total purchase price to qualify for a conventional mortgage.


To help you get a better idea of what your own situation might look like, try “running some numbers” with one of the many mortgage calculators that are prevalent online, especially on real-estate- and consumer-finance-focused websites.


Types of Mortgages


Aside from your income, the other key variables affecting how much house you can afford are the term and interest rate of your mortgage. The term is the length of time (usually 15 or 30 years) over which payments will be paid. The rate can be fixed (meaning it doesn’t change over the loan’s term) or adjustable (it fluctuates with market conditions). Thirty-year, fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, these mortgages are attractive to buyers planning to stay at least six or seven years in their new home.

Understanding Health Savings Accounts

Health SavingsHealth savings accounts (HSAs) are tax-preferred savings accounts set up in conjunction with high-deductible health insurance policies that are used to fund qualified medical expenses. Enrollees or their employers make tax-free contributions to an HSA, then use the funds typically to purchase medical care until they reach their deductibles. But HSAs are not for everyone and it helps to fully understand how they work before considering them as a viable option to help fund your health care costs.
HSA Specifics
You are eligible for an HSA if you meet these four qualifying criteria:

  • You are enrolled in a qualified high-deductible health plan (HDHP).
  • You are not covered by another disqualifying health plan (whether insurance or an uninsured health plan).
  • You are not enrolled in Medicare.
  • You are not a dependent of another person for tax purposes.

HSAs are generally available through insurance companies that offer HDHPs. Many employer-sponsored health plans also offer HSA options. Although most major insurance companies and large employers now offer an HSA option under their health plan, it’s important to remember that most health insurance policies are not considered HSA-qualified HDHPs. In fact, the IRS has set limits as to what qualifies as an HDHP. For 2016, a plan can only be considered an HDHP if its deductible is at least $1,300 ($2,600 family). So make sure to check with your insurance company or employer to see if an
HSA plan option might apply.
The maximum contribution to an HSA for 2016 is $3,350 if you have single coverage, or $6,750 if you have family coverage. If you are over age 55 then you can contribute an additional $1,000 in 2016 regardless of whether you have single or family coverage. Such contributions are made on a before-tax basis, meaning they reduce your taxable income. Note that unlike IRAs and certain other tax-deferred investment vehicles, no income limits apply to HSAs.
HSAs offer investment options that differ from plan to plan, depending upon the provider. What’s more, HSA account balances carry over from year to year, unlike their predecessors, medical savings accounts (MSAs), which contained a “use it or lose it” feature that severely limited their usefulness for most people. Earnings on HSAs are not subject to income taxes.
Any ordinary medical, dental or health care expense that would qualify as a tax-deductible item under IRS rules can be covered by a HSA. A doctor’s bill, dental procedures and most prescriptions are examples of covered items. See IRS Publication 502 (https://www.irs.gov/publications/p502/) for a definitive guide of what costs are covered. If funds are withdrawn for any other purpose than qualifying health care expenses before age 65, you will be required to pay taxes on amounts withdrawn plus a 20% additional federal tax. Once you reach age 65, you can use HSA money to pay for non-medical expenses, but you will still owe taxes on the withdrawal.
In summary, HSAs can offer significant benefits for some situations, but may not fit your specific needs.
March 2016

Contribution and Out-of-Pocket Limits for Health Savings Accounts and High-Deductible Health Plans For 2016 For 2015 Change
HSA contribution limit (employer + employee) Individual: $3,350

Family: $6,750

Individual: $3,350

Family: $6,650

Individual: no change

Family: +$100

HSA catch-up contributions (age 55 or older)* $1,000 $1,000 No change**
HDHP minimum deductibles Individual: $1,300

Family: $2,600

Individual: $1,300

Family: $2,600

Individual: no change

Family: no change

HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums) Individual: $6,550

Family: $13,100

Individual: $6,450

Family: $12,900

Individual: +$100

Family: +$200

* Catch-up contributions can be made any time during the year in which the HSA participant turns 55.

** Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.


Saving for Short-Term Financial Goals

save moneyMost of us know we need to save for our future goals. Buying a home, providing an education for our children and investing for a secure retirement are the most common long-term savings goals. But what about next year’s vacation, remodeling or refurbishing your house, or buying a second car? You can always just say “charge it.” That is how Americans have amassed billions of dollars in credit card debt. Instead, why not try a new approach? With a little encouragement and guidance, you can begin saving for these short-term needs today.
Getting Started
The first step in any investment strategy is to develop goals. And the first “must have” goal is to ensure that you have adequate reserve funds to cover emergencies or even temporary unemployment. Many financial planners suggest that you have three months’ salary available in savings for the unexpected.
Next, take a look at your spending needs over the coming 12 to 24 months. How much did you spend on your last vacation? How is the car running? By planning ahead for large expenditures, you can prevent anxiety and save on finance charges. Once you have determined how much you need—and when you will need it—you are ready to begin matching your goals to the investment options available to you.
It sounds easy, but if you are like most people, you may lack the discipline to save. Some banks and most credit unions offer a variety of special-purpose savings plans designed to help. Vacation and Christmas Clubs use coupon books that provide a schedule for reluctant savers. If your bank does not offer special savings plans, you can take the lead by setting up your own automatic transfers from your checking account to your savings account.
The idea is to make savings a habit and to treat your monthly (or weekly) savings deposits as a fixed expense—like a rent or mortgage payment—not just an afterthought once the bills have been paid.
Key Investment Criteria
Whether your goals are long term or short term, you should look at three investment factors before choosing a savings or investment vehicle: liquidity, safety and return.
Liquidity—When can you get your money? If your savings are meant to pay for next year’s vacation, real estate is probably not a good investment. But even certificates of deposit (CDs) may be too restrictive.1 Be sure you understand what it might cost to turn your investment into cash. Are there penalties for early withdrawal? When you are using a time deposit, make sure the investment’s maturity matches your needs.
Safety—As a general rule, return is proportional to risk. Just as liquidity concerns would rule out short-term investments in real estate, safety factors would rule out short-term investments in stocks or bonds.2 It is not that these investments are inherently unsafe, but that the volatility (or fluctuation in the value) of these investments often makes them unsuitable for short-term investing.
Return—Short-term investors are restricted by safety and liquidity. You should, therefore, be realistic about how much you can expect to earn. Still, there are many investment choices available. While some investments require a minimum amount, others do not. Generally speaking, the more you have, the more you can earn. Even if you don’t have the $500 for a CD, you can still save $50 a week until you do. Keep in mind that your final return will be reduced by any fees or taxes you incur.
Savings Vehicles
Savings Accounts—Given their convenience, availability and relative safety, banks are often the first choice for savings. Accounts at FDIC-insured banks are protected to $250,000 per depositor, per insured bank, for each account ownership category.
Additional explanation provided on FDIC.gov states the following:

“The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For example, if a person has a certificate of deposit at Bank A and has a certificate of deposit at Bank B, the accounts would each be insured separately up to $250,000. Funds deposited in separate branches of the same insured bank are not separately insured.
“The FDIC provides separate insurance coverage for funds depositors may have in different categories of legal ownership. The FDIC refers to these different categories as ‘ownership categories.’ This means that a bank customer who has multiple accounts may qualify for more than $250,000 in insurance coverage if the customer’s funds are deposited in different ownership categories and the requirements for each ownership category are met.”3

Shop around for rates and fees, keeping in mind that banks will usually waive monthly fees if you maintain a minimum balance. Most banks will link your savings and checking accounts, making regular transfers between the two accounts much easier.
Money Market Deposit Accounts—These accounts generally pay a higher rate than passbook savings accounts, but the rate typically fluctuates with market conditions. You may also get the advantage of limited check writing.
Time Deposits—CDs are available with terms ranging from 7 days to 30 years. CDs are FDIC insured and offer a fixed rate of return if held to maturity. A fixed-rate CD may or may not be an advantage. The time to lock in is when rates are at their peak. Since it is difficult to know when rates have peaked, you can stagger maturities to limit your interest rate risk (the likelihood that rates will rise or fall). By purchasing CDs with a variety of maturities, you can reinvest principal from maturing CDs if rates go up, while longer-term CDs will continue earning higher returns should rates fall.
Relationship Accounts—Many banks reward their best customers with relationship accounts. By consolidating your deposits and loans with one bank, you can often minimize fees, earn higher rates or get free services. Check with your bank to see if this option would benefit you.
U.S. Treasury and Other Money Market Securities
U.S. Treasury bills (T-bills) are generally issued in 13- and 26-week maturities with a $1,000 minimum investment. You can also purchase T-bills with shorter maturity rates directly through banks and brokers. T-bills are sold at a discount, which means that the interest is paid to you when the bill matures. An added bonus is that interest earnings on T-bills are exempt from most state and local taxes. However, earnings may be subject to the alternative minimum tax (AMT).
In addition to Treasury securities, a wide variety of short-term commercial securities are available. The yields will be higher than T-bills due to the increased risk. Unlike bank money market deposit accounts, these investments pay a fixed rate of return.

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