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October 2009


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My October Financial Newsletter

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October 2009

  1. 1. October 2009 Ameriprise Financial Greg Younger, CRPC® 14755 N. Outer Social Security: What Does the Future Hold? Chesterfield, MO 63017 636.534.2092 Each year, the Social Security and Medicare report mentions immediately increasing the trustees issue a report on the financial health payroll tax or reducing benefits as additional of these two programs. The news hasn't been options. good. According to this year's report, in 2016, Social Security The near future will begin paying out more The Congressional Budget Office (CBO) is money than it takes in, and will projecting that for the first time since 1975, be able to pay promised benefits when cost-of-living adjustments (COLA) were only until 2037; afterwards, the first payable, Social Security beneficiaries will trust fund reserves will be ex- not receive an automatic increase next year hausted and payroll tax income will be enough (or for 2011), due to low inflation. According to to finance only 76% of scheduled benefits the CBO, the absence of COLA will also affect until 2083. the maximum earnings that are taxable for Social Security reform has been a political hot Social Security, because under the Social potato, but that may be about to change. The Security Act, the earnings maximum can only decline of the financial markets has led to increase when COLA is payable. Therefore, renewed focus on the importance of Social the CBO is projecting that this year's earnings Security income to retirees, and on the need base of $106,800 will remain the same for the to address the growing burden that Social next two years. Security is placing on the federal budget. Medicare beneficiaries will be affected too. By law, for individuals who have their Medicare You can find the annual trustees Part B premiums withheld from their Social report on the Social Security Security checks, premiums cannot rise more Administration's website, than COLA increases for Social Security. Con- sequently, no annual COLA means that stan- dard Medicare premiums will remain at their current level of $96.40 per month for approxi- Proposals to stabilize Social Security mately 75% of Medicare beneficiaries. How- Despite fears that Social Security will not be ever, certain beneficiaries (those who do not In this issue: around for future generations, there have have their premiums deducted directly from Social Security: What Does been no calls to eliminate Social Security, and Social Security and those with higher incomes the Future Hold? the focus is on making the program sustain- who pay higher income-related premiums) do able. In fact, President Obama has repeatedly not have this protection, and will see their More Drops in the Higher Education Bucket expressed his commitment to preserving So- premiums rise, perhaps substantially. cial Security. To help accomplish this, he fa- Health Insurance Options After vors a Social Security payroll tax on earnings Stay informed a Job Loss above $250,000 (currently no Social Security Most Americans rely on Social Security for at Can creditors reach my 401(k) payroll tax is assessed on earnings above a least a portion of their retirement income, but plan account? certain maximum, $106,800 in 2009). Many to ensure that Social Security will be able to other potential solutions have also been sug- pay promised benefits for many years to gested. For example, the Social Security Sol- come, it's clear that the program must change. vency Act of 2009, introduced in the Senate in It's a good idea to follow the news to learn February, proposes accelerating by five years about legislative developments and model the gradual increase in full retirement age to various income scenarios when developing 67, and modifying the benefit calculation to your own retirement plan. reduce benefit growth. This year's trustees
  2. 2. Page 2 More Drops in the Higher Education Bucket The world of higher edu- not increase the amount of the Lifetime Learn- cation has received some ing credit, which is geared more toward occa- attention in Washington sional courses taken by students who are this year. The American enrolled in school less than full-time.) Recovery and Reinvest- ment Act of 2009 (ARRA) Qualified expenses and 529 plans was signed into law by President Obama in ARRA has expanded the definition of February. This legislation, along with Presi- "qualified higher education expenses" for 529 dent Obama's proposed budget for FY 2010, plans to include expenses paid or incurred in contains several provisions related to higher 2009 or 2010 for computer technology, equip- education. ment, and Internet access, provided they are used by the 529 plan beneficiary and the Hope credit beneficiary's family during any of the years the The Hope credit is a tax credit for college tui- beneficiary is enrolled at an eligible educa- tion and related expenses. ARRA changed tional institution. This means you can take a the Hope credit significantly. For 2009 and tax-free withdrawal from your 529 plan to pay 2010, the Hope credit is renamed the Ameri- for these items. (Previously, a computer had can Opportunity tax credit and can be worth to be required by the college in order to be $2,500 per student per year, up from $1,800. considered a qualified education expense.) (President Obama's FY 2010 budget blueprint proposes making the credit permanent.) In This carve out for computer-related expenses addition, the credit now applies to the first four is similar to the existing provision for K-12 years of a student's post-secondary educa- computer expenses currently allowed by tion, provided he or she attends at least half- Coverdell education savings accounts. time (previously, the credit applied only to the Pell Grants first two years of college). And the income limits for qualifying have been increased: ARRA increased the maximum Pell Grant to $5,350 for 2009/2010 and to $5,550 for • A full credit is available to single filers 2010/2011. President Obama's FY 2010 with a modified adjusted gross income budget proposes making the Pell Grant pro- (MAGI) below $80,000 (previously gram a mandatory spending program with By increasing $50,000) and joint filers with a MAGI be- automatic increases tied to the Consumer both the amount low $160,000 (previously $100,000) Price Index. of the credit and the income limits • A partial credit is available to single filers Federal Family Education Loan program to qualify for it, with a MAGI between $80,000 and $90,000 (previously $50,000 and President Obama's 2010 proposed budget and by seeks to eliminate the Federal Family Educa- expanding the $60,000) and joint filers with a MAGI be- tween $160,000 and $180,000 tion Loan program in 2010. If it passes, all availability of the student loans would be made through the credit to all four (previously $100,000 and $120,000) federal government's Direct Loan program. years of college, Other points to note about the new credit: the federal Financial aid government has • The credit may be claimed against an According to, President put the focus on individual's alternative minimum tax Obama wants to simplify the federal financial helping liability aid application process by eliminating the cur- traditional rent FAFSA application and allowing families • Up to 40% of an individual's allowable college students to apply by simply checking a box on their tax credit may be refundable pay for college. form, authorizing their tax information to be • For purposes of the credit, the definition used. Stay tuned to see whether this major of "qualified tuition and related expenses" time-saving objective will happen in 2010. is expanded to include course materials By increasing both the amount of the credit and the income limits to qualify for it, and by expanding the availability of the credit to all four years of college, the federal government has put the focus on helping traditional col- lege students pay for college. (Congress did
  3. 3. Page 3 Health Insurance Options After a Job Loss It's hard enough facing the financial and emo- coverage, you and your family can enroll in tional trauma of losing your job. One of the your spouse's plan without having to wait until issues you may confront is the loss of your the plan's regular enrollment period, and you employer-provided health insurance as well. can't be excluded for pre-existing health While there may not be a simple solution to conditions. your health insurance dilemma, you should But don't jump to your spouse's plan just understand your options. because it's cheaper than your COBRA COBRA coverage without considering some important factors. Your spouse's plan may not offer as The Consolidated Omnibus Budget Recon- many benefits as your COBRA coverage. For ciliation Act of 1985 (COBRA) provides for example, your spouse's insurance plan may continued access to health insurance for peo- not cover your doctor or your preferred ple who lose their employer-sponsored cover- medical facility. And while that plan may cost age due to termination of employment (among less because of greater employer contribu- other triggering events). tions, if your spouse gets sacked, your spouse's COBRA coverage might cost more Under federal law, employers with 20 or more than your COBRA coverage. So before employees that provide health insurance are How much will switching health plans, compare your required to offer COBRA coverage. As a COBRA cost? spouse's plan benefits to your COBRA cover- qualifying employee, you can remain on your age, consider the security of your spouse's Excluding the employer's plan for up to 18 months. job, and find out what your spouse's COBRA temporary subsidy However, you must pay the cost of COBRA coverage would cost. provided by ARRA, insurance, plus a 2% administrative fee, you generally are unless your employer pays some of the cost. Insurance through an organization responsible for 102% of But you can't be turned down due to Often, various groups and organizations such the cost of COBRA pre-existing health conditions, and the as fraternal clubs, religious groups, unions, continuation coverage. coverage will include your family if they were also covered under your employer-sponsored and local chambers of commerce offer health In 2008, the average plan. insurance to their members. Because the annual cost for COBRA coverage is based on a group, its cost is continuation health Note: The American Recovery and Reinvest- usually less than comparable private insur- insurance was $4,704 ment Act of 2009 (ARRA) provides that, for ance. But coverage may be offered through for an individual plan involuntary terminations that occur on or after only one insurer, the plan benefits may be and $12,680 for family September 1, 2008, and before January 1, limited, and co-payments and deductibles may coverage. 2010, assistance-eligible individuals will only be higher than under your current plan. Source: The Henry J. need to pay 35% of COBRA premiums for a Private health insurance Kaiser Family period of up to 9 months. The remaining 65% Foundation of premium cost will be subsidized by the Another alternative is private individual or fam- Employee Health federal government. ily health insurance. Private insurance gives Benefits: 2008 Annual State programs you the greatest choices for plan benefits, but Survey, September it most likely will cost more than coverage 2008. If your employer has gone out of business, through your former employer. Also, you or stopped offering health insurance, or is too members of your family could be denied insur- small to qualify for COBRA, you may still be ance coverage due to pre-existing medical protected. Many states have laws that provide conditions unless you meet specific HIPAA health insurance continuation programs simi- qualifications. lar to COBRA. However, the laws of each state may differ as to employee qualifications, More options length of coverage, spousal and dependant Other cost-effective choices include high benefits, etc. Check with your state's labor deductible individual plans and the federally department or insurance commissioner's subsidized, state-administered Children's office for more specific information. Health Insurance Program (CHIP), which is Your spouse's coverage available for families with modest incomes. Contact your state insurance department for If you have a spouse who is working, he or more information. she may have access to employer-sponsored health insurance. If your spouse qualifies for
  4. 4. Ask the Experts Can creditors reach my 401(k) plan account? The extent to which your But again, this broad protection applies only if 401(k) plan account is pro- your 401(k) plan is governed by ERISA. Some tected from the claims of plans are not. For example, a plan that covers your creditors depends on only a business owner, or the owner and his two things: (1) whether your or her spouse (i.e., an "individual 401(k)" plan is covered by the Employee Retirement plan), isn't covered by ERISA. Plans spon- Income Security Act of 1974 (ERISA), and (2) sored by governmental entities and certain Ameriprise Financial the type of claim (in bankruptcy or outside of churches aren't governed by ERISA Greg Younger, CRPC® bankruptcy). either. 14755 N. Outer Chesterfield, MO 63017 Most 401(k) plans are covered by ERISA. If you participate in one of these plans, you 636.534.2092 ERISA contains an "anti-assignment" rule that won't be able to rely on ERISA at all for pro- provides broad protection from creditors' tection from your creditors. What happens claims. This anti-assignment rule applies then? Your 401(k) plan account will still be The information contained in this material is whether you've declared bankruptcy or not-- fully protected from your creditors if you de- being provided for general education purposes and with the understanding that it is not intended no bankruptcy or judgment creditor can reach clare bankruptcy, as a matter of federal law. to be used or interpreted as specific legal, tax or your 401(k) plan account, if the plan is gov- But whether you'll be protected from creditor investment advice. It does not address or account for your individual investor erned by ERISA. (There are several important claims outside of bankruptcy will depend on circumstances. Investment decisions should always be made based on your specific financial exceptions to ERISA's anti-assignment rule. the laws of your particular state. While most needs and objectives, goals, time horizon and risk tolerance. For example, the IRS may be able to levy states provide at least some protection for The information contained in this communication, against your 401(k) plan account for failure to retirement accounts, some do not. You'll need including attachments, may be provided to support the marketing of a particular product or pay your taxes. And a court can issue a quali- to consult a qualified attorney to determine service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal fied domestic relations order (QDRO) that will how the laws of your state apply to your Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your require the plan to pay all or part of your plan particular situation. circumstances. benefit to your former spouse.) Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. Can creditors reach my IRA assets? The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and Traditional and Roth IRAs generally aren't protected from your bankruptcy creditors un- completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the subject to ERISA (we'll discuss SEPs and der federal law--the $1,095,000 limit doesn't publisher has been diligent in attempting to SIMPLE IRAs later). Therefore, they don't apply. But whether or not your SEP/SIMPLE provide accurate information, the accuracy of the information cannot be guaranteed. Laws and qualify for the broad protection from creditors IRA has protection from your creditors outside regulations change frequently, and are subject to differing legal interpretations. Accordingly, that ERISA typically provides. However, even of bankruptcy may depend on whether your neither the publisher nor any of its licensees or their distributees shall be liable for any loss or though ERISA doesn't apply, federal law still plan is governed by ERISA (because it covers damage caused, or alleged to have been caused, by the use or reliance upon this service. provides protection for up to $1,095,000 (in one or more common law employees). 2009) of your aggregate traditional and Roth IRA assets if you declare bankruptcy. If your SEP/SIMPLE IRA plan isn't subject to ERISA, whether you'll have protection from If you've rolled any funds over from a 401(k) your creditors outside of bankruptcy will likely or 403(b) plan (or another qualified plan) to depend on the laws of your particular state. your IRA, then those assets, and any earnings on them, aren't subject to the $1,095,000 cap, But if your SEP/SIMPLE IRA is governed by and are fully protected. (You may want to con- ERISA, whether you'll have protection under sider setting up a separate IRA to hold roll- state law from creditors outside of bankruptcy over funds so that you can more easily iden- is not clear. These plans are not covered by tify the amount eligible for full protection if you the part of ERISA that protects assets from declare bankruptcy.) creditors generally. But they are subject to the part of ERISA that preempts state laws. So But, with IRAs, federal law governs only bank- state laws that may have provided protection ruptcy claims. Whether you'll have protection for your SEP or SIMPLE IRA account from Prepared by Forefield Inc, from your creditors outside of bankruptcy will nonbankruptcy creditors may not be available. Copyright 2009 depend on the laws of your particular state. These rules are obviously quite complicated. Different rules apply to SEP IRA and SIMPLE Be sure to consult a qualified attorney if credi- IRA plans. SEP and SIMPLE IRAs are fully tor protection is important to you.