01/29/2009

Retirement Plans for Small Businesses

As a business owner, a retirement plan can help you and your employees save for the future.

Retirement plans are usually either IRA-based or qualified. Qualified plans must be maintained by a third party and are more complicated and expensive to administer because they have to comply with more federal regulations than IRA-based plans do. IRA-based plans can be self-managed and cost less to maintain.

So which plan is right for your business? Start by defining your goals before attempting to choose a plan. Do you want:

• To maximize the amount you can save for your own retirement?
• A plan funded by employer contributions? Employee contributions? Both?
• A plan that allows you and your employees to make pretax and/or Roth contributions?
• The flexibility to skip employer contributions in some years?
• A plan with the lowest cost? Easiest administration?

 Let’s look at the different types of plans.

A SEP allows you to set up an IRA for yourself and each of your eligible employees. Most employers, including those who are self-employed, can establish a SEP-IRA. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and earns $500 or more. For 2008, employer contributions for each employee are limited to the lesser of $46,000 or 25% of pay.

The SIMPLE IRA plan is for 100 or fewer employees. Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan. In 2008, employees can contribute up to $10,500. You must either match your employees' contributions up to 3% of their salary or make a fixed contribution of 2% of compensation for each eligible employee. SIMPLE IRA plans are easy to set up and administrative costs are low.

Profit sharing plans favor the employer because they are qualified and discretionary. There's usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose. Employees with a year of service are eligible to participate and the plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses that it makes for them.

The 401(k) plan is technically, a qualified profit-sharing plan with a cash or deferred feature. Employees with a year of service must be allowed to contribute to the plan. In 2008, employees can make pretax contributions of up to $15,500 of salary. These deferrals go into a separate account for each employee and aren't taxed until distributed. Employer contributions can be made by discretionary profit-sharing contributions or employee matching contributions. Combined contributions in 2008 can't exceed the lesser of $46,000 or 100% of the employee's salary. Most 401(k) plans are subject to discrimination testing to ensure that higher paid employees aren’t being paid plan benefits disproportionately. A safe harbor 401(k) plan avoids discrimination testing by requiring employers to make either matching or fixed contributions to all eligible employees.

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement, like an amount equal to 30% of pay at retirement. This plan defines the retirement benefit, not the level of contributions. In 2008, a defined benefit plan can provide an annual benefit of up to $185,000 or 100% of pay if less. The annual contributions employers make to the plan to fund the promised benefit may vary from year to year, depending on the performance of plan investments. Defined benefit plans are generally too costly and too complex for most small businesses.

Consult your friendly home town banker to help set up your company’s retirement plan.

01/22/2009

The Basics of Financial Aid for College

Financial aid is money distributed by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid, while grants and scholarships do not. A student can receive both federal and college aid.

Financial aid can be either need-based, which is dependent on your child's financial need, or merit-based, which is awarded according to your child's academic, athletic, musical, or artistic merit. Most financial aid is need-based.

The FAFSA (Free Application for Federal Student Aid) uses a formula to determine need for financial aid. Your income and assets and your child's income and assets are tallied and assessed at certain rates. You're granted certain deductions and allowances against income, and you're able to exclude certain assets from consideration. The result is a figure known as your expected family contribution, or EFC. This is the amount of money you must contribute to college costs to be eligible for aid. To calculate your child's financial need, subtract your EFC from the cost at a given college.

Colleges have their own way of determining financial aid. The process works similarly as with the federal government, except that the college formula takes a more in-depth look at your income and assets to determine how "needy" your child really is. Just because your child has financial need doesn't mean that colleges will meet 100% of that need. Some colleges meet only a portion of that need, which is called getting "gapped." If this happens to you, you'll have to cover the gaps, in addition to paying your EFC.

The FAFSA can be completed online at www.fafsa.ed.gov. This method takes only one week to process. The FAFSA can't be filed before January 1 in the year that your child will be attending college. After your FAFSA is processed, your child will receive a Student Aid Report in the mail highlighting your EFC. Then, the financial aid administrator at each school will try to craft an aid package to meet your child's financial need. In early spring, your child will receive financial aid award letters from colleges. If you'd like more aid from a particular school, your chances are best if you can document a change in circumstances that affects your ability to pay, such as a job loss, high medical bills, or an unforeseen event.

Here are some financial aid products you should know:

• Stafford Loan--The most common low-interest, federal student loan for college students. The interest rate is fixed at 6.8% for new loans.
• Perkins Loan--A low-interest, federal student loan for college students with the greatest financial need. The interest rate is fixed at 5%.
• PLUS Loan--A federal education loan for parents of college students that’s available through financial institutions. Parents can borrow the full cost of their child's education, less any financial aid received. Their credit history must be good to qualify. The interest rate is fixed at 8.5% for new loans.
• Pell and SEOG Grants--These grants are available to undergraduate students with exceptional financial need.

 In recent years, merit aid has been making a comeback at colleges. Many groups offer merit scholarships to students meeting certain criteria. Your child can apply online and input his or her background, abilities, and interests and receive a free matching list of potential scholarships. Then it's up to your child to meet the various application deadlines.

Consult your friendly home town banker to design a plan for you to pay for college expenses. Start early by saving and use need and merit-based financial aid when it’s time to apply.

01/15/2009

Understanding IRAs

An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. Let’s look at some basic IRA rules and benefits.

There are two major types of IRAs: traditional IRAs and Roth IRAs. Both allow you to make annual contributions of up to $5,000 in 2008 and 2009--or $6,000 if you’re age 50 or older. You must have taxable income to contribute to an IRA, but your spouse can contribute even though he/she is not working. Both traditional and Roth IRAs feature tax-sheltered growth of earnings. There are important differences between these two types of IRAs that you must understand.

Traditional IRAs can be opened by anyone working with taxable earnings who is under the age of seventy and one-half. You can contribute up to the maximum limit each year only if your taxable income meets that amount. If you make less than the maximum limit, you can only contribute an amount equal to what you made in taxable income for that year. Traditional IRA contributions may be tax deductible on your federal income tax return. This is important because tax-deductible (pre-tax) contributions lower your taxable income for the year, saving you money in taxes. If you or your spouse is covered by an employer-sponsored retirement plan, limitations exist based on your modified adjusted gross income (MAGI). Be sure to verify the amount you can contribute in this circumstance.

Your traditional IRA will grow tax-deferred until you start making withdrawals. Withdrawals are subject to income tax. Withdrawals prior to age fifty-nine and one-half carry an early withdrawal penalty of 10%. Withdrawals become mandatory at age seventy and one-half when your IRA becomes subject to required minimum distributions (RMDs) designed to deplete your account based on your life expectancy.

Roth IRAs are more challenging to establish. You qualify by having taxable compensation, meeting MAGI limits, and establishing your tax filing status. You can invest only after-tax dollars in a Roth IRA. If you meet certain conditions, withdrawals from a Roth IRA will be completely free from federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply: You have reached age 59½ by the time of the withdrawal; the withdrawal is made because of disability; the withdrawal (of up to $10,000) is made to pay first-time homebuyer expenses; the withdrawal is made by your beneficiary or estate after your death.

The ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. Another Roth IRA advantage is that there are no RMDs after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. You can also keep contributing to a Roth IRA after age 70½, as long as you have taxable compensation and qualify.

Which type of IRA is best for you? The Roth IRA may make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. A traditional IRA may be a better tool if you want to lower your yearly tax bill while you're still working. You can have a traditional IRA and a Roth IRA, but your total annual contribution to both cannot exceed the $5,000 standard limit or $6,000 if you’re age 50 or older.

Consult your friendly home town banker for IRAs and all of your retirement savings needs.

01/06/2009

Estate Planning With Beneficiary Designations

One way to leave assets after your death without writing a will is to designate a beneficiary. A beneficiary is the person or entity you choose to receive the assets. If you're single, you can choose anyone you wish as beneficiary. If you're married, spousal rights may restrict your choice. You can also name a charity, your estate, or a trust as the beneficiary of some life insurance policies and retirement plans. It's easy to designate a beneficiary and it costs nothing. You simply file the appropriate form with your retirement plan administrator or your life insurance company.

A beneficiary designation allows you to transfer the proceeds of a life insurance policy or a retirement plan without going through probate. Probate can be a lengthy and costly process. Assets that pass through probate may take a year or more to reach your beneficiaries, and you run the risk that they may not reach the people you intended. Also, probate records are open to the public, so knowledge of how you've bequeathed your estate is available to anyone who inquires.

A beneficiary designation allows your assets such as a retirement plan or life insurance policy to remain in your name until you die, although others invest and control the funds. Because the assets remain in your name, you may be able to borrow against the funds in a retirement account. Or, you could cash in your life insurance policy to provide needed income if you were faced with a terminal illness or other emergency. In other words, by using a beneficiary designation as an estate planning tool, you haven't made an irrevocable choice, as you would have if you'd set up an irrevocable trust. And you can change your beneficiary at any time. However, if you're married, your spouse may have to consent to a change in the beneficiary of certain asset accounts.

A beneficiary designation can have an important impact on both income and estate taxes. Death proceeds received under a life insurance policy generally aren't subject to income tax. Your retirement account savings are exempt from income tax during your life, but after your death, your beneficiary is taxed on the proceeds. Income tax isn't owed until withdrawals are made. As for estate taxes, your entire interest in a retirement plan or life insurance policy at the time of your death is added to your other assets in determining whether any estate tax is owed. When you designate your spouse as the beneficiary, however, no estate tax is owed due to the unlimited marital deduction.

Choosing the beneficiary for the type of account you have is very important. Typical choices include: Spouse, children (If you name a child as a beneficiary, you should also appoint an adult to act as guardian of the money.), another adult, a favorite charity, a trust, or an estate. Note that designating your estate as beneficiary wipes out the benefits of saving time in probate and could create an undesirable taxable event.

Once you're gone, your beneficiary is free to use the proceeds from your assets as he or she pleases, unless you use a trust. A spouse may remarry, or simply change his or her mind about providing for the children from your first marriage. If this is a concern, consider naming a trust as the beneficiary.

Consult your friendly home town banker about naming beneficiaries on your bank accounts and how to best use beneficiary designations as an estate planning tool that can work for you while you’re here --- and when you’re not.

Back to President's Articles

01/29/2009

Retirement Plans for Small Businesses

As a business owner, a retirement plan can help you and your employees save for the future.

Retirement plans are usually either IRA-based or qualified. Qualified plans must be maintained by a third party and are more complicated and expensive to administer because they have to comply with more federal regulations than IRA-based plans do. IRA-based plans can be self-managed and cost less to maintain.

So which plan is right for your business? Start by defining your goals before attempting to choose a plan. Do you want:

• To maximize the amount you can save for your own retirement?
• A plan funded by employer contributions? Employee contributions? Both?
• A plan that allows you and your employees to make pretax and/or Roth contributions?
• The flexibility to skip employer contributions in some years?
• A plan with the lowest cost? Easiest administration?

 Let’s look at the different types of plans.

A SEP allows you to set up an IRA for yourself and each of your eligible employees. Most employers, including those who are self-employed, can establish a SEP-IRA. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and earns $500 or more. For 2008, employer contributions for each employee are limited to the lesser of $46,000 or 25% of pay.

The SIMPLE IRA plan is for 100 or fewer employees. Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan. In 2008, employees can contribute up to $10,500. You must either match your employees' contributions up to 3% of their salary or make a fixed contribution of 2% of compensation for each eligible employee. SIMPLE IRA plans are easy to set up and administrative costs are low.

Profit sharing plans favor the employer because they are qualified and discretionary. There's usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose. Employees with a year of service are eligible to participate and the plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses that it makes for them.

The 401(k) plan is technically, a qualified profit-sharing plan with a cash or deferred feature. Employees with a year of service must be allowed to contribute to the plan. In 2008, employees can make pretax contributions of up to $15,500 of salary. These deferrals go into a separate account for each employee and aren't taxed until distributed. Employer contributions can be made by discretionary profit-sharing contributions or employee matching contributions. Combined contributions in 2008 can't exceed the lesser of $46,000 or 100% of the employee's salary. Most 401(k) plans are subject to discrimination testing to ensure that higher paid employees aren’t being paid plan benefits disproportionately. A safe harbor 401(k) plan avoids discrimination testing by requiring employers to make either matching or fixed contributions to all eligible employees.

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement, like an amount equal to 30% of pay at retirement. This plan defines the retirement benefit, not the level of contributions. In 2008, a defined benefit plan can provide an annual benefit of up to $185,000 or 100% of pay if less. The annual contributions employers make to the plan to fund the promised benefit may vary from year to year, depending on the performance of plan investments. Defined benefit plans are generally too costly and too complex for most small businesses.

Consult your friendly home town banker to help set up your company’s retirement plan.

01/22/2009

The Basics of Financial Aid for College

Financial aid is money distributed by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid, while grants and scholarships do not. A student can receive both federal and college aid.

Financial aid can be either need-based, which is dependent on your child's financial need, or merit-based, which is awarded according to your child's academic, athletic, musical, or artistic merit. Most financial aid is need-based.

The FAFSA (Free Application for Federal Student Aid) uses a formula to determine need for financial aid. Your income and assets and your child's income and assets are tallied and assessed at certain rates. You're granted certain deductions and allowances against income, and you're able to exclude certain assets from consideration. The result is a figure known as your expected family contribution, or EFC. This is the amount of money you must contribute to college costs to be eligible for aid. To calculate your child's financial need, subtract your EFC from the cost at a given college.

Colleges have their own way of determining financial aid. The process works similarly as with the federal government, except that the college formula takes a more in-depth look at your income and assets to determine how "needy" your child really is. Just because your child has financial need doesn't mean that colleges will meet 100% of that need. Some colleges meet only a portion of that need, which is called getting "gapped." If this happens to you, you'll have to cover the gaps, in addition to paying your EFC.

The FAFSA can be completed online at www.fafsa.ed.gov. This method takes only one week to process. The FAFSA can't be filed before January 1 in the year that your child will be attending college. After your FAFSA is processed, your child will receive a Student Aid Report in the mail highlighting your EFC. Then, the financial aid administrator at each school will try to craft an aid package to meet your child's financial need. In early spring, your child will receive financial aid award letters from colleges. If you'd like more aid from a particular school, your chances are best if you can document a change in circumstances that affects your ability to pay, such as a job loss, high medical bills, or an unforeseen event.

Here are some financial aid products you should know:

• Stafford Loan--The most common low-interest, federal student loan for college students. The interest rate is fixed at 6.8% for new loans.
• Perkins Loan--A low-interest, federal student loan for college students with the greatest financial need. The interest rate is fixed at 5%.
• PLUS Loan--A federal education loan for parents of college students that’s available through financial institutions. Parents can borrow the full cost of their child's education, less any financial aid received. Their credit history must be good to qualify. The interest rate is fixed at 8.5% for new loans.
• Pell and SEOG Grants--These grants are available to undergraduate students with exceptional financial need.

 In recent years, merit aid has been making a comeback at colleges. Many groups offer merit scholarships to students meeting certain criteria. Your child can apply online and input his or her background, abilities, and interests and receive a free matching list of potential scholarships. Then it's up to your child to meet the various application deadlines.

Consult your friendly home town banker to design a plan for you to pay for college expenses. Start early by saving and use need and merit-based financial aid when it’s time to apply.

01/15/2009

Understanding IRAs

An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. Let’s look at some basic IRA rules and benefits.

There are two major types of IRAs: traditional IRAs and Roth IRAs. Both allow you to make annual contributions of up to $5,000 in 2008 and 2009--or $6,000 if you’re age 50 or older. You must have taxable income to contribute to an IRA, but your spouse can contribute even though he/she is not working. Both traditional and Roth IRAs feature tax-sheltered growth of earnings. There are important differences between these two types of IRAs that you must understand.

Traditional IRAs can be opened by anyone working with taxable earnings who is under the age of seventy and one-half. You can contribute up to the maximum limit each year only if your taxable income meets that amount. If you make less than the maximum limit, you can only contribute an amount equal to what you made in taxable income for that year. Traditional IRA contributions may be tax deductible on your federal income tax return. This is important because tax-deductible (pre-tax) contributions lower your taxable income for the year, saving you money in taxes. If you or your spouse is covered by an employer-sponsored retirement plan, limitations exist based on your modified adjusted gross income (MAGI). Be sure to verify the amount you can contribute in this circumstance.

Your traditional IRA will grow tax-deferred until you start making withdrawals. Withdrawals are subject to income tax. Withdrawals prior to age fifty-nine and one-half carry an early withdrawal penalty of 10%. Withdrawals become mandatory at age seventy and one-half when your IRA becomes subject to required minimum distributions (RMDs) designed to deplete your account based on your life expectancy.

Roth IRAs are more challenging to establish. You qualify by having taxable compensation, meeting MAGI limits, and establishing your tax filing status. You can invest only after-tax dollars in a Roth IRA. If you meet certain conditions, withdrawals from a Roth IRA will be completely free from federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply: You have reached age 59½ by the time of the withdrawal; the withdrawal is made because of disability; the withdrawal (of up to $10,000) is made to pay first-time homebuyer expenses; the withdrawal is made by your beneficiary or estate after your death.

The ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. Another Roth IRA advantage is that there are no RMDs after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. You can also keep contributing to a Roth IRA after age 70½, as long as you have taxable compensation and qualify.

Which type of IRA is best for you? The Roth IRA may make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. A traditional IRA may be a better tool if you want to lower your yearly tax bill while you're still working. You can have a traditional IRA and a Roth IRA, but your total annual contribution to both cannot exceed the $5,000 standard limit or $6,000 if you’re age 50 or older.

Consult your friendly home town banker for IRAs and all of your retirement savings needs.

01/06/2009

Estate Planning With Beneficiary Designations

One way to leave assets after your death without writing a will is to designate a beneficiary. A beneficiary is the person or entity you choose to receive the assets. If you're single, you can choose anyone you wish as beneficiary. If you're married, spousal rights may restrict your choice. You can also name a charity, your estate, or a trust as the beneficiary of some life insurance policies and retirement plans. It's easy to designate a beneficiary and it costs nothing. You simply file the appropriate form with your retirement plan administrator or your life insurance company.

A beneficiary designation allows you to transfer the proceeds of a life insurance policy or a retirement plan without going through probate. Probate can be a lengthy and costly process. Assets that pass through probate may take a year or more to reach your beneficiaries, and you run the risk that they may not reach the people you intended. Also, probate records are open to the public, so knowledge of how you've bequeathed your estate is available to anyone who inquires.

A beneficiary designation allows your assets such as a retirement plan or life insurance policy to remain in your name until you die, although others invest and control the funds. Because the assets remain in your name, you may be able to borrow against the funds in a retirement account. Or, you could cash in your life insurance policy to provide needed income if you were faced with a terminal illness or other emergency. In other words, by using a beneficiary designation as an estate planning tool, you haven't made an irrevocable choice, as you would have if you'd set up an irrevocable trust. And you can change your beneficiary at any time. However, if you're married, your spouse may have to consent to a change in the beneficiary of certain asset accounts.

A beneficiary designation can have an important impact on both income and estate taxes. Death proceeds received under a life insurance policy generally aren't subject to income tax. Your retirement account savings are exempt from income tax during your life, but after your death, your beneficiary is taxed on the proceeds. Income tax isn't owed until withdrawals are made. As for estate taxes, your entire interest in a retirement plan or life insurance policy at the time of your death is added to your other assets in determining whether any estate tax is owed. When you designate your spouse as the beneficiary, however, no estate tax is owed due to the unlimited marital deduction.

Choosing the beneficiary for the type of account you have is very important. Typical choices include: Spouse, children (If you name a child as a beneficiary, you should also appoint an adult to act as guardian of the money.), another adult, a favorite charity, a trust, or an estate. Note that designating your estate as beneficiary wipes out the benefits of saving time in probate and could create an undesirable taxable event.

Once you're gone, your beneficiary is free to use the proceeds from your assets as he or she pleases, unless you use a trust. A spouse may remarry, or simply change his or her mind about providing for the children from your first marriage. If this is a concern, consider naming a trust as the beneficiary.

Consult your friendly home town banker about naming beneficiaries on your bank accounts and how to best use beneficiary designations as an estate planning tool that can work for you while you’re here --- and when you’re not.

Back to President's Articles