Financial Planning Guide


Personal Financial Planning
Steps to managing income and expenses include:
Be realistic when making a budget.
Identify monthly outflows as living expenses, savings, and discretionary.
Estimate low for income.
Estimate high for expenses.
Track every expense.
Track income and expenses monthly and review periodically.
Save for large purchases.
Save first.
Budget for fun.
Education Funding
Several tax advantages are available to help save for educa- tion expenses.
Savings bond interest may be tax free if used for qualified education expenses.
Coverdell education savings accounts (ESAs) provide tax-deferred growth and tax-free distributions for qual- ified education expenses.
Qualified tuition programs (529 plans) provide tax-free distributions for qualified tuition expenses.
A gift of low-basis stock allows the individual’s child to sell the stock and use the proceeds to fund education ex- penses. This is beneficial when the individual is in a high- er tax bracket and the student is in a lower tax bracket. Kiddie tax rules may apply.
Roth IRAs can be used as a savings vehicle for educa- tion purposes. Contributions are removed from a Roth IRA without tax or penalty. Parents and grandparents fund the Roth IRA with the intention of removing the

contribution and gifting that amount to the student. If the student does not go to college, or has the costs covered by other means, the contributions can stay in the Roth IRA without concern for tax or penalty.
Cash-value life insurance can also be used as a funding mechanism for college expenses.

The purpose of insurance is to transfer the risk of loss to a third party to prevent catastrophic financial loss should that risk become a reality. For this reason, people choose to insure the larger risks and take on the smaller potential losses at their own risk.
Liability insurance protects from financial loss due to specific incidents that create a liability. Automobile and homeowner insurance are examples of insurance that provide liability protection.
Health insurance provides financial protection from medical costs associated with illness and/or injury.
Disability insurance provides for income replacement in the event a person is unable to work due to injury or illness.
Long-term care insurance protects financial assets and income in the event a person is confined to a long-term nursing home or needs in-home care for an extended pe- riod of time.
Life insurance provides for an immediate lump-sum amount of money in the event of the insured’s death. The purpose of life insurance is to provide income replace- ment in the event the income earner dies.
➲ Planning Tip: Individuals may want to ask their insurance agent about purchasing umbrella liability protection. The cost is typically economical and it can provide additional protec- tion from a liability loss.


Investment Planning


Financial Planning Guide


Example: Val owns the following shares of stock.
Stock A Stock B Total
Cost…………………………….. $1,000 $3,000 $4,000
FMV ……………………………. $4,000 ……. $1,000 $5,000
Unrealized gain/loss …. $3,000 ….. ($2,000) $1,000
Val wants to make a $5,000 charitable donation by selling stock

Stocks, bonds, money markets, mutual funds, commodities, real estate, and options are the most common types of in- vestments. Most financial professionals will recommend diversifying an investment portfolio across the different spectrum of investments. Investors need to be aware of the risks involved with any investment.
Market risk. This is the risk that the value of the invest- ment will be below the purchase price when or if it needs to be sold.
Inflation risk. If the increase in value of an investment is less than the increase in the inflation rate, the future pur- chasing power will be less.
Liquidity risk. Not all investments can be sold at a mo- ment’s notice. Some investments do not have a market- place where they can be sold.
Interest rate risk. If an individual buys an interest-bear- ing investment and interest rates go up, the current in- vestment value can decrease.
Tax risk. Buying and selling repeatedly for a profit will lead to taxable gains. The tax paid presents a risk to the investment value.
Political risk. Specifically, when investing globally, po- litical changes within a country can decrease investment values.
Currency risk. Fluctuations in world currencies will cause investment values to rise or fall, independent from the true value of the investment.

Income Tax Planning
In addition to the economic logic that a financial transaction must have, it is important to evaluate the tax consequences of those transactions.

Basis and Holding Period
Knowing the basis and holding period in advance of a transaction can prevent costly tax consequences. Selling highly-appreciated assets will increase the amount of tax owed. Selling investments that are below basis can pro- vide tax benefits by allowing a dollar-for-dollar reduction against capital gains. In addition, individuals are allowed to write off investment losses in excess of gains up to $3,000 per year. Any amount not used can be carried forward to future tax years.

and contributing the cash to charity. If she sells both stocks and
donates the proceeds, she will generate a taxable capital gain of
$1,000 and take a charitable deduction of $5,000. Instead of sell- ing both stocks, Val could gift stock A to the charity, along with the proceeds from the sale of stock B. Her tax result would be a capital loss of $2,000 from the sale of stock B and a charitable deduction of $5,000 ($4,000 FMV of stock A, plus $1,000 proceeds from the sale of stock B). She thus avoids paying tax on the $3,000 appre- ciation on stock A while achieving the same charitable deduction.

Annuity or Life Insurance Exchanges
A life insurance or annuity contract can be exchanged to a dif- ferent life insurance or annuity contract without the exchange becoming taxable. Limitations may apply.

Early Retirement
Early retirees (before age 59½) are allowed to take distribu- tions from retirement plans and avoid the 10% additional tax. In order to do so, they must follow certain rules.
Distributions must be taken at least annually in substan- tially equal amounts.
Distribution amounts are determined by life expectancy of the recipient.
Distributions must be taken for a minimum of five years beginning with the year of the first distribution. If, at the end of the five years, the recipient has not yet attained the age of 59½, he or she must continue the distributions un- til attaining age 59½.

This brochure contains general information for taxpayers and should not be relied upon as the only source of authority.
Taxpayers should seek professional tax advice for more information.
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