EagleStone Tax & Wealth Newsletter – July 2015

Reviewing Your Finances Mid-Year


You made it through tax season and now you’re looking forward to your summer vacation. But before you go, take some time to review your finances. Mid-year is an ideal time to do so, because the demands on your time may be fewer, and the planning opportunities greater, than if you wait until the end of the year.

Think about your priorities

What are your priorities? Here are some questions that may help you identify the financial issues you want to address within the next few months.

  • Are any life-changing events coming up soon, such as marriage, the birth of a child, retirement, or a career change?
  • Will your income or expenses substantially increase or decrease this year?
  • Have you managed to save as much as you expected this year?
  • Are you comfortable with the amount of debt that you have?
  • Are you concerned about the performance of your investment portfolio?
  • Do you have any other specific needs or concerns that you would like to address?

Take another look at your taxes

Completing a mid-year estimate of your tax liability may reveal tax planning opportunities. You can use last year’s tax return as a basis, then make any anticipated adjustments to your income and deductions for this year.

You’ll want to check your withholding, especially if you owed taxes when you filed your most recent income tax return or you received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid a big tax bill or having too much of your money tied up with Uncle Sam. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.

To help avoid missed tax-saving opportunities for the year, one basic thing you can do right now is to set up a system for saving receipts and other tax-related documents. This can be as simple as dedicating a folder in your file cabinet to this year’s tax return so that you can keep track of important paperwork.

Reconsider your retirement plan

If you’re working and you received a pay increase this year, don’t overlook the opportunity to increase your retirement plan contributions by asking your employer to set aside a higher percentage of your salary. In 2015, you may be able to contribute up to $18,000 to your workplace retirement plan ($24,000 if you’re age 50 or older).

If you’re already retired, take another look at your retirement income needs and whether your current investments and distribution strategy will continue to provide enough income.

Review your investments

Have you recently reviewed your portfolio to make sure that your asset allocation is still in line with your financial goals, time horizon, and tolerance for risk? Though it’s common to rebalance a portfolio at the end of the year, you may need to rebalance more frequently if the market is volatile.

Note: Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Identify your insurance needs

Do you know exactly how much life and disability insurance coverage you have? Are you familiar with the terms of your homeowners, renters, and auto insurance policies? If not, it’s time to add your insurance policies to your summer reading list. Insurance needs frequently change, and it’s possible that your coverage hasn’t kept pace with your income or family circumstances.

Why Businesses Need a Disaster Preparedness Program


According to the Insurance Information Institute, 119 natural disasters occurred in the United States in 2014, totaling $25 billion in losses. But natural disasters represent just a portion of the crises that your business could face. Although you may not be located in an area prone to hurricanes, blizzards, tornadoes, floods, earthquakes, mudslides, and wildfires, you still need to consider the potential for power outages, civil unrest, terrorism (including cyberterrorism), fire, data breaches, and illness epidemics. What risks and hazards might your business face?

Approximately 40% to 60% of small businesses never recover from a disaster, reportspreparemybusiness.org, a website created by the Small Business Administration (SBA) and Agility Recovery, an organization that helps businesses prepare for disasters and manage emergencies when they strike. For this reason, it is in the best interest of every business to identify potential risks and develop a plan to address them–before a crisis hits. Fortunately, many resources are available to assist business owners in developing a disaster preparedness program.

Where to start

Following are five steps that will help you create a disaster preparedness program, as outlined by ready.gov, a national public service campaign designed to educate Americans about preparing for and responding to natural and man-made disasters.

Step 1: Program Management. Although there are often minimum regulations that govern how certain businesses manage risk, as a business owner you will need to determine whether the minimums are enough. As ready.gov states, “Many risks cannot be insured, so a preparedness program may be the only means of managing those risks.” Management commitment to a preparedness program, as well as a written preparedness policy and oversight committee, may be critical to ensuring your business’s longevity.

Step 2: Planning. This step should include the creation of a “risk assessment” that identifies all potential risks and hazards for your business, with ideas for mitigating their impacts. It should highlight threats and hazards that are considered “probable,” as well as any that could cause injury, property damage, business disruption, or environmental impact. Another critical document is the “business impact analysis,” which details sensitive or critical processes, as well as the financial and operational impacts that would occur due to disruption of those processes.

Step 3: Implementation. In this step, committee members identify and assess resources, draft written plans, develop a system to manage incidents, and train employees as needed. Several key documents contribute to successful program implementation, including crisis communications, emergency response, and business continuity plans.

Step 4: Testing & Exercises. In order to evaluate the program’s effectiveness, including the success of employee training, management should run tests and drills to see what works and note opportunities for improvement.

Step 5: Program Improvement. During testing or an actual incident, weaknesses in the program are likely to be revealed. They should be documented, along with lessons learned and strategies for addressing such problems in the future.

Other resources

The Small Business Adminstration (sba.gov) offers a number of resources designed to help small businesses shore up their emergency preparedness, including links to templates and worksheets that will help you gather the data you need to put together the various written documents. At this website, you can also find links to information about the SBA’s own “Disaster Preparedness and Recovery Plan,” which provides details on assistance the SBA offers after a disaster strikes.

American Red Cross Ready Rating™ (readyrating.org) is a self-guided online program designed to help member businesses, organizations, and schools assess their level of emergency preparedness. The core of the program is a 123-point self-assessment that is used to gauge one’s level of preparedness. Members also have access to a variety of online tools and resources to help create and refine a disaster preparedness plan.

At preparemybusiness.org, the site mentioned above, business owners will find downloadable educational information, an archive of helpful webinars, and links to many of the other resources mentioned here.

Finally, the Insurance Institute for Business & Home Safety (disastersafety.org) offers a variety of resources, including research reports and an online tool that allows you to enter your Zip code and receive information about specific risks in your area.

Three College Savings Strategies with Tax Advantages


To limit borrowing at college time, it’s smart to start saving as soon as possible. But where should you put your money? In the college savings game, you should generally opt for tax-advantaged strategies whenever possible because any money you save on taxes is more money available for your savings fund.

529 plans

A 529 plan is a savings vehicle designed specifically for college that offers federal and state tax benefits if certain conditions are met. Anyone can contribute to a 529 plan, and lifetime contribution limits, which vary by state, are high–typically $300,000 and up.

Contributions to a 529 plan accumulate tax deferred at the federal level, and earnings are tax free if they’re used to pay the beneficiary’s qualified education expenses. (In his State of the Union speech in January, President Obama proposed eliminating this tax-free benefit but subsequently dropped the proposal after a public backlash.) Many states also offer their own 529 plan tax benefits, such as an income tax deduction for contributions and tax-free earnings. However, if a withdrawal is used for a non-educational expense, the earnings portion is subject to federal income tax and a 10% federal penalty (and possibly state tax).

529 plans offer a unique savings feature: accelerated gifting. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2015) is allowed in a single year per beneficiary, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. No gift tax will be owed if the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years. This can be a favorable way for grandparents to contribute to their grandchildren’s education.

Also, starting in 2015, account owners can change the investment option on their existing 529 account funds twice per year (prior to 2015, the rule was once per year).

Note: Investors should consider the investment objectives, risks, fees, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. Finally, there is the risk that investments may lose money or not perform well enough to cover college costs as anticipated.

Coverdell education savings accounts

A Coverdell education savings account (ESA) lets you contribute up to $2,000 per year for a child’s college expenses if the child (beneficiary) is under age 18 and your modified adjusted gross income in 2015 is less than $220,000 if married filing jointly and less than $110,000 if a single filer.

The federal tax treatment of a Coverdell account is exactly the same as a 529 plan; contributions accumulate tax deferred and earnings are tax free when used to pay the beneficiary’s qualified education expenses. And if a withdrawal is used for a non-educational expense, the earnings portion of the withdrawal is subject to income tax and a 10% penalty.

The $2,000 annual limit makes Coverdell ESAs less suitable as a way to accumulate significant sums for college, though a Coverdell account might be useful as a supplement to another college savings strategy.

Roth IRAs

Though traditionally used for retirement savings, Roth IRAs are an increasingly favored way for parents to save for college. Contributions can be withdrawn at any time and are always tax free (because contributions to a Roth IRA are made with after-tax dollars). For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings–typically subject to income tax and a 10% premature distribution penalty tax–is spared the 10% penalty if the withdrawal is used to pay a child’s college expenses.

Roth IRAs offer some flexibility over 529 plans and Coverdell ESAs. First, Roth savers won’t be penalized for using the money for something other than college. Second, federal and college financial aid formulas do not consider the value of Roth IRAs, or any retirement accounts, when determining financial need. On the flip side, using Roth funds for college means you’ll have less available for retirement. To be eligible to contribute up to the annual limit to a Roth IRA, your modified adjusted gross income in 2015 must be less than $183,000 if married filing jointly and less than $116,000 if a single filer (a reduced contribution amount is allowed at incomes slightly above these levels).

And here’s another way to use a Roth IRA: If a student is working and has earned income, he or she can open a Roth IRA. Contributions will be available for college costs if needed, yet the funds won’t be counted against the student for financial aid purposes.

Should I be worried about a Federal Reserve interest rate hike?

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After years of record-low interest rates, at some point this year the Federal Reserve is expected to begin raising its target federal funds interest rate (the rate at which banks lend to one another funds they’ve deposited at the Fed). Because bond prices typically fall when interest rates rise, any rate hike is likely to affect the value of bond investments.

However, higher rates aren’t all bad news. For those who have been diligent about saving and/or have kept a substantial portion of their portfolios in cash alternatives, higher rates could be a boon. For example, higher rates could mean that savings accounts and CDs are likely to do better at providing income than they have in recent years.

Also, bonds don’t respond uniformly to interest rate changes. The differences, or spreads, between the yields of various types of debt can mean that some bonds may be under- or overvalued compared to others. Depending on your risk tolerance and time horizon, there are many ways to adjust a bond portfolio to help cope with rising interest rates. However, don’t forget that a bond’s total return is a combination of its yield and any changes in its price; bonds seeking to achieve higher yields typically involve a higher degree of risk.

Finally, some troubled economies overseas have been forced to lower interest rates on their sovereign bonds in an attempt to provide economic stimulus. Lower rates abroad have the potential to make U.S. debt, particularly Treasury securities (whose timely payment of interest and principal is backed by the full faith and credit of the U.S. Treasury), even more attractive to foreign investors. Though past performance is no guarantee of future results, that’s what happened during much of 2014. Increased demand abroad might help provide some support for bonds denominated in U.S. dollars.

Remember that bonds are subject not only to interest rate risk but also to inflation risk, market risk, and credit risk; a bond sold prior to maturity may be worth more or less than its original value. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

Will I have to pay a penalty tax if I withdraw money from my IRA for a down payment on a house?

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Whether you may be subject to a penalty tax depends on a number of factors, such as your age at the time of the withdrawal, how quickly you use the funds, and whether the person acquiring the home is a first-time homebuyer.

Distributions from an IRA before you reach the age of 59½ are generally considered premature distributions (or early withdrawals) by the IRS. To discourage withdrawals taken before retirement age, these premature distributions are subject to the usual federal (and possibly state) income taxes in the year received, and the taxable portion may be subject to a 10% federal tax penalty under Internal Revenue Code Section 72(t) (and possibly a state penalty tax). This 10% tax is referred to as the “premature distribution tax.”

Fortunately, not all distributions before age 59½ are subject to this penalty. The IRS does allow some exceptions, including one for the payment of first-time homebuyer expenses.

In order for your withdrawal to qualify for this exception, the funds must be used within 120 days to pay the costs of acquiring the principal residence of a first-time home buyer. A first-time homebuyer (you or your spouse, or the child, grandchild, or ancestor of either you or your spouse) is one who neither owned nor had an ownership interest in another principal residence during the two-year period ending on the day the new home is acquired.

Keep in mind that if you qualify for this exception, it is subject to a $10,000 lifetime limit.


IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015


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