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Three Reasons Why your Child Should (or Shouldn’t) Have Life Insurance

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Should you carry life insurance on your children? When determining whether or not to carry life insurance on your children, you’ll find that people have a variety of opinions. Here’s a look at some of the most common considerations for and against life insurance policies on children:

  • Financial security. Traditionally, you take out life insurance to provide for the financial security of dependents. The policy should include funds to replace the insured’s income and to pay off debts. Neither of these reasons applies to young children. They don’t generally have any significant income, and they don’t usually have any debts. Some parents might want to carry a modest amount of insurance to cover funeral costs for their children in case the unthinkable happens.
  • Some people believe that by taking out a policy at a young age, it helps guarantee insurability as the child grows older. This could be important if the child develops a major illness later in life. The problem is that if the child does develop a serious illness, insurance will still become very expensive or limited.
  • Insurance as an investment. Some advisors suggest that parents should take out a whole life policy on their children. These policies include a savings component to build up cash value in the policy. You could then use that value for education expenses or other needs. But others say that there are cheaper and more efficient ways to save than by using life insurance. For example, putting money into a tax-advantaged 529 education savings plan is often a better way to save for school tuition costs.

Although a majority of advisors may argue against life insurance for children, there may be some situations where people find it makes sense. However, you shouldn’t take out a policy just because it is offered to you or because others are doing it. Make sure to do your homework and know exactly why you need the insurance.

New Job? Four Choices for Your Existing 401(k)

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Changing jobs and companies can be an exciting opportunity, but you have a choice to make. What will you do with the retirement savings you have built in your 401(k)? Consider these four options:

  1. Withdraw the money and don’t reinvest it. This is usually the worst choice you can make. Generally, you’ll owe taxes on the distribution at ordinary income rates. (Special rules may apply if you own company stock in the plan.) Unless you’re over age 59½, you’ll pay a 10 percent penalty tax, too. More importantly, you’ll lose the opportunity for future tax-deferred growth of your retirement savings. And once you have the funds readily available, it’s all too easy to spend the money instead of saving for your retirement.
  2. Roll the money into an IRA. You can avoid immediate taxes and preserve the tax-favored status of your savings by rolling the money into an IRA. This option also gives you full control over how you invest the balances in the future. You have a 60-day window to complete the rollover from the time you close out your 401(k). However, you should always ask for a “trustee-to-trustee” rollover to avoid potential problems.
  3. Roll the balance into your new employer’s plan. If your new employer allows it, you can roll the balance into your new plan and invest it according to your new investment choices. However, there may be a waiting period before you can join your new plan.
  4. Leave the money in your old employer’s plan. You may be able to leave the balance in your old plan, at least temporarily. Then you can do a rollover to an IRA or a new plan later. Check with your employer to see if this is an option.

Call if you need help making the right choice for your particular circumstances.

Could the Coverdell ESA be the Right Fund for You?

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You’re probably familiar with 529 college savings plans. Named for Section 529 of the Internal Revenue Code, they’re also known as qualified tuition programs, and they offer tax benefits when you save for college expenses.

But are you aware of a lesser-known cousin, established under Section 530 of the code? It’s called a Coverdell Education Savings Account and it’s been available since 1998.

The general idea of Coverdell accounts is similar to 529 plans – to provide tax incentives to encourage you to set money aside for education. However, one big difference between the two is this: Amounts you contribute to a Coverdell can be used to pay for educational costs from kindergarten through college.

Generally, you can establish a Coverdell for a child under the age of 18 – yours or someone else’s. Once the Coverdell is set up, you can make contributions of as much as $2,000 each year. That contribution limit begins to phase out when your income reaches $190,000 for joint filers and $95,000 for single filers.

Anyone, including trusts and corporations, can contribute to the account until the child turns 18. There are no age restrictions when the Coverdell is established for someone with special needs.

While your contribution is not tax-deductible, earnings within the account are tax-free as long as you use them for educational expenses or qualify for an exception. In addition, you can make a tax-free transfer of the account balance to another eligible beneficiary.

Qualified distributions from a Coverdell are tax-free when you use the money to pay for costs such as tuition, room and board, books, and computers.

Please call for information about other rules that apply to Coverdell accounts. We’ll be happy to help you decide whether establishing one makes sense for you.

How to be a Successful Saver

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How much money did you save last year? If your savings fell short of your goals, don’t give up. You can still take charge of your financial future. Here are tips to become a successful saver.

  • Set goals. Give your saving a purpose. Do you want to accumulate an emergency fund with enough cash to cover six months of living expenses? Other saving goals may include a college savings fund, vacation fund, or a fund for major purchases.
  • Treat your savings as your most important monthly bill. Write a check to savings first, or have your savings automatically deducted from your checking account or paycheck.
  • Take advantage of tax-deferred retirement accounts. If your employer offers a 401(k) or SIMPLE retirement plan, contribute the maximum amount allowed. No employer plan available? Contribute to an individual retirement account. The money you contribute can reduce your taxable income and grow tax-deferred.
  • Track your expenses. Highlight and eliminate unnecessary or wasteful spending. Control the use of your credit cards. The amount you pay each month in finance charges could go to savings instead. Get in the habit of giving yourself a regular cash allowance, and try to live with it.

For help in setting financial goals and developing a savings plan, call us.

Know When to Sell

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Deciding when to buy a stock is often easier than determining when to sell. As you’re reviewing your portfolio at year-end, consider these situations that may indicate the right time to sell.

When there are no tax consequences. If you hold stock in a retirement fund, you may want to reap gains with no tax impact.

To take money off the table. If a stock has had a nice run, you could sell a portion to recoup part of your investment. You can continue to invest in the stock but with locked-in gains.

A shift in fundamentals. Consider selling if the economy changes or an entire industry becomes vulnerable due to negative news.

When you’ve given up on a stock. If a stock has been declining or flat-lining for an extended period, selling low now can save you from having to sell even lower later on.

To take a contrarian position. If the market has gotten frothy and all the news is optimistic, choosing to harvest your gains could be a wise move.

When cash becomes attractive. A gloomy economic outlook could be reason to increase your cash reserves.

Having a disciplined selling strategy means giving as much thought to the sale of a stock as to the purchase. Contact us. We’re here to help.

Watch Year-End Mutual Fund Transactions

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The income tax effects of mutual funds can be complex, and poorly timed purchases or sales can create unpleasant year-end surprises. Read more

Balance Risk and Return to Create Investment Balance

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Even if you’re not an investment expert, you’re probably familiar with the term “diversification.” It means not putting all your eggs in one basket. Diversification calls for choosing the right mix of investments to keep a balance between risk and return. Read more

Don’t Get Soaked by a Wash Sale

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If you’re planning to adjust your investment portfolio by selling some losing stocks at year-end, take a minute to review the wash sale rules. Read more

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Eggs, Baskets, and Investments

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A well-diversified portfolio spreads out your investment risk. However, you can easily end up with more eggs in one basket than you intended. Here are some investment tips. Read more

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What Investment Expenses are Deductible?

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Whether you’re a stock market bull or bear, you have investment expenses – and you may be wondering if they’re deductible on your federal income tax return. Read more