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Divorcing? Pay attention to financial details

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SAN FRANCISCO (9/30/14)--If you didn't play a role in managing family finances during your marriage, you could be at a disadvantage if you're going through a divorce ( USAToday.com Sept. 23).
 
It's important for both spouses to understand their current financial situation and postdivorce needs. Address these items to stay on top of your money situation:
  • Cash flow --Understand immediate cash-flow needs; if you'll need access to cash right away, look at liquid assets such as stocks, bonds, and mutual funds. If you won't need cash immediately, look at long-term assets such as retirement plan accounts.
  • Insurance coverage-- Check for coverage gaps and ways to cut costs. Don't find out after a disaster that coverage was cancelled for lack of payments by your spouse. Remove your former spouse from your auto policy to protect yourself from liability if he or she is involved in an accident and is sued. Consider life insurance as part of the final divorce decree to cover financial obligations. If the spouse providing alimony and child support dies, this may mean a significant loss of income.
  • Taxes --Review the tax impact of investments. Even if two assets or accounts have equal value, their economic values could be very different once you factor in taxes. Keep unrealized capital gains on taxable investments in mind, since taxes will be due someday. Review the past three years to five years of taxes you filed as a married couple. This shows combined incomes and if there are tax assets that need to be considered in divorce negotiations. Tax assets, such as charitable contribution carry-forwards, provide a reduction in future taxes and should be considered an asset when splitting the marital estate.
  • Retirement assets --Handle these transfers with care. The divorce decree should classify these items in a specific way. Consult a tax adviser for assistance.
  • Account passwords --Make sure you have information for all financial accounts. You and your spouse eventually will have separate accounts for most items, but you still might need access to accounts such as college savings plans for children.
  • Joint liabilities --Cancel jointly held credit cards, pay outstanding tax liabilities, and refinance your mortgage if possible. Settle all liabilities before your divorce is final by either paying them off or by transferring them to the spouse taking responsibility for the debt.
  • Beneficiaries --Check your will, all insurance policies, and financial accounts such as pensions and 401(k)s to change beneficiaries.
  • Digital assets --Though some of these assets might not have financial value, they have emotional value. If you and your spouse shared profiles on social networking sites, now's the time to create individual ones. Make sure you have passwords to access the sites in the meantime. If you have an estate plan for digital assets if you die, change the digital executor if needed.
For related information, read "Breaking Up: Your Finances in a Legal Separation" and "Life Changes Trigger Financial Changes" in the Home & Family Finance Resource Center .
 

Use your gift cards, avoid wasted money

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AUSTIN, Texas (9/23/14)--When you give someone a gift card, there's a good chance at least a portion of your gift will go unused.
 
Every year close to $1 billion worth of gift cards is lost, due either to the card being misplaced or to the balance going so low it's merely forgotten (CreditCards.com Sept. 17). The Credit CARD Act of 2009 made it more difficult for retailers to run down the card value through inactivity fees or to cancel unused cards--but that doesn't protect consumers from themselves.
 
So here are some tips from CreditCards.com to ensure you get the full value of your gift card.
  • Put all your gift cards in one place. You can organize them physically or scan them all into an app on your phone.
     
  • Know the penalties. A company can't charge an inactivity fee for at least a year or deactivate a card sooner than five years. That's a generous window--just don't let it close.
     
  • Plan your shopping around gift cards. If you know how you're going to spend the gift card before you go shopping, you're more likely to use it.
     
  • Sell it or swap it. If you know you'll never use the card, there are multiple sites, such as cardpool.com or swapagift.com, where you can exchange it for cash or another gift card, though you might not get full face value.
     
  • Consider giving low-end gift cards. Research shows cards to fast food and retailers like Target are used more quickly than cards for higher-end shops.
     
  • Beware general-purpose gift cards. Credit card companies offer gift cards you can use anywhere, but they often come with fees and use-by dates, after which you have to call customer service to request a new card if you want to use the remaining balance.
     
  • Donate your card. Websites like Charity Choice and Gift Card Give collect low-balance gift cards and combine them into higher-balance cards to give to the needy.
     
  • As a last resort, check unclaimed property. Many states require inactive gift cards with a remaining balance be turned over to the state's lost property department after a certain amount of time has passed. If you can prove the card was yours, you may be able to retrieve it there.  
For related information, read "Fee Money or Free Money? Claiming Unclaimed Assets" and "Plan Now for Holiday Success" in the Home & Family Finance Resource Center.

Millennials: Rethink credit vs. debit

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NEW YORK (9/16/14)--There is a generational divide when it comes to shopping: A CreditCards.com survey indicates that boomers and millennials both choose plastic, but for the older cohort the word is "credit" and for the younger, it is "debit" (MarketWatch.com Sept. 2).
 
Both systems work well but boomers might point out to their juniors that using debit to the exclusion of credit has its handicaps. Millennials prefer debit over credit by a ratio of nearly 3 to 1, according to the survey, even though debit cards offer fewer protections and rewards and don't help young people build credit.
 
Matt Schulz, senior industry analyst at CreditCards.com, suggests that psychology may be a factor in the decision; consumers may be trying to limit spending to the money they have by using a debit card, which pulls money directly from a checking account. But if a scammer gets hold of a debit card, the consumer could be liable for unauthorized charges of $500 or more. Credit card holders are only responsible for up to $50 and can report a bogus purchase as fraud.
 
"If your debit card information gets stolen, somebody can take real money out of your account that you won't be able to use to make a car payment or a doctor's bill," Schulz says. "That money may be gone for a week or two."
 
Credit Union National Association Center for Personal Finance editors point out that, by choosing "debit" and entering a personal identification number, your transaction is treated as an ATM transaction.
 
The editors advise, "Instead, when you're making retail purchases with your debit/ATM card, choose 'credit.' You'll bypass any potential fees--and the funds still come out of your share draft/checking account."
 
Another good reason: Credit transactions require a signature, which helps guard against fraud.

For related information, read "Gotta Have It? Check Impulse Spending" and "What Will EMV (Chip) Credit and Debit Cards Mean for You?" in the Home & Family Finance Resource Center.

Suss out features of college-payment strategies

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WASHINGTON (9/9/14)--College students who borrow to attend college graduate with a debt load equivalent to a new-car purchase or a down payment on a house, averaging $25,000. Some borrowing might be inevitable, but also explore the features of other college payment strategies (Kiplinger Aug. 26).
 
529 savings plans
  • Pros: Your savings grow tax-free and earnings escape federal tax if you use withdrawals for qualified college expenses. Your state might give you a tax break for contributions; you may invest in other states' 529 plans.
  • Cons: If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings. A state-appointed firm manages the account you so lose direct control.
Prepaid tuition plans
  • Pros: You can lock in tuition at in-state public colleges years in advance. The tax benefits are the same as for a 529 savings plan. If your student goes to an out-of-state or private school instead, you can transfer the value of the account or get a refund.
  • Cons: Not all states participate. If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings.
Coverdell education savings accounts
  • Pros: The tax benefits are the same as for a 529 savings plan, and Coverdells expand the definition of "qualified" to include tuition at private elementary schools and high schools.
  • Cons: Your contributions can't exceed $2,000 a year and the beneficiary must be younger than 18; contributions are limited by your modified adjusted gross income.
Roth IRAs
  • Pros: The money in a Roth grows tax-free. Withdrawals are not limited to qualified education expenses. You can avoid taxes on withdrawals as long as they don't exceed your contributions; you can avoid a 10% early withdrawal penalty on earnings if you use the money for educational expenses.
  • Cons: If you are younger than age 59 1/2, you will owe tax on any earnings you withdraw. If you are 59 1/2 or older you must have held the account for five years to avoid taxes on earnings you withdraw. The ability to contribute to a Roth IRA is governed by modified adjusted gross income limits.
Custodial accounts
  • Pros: You manage the account until the child reaches 18 or 21, depending on your state. After that your adult child owns the account (this could be a con). There are no limits on how the money can be used. There's no limit on how much a parent can put into a custodial account. Full-time students younger than age 24 pay no tax on the first $950 of unearned income and pay the child's rate on the next $950. Earnings above $1,900 are taxed at the parents' marginal rate. Investment choices aren't restricted.
  • Cons: If your contributions surpass $13,000 a year you'll have to pay a gift tax. Large balances in a custodial account can hurt chances for financial aid.
Private scholarships
  • Pros: The money is free, and many scholarships are awarded to students based on need or special interests.
  • Cons: Schools might reduce aid if scholarships and aid combined are more than a student's calculated need.
With soaring tuitions, borrowing is often necessary even after accounting for savings and scholarship money. Investigate government-sponsored loans, federal work-study programs, state programs, and institutional aid with the Free Application for Federal Student Aid form. Consider federal PLUS loans as well as a private loan from your credit union. Private student loans come into play after all other resources are exhausted.
 
For related information, read "Parental Income Dings a Student's Financial Aid" and "Parents: Borrow for Kids' College, Jeopardize Retirement" in the Home & Family Finance Resource Center.

Savings gains start with spending scrutiny

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McLEAN, Va. (9/3/14)--If you want to boost savings, create a smart spending plan--and stick to it. It sounds easy, but, according to a recent survey by the National Foundation for Credit Counseling, Washington D.C., about 71% of people have financial worries, and 31% of them say not having enough savings is their biggest concern. Thirty-four percent say they have nothing saved for retirement (USAToday.com July 29).
 
On a brighter note, millennials are on top of their retirement savings game. A recent survey from San Francisco-based Transamerica found that 3 of 4 young adults born between 1979 and 1996 already are discussing saving and investing and planning for retirement with family and friends (July 15). The survey found that 18% of millennials frequently discuss retirement savings, compared with 9% of baby boomers. Seventy percent of millennials already are saving for retirement either through an employer-sponsored plan such as a 401(k) or through anther savings vehicle such as an IRA (individual retirement account).
 
To get a handle on spending--and saving--or to amplify what you're already doing:
  • Save for retirement: Aim to save 10% to 13% of your gross pay. This includes your employer match if you get one. If you're already saving enough in your employer's retirement plan to get the company match, consider opening a traditional or Roth IRA at your credit union as well.
  • Review housing costs: If you own a home or are thinking about buying one, principal, interest, taxes, insurance, and homeowners association dues shouldn't exceed 28%-36% of your gross pay. And don't forget about home repairs and lawn maintenance costs, even though these expenses aren't included in the housing debt percentage.
     
  • Save for major expenses: Expenses might include, but aren't limited to, a down payment for a house, children's college education, a different car, home remodeling project and emergency fund savings in case you lose your job or become ill. According to a recent study by the Federal Reserve Board, 39% of respondents reported having a rainy day fund that could cover three months of expenses.
     
  • Control living expenses: Check with TV, Internet and phone providers to make sure you're getting the lowest rates. Find out if bundling services can help you save. Compare insurance policies and check the National Association of Insurance Commissioners website for price comparisons and the Insurance Information Institute for advice about picking reputable companies. Cut back on going out to eat and picking up take-out meals.
For related information, read "Everybody's Money Matters: Deciding How Much to Save" in the Home & Family Finance Resource Center.

Creative uses for your tax-advantaged accounts

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NEW YORK (8/26/14)--Just as with finding unconventional uses for common items--did you know crushed aspirin is great at removing sweat stains?--there are multiple ways to use your tax-advantaged accounts. 
 
A report released this month from the Employee Benefit Research Institute, Washington D.C., found that the average person contributing the maximum allowed to a health savings account (HSA) could save up $360,000 in 40 years assuming a 2.5% rate of return. That amount jumps to $600,000 after 40 years at a 5% rate of return (The New York Times Aug. 19).
 
HSAs were created a decade ago to help people with high-deductible insurance plans pay for health-care expenses. The reason financial planners are beginning to recommend them as a potential vehicle for retirement savings is that they're triple tax-advantaged: contributions reduce your taxable income, grow tax free, and can be withdrawn tax-free for eligible expenses. 
 
And although the max you can contribute annually to an HSA now is $3,300 for an individual and $6,550 for a family, the balance can be rolled over from year to year and invested. 
 
You can only contribute to an HSA if you're enrolled in a high-deductible health insurance plan, and it only makes sense to use it as a long-term investment if you have enough money to cover your out-of-pocket healthcare expenses.
 
Here are some other outside-the-box uses for conventional tax-advantaged accounts (Forbes Aug. 14):
  • Make your Roth IRA an emergency fund. Ideally, you'd have an emergency fund equal to three to six months of expenses. What could help get you there more quickly is using your Roth IRA (individual retirement account) as an emergency fund. You can withdraw any money except earned interest, tax-free, from a Roth IRA at any time.
     
  • Tap your 401(k) for a down payment on a house or for education expenses. You can withdraw up to $10,000 from your retirement account without paying the 10% penalty if it's used to buy a new home--to qualify you cannot have owned a home in the last 3 years--or for education expenses. Both a degree and paid-off home can be huge assets later in life, but make sure you're still on track for retirement without that money.
     
  • Use your Roth IRA for health insurance in retirement. If you retire before you're eligible for Medicare at 65, you may be eligible for subsidies that significantly lower the cost of buying a plan through a healthcare exchange. Because Roth IRA withdrawals are tax-free, you can use that money to pay for the health plan without affecting your eligibility for subsidies.
For related information, read "Interest Deferred: Beware Zero-Percent Medical Credit Cards" and "Self-Directed IRAs: With Flexibility Comes Risk" in the Home & Family Finance Resource Center.

Retirees: GAO finds managed account fees offset gains

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NEW YORK (8/19/14)--Any retiree wants the best return on retirement accounts. But trying to achieve strong returns by using managed investment accounts could backfire, according to a new Government Accountability Office (GAO) report (Marketwatch Aug. 5).
 
Managed accounts involve professionals making decisions about what vehicles the products invest in, versus passive investing that tracks common indices such as the Dow or a market sector such as small cap funds. That hands-on management requires investors to pay higher fees, which may offset some or all of the gains. The GAO report looked at eight managed account providers accounting for 95% of the market.
 
Since regulatory changes in 2007 gave employers the OK to automatically enroll 401(k) participants into managed accounts, these kinds of investments have become more popular, offered in 36% of plans in 2012, up from 25% in 2005. Many observers think the plans will only become more popular as baby boomers approach retirement, a time when many workers turn to the more tailored advice managed accounts offer.
 
The GAO observed that fees for managed accounts--fees in addition to the expense ratios participants already pay to invest in mutual funds--range widely, from nothing to as much as 1% of the account balance each year. As a result of the added fees, the GAO found that "401(k) participants who do not [consistently] receive higher investment returns from the managed account services risk losing money over time."
 
Some managed account providers claim the funds earn a bonus of as much as three percentage points a year. But the GAO study, citing Vanguard data, reported that "published returns for managed account participants" were "generally less than or equal to returns" of other popular 401(k) investments, including target date funds or balanced funds invested in a mix of stocks and bonds.
 
In addition, the GAO study noted a lack of standards allowing consumers to compare managed account performance with that of other 401(k) investments, leaving investors with no way to accurately size up an investment. The GAO report also noted that the Labor Department, the 401(k) plan regulator, does not mandate disclosure of performance benchmarking for managed accounts, although it does for other 401(k) investments.
 
The report also cited a possible conflict of interest for managed account providers, who may have a financial incentive in recommending that retirees stay in the former employer's 401(k) plan and continue to pay managed account fees. It might be a better choice for retirees to transfer assets to an annuity or individual retirement accounts, the GAO report noted.
 
The report noted, too, that some managed account providers might not serve as fiduciaries; a fiduciary must make decisions based on what's financially best for you and also has to disclose any possible conflict of interest. The Credit Union National Association's Home & Family Finance Resource Center has reported that, "Three-fourths of investors incorrectly believe that financial advisers are fiduciaries and two-thirds wrongly believe stockbrokers are fiduciaries ... That ignorance can be costly."
 
The Labor Department requires a managed account provider to act as a fiduciary, and assume liability for flawed advice, when participants are enrolled automatically in these accounts. But if participants opt in to managed accounts, the rules do not "have a similar explicit requirement," according to the GAO report. "[S]ome providers may actively choose to structure their services to limit their fiduciary liability," the report noted.
 
For related information, read "Making Dollars and Sense of Financial Planner Designations" and "Your 401(k) Manager Not Always Best Adviser" in the Home & Family Finance Resource Center.