It’s Hurricane Season (again) – Are You Prepared?

It’s Hurricane Season (again) – Are You Prepared?

By E. Christopher Caravette

July 2, 2017

With hurricane and storm season upon us, take time to review and record your possessions and important papers.

If a storm strikes, knowing what you have will help if disaster strikes.

• Safeguard your Paperwork – make sure all of your important legal documents (your will, powers of attorney or health care surrogate designation, birth and marriage certificate, social security card, passport or naturalization certificate, deeds and property records, and financial records) are protected or stored in the cloud or elsewhere)

• Inventory your Personal Property – make a list or, better yet, photograph or video your property with your mobile phone

In terms of your real estate, beware of the potential damage from wind, blowing rain and flooding. The Insurance Institute for Business & Home Safety and the Federal Alliance for Safe Homes offer these tips to help reduce damage to your home.

• Check for gaps around pipes, electrical boxes and vents. Use waterproof caulk to seal any gaps or holes

• Purchase storm shutters (consider permanent ones – they could be worth the price) or plywood (½-inch to ¾-inch thick) to cover windows. Installing the hardware now will make putting up the shutters or plywood easier when a storm heads your way

• Add weatherstripping to hurricane shutters or plywood where they meet with walls to provide extra protection against water intrusion

• Trim tree branches that could break off in high winds and cause property damage

• Put away items around your yard, such as garbage cans, patio furniture and kids’ riding toys

• Roll up area rugs and move them to a second story, if possible, to help prevent growth of mold in case water seeps into your house

• Inspect sump pumps and drains to ensure they operate properly

• Remove outdoor items that are not tethered down

• Fill gas tanks in your cars

• Get extra cash from the bank or ATM

• Move furniture away from windows

• Store important documents in waterproof containers

Finally, prepare a Hurricane Kit. Make sure it includes:

• Flashlights & extra bulbs

• A battery-operated radio

• Battery-operated lanterns

• Batteries (in different sizes!)

• Matches

• A first aid kit

• Duct tape

• Rain gear

• A clock or watch (wind-up or battery-powered)

• Plastic garbage bags

• A fire extinguisher

• Scissors

• A can opener

• Clean clothes

• Extra blankets

• Heavy gloves

• Food and Water – Pack non-perishable food for each person for 3-7 days, including bottled water (1 gallon per person per day), bottled juice, two coolers (one for drinks, one for food), canned foods, and a manual can opener

• Dry pet food (if you have a pet).

LOOK TO US FOR ALL OF YOUR REAL ESTATE, SMALL BUSINESS, AND ESTATE PLANNING LEGAL NEEDS! WE APPRECIATE YOUR BUSINESS!

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

Pet Trusts – Should You Consider One?

Pet Trusts – Should You Consider One?

By E. Christopher Caravette 

July 1, 2017

First of all, just what is a pet trust?

A pet trust is an arrangement to provide for the care and financial support of your pet (or pets) upon your disability or death. The trust is funded with property or cash that can be used to provide for your pet, based upon the specific instructions one specifies in the trust document.

A pet trust should name a trustee, the person who will carry out the trust directions for the care of the pet, including the handling and disbursement of trust funds and delivering the pet to the person or entity you designate to serve as the pet’s caregiver. The trustee and caregiver can be the same person or entity.

As with most trusts, you can create the pet trust while you are alive (called an inter-vivos or living trust), or at your death (a testamentary trust which is set forth in your will). In either case, you can change the terms of your pet trust at any time during your lifetime to accommodate changing circumstances. If you create an inter vivos trust, you can fund it with cash or property either during your lifetime (needed if the trust is to care for your pet if you become incapacitated), or at your death. A testamentary trust is only funded after you die.

Some of the instructions to consider for your pet trust include provisions for food and diet, daily routines, toys, medical care, grooming, and how the trustee or caregiver is to document expenditures for reimbursement. The trust can recite that it will insure the caregiver for any injuries or claims caused by the pet, and the trust can also provide for the disposition of your pet’s remains.

You may also want to name a person or organization to take your pet should your trust run out of funds. Also consider naming a remainder beneficiary to receive any funds or property remaining in the trust after your pet dies.

A potential problem arises if your pet is expected to live for more than 21 years after your death. This problem arises because, in many states, the “rule against perpetuities” (a legal term) forbids a trust from lasting beyond a certain period of time (usually 21 years after the death of an identified person – or in this case, an identified pet). However, almost every state has laws relating to pet trusts that address this issue in particular and allow for the continued maintenance of the trust, even if its terms would otherwise violate the rule against perpetuities.

We routinely create pet trusts for our clients.

For additional information, please contact me at christopher@caravette.com.

LOOK TO US FOR ALL OF YOUR REAL ESTATE, SMALL BUSINESS, AND ESTATE PLANNING LEGAL NEEDS! WE APPRECIATE YOUR BUSINESS!

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

 

What Is A HIPAA Authorization, And How Does It Work?

By E. Christopher Caravette

March 24, 2017

In our lifetimes, most of us will face a serious illness or debilitating condition. Most of us also wish our loved ones to be kept well informed about our condition and illness. But unless one has completed and properly executed a Health Insurance Portability and Accountability Act (HIPAA) Authorization, our loved ones may be denied access to that important medical and health information.

The HIPAA Authorization gives healthcare providers permission to share information about your medical conditions and health care with as many people as you wish. But these Authorizations are very specific, and generally require reference to particular people, including spouses, partners, and children, before providers can speak with or provide information to them. Most doctors’ offices and hospitals have these forms available upon request. We also have these forms in office.

It is important to distinguish between a Healthcare Power of Attorney (or Health Care Surrogate Form) and a HIPAA Authorization. The HIPAA Authorization allows access to information, but only a Healthcare Power of Attorney (or Health Care Surrogate Form) allows an individual to make decisions based on that information. Though these other documents also give your agent access to your medical and health information, you should have both documents in place to protect your wishes and allow your loved ones to act on your behalf.

We routinely prepare HIPAA Authorizations for our clients and would be happy to assist you with yours.

For additional information, please contact me at christopher@caravette.com.

LOOK TO US FOR ALL OF YOUR REAL ESTATE, SMALL BUSINESS, AND ESTATE PLANNING LEGAL NEEDS! WE APPRECIATE YOUR BUSINESS!

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

Are your Powers of Attorney Up-to-Date? Changes in both Florida’s and Illinois’ Power of Attorney laws in the past few years may have an impact on those provisions you have already put in place. Now is the time to make sure your Powers of Attorney are as effective as you need them to be!

by E. Christopher Caravette

What is a “Power of Attorney” in the first place?

A Power of Attorney is a legal document that gives another individual the authority to act on your behalf when you do not or cannot act. You are the “principal” and the person you appoint is the “agent”.

There are generally two types of Powers of Attorney:

  • The financial Power of Attorney (in Illinois, called the “Power of Attorney for Property”), for financial and property matters; and,
  • The health care Power of Attorney (in Florida, called the “Health Care Surrogate”), for health care decisions.

Florida

Effective October 1, 2011, Florida’s Power of Attorney law changed drastically.

With respect to a Power of Attorney dealing with financial and property issues, the new law expands on the old law as a result of careful consideration by the Florida legislature and also as a result of experience over time with the provisions of the old law.  Some of the changes in the new law are:

  • Co-agents can exercise authority independently, unless the Power of Attorney provides otherwise.
  • Copies in lieu of original documents are acceptable.

One of the key purposes of the Florida Power of Attorney Act is to clarify the agent’s authority as it might affect the principal’s estate plan.  The principal must specifically acknowledge in the document if:

  • The agent has authority to make changes to the principal’s estate plan.
  • The agent has authority to change the rights of survivorship and beneficiary designations.
  • The agent has authority to waive rights under annuities and retirement plans.
  • The agent has authority to make gifts.

These are called the “superpowers”.  This list is by no means exhaustive, but instead illustrates some of the clarifications which the legislature intended to confer with the new law.  The purpose of these changes is to protect the principal and to clarify what previously was not in the statute.

How does this change in the law affect you?  Well, if you executed a Power of Attorney previous to the change, your Power of Attorney is still effective.  However, because of the change in Florida law, it is advisable to execute new documents to make sure your Power conforms and expresses your unique desires.

Illinois

Effective July 1, 2011, Illinois’ Power of Attorney law changed. The legislature’s goals were to provide more protection to the often-vulnerable principal from financial or physical abuse, and to make the forms more user-friendly.

How has the law changed?

With respect to an Illinois Power of Attorney for Health Care:

  • It incorporates into the new statutory Power of Attorney for Health Care form the latest changes in light of HIPAA and the new Disposition of Re­mains Act.
  •  It deletes use of the outdated medical term “irreversible coma” and replaces it with more medically accepted definitions used in the Health Care Surrogate Act.

With respect to an Illinois Power of Attorney for Property (financial decisions):

  • It elevates the agent’s standard of care, requires more oversight of the agent’s actions, and expands the remedies against an agent who abuses his or her fiduciary responsibilities.
  • It provides a notice to an agent under the Power of Attorney for Property that describes his or her responsibilities.
  • It provides default provisions for co-agents in a non-statutory Power of Attorney for Property.
  • It limits who may act as a witness to the execution of a Power of Attorney to avoid conflicts of interest.

If you executed a Power of Attorney in Illinois previous to this change, your Power of Attorney is still effective.  However, because of the change in Illinois law, it would be prudent to consult with us to make sure any Power still reflects your unique needs and desires.

Our firm has been assisting our clients with their estate planning needs for more than twenty-five years.  Please call us to discuss how this change in both Florida and Illinois law might affect your situation.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

Estate Planning Checklist

ESTATE PLANNING IS SO VERY IMPORTANT!

ARE YOU PREPARED?

TAKE 60 SECONDS TO ANSWER THESE QUICK QUESTIONS:

[YES or NO] I have a current Living Will which expresses in writing my wishes concerning life-sustaining treatment or death-delaying procedures.

[YES or NO]  I have a Health Care Power of Attorney or Health Care Surrogate to permit my spouse, children, or other designated person to make health care decisions for me in the event I am unable to make those decisions myself.

[YES or NO]  I am confident that my current estate plan protects me from unnecessary placement in a nursing home and provides clear instructions for care in my own home.

[YES or NO]  I have a Living Trust in place as part of my estate plan so my family can avoid the delays and expenses of probate.

[YES or NO]  I am comfortable that my estate plan will allow my family to avoid costly guardianship court proceedings.

[YES or NO]  I am confident that my current plan protects my surviving spouse and children from creditors, lawsuits, and failed marriages.

[YES or NO]  I am confident that my current estate plan has taken into consideration any potential federal estate tax consequences at my death.

[YES or NO]  I have taken steps to protect my children’s inheritance in the event my surviving spouse chooses to remarry after my death.

[YES or NO]  I am confident that my current estate plan contains the documents necessary for my family to do Medicaid planning in the future and to help prevent the impoverishment of me or my spouse from the devastating effects of a long-term catastrophic illness and nursing home costs.

If you answered “No” to one or more of these questions, please give us a call or send us an e-mail to discuss how we can assist with your estate planning needs.

Caravette & Associates, P.C.

312 540 1600

Email Contact Form

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

What is a Land Trust, and How Can it Benefit Me?

by E. Christopher Caravette

Illinois is one of only a few states that allow Land Trusts which can be a terrific estate planning tool.

What is a Land Trust, and how can it benefit you?

A Land Trust is established by signing a Trust Agreement with the trustee, usually an institution in the business of land trusts.  It offers you, as an owner of property, a unique package of benefits that while letting you enjoy all the advantages of ownership without some of the complexities.

Some of the benefits of a Land Trust may include:

  • Privacy – Once the Trust Agreement is executed by both parties, and once real estate is conveyed to the trustee, the title is held by the trustee, not you as an individual.
  • Avoidance of Probate and Cost Savings – A Land Trust can allow your estate to avoid having to probate the real estate upon your death contingent beneficiaries are named, which can significantly reduce expenses to your estate.
  • May allow you to use your signature alone for property documents, eliminating the need to have other joint owners sign on deeds, mortgages, leases, and other required documents.
  • May reduces joint ownership risks, such as faulty titles due to insanity, divorce, or a co-owner’s death.
  • May reduce the paperwork associated with real estate sales, making the transfer of title a simpler procedure.
  • May avoids ancillary probate for out-of-state owners.
  • May sometimes allow you to take advantage of certain tax deductions as a beneficiary which are not otherwise available.
  • May allow ownership interests to be assigned. You may use the equity as collateral for borrowing purposes.

A revocable living trust may be of tremendous benefit to you, but each individual has to weigh the costs and benefits. Our firm has been assisting our clients with their estate planning needs, including advising clients on land trusts, for more than twenty-five years, and would be happy to help you as well.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

 

 

Revocable Living Trust

by E. Christopher Caravette

What is a Revocable Living Trust, and How Can it Benefit Me?

A revocable living trust is a type of trust that is typically used for estate planning purposes.  It is a carefully drafted document, called a trust agreement or declaration of trust, that is tailored to your particular and unique circumstances.  It does not replace a will, but works with your will to provide additional advantages and benefits.

Like all trusts, there are three separate parties:

There is the person who creates the trust (typically called the grantor), who transfers legal title to certain of his or her assets to…

A trustee, who, in turn, holds and manages those assets for the benefit of…

A beneficiary (or beneficiaries), who is entitled to the trust assets.

A revocable living trust is one in which you, as the grantor, name yourself as a beneficiary during your lifetime and then designate others as future beneficiaries (usually upon your death). Initially, and during your life, you will act as the sole trustee (in which case the trust is called a “self declaration” or “declaration of trust”).  You also manage the trust during your lifetime, just as you manage your every day affairs.  Upon your death, or upon your disability, you may name a friend or relative as successor trustee.

What are the advantages and benefits of a revocable living trust?

Avoidance of Probate.  A revocable living trust may help you reduce certain delays and costs associated with formal probate proceedings, depending upon the extent to which your revocable living trust is funded prior to your death.  A simple will not allow your estate avoid the probate process.  This streamlines the settlement of your estate, and can save your estate quite a bit of money, as probate is a process that takes at least six months and sometimes years to settle, and can cost thousands of dollars (typically six to ten percent of the value of your estate).  While a revocable living trust will cost more than a simple will, the cost savings to your estate can be substantial.

Additionally, a revocable living trust is less vulnerable than a will to legal challenges in court, and can include a clause disinheriting any party who challenges the terms of the trust.

Provides for Your Disability.  Unlike a will, a revocable living trust allows you to provide for the management of your property in the event you become seriously ill, incapacitated, or you were no longer able to manage the trust property yourself.  Upon that disability, your successor trustee would simply take over for you.

Flexibility.  A revocable living trust is “revocable” because you can amend the trust or terminate it at any point during your life.  It is called “living” because it becomes effective immediately – during your lifetime. Upon your death, your trust may continue as an irrevocable trust that cannot be changed.

Typically, the trust agreement will require the trustee to distribute income and principal to you, or as you direct. During any period in which you are not disabled, you may change any or all provisions regarding succeeding beneficiaries (who they are and the nature of their interests) as well as provisions regarding the trustees (who they are, when they will serve, and the extent of their powers).

For tax purposes, income generated by the trust is taxed to you during your life. Distributions to you are not considered taxable gifts. Upon your death, the trust assets are subject to estate tax as part of your estate.

Continuity. When you create a revocable living trust, you establish an arrangement that may continue throughout your life and possibly provide for future generations. We will work with you to draft your trust agreement.  Typically, it will provide that upon your death, the trust assets will continue in trust for a stated period of time for the benefit of your family or other persons, or charity, as you designate. In addition, we will prepare a simple “pour over” will, which can dispose of tangible personal property in your estate upon your death by “pouring” those assets into the trust.

Tax Considerations. In some cases, a revocable living trust will maximize your opportunities to save on estate taxes.  These taxes are imposed after your death and are based on the size of your estate (including assets in your trust) after the application of certain exemptions and deductions. However, a revocable living trust is typically not a tax-saving device.  You will still be taxed on the trust’s income each year, and the property in the trust will be included in your gross estate for federal estate-tax purposes.

Confidentiality.  A will that is probated is a matter of public record, available to anyone to read or publish; a revocable living trust is not.  Consequently, information relating to the existence and size of your trust and its beneficiaries remains private, before and after your death.

Is a revocable living trust right for you?

A revocable living trust may be of tremendous benefit to you, but each individual has to weigh the costs and benefits.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

 

Is It Time for a Financial Checkup?

by E. Christopher Caravette

Many of us, especially as we get older, are good about going to the doctor for an annual physical.  But how many of us take the time to get our financial house in order?

We got to the edge of the “fiscal cliff”, but did not fall over.  The real estate market has softened, and obtaining credit requires more patience and determination.

We recommend that our clients do a financial checkup every year as well.  It doesn’t take long, and can go a long way toward building on the future.

Here’s a list of the issues you might want to review:

Review Your Mortgage

  • Take a look at whether your current mortgage might be refinanced into a new mortgage with lower rates.  Interest rates are at an all-time low, so you might be able to save some real money over the long run.
  • Does your mortgage include PMI (or private mortgage insurance)?  If so, you should be aware that if the outstanding principal amount on your mortgage drops below 80% of the fair market value of the home, you may be able to avoid paying PMI, particularly if you’ve made substantial improvements to your home since you took out the mortgage.

Review Your Insurances

  • Review all of your insurance policies to make sure they afford you adequate coverage and that the premiums are competitively priced.  This includes automobile insurance, homeowner’s insurance, health insurance, disability insurance, long-term care insurance, and life insurance.
  • Check and update the beneficiary designations on any life insurance policies and retirement plans.
  • List and photograph possessions for insurance purposes and put the list and photos in a safety deposit box.
  • Consider the future and whether long-term care insurance might work for you.  Premiums and insurability on these types of polices go up as you get older, making it much more difficult to obtain coverage when you may need it most.
  • Consider the need for disability insurance and additional life insurance benefits. Keep in mind that long-term illness, loss of employment or other unexpected events can really impact your lifestyle and standard of living.  As a general rule, three to six months of living expenses should be kept in safe liquid assets to protect against such events.
  • Take an inventory of your personal property.  This is a good idea for insurance purposes, as well as for estate planning purposes.  With today’s technology, you might consider just spending an hour taking photographs or a video of your home and its content, including art, china and silver, and other valuables.

Do Your Estate Planning!

  • If you haven’t done so already, do your estate planning.  Whether you are young or old, married or single, everyone needs to have an estate plan.  At the very minimum, everyone should have a simple will.
  • We always recommend to our clients that they execute the statutory powers of attorney, one for health care, the other for property.  These documents allow you to appoint an agent to make health care and financial decisions during your lifetime if you are unable to do so.
  • If you have an estate plan in place, review it now to make sure it still meets your needs and is up to date.  Check to determine if the executor and guardian of minor children are people whom you trust and determine whether those people you have designated are still willing and able to handle financial and legal decisions.
  • Review and update the way assets are titled, particularly bank accounts and real estate.  Consider a revocable trust, or putting your real estate in a land trust to avoid probate, which can be very costly and time-consuming.  If assets are titled solely in your name, consider whether your family and loved ones will be able to access them in the event of your death.
  • Don’t procrastinate!  It’s very easy to draft at least a simple estate plan, which can save your estate time and money.

Our firm has been assisting our clients with their estate planning needs for more than twenty-five years, and would be happy to help you as well.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

 

Naming Beneficiaries and Estate Planning

Choosing beneficiaries is an important step in filling out financial documents. Here’s how to make sure the right people will benefit from your estate.

Many financial documents provide space for you to designate a beneficiary who will receive the money involved in the event of your death. These documents include life insurance policies, annuities and retirement savings programs such as IRAs, 401 (k) accounts, 403(b) accounts, and Keogh plans for the self-employed. Several states also allow you to designate beneficiaries for bank and securities accounts.

Unfortunately, a good many people either leave the beneficiary space blank, or scribble the first name that comes to mind without giving much consideration to the matter. This could turn out to be one of the biggest financial mistakes they ever make.

If you don’t bother to name a beneficiary, you could be allowing the state legislature of wherever you live to make that decision for you. If you name no one, a judge who knows nothing about you will choose your beneficiaries according to the laws of inheritance of your state. These could be far different from what you would have preferred.

If you name beneficiaries but choose them wrong, you can cause unnecessary pain for your loved ones. Frayed family feelings often occur because the account holder or insured person forgets to change a named beneficiary after a marriage, divorce or birth of a child.

Suppose, for example, a young man receives a life-insurance policy as an employment benefit on his first job. Being single and romantically inclined, he names his current girlfriend as his beneficiary. They soon break up and eventually marry others, but no one remembers to notify the insurance company. When the fellow dies many years later, his wife is anguished to learn that he apparently never got over his first love, because he left his insurance to her.

Some such mishaps are bittersweet. Others can be tragic. Indeed, most estate planners can recall dozens of sad variations on this theme, including people who go through an acrimonious divorce but fail to remove their ex-spouse as beneficiary of their retirement account, and folks who intend all their children to benefit equally but never get around to adding the younger children to the beneficiary form, thereby inadvertently leaving everything to the older ones who happened to be mentioned by name.

People are sometimes surprised to learn that these mix-ups can occur even when someone’s true intentions are made perfectly clear in the person’s will. The fact is, life insurance proceeds and retirement benefits generally pass outside the will, so your will could say that you leave everything to your second husband, but if your first husband is still named as beneficiary of your IRA, your present family will never see a penny of those funds.

Naming your estate as beneficiary can prevent problems like this, but it also could end up costing your heirs more in fees and/or taxes, so competent professional advice is essential before making such a change.

To avoid all the headaches and heartaches that can arise when beneficiaries are poorly chosen, make certain that the beneficiaries named on your policies and accounts really are the people you want to benefit. Contact each investment company that is involved, working whenever possible through your broker, insurance agent, or retirement plan administrator at work. Ask for a written copy or a printout of your current beneficiary designation, which will show you who the named beneficiaries of record actually are. At the same time, request the appropriate form for making changes, so you can correct any errors you notice.

Remember that your primary beneficiary can be one person, several people (such as all your children), or an entity like a trust. (If the children are minors, you will need to set up a legal guardianship.) Whoever you choose needs to be clearly and fully named. If, for instance, your children will share the proceeds of a retirement account, you may want to include the full name of each child. You also can use the beneficiary designation space to indicate where you want the funds to go in case your primary beneficiary dies before you. If the primary beneficiary is a single individual, it is a good plan to name a secondary or contingent beneficiary to stand next in line. If your siblings or your children are collectively the primary beneficiary, decide what you want to happen in case one or more of them does not survive you.

If you want a deceased person’s share to pass to his or her children, you may hear the shorthand Latin phrase “per stirpes”, which means that the children of the deceased move up the inheritance ladder to take their deceased parents place. If you would rather have your surviving siblings or children divide the deceased person’s share, the Latin phrase ‘per capita’ means that everything goes to whoever is left in the original group.

The form you are sent may not have enough room to name all the primary and secondary beneficiaries you have in mind. If necessary, write in the margins, use the back of the form, or attach extra sheets of paper, but never, never trim your beneficiary designations just to fit the space provided.

From here on, pay special attention to any paperwork that requires you to name a beneficiary. Even if the investment involved seems too small to worry about today, it could grow into significance tomorrow.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)

 

IRA Menu

by Margaret Upsala

IRAs are still a great investment, just made a little more complicated though the helpful working of Congress.

Back in the 1970s, Individual Retirement Accounts were pretty simple: Put in up to $2,000 a year, take a tax deduction for your contribution, and watch your earnings grow, untaxed, until you were between the ages of 59½ and 70½. At that point, you had to start taking out the money, which would be taxed as ordinary income. Practically everyone agreed that IRAs were one of the best deals for ordinary people ever to come out of Washington.

Over the years, Congress has kept tinkering, trying to make IRAs better than ever. As a result, there is now a Traditional IRA, Non-Deductible IRA, Spousal IRA, Roth IRA, and Education IRA, each with its own regulations, limitations, and prohibitions. “The rules are much more complicated than they should be for something that is supposed to be the common man’s retirement plan,” says Peter Wheeler, a certified financial planner, chartered life underwriting and financial consultant with Wheeler Frost Associates in San Diego.

The IRA described at the beginning of this article is knows as a Traditional IRA. The rules remain basically the same, except that people who also participate in a retirement plan, such as a 401(k) at work, can deduct IRA contributions only if their adjusted gross income is less than $31,000 for a single person or less than $51,000 for a married couple filing a joint return. The deduction phases out between $31,000 and $41,000 of adjusted gross income for a single person and between $51,000 and $61,000 for a couple filing jointly, assuming both work and both participate in an employer-sponsored retirement plan. (If only one participates, the nonparticipants’s IRA contribution is fully tax deductible when joint adjusted gross income is less than $150,000 and is partially tax deductible to $160,000.) Contributions above all these levels are permitted but are not tax deductible, so folks investing on this basis are said to have Non-Deductible IRAs.

One recent rule change affects stay-at-home spouses. Previously, a nonworker had limited IRA options, but now he or she can put up to $2,000 a year into what is sometimes called a Spousal IRA. The contribution is fully deductible if the couple’s adjusted gross income is less than $150,000 and partially deductible to $160,000. This has created a nice little tax benefit for a lot of families,” Wheeler observes.

The Roth IRA, which took effect in 1998, offers a clear alternative to the Traditional IRA. For the moment, the maximum contribution to either program is $2,000 a year (although there is talk in Congress of increasing both amounts to $5,000 per person). Earnings inside both IRAs are not taxed, and penalties apply in both programs for early withdrawals. But there the similarities end. Constrictions to a Roth IRA are not deductible but withdrawals are not taxed, whereas contributions to a Traditional IRA are deductible (to certain income limits) but withdrawals are taxed.

Financial planners often suggest putting new IRA contributions into a Roth. “You give up the one-time tax deduction at the beginning in favor of years of tax-free distributions on the back end. It’s like asking a farmer, “Would you rather pay taxes on the seed or on the crop?” says David P. Robinson, a certified financial planner, credited asset management specialist, and president of Recourse Consulting Group in Austin.

Both IRAs also let you contribute longer (in a Traditional IRA you must stop at age 70½ but a Roth IRA has no age limit) and postpone distributions indefinitely if you wish (in a Traditional IRA you must begin taking distributions by 70½). “A Roth lets you keep putting money in and never take anything out, which makes it an excellent place for assets that you want to transfer to the next generation,” says Kathleen Rehl, a certified financial planner in the Tampa suburb of Lutz.

Anticipating the Roth IRA’s popularity, Congress made it possible for anyone in a Traditional IRA with an adjusted gross income of less than $100,000 to convert penalty-free to a Roth IRA. However, income tax on the amount transferred is due in the year of conversion. When does conversion make sense? “Generally, the longer you intend to leave the money alone and the lower your present tax bracket, the more attractive conversion becomes,” Robinson reports.

Several mutual fund companies and brokerage houses offer conversion comparison worksheets to see whether switching from a Traditional IRA to a Roth IRA makes sense in your own circumstances. One easy to use free program is available on the Strong Funds Web site. (www.strongfunds.com).

The Education IRA is perhaps the most controversial IRA program. It allows parents and others to contribute a total of $500 a year per child under 18, to be used for certain higher education such as costs as tuition and books. Contributions are not tax-deductible, but funds spent properly are never taxed. However, anyone who has not used all the money for education by age 30 must either pass the remainder along to a younger sibling or pay income tax plus a 10 percent penalty on whatever is left.

“An Education IRA can hurt a child’s chances of getting loans and scholarships,” Rehl cautions. The IRA will reduce the amount that financial-aid officers figure a student needs to attend their school. “If the parents put the money into their own Roth IRA instead, it won’t count on financial aid forms at all because it is their retirement asset. Then the parents can take it out of the Roth with no penalty and no tax problem because they’re using it for an educational purpose.” Rehl adds.

This curious provision exists in both Traditional and Roth IRAs. You can withdraw funds up to certain limits without penalty, even before age 59½ for non-retirement-related activities such as higher education, health insurance if you are unemployed, and buying a first home. As always, withdrawals from Traditional IRAs are taxed, while those from Roth IRAs are not. However, financial planners generally oppose such early withdrawals. “Long-term accumulation, not short term needs, is the only reason to put money into an IRA in the first place,” Wheeler says.

Note: The information in this article is intended to be general in nature. Obtain specific information about IRAs from a qualified financial professional.

Reprinted from Spirit magazine
November 1999

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)