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Over the last 20 years, I have assisted numerous clients and family members with financial planning. With the ever-changing economic landscape and annual uncertainty over tax laws, 2010 has posed its own unique problems in giving financial advice.
Still, there are some tried and true financial planning techniques that can assist individuals in preserving retirement income and estates for their beneficiaries.
Don’t Let Holiday Spending Ruin Your Financial Plan
The holidays present strong incentives to overspend. Two points to remember: You do not need to buy an expensive gift for everyone on your list. Homemade, heartfelt gifts can be far more meaningful and be far less devastating to your checkbook. Second, holiday sales are not bargains if they entice you to buy things you don’t really need, and prevent you from later purchasing things you really want. Keep short-term and long-term goals in mind even at year end. I’m not saying don’t spend during the season, I’m saying spend wisely.
Consider Long-Range Goals for your Individual Retirement Account
There are significant advantages to having your Individual Retirement Account (IRA) pass directly to a named beneficiary rather than go through your estate. If you are already taking required minimum distributions, your beneficiary can elect to continue to take the required minimum distribution at a rate calculated using their life expectancy, not yours. In addition, a named beneficiary can elect to reject the inheritance, passing along the IRA principal to the next in succession, like a grandchild. Distributions can then be taken based on the child’s life expectancy.
Required Minimum Distributions
If you are age 70-1/2 or older, you should have begun taking your required minimum distribution from your IRA. If you have not, be sure to withdraw it before the end of the year, or you could be faced with a stiff penalty next year.
Review Your Flexible Spending Accounts
Consider your actual expenses and the amount you contributed to your flexible spending accounts and adjust your contributions for 2011. Any money left over at the end of the year is lost, so you do not want to over contribute. In the same vein, if your medical or child care costs are substantially more than the amount you contributed, you may be paying more taxes than necessary. Be sure to take into consideration any past or future exceptional expenses that may skew your estimates.
Consider Gifting Wisely
If it is possible that your estate may be taxed, consider moving money to your children or grandchildren sooner rather than later. By taking full advantage of the IRS’s annual exclusion for gifting, you can avoid gift taxes and reduce the value of your estate. For those with grandchildren in college, tuition payments made directly to an institution are not considered taxable gifts nor are they included as part of the annual exclusion amount.
Create an Emergency Fund in a Savings Account
I differentiate between investing and saving as long-term financial planning and short-term financial planning. Easily accessible savings accounts may not yield the largest return, but short-term savings plans are vital to financial health. You do not want to take a penalty on long-term investments or retirement savings to replace the clutch or repair the water heater. Many online financial institutions offer better than average interest rates and you can set most of them up to automatically debit your bank account for a set amount periodically – making savings practically painless.
Set Up Your Own Christmas Club Account
When I was a child, our bank offered Christmas Club Accounts. These savings accounts allowed for small opening balances and small monthly contributions, without any bank fees. It was a great way to teach children how to save. While I am unaware of any banks currently offering Christmas Club Accounts, the premise is a good one. Open a separate savings account and set up automatic periodic deposits based on your anticipated holiday spending for 2011. This time next year, you’ll have your holiday budget fully funded.
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