Reduce your taxable income

In this tough economy, you may think tax shelters are of little use to you. But as President Barack Obama's fiscal reform commission considers raising taxes in its war on debt, methods of reducing taxable income are more important than ever (The Hill Apr. 13).

This is especially true for retirement plans such as 401(k)s and individual retirement accounts (IRA). Here's why:

• Tax shelters are off-limits for creditors. Unfortunately for many debtors, this will be important. Money in a tax shelter strengthens your hand if you have to negotiate with lenders and is protected if you end up in bankruptcy.
• Federal deficits mean your taxes probably will be higher in the future. Tax shelters are more valuable as your tax rate goes up. By the way, this is also a reason to own a Roth IRA. By paying the tax upfront, assuming you're 59 1/2 or older and the money's been in the Roth at least five years, you don't owe taxes when you take money out.
• Keeping bonds in a tax shelter increases returns. Recent stock market volatility has reminded investors to keep some money in bonds. But bonds, except for municipals, don't get favorable tax treatment--unless they're in a tax shelter. This is especially important if you hold Treasury inflation-protected securities (TIPS) bonds; always try to hold TIPS bonds in a tax shelter. Why? The value of TIPS bonds is adjusted twice a year for inflation and counts as taxable income.
• You'll be expected to contribute less if your children apply for financial aid for college. Money in tax shelters like an IRA or a 401(k) doesn't count against you in the federal formula for financial aid. Money in a regular investment account does.
• The less money you have in retirement, the more your tax shelter will pay you. That's because income tax rates are progressive--you'll get to keep more of your money.

When you move investments into a tax shelter, your gains aren't taxed each year, but you make a trade. When you withdraw the money in retirement, except for a Roth IRA, the withdrawal is taxed as ordinary income. If that worries you, keep in mind that you are subject to the top 35% marginal tax rate only if you're earning $370,000 a year in retirement, in which case you likely don't have too much to worry about.

If your situation is more like that of the average married couple in retirement, according to the U.S. Census you'll live on about $31,000 a year. That would put you in the 15% income tax bracket. You'll get to keep most of the money you withdraw from your tax shelters.

Gas-Saving Tips

It's almost vacation time and gas prices are on the rise. Fuel prices have been averaging $2.85 per gallon and forecasters expect prices to continue to increase, to about $3 per gallon by summer (billshrink.com April 16).

In fact, fuel prices are a key factor in the 4.8% rise in the cost to own and operate a vehicle, according to AAA's 2010 "Your Driving Costs" released earlier this month.

Here are some ways to cut your fuel bill:

• Avoid carrying excess weight. Car-top carriers are convenient, but cause you to use extra gas. Every extra 100 pounds reduces miles per gallon by 2%.
• Use cruise control. Driving at a consistent speed saves gas.
• Consider joining a loyalty club. Some gas stations offer lower prices on gas to customers using a membership card.
• Slow down and calm down. "Cut back your speed, not necessarily to the speed limit but to match the traffic flow," said Jerry Edgerton, an automotive writer in New York and frequent contributor to the Credit Union National Association's Home & Family Finance publications. "Even more, don't speed up, slow down, speed up. That means don't tailgate, because then you have to brake and speed up again. Don't constantly switch lanes trying to go faster, then have to brake."
• Avoid idling. "Most people don't think about this," Edgerton said. "This is such a gas saver that auto companies are working on technology to shut off the engine at stoplights, then seamlessly start it again—just as now happens in gas-electric hybrids. If you are waiting for someone, shut off the car."

Go Easy on Scissors When Cutting Family Budget

Trying to make ends meet during tough times? Be careful. Some cuts that save you $10, $20, or even $100 now could cost you thousands later, according to Bankrate.com. Ignoring auto oil changes and regular maintenance could harm the engine. Insufficient tire pressure could cause accidents. Skipping or halving doses of medicine—while it may double the life of that prescription—could harm your health and shorten your life. And lowering homeowners insurance—even if your home's value has dropped—could leave you holding the bag when insurance doesn't cover a catastrophic loss.

Rebalance Portfolio at Regular Intervals

Not sure when to rebalance your investment portfolio? Avoid the guessing game - and subjective decisions based on emotion - by rebalancing at regular intervals, such as once a year. Rebalancing re-establishes your original asset allocation based on your time horizon and risk tolerance. Check whether your employer-sponsored plan offers an automatic-rebalancing feature. Remember: Lifecycle/target-date retirement plans automatically adjust your investments as you approach retirement age.

MyMoney is here!

Manage your finances right from your Facebook profile, simply and securely! MyMoney is an online home banking application that interacts with a variety of financial institutions, so you can view your account balances, transfer money between accounts, review histories, and much more.

Interested in security? MyMoney uses multiple layers of security to ensure that you, and only you, can access your account. First, you have the standard privacy features offered by Facebook. Next, we’ve added a built-in two-way security system with photo and phrase ID that lets your financial institution know it’s truly you accessing your account – and confirms that you’re connected to the right financial institution. Finally, MyMoney fully encrypts all data before it’s sent, using a 128 bit data encryption over a secure socket layer (SSL). So, your confidential information stays that way.

With MyMoney, you know instantly how much you have to spend on gifts, go shopping at the marketplace, and more! To get started, just click the “Add Application” button and search for LifeWay Credit Union. If you need assistance setting up your MyMoney account, call us or visit www.lifewaycu.org for an instruction sheet.

What's your plan for the April 15 tax deadline?

Nearly seven of 10 taxpayers will get a refund, and the average refund for 2009 is up nearly 10% from last year to $3,036, according to the Internal Revenue Service (IRS). Eight of 10 people getting a refund say they will pay down debt, save, invest, or use it for everyday necessities, a telephone poll by Bankrate.com (April 5) revealed. Less than 10% plan to splurge on some extravagance.

And among the 24% paying the IRS this week, 60% will pay taxes with funds from their bank or credit union accounts, 6% plan to borrow money, and 17% say they intend to set up an installment plan to pay, according to the Bankrate survey.

That 70% of consumers pay more than they owe each month and will get a hefty refund suggests many need to adjust their income tax withholding, says Michelle Dosher, managing editor of Credit Union National Association's (CUNA) MoneyMix and Home & Family Finance Resource Center online money management tools for credit unions.

"A recent survey by the National Foundation for Credit Counseling found that 72% of 4,000 respondents preferred to have an extra couple hundred dollars in their pocket each month rather than a $2,400 refund once a year," Dosher noted. "People should recognize that a refund means you have overpaid your tax liability all year long." Too often, she said, those who overpay each month are the very ones who struggle to make ends meet.

"Consumers can adjust their withholding any time during the year," she advised.

For consumers getting a refund, Dosher offered these ideas:

• Adjust your deductible. Think about it. If you receive the average return of more than $3,000, you gave the federal government an interest-free loan of $250 per month.
• Pay down your credit card debt.
• Open an individual retirement account (IRA) or direct the amount of your refund you want going toward that option. With 54% of Americans having less than $25,000 saved for retirement, it's a great way to start saving. Only 3% of respondents to the Bankrate.com survey said they were going to have their refunds deposited into multiple savings options.
• Make energy-efficient upgrades to your home. Check energystar.gov to see which upgrades qualify for tax incentives.
• Pay down your mortgage or look into refinancing it. Your credit union professionals can help you decide which option makes more sense for you. Knocking $1,000 off your principal now will save significant dollars over a 30-year mortgage. Or look to refinance. Rates are still at historically low levels.
• Use the refund to bolster a down payment for a vehicle upgrade. Nationally, credit union rates for new and used vehicles are more than 100 basis points (or one percentage point) lower than bank rates, according to Datatrac, a rating service out of Milwaukee, Wis.

Health care cost study offers more incentives to save

Consumers looking for incentives to save for retirement need look no further than health care costs.

A new study from the Center for Retirement Research (CRR March) at Boston College suggests health care will cost the typical married couple age 65 about $197,000 over the rest of their lifetimes. These costs include insurance premiums, out-of-pocket costs, and home health care costs.

But that estimate does not include costs for nursing home care, which could boost lifetime health care costs for that couple to $260,000. On a worst-case basis, according to the report, there is a 5% chance costs could exceed $570,000.

It is unclear how the new health care reform act would change CRR calculations, but the report nevertheless shows how health care costs represent a substantial risk for all households.

"Even at the peak of the stock market in 2007, less than 15% of households approaching retirement had accumulated that much ($570,000) in total financial assets, much less financial assets available for health care costs," the report says.

Prudential Financial, a Newark, N.J.-based provider of life and health insurance, provided support for the research paper, co-authored by Anthony Webb, associate director for research at the Boston College CRR, and Natalia Zhivan, a consultant for the CRR. Cost estimates in the report, "What Is The Distribution of Lifetime Health Care Costs From Age 65," are consistent with other research findings.

About one-third of people turning 65 this year will need at least three months of nursing home care, 24% more than a year, and 9% more than five years, according to the report. The average annual cost for a stay in a nursing home is about $71,000 for a semi-private room.

"These numbers are eye popping," noted Susan Tiffany, editorial director for the Credit Union National Association's online Web products Plan It and Home & Family Finance Resource Center.

"There's plenty of evidence to suggest that it will take big money to live well in retirement: As a nation, we're living longer, which means our nest eggs will have to last longer. Inflation in the cost of health care also is a major consideration, and health is strongly correlated with financial wherewithal. The respected Health and Retirement Study from the University of Michigan, Ann Arbor, indicates that average household net worth is more than $400,000 when both spouses are in excellent health, but only $31,000 when they are in poor health," Tiffany said.

If there's good news, it is that spending tends to fall rather than rise following retirement and continues to fall rather than rise with inflation. That's because people older than age 75 typically spend about one-quarter less each year than those age 65 to 74, according to the Department of Labor's Consumer Expenditure Survey. So, inflation will eat up some portion of your income, but you will be inclined to spend less as you become less active. But health care costs remain the No.1 question mark for people planning their retirement finances, Tiffany noted.

Emergency Fund - Start Small, Thank Big

Beefing up your emergency fund isn't as hard as you might think. The strategy is to start small. The payoff is priceless: a healthy financial picture for you and your family.

So how do you go from $600 in savings to six months of living expenses? Change your mindset, and change a few habits.

One question that pops up frequently is, "How can I build an emergency fund when I'm trying to pay off my debts?"

If you're starting from scratch with your emergency fund, build it up to one or maybe two months of living expenses, and then accelerate credit card payments above the minimum payments required. Once you have paid down your debt, go back and boost payments to your emergency fund so you don't go into debt again.

Here are six ways to boost your emergency/security fund and change savings habits for life:

* Treat savings as a bill. Figure out what you can afford to save each month and stash away $75, $50, $25, or even $10 a month. No matter the amount, it adds up, and it's habit-forming. As your situation improves, increase the amount.

* Round up. Let's say your monthly utility payment is $76.26 year-round. Budget for $80. If your mortgage payment is $967.89, budget for $1,000. These amounts make budgeting easier, and you'll have a buffer at the end of the month to apply to your emergency fund.

* Live one raise behind. Budget using your old income and apply the extra amount to your emergency fund.

* Automate it. If it's not in your wallet or your checking account, you're less likely to spend it. Use automatic transfers to savings. Out of sight, out of mind, but you know it's there if you really need it.

* Give savings a garage-sale boost. Schedule an emergency-fund-dedicated spring-cleaning event. Go from room to room and purge stuff you no longer want and need. You'll clean house, feel refreshed, and boost your savings.

* Think of it as a freedom fund. If you can't find that initial "spark" to get started, ask yourself how you'd pay your bills if you got a pink slip tomorrow, or if your car needed major repairs. If you know the money is there when you need it, the burden of worry is lifted.

Remember: The professionals at LifeWay Credit Union are ready to help with all your savings needs. Call us at 615-251-2089 to set up short-term and long-term savings vehicles that fit your needs.