Hill's Personal Finance

Annuities and 401(k)s

With longer life expectancies, some employers are adding annuities to their 401(k) options. This will be the first generation reliant on 401(k)s instead of pensions so preparing for lifetime income is essential. An annuity in your 401(k) maybe in your future

Via accountingweb.com

Insurance for The Small Business Owner

Do you own a small business? Are you starting one? What kind of insurance should you have? Truthfully, you should consider (and preferably have) three kinds of insurance for your business and its assets.

Liability insurance. Absolutely essential … because if you run a small business, especially one that provides services of some kind, you will inevitably be sued someday or at least threatened with a suit. Liability insurance will help you if your services or products cause harm to someone or their property. In such cases, liability insurance pays for some or all of the damages, plus lawyer’s fees and court costs. Doctors and lawyers wouldn’t dream of practicing without this coverage, which is called Errors & Omissions (E&O) insurance in the medical and legal fields.

Workers comp insurance. Presuming you have employees, you will need this. In fact, the state in which your business is located may require it. If you have an employee that falls ill or suffers an injury that is work-related, workers comp coverage can cover the costs of their medical bills and some or all of the wages they have lost by being away from work. In different states, workers comp insurance offers different degrees of coverage; it doesn’t always cover independent contractors, and the number of workers you many insure varies.

Property insurance. Acts of nature, acts of violence, accidents … they can all damage your business. And physically, where is your business? If you lease space in a building you don’t own, you need to understand that the property owner’s building insurance will not protect your business assets, so additional property insurance is a very, very good idea. If you work from a home office, your homeowners policy will probably not insure your business assets either – very likely, you will have to get a separate policy to properly insure them. Do you actually own the building your business is based in? Then undoubtedly you have business property insurance. You should still review your policy to make sure what it does and doesn’t cover. You may need to extend the coverage to apply to what isn’t real property (office machines, furniture, appliances, and any goods of value that you store or warehouse).

If you have questions about business insurance or suspect that your business may be underinsured, talk with a qualified insurance professional today who can help you take a look at your options.

Deferred Compensation Plans

Should you consider one?

In recent years, the use of Deferred Compensation Plans has grown considerably. This is largely due to the current job market … employers are looking for new ways to appeal to and retain skilled employees. Looking at new ways to approach employee benefits is one way to work toward accomplishing that.

But … what are they? In the simplest terms, a Deferred Compensation Plan allows an owner or an employee to set aside a portion of their income to be paid out at a future date. These plans are broken down into two basic categories: Qualified and Non-Qualified plans.  Each type of plan holds certain advantages, but the major difference between them is in the way the plans are taxed by the IRS.

Non-Qualified Plans: In a non-qualified plan, the employer does not receive tax deductions until the time when the employee’s benefits have been paid out … and at that time the benefits are taxable to the employee. On the plus side, setting up a non-qualified plan is generally less expensive. Also, employer contributions are not limited and these plans do not have substantial reporting or filing regulations.

Qualified Plans: In a qualified plan, reporting requirements are more significant, highly paid employees may be prohibited from participating, and the amount an employer may contribute is limited. However, qualified plans include benefits that are allowed to mature tax-deferred until they are dispersed. Additional tax deferral may be possible as well, because qualified plans are commonly eligible for rollover to an IRA or other (qualified) plan.

So which plan, if any, is right for you? Well, that’s a tricky question. Although tax deferral is generally thought of as a benefit, it could be a disadvantage if an employee’s tax rate has increased before compensation has been paid out. However, if tax rates do not rise (or if they drop), a well-compensated employee is almost always likely to benefit by deferring a portion of their income.

Tax rates are a major factor to consider when contemplating a Deferred Benefit Plan, and there are other aspects to consider as well. The best thing to do is speak with a qualified financial professional who can take a look at your unique situation and help you to determine if setting up a Deferred Benefit Plan will be a good move for you.

Proposed Immigration Reforms

The economic reasoning behind the guest worker program.

Currently, the U.S. Senate is considering an immigration bill that would a) provide legal status to roughly 12 million undocumented immigrants, b) start a guest worker program, and c) make job skills and education the major factors in future immigration decisions. What might all this mean economically?

The intent. The Bush administration wants to solve thorny immigration issues while giving a long-term boost to the economy. So after paying a one-time $5,000 fine, undocumented workers who arrived in the U.S. before 2007 would then pay fees to obtain a “Z visa" and register with a guest worker program. This program would match them to jobs no American is available for or willing to take. The Bush administration believes that this would lower the jobless rate significantly and keep the economy running on all cylinders. Immigrants enrolled in the guest worker program could become permanent U.S. residents in 8-13 years; however, they would have to return to their home country within 8 years to apply for legal re-entry into the United States.The economic demand. In 2004, the Department of Labor forecast that 3.4 million additional jobs for semi-skilled workers would be created in the retail, manufacturing, hospitality and healthcare fields by 2014. The guest worker program would help companies fill these high-turnover positions. The native-born American workforce is becoming older, better educated, and less likely to take these jobs. Under the proposal, American companies would have to make every effort to hire American workers first. If they hired undocumented immigrants not enrolled in the program, they would be fined.

The social complication. Like the bracero program of the mid-20th century, the guest worker program would emphasize the employment of individuals rather than the immigration of families. A merit-structured point system would be used to rank a guest worker’s skills, and the ranking would help determine his or her employability. Currently US iimmigration policy gives preference to adult children and siblings of U.S. citizens who wish to immigrate; that preference would cease with the guest worker program

What is the Pension Protection Act?

What it is, what it means, and what you need to know.

The Act. A bipartisan bill signed into law in August of 2006 and containing a staggering 900+ pages of text, the Pension Protection Act was drafted to refine and reform policies regarding retirement planning. It’s important that you understand these new regulations and what effect they could have on your retirement. While I can’t cover all 900 pages here, I’ll attempt to give you the essentials …

What it did. The lion's share of the act was intended to hold employers accountable for strengthening their pension plans. Many plans had previously been under-financed, with the risk of not having enough cash to pay out promised pension benefits. Under the new law, however, most plans were required to become fully funded within a seven-year period. Basically, businesses which offer private pension plans were told to make sure they set aside enough money now to be able to pay the benefits they’ve promised later.

                                    

How it did it. The plan cracked down on companies that under-funded their plans; those companies can now face the prospect of increased premiums and tax penalties. The PPA also required employers to be more precise in the evaluation of their pension plan obligations, and closed a loophole which permitted under-funded plans to skip pension payments.

What it means for you. The PPA stipulates that workers must have more information about pension account performance. It also contains provisions which offer increased access to professional investment advice, and gives employees more control over how their accounts are invested. Bottom line – the title says it all. The mission was to protect pension plans for workers.

What to be aware of. While the main objective of the PPA is protection, there are a few key details you should know about. One such item is automatic enrollment. To encourage less reliance on government benefits and more on individual retirement savings, the act allows employers to automatically enroll workers into their 401(k) plans (with a 90-day window to opt out of the plan). Another change has to do with non-spousal beneficiaries and the manner in which they receive funds. Yet another change allows distributions to employees over the age of 62, which can allow older employees to work part-time while receiving benefits, thus “phasing in” their retirements.

Moving forward. The PPA was a landmark piece of legislation, and the information I’ve provided here merely scratches the surface as to what changes were implemented and how they could affect you. It may be a good idea to speak with both a tax professional and a qualified financial advisor who can look at your financial situation and help determine how these changes will affect your retirement strategy. If you already had a firm retirement plan in place prior to the PPA, now is a good time to take another look at it and find out if your previous strategy should be adjusted

How Fees Negatively Effect 401k's

Your 401(k) offers you an outstanding retirement savings vehicle … with fees attached. Over time, those fees will actually cut into your retirement savings potential.

How high are these fees? Typically, 401(k) annual fees run from .25% to 1.5%. The fees are subtracted right out of the savings in your account, and there is no requirement to notify you about them: when you get your quarterly 401(k) statement, you will find no line-item expense labeled “fees.” The bulk of these fees are for investment services. Most people who invest in 401(k)s invest in major mutual funds and have to pay these investment fees by law. (In response, some corporations have created their own generic wholesale funds to give employees lower-cost options.) Some plans also charge fees for legal, administrative, record-keeping and even advertising costs.

The cost to you. Over a 20- or 30-year period, these fees can really affect the compounding of your assets. The Department of Labor offers an example: if you have $25,000 right now in your 401(k) and hypothetically just let it sit there, and your investment returns average 7% across the next 35 years with 0.5% annual fees, you will end up with $227,000 in 2042. But if those annual fees are bumped up to 1.5%, you will end up with only $163,000 in 2042. A 1% difference in fees and expenses would leave you with 28% less money for retirement.

A call for change. According to a new Government Accountability Offfice report comissioned by Congress, about 80% of 401(k) plan participants don't know how many fees they are paying, or how much in fees they are paying. That may change thanks to a new effort in Congress. Rep. George Miller (D-Calif.), the new Education and Workforce Committee Chairman in the House of Representatives, wants Congress to act to change the rules regarding 401(k)s and make companies that manage them provide clearer and plainer information on fees. The new GAO report urges Congress to require the disclosure of 401(k) fees to permit investors to compare plan options.

These views are those of Peter Montoya Inc. and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Please consult your Financial Advisor for further information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards.

1% Solution for your Financial Life

The 1% solution relates to life and what we must do to make it work. The circle below represents any challenge or obstacle we must face whether it is a task, a project, or a goal. We must give the 1% to get what we want. Life might require more than the 1% to get all we want, but that is the starting point. To write a hundred page book one must write the first page. Focus on the next task at hand. Finish it, Start the next. Finish what you start. The journey of a thousand miles begins with the first step.

Planning The circle represents a day. There are 1,440 minutes in 24 hours. One percent equals 14.4 minutes, lets round that to 15 minutes. Why not use that 1% to plan for the other 99%? If we do not have time to plan, how do we have time to do it over? Most people do not plan to fail, they just fail to plan.

Investment Goals. The circle now represents an amount money we need to accumulate for retirement, college expenses, or anything. Why not invest 1% of your goal each year? With a 7% return and 30 years you will reach your goal. If you invest 2% and get an 8% return, your goal will be reached in 20 years.

Life Insurance Now the circle represents your annual earning potential. Wouldn’t it make sense to spend 1% of your earnings to insure that the investment goal from above is met in your absence?

Disability Income Insurance. Let’s say the circle represents your earned income. Wouldn’t it make sense to let 1% (or 2%) each year help protect the other 99%?

Estate Planning. The circle now represents the sum of your investment goals and hard work – your estate. If your estate is worth 10 million dollars, the estate tax liability will be between 4 and 5 million dollars. Why not use 1% ($100,000) of your estate annually to reduce or eliminate that tax liability from the other 99%. If they do away with the estate tax, that will be more for your heirs or charity.

Business Planning.  The circle represents your business’ sales why not use 1% of those sales to protect the other 99%? If it makes sense to insure your buildings, inventory, and PCs, why doesn’t it make sense to insure the rainmakers, the VPs and the president who help create those sales?

The 1% solution is the way to simplify things. It helps put things in perspective. How does one eat an elephant – one bite at a time.

Webinar: Small Business Retirement Plans

On November 28th, 2006 at 2 pm we will be hosting a webinar on Small Business Retirement Plans. The common ones will be covered from SEP-IRAs,  SimpleIRA's, 401(k)s, Individual 401(k), and Solo DBs. The seminar will include maximum contribution limits of each and strategies on how to increase your retirement  savings.  To join us click the seminar link below.to register by email. Please include your name, address, and email so we can send you the connection instructions.

                 Small Business Retirement Webinar registration

The process of Selling a Small Buisness

Every  business owner will eventually leave their business whether it is through retirement, sale, or untimely death. The only way to maximize the return is through a solid plan that takes into account the owners objectives, potential buyers, and tax consequences of the sales method. The exit strategy may need anywhere from 2 to 10 years to achieve the best outcome for the business owner. John Burley at INC.com has a good synopsis of this process in "Lifecycle of Selling a Small Business"

Nepotism & the Family Business

Should a founder leave their family business to their child to run or hire an outside CEO? I do not know the answer to that question - but I know it is one a founder should consider. More factors are considered in this Freakonomics post "Should the founder's son be CEO"