Tax Regulation Makes LTCI More Affordable

Are you reluctant to buy long-term care insurance (LTCI) because it’s not exactly cheap? Or maybe you might not like the thought that if you don’t use the insurance, you’ve wasted your money. However, without some kind game plan, a change in your health could wipe you out! Well, thanks to the IRS, you might be able get a policy while still accumulating bucks for the future. It starts with a fixed, deferred annuity (FDA). Money you put into one of these annuities accumulates tax-free until you withdraw it. When you make a withdrawal, part it is considered a return of your original investment, thus comes out tax-free. The rest is considered earnings and taxed at your ordinary income tax rate. As you can see then, FDAs can be a valuable way to put away money for retirement, much like an IRA. Now, back to LTCI … The Pension Protection Act of 2006 includes two provisions regarding FDAs, life insurance and LTCI that took effect January 1, 2010: 1. Money you withdraw to pay LTCI premiums is distributed free of taxes, therefore your after-tax cost for the policy could be less. 2. Money you transfer directly from an annuity or the cash value in life insurance to pay for long-term care insurance is not taxable. Insurance companies were quick to jump on the second provision by introducing FDAs with a LTCI rider. Very simply here’s how they work: Suppose, for example, you put $50,000 into a FDA. And let’s assume it’s designed to pay you up to 300% in benefits. That means you’d have $150,000 in coverage from day one without paying LTCI premiums. And if you never have to use the benefit, your $50,000 continues to grow tax-deferred. Of course, this perk comes at a cost, which is a reduction in the interest rate you’ll receive on the amount you pay in. So be sure to ask your agent for the details. But at least now you have a basic idea of two more ways to protect your nest egg and leave something for your love ones. To learn more about the many options available to help plan for long-term care expenses, be sure to check out A Boomer’s Guide to Long-Term Care. Best wishes, George

Costa Ricans Squash Border Problem … Without U.S. Help!

I just returned from Costa Rica. This time I went south to the San Isidro area. Beautiful mountains, gorgeous beaches, and friendly Ticos. But I got to witness something that many visitors might not appreciate. There was a clash on the Nicaragua border. It seems that a big-time, Nicaraguan landowner was starting to dig a trench onto a Costa Rican’s property. And apparently he had enough influence to get some soldiers to give him a hand. I won’t go into the details. You can read more here if you’re curious. I can tell you this though: All the locals I met were furious. The reporting was nonstop on TV. After a day or so of negotiations, it didn’t look like this was going to get resolved. And I envisioned that the U.S. would get dragged in one way or another. Then on Friday I watched on TV as Costa Rican police loaded planes and headed to the border. Well, sure enough, they settled the issue and sent the Nicaraguans packing. What impressed me is that Costa Rica hasn’t had a military since 1948! A point most Ticos are very proud of. However, they do have police force, which despite being underpaid and under-equipped, is not afraid to act when needed. And they took care of what could have become a huge international crisis without us sticking our nose into it. Best wishes, George

Congress Wimps Out

Well, no doubt our Congressional members are worried about keeping their jobs. So they decided to sweep important tax issues under the rug until after the mid-term election next month. Then, of course, we’ll have the holiday recess. And hopefully a lot of new cast members. I wouldn’t expect income tax, estate tax and alternative minimum tax to come to anyone’s attention until well into the first quarter of 2011. Congress did, however, pass the Small Business Jobs Act of 2010 before hitting the campaign trail. Here’s a quick overview of a few points that might touch your wallet: Employee cellphones — If your employer provides you with a cellphone, you’ll no longer have to deal with the recordkeeping nightmare of logging your personal cell use. Roth 401(k) plans — You can now transfer 401(k) money into a Roth 401(k) plan. You’ll have to pay income taxes, but Roths allow tax-free buildup and tax-free withdrawals. And if you make the switch this year, you can defer the conversion income taxes into 2011 and 2012. The catch is that your employer's plan must allow for such Roth accounts. Annuity payouts — If you own a tax-deferred annuity outside of a retirement plan, you can now break out part of that money to provide a steady income. The balance will continue to grow tax-deferred. For instance, suppose you have a tax-deferred annuity that’s worth $100,000. And maybe you only need enough income each month to pay for long-term care insurance. You could ask the annuity company exactly how big of a lump sum would you need much to generate $xx a month for the rest of your life. Let’s say it’s $25,000. That amount will set you up with the ongoing income you want and the remaining $75,000 will stay in the original account for you to use in the future. Rental expenses — Those of us with rental properties now have one more government-induced aggravation to deal with. Starting in 2011, we’ll have to fill out 1099’s for anyone who does more than $600 in work for us during the year. Landscapers, plumbers, painters are among those who will have to give you Social Security numbers so you can report the income to the IRS. So you better make sure they’re legal residents with valid Social Security numbers before hiring them. What’s in store for us when Congress gets back to work in January? I place my bet on higher taxes for all. And even if Congress refuses to boost taxes or cut expenses, state and local governments are swimming in a sea of red ink. Good luck! George