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LifeFocus.com T. Young info@lifefocus.com www.LifeFocus.com

Starting a Family

March 28, 2010


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Table of Contents Planning for the Birth of a Child ........................................................................................................................ 8 What is it? ................................................................................................................................................ 8 Having a child will affect you financially ................................................................................................... 8 Having a child will change your insurance needs .................................................................................... 8 Having a child means reviewing your estate plan .................................................................................... 8 Other planning issues .............................................................................................................................. 8 Financial Planning Issues for New Parents .......................................................................................................9 What is it? ................................................................................................................................................ 9 Budgeting for baby ................................................................................................................................... 9 Estate planning issues ............................................................................................................................. 10 Insurance issues ...................................................................................................................................... 11 Income tax considerations ....................................................................................................................... 12 The Spending Plan (Budget) .............................................................................................................................13 What is the spending plan? ......................................................................................................................13 How do you create a spending plan? .......................................................................................................13 How do you develop a spending plan? .................................................................................................... 13 How do you implement and monitor the plan? .........................................................................................13 How do you cut costs if you are spending too much? ..............................................................................13 How do you increase your cash flow? ......................................................................................................14 Can you afford to have one spouse stay at home? ..................................................................................14 Cash Reserve ................................................................................................................................................... 15 What is a cash reserve? ...........................................................................................................................15 Why is a cash reserve necessary? .......................................................................................................... 15 Determining how large a cash reserve should be .................................................................................... 15 Achieving your cash reserve goal ............................................................................................................ 16 Structuring and maintaining a cash reserve .............................................................................................17 The Family and Medical Leave Act of 1993 ...................................................................................................... 19

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What is the Family and Medical Leave Act of 1993? ............................................................................... 19 Who is covered by the FMLA? ................................................................................................................. 19 When will you be eligible for leave? ......................................................................................................... 19 How does the FMLA protect you? ............................................................................................................19 How do you take FMLA leave? ................................................................................................................ 20 Know your rights ...................................................................................................................................... 21 Questions & Answers ...............................................................................................................................21 The National Defense Authorization Act for FY 2008 .............................................................................. 21 College Saving Options .................................................................................................................................... 22 College costs ............................................................................................................................................22 College savings options ........................................................................................................................... 22 Factors that may affect college savings decisions ................................................................................... 23 Discussing a college funding plan with your child .................................................................................... 25 Dilemma of saving for college and retirement ..........................................................................................25 Saving for College and Retirement ................................................................................................................... 26 What is it? ................................................................................................................................................ 26 First, determine your monetary needs .................................................................................................... 26 You've come up short: what are your options? ........................................................................................ 26 How do you decide what strategy is best for you? ...................................................................................28 Can retirement accounts be used to save for college? ............................................................................ 29 Can You Afford to Have One Spouse Stay at Home? ...................................................................................... 30 Can you afford to have one spouse at home? ......................................................................................... 30 Impact of the loss of second income ........................................................................................................30 Cost of earning the second income ..........................................................................................................30 Hidden benefits ........................................................................................................................................ 31 Long-term cost of not working ..................................................................................................................31 Lifestyle changes ..................................................................................................................................... 31 Assuring the Smooth Distribution of Your Estate .............................................................................................. 33 What is it? ................................................................................................................................................ 33

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Wills ..........................................................................................................................................................33 Selecting an executor ...............................................................................................................................33 Nominating a guardian/conservator for minor children ............................................................................ 33 Intestacy ...................................................................................................................................................34 Determining the Need for Life Insurance: How Much Is Enough? (General Discussion) ..................................35 What determines your life insurance need? .............................................................................................35 Methods of calculating life insurance need .............................................................................................. 36 Insurance mistakes .................................................................................................................................. 37 Child Tax Credit ................................................................................................................................................ 38 What is the child tax credit? ..................................................................................................................... 38 Who is a qualifying child for the purposes of the child tax credit? ............................................................38 Your ability to claim the credit depends on your income level ................................................................. 38 Calculating the credit ................................................................................................................................39 Refundable portion of child tax credit ("additional child tax credit") ......................................................... 39 Limits on the child tax credit .....................................................................................................................39 And Baby Makes Three .................................................................................................................................... 40 Reassess your budget ............................................................................................................................. 40 Decide if one of you should stay home .................................................................................................... 40 Review your insurance needs .................................................................................................................. 40 Update your estate plan ........................................................................................................................... 41 Start saving for your little one's education ............................................................................................... 41 Don't forget about your taxes ................................................................................................................... 41 Life Insurance at Various Life Stages ............................................................................................................... 42 Footloose and fancy-free ......................................................................................................................... 42 Going to the chapel .................................................................................................................................. 42 Your growing family ..................................................................................................................................42 Moving up the ladder ................................................................................................................................43 Single again ............................................................................................................................................. 43 Your retirement years ...............................................................................................................................43

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Life Insurance Basics ........................................................................................................................................ 44 The many uses of life insurance .............................................................................................................. 44 How much life insurance do you need? ................................................................................................... 44 How much life insurance can you afford? ................................................................................................ 44 What's in a life insurance contract? ......................................................................................................... 44 Types of life insurance policies ................................................................................................................ 45 Your beneficiaries .................................................................................................................................... 45 Where can you buy life insurance? .......................................................................................................... 46 Do You Need Disability Income Insurance? ......................................................................................................47 A look at the odds .................................................................................................................................... 47 What would happen if you became disabled? ..........................................................................................47 But isn't disability coverage through an employer or the government enough? .......................................47 Planning a Family? Get to Know Your Health Insurance Policy ....................................................................... 49 Check your coverage ............................................................................................................................... 49 Changing jobs? Be careful ....................................................................................................................... 49 When will the baby's coverage start? .......................................................................................................49 What is covered before your baby is born? ..............................................................................................49 What is covered during and immediately after birth? ............................................................................... 50 After you bring your baby home ............................................................................................................... 50 Understand your out-of-pocket expenses ................................................................................................ 50 Maximum lifetime benefits ........................................................................................................................50 Health Insurance and COBRA: Sometimes You Can Take It with You ............................................................ 52 The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time ....................................................................................................... 52 The Health Insurance Portability and Accountability Act of 1996 expanded COBRA .............................. 53 The American Recovery and Reinvestment Act of 2009 provides Cobra subsidy ...................................53 Investing for Major Financial Goals ...................................................................................................................54 How do you set goals? .............................................................................................................................54 Looking forward to retirement .................................................................................................................. 54 Facing the truth about college savings .....................................................................................................55

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Investing for something big ...................................................................................................................... 55 The Best Ways to Save for College .................................................................................................................. 56 529 plans ................................................................................................................................................. 56 529 plans: college savings plans ............................................................................................................. 56 529 plans: prepaid tuition plans ............................................................................................................... 57 Coverdell education savings accounts .....................................................................................................57 Custodial accounts ...................................................................................................................................58 U.S. savings bonds .................................................................................................................................. 59 Financial aid impact ................................................................................................................................. 59 Saving for Retirement and a Child's Education at the Same Time ................................................................... 61 Know what your financial needs are ........................................................................................................ 61 Figure out what you can afford to put aside each month ......................................................................... 61 Retirement takes priority .......................................................................................................................... 61 If possible, save for your retirement and your child's college at the same time ....................................... 62 Help! I can't meet both goals ....................................................................................................................62 Can retirement accounts be used to save for college? ............................................................................ 63 Estate Planning: An Introduction .......................................................................................................................64 Over 18 .................................................................................................................................................... 64 Young and single ..................................................................................................................................... 64 Unmarried couples ................................................................................................................................... 64 Married couples ........................................................................................................................................64 Married with children ................................................................................................................................ 65 Comfortable and looking forward to retirement ........................................................................................ 65 Wealthy and worried ................................................................................................................................ 65 Elderly or ill ...............................................................................................................................................65 Wills: The Cornerstone of Your Estate Plan ......................................................................................................66 Wills avoid intestacy .................................................................................................................................66 Wills distribute property according to your wishes ................................................................................... 66 Wills allow you to nominate a guardian for your minor children ............................................................... 66

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Wills allow you to nominate an executor .................................................................................................. 66 Wills specify how to pay estate taxes and other expenses ...................................................................... 66 Wills can create a testamentary trust ....................................................................................................... 67 Wills can fund a living trust .......................................................................................................................67 Wills can help minimize taxes .................................................................................................................. 67 Assets disposed of through a will are subject to probate ......................................................................... 67 Will provisions can be challenged in court ............................................................................................... 67 Choosing an Income Tax Filing Status ............................................................................................................. 68 The five filing statuses and how they affect your tax liability ....................................................................68 You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year 68 Married filing jointly often results in tax savings for married couples ....................................................... 68 You don't have to be separated to choose married filing separately ....................................................... 69 Head of household status offers certain income tax advantages .............................................................69 Qualifying widow(er) with dependent child offers the advantages of a joint return .................................. 69 How can I save for my child's college education? .............................................................................................71 Who should I name as guardian of my children in case my spouse and I should die at the same time? ......... 72 Should I buy life insurance on my child? ...........................................................................................................73 How do I find quality child care? ....................................................................................................................... 74 Does it make sense financially for both me and my spouse to work after our child is born? ............................ 75 How do I pay for child care? ..............................................................................................................................76 When do I have to apply for a Social Security number for my newborn? ......................................................... 77 What is the kiddie tax? ...................................................................................................................................... 78 What is the earned income credit and who qualifies for it? ...............................................................................79 Can I take the tax credit for child care? .............................................................................................................80 What is the child tax credit? .............................................................................................................................. 81 Does a typical dental insurance policy cover braces? ...................................................................................... 82

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Planning for the Birth of a Child What is it? Planning for the birth of a child is an exciting yet stressful time. Along with the fun of picking out a name for your baby and shopping for baby clothes comes the realization that you're now responsible for a new life. You'll naturally start thinking about what kind of life you want your child to have, and you'll need advice about financial matters, insurance, and estate planning.

Having a child will affect you financially When you have a baby, it's a good time to review or make a budget. Your day-to-day living expenses may increase dramatically, while your income may decrease if you stay home with your baby temporarily or permanently. Your savings plan may change as well if you decide to save for your child's education or put a portion of your money into an emergency fund. In addition, having a child often affects your taxes positively. Due to the increased exemptions, deductions, and credits you may be able to claim, you may find yourself paying less income tax in the future. For more information on the financial implications of raising a child, see Financial Planning Issues for New Parents.

Having a child will change your insurance needs New parents need to protect their families by reviewing their current life, health, and disability insurance, making sure that their current policies are adequate, and purchasing additional insurance if needed. For more information on this topic, see Financial Planning Issues for New Parents.

Having a child means reviewing your estate plan Planning for your child's future in the event that you die is crucial. You'll need to draw up or revise your will, nominate a guardian for your child, review your beneficiary designations, and make sure that your assets are distributed according to your wishes. You may also want to set up a trust to ensure that estate funds are used to benefit your child. For more information, see Financial Planning Issues for New Parents.

Other planning issues Taking time off from work after the birth of your child If you're working, you and your partner (if any) may need to decide whether either one of you wants to stop working temporarily or permanently once your child is born. Either of you may be eligible for short-term paid or unpaid leave from your employer, or you may be able to take up to 12 weeks unpaid leave under the Family and Medical Leave Act of 1993. If you do decide to work, you'll need to investigate child-care options, perhaps even before your child is born. If you're not sure whether you can afford to stay home while your spouse works, you may want to read Can You Afford to Have One Spouse Stay at Home?. Applying for vital records after the birth of your child It's important to remember to apply for a Social Security number for your child as soon as possible after he or she is born because you'll need the number to fill out your income tax return for the year. In addition, you'll want to apply for a birth certificate. Many hospitals now routinely allow you to apply for these records before you leave the hospital with your child and will file the paperwork for you. For more information, see Applying for Vital Records.

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Financial Planning Issues for New Parents What is it? As you prepare for life with your new child, it's time to prepare a new financial plan for your family or make any necessary changes to your existing plan. You'll want to consider how your baby will affect your budget, make sure you have adequate insurance, protect your child's future with a well-thought-out estate plan, and determine how having a child will affect your income taxes.

Budgeting for baby Develop a new spending plan The birth of a child is an opportunity for you to set up a new budget or review an existing one. You'll have to consider the impact that your child will have on your living expenses as well as account for any shift in income that might occur if you decide to quit your job. You'll also need to save more money to ensure that your family has money to meet its future needs. Expenses that typically increase when you have a baby • Your grocery bill: Diapers and formula (you may use some even if you're breast-feeding) are very expensive, adding $100 or more to your monthly grocery bill. Later, when your baby turns to solid food, you'll have to figure in the cost of baby food. • Your housing costs: If you don't already live in a house or large apartment, you may find yourself moving once your baby gets old enough to take up a lot of space with toys and equipment. • Your transportation costs: If you have a small car or a two-seat convertible, you may find it difficult to fit in a car seat, and you may need to buy a new car. Or, if you have an old car, you may want to buy something more reliable now that you have to worry about your baby's safety. • Your clothing and household expenses: You'll find yourself spending less on yourself and more on your child now that your budget has to stretch. You'll spend a lot initially to buy essentials for your child and then spend a bit more each month than you're used to for items your child needs. • Medical expenses: You'll probably pay a co-payment for each of these trips unless your health insurance plan covers 100 percent of well-baby care. Your health insurance premium will likely dramatically increase as well, unless you already had family coverage for you and your spouse. • Cost of child care: Whether you look for full-time day care or hire an occasional baby-sitter, you need to plan for the impact this will have on your budget. Initial expenses The initial outlay for your baby can be quite high. You'll have to equip your home with baby furniture, a stroller, a high chair, an infant seat, a car seat, bedding, and clothing, among other items. You could spend well over $1,000 equipping your home with just the basics, and many new parents spend a lot more. However, when you're shopping for the baby you're expecting, try to separate emotion from need. Of course, you want your baby to have the best, but you don't really need the best in most cases. Your baby won't look any cuter in that $1,000 crib than he or she will look in the $200 one, and many parents can tell stories about the top-of-the-line stroller he or she bought then found was too heavy to push easily. The best way to proceed is to ask other parents for recommendations, then shop around. Usually, you don't have to sacrifice quality to save money. If you start shopping far enough ahead, you can find good deals in discount stores, department stores,

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and superstores. You can also look for items in thrift stores, consignment shops, and yard sales, although finding clean secondhand items in good condition can be a challenge. Ask friends and relatives, too, if you can borrow baby items that they're not currently using. If your friends are throwing you a shower, ask for items you need. Tip: Don't buy more than you initially need for your baby, because you may find that what you thought you needed, you really don't. In addition, your friends and relatives may shower you with gifts once the baby is born, and you won't need to buy as much as you thought you would. In particular, don't go overboard buying clothes until you can gauge how rapidly your baby will grow. One thing you definitely should buy is a car seat. Many hospitals won't let you leave without having one, although they may loan you one temporarily. Costs of day care The cost of day care will depend on where you live, how many children you have in day care, how old your children are, and what type of child care you choose. Saving for education It's wise to begin saving for your child's education as early as possible. There are several ways to do this. You can begin by depositing a certain amount every month into a savings or money market account, contribute to a college savings account, purchase Series EE bonds (may be called Patriot bonds), or take advantage of a wide variety of other investment vehicles. Saving for emergencies If you don't have an emergency fund, now is the time to set one up. If your child gets sick, your car breaks down, you need to move unexpectedly, or you lose your job, you can dip into your emergency account. An emergency account should normally contain an amount that equals three to six months' worth of living expenses.

Estate planning issues Estate planning is a subject many parents would like to avoid. After all, you're celebrating new life, and it's sad to think that you may not be around to raise your child. However, it's crucial to the welfare of your child that you leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you don't currently have a will, now is the time for you (and your partner, if any) to draw one up. If you do have a will, you'll need to review it. You'll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child's interests after your death. You should also review your beneficiary designations. Wills Each parent should have a will to ensure smooth distribution of his or her estate. After your child is born, you should review your will (or draw up a will if you don't already have one) to make sure that your assets are distributed as you would like, to nominate a guardian for your child, and to choose an executor for your estate. Tip: You may want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything--your philosophy on life, the family history, or some advice that you'd like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping. Example(s): When her daughter Sara was born, Emily wrote a letter to her that described the night Sara was born and Emily's hopes and dreams for Sara's future. When Emily was killed in a car accident the year Sara turned 16, Sara read the letter and found out that her mother was proud of her and really wanted her to attend college. So Sara worked hard the next two years of school so that she could get into the local university.

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Nominating a guardian Choosing a guardian for your child is very important. If you die without naming a guardian for your child, it will be up to the court to do it for you, and the person whom the judge names may not be the person you would have chosen to look out for your child. When choosing a guardian, look for someone who will look out for the best interests of your child, preferably someone who has the time and energy to meet the demands of raising a child. Make sure that you ask a potential guardian whether he or she would like to serve as your child's guardian. Often someone you think is the perfect choice really doesn't want the responsibility. For this reason, you should also nominate a contingent guardian. Periodically rethink your choice of guardian. As your children grow older, you can ask them whom they would like to live with in the event you die. Although this can be a scary subject for children, it's important to raise the issue with them. In addition, once your children are old enough, tell them whom their guardian will be in the event you die. Setting up a trust Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your children spent, and it can ensure that your child's money is protected. A trust can help the guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.

Insurance issues Before your child is born, review your insurance coverage to make sure that you and your family are adequately protected. If you or your spouse is going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you'll need to buy more coverage. Life insurance Having a child will increase your need for life insurance coverage. Many experts recommend that you have life insurance equal to five times your annual salary. Health insurance The best time to check your maternity coverage is before you become pregnant. If you don't have health insurance or if your health insurance doesn't cover maternity care, you'll need to buy maternity coverage or figure out how to pay the cost of having your baby. Make sure that you understand your deductibles, your co-payments (if any), and whether your policy covers testing, emergency care, and all the costs of delivery (including anesthesia, if necessary). Find out about claims-handling procedures, how long you will be able to stay in the hospital once you've been admitted for delivery, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth, but check your insurance policy anyway to make sure. Determine, too, whether your policy covers routine visits to a family practitioner or a pediatrician once your child is born. If both you and your partner are covered by or eligible for coverage under an employer-sponsored policy, you may need to decide which policy offers the best (or most cost-effective) family coverage. Disability insurance Before you had a child, you may not have worried about becoming disabled. Now that you're planning to have a child, you may be thinking about what would happen if you suffered an injury or illness and couldn't work for days, months, or even years. If you're married, you may be able to rely on your spouse for income, but could your spouse really support all of you? Example(s): Bob worked as an accountant, a relatively nonhazardous occupation. However, on Christmas Eve, he broke both wrists when he slipped and fell on a patch of ice. Since his injury was not work-related, he wasn't eligible to receive workers' compensation insurance. In addition, he wasn't covered by an individual or group disability policy. His wife was working full-time as a

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seamstress but wasn't able to support Bob and their children on her salary alone. Within a few weeks, they were financially destitute. To protect your family in case your income is cut off due to disability, consider purchasing disability insurance if you don't already have it. You may have a group disability policy through your employer or you may want to purchase an individual disability insurance policy. A disability policy won't replace your total income, but it will likely replace 50 to 70 percent of your earnings.

Income tax considerations At tax time, you'll find out that some financial benefits can help defray the cost of raising a child. You'll suddenly be eligible for an extra exemption, and you may be eligible for one or more tax credits. Exemptions When you file your income tax return, you may be able to claim an exemption for you, your spouse, and your dependents if your adjusted gross income is below a certain phaseout amount. This means that when you file your income tax return in the year of your child's birth (and ensuing years), you'll be able to claim an extra exemption that will reduce your tax liability. Tax credits Having a child might enable you to qualify for one or more tax credits. Credits related to children are the child and dependent care tax credit (if you have qualifying child-care expenses), the child tax credit, and the earned income credit (if you have income under a certain level, having a child raises the amount of income you can have and still claim the credit).

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The Spending Plan (Budget) What is the spending plan? Your spending plan is essentially your budget. By using a more positive name, you can escape the feeling of restriction that often accompanies the term budget.Your spending plan is a tool to help you achieve financial goals that otherwise might seem impossible to reach. It is a way to take charge of your spending on a daily, weekly, and monthly basis so that you can channel your income to achieve your goals. A spending plan is also a way to keep money from slipping away unnoticed, allowing you to take charge of decisions such as what to buy, when to buy it, and why.

How do you create a spending plan? The first step is to set your budget goals, both short and long term. Goals give you something to look forward to and help you identify what you would eventually like to accomplish with your spending plan. In addition to identifying your financial goals, you need to estimate their cost, factoring in the rate of inflation for long-term goals. This allows you to determine how much must be set aside each month and helps you prioritize your goals. Changes in your income, health, the economy, your family size, and dozens of other variables can affect your plan and force you to sacrifice some of your goals. By prioritizing your goals, you will be prepared to make crucial decisions about what goals to abandon if necessary.

How do you develop a spending plan? To develop a spending plan, you must first become aware of your monthly expenditures and income. A spending diary, whether computerized or handwritten, will help you to identify your spending patterns and eliminate unnecessary expenditures. Your expenditures analysis should include out-of-pattern expenses (expenses that are not incurred every month, such as annual insurance premiums, automobile registration fees, subscription renewals, and holiday expenditures). Unless you derive income from various and unpredictable sources, your income analysis should be easier. Include your current salary or use estimates based on the past two years. Once you know how much money you have coming in and where it is going, you can determine what percentage of your gross income goes to each category of expenditures (e.g., housing, taxes, transportation, food, clothing, entertainment). If you have selected goals, such as paying off credit card balances or saving for retirement, then you can try to squeeze money out of one or more of your spending categories to fund the goal. By keeping your plan flexible and periodically reevaluating your progress, you can take control of your financial situation.

How do you implement and monitor the plan? Once your goals have been identified and your spending plan developed, all you need to do is implement the plan and monitor your progress. To make the process easier, you should include the whole family in the effort, commence the plan at a good time (not just before the holidays or vacation), keep the monitoring process simple, and be flexible. Discipline is necessary, but don't be too hard on yourself or you may become frustrated and abandon the whole effort. Be willing to make adjustments as you go along. You can monitor your plan using modern computer software or old-fashioned paper and pencil.

How do you cut costs if you are spending too much? If you are spending too much, there are several ways to cut back. One approach is to work on changing your spending habits. Suppose you are spending too much money on particular items (such as clothing) or spending more money at certain times of the month (near payday). By being aware of those habits, you can make appropriate changes. You may also try shopping smarter and reducing restaurant and/or entertainment expenses. Another option is to downsize to a less expensive car or home to reduce spending.

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You may also reduce spending by reducing the cost of your debt. One way is to consolidate or refinance high-interest loans. As mentioned, you shouldn't be too hard on yourself, but make a few changes. In time, you may be able to bring your spending under control.

How do you increase your cash flow? To maintain your spending plan, you must always have sufficient cash flow. There are a number of ways to increase your cash flow if you need to. You might ask for a raise, take a higher-paying job, take a second job, or turn a hobby into a business. You can sell or liquidate assets and eliminate expenses. You can also borrow your way through a cash flow crisis, provided you can afford the additional loan payments when they come due.

Can you afford to have one spouse stay at home? If you are developing your spending plan to determine whether a spouse can remain at home, then you have additional factors to consider. You should examine the short-term impact that losing an income will have on you and your family (immediate loss of cash flow) as well as the long-term impact (only one income contributing to the retirement fund, for example). Remember that when one spouse stays home, you may actually reduce some spending categories, such as child-care costs and commuting costs. It is always good to do a second-income analysis to determine the after-tax benefits of having both spouses working, and be prepared to accept lifestyle changes if you decide to have one spouse stay home.

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Cash Reserve What is a cash reserve? A cash reserve is a pool of funds (and sometimes credit) that you hold in a readily available form to meet emergency and other highly urgent, short-term needs. Sometimes, it is referred to as an emergency or contingency fund. Caution: Terminology is important here because contingencies often are not emergencies. Purchasing an expensive item that suddenly goes on sale or buying stock when its price suddenly drops might lead one to tap a so-called contingency fund, but these are certainly not emergencies. The definition used here of a cash reserve is money set aside solely to cover critical, unexpected needs, such as a sudden loss of income. Consequently, it is not a fund for meeting anticipated expenses, large or small, such as real estate taxes, tuition, or a spontaneous vacation. Instead, a cash reserve protects you, your family, and your loved ones against unexpected financial crises. Example(s): The manufacturer of a new computer you've been thinking about buying has just announced a substantial rebate on machines purchased within the next two months. While this might be an excellent opportunity to purchase the item at a reduced cost, it is not an emergency and therefore does not justify tapping your cash reserve. Maintaining sufficient savings elsewhere eliminates the temptation to tap emergency-designated funds for nonemergency needs.

Why is a cash reserve necessary? A sound financial plan should ensure that you are protected when financial emergencies arise. In times of crisis, you do not want to shake pennies out of a piggy bank. Also, having a cash reserve may help prevent being forced to take on additional debt precisely when another financial challenge is the last thing you need. Consequently, the first step in the financial planning process should be to establish a cash reserve.

Determining how large a cash reserve should be The amount of your cash reserve should be based on your own personal situation. While basic guidelines do exist, you should adjust them to reflect your unique circumstances. Some factors you should consider when determining a cash reserve goal include job security, the condition of your real estate, and the health of you and your dependents. Naturally, such factors change with time, so an annual review and adjustments are important elements of the planning process. Three to six months of routine living expenses compose a typical cash reserve, but there are exceptions Your should generally follow the 3-6 months rule: that is, your cash reserve should equal 3 to 6 months of ordinary living expenses. Occasionally, low job security or high income volatility might suggest having a reserve of up to 12 months of expenses. The actual number of months selected should reflect these and other significant risk factors, such as the adequacy of insurance coverage and the condition of any property you own. Using credit provides a higher-risk secondary funds source Credit available to you can be a secondary source of funds in a time of crisis. However, because borrowed money must be paid back (often at very high interest rates), using lenders as the primary source of your cash reserve can create more long-term financial problems than it solves. Credit as part of a cash reserve functions best when it's part of a multi-tier cash reserve structure that includes multiple financial resources.

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Taking stock of what you have List the locations and amounts of your money that you can withdraw on an immediate (or nearly immediate) basis without incurring a loss. Typical sources include savings accounts, money market accounts, Treasury securities, and cash value life insurance. Be careful to exclude accounts set up to meet everyday needs or special objectives, such as education, vacations, or a new car. You can also include untapped credit resources, provided you count them separately from cash resources. Are you missing the goal? If so, by how much? This is almost as easy as subtracting what you have from what you need. If you elect to consider credit resources part of your cash reserve, the procedure is slightly more complex, since part of the total amount must be held as cash (noncredit) assets. Example(s): Hal and Jane determine that their cash reserve should equal five months of living expenses, or $25,000 ($5,000 per month). Because their current cash reserve is only $15,000 in a non-tax sheltered money market account, they need to save or reallocate an additional 10,000 to meet their goal. The $15,000 amount is sufficient to cover at least three months of expenses. Therefore, they can cover the $10,000 difference partly or entirely with available credit.

Achieving your cash reserve goal Your initial thought is probably that cutting spending and saving aggressively are the only options for establishing or increasing a cash reserve. However, you may already have assets that you could make part of your cash reserve. These could include savings bonds coming due, the cash value of a life insurance policy you plan to convert, or even an antique you no longer care about that you might sell. The discussion that follows explains methods that you can use to build your reserve fund to the desired level rapidly. Identifying, converting, and reallocating current assets to build your cash reserve You may be able to reposition current assets. Current or liquid assets are those that are cash or convertible to cash within a year. You can designate those already in cash form to be part of your cash reserve. Those not in cash form can be converted to cash when appropriate and added to your cash reserve. Examples of current assets include: • Certificates of deposit and savings bonds that will mature in 12 months (avoid paying an early redemption penalty by waiting until they mature) • An antique, a painting, or a piece of jewelry • Stock shares • A valuable collection (stamps, antique dolls, rare books, etc.) • Current savings for nonemergency contingencies, part of which might be reallocated to your cash reserve Evaluate the approaches to systematic saving currently available to you If you have not established a cash reserve or if the one you have falls short of your goal, there are several paths you can take to eliminate the shortfall. Automatic savings (e.g., using payroll deduction at work) is one of the best approaches. Systematic savings that are budgeted as a regular household expense ican also help. Curtailing discretionary spending is still another wise choice. Exploring the pros and cons of your alternatives will help you create a savings plan that is best for your own situation.

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Develop a cash reserve savings plan to achieve your goal as rapidly as is reasonably possible Having reviewed the available savings options, select one or a combination of approaches to achieve your cash reserve goal. Because an adequate cash reserve serves as your protection against financial chaos, you should be as aggressive as reasonably possible in achieving your goal. Combining both spending reduction and savings can help you quickly reach your goal.

Structuring and maintaining a cash reserve The most important attribute of a cash reserve is its availability in time of sudden need. However, his does not necessarily require you to keep the entire sum in a low-interest savings account. There are several excellent alternatives, each with its own unique advantages. For those with a larger cash reserve, a multi-tier structure of sources based on timeliness of access is often desirable. Because income and personal circumstances are subject to change, periodic review of the cash reserve total and its structure is advisable. Stash the cash: deciding where and in what form to keep a cash reserve A federally insured savings account is considered one of the safest places to put money being reserved for emergencies, but when interest rates are in the basement, there may be better alternatives. Money market deposit accounts at a bank and various types of term deposits, such as certificates of deposit (CDs), typically offer higher interest rates with little, if any, increased risk. Term deposits are effectively a loan to the institution and not intended for withdrawal prior to the expiration or maturity date. Financial institutions generally assess a substantial penalty for early withdrawal. Laddering maturity dates provides a means of minimizing the impact of this disadvantage. Money market mutual funds are another good choice. However, you need to understand that a money market mutual fund, whether from a bank or fund company, is not federally insured. With a money market fund, it's possible to lose money, although most money market funds will go to great lengths to avoid "breaking the buck"--that is, allowing a share's value to fall below $1, thus costing investors at least part of their principal. Be sure to obtain and read a fund's prospectus (available from the fund) so you can carefully consider its investment objectives, risks, expenses, and fees before investing. Ladder maturities of term deposits for better accessibility and lower interest rate risk Laddering refers to staggering the maturity dates of fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date). Certificates of deposit (CDs) and U.S. Treasury securities (T bills) are examples of savings vehicles you might consider as a second tier of your cash reserve. If so, spreading the maturity dates of such vehicles over a short time period (e.g., two to five months) assures their availability to meet sudden financial needs that may extend beyond a few months. Laddering enables you to seek as higher level of interest while preserving some accessibility and flexibility to adjust to changing financial circumstances. Build a multi-tier cash reserve when using term deposits or credit lines If your cash reserve includes more than two or three months of living expenses, you can consider dividing it into two or three tiers. You then have the option of using a different form of savings or credit for each tier. This method allows you to consider savings vehicles that offer higher interest rates, although such money will not be available immediately without penalty. If you choose to include credit as part of a multi-tier account structure for your cash reserve, always use it as the final tier, because payback requirements and related interest charges make it the least desirable form of emergency protection. The following table illustrates this point: TIER DESCRIPTION

ACCOUNT TYPE

1

3-4 months living expenses immediately available Ordinary or money market savings

2

4-6 months of living expenses

Money market savings, CDs, or Treasury bills

3

6-12 months of living expenses

CDs

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Preapproved credit

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Review and adjust your cash reserve annually to reflect your changing circumstances If anything is certain, it is that the personal and financial circumstances of you, your family, and your loved ones are very likely to change within the span of a year or two. A new child comes along, an aging parent becomes more dependent, a larger home or new car brings increased expenses, or maturing offspring leave the nest. Because your cash reserve is your first line of protection in a financial crisis, it is important to review it annually. If the amount and structure of your reserve no longer matches current needs, you should make the appropriate adjustments. An overly large reserve can mean that opportunities for better returns are being overlooked. In contrast, an undersized reserve increases the risk for financial chaos and stress in a time of sudden need.

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The Family and Medical Leave Act of 1993 What is the Family and Medical Leave Act of 1993? The Family and Medical Leave Act of 1993 (FMLA) was enacted to help employees who need to take leave for certain family responsibilities, but who are afraid of losing their jobs. Under the FMLA, you are entitled to take up to 12 weeks of unpaid leave for the birth and care of a new child (your natural child or an adopted or foster child) or to care for yourself or an immediate family member who has a serious health condition. You must work for a covered employer and meet certain eligibility criteria. Tip: The National Defense Authorization Act for FY 2008 expanded the benefits of the FMLA to assist service members and their families. See below for more information.

Who is covered by the FMLA? Employees of private companies that have 50 or more employees You may be covered by the FMLA if: 1. You work for a private company that is engaged in commerce or in any industry or activity affecting commerce and 2. The company has employed 50 or more people in total at your worksite (plus all worksites within 75 miles) each working day during at least 20 calendar weeks (not necessarily consecutive weeks) in the current or preceding calendar year. Employees of all public agencies If you work for a state or local government or a public or private elementary or secondary school, then you are covered under the FMLA, even if your employer does not employ 50 or more individuals. Most federal civil service and Congressional employees are also covered by the FMLA, subject to regulations issued by the Office of Personnel Management.

When will you be eligible for leave? You may be eligible for leave if you work for a covered employer, as mentioned. You also must have worked at least 12 months (not necessarily consecutively) for that employer, and you must have worked at least 1,250 hours during the 12 months immediately preceding the starting date of your FMLA leave. In addition, you must be taking leave for one of the following reasons: • For the birth and care of your child, or for the adoption of a child or placement of a foster child • For the care of an immediate family member (spouse, child, or parent) who has a serious health condition • For your own serious health condition that makes you unable to perform the functions of your job

How does the FMLA protect you? Allows you to take unpaid leave If you are eligible for leave under the FMLA, you can take up to 12 weeks of unpaid leave during any 12 months.

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Tip: Some states have rules regarding leave time that are more generous than federal rules. Check the laws of your state. See Questions & Answers below. Protects your job When you return from leave under the FMLA, your employer must return you to your former position or to an equivalent job. An equivalent job is one that has equivalent pay, benefits, and terms and conditions of employment as the job you had before taking leave under the FMLA. Example(s): When her son was born, Jane, a reporter, took 12 weeks of unpaid FMLA leave. When she returned to work, her former job had been filled by another employee; however, Jane was given another reporting job at the same pay and with the same benefits as her former job. Protects your health benefits Your employer must maintain your group health benefits while you are on leave. This means that your health insurance won't be canceled and your employer will continue paying your health insurance premiums, if the employer normally pays them. Example(s): Jessica was nine months pregnant. Her doctor ordered her to take time off from work because she was developing severe high blood pressure. But Jessica didn't want to leave because she feared losing her group health insurance benefits at the time she needed them most. Her employer assured her that under the FMLA, she could take up to 12 weeks of unpaid leave without losing any group health benefits to which she was already entitled. Tip: If you don't return from FMLA leave your employer can recover all premiums he or she paid for your health insurance during your leave, unless you didn't return for a reason beyond your control, such as the continued serious health condition of you or your family member. Protects employee benefits that are accrued If you receive other accrued employee benefits besides health, such as sick leave or vacation days, your employer must protect those benefits as well. You won't be able to accrue any benefits while you're on leave, but when you return, your employer must give you the same benefits at the same levels as before. Your employer, however, may require you to use any accrued paid leave (vacation, sick, or personal days) for periods of unpaid FMLA leave. Unaccrued benefits (life insurance benefits, for instance) are not protected under the FMLA. Example(s): Kenneth took 12 weeks of unpaid leave under the FMLA to care for his newly adopted daughter. Since he had accrued 8 days of vacation time and 3 sick days before his leave time, his employer required that he use this time in place of 11 days of unpaid FMLA leave.

How do you take FMLA leave? Give your employer advance notice If you know you will need to take FMLA leave in the future for an expected birth, adoption or foster care placement or scheduled medical treatment, you must give your employer at least 30 days notice of your need for leave. If the need for leave suddenly arises or if 30 days notice is not practicable, you must give your employer as much notice as possible. Your employer may also require that you give notice of your intent to return to work. Comply with your employer's instructions Your employer may require you to provide certification that leave is necessary because of a serious medical condition affecting you or a family member. Your employer may also ask you to provide a certification of fitness from a health care provider, saying that you are medically fit to return to your job (based on the health condition that caused your absence) if you take FMLA leave for health reasons. Although you may take intermittent leave (leave taken off and on for less than the full 12 weeks), your employer must approve this type of leave unless your leave is to care for someone (including yourself) with a serious health condition.

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Know your rights Your employer is required to post a notice that outlines the basic provisions of the FMLA and is prohibited from discriminating against or interfering with an employee who takes FMLA leave. If you feel your employer has violated your rights under the FMLA, you can file a complaint with the Employment Standards Administration, U.S. Department of Labor. You can also try to recover damages through the courts on your own.

Questions & Answers Do you have to take all 12 weeks of leave? No. Twelve weeks is the maximum leave you can take in one year. There is no minimum, so you can take as little leave as you need, assuming you are eligible for leave. Be aware, though, that your employer may ask you to take any accrued vacation time or sick days before you take FMLA leave. If you can't afford to take unpaid leave, what are your other options? Under the FMLA, none. The law was set up to protect employees from losing their jobs, not to ensure income in the event that you need to take time off from work to care for your family. You may need to use accrued sick days or vacation time. In addition, if you are sick, you may be eligible for disability insurance benefits through an employer-sponsored plan. Check with your employer. What do you do if you need more than 12 weeks off from work? Ask your employer if he or she will allow you to take more than 12 weeks off. Some employers will grant the time under special circumstances. In addition, check your state's laws. Some states have rules regarding leave time that are more generous and encompassing than the federal FMLA rules.

The National Defense Authorization Act for FY 2008 The National Defense Authorization Act for FY 2008, signed by President Bush on January 28, 2008, included two provisions that expand the benefits of the FMLA to assist servicemembers and their families. One provision requires employers with 50 or more employees to provide up to 12 weeks of unpaid leave a year for a "qualifying exigency" connected to the active duty status of an employee's spouse, son, daughter, or parent ("active duty leave"). The other provision entitles eligible family members to take up to 26 weeks of unpaid leave to care for a wounded servicemember ("caregiver leave"). The active duty leave creates an additional basis for an employee to take FMLA leave. Specifically, this reason for FMLA leave is for a "qualifying exigency" that arises from the fact that the employee's spouse, son, daughter or parent is on active duty or has been notified of an impending call or order to active duty. The term "qualifying exigency" has not yet been defined. The other provision is a FMLA servicemember family leave program. It provides that an eligible employee may take up to 26 weeks of FMLA leave to care for a spouse, son, daughter, parent, or next of kin ("nearest blood relative") who is a covered servicemember. The servicemember must have a "serious illness or injury" incurred while on active duty that may render the member unable to perform the duties of his or her office, grade, rank, or rating and for which the member is (1) undergoing medical treatment, recuperation, or therapy, (2) an outpatient, or (3) on a temporary disability retired list. The FMLA caregiver leave is available only during a single 12-month period.

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College Saving Options College costs For the 2009/2010 college year, the average annual cost of attendance (known as the COA) at a four-year public college for in-state students is $19,388, the average cost at a four-year public college for out-of-state students is $30,916, and the average cost at a four-year private college is $39,028. The COA figure includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. (Source: The College Board's 2009 Trends in College Pricing Report.)

College savings options It is important for parents to start putting money aside for college as early as possible. But where should you put your money? There are many possibilities, each with varied features. For example, some options offer tax advantages, some are more costly to establish, some charge management fees, some require parental income to be below a certain level, and some impose penalties if the money is not used for college. Following is a list of options: • 529 college savings plans • 529 prepaid tuition plans • Coverdell education savings accounts • Custodial accounts (UTMA/UGMA) • Gifting • Series EE bonds • Traditional IRAs and Roth IRAs • Employer-sponsored retirement plans • Employee stock purchase plans • Cash value life insurance • 2503 (c) trusts • Crummey trusts • Tax-deferred annuities • Other tax-advantaged strategies • Prepay mortgage • CollegeSure CD • Options unique to business owners

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Factors that may affect college savings decisions When investing for college, there are several factors to consider. Tax advantages Money saved for college goes a lot further when it's allowed to accumulate tax free or tax deferred. To come out ahead in the college savings game, it's wise to consider tax-advantaged strategies. Example(s): Assume that every year you put money away in a non tax-advantaged investment that earns 9 percent. If your earnings are subject to a 33 percent tax rate (federal and state), your after-tax return is 6 percent. Example(s): Now assume you put the same amount of money every year into a tax-advantaged vehicle, such as a 529 plan that earns 9 percent per year. If you later withdraw the money to pay qualified education expenses, you have no tax liability. So, your after-tax return is 9 percent. Example(s): The result is that in some cases your return can be 50 percent greater with a tax-advantaged strategy like a Coverdell ESA than with an investment that offers no special tax advantages (although there is no guarantee that an investment will generate any earnings). Tip: Due to provisions in the Jobs and Growth Tax Relief Reconciliation Act of 2003 that reduced the tax rates on dividends and long-term capital gains, the comparative advantage of tax-advantaged strategies over non tax-advantaged strategies is somewhat lessened. (However, the reduced tax rates for dividends and long-term capital gains are scheduled to sunset, or expire, beginning in 2011.) Kiddie tax Many parents believe they can shift assets to their child in order to avoid high income taxes. This strategy works best if the child is generally age 24 or older. If the child is under age 24, the kiddie tax rules apply. The basic tax rules are as follows: • For children age 18 or under age 24 if a full-time student, the first $950 of annual unearned income (e.g., interest, dividends, capital gains) is tax free, the second $950 is taxed at the child's rate, and any unearned income over $1,900 is taxed at the parents' rate. This latter tax is referred to as the kiddie tax. So, after the first $1,900 of investment income, a child under age 24 will end up paying the same tax as if the parents had retained the asset. • For children age 24 or older, the first $950 of annual unearned income is tax free, and all earnings over $950 are taxed at the child's rate. if the child is in a lower percent tax bracket, the child will pay less tax than his or her parents would pay on the same income. Tip: One way parents may avoid the kiddie tax is to put their child's savings in tax-free or tax-deferred investments so that any taxable income is postponed until after the child reaches age 24 (when the child is taxed at his or her own rate). Such investments can include Series EE bonds (may also be called Patriot bonds) or tax-free municipal bonds. Alternatively, parents can try to hold just enough assets in their child's name so that the investment income remains under $1,900. Financial aid Whether or not a child will qualify for financial aid (e.g., loan, grant, scholarship, or work-study) may affect parental savings decisions. The majority of financial aid is need-based, meaning that it's based on a family's ability to pay. Predicting whether a child will qualify for financial aid many years down the road is an inexact science. Some

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families with incomes of $100,000 or more may qualify for aid, while those with lesser incomes may not. Income is only one of the factors used to determine financial aid eligibility. Other factors include amount of assets, family size, number of household members in college at the same time, and the existence of any special personal or financial circumstances. If a child is expected to qualify for financial aid (and most do), parents should be aware of the formula the federal government uses to calculate aid--called the federal methodology--because there can be a financial aid impact on long-term savings decisions. The more money a family is expected to contribute to college costs, the less financial aid a child will be eligible for. Briefly, under the federal methodology, parents are expected to contribute 5.6 percent of their assets to college costs each year, and students are expected to contribute 20 percent of their assets each year. Example(s): For example, $20,000 in your child's savings account would translate into a $4,000 expected contribution ($20,000 x.20), but the same money in your account would result in a $1,120 expected contribution ($20,000 x.056). Also, the federal methodology excludes some parental assets from consideration in determining a family's total assets: • Retirement accounts (e.g., IRA, 401(k) plan, 403(b) plan, Keogh plan) • Home equity in a primary residence or family farm • Cash value life insurance • Annuities Thus, all options being equal, parents may choose to put their money into one or more of these nonassessable assets. Caution: Although the federal government excludes these assets, individual colleges have discretion whether to consider them in determining a family's ability to pay college costs. Time frame Time frame is a very important consideration. Is the child in preschool or a freshman in high school? Obviously, most college savings strategies work best when the child is many years away from college. With a longer time horizon, parents can be more aggressive in their investments and have more years to take advantage of compounding. When the child is a baby up until about middle school, most professional financial planners recommend putting more money into equity investments because historically, over the long term, equities have provided higher returns than other types of investments (though past performance is no guarantee of future results). Then, as the child moves from middle school to high school, it's usually wise for parents to start shifting a portion of their equities toward shorter-term, fixed income investments. If the time frame is only a few years, parents will be limited in their choice of appropriate strategies. For example, if the child were in high school, equities normally would not be a preferred strategy due to the short-term volatility of these investments. Similarly, parents would not have enough time to build up cash value in a life insurance policy. Amount of money available to invest The amount of money parents have to invest at a particular time might affect their savings strategies. For example, if parents have only a small amount of money to invest, trusts probably aren't the best option because they are typically more costly to establish and maintain than other college saving options. In this case, a 529 plan may be more appropriate.

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Control issues Generally, when parents give money or property to their child, they lose control of those assets. Such a loss of parental ownership can take place immediately, as in the case of an outright gift of stock certificates, or it may be delayed, as in the case of a custodial account or trust. In any event, parents must assess their personal feelings about relinquishing control of assets to their child. Some children may not be mature enough to handle such assets, whereas others can be counted on to use them for college costs.

Discussing a college funding plan with your child As college expenses continue to rise relative to the means of the average family to pay such costs in full, parents may find it helpful to sit down with their older children and discuss ways to pay for college. For example, parents may want to discuss: • Whether they intend to fund 100 percent of college costs or whether they expect their child to contribute and, if so, in what amount. For example, parents might convey their expectation that their child contribute a certain percentage of all earnings from a part-time job or a portion of all gifts. • Whether the child will play a role in the savings strategy. For example, parents who want to gift appreciated stock to their child should convey their expectation that the child will apply all of the gains to college costs. • Whether any money will need to be borrowed, and if so, how much and in whose name the loan(s) will be obtained. The amount that needs to be borrowed may affect the type of college the child applies to (e.g., public or private, top tier or middle tier). • Whether there will need to be shared financial responsibility during the college years. For example, the child may need to participate in a work-study program or obtain outside work during the college years. Communicating these expectations ahead of time can prevent unpleasant surprises and help parents and their children better plan for the expenses that lie ahead. Also, an open discussion can give children an increased awareness of the financial burden their parents may be undertaking on their behalf.

Dilemma of saving for college and retirement For many parents, especially those who started families in their 30s and 40s, the problem of saving for college and retirement at the same time is a nagging reality. Most financial planning professionals recommend saving for both at the same time. The reason is that parents typically can't afford to delay saving for their retirement until the college years are over, because doing so would mean missing out on years of tax-deferred growth and, possibly, employer-matching 401(k) plan contributions. The key to saving for both is for parents to tailor their monthly investment to the particular investment goal--college or retirement. Parents will then need to determine their time frames and liquidity needs for each goal, which may require the assistance of a financial planning professional.

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Saving for College and Retirement What is it? These days it's not uncommon for parents to postpone starting a family until both spouses are settled in their marriage and careers, often well into their 30s and 40s. Though this financial security can be an advantage, it can also present a dilemma--the need to save for college and retirement at the same time. The prevailing wisdom has parents saving for both goals at the same time. The reason is that older parents can't afford to put off saving for retirement until the college years are over, because to do so means missing out on years of tax-deferred growth. Moreover, because generous corporate pensions (and lifetime job security) are now the exception rather than the rule, employees must take greater responsibility for funding their own retirements.

First, determine your monetary needs The first step is to determine your projected monetary needs, both for retirement and college. This analysis will reveal whether you are on a savings course to meet both goals, or whether some modifications will be necessary.

For information on figuring your income needs in retirement, see Determining Your Retirement Income Needs: Pre-Retirement. For information on estimating college expenses, see Estimating College Costs.

You've come up short: what are your options? You've run the numbers on both your anticipated retirement and college expenses, and you've come up short. The numbers say you won't be able to afford to educate your children and retire with the lifestyle you expected based on your current earnings. Now what? It's time to sit down and make some tough decisions about your expectations and, ultimately, how to compromise. The following options can help you in that effort. Some parents may need to combine more than one strategy to meet their goals. Defer retirement Staying in the workforce longer is one way of meeting your retirement and education goals. The longer you wait to dip into your retirement funds, the longer the money will last. For more information, see Delayed Retirement Considerations. Reduce standard of living now or in retirement You may be able to adjust your spending habits now in order to have more money later. Consider making a written budget to track your monthly income and expenses (see Budgeting for more information). If your monetary needs have fallen far short of the mark, you will need to make a bigger spending adjustment than you would with a lesser shortfall. The following are some suggested changes: • Move to a less-expensive home or apartment • Sell your second car and carpool whenever possible • Reduce your entertainment budget (e.g., bring your lunch to work, eat out once a month instead of every week, rent movies instead of going to the cinema)

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• Get books and magazines from the library instead of the bookstore • Cancel any club memberships (e.g., golf club, health club) • Set a limit on birthday and holiday gifts for family members • Forgo expensive vacations • Shop for clothes in the off-season, when they're likely to be on sale • Buy used furniture and used big-ticket items • Limit your child's extracurricular activities, like music lessons or hockey camp If you're unable or unwilling to lower your standard of living now, perhaps you can lower it in retirement. This may mean revising your expectations about a luxurious, vacation-filled retirement. The key is to recognize the difference between the things you want and the things you need. The following are a few suggestions to help reduce your standard of living in retirement: • Reduce your housing expectations • Cut back on travel plans • Own a less-expensive automobile • Lower household expenses Note: There's a difference between reducing your standard of living in retirement and drastically reducing your standard of living in retirement. Most professionals discourage the use of retirement funds for your child's education if paying college bills will leave you high and dry in your retirement years. Work part-time during retirement About 25 percent of retirees work part-time. You may find that the extra income enables you to enjoy the kind of retirement you had anticipated. Increase earnings (i.e., spouse returns to work) Increasing earnings may be another way to meet both your education and retirement goals. The usual scenario is that a stay-at-home spouse returns to the workforce. This has the benefit of increasing the family's earnings so there's more money available to save for education and/or retirement. However, there are drawbacks. The additional income may push the family into a higher tax bracket (see Second-Income Analysis), and incidental expenses like day care and commuting costs may eat into your overall take-home pay. For more information on the pros and cons of a spouse returning to work, see Spouse Returns to or Increases Hours at Work. In addition to a spouse returning to work, one spouse may decide to increase his or her hours at work, take another job with better compensation, or moonlight at a second job. Factors to consider here include the expectation of increased job pressure, less availability for child rearing and household management, the amount of extra income, the opportunity for advancement, and job security. Another way to create extra income is for a spouse to turn a hobby into a business. Be more aggressive in investments Your analysis has shown that your current savings (and the accompanying investment vehicles) will leave you short of your education and retirement goals. One option is to try to earn a greater rate of return on your savings. This may mean choosing more aggressive investments (e.g., growth stocks) over more conservative investments (e.g., bonds, certificates of deposit, savings accounts). This strategy works best the more years you have until retirement.

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Caution: The more aggressive the investment, the greater the risk of loss of your principal. This strategy isn't for people who shudder at the slightest downturn in the stock market. If you'll have trouble sleeping at night, you probably shouldn't take on greater risk in your investment portfolio. Reduce education goal One of the realities parents may have to face is that they can't afford to fund 100 percent (or 75 percent, or 50 percent, as the case may be) of their child's college education. This is often an emotional issue. Parents naturally want the best for their children. For many parents, this translates into sending them to (and paying for) college (especially in cases where one or both parents didn't have such an opportunity). You may have dreamed that your child would go to a prestigious Ivy League school. Well, with a year's cost at such a school hovering at the $40,000 mark, maybe you need to lower your expectations. That small liberal arts college or the big state school may challenge your child just as much and at a far lower cost. Remember, there are loans available for college, but none for retirement. Children pay more and/or assume more responsibility for loans With college costs continuing to increase at a rate faster than most family incomes (see Estimating College Costs), and with perhaps more than one child in the family picture, chances are that more responsibility will fall on your child to help fund college costs. This money can come from part-time jobs or gifts, though the majority of your child's contribution is likely to come from student loans. For more information on student loans, see Financial Aid: Loans. Though student loans can be a financial burden in the early years, when graduates are just starting out in their careers, many loan providers offer flexible repayment options in anticipation of this common situation (see Repaying Student Loans). In addition, if your child meets certain income limits, he or she can deduct the interest paid on qualified student loans (see Student Loan Interest Deduction for more information). When children take out student loans, parents can always decide to help financially rather than mortgaging their house before college. Students who take out student loans to pay for college may have a more vested interest in their education than students who receive help from their parents. Other ways to lower cost of college In addition to reducing your education goal and having your child pay a portion of college costs, there are other ways to lower the cost of college. For example, your child can choose a college with an accelerated program that allows students to graduate in three years instead of four. Likewise, your child may choose to attend a community college for two years and then transfer to a four-year private institution. The diploma will reflect the four-year college, but your pocketbook won't. For more ideas on ways to lower the cost of college, see Implementing Other Creative Solutions to Cover Higher Education Costs.

How do you decide what strategy is best for you? This decision must be made on a case-by-case basis. What works for one family may not work for another family. In some cases, more than one strategy will be necessary to deal with the demands of educating children and retiring successfully. Factors influencing your decision may include the following: • The amount of your financial need • Your current income and assets and any expectation of significant future income (e.g., a bonus at work, exercise of stock options, an inheritance) • The number of years you have until retirement • Your willingness to reduce your standard of living (now or in the future) for the sake of your children • The number of children in your family who plan on attending college

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• The academic, athletic, or other notable skills of your child that may raise the possibility of a college scholarship

Can retirement accounts be used to save for college? Yes. But should you? Probably not. Many financial advisors recommend against dipping into your retirement account to pay college expenses as a preferred strategy. But if you must, there are some tax breaks available. It's now possible to withdraw money from either a traditional IRA or Roth IRA before age 59½ to pay college expenses without incurring the 10 percent early withdrawal penalty that normally applies to such withdrawals. However, any distributions of earnings and deductible contributions from a traditional IRA and any nonqualified distributions of earnings from a Roth IRA may be included in your income for the year, which may push you into a higher tax bracket. For more information, see Traditional IRAs and Roth IRAs. Tip: This college exception to the 10 percent early withdrawal penalty is a good reason to funnel your child's income from a part-time job into an IRA. Unfortunately, there's no similar college exception for employer-sponsored retirement plans, such as a 401(k) plan. So, if you're under age 59½, you'll pay a 10 percent early withdrawal penalty on any withdrawals. As with an IRA, any withdrawals are added into your income for the year, which may push you into a higher tax bracket. Nevertheless, saving in a 401(k) plan can be an attractive option for some parents because the company may match employee contributions and because most employer plans allow you to borrow against your contributions (and possibly earnings) before age 59½ without penalty. For more information, see Employer-Sponsored Retirement Plans for Education Savings. Tip: Some parents who have built a college fund within their 401(k) accounts, but who are not yet 59½ when the kids are in college, take out what's called a bridge loan (such as a home equity loan) to pay their child's college bills. A bridge loan is a source of funds that tides you over until it's more economical to tap your retirement account. Although you pay interest on a bridge loan, it may still cost less than what your 401(k) funds can earn. Then, when you turn 59½, you can start tapping your 401(k) plan to pay off the bridge loan with no early withdrawal penalty. A benefit of using retirement accounts to save for college is that the federal government doesn't consider the value of your retirement accounts in awarding financial aid (the federal formula also excludes annuities, cash value life insurance, and home equity from consideration). However, most private colleges do consider the value of your retirement accounts in deciding which students are the most deserving of campus-based aid. See Applying for Financial Aid for more information.

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Can You Afford to Have One Spouse Stay at Home? Can you afford to have one spouse at home? For many families, this is an important question. Unfortunately, most dual income couples feel that both of them have to work in order to meet their expenses and maintain their lifestyle. If you evaluate your situation financially--factoring in the cost of working and the amount of taxes that you pay while both of you are working--you may find that you have a choice. One of you may be able to stay at home without seriously affecting your cash flow. This evaluation will at least enable you to make a more informed decision. When one spouse stays at home, you will not have to incur several work-related expenses, especially if you have young children and are paying for child care. Most people are aware of child-care expenses because they are so obvious, but you need to take into account many other hidden expenses when you consider staying home. In many cases, not only do you save money by not incurring those expenses, but you may be able to save a great deal of money by making some small changes in your lifestyle. Here is what you need to consider: • Impact of the loss of second income • Cost of earning the second income • Hidden benefits • Long-term cost of not working • Lifestyle changes

Impact of the loss of second income Frequently, the real impact of the second income is not as much as the income itself. In fact, it can be much less. It is easy to think that if you are making $70,000 a year, your loss would be $70,000. However, if you calculate the taxes, the extra cost of working, and other expenses, the real impact may be far less, depending upon where and how you live.

Cost of earning the second income Here is a list of some typical expenses that you need to consider before making that decision. Look at your spending diary and identify how many expenses are related to both of you working. Make a list of how much you can save by not incurring those expenses. Child care For most working couples with young children, child care is the expense with the most impact on your decision. Depending upon how young your children are, the kind of child-care arrangement you prefer, and the number of children, the cost of child care will vary. When you calculate child-care expenses, make sure that you add related expenses, such as driving to and from the child-care center or any payroll taxes that you may be paying for your nanny. Commuting The reduced commuting expenses also add up, not only in terms of gasoline and oil changes, but also wear and tear on your car and auto insurance.

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Lunches out When you are working outside the home, the seemingly small expense of lunches adds up. When considering whether you or your spouse should stay home, you should take into account the amount spent on office lunches. Clothing Depending upon where you both work, you may be spending a sizable portion of your income to buy work clothes. When one of you stops working, you will not be spending this money on clothes. Dry cleaning The same holds true for your dry cleaning expenses. Add them up to find out how much you would save if dry cleaning became unnecessary for one of you. Take-out dinners With two of you working, you are probably spending a sizable amount of money on take-out dinners. If you are able to have your dinners at home, you reduce the need for expensive take-out meals. You may also save on groceries, since you will have more time to shop carefully, and may find many items on sale. Housecleaning services When both of you work, you may be paying to have your house cleaned. Add up those expenses.

Hidden benefits There may be some hidden savings when you switch from a two-income to a one-income household. For example, you may be able to save on taxes. Often, your joint income puts you into a higher tax bracket and you wind up paying a good portion of one spouse's income on taxes. If you are filing a joint return, calculate the impact of the second income on your taxes.

Long-term cost of not working Although the picture in the short-term may look promising for one spouse to stay at home, you need to consider some long-term implications of that decision. Consider the long-term effect on your 401(k) plan. If you or your spouse remain in the workforce, 401(k) plans not only give you an immediate tax break, but also grow to make a larger retirement nest egg. Your 401(k) is funded more when you are working because you are contributing (and your employer may also make contributions). Consider when, if at all, you or your spouse is planning to reenter the workforce and the effect on future earnings. When one of you reenters the workforce, your earning power is likely to be diminished. Some individuals who reenter the workforce find that they are not getting paid their former salary while doing a similar job. Also, you may have to climb the career ladder once again since there may not be the opportunity to start where you left off. Remember that now you are more exposed to the risks of the economy because you are dependent on one income. You are more vulnerable to economic downturns and company downsizing. So, if the working spouse loses a job, it will have a more devastating effect on the family's finances. Keep in mind that as your children grow, your child-care expenses--one of the biggest expenses in a young family's budget--will decrease considerably. As a result, you will save less from having one of you stay home.

Lifestyle changes

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When one spouse stays home, you may need to make some lifestyle changes. In fact, making some changes in your present lifestyle might allow one of you to stay home. Here is how you can do it. Make two lists: need list and want list In your need list, include all the bills that you have to pay, whether you stay home or work outside. In your want list, include entertainment, travel, music and dance lessons, books, toys, and gifts. For many, the need list is probably all you can handle with one income. Don't panic. You can take steps to have at least some items from your want list. Reduce expenses You can make both big and small changes that will reduce your expenses. For more information and specific ideas, see How to Cut Costs. Remember that little things add up By making small changes, such as turning off lights when not needed or drying clothes on racks instead of using the dryer, you not only save money, but also instill in your children the value of such things. Make things instead of buying them Frequently, your creativity gets a big boost when you have a little more time to yourself. You can save a considerable amount of money by making small things such as birthday cards and holiday gifts. The added advantage can be the personalized attention given to each item, and the feeling of joy when you have created something yourself. Find alternatives If you work out at a health club, find out if you can join a nearby YMCA or a less expensive health club instead. Instead of renting a hotel room at a fancy resort, find out if you can rent a cabin in a national park. Find out if you can make money working at home You may not realize that you can also make money by staying home. Find alternative employment such as a part-time, evening, temporary, or a work-at-home job to fill the shortage. Turn your hobby into a part-time business If you like to write, find out if you can write for your local newspaper. This will not only give you extra income, but also some recognition, and may be a way to voice your opinions. For other ideas, see How to Increase Cash Flow. Plan ahead Do not quit your job without planning. If you plan ahead, you can pay off a loan to save monthly installments, secure a part-time or at-home job, or start implementing other lifestyle changes to reduce the impact when your second income stops.

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Assuring the Smooth Distribution of Your Estate What is it? One of the nicest gifts you can leave your heirs when you die is an estate that's in good order, planned according to your wishes, with a guardian designated to represent any minor children, and with provisions to cover estate taxes. You can accomplish all this by leaving a will, yet close to 60 percent of Americans die without one (Source: FindLaw.com). If you die without a will, that is if you die intestate, you leave it to the courts to resolve your estate, which may or may not pass according to your wishes. The court will appoint an administrator for your estate and a guardian for your minor children. These may be people who don't have your best interests at heart and whom you would not have chosen to represent you. You lose the opportunity to minimize estate taxes and to avoid the potentially costly intestacy process, both of which can greatly diminish the value of your estate. You owe it to yourself and your loved ones to ensure that your estate is distributed as you wish. Don't leave it to the state and the courts to make these critical decisions for you. You can ensure that your estate is planned according to your wishes by drawing up a will, selecting an executor, and nominating a guardian for your minor children. If you care about your loved ones, don't die intestate.

Wills A will is a legal document that allows you to determine how your estate is distributed after your death. In addition to saying who gets what, it allows you to name an executor for your estate and to designate a guardian for your minor children. A will also provides an opportunity to minimize estate taxes and probate costs. One of the most important advantages of a will is that it allows you to avoid intestacy. If you die without a will, the intestacy laws of your state of domicile determine how your estate is distributed. Intestacy can be a costly process for your estate. Without a will, the courts will also select an administrator for your estate and appoint a guardian for your minor children. These may not be the people you would have chosen to represent you. You can control the distribution of your estate and avoid these other potential difficulties by drawing up a will.

Selecting an executor An executor represents you after your death in settling your estate. You want your executor to be someone you trust who has the necessary knowledge and experience to oversee your affairs. You can designate an executor in your will. If you don't, the court appoints one for you. He or she is called an administrator. With a court-appointed administrator, you have no say in who manages your final affairs. Also, an executor or administrator is entitled to a fee from your estate for the services he or she provides. Close family members often waive the fee. A court-appointed administrator, however, can take a sizable cut, greatly diminishing the value of your estate.

Nominating a guardian/conservator for minor children If your children are still minors when you die, and your spouse does not survive you, you'll need someone to raise your children. If you haven't nominated a guardian in your will, the court will appoint someone. If your spouse dies before you or if you and your spouse die together, the court may appoint an aging grandparent who lacks the health or financial resources to care for the children until they come of age. Or, the court may appoint a sibling with whose lifestyle you disagree. If no one else comes forward, the court may name a relative who volunteers, regardless of that person's suitability. Guardians should be your trusted representatives. You can nominate guardians in advance through your will and other legal directives.

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Intestacy If you die without a valid will, the intestacy laws of your state of domicile govern how your estate is distributed. In an effort to provide for the uniform succession of property not covered by a will, your state legislature has essentially created a one-size-fits-all will through its intestacy laws. If you die intestate, your state legislature and not you determines who gets what. Intestacy laws vary by state, but there is a general pattern to them. They determine who your heirs are regardless of whether you had good or bad relationships with them--the order of succession, the percentage of your estate each receives, and in what form they receive it. There's no flexibility to provide for a devoted friend, an unrelated caretaker, or a favorite charity, or to provide a greater share for a less well-off child or relative. Intestacy can also be a more costly process than probating a will, and it doesn't allow you the opportunity to minimize estate taxes.

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Determining the Need for Life Insurance: How Much Is Enough? (General Discussion) What determines your life insurance need? Life stages and circumstances When determining your life insurance need, you should first consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, your career stage, and your intentions to pass on your property are all factors to consider. Your need for life insurance changes as the circumstances of your life change. Starting out In the "starting out" stage of life, you may be just beginning your career or family. You may not have children or other dependents at this stage, but that doesn't mean you have no obligations. For instance, if you paid for your college education with student loans, you likely had a cosigner for your loan--maybe your parents or a grandparent. The same may be true of your car loan. If you were to die before the loan is paid, your cosigner would be obligated to pay the debt. Under law, a cosigner is responsible for full payment of a debt in the event of default. Death doesn't erase the debt obligation. Single adult A growing percentage of the population now falls into the single adult demographic group. This group covers a broad spectrum of ages, lifestyles, and obligations. Family obligations--Parents Although you may not have a spouse, your death could have a serious financial impact on other family members. If, like many adults, you are supporting your parents (either financially or with care), your death could have a major impact, both emotionally and financially. They would not only lose the support you have been providing to them, but they would also need to come up with the money for your final expenses. Family obligations--Children If you are a single parent, the primary financial support for your children would die with you. If you are lucky, you may have family members who would step in and help your children if you died. If you are even luckier, they will be able to provide your children with the education and lifestyle you had hoped for them to have. Your need for life insurance as a single parent is even greater than that of a dual-parent, dual-income household, which would still have one income if one parent died. Life insurance is a cost-effective way to make sure that your children are protected financially should anything happen to you. Debt obligations In this stage of life, you may still be paying for or even still accumulating education loans. You may have purchased a house or condo with a cosigner. If you died, your cosigner would be legally liable for the payments on the debt. Protect your insurability Another reason to buy life insurance at this stage of your life is to protect your future insurability. Once you buy a permanent, cash value life insurance policy, it remains in effect for your entire life (assuming the premiums are paid), even if your health changes. If you were to experience a serious change in health, you might not be able to buy additional insurance coverage, but you would still have the permanent coverage you already own.

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Dual-income couple or family If you and your spouse both earn an income, it is possible that if one of you died, the other may be able to cope financially on the remaining income. If there are mortgages, joint credit cards or other debt, or children in the picture, the loss of one income could be much more difficult to overcome. The more people who depend on your income while you are alive, the more life insurance you should own. If you died today with insufficient or no insurance, your mate could be forced to give up the residence or lifestyle for which you have both worked. When there are children involved, the loss of one breadwinner could mean a setback in the daily way of life, not to mention any plans for private school or college. Parent of grown children Just because your children have grown up and left the nest doesn't mean you have no need for life insurance. You may have spent your entire adult life building an estate that you intend to pass on to your children, grandchildren, or favorite charity. You can use life insurance to ensure that the bulk of your estate passes to your heirs or designated charitable organization subject to certain tax advantages. Part of overall financial planning Determining your life insurance needs should not be done in isolation. Instead, it should be looked at as part of your overall financial plan, with consideration given to your goals for savings and retirement, as well as tax and estate planning. As your life changes, your financial goals may change, as well as your need for life insurance, making it important to also periodically review your coverage.

Methods of calculating life insurance need Several methods are used to calculate the appropriate level of insurance for you and your situation. While they all share common features, some methods strive to be more simplistic, while others involve more sophisticated calculations. Some of these differences are illustrated in the Table of Alternatives. You may want to determine an amount on your own, using one of the simpler methods. This can provide a basis for your discussions with your financial planner. Insurable interest Before you begin calculating your insurance needs, it is important to determine insurable interest. Basically, having an insurable interest in a person's life means that you would suffer emotional or financial harm or loss if that person were to die. It is always assumed that you have an insurable interest in your own life. However, to prove an insurable interest in someone else's life, you must have a relationship to that person based on blood, marriage, or monetary interest. You must have an insurable interest before you can purchase an insurance policy. Family needs approach The family needs approach is one of the more comprehensive methods of calculating your life insurance needs. It assumes that the purpose of life insurance is to cover the needs of the surviving family members. This method takes into account the immediate and ongoing needs of the surviving family members, as well as income from other sources and the value of assets that could be used to help defray the family's expenses (such as bank accounts and real estate). Capital retention approach The capital retention approach is one of two calculation methods under the family needs approach. This approach assumes that life insurance principal will support the family indefinitely into the future. Because you will purchase more life insurance under this method, you will be in a better position if the surviving spouse lives longer than expected.

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Capital liquidation approach The capital liquidation approach is the second of two calculation methods under the family needs approach. This method does not provide as much continuing capital for the surviving spouse or for heirs after the death of the surviving spouse. However, it does allow you to spend less money by purchasing a lesser amount of life insurance coverage. Estate preservation and liquidity needs The estate preservation and liquidity needs approach attempts to determine the amount of insurance needed at death for items such as taxes, expenses, fees, and debts while preserving the value of the estate. This method considers all the variables of family lifestyle and the total cash needed to maintain the current value of the estate while providing adequate cash needed to cover estate expenses and taxes. Income replacement approach The income replacement calculation is based on the theory that the purpose of insurance is to replace the loss of your paycheck when you die. This analysis determines an economic or human life value and factors in salary increases and the effects of inflation in determining the appropriate level of coverage. While more comprehensive than the rules of thumb, this method still fails to consider special circumstances or financial needs and operates on the premise that the current level of income provides a satisfactory standard of living that will remain level throughout the future. Rules of thumb The rules of thumb are extremely basic calculations. They provide a starting point but fail to recognize special family circumstances or needs and focus only on the most basic components. One rule of thumb dictates that multiplying your salary by a certain number will provide an adequate level of insurance, while another calculates need based on normal living expenses.

Insurance mistakes No insurance The worst mistake you could make concerning life insurance is having a need and not having any insurance at all. Very often, people can find all sorts of excuses for not buying life insurance. It's no fun to plan for your death, for one thing. For another, there's the tendency to think that dying won't happen to you, only to some person you read about in the obituaries. But how many times have you heard about a young, apparently healthy person dying suddenly in a car accident, leaving behind a spouse, a young child, and no insurance? Sadly, it happens, and when it does, the family faces not only emotional trauma but possibly an extremely difficult financial situation, as well. Not enough insurance The majority of people with insurance are underinsured. Insufficient coverage can occur as a result of buying what is affordable instead of what is needed. Failure to review your coverage periodically could also result in insufficient insurance, even if you started out with adequate levels. Inflation rates, your career, and your lifestyle may have changed. Your family could be faced with a large financial gap and left unable to maintain the current lifestyle if you died today. Consequences could include loss of the family home, scaling back of college plans, and possibly years of financial difficulty. Too much insurance If you purchased a large policy during one point in your life and then didn't adjust your coverage when your insurance need was reduced, it is possible that you have too much life insurance. This is another good reason to periodically review your coverage with your financial planning professional. Periodic reviews of your insurance coverage can reveal opportunities to change your levels of coverage to match your current and projected needs.

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Child Tax Credit What is the child tax credit? The child tax credit is a tax break for parents. The credit is $1,000 for each qualifying child. Tip: A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income. Caution: Absent further legislative action, the child tax credit is scheduled to decrease to $500 in 2011 and thereafter.

Who is a qualifying child for the purposes of the child tax credit? A uniform definition of a qualifying child applies to all child-related tax benefits, including the child tax credit. Under the uniform definition, a qualifying child for the purposes of the child tax credit must meet all of the following tests: • The child has the same principal abode as the taxpayer for more than half the year (temporary absences due to special circumstances are not treated as absences) • The child must be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendent of such individuals. A child who is legally adopted by, or lawfully placed for adoption with the taxpayer is a qualifying child. A foster child who is placed with the taxpayer by an authorized agency, judgment, decree, or other such order is also a qualifying child. • The child must be under age 17 If a child would be a qualifying child with respect to more than one individual (e.g., a child lives with his or her mother and grandmother in the same residence) and more than one person claims a benefit for the child, then the following tie-breaking rules apply: • If only one of the individuals claiming the child as a qualifying child is the child's parent, the child is deemed the qualifying child of the parent • If both parents claim the child and the parents do not file a joint return, then the child is deemed a qualifying child of: (1) the parent with whom the child resides for the longest period of time, or (2) if the child resides with both parents for the same amount of time, of the parent with the highest adjusted gross income • If the child's parents do not claim the child, then the child is deemed a qualifying child with respect to the claimant with the highest adjusted gross income

Your ability to claim the credit depends on your income level The credit is limited if your modified adjusted gross income is above a certain amount. The thresholds vary, depending on your filing status. The credit begins to phase out by $50 for each $1,000 above the following thresholds: • $110,000 for joint filers • $75,000 for single and head of household filers • $55,000 for those married filing separately

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The level at which the credit is completely phased out is based on the number of children you have. For instance, a married couple with one child and an adjusted gross income (AGI) of $130,000 isn't entitled to a credit. Their AGI is $20,000 more than the $110,000 phaseout threshold for joint filers ($130,000 - $110,000 = $20,000 excess AGI). While they would ordinarily be entitled to a $1,000 credit for one child, their excess AGI means they face a phaseout of the same amount ($50 for every $1,000 over the $110,000 threshold, or $50 x 20). As a result, they are entitled to $0 credit. For more information, see IRS Publication 972.

Calculating the credit A set of questions in the Form 1040 instructions determines whether your child tax credit should be calculated using the Child Tax Credit Worksheet, or calculated using Publication 972. (Generally, taxpayers who are subject to the income phaseout rules must use Publication 972.)

Refundable portion of child tax credit ("additional child tax credit") In the past, the child tax credit was generally nonrefundable. Essentially, this meant it was allowed only to the extent that it reduced your regular tax liability plus your alternative minimum tax liability. As a result, many lower-income parents--who couldn't claim the full credit--didn't derive much benefit from it. Beginning in 2001, a portion of the credit became refundable for certain taxpayers who had at least one qualifying child. Such taxpayers may now obtain a refund if the credit exceeds their regular tax or AMT liability. Currently, the credit can result in a refund for as much as 15 percent of your earned income in excess of $3,000, up to the $1,000 per-child credit amount. For instance, if you earn income of $14,000 in 2009, $1,650 of your credit may be refundable ($14,000 - $3,000 x 15%). You must use Form 8812 to claim the additional child tax credit. Special rules may apply if you have three or more qualifying children and are eligible for the earned income credit (EIC). The child tax credit will be refundable under the prior law rules or the new law rules, whichever produces the greater credit. More specifically, parents with three or more children will be allowed a refundable credit for the amount by which their Social Security taxes exceed their EIC (as under prior law) if that amount is greater than the refundable credit based on their earned income over $3,000. Tip: For 2008, the Emergency Economic Stabilization Act of 2008 increased the refundable portion of the child tax credit to 15 percent of earned income in excess of $8,500. Prior to the Act, the refundable portion for 2008 was $12,050. For 2009 and 2010, the Recovery and Reinvestment Act of 2009 increased the refundable portion of the child tax credit to 15 percent of earned income in excess of $3,000. Prior to the Act, the refundable portion for 2009 was limited to 15 percent of earned income in excess of $12,550.

Limits on the child tax credit The nonrefundable portion of the child tax credit is limited to total tax (regular tax plus alternative minimum tax) reduced by any other nonrefundable personal credits claimed (other than the adoption tax credit and the tax credit for IRAs and retirement plans) and the foreign tax credit. The nonrefundable portion of the child tax credit is also reduced by the refundable portion of the child tax credit (the "additional child tax credit"). Caution: Absent further legislative action, in 2011, the child tax credit will decrease to $500 and there will be limited circumstances under which a portion of the child tax credit may be refundable.

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And Baby Makes Three So you're going to have or adopt a baby. Congratulations! Parenthood may be one of the most rewarding experiences you'll ever have. As you prepare for life with your baby, here are a few things you should think about.

Reassess your budget You'll have to buy a lot of things before (or soon after) your baby arrives. Buying a new crib, stroller, car seat, and other items you'll need could cost you well over $1,000. But if you do your homework, you can save money without sacrificing quality and safety. Discount stores or Internet retailers may offer some items at lower prices than you'll find elsewhere. If you don't mind used items, poke around for bargains at yard sales and flea markets. Finally, you'll probably get hand-me-downs and shower gifts from family and friends, so some items will be free. Buying all of the gear you need is pretty much a one-shot deal, but you'll also have many ongoing expenses that will affect your monthly budget. These may include baby formula and food, diapers, clothing, child care (day care and/or baby-sitters), medical costs not covered by insurance (such as co-payments for doctor's visits), and increased housing costs (if you move to accommodate your larger family, for example). Redo your budget to figure out how much your total monthly expenses will increase after the birth of your baby. If you've never created a budget before, now's the time to start. Chances are, you'll be spending at least an extra few hundred dollars a month. If it looks like the added expenses will strain your budget, you'll want to think about ways to cut back on your expenses.

Decide if one of you should stay home Will it make sense for both of you to work outside the home, or should one person stay home? That's a question only you and your spouse can answer. Maybe both of you want to work because you enjoy your jobs. Or maybe you have no choice if the only way you can get by financially is for both of you to work. But don't be too hasty--the financial benefits of two incomes may not be as great as you think. Remember, you may have to pay for expensive day care if both of you work. You'll also pay more in taxes because your household income will be higher. Finally, the working spouse will have commuting and other work-related expenses. Run the numbers to see how much of a financial benefit you really get if both of you work. Then, weigh that benefit against the peace of mind you would get from having one spouse stay home with the baby. A compromise might be for one of you to work only part-time.

Review your insurance needs You'll incur high medical expenses during the pregnancy and delivery, so check the maternity coverage that your health insurance offers. And, of course, you'll have another person to insure after the birth. Good medical coverage for your baby is critical, because trips to the pediatrician, prescriptions, and other health-care costs can really add up over time. Fortunately, adding your baby to your employer-sponsored health plan or your own private plan is usually not a problem. Just ask your employer or insurer what you need to do (and when, usually within 30 days of birth or adoption) to make sure your baby will be covered from the moment of birth. An employer-sponsored plan (if available) is often the best way to insure your baby, because these plans typically provide good coverage at a lower cost. But expect additional premiums and out-of-pocket costs (such as co-payments) after adding your baby to any health plan. It's also time to think about life insurance. Though it's unlikely that you'll die prematurely, you should be prepared anyway. Life insurance can protect your family's financial security if something unexpected happens to you. Your spouse can use the death benefit to pay off debts (e.g., a mortgage, car loan, credit cards), support your child, and meet other expenses. Some of the funds could also be set aside for your child's future education. If you don't have any life insurance, now may be a good time to get some. The cost of an individual policy typically depends on your age, your health, whether you smoke, and other factors. Even if you already have life insurance (through your employer, for example), you should consider buying more now that you have a baby to care for. An insurance agent or financial professional can help you figure out how much coverage you need.

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Update your estate plan With a new baby to think about, you and your spouse should update your wills (or prepare wills, if you haven't already) with the help of an attorney. You'll need to address what will happen if an unexpected tragedy strikes. Who would be the best person to raise your child if you and your spouse died at the same time? If the person you choose accepts this responsibility, you'll need to designate him or her in your wills as your minor child's legal guardian. You should also name a contingent guardian, in case the primary guardian dies. Guardianship typically involves managing money and other assets that you leave your minor child. You may also want to ask your attorney about setting up a trust for your child and naming trustees separate from the suggested guardians. While working with your attorney, you and your spouse should also complete a health-care proxy and durable power of attorney. These documents allow you to designate someone to act on your behalf for medical and financial decisions if you should become incapacitated.

Start saving for your little one's education The price of a college education is high and keeps getting higher. By the time your baby is college-bound, the annual cost of a good private college could be almost triple what it is today, including tuition, room and board, books, and so on. How will you afford this? Your child may receive financial aid (e.g., grants, scholarships, and loans), but you need to plan in case aid is unavailable or insufficient. Set up a college fund to save for your child's education--you can arrange for funds to be deducted from your paycheck and invested in the account(s) that you choose. You can also suggest that family members who want to give gifts could contribute directly to this account. Start as soon as possible (it's never too early), and save as much as your budget permits. Many different savings vehicles are available for this purpose, some of which have tax advantages. Talk to a financial professional about which ones are best for you.

Don't forget about your taxes There's no way around it: Having children costs money. However, you may be entitled to some tax breaks that can help defray the cost of raising your child. First, you may be eligible for an extra exemption if your annual income is below a certain level for your filing status. This will reduce your income tax bill for every year that you're eligible to claim the exemption. You may also qualify for one or more child-related tax credits: the child tax credit (a $1,000 credit for each qualifying child), the child and dependent care credit (if you have qualifying child-care expenses), and the earned income credit (if your annual income is below a certain level). To claim any of these exemptions and credits on your federal tax return, you'll need a Social Security number for your child. You may be able to apply for this number (as well as a birth certificate) right at the hospital after your baby's birth. For more information about tax issues, talk to a tax professional.

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Life Insurance at Various Life Stages Your need for life insurance changes as your life changes. When you're young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let's look at how your life insurance needs change throughout your lifetime.

Footloose and fancy-free As a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority. Some would argue that you should buy life insurance now, while you're healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums. If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums. Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.

Going to the chapel Married couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other. Once you buy a house, the situation begins to change. Even if both spouses have well-paying jobs, the burden of a mortgage may be more than the surviving spouse can afford on a single income. Credit card debt and other debts can contribute to the financial strain. To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected. Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.

Your growing family When you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate. Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate

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costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths. Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.

Moving up the ladder For many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It's important to review your life insurance coverage any time you leave an employer. Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere. Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.

Single again If you and your spouse divorce, you'll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex. If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you'll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can't come to terms, the court will make the decisions for you.

Your retirement years Once you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it's also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.

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Life Insurance Basics Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need? Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases. There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions: • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death? • How much of your salary is devoted to current expenses and future needs? • How long would your dependents need support if you were to die tomorrow? • How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children? Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford? How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract? A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

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Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses). The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits. The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods. Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories: • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer. • Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time. • Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested. • Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts. Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiaries You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of

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your beneficiary designations to ensure that your wishes are carried out as you intend. Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance? You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company. Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

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Do You Need Disability Income Insurance? People ordinarily buy property and casualty insurance to protect their possessions (houses, cars, and furniture) and life insurance to provide income for their survivors. However, many people don't think about protecting their income with disability income insurance. But how well could you live if you weren't able to work? Disability is an unpredictable event, and if you become disabled, your ability to make a living could be restricted. Although you may have enough money in the bank to meet your short-term needs, what would happen if you were unable to work for months or even years? The real value of disability income insurance lies in its ability to protect you over the long haul.

A look at the odds Your need for disability income insurance may be greater than you think. Here are some important disability statistics to consider: • The Social Security Administration estimates that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching retirement age. (Social Security Disability Benefits, SSA Publication Number 05-10029, November 2008) • There were more than 7 million disabled workers in 2008 receiving Social Security disability benefits. (Fact Sheet On The Old-Age, Survivors And Disability Insurance Program, Social Security Administration, July 2, 2008) As these statistics show, your chances of being disabled are great. Of course, statistics can be misleading--you might never become disabled. But then again, how many of your friends and family members have been in car accidents? Disability can be caused by illness as well as injury. How many people do you know who have suffered a heart attack or stroke? If you became ill, how would you support yourself or your family?

What would happen if you became disabled? What would happen if you suffered an injury or illness and couldn't work for days, months, or even years? If you're single, you may have no other means of support. If you're married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse really support you and your family? In addition, remember that you don't have to be working in a hazardous occupation to need disability income insurance. Accidents happen not only on the job but also at home, and illness can strike anyone. For these reasons, everyone who works and earns a living should consider purchasing disability income insurance.

But isn't disability coverage through an employer or the government enough? You might think that you are adequately insured against disability because you have coverage through your employer or through government programs such as Social Security and workers' compensation. However, many employers (especially small employers) do not offer disability benefits, and government programs may pay benefits only if you meet a strict definition of disability. Here's an idea of the benefits you may already have, as well as their limitations: Social Security: Although you shouldn't overlook the disability benefits you may be eligible to receive from Social Security, you shouldn't rely on them, either. Social Security denies many claims, in part due to its strict definition of disability. Even if you are deemed eligible for benefits, you still won't begin receiving them until at least six months after you become disabled because Social Security imposes a waiting period. In addition, your benefit

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may replace only a fraction of your predisability income. Workers' compensation: If you're injured at work or get sick from job-related causes, you may receive some disability benefits from workers' compensation insurance. The amount you receive depends on the state you live in. However, when you review your disability income insurance needs, remember that workers' compensation pays benefits only if your disability is work related, so it offers only limited disability protection. Some states also cover only the diseases or disabilities outlined in that state's workers' compensation laws. Pension plans: Some government and private pension plans pay disability benefits. Often, these plans pay benefits based on total, permanent disability, or reduce your retirement benefit in proportion to what you have already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers' compensation, so your benefit may be less than you expect if you also receive disability income from these government sources.

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Planning a Family? Get to Know Your Health Insurance Policy Congratulations! You've decided to start a family. Up until now, your health insurance has probably been adequate, paying for routine doctor visits and prescription drugs. But now that you're facing a lifestyle change, you must make sure that your health insurance policy will keep up with those changing needs.

Check your coverage Some policies insure only spouses and dependent children. So, if you and your partner aren't married, you'll want to check your policy carefully. If coverage is an issue, and you don't plan on getting married, consider whether purchasing an individual health insurance policy is an option. Don't wait until you become pregnant to look for that policy, though. The insurance company will know that you have a condition that's going to require treatment and care. In a worst-case scenario, something happens (e.g., a difficult birth, or a premature baby), and the baby ends up in the neonatal unit. So, whenever you try to buy insurance for a condition that already exists, expect the cost to be high.

Changing jobs? Be careful Be careful about changing jobs. Federal law bars pregnancy from being considered a pre-existing condition. If you change health plans while you're pregnant, your new insurer can't deny claims related to your pregnancy. However, there are some exceptions: • If you had no insurance, became pregnant, then got a new job that offered group health coverage, your new health plan would not have to immediately cover your pregnancy. You might have to sit out a pre-existing condition waiting period--a time that could be longer than your pregnancy--and in the meantime pay for your own doctor visits. • The law applies only to group health plans. If you have individual insurance and are pregnant, and then buy group health insurance, there could be a pre-existing condition waiting period. Also, if you move from one individual health plan to another individual health plan, you might not have coverage during a waiting period.

When will the baby's coverage start? Usually, your baby will be covered from the time of birth. Even if you and your partner are not married, either one of you should be able to add the baby to an existing plan. Find out what you have to do to add your baby to your health insurance policy. Some plans require you to add your baby within the first 30 days following birth. Other plans will waive the additional premium for the first 31 days if you enroll within 31 days following birth. If you're adopting an infant, and the birth mother has no insurance, you may have to pay for prenatal care and the costs of childbirth. If you're adopting an older child, make sure that you know when your insurance policy will begin coverage.

What is covered before your baby is born? Will the plan pay for the first prenatal visit during the first trimester of pregnancy? Does the plan offer a prenatal program to assist you in having a full-term baby and avoiding a problem pregnancy? Some plans provide prenatal education, health screening to determine risk, and case management services to encourage a healthy delivery.

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Are services for any medical condition that may complicate a pregnancy covered? If your physician leaves the insurance plan while you're pregnant, does the plan's continuity of care policies cover the remainder of the pregnancy with the noncontracted physician if you're already in the second or third trimester?

What is covered during and immediately after birth? • Is precertification required prior to hospital admission? If so, make sure you take care of it, otherwise you might have a problem with claim payments. • What length of hospital stay is covered? Do vaginal and cesarean deliveries have different time limits? • Is the baby's stay in the nursery covered? • Does the plan pay for administering anesthesia, obstetrical procedures, and any assisting required? • If it is necessary for your baby to be hospitalized past the normal time period, will a separate deductible and coinsurance apply? • Will the policy cover any complications from a premature birth? • What if there's a difficult birth that lands your baby in an expensive neonatal unit? • Does your plan provide care before the baby leaves the hospital, including routine tests, nursery service, doctor exams, and circumcision?

After you bring your baby home How easy will it be to get emergency care under your plan's rules? Babies are susceptible to illnesses and injuries. You don't want to have to wait for prior approval or drive past two hospitals while rushing your sick newborn to an approved medical facility. Will the plan pay for transportation costs to the nearest facility to treat any special conditions? If so, is there a maximum amount? Does the policy have a maximum amount it will pay for well-child care? Well-child care usually includes physical examinations, laboratory tests, developmental assessment, immunizations, and guidance necessary to monitor the normal growth and development of your child. How many years will it pay? What if your adopted baby is born with medical problems you didn't expect? Will the policy cover pre-existing conditions if you're adopting an older child? Does the plan offer home visits for new mothers?

Understand your out-of-pocket expenses Many policies have a family deductible, which is the maximum amount that the family as a group must pay before the coverage begins. Instead of multiplying the individual deductible by the number of family members, the family deductible is often two or three times the individual deductible, regardless of how many family members are covered. The same is true of your coinsurance cap. Review your co-payments. With a new baby, you will be making more trips to the doctor and buying more prescription medicines. It might be worthwhile to lower your deductible and co-payment. Your insurance premiums will be higher, but your benefits will be greater. Do a comparison to see what will work best for you.

Maximum lifetime benefits Although no one can forecast how much you might need during a lifetime, $1 million or higher is the minimum you should look for. This may seem like an outrageous sum, but keep in mind that expenses from birth

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complications for mother and child can reach this amount. Read your policy carefully and make sure you have the coverage you need. If you have questions, meet with an insurance professional. Understand how your policy works--what's covered and what isn't.

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Health Insurance and COBRA: Sometimes You Can Take It with You If you're like most Americans, you count on your employer for health insurance coverage. But what would happen to your health insurance if you suddenly stopped working or no longer qualified for benefits? No one can predict the future. It's possible that your company could lay you off or reduce your hours to part-time, your spouse could die, or your marriage could end in divorce. If something unexpected happened, you could be left without health benefits. And remember, buying private health insurance on your own can be pretty costly, especially if you're out of work. Fortunately, there's the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA can prove to be a real lifesaver for you and your family when your health coverage is jeopardized. You may also benefit from the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which took some further steps toward health-care reform.

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) may help you continue your health insurance coverage for a time COBRA is a federal law designed to protect employees and their dependents from losing health insurance coverage as a result of job loss or divorce. If you and your dependents are covered by an employer-sponsored health insurance plan, a provision of COBRA entitles you to continue coverage when you'd normally lose it. Most larger employers (20+ employees) are required to offer COBRA coverage. As an employee, you're entitled to COBRA coverage only if your employment has been terminated or if your hours have been reduced. However, your dependents may be eligible for COBRA benefits if they're no longer entitled to employer-sponsored benefits because of divorce, death, or certain other events. Unfortunately, you can't continue your health insurance coverage forever. You can continue your health insurance for 18 months under COBRA if your employment has been terminated or if your work hours have been reduced. If you're entitled to COBRA coverage for other qualifying reasons, you can continue your coverage for 36 months. • Divorce: If your former spouse maintained family health coverage through work (and works for a company with at least 20 employees), you may continue this group coverage for up to 36 months after the divorce or legal separation. You'll have to pay for this coverage, though. Your cost of continuing coverage cannot exceed 102 percent of the employer's cost for the insurance. COBRA coverage will terminate sooner than 36 months if you remarry or obtain coverage under another group health plan. • Company goes out of business: Unfortunately, you may be out of luck here. If your company goes out of business and no longer has a group health insurance policy in force, then COBRA coverage will not be available. (A possible exception involves union employees covered by a collective bargaining agreement.) Keep in mind that, whatever your circumstances, you'll have to pay the premium yourself for COBRA coverage--your employer is not required to pay any part of it. However, if you're eligible for COBRA coverage and don't have any other health insurance, you should probably accept it. Even though you'll pay a lot more for coverage than you did as an employee, it's probably less than you'll pay for individual coverage. You won't be subject to any health screenings, tests, or other pre-existing medical condition requirements when converting to a COBRA contract. Your COBRA benefits and coverage will be identical to those provided to similarly enrolled individuals. The American Recovery and Reinvestment Act of 2009 provides that, for involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, assistance-eligible individuals will only need to pay 35 percent of COBRA premiums for a period of up to nine months. The remaining 65 percent of COBRA premiums

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will be subsidized. However, this premium subsidy may need to be repaid in some cases.

The Health Insurance Portability and Accountability Act of 1996 expanded COBRA In 1996, HIPAA expanded certain COBRA provisions and created other health-care rights. In many ways, HIPAA took a significant step toward health-care reform in the United States. Some of its provisions may affect you. The major provisions of HIPAA: • Allow workers to move from one employer to another without fear of losing group health insurance • Require health insurance companies that serve small groups (2 to 50 employees) to accept every small employer that applies for coverage • Increase the tax deductibility of medical insurance premiums for the self-employed • Require health insurance plans to provide inpatient coverage for a mother and newborn infant for at least 48 hours after a normal birth or 96 hours after a cesarean section For example, assume you're pregnant and covered by a group health insurance plan at work. You decide to take a job at another firm. Under HIPAA, pregnancy cannot be considered a pre-existing condition for a woman who's changing jobs if she was previously covered by a group health insurance plan. So if you had insurance at your old job, you can't be denied health insurance coverage at your new job simply because you're pregnant. However, many companies require you to be employed for 30 days or more before you become eligible for coverage. If you are nearing the end of your pregnancy, and that requirement poses a problem for you, you may be eligible for coverage under COBRA through your former employer.

The American Recovery and Reinvestment Act of 2009 provides Cobra subsidy ARRA provided a government subsidy of 65 percent of the cost of COBRA coverage for employees (and their eligible family members) who lost their health insurance coverage due to involuntary termination of employment in 2009. This subsidy was to last for up to nine months. The Department of Defense Appropriations Act, 2010 extends the subsidy to February 28, 2010.

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Investing for Major Financial Goals Go out into your yard and dig a big hole. Every month, throw $50 into it, but don't take any money out until you're ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn't it? But that's what investing without setting clear-cut goals is like. If you're lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set goals? The first step in investing is defining your dreams for the future. If you are married or in a long-term relationship, spend some time together discussing your joint and individual goals. It's best to be as specific as possible. For instance, you may know you want to retire, but when? If you want to send your child to college, does that mean an Ivy League school or the community college down the street? You'll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan). You can then decide how much money you'll need to accumulate and which investments can best help you meet your goals.

Looking forward to retirement After a hard day at the office, do you ask, "Is it time to retire yet?" Retirement may seem a long way off, but it's never too early to start planning--especially if you want your retirement to be a secure one. The sooner you start, the more ability you have to let time do some of the work of making your money grow. Let's say that your goal is to retire at age 65 with $500,000 in your retirement fund. At age 25 you decide to begin contributing $250 per month to your company's 401(k) plan. If your investment earns 6 percent per year, compounded monthly, you would have more than $500,000 in your 401(k) account when you retire. (This is a hypothetical example, of course, and does not represent the results of any specific investment.) But what would happen if you left things to chance instead? Let's say you wait until you're 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with only about half the amount in the first example. Though it's never too late to start working toward your goals, as you can see, early decisions can have enormous consequences later on. Some other points to keep in mind as you're planning your retirement saving and investing strategy: • Plan for a long life. Average life expectancies in this country have been increasing for many years. and many people live even longer than those averages. • Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments that, though more volatile, offer a higher potential for long-term return than do more conservative investments. Conversely, if you're nearing retirement, a greater portion of your nest egg might be devoted to investments focused on income and preservation of your capital. • Consider how inflation will affect your retirement savings. When determining how much you'll need to save for retirement, don't forget that the higher the cost of living, the lower your real rate of return on your investment dollars.

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Facing the truth about college savings Whether you're saving for a child's education or planning to return to school yourself, paying tuition costs definitely requires forethought--and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the more you're able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth. Consider these tips as well: • Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost of tuition at two-year and four-year public and private colleges and universities are widely available. • Research financial aid packages that can help offset part of the cost of college. Although there's no guarantee your child will receive financial aid, at least you'll know what kind of help is available should you need it. • Look into state-sponsored tuition plans that put your money into investments tailored to your financial needs and time frame. For instance, most of your dollars may be allocated to growth investments initially; later, as your child approaches college, more conservative investments can help conserve principal. • Think about how you might resolve conflicts between goals. For instance, if you need to save for your child's education and your own retirement at the same time, how will you do it?

Investing for something big At some point, you'll probably want to buy a home, a car, maybe even that yacht that you've always wanted. Although they're hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is common. Because you don't have much time to invest, you'll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

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The Best Ways to Save for College In the college savings game, all strategies aren't created equal. The best savings vehicles offer special tax advantages if the funds are used to pay for college. Tax-advantaged strategies are important because over time, you can potentially accumulate more money with a tax-advantaged investment compared to a taxable investment. Ideally, though, you'll want to choose a savings vehicle that offers you the best combination of tax advantages, financial aid benefits, and flexibility, while meeting your overall investment needs.

529 plans Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings--an indispensable tool for helping you amass money for your child's or grandchild's college education. That's because 529 plans offer a unique combination of benefits unmatched in the college savings world. There are two types of 529 plans--college savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name "529" plans), college savings plans and prepaid tuition plans are very different college savings vehicles. There are typically fees associated with opening and maintaining each type of account. Note:Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

529 plans: college savings plans A 529 college savings plan is a tax-advantaged college savings vehicle that lets you save money for college in an individual investment account. Some plans let you enroll directly, while others require that you go through a financial professional. The details of college savings plans vary by state, but the basics are the same. You'll need to fill out an application, where you'll name a beneficiary and select one or more of the plan's investment portfolios to which your contributions will be allocated. Also, you'll typically be required to make an initial minimum contribution, which must be in cash. 529 college savings plans offer a unique combination of features that no other college savings vehicle can match: • Federal tax advantages: Contributions to your account grow tax deferred and are completely tax free if the money is used to pay the beneficiary's qualified education expenses. The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10 percent federal penalty. • State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals. However, be aware that some states limit their tax deduction to contributions made to the in-state 529 plan only. • High contribution limits: Most college savings plans have lifetime maximum contribution limits over $300,000. • Unlimited participation: Anyone can open a 529 college savings plan account, regardless of income level. • Professional money management: College savings plans are managed by designated financial companies who are responsible for managing the plan's underlying investment portfolios.

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• Flexibility: Under federal rules, you can change the beneficiary of your account to a qualified family member at any time without penalty. And you can rollover the money in your 529 plan account to a different 529 plan once per year without income tax or penalty implications. • Wide use of funds: Money in a 529 college savings plan can be used at any college in the United States or abroad that's accredited by the U.S. Department of Education and, depending on the individual plan, for graduate school. • Accelerated gifting: 529 plans offer an excellent estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren's college education. Individuals can make a lump-sum gift to a 529 plan in 2010 of up to $65,000 ($130,000 for married couples) and avoid federal gift tax, provided a special election is made to treat the gift as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years. • Variety: Currently, there are over 50 different college savings plans to choose from because many states offer more than one plan. You can join any state's college savings plan. But college savings plans have drawbacks too. You relinquish some control of your money. Returns aren't guaranteed--you roll the dice with the investment portfolios you've chosen, and your account may gain or lose money.

529 plans: prepaid tuition plans Prepaid tuition plans are distant cousins to college savings plans--their federal tax treatment is the same, but just about everything else is different. A prepaid tuition plan is a tax-advantaged college savings vehicle that lets you pay tuition expenses at participating colleges at today's prices for use in the future. Prepaid tuition plans can be run either by states or colleges. For state-run plans, you prepay tuition at one or more state colleges; for college-run plans, you prepay tuition at the participating college(s). As with 529 college savings plans, you'll need to fill out an application and name a beneficiary. But instead of choosing an investment portfolio, you purchase an amount of tuition credits or units (which you can then do again periodically), subject to plan rules and limits. Typically, the tuition credits or units are guaranteed to be worth a certain amount of tuition in the future, no matter how much college costs may increase between now and then. As such, prepaid tuition plans provide some measure of security over rising college prices. • Federal and state tax advantages: The federal and state tax advantages given to prepaid tuition plans are the same as for college savings plans. • Other similarities to college savings plans: Prepaid tuition plans are open to people of all income levels, and they offer flexibility in terms of changing the beneficiary or rolling over to another 529 plan once per year, as well as accelerated gifting. Prepaid tuition plans have some limitations, though, compared to college savings plans. One major drawback is that your child is generally limited to your own state's prepaid tuition plan, and then your child is limited to the colleges that participate in that plan. If your child attends a different college, prepaid plans differ on how much money you'll get back. Also, some prepaid plans have been forced to reduce benefits after enrollment due to investment returns that have not kept pace with the plan's offered benefits. Even with these limitations, some college investors appreciate the peace of mind that comes with not worrying about college inflation each year by locking in college costs today.

Coverdell education savings accounts A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here's how it works:

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• Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. The beneficiary must be under age 18 when the account is established (unless he or she is a child with special needs). • Contribution rules: You (or someone else) make contributions to the account, subject to the maximum annual limit of $2,000. This means that the total amount contributed for a particular beneficiary in a given year can't exceed $2,000, even if the money comes from different people. Contributions can be made up until April 15 of the year following the tax year for which the contribution is being made. • Investing contributions: You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit)--you have sole control over your investments. • Tax treatment: Contributions to your account grow tax deferred, which means you don't pay income taxes on the account's earnings (if any) each year. Money withdrawn to pay college or K-12 expenses (called a qualified withdrawal) is completely tax free at the federal level(and typically at the state level too). If the money isn't used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary's tax rate and subject to a 10 percent federal penalty. • Rollovers and termination of account: Funds in a Coverdell ESA can be rolled over without penalty into another Coverdell ESA for a qualifying family member. Also, any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs). Unfortunately, not everyone can open a Coverdell ESA--your ability to contribute depends on your income. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of $95,000 or less, and joint filers must have a MAGI of $190,000 or less. And with an annual maximum contribution limit of $2,000, a Coverdell ESA probably can't go it alone in meeting today's college costs. Note: The provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 that increased the annual contribution limit for Coverdell ESAs to $2,000 is scheduled to expire on December 31, 2010. Unless Congress acts, after this date, the annual contribution limit for Coverdell ESAs will revert to $500, its status prior to January 1, 2002.

Custodial accounts Before 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets--under the watchful eye of a designated custodian--that he or she ordinarily wouldn't be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, hockey lessons, a computer). Here's how a custodial account works: • Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. • Custodian: You also designate a custodian to manage and invest the account's assets. The custodian can be you, a friend, a relative, or a financial institution. The assets in the account are controlled by the custodian. • Assets: You (or someone else) contribute assets to the account. The type of assets you can contribute depends on whether your state has enacted the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Examples of assets typically contributed are stocks, bonds, mutual funds, and real property. • Tax treatment: Earnings, interest, and capital gains generated from assets in the account are taxed every year to your child. Assuming your child is in a lower tax bracket than you, you'll reap some tax savings compared to if you had held the assets in your name. But this opportunity is very limited

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because of special rules, called the "kiddie tax" rules, that apply when a child has unearned income. Under these rules, children are generally taxed at their parents' tax rate on any unearned income over a certain amount. For 2010, this amount is $1,900 (the first $950 is tax free and the next $950 is taxed at the child's rate). The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn't exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support. A custodial account provides the opportunity for some tax savings, but the kiddie tax sharply reduces the overall effectiveness of custodial accounts as a tax-advantaged college savings strategy. And there are other drawbacks. All gifts to a custodial account are irrevocable. Also, when your child reaches the age of majority (as defined by state law, typically 18 or 21), the account terminates and your child gains full control of all the assets in the account. Some children may not be able to handle this responsibility, or might decide not to spend the money for college.

U.S. savings bonds Series EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. The bonds can be easily purchased from most neighborhood banks and savings institutions, or directly from the federal government. They are available in face values ranging from $50 to $10,000. You may purchase the bond in electronic form at face value or in paper form at half its face value. If the bond is used to pay qualified education expenses and you meet income limits (as well as a few other minor requirements), the bond's earnings are exempt from federal income tax. The bond's earnings are always exempt from state and local tax. In 2010, to be able to exclude all of the bond interest from federal income tax, married couples must have a modified adjusted gross income of $105,100 or less at the time the bonds are redeemed (cashed in), and individuals must have an income of $70,100 or less. A partial exemption of interest is allowed for people with incomes slightly above these levels. The bonds are backed by the full faith and credit of the federal government, so they are a relatively safe investment. They offer a modest yield, and Series I bonds offer an added measure of protection against inflation by paying you both a fixed interest rate for the life of the bond (like a Series EE bond) and a variable interest rate that's adjusted twice a year for inflation. However, there is a limit on the amount of bonds you can buy in one year, as well as a minimum waiting period before you can redeem the bonds, with a penalty for early redemption.

Financial aid impact Your college saving decisions impact the financial aid process. Come financial aid time, your family's income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as the expected family contribution, or EFC. In the federal calculation, your child's assets are treated differently than your assets. Your child must contribute 20 percent of his or her assets each year, while you must contribute 5.6 percent of your assets. For example, $10,000 in your child's bank account would equal an expected contribution of $2,000 from your child ($10,000 x.20), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x.056). Under the federal rules, an UGMA/UTMA custodial account is classified as a student asset. By contrast, 529 plans and Coverdell ESAs are considered parental assets if the parent is the account owner (so accounts owned by grandparents or other relatives or friends don't count at all). And distributions (withdrawals) from 529 plans and Coverdell ESAs that are used to pay the beneficiary's qualified education expenses are not classified as parent or student income on the federal government's aid form, which means that some or all of the money is not counted again when it's withdrawn. Other investments you may own in your name, such as mutual funds, stocks, U.S. savings bonds (e.g., Series EE and Series I), certificates of deposit, and real estate, are also classified as

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parental assets. Regarding institutional aid, colleges are generally a bit stricter than the federal government in assessing a family's assets and their ability to pay college costs. Most use a standard financial aid application that considers assets the federal government does not, for example, home equity. Typically, though, colleges treat 529 plans, Coverdell accounts, and UTMA/UGMA custodial accounts the same as the federal government, with the caveat that distributions from 529 plans and Coverdell accounts are often counted again as available income.

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Saving for Retirement and a Child's Education at the Same Time You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child's education at the same time can be a challenge. But take heart--you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started: For retirement: • How many years until you retire? • Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what's your balance? Can you estimate what your balance will be when you retire? • How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.) • What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply? • Do you or your spouse expect to work part-time in retirement? For college: • How many years until your child starts college? • Will your child attend a public or private college? What's the expected cost? • Do you have more than one child whom you'll be saving for? • Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship? • Do you expect your child to qualify for financial aid? Many on-line calculators are available to help you predict your retirement income needs and your child's college funding needs.

Figure out what you can afford to put aside each month After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you'll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you've come up with a dollar amount, you'll need to decide how to divvy up your funds.

Retirement takes priority Though college is certainly an important goal, you should probably focus on your retirement if you have limited

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funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you'll miss out on years of tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there's no such thing as a retirement loan!

If possible, save for your retirement and your child's college at the same time Ideally, you'll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child's college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you'd have $18,415 in your child's college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.) If you're unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you're pursuing both goals at the same time doesn't necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

Help! I can't meet both goals If the numbers say that you can't afford to educate your child or retire with the lifestyle you expected, you'll have to make some sacrifices. Here are some things you can do: • Defer retirement: The longer you work, the more money you'll earn and the later you'll need to dip into your retirement savings. • Work part-time during retirement. • Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement. • Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce. • Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). • Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college. • Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don't feel guilty--a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost. • Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

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Can retirement accounts be used to save for college? Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child's college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you're under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you'll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

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Estate Planning: An Introduction By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust. To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18 Since incapacity can strike anyone at anytime, all adults over 18 should consider having: • A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so. • An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples Married couples have unique estate planning challenges and opportunities. On the one hand, you can transfer your entire estate to your spouse gift and estate tax free under the unlimited marital deduction. This will postpone taxation until the death of the surviving spouse. While this may be a good outcome for couples with smaller estates, couples with combined assets in excess of the estate tax exemption amount ($3.5 million per person in 2009) may wind up paying more in estate taxes than is necessary because they've wasted the exemption of the first spouse to die. Couples in this situation need to plan in advance to avoid this result (perhaps by using a "credit shelter" or "bypass" trust, or some combination of marital trusts, often referred as an "A/B or A/B/C trust arrangement"). Note: Funding a bypass trust with funds from a retirement plan could have adverse income tax consequences.

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Note: In the states that have "decoupled" their death tax systems from the federal system, using a formula provision to fund a bypass trust may increase the chance of having to pay state death taxes. Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (although a $133,000 annual exclusion, for 2009, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time. Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried Depending on the size of your estate when you die, you may need to be concerned about estate taxes. Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent. There is uncertainty about the exact form the federal estate tax system will take in future years. However, it appears that individuals with estates valued at under $1 million need not worry too much about federal estate taxes, those with estates between $1 million and $3.5 million should have some flexibility built into their plans, and those with over $3.5 million need to implement plans now to avoid having to pay federal estate tax. TWhether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.

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Wills: The Cornerstone of Your Estate Plan If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.

Wills avoid intestacy Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will. Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.

Wills allow you to nominate a guardian for your minor children In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

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Wills can create a testamentary trust You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.

Wills can help minimize taxes Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include: • You lacked testamentary capacity when you signed the will • You were unduly influenced by another individual when you drew up the will • The will was forged or was otherwise improperly executed • The will was revoked

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Choosing an Income Tax Filing Status Selecting a filing status is one of the first decisions you'll make when you fill out your federal income tax return, so it's important to know the rules. And because you may have more than one option, you need to know the advantages and disadvantages of each. Making the right decision about your filing status can save money and prevent problems with the IRS down the road.

The five filing statuses and how they affect your tax liability Your filing status is especially important because it determines, in part, the tax rate applied to your taxable income, the amount of your standard deduction, and the types of deductions and credits available. By choosing the right filing status, you can minimize your taxes. The five filing statuses are unmarried, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. There are six income tax brackets. Your tax rate depends on your filing status and the amount of your taxable income. For example, if you're unmarried and your taxable income is more than $8,375 but not more than $34,000 (in 2010), it's taxed at 15 percent. If you're a head of household filer, though, your taxable income can climb to $45,550 and still be taxed at 15 percent. So, it's clear that some filing statuses are more beneficial than others. Although you'll generally want to choose whichever filing status minimizes your taxes, other considerations (such as a pending divorce) may also come into play.

You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year This one's pretty straightforward. And, depending on your circumstances, it may be your only option. Your filing status is determined as of the last day of the tax year (December 31). To use the unmarried status, you must be unmarried or separated from your spouse by either divorce or a written separate maintenance decree on the last day of the year. Unfortunately, you jump into a higher tax bracket more quickly with the unmarried status than with some of the other filing statuses.

Married filing jointly often results in tax savings for married couples You may file jointly if, on the last day of the tax year, you are: • Married and living together as husband and wife • Married and living apart, but not legally separated under a divorce decree or separate maintenance agreement, or • Separated under an interlocutory (i.e., not final) decree of divorce Also, you are considered married for the entire tax year for filing status purposes if your spouse died during the tax year. When filing jointly, you and your spouse combine your income, exemptions, deductions, and credits. Filing jointly generally offers the most tax savings for married couples. For one thing, there are many credits that you can take if you file a joint return that you can't take if you file married filing separately. These include the child and dependent care credit, the adoption expense credit, the Hope credit (renamed the American Opportunity credit for 2009 and 2010), and the Lifetime Learning credit. Still, this filing status is not always the most advantageous. If your spouse owes certain debts (including

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defaulted student loans and unpaid child support), the IRS may divert any refund due on your joint tax return to the appropriate agency. To get your share of the refund, you'll have to file an injured spouse claim and probably have to jump through hoops. You can avoid the hassle by filing a separate return.

You don't have to be separated to choose married filing separately You and your spouse can choose to file separately if you're married as of the last day of the tax year. Here, you'd report only your own income and claim only your own deductions and credits. Filing separately may be wise if you want to be responsible only for your own tax. With a joint return, by comparison, each spouse is jointly and individually liable for the full amount of the tax due. So, if your spouse skips town, you'd be left holding the tax bag unless you qualified as an innocent spouse. Filing separately might also be the best tax move if one spouse has significant medical expenses or miscellaneous itemized deductions. Your ability to take these deductions is tied in to the level of your adjusted gross income (AGI). For example, medical expenses are deductible only if they exceed 7.5 percent of AGI. By filing separately, the AGI for each spouse is reduced. Keep in mind that if you and your spouse file separately and your spouse itemizes deductions, you'll have to do the same. Remember, though, that you won't qualify for certain credits (such as the child and dependent care tax credit) and can't take certain deductions if you file separately. For example, you cannot deduct qualified education loan interest if you're married, unless you file a joint return.

Head of household status offers certain income tax advantages Those who qualify for the head of household filing status get special tax treatment. Not only are the tax rates lower for head of household filers than for unmarried filers and married filing separately filers, but the standard deduction is larger as well. However, you'll have to satisfy the following requirements: • Generally, you should be unmarried at the end of the year (unless you live apart from your spouse and meet certain tests) • You must maintain a household for your child, dependent parent, or other qualifying dependent relative • The household must be your home and generally must also be the main home of a qualifying relative for more than half of the year • You must provide more than half the cost of maintaining the household • You must be a U.S. citizen or resident alien for the entire tax year

Qualifying widow(er) with dependent child offers the advantages of a joint return You may be able to select the qualifying widow(er) with dependent child filing status if your spouse died recently. This status allows you to use joint tax rates and offers the highest possible standard deduction, the one applicable to joint tax returns. To qualify, you must satisfy all of the following conditions: • Your spouse died either last tax year or the tax year before that • You qualified to file a joint return with your spouse for the year he or she died • You have not remarried before the end of the tax year • You have a qualifying dependent child • You provide over half the cost of keeping up a home for yourself and your qualifying child

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As you can see, choosing the correct filing status is not always easy. You might want to speak with a professional tax preparer or consult IRS Publication 17 for more information.

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How can I save for my child's college education? Question: How can I save for my child's college education?

Answer: This is a very broad question that's difficult to answer without knowing your individual situation. The option(s) you choose will depend on a number of factors: • Your need for strategies with tax advantages (some investments and savings vehicles offer special tax advantages if the money is used to pay college expenses) • Your certainty that your child will want to attend college (tax- sheltered plans have restrictions on the use of funds) • Your income (some savings vehicles exclude parents above certain income limits) • Your willingness to put funds in your child's name • Your risk tolerance • Your expectation of qualifying for financial aid • The amount of money you have available to invest • The number of years you have to invest You may need to consult a professional financial planner or tax advisor to determine the best course of action in your particular situation. Yet there is one universal truth: It's recommended that you start saving for your child's college education as early as possible, preferably with regular, manageable contributions that increase over time. But what if your child is only a couple of years away from college? Your emphasis then won't be on a savings program so much as it will be on what assets, if any, you might use for college expenses. Do you have retirement accounts? A cash value life insurance policy? Home equity? These are all sources of potential cash. Finally, if you expect to qualify for financial aid, you should familiarize yourself with the financial aid process before your child starts college. It's often a good idea to do a dry run through the federal financial aid application. This will help you estimate how much money your family will be required to pay toward college costs each year before any financial aid is forthcoming.

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Who should I name as guardian of my children in case my spouse and I should die at the same time? Question: Who should I name as guardian of my children in case my spouse and I should die at the same time?

Answer: This is an extremely important question. After all, what can be more important than choosing a surrogate parent for your minor children? This process takes careful consideration and may be emotionally difficult, so you'll want to take your time. The best guardian may not be the obvious choice. You generally name a guardian in your will. Of course, spouses typically name each other as guardian first and then name an alternate guardian or guardians in case the spouse cannot serve for any reason, including death. Some parents nominate one guardian or guardians to care for the children and a different guardian to care for the children's assets and finances. All of this is perfectly permissible. The court will have final approval but generally gives your selection the highest regard. Who is the right guardian for your children? It's customary for people to name parents, siblings, or best friends. You should select a responsible person with good character who shares your values and has the time and willingness to take on the job. When choosing a guardian, some of the things you may want to consider are: • Who loves and cares about your children? • Who do your children love and respect? • Who do you trust? • Who is financially and emotionally able to take on the responsibility? • Who is willing to take on the responsibility? Be sure to talk with any prospective guardian before you nominate that person. Impress upon him or her the gravity of your request. Discuss your wishes regarding how you want your children to be raised (e.g., you want them to have a religious upbringing, or you want them to go to college) and what financial resources will be available (e.g., you have life insurance). Give the potential guardian plenty of time to think over your request carefully.

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Should I buy life insurance on my child? Question: Should I buy life insurance on my child?

Answer: Since the main purpose of life insurance is to protect against financial loss when someone dies, it's often better to wait until your child reaches adulthood to purchase life insurance. Although your child's death would be a tragedy, it would probably not affect your family much financially unless he or she was earning a substantial amount of income for the family. However, there are a few reasons why you might purchase life insurance on your child. For instance, you might buy life insurance on your young child so you can take advantage of the rates, which are lower for healthy children than for adults. Your employer may even offer inexpensive term coverage for dependents. Purchasing a policy while your child is healthy can also guarantee that your child will be protected throughout adulthood, even if he or she becomes ill, works in a hazardous occupation, engages in dangerous activities, or becomes uninsurable for other reasons. Some parents also buy term insurance policies on their children to cover the time period when they are paying for their children to attend college or graduate school. If a child dies during this period, the death benefit can be used to help pay off college debt. To find out if buying life insurance for your child makes sense in your situation, talk to a trusted insurance advisor.

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How do I find quality child care? Question: How do I find quality child care?

Answer: Whether you're looking for a nanny, a family day-care provider, or a child-care center, you'll want to make sure that your child will be safe and happy in his or her day-care setting. Start by asking your friends, family members, and neighbors for referrals to child-care providers that they've been happy with. You can also call Child Care Aware at (800) 424-2246 to find the Child Care Resource and Referral program nearest you. When you call your local program, you'll be referred to child-care providers in your area and given information about selecting a child-care provider, including information about how your state regulates child care. Once you've compiled a list of providers, visit each one that seems suitable. If possible, bring your child so that you can see how the provider interacts with your child. During the visit, look for signs that the home is clean and safe, and that the children who stay there seem happy. Finally, ask the provider for references from other parents, and call them. It's also essential to check state records to see if any complaints have been lodged against the provider.

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Does it make sense financially for both me and my spouse to work after our child is born? Answer: Following the birth of your child, you may feel that both you and your spouse need to work to meet household expenses and maintain your current lifestyle. However, you may discover that one of you can stay home without seriously affecting your net income. Though you would have to do without a second income, you need to factor in what you'd save: • Child-care costs: The cost per child for a day-care facility, nursery school, or nanny • Commuting costs: Gasoline, wear and tear on your car, tolls, and parking • Clothing: Work clothes and dry cleaning • Restaurant and take-out food: Prepared dinners you purchase because you have no time to cook • Lunches out: You have more time to prepare your own • House cleaning and gardening: Hired help to clean the house and mow the lawn • Taxes: With only one salary, you may move into a lower tax bracket Now, consider the adverse effects of becoming a single-income household. The most obvious, of course, is a reduced family income. You should also consider what effect a leave of absence will have on the stay-at-home spouse's career and your family's retirement plans. You may both be at a point in your careers where you are earning high salaries. Leaving your job now may mean having to start over lower on the career ladder. And if one of you leaves work, you may miss the opportunity to fully fund your employer-sponsored retirement plan. Further, with only one income, you are more vulnerable in the event of an economic downturn. Finally, the stay-at-home spouse may lose the sense of accomplishment and community one gets from working outside the home. You should balance all the issues, both pro and con. And remember, although it may make sense for both of you to continue working, some nonfinancial considerations, such as the opportunity to raise and supervise your child in your own home, may outweigh your financial concerns.

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How do I pay for child care? Question: How do I pay for child care?

Answer: If you are like many working people with children, you commonly pay for your child-care costs out of current cash flow, including income from salaries, tips, investments, and other sources. Child care is part of your regular monthly expenses and generally cannot be avoided. However, some methods are available to you that may help save on taxes and reduce costs. For instance, your employer may include a designated flexible spending account (FSA) in its employee benefits package. You contribute pretax dollars, deducted from your paycheck, to a fund earmarked for dependent care expenses. You pay your day-care bills and are later reimbursed out of your tax-free FSA. You and your spouse can more easily meet your child-care expenses by reducing costs. Some child-care providers allow parents to volunteer their services in exchange for a lower bill. Or, if possible, you and your spouse can work alternate work schedules so that at least one of you is home with your child for all or part of the day. This will allow you to pay for part-time day care or to fully avoid such costs. Other alternatives include job sharing, where you and another person fill one full-time job, allowing more free time to spend at home; telecommuting, where you work some days at home; or a compressed work week, where you work four 10-hour shifts during the week and spend the fifth day at home. You might also consider working part-time for a few years until your child is in school. If you work part-time, you could try to create a child-care swap with other neighbors who work part-time. In addition, some companies provide up to three months of paid parental leave time, so take full advantage if this is available to you.

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When do I have to apply for a Social Security number for my newborn? Question: When do I have to apply for a Social Security number for my newborn?

Answer: There's no time limit on applying for a Social Security number for your newborn. However, you may want to do it right away, because you're required to include a child's Social Security number on your tax return to claim that child as a dependent. There are two ways to apply for a Social Security number for your newborn. The first is to apply at the hospital when the baby is born. A doctor or hospital representative will ask for information to complete your baby's birth certificate. Ask him or her to have your state's vital statistics office share this information with the Social Security Administration. You'll need to provide the Social Security number for each parent, although the application can proceed even if one parent's number is unknown or not available. Your baby's card will be mailed to you within a few weeks. If you do not apply for the Social Security card at the hospital, you can apply for the baby's number at a Social Security Administration office. You'll need to fill out an application (Form SS-5). Generally, you'll need to do the following: • Provide both parents' Social Security numbers • Show evidence of your child's age (the birth certificate), identity (a hospital record other than the birth certificate), and citizenship (the birth certificate) • Show evidence of your identity (a driver's license or passport) To obtain a copy of Form SS-5, access the Social Security Administration website or call toll free at (800) 772-1213 to request one. Mail or hand deliver the completed application to your local Social Security Administration office.

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What is the kiddie tax? Answer: Special rules commonly referred to as the "kiddie tax" rules apply when a child has unearned income (for example, investment income). Children subject to the kiddie tax are generally taxed at their parents' tax rate on any unearned income over a certain amount. Currently, this amount is $1,900 (the first $950 is tax free and the next $950 is taxed at the child's rate). The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn't exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn't exceed one-half of their support. In some cases, a parent has the option of reporting the child's unearned income on his or her tax return. In other cases, the child must file his or her own return. Each method of filing has several advantages and disadvantages. Note that the kiddie tax rules apply regardless of whether the child is your dependent. Further, the definition of a child includes your legally adopted child and your stepchild. You should note that a child who has significant tax exempt interest, or tax preferences or adjustments, may be subject to the alternative minimum tax.

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What is the earned income credit and who qualifies for it? Answer: The earned income credit (EIC) is a refundable tax credit available to certain low-income individuals who have earned income, meet adjusted gross income thresholds, and do not have more than a specified amount of disqualified income (excess investment income). If you file a federal tax return and meet all applicable requirements, your income tax (if any) will be reduced and you might receive a refund. To qualify for the EIC, you must meet all of the following requirements: • Must have earned income • Tax return must cover a full 12 months (unless a short period is filed due to taxpayer's death) • Filing status cannot be married filing separately • Cannot be a qualifying child of another taxpayer • Must not have filed forms related to foreign earned income • Must have no more than $3,100 of disqualified income In addition, special rules will apply to taxpayers who have qualifying children and to taxpayers who do not have qualifying children. If you are eligible to claim the EIC and have at least one qualifying child, you can receive part of your credit in your paycheck during the year, rather than all at once at tax time. This is known as the advance EIC. However, several requirements apply. For more information, consult a tax professional.

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Can I take the tax credit for child care? Question: Can I take the tax credit for child care?

Answer: The child and dependent care credit is a tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work. To be eligible for the credit, you must care for a qualifying person, incur work-related expenses, and have earned income. A qualifying person is: • Your dependent who was under the age of 13 when the care was provided and for whom you can claim an exemption, or • Your dependent who was physically or mentally unable to care for himself or herself and for whom you can claim an exemption (or for whom you could have claimed an exemption but for the income test), or • • Your spouse who is physically or mentally unable to care for himself or herself, or • In certain cases, a dependent claimed by a divorced spouse Child and dependent care expenses must be work related to qualify for the credit. That is, the expenses must allow you to work or look for work. If you are married, you must file a joint tax return and both you and your spouse must generally work or look for work. (Your spouse is treated as working during any month he or she is employed, or is a full-time student, or is physically or mentally unable to care for himself or herself.) Your child and dependent care credit is a percentage of a portion of your work-related expenses. The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent, and $6,000 for more than one qualifying individual. The percentage used in calculating the credit is gradually reduced as adjusted gross income (AGI) exceeds $15,000. If your AGI exceeds $43,000, your credit is limited to the minimum allowed by this law--20 percent of qualifying work-related expenses. For additional details, consult a tax professional.

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What is the child tax credit? Answer: The child tax credit is a per-child tax credit against your personal income tax liability. The child tax credit is $1,000 per child. If you have a qualifying child under the age of 17, you may be entitled to claim this credit. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($110,000 for married persons filing jointly, $55,000 for married persons filing separately, and $75,000 for heads of household, widow(er)s, and single persons). The credit is reduced by $50 for each $1,000 that your MAGI exceeds the above amounts. To claim the child tax credit, you must file either federal Form 1040 or 1040A. The credit is refundable, so you may be able to obtain a refund even if the credit exceeds your regular or alternative minimum tax (AMT) liability. Currently, the credit is refundable to the extent of 15 percent of your earned income in excess of $3,000, up to the per-child credit amount. Special rules may apply if you have three or more qualifying children and are eligible for the earned income credit (EIC).

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Does a typical dental insurance policy cover braces? Question: Does a typical dental insurance policy cover braces?

Answer: Some dental policies cover orthodontia (including braces) and others don't. You should carefully read through a dental insurance plan before selecting it if you think a member of your family may need orthodontic services. If your dental policy covers orthodontia, there may be a waiting period before the coverage kicks in. Also, your policy may contain a maximum annual benefit limit for orthodontic work. And keep in mind that most plans offer orthodontic treatment to children only, not to adults. One more word of caution: If your child has a pre-existing dental condition, it may be excluded from coverage, depending on the policy provisions. A dental plan's orthodontic benefits may be treated differently from other dental benefits. Normally, the plan will pay for a certain percentage of orthodontic treatment. The co-payments and deductibles may also differ from standard dental care. If you have any questions related to the orthodontia component of your dental insurance, contact your plan administrator or a customer service representative at your insurer.

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Starting a Family eBook  

LifeFocus.com T. Young March 28, 2010 info@lifefocus.com www.LifeFocus.com Structuring and maintaining a cash reserve .........................

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