Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

• What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
• Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
• How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
• Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
• Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
• How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
• Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.
• Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
• How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
• Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
• How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why is your withdrawal rate important?

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you’ll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.

Source: National Vital Statistics Report, Vol. 59, No. 4, March 2011

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. A seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years. More recently, Bengen used similar assumptions to show that a higher initial withdrawal rate–closer to 5%–might be possible during the early, active years of retirement if withdrawals in later years grow more slowly than inflation.

Other studies have shown that broader portfolio diversification and rebalancing strategies also can have a significant impact on initial withdrawal rates. In an October 2004 study (“Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?,”Journal of Financial Planning) Jonathan Guyton found that adding asset classes such as international stocks and real estate helped increase portfolio longevity (although these may entail special risks). Another strategy that Guyton used in modeling initial withdrawal rates was to freeze the withdrawal amount during years of poor portfolio performance. By applying so-called decision rules that take into account portfolio performance from year to year, Guyton found it was possible to have “safe” initial withdrawal rates above 5%.

A still more flexible approach to withdrawal rates builds on Guyton’s methodology (“Using Decision Rules to Create Retirement Withdrawal Profiles,” Journal of Financial Planning, August 2007). William J. Klinger suggests that a withdrawal rate can be fine-tuned from year to year, using Guyton’s methods but basing the initial rate on one of three retirement profiles. For example, one person might withdraw uniform inflation-adjusted amounts throughout his or her retirement. Another might choose to spend more money early in retirement and less later; still another might plan to increase withdrawals as he or she ages. This model also requires estimating the odds that the portfolio will last throughout retirement. One retiree might be comfortable with a 95% chance that his or her strategy will permit the portfolio to last throughout retirement; another might need assurance that the portfolio has a 99% chance of lifetime success. The study suggests that this more complex model might permit a higher initial withdrawal rate, but also means the annual income provided is likely to vary moreover the years.

Don’t forget that all these studies were based on historical data about the performance of various types of investments, and that past results don’t guarantee future performance. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Inflation is a major consideration

For many people, even a 5% withdrawal rate seems low. To better understand why suggested initial withdrawal rates aren’t higher, it’s essential to think about how inflation can affect your retirement income.

Here’s a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in a money market account yielding 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income–$51,500–would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio’s ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account–and the need for a relatively predictable income stream in retirement isn’t the only reason. According to several studies in the late 1990s by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio’s fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio’s ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski,  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Some employers offer 401(k) plan participants the opportunity to make Roth 401(k) contributions. If you’re lucky enough to work for an employer who offers this option, Roth contributions could play an important role in maximizing your retirement income.

What is a Roth 401(k)?

A Roth 401(k) is simply a traditional 401(k) plan that accepts Roth 401(k) contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there’s no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributed from the plan. (403(b) and 457(b) plans can also allow Roth contributions.)

Who can contribute?

Unlike Roth IRAs, where individuals who earn more than a certain dollar amount aren’t allowed to contribute, you can make Roth contributions, regardless of your salary level, as soon as you’re eligible to participate in the plan. And while a 401(k) plan can require employees to wait up to one year before they become eligible to contribute, many plans allow you to contribute beginning with your first paycheck.

How much can I contribute?

There’s an overall cap on your combined pretax and Roth 401(k) contributions. You can contribute up to $17,000 of your pay ($22,500 if you’re age 50 or older) to a 401(k) plan in 2012. You can split your contribution any way you wish. For example, you can make $10,000 of Roth contributions and $7,000 of pretax 401(k) contributions. It’s up to you.

But keep in mind that if you also contribute to another employer’s 401(k), 403(b), SIMPLE, or SAR-SEP plan, your total contributions to all of these plans–both pretax and Roth–can’t exceed $17,000 ($22,500 if you’re age 50 or older). It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.

Can I also contribute to a Roth IRA?

Yes. Your participation in a Roth 401(k) plan has no impact on your ability to contribute to a Roth IRA. You can contribute to both if you wish (assuming you meet the Roth IRA income limits). You can contribute up to $5,000 to a Roth IRA in 2012, $6,000 if you’re age 50 or older (or, if less, 100% of your taxable compensation).

Should I make pretax or Roth 401(k) contributions?

When you make pretax 401(k) contributions, you don’t pay current income taxes on those dollars (which means more take-home pay). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 401(k) contributions are subject to income taxes up front, but qualified distributions of your contributions and earnings are entirely free from federal income tax.

Which is the better option depends upon your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, Roth 401(k) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates. However, if you think you’ll be in a lower tax bracket when you retire, pretax 401(k) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. A financial professional can help you determine which course is best for you.

Are distributions really tax free?

Because your Roth 401(k) contributions are made on an after-tax basis, they’re always free from federal income tax when distributed from the plan. But the investment earnings on your Roth contributions are tax free only if you meet the requirements for a “qualified distribution.”

In general, a distribution is qualified only if it satisfies both of the following:

• It’s made after the end of a five-year waiting period
• The payment is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts with the year you make your first Roth contribution to your employer’s 401(k) plan. For example, if you make your first Roth contribution to the plan in December 2012, then the first year of your five-year waiting period is 2012, and your waiting period ends on December 31, 2016.

But if you change employers and roll over your Roth 401(k) account from your prior employer’s plan to your new employer’s plan (assuming the new plan accepts Roth rollovers), the five-year waiting period starts instead with the year you made your first contribution to the earlier plan.

If your distribution isn’t qualified (for example, if you receive a payout before the five-year waiting period has elapsed or because you terminate employment), the portion of your distribution that represents investment earnings on your Roth contributions will be taxable, and will be subject to a 10% early distribution penalty unless you are 59½ or another exception applies.

You can generally avoid taxation by rolling your distribution over into a Roth IRA or into another employer’s Roth 401(k), 403(b), or 457(b) plan, if that plan accepts Roth rollovers. (State income tax treatment of Roth 401(k) contributions may differ from the federal rules.)

What about employer contributions?

While employers don’t have to contribute to 401(k) plans, many will match all or part of your contributions. Your employer can match your Roth contributions, your pretax contributions, or both. But your employer contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and investment earnings on those contributions, are not taxed until you receive a plan distribution.

What else do I need to know?

Like pretax 401(k) contributions, your Roth 401(k) contributions and investment earnings can be paid from the plan only after you terminate employment, incur a financial hardship, attain age 59½, become disabled, or die.

Also, unlike Roth IRAs, you must begin taking distributions from a Roth 401(k) plan after you reach age 70½ (or in some cases, after you retire). But this isn’t as significant as it might seem, since you can generally roll over your Roth 401(k) dollars (other than RMDs themselves) into a Roth IRA if you don’t need or want the lifetime distributions.

Employers aren’t required to make Roth contributions available in their 401(k) plans. So be sure to ask your employer if they are considering adding this exciting feature to your 401(k) plan.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

What is a split annuity?

An annuity is a contract purchased from an insurance company that can be used to accumulate money on a tax-deferred basis for retirement and/or to convert retirement assets into a stream of income. A split annuity isn’t really one annuity, but a combination of two or more annuities funded with a single sum of money. A portion of the money is placed in an immediate annuity that makes a fixed payment to you for a fixed period of time, such as ten years. The balance of the money is invested in a fixed-interest deferred annuity, which accrues sufficient interest to equal the beginning sum used to fund both annuities by the time the immediate annuity payments stop. The amount of income you receive depends on the amount of money paid into each annuity, and the terms and interest rates applicable to each contract.

Split annuity benefits

Fixed income –The immediate annuity makes fixed payments to you for a fixed period of time, regardless of changing interest rates or stock market fluctuations.

Possible tax-advantaged payments –The tax code treats payments received as an annuity as being divided into two parts: a nontaxable portion that represents the return of premiums paid into the annuity, and a taxable portion that corresponds to the earnings in the annuity. As a result, only a portion (i.e., the earnings) of each payment is included in your gross income. The remainder is a return of principal and not taxed.

Tax-deferred accumulations –The earnings on a fixed-interest deferred annuity (i.e., the interest earned on your money) are tax deferred until withdrawn. Unlike most taxable investments, you pay no taxes on your annuity earnings until you begin to take payments or receive income. Income tax deferral allows your money to potentially grow faster than in a taxable account, because earnings that otherwise would be subject to taxes are available for growth.

Flexibility –The fixed-interest deferred annuity can provide a new income stream at its maturity. Also, most fixed-interest deferred annuities allow you to withdraw a portion of the annuity’s cash value without penalty. This option provides you with access to additional money should you need it in addition to the immediate annuity payments.

Return of principal –At the end of the immediate annuity payout period, the fixed-interest deferred annuity is worth the original amount of your investment in both annuities. At that time, you can use the money from the fixed-interest deferred annuity however you wish, including another split annuity.

Split annuity limitations

Surrender or early withdrawal charges –The fixed-interest deferred annuity usually has early withdrawal or surrender charges. This assessment is often a percentage of a withdrawal exceeding any applicable penalty-free amount allowed in the annuity contract. Most fixed-interest deferred annuities include some exceptions to the withdrawal charge, including withdrawals due to disability, loss of employment, long-term care, and death of the annuity owner.

Fixed annuity payments –While knowing that you will receive a fixed payment for a fixed period of time may be comforting, it may also prove inconvenient if you need or want more income. Typically, immediate annuity payments are fixed once they’ve begun, although there are some exceptions (such as inflation adjustments and commuted payment options) that allow for withdrawals from the balance of the immediate annuity in addition to the fixed payments.

Lower deferred annuity interest rates –The appeal of the split annuity idea is knowing that at the end of the immediate annuity payout period, the fixed-interest deferred annuity will have earned enough interest to equal the principal amount used to fund both annuities. The growth of the fixed-interest deferred annuity portion of the split annuity is based on the interest rate paid by the annuity issuer. The immediate annuity payments are based, in part, on the amount apportioned to the immediate annuity. The more money allocated to the immediate annuity, the larger the income payments. If more money is allocated to the fixed-interest deferred annuity because of lower interest rates, then less money is allocated to the immediate annuity, decreasing the payments to you.

Split annuity uses

While the split annuity concept is not the only alternative for pursuing a particular financial objective, it may be useful in a number of situations.

Dependable income and savings–Many people, especially retirees, want a dependable income coupled with preservation of retirement funds. The split annuity concept may offer a means to both objectives. Not only does the immediate annuity pay a fixed income for a fixed period of time, but a portion of each payment received from the immediate annuity may not be subject to income tax because it is considered a return of premium. Immediate annuity payments are fixed and don’t fluctuate during the payout period, regardless of changing interest rates. Moreover, the deferred annuity part of the concept offers a fixed interest rate on that portion of the money allocated to it. Most deferred annuities also allow for a portion of the account value to be withdrawn without penalty, so if you need more money in addition to the immediate annuity payments, you can withdraw it from the deferred annuity.

For retirement plan income –Say your only retirement income is Social Security. You have savings but you’re concerned that if you take out too much, you may run out too soon. The split annuity can provide a steady source of income without exhausting your principal. It’s also flexible enough that if you need more income, you can take some from the fixed-interest deferred annuity (subject to early withdrawal penalties). At the end of the fixed income period, you can reevaluate your finances and determine whether you need more, less, or the same income, and adjust accordingly.

Bridge the gap between retirement and Social Security –You have some savings in the bank and you want to retire, but you don’t want to (or are too young to) apply for Social Security retirement benefits. The income payments from the immediate annuity part of the split annuity concept may provide the income you want between retirement and Social Security. The fixed-interest deferred annuity preserves your principal by earning interest on the money you apportion to it. When you’re ready to begin receiving Social Security retirement benefits, the fixed interest deferred annuity will have earned enough interest to equal your original principal investment.

The split annuity can help

With company pensions vanishing and the cost of living rising, you likely will have to rely on your own savings to provide the majority of your retirement income. The split annuity concept can be a useful part of your retirement income plan by supplying fixed income while preserving funds for later use.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

The first-time homebuyer tax credit was originally established by the Housing and Economic Recovery Act of 2008. The credit was subsequently extended and modified by the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership, and Business Assistance Act of 2009.

Home purchases made April 9, 2008 through December 31, 2008

A temporary refundable credit equal to 10-percent of the purchase price of a principal residence, up to $7,500 ($3,750 if married filing separately) was available to first-time homebuyers who purchased a home on or after April 9, 2008, and before January 1, 2009. Generally, to qualify as a first-time homebuyer, you (and your spouse if you were married), could not have owned any other principal residence during the three-year period ending on the date of purchase.

The credit was phased out for individuals with higher incomes. Specifically, the credit was reduced for individuals with modified adjusted gross income (MAGI) exceeding $75,000, and was eliminated for individuals with MAGI equal to or exceeding $95,000. For married individuals filing a joint federal income tax return, the credit was reduced if MAGI exceeded $150,000, and was eliminated for those with a MAGI of $170,000 or more.

The credit at this time was effectively an interest-free loan. Individuals who claimed the credit for purchases made during this period of time are required to pay back the credit over fifteen years in equal installments. The fifteen year repayment period begins two years after the credit was claimed. So, if an individual claimed a $7,500 credit on his or her 2008 federal income tax return, he or she would start paying $500 a year back, beginning with his or her 2010 return.

Caution:  If an individual claimed the credit for a home purchase made during this period of time, and sells the home during the fifteen year repayment period, or the home ceases to be the principal residence of the individual during the fifteen-year repayment period, repayment of the credit is accelerated. Repayment is generally not accelerated if the home remains the principal residence of the individual’s spouse.

Tip:  If the principal residence is sold during the fifteen-year repayment period, then the remaining credit amount would be due from the gain on the home sale. If there is insufficient gain, then the remaining credit payback is forgiven. Also, if an individual dies during the repayment period, the balance is forgiven.

Caution:  Although the repayment amount is limited to the gain realized upon the sale of the home, if the home is sold during the payback period, that gain is determined by reducing the basis in the home by the amount of the remaining unpaid credit.

Caution:  The tax credit could not be combined with the mortgage revenue bond (MRB) homebuyer program or the DC first-time homebuyer credit.

Tip:  The credit could also be applied against the alternative minimum tax (AMT).

Home purchases made on or after January 1, 2009 and before November 7, 2009

A temporary refundable credit equal to 10-percent of the purchase price of a principal residence, up to $8,000 ($4,000 if married filing separately) was available to first-time homebuyers who purchased a home on or after January 1, 2009, and before November 7, 2009. Generally, to qualify you (and your spouse if you were married), could not have owned any other principal residence during the three-year period ending on the date of purchase.

The income phaseout ranges for the credit remain the same as the amounts that applied to qualifying 2008 purchases: Specifically, the credit is reduced for individuals with modified adjusted gross income (MAGI) exceeding $75,000, and is eliminated for individuals with MAGI equal to or exceeding $95,000. For married individuals filing a joint federal income tax return, the credit is reduced if MAGI exceeds $150,000, and is eliminated for those with a MAGI of $170,000 or more.

While any credit claimed as a result of a qualifying purchase in 2008 had to be paid back over a fifteen year period, there is no such requirement for qualifying purchases made on or after January 1, 2009. However, if the home ceases to be an individual’s principal residence within thirty-six months of the purchase, the individual must pay the credit back. If married at the time of purchase, the home must remain the principal residence of either spouse for the thirty-six month period to avoid repayment. If repayment is required, it is reported and paid on the federal income tax return for the year in which the home ceased being a principal residence.

Tip:  The credit can be applied against the alternative minimum tax (AMT).

Caution:  No District of Columbia first-time homebuyer credit is allowed with respect to the purchase of a residence after December 31, 2008, if the first-time homebuyer tax credit described here is allowable to such individual (or the individual’s spouse) with respect to such purchase.

Home purchases on or after November 7, 2009 and before October 1, 2010

A refundable credit equal to 10-percent of the purchase price of a principal residence, up to $8,000 ($4,000 if married filing separately) is available to first-time homebuyers who purchased a home on or after November 7, 2009 and before May 1, 2010. Homes purchased on or after May 1, 2010 and before October 1, 2010 can qualify for the credit if a binding written contract to complete the purchase was entered into prior to May 1, 2010. Generally, to qualify you (and your spouse if you were married), could not have owned any other principal residence during the three-year period ending on the date of purchase.

A refundable credit equal to 10-percent of the purchase price of a principal residence, up to $6,500 ($3,250 if married filing separately) is available to individuals who have maintained the same principal residence for at least five consecutive years in the eight year period ending at the time the new home is purchased during the time period described above.

For purchases during this time period, the credit is phased out for individuals with modified adjusted gross income (MAGI) exceeding $125,000, and is eliminated for individuals with MAGI equal to or exceeding $145,000. For married individuals filing a joint federal income tax return, the credit is reduced if MAGI exceeds $225,000, and is eliminated for those with a MAGI of $245,000 or more. The credit is not available for any home with a purchase price exceeding $800,000.

Additionally:

• The credit is not allowed unless the individual claiming the credit is eighteen years of age as of the date of purchase. An individual who is married is treated as meeting the age requirement if the individual or the individual’s spouse meets the age requirement.
• The credit is not allowed if the principal residence is acquired from a person who is closely related to the individual or the spouse of the individual.
• No credit is allowed if the individual is a dependent of another taxpayer.
• No credit is allowed unless the individual attaches to the relevant tax return a properly executed copy of the settlement statement used to complete the purchase.
• The credit is not available to nonresident aliens

Caution:  If the home ceases to be an individual’s principal residence within thirty-six months of the purchase, the individual must pay the credit back. If married at the time of purchase, the home must remain the principal residence of either spouse for the thirty-six month period to avoid repayment. If repayment is required, it is reported and paid on the federal income tax return for the year in which the home ceased being a principal residence.

Caution:  No District of Columbia first-time homebuyer credit is allowed to any taxpayer with respect to the purchase of a residence after December 31, 2008, if the first-time homebuyer tax credit described here is allowable to such taxpayer (or the taxpayer’s spouse) with respect to such purchase.

Tip:  The credit can be applied against the alternative minimum tax (AMT).

Special rules apply to members of the uniformed services

Special rules apply to an individual who receives government orders (or whose spouse receives such orders) for qualified official extended duty service. If such an individual disposes of a principal residence after December 31, 2008 (or no longer uses the home as a principal residence) in connection with the government orders, no recapture of the first-time homebuyer credit applies by reason of the disposition of the residence. Any 15-year recapture with respect to a home acquired before January 1, 2009, ceases to apply in the taxable year the disposition occurs.

In addition, the qualifying time period for the first-time homebuyer credit is extended for one year. Specifically, In the case of any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period January 1, 2009 through April 30, 2010, the qualifying time period for the first-time homebuyer credit is extended for one year, through April 30, 2011 (through June 30, 2011, in the case of an individual who enters into a written binding contract before May 1, 2011, to close on the purchase of a principal residence before July 1, 2011).

Tip:  Qualified official extended duty service means service on official extended duty as a member of the uniformed services, a member of the Foreign Service of the United States, or an employee of the intelligence community.

Tip:  Qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer’s principal residence or under orders compelling residence in government furnished quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

Tip:  The uniformed services include: (1) the Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard); (2) the commissioned corps of the National Oceanic and Atmospheric Administration; and (3) the commissioned corps of the Public Health Service. The term “member of the Foreign Service of the United States” includes: (1) chiefs of mission; (2) ambassadors at large; (3) members of the Senior Foreign Service; (4) Foreign Service officers; and (5) Foreign Service personnel.

Tip:  The term “employee of the intelligence community” means an employee of the Office of the Director of National Intelligence, the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, or the National Reconnaissance Office. The term also includes employment with: (1) any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs; (2) any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of the Treasury, the Department of Energy, and the Coast Guard; (3) the Bureau of Intelligence and Research of the Department of State; and (4) the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information.

Electing to treat purchase as if made in prior year

If an individual purchases a principal residence in 2009 and qualifies for the first-time homebuyer credit, he or she can elect to treat the purchase as if it occurred on December 31, 2008, claiming the credit on his or her 2008 federal income tax return (amending the return to claim the credit if necessary). Similarly, individuals who purchase a principal residence in 2010 can elect to treat the purchase as occurring on December 31, 2009 for purposes of the first-time homebuyer credit.

Tip:  For individuals who purchase a principal residence in 2010 but elect to treat the purchase as if it occurred on December 31, 2009, 2009 modified adjusted gross income (MAGI) is used to determine whether the credit is reduced or eliminated.

Allocating the credit between individuals who aren’t married

The first-time homebuyer credit can be allocated when two or more unmarried individuals purchase a principal residence. IRS Notice 2009-12 explains that when two or more individuals purchase a qualifying principal residence and otherwise satisfy all requirements, the first-time homebuyer tax credit can be allocated among the individuals using any reasonable method, provided the method does not allocate any portion of the credit to an individual who is not eligible to claim that portion. Reasonable methods include allocating the credit based on individuals’ contributions toward the purchase price, and allocating the credit based on individuals’ ownership interests.

Caution:  The total first-time homebuyer tax credit allowed for all individuals cannot exceed $8,000 ($6,500 if qualification for the credit is based on prior ownership of a principal residence for a period of at least five years).

Summary of general rules (table)

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

If you itemize deductions, you can generally deduct “qualified residence interest” you pay on certain home mortgages taken in connection with your primary residence and a second residence. (You cannot deduct mortgage interest with respect to a third residence.) This deduction generally applies only to interest on mortgages to buy, build, or improve your primary or secondary residence or to home equity loans used for any purpose.

The extent to which you may deduct the interest on your home loan depends on several factors, including the manner in which the loan proceeds are used, the amount of the loan(s), the type of loan, and whether your loan was taken prior to October 14, 1987.

Tip:  For 2007 through 2011 only, premiums paid or accrued for qualified mortgage insurance is treated as deductible mortgage interest. Qualified mortgage insurance means mortgage insurance provided by the VA, FHA, and Rural Housing Authority as well as private mortgage insurance (PMI). The amount of the deduction is phased out if your AGI exceeds $100,000 ($50,000 if married filing separately). This provision does not apply with respect to any mortgage contract issued before January 1, 2007 or after December 31, 2011.

What is qualified residence interest?

Qualified residence interest consists of any interest you pay in a given tax year for acquisition indebtedness or home equity indebtedness on your “qualified residence.”

A qualified residence is your principal residence and/or a second residence that meets certain requirements. A second residence you rent to others during the year can be considered a qualified residence for tax purposes only if you (or close relatives) use it for personal purposes for the greater of 14 days during the year or 10 percent of the number of days it is rented during the year.

Definition of home acquisition indebtedness

Acquisition indebtedness is a loan that meets certain dollar limitations and is incurred in buying, building, or substantially improving your qualified residence. In addition, the loan must be secured by a mortgage on that residence.

Example(s): Assume John buys his first home for $250,000, taking out a mortgage of $200,000. The $200,000 mortgage is considered acquisition indebtedness.

Tip:  An improvement must add value to your home (and be added to your home’s basis for tax purposes). Proceeds used to pay for repairs do not qualify.
Amount of home acquisition debt

Home acquisition debt on your primary residence and a second residence totaling up to $1 million ($500,000 if you’re married and file separately) qualifies for interest deductibility. However, these dollar amounts are reduced by the total amount of any outstanding “pre-October 13, 1987″ indebtedness that you may have.

For IRS purposes, all loans taken on and secured by your primary residence and one second residence prior to October 14, 1987 (no matter how the proceeds are used) are considered “grandfathered” home acquisition debt. All interest paid on such grandfathered debt is deductible, even if the total debt exceeds $1 million (or $500,000 if you’re married and file separately).

Tip:  Because the IRS has complex rules for tracing the use of borrowed funds, you should keep detailed records of loans taken to buy, build, or improve a residence so you can (if necessary) prove that the proceeds qualify as a home acquisition loan.

Definition of home equity indebtedness

Home equity indebtedness refers to debt secured by your main or second home that exceeds the acquisition indebtedness. Home equity debt is limited to the lesser of:

1. The fair market value (FMV) of the home minus total acquisition indebtedness on that home, or
2. $100,000 ($50,000 if married filing separately) for main and second homes combined

Interest on home equity loans that meet these limits and qualifications is deductible no matter what the loan proceeds are used for, except when the proceeds are used to purchase tax-exempt vehicles (investments or properties), such as tax-exempt bonds.

Example(s): Suppose you bought a home in 1980 for $180,000, taking out a mortgage of $130,000 to buy the home. The $130,000 is considered home acquisition debt. A few years later, when the fair market value of the home has increased to $195,000 and the principal balance on the original $130,000 acquisition loan has been paid down to $110,000, you take out a home equity loan of $90,000. You may deduct interest paid on $85,000 of the $90,000 home equity loan. Why? Interest cannot be deducted on the home equity debt that exceeds the difference between the fair market value of the residence ($195,000) and the principal owed on the acquisition debt on the residence ($110,000) at the time the home equity loan is taken.

Caution:  Refinancing of an acquisition debt is considered acquisition debt to the extent it does not exceed the principal outstanding on the loan immediately before the refinancing.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Cash alternatives, often used to fund a cash reserve, can be a useful financial tool for investors because they provide a low-risk place to hold money until it is needed for a future purpose.

Convenience is the principal benefit of cash alternatives. They typically pay a relatively low rate of interest, so their primary risk is opportunity cost. There are several strategies to help you get the most out of your cash alternative investments. For example, you can:

• Diversify the investment vehicles you use and ladder maturity dates. This can help you maximize liquidity, create a more steady flow of income, or defer recognition of taxable income from one year to the next.
• Evaluate both taxable and tax-exempt investments in light of your tax bracket and other income to maximize your after-tax returns
• If you have specific goals, consider concentrating your money in an appropriate cash alternative vehicle. For example, Series EE bonds may be a good vehicle for funds earmarked for a child’s college education.

There are various types of cash alternatives. When selecting your investment vehicles, you should balance liquidity needs with potential returns. If you already have a comfortable level of cash reserves, it might be wiser to place part of your money in cash alternatives that offer higher interest rates, even if they impose penalties for early withdrawals. On the other hand, if your cash reserves are relatively small, there may be a greater likelihood that you’ll need to make an early withdrawal, and you might be better off accepting a lower rate to avoid penalties.

Strategies for tax planning

Here are some factors to consider when doing tax planning for cash and cash alternatives, and deciding how much emphasis to give taxable versus tax-exempt instruments:

• Evaluate the effect your proposed investment might have on your other tax items. For example, taxable interest income increases your adjusted gross income (AGI), which can reduce allowable itemized deductions if you are in a high income tax bracket and subject to the itemized deduction phaseout.
• If you receive Social Security benefits, be aware that tax-exempt interest is included in the income calculation that is used to determine the taxable amount of such benefits. Thus, tax-exempt interest can increase your tax liability.
• If you do not generate sufficient taxable income, you may lose the benefit of your itemized or standard deductions and personal exemptions. You may want to generate enough taxable income to benefit from these deductions (assuming the rate you earn on your taxable investments exceeds that of your tax-exempt investments).

Strategies for maximizing liquidity and deferring income

Laddering is a method of investing or depositing money so as to avoid having large sums come in all at once–with little or nothing in between–by investing in more than one vehicle and staggering maturity dates.

For example, you might invest in certificates of deposit (CDs) with various maturity dates so they will come due at different times. Alternatively, consider combining your CD investments with other cash alternatives in order to obtain higher interest rates. Or, you could use a multi-tiered investment approach by combining a number of different cash alternative vehicles with a personal line of credit.

One of the greatest benefits of laddering cash alternative investments is that it minimizes interest-rate risk. Interest rates rise and fall in response to many factors, which makes them very difficult to predict. Shorter-term investments, such as money market funds and short-term CDs, are among the most sensitive to the ups and downs of interest rates. If you combine longer and shorter maturities, you don’t have to guess which way rates are headed next. Your risks are spread out. Laddering can also be used to help reduce the likelihood that you will have to face early withdrawal penalties if you need to draw money out to meet unexpected needs.

When choosing among specific cash alternative investments, it’s important to weigh the benefits and tradeoffs of each vehicle. There are several major factors to consider:

1. The financial strength of the issuer
2. The maturity date of the instrument
3. Any early withdrawal penalties
4. The yield to maturity
5. The liquidity relative to other cash alternatives (some types have no guaranteed liquidity)

Although the companies that issue commercial paper are of the highest quality, an unforeseen development could weaken the issuer financially, potentially reducing your prospects of being repaid when the instrument matures. Ratings provided by independent ratings services provide a helpful, independent assessment of the credit quality of the issuer. However, ratings are not continually updated and time can change a company’s outlook quickly.

The maturity date tells you how long you must wait before your principal will be repaid. Longer maturity periods typically involve higher risk and higher potential returns. An early withdrawal penalty is the amount you forfeit if you need to withdraw your money before the maturity date.

Finally, the yield to maturity is the amount of interest (and possible gain in principal amount) you receive if you hold the instrument until it matures.

Strategies that help you work towards specific goals

If you have a specific investment goal in mind, such as saving for your child’s college education, it may be wise to concentrate in one form of cash alternative, such as Series EE government savings bonds.

Also, bear in mind that changing allocations as your goals or time horizons change often involves becoming more conservative. For example, cash alternatives may be a good choice as you near the specific event for which you are saving. As a rule, your ability to accept risk decreases as your time horizon gets shorter. Say your child will be starting college in two years. If you started saving 15 years ago and have been investing in long-term vehicles, now may be a good time to shift those funds to more conservative, more liquid investments.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

If you participate in a traditional pension plan at work (technically known as a qualified defined benefit plan), you’ll generally be entitled to receive monthly benefits from the plan after you retire. These benefits are usually based on your age at retirement, as well as your years of service and your average earnings with the company. The normal form of benefit is typically a single life annuity. That is, an annuity that makes monthly payments to you while you’re alive, and stops upon your death.

If you’re not married at retirement, federal law requires that your benefit be paid as a single life annuity, unless you elect a different payment option. If you are married when you retire, federal law requires that your benefit be paid as a qualified joint and survivor annuity (QJSA), unless you elect another payment option. The QJSA is an annuity that pays monthly benefits to you while you’re alive, and continues to pay at least 50 percent of your benefit to your spouse upon your death.

Depending on your plan’s provisions, you may have other payout options to choose from as well. Any optional form of benefit offered by your plan must be at least as valuable (actuarially speaking) as the single life annuity. You’ll want to select a payment option that will provide you with sufficient retirement income. In addition, if you’re married, you’ll want to be sure that your spouse will have sufficient income in the event that he or she outlives you.

Caution:  If the present value of your pension benefit is $5,000 or less at your retirement date, the plan can pay your benefit in a lump sum without your (or your spouse’s) consent. If you fail to choose whether to receive the distribution in cash or to roll it over to an IRA, and the present value of your benefit exceeds $1,000, your plan is required to automatically roll the money over to an IRA established on your behalf.

Qualified joint and survivor annuity

The payments you’ll receive under a qualified joint and survivor annuity (QJSA) are generally smaller than you would receive with a single life annuity because they continue until both you and your spouse have died. The single-life annuity provides a larger monthly payment because it’s paid over a shorter period of time–one lifetime instead of two. Payments stop once you, the plan participant, die.

The QJSA is typically “actuarially equivalent” to the single life annuity. That is, the present value of the smaller QJSA benefit (payable for a longer period of time) is equal to the present value of the larger single life annuity benefit (payable for a shorter period of time), based on your life expectancy and that of your spouse.

However, some employers “subsidize” the QJSA. Subsidizing the QJSA occurs when your employer’s plan does not reduce the benefit payable during your joint lives (or reduces it less than actuarially allowed), despite the longer payout period, making the actuarial value of the QJSA greater than that of the single life annuity option. It’s important for you to know whether your employer subsidizes the QJSA, so that you can make an informed decision about which payment option to select.

Example(s): Mary is a participant in her employer’s defined benefit plan, and is married. Mary’s pension benefit, payable as a single life annuity, is $3,000 per month beginning at age 65. Mary’s benefit payable as a QJSA is $2700 per month, with 50 percent of her benefit (which is $1,350) continuing to her husband after her death. Mary’s benefit is not subsidized, because the benefit payable during her lifetime is actuarially reduced so that the present values of the QJSA and the single life annuity are equal.

John is a participant in his employer’s defined benefit plan, and is married. His pension benefit payable as a single life annuity is $3,000 per month beginning at age 65. His benefit payable as a QJSA is $3,000 per month, with 50 percent of his benefit (which is $1,500) continuing to his wife after his death. John’s QJSA is subsidized. The benefit payable during John’s lifetime is not reduced, even though benefits will be paid over both John’s and his spouse’s lifetimes. The present value of the QJSA is greater than the present value of the single life annuity.

Federal law requires that the survivor annuity portion of a QJSA be at least 50 percent of the amount you receive during your joint lives. However, depending on the terms of your employer’s plan, you may be able to elect a spousal survivor benefit of up to 100 percent of the amount you receive during your joint lives. Generally, the greater the survivor benefit you elect, the smaller the amount you will receive during your lifetime (unless your employer subsidizes the survivor annuity).

Tip:  For plan years beginning after December 31, 2007, the Pension Protection Act of 2006 provides that if the survivor annuity provided by a plan’s QJSA is less than 75 percent, a participant must be allowed instead to elect a 75 percent survivor annuity. If the survivor annuity provided by the plan’s QJSA is greater than or equal to 75 percent, the participant must be allowed to elect a 50 percent survivor annuity. This qualified optional survivor annuity must be actuarially equivalent to a single annuity for the life of the participant. (Generally, a later effective date applies to collectively bargained plans.)

You and your spouse should receive an explanation of the QJSA (including your right to waive the QJSA benefit), and a discussion of the relative values of the payment options available to you. Be sure you discuss your options with your spouse before making an election.

Tip:  The QJSA must be at least as valuable as any optional form of benefit available to you.

Caution:  Your plan can require that you be married for one year before you’re eligible to receive your pension benefit in the form of a QJSA.

Caution:  Special rules apply to plan participants who have been divorced. In some cases, your previous spouse may be entitled to the QJSA if required by a court’s qualified domestic relations order (QDRO). Make sure to discuss your particular situation with a qualified professional.

Waiving the QJSA in favor of a single life annuity
In general

You may waive the QJSA with your spouse’s written consent during the waiver period. The waiver period is generally the 180-day period prior to your annuity starting date. Assuming the QJSA is available to you, and your spouse agrees to a waiver, the two of you may have a difficult decision to make. If you opt for the QJSA, you have the security of knowing that your spouse will receive a guaranteed monthly income after you die. Also, choosing a QJSA often entitles both spouses to continued health coverage and other benefits that might otherwise be lost. On the other hand, waiving the QJSA in favor of a single life annuity or other payout will often increase the monthly benefit you’ll receive during your joint lifetimes. However, your spouse will lose the benefit of guaranteed survivor benefits over his or her lifetime after you die.

Caution:  Be sure to seek qualified professional advice, since choosing a pension payout option can be complex, and the decision will impact your financial future and that of your spouse. The decision to waive the QJSA can be one of the most important retirement decisions you will make.

With a QJSA, payments continue as long as either you or your spouse is alive. By contrast, with a single life annuity, payments last for your lifetime and cease upon your death. For example, if you received one payment after retirement and then died, the single life annuity would provide no further pension payments. Your spouse would receive nothing. As noted above, the QJSA will normally be the most valuable form of benefit available to you, and is sometimes subsidized, so consider your options carefully.

Why would you waive the QJSA and instead opt for a single life annuity knowing that payments will stop at your death? One reason is that, as discussed earlier, the single life annuity generally pays a larger monthly benefit than the joint and survivor annuity. That’s because the payments are designed to last for a smaller number of years (i.e., one life expectancy instead of two). But that’s not the only consideration. Some other factors to consider include:

• Health and life expectancy of your spouse: If your spouse is in poor health or has a short life expectancy, selecting the single life annuity may make more sense than selecting the QJSA. As the plan participant and the surviving spouse, you would have the benefit of the higher monthly payout from the single life annuity for the rest of your life.
• Other sources of retirement income: If you (or your spouse) have other assets that can provide sufficient income for your spouse after your death, it may make sense to waive the QJSA and choose the larger single life annuity benefit.
• Age difference between you and your spouse: If there is a large difference between your age and your spouse’s age (with you being much older), opting for the single life annuity may make more sense. If your spouse is considerably younger than you, his or her longer life expectancy will be factored into the calculation of the QJSA benefit, resulting in smaller monthly payments. This could leave you and/or your spouse without sufficient retirement income. But again, caution is necessary–if you select a single life annuity and you die soon after retiring, your spouse may have to survive financially without the benefit of your pension for a long period of time.
• Your gender: If you (the plan participant) are female, then selecting the single life annuity may make more sense than selecting the QJSA. The reason: All other factors being equal, women are statistically more likely to outlive men of the same age. You will benefit from the higher monthly payout under the single life annuity while you are alive. By contrast, if you select the QJSA and your spouse dies first, you may be stuck with a smaller payout for the rest of your life.
• Other plan features: Be sure you understand all of the options and features available to you under your employer’s plan. For example, some pension plans have a cost-of-living adjustment (COLA) feature that allows the monthly benefits to be periodically increased to keep pace with the rate of inflation. This could be a valuable benefit for your spouse following your death. And, some pension plans offer their participants a “pop-up” provision specifying that if they initially select a QJSA payout and the spouse dies first, they can then retroactively select a single life annuity payout. This gives you flexibility to adapt if things do not go as planned. If your pension plan offers this option, it may be better to initially select the QJSA.

Waiving an annuity in favor of a lump-sum payment
In general

Some traditional defined benefit plans allow you to take a lump-sum payment in lieu of an annuity (again, you’ll need your spouse’s consent if you’re married). Whether to take the lump sum instead of an annuity can be a difficult decision. If you take a lump sum, you’ll be giving up guaranteed income for your life (and your spouse’s life if you’re married). You’ll also assume the risk (and the potential reward) of investing the assets yourself. You’ll need to make an educated guess as to whether the lump sum will ultimately be more valuable to you than the annuity benefit–but this will depend on your actual investment experience, how long you (and your spouse) live, inflation, and other factors that are currently unknown. When making your comparison, you’ll also need to consider whether your annuity benefit would have been eligible for inflation (COLA) adjustments, or early retirement or other employer subsidies.

Caution:  The guaranteed income is subject to the claims-paying ability of the annuity issuer.

Tip:  To get a quick idea of the value of a lump-sum payment versus the plan’s annuity benefit, consider how much of an annuity benefit you can purchase outside the plan with that lump-sum payment.

A lump sum might be an attractive alternative if you’re in poor health. If you roll the funds over to an IRA, your beneficiary will receive any balance left at your death. Your beneficiary can then take withdrawals, or convert all or part of the balance to an annuity. You may also find the lump sum attractive if you have other resources available and don’t immediately need the income when you retire.

Caution:  While you can use all or part of your lump sum to purchase an annuity, the expenses involved may cause you to wind up with a smaller annuity benefit than you could have received from your pension plan (you’ll be paying the expense of purchasing the annuity instead of the pension plan).
Advantages of selecting a lump-sum payout

The advantages of selecting a lump sum include:

• You’ll have complete control over when and how you use your pension benefits, and how those dollars are invested until you need them. Annuity benefits, like other fixed income payments, can be eroded by inflation. With a lump sum, you’ll be managing your investments yourself, and you may be able to rebalance your portfolio to counter inflationary trends.
• Your lump sum can generally be rolled over into an IRA where it can continue to enjoy the benefit of tax-deferred earnings. (If you’re over 70½, you can’t roll over any part of your lump sum that constitutes a required minimum distribution. Your plan administrator will calculate this amount for you.)
• A lump sum allows you to potentially leave funds to your heirs or to a charity. A lump sum may be particularly attractive to single employees for this reason–with the single life annuity, payments would stop after the employee’s death.
• Some pension plans satisfy their benefit obligation by purchasing an annuity for you from an insurance company. Others will not purchase an annuity, but will pay your pension benefit directly out of plan assets instead. Plan assets are held separately from your employer’s general assets. But in the event of bankruptcy, there may not be enough assets to pay all promised benefits. If your plan pays pension benefits out of plan assets, and you’re concerned about your employer’s financial condition, the lump sum may be a better choice. (Tip: Your benefit may be fully protected by the Pension Benefit Guarantee Corporation (PBGC), which insures defined benefit pension plans.)
• You can use all or part of your lump sum to purchase an annuity. However, because you’ll be paying the expense of purchasing the annuity instead of the pension plan, you may wind up with a smaller annuity benefit than you could have received from your pension plan.

Disadvantages of selecting a lump-sum payout

Disadvantages of selecting a lump sum include:

• You may be tempted to use the funds without incorporating your withdrawals into a comprehensive retirement income strategy. If you use your retirement nest egg too soon, you could find yourself without sufficient funds to last through your, and your spouse’s, retirement.
• You’ll be responsible for investing your lump-sum dollars until you need them. Investment losses, especially in your early years of retirement, could also cause you to experience a retirement income shortfall.
• You may underestimate life expectancies for you or your spouse, causing you to run out of funds too early.
• If you don’t roll over your lump sum, the entire amount will generally be subject to income tax (at ordinary income tax rates) when received, and a 10 percent premature distribution penalty may also apply if you retire before age 55 (age 50 for public safety employees participating in governmental defined benefit plans), unless an exception applies. And, you’ll lose the benefit of tax-deferred earnings.
• By opting for the lump sum, you’ll generally forego the value of any early retirement or QJSA subsidies.
• Some employers tie eligibility for retiree health coverage to the pension payment–if you choose a lump sum, you could lose your retiree health coverage.

Maximizing your pension with life insurance

As discussed earlier, under most pension plans (and depending on various factors such as the age of the two spouses), a single life annuity will pay out substantially more per month than a QJSA. Most people would like to have that extra income during their retirement years. However, most people are also concerned about providing for their spouses if they should die first. One technique for solving this dilemma is to choose the single life annuity, and then purchase insurance on your life with your spouse named as beneficiary. By selecting a single life annuity along with the purchase of a life insurance policy on the participant’s life, some couples can increase their income during retirement while also providing for the surviving spouse’s financial future. You should consider whether this strategy, commonly called pension maximization using life insurance, is appropriate for you.

Other payment options

Depending on the distribution options your plan offers, you may be able to waive the single life annuity or QJSA (with your spouse’s consent), and receive payments from the plan in some other form instead. You may also be able to choose a joint annuitant other than your spouse. In general, the same considerations described above in “Waiving the QJSA” apply when determining whether to waive the QJSA in favor of an optional form of benefit. The following are some of the more common optional forms of benefit available in defined benefit pension plans.

• Period certain: This option is generally a single life annuity combined with a guarantee period. If you die before a specified period of time (usually 5, 10, or 15 years) payments will continue to your beneficiary until the end of the guarantee period. The benefit payable during your lifetime is smaller than with the regular single life annuity because of the period certain benefit.
• Level income option: If you retire before you’re eligible for Social Security benefits (age 62 for early benefits, age 65 or later for full benefits), you’ll have a gap in your retirement income until your Social Security benefits begin. The level income option lets you receive a larger benefit from your pension plan before you start collecting Social Security, and a smaller pension benefit afterwards. In this way, your combined pension and Social Security benefits remains relatively stable during your retirement years. You can generally elect this option whether you receive your benefit as a single life annuity or a QJSA.
• Lump sum: See “Waiving an annuity in favor of a lump sum,” above.

Qualified pre-retirement survivor annuity

If you die before you begin receiving distributions from your defined benefit plan, your surviving spouse may be entitled to what is known as a qualified pre-retirement survivor annuity (QPSA). The QPSA is an immediate annuity, payable for your surviving spouse’s life, that is at least equal in value to the QJSA benefit your spouse would have received if you had retired upon reaching the plan’s earliest retirement age (or, if later, on your date of death).

You may waive the right to a QPSA, and have your death benefits paid in some other form or to a beneficiary other than your spouse instead, but only if the plan permits such an election and your spouse consents to the waiver in a timely-filed and witnessed writing. If a QPSA waiver is allowed, you and your spouse should receive an explanation of the QPSA, and a description of the financial effect, if any, that selecting or waiving the QPSA will have on your normal retirement benefit. Because waiving the QPSA will generally mean that your surviving spouse will not receive a survivor annuity if you die before you retire, be sure to fully discuss the decision with your spouse and your financial professional.

Caution:  If you’ve been divorced, a court’s qualified domestic relations order (QDRO) can require that your QPSA be paid to your prior spouse. Be sure to discuss your individual situation with a qualified professional.

Taxation of annuity payments

In general, retirement plan distributions are subject to ordinary federal (and possibly state) income tax. The one exception is if you have ever made any after-tax contributions to the plan. Because those dollars have been taxed already, they will not be taxed again when they are paid out to you. While uncommon, if you’ve made after-tax contributions to your defined benefit plan, a portion of each annuity payment made to you will not be subject to income tax.

Tip:  States generally can not tax your pension benefit if you’re not a resident of the state at the time you receive your payment. This is true even if you earned the pension in that state but have since moved.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Improving poor credit can be a long and arduous process. If you have struggled through a period of financial difficulty, or even filed for bankruptcy, your ability to obtain credit may be compromised long after you have gotten back on your feet. Luckily, the realities of a highly competitive market and an ever-changing economy have made most lenders less squeamish about making loans to a consumer with less than exemplary credit. Additionally, there are measures you can take to improve your credit file, such as refusing to get bogged down in shame or regret and getting to work instead.

How do you repair poor credit?

Correct errors

Obtain a copy of your credit report. Check it carefully for errors. Make certain that all the information contained in your credit report is correct. If it is not, make sure to correct the errors. Erroneous information only adds confusion, regardless of whether it is derogatory or not.
Add good credit information to your file

By adding positive account information to your credit report, you can mitigate the impact of derogatory credit. There is no law that requires creditors to report information to a credit bureau. Accordingly, you may have several good credit accounts that do not appear on your credit report. You can contact creditors with whom you have a good credit relationship, tell them a credit bureau will be contacting them, and give them permission to release your account information. Next, contact the credit bureau directly to provide the name and telephone numbers of your creditors. For a small fee (typically less than $5 per account), most credit bureaus will agree to call any creditor you specify and add their account information to your file.

Tip:  The credit bureaus are not required to perform this service. However, the Federal Trade Commission has encouraged them to do so, especially where a report has resulted in an adverse action against a consumer.

Example(s): Joey obtained a copy of his credit report after being denied a car loan. The report contained only derogatory information. Only two creditors had submitted account information, and Joey had been slow in paying both of them. Joey contacted the credit bureau. For a small fee, the credit bureau agreed to contact four other creditors with whom Joey had done business and paid as agreed. This positive account information was added to Joey’s report. Now, instead of having a credit report with nothing but poor credit information, Joey has a credit report with twice as much good information as poor.

In the preceding example, there is no guarantee that Joey will get the car loan, but his credit bureau report looks much better than it did before Joey’s action. Most importantly, his credit report now shows a more balanced and fair picture of his credit history.
Go directly to the creditor to clear your credit record

If your poor credit resulted from circumstances that were beyond your control, and you have reconciled your account since that time, then you may be able to convince your creditor to upgrade your rating out of a sense of customer loyalty. Plead your case to the creditor. If you were hospitalized, laid off, or subjected to other unforeseen losses, tell the creditor about your circumstances. Explain the hardships you have endured and remind the creditor that your account is now current. Out of sympathy or an interest in retaining you as a customer, the creditor may remove the derogatory information from your credit report or at least indicate that you have cleaned up the account.

If you have bad debts, you may be able to negotiate away poor credit by agreeing to pay your debts off over a period of time. Contact the creditor and propose a deal in which you will agree to a reasonable repayment schedule if the creditor agrees to upgrade your status with the credit bureau. If the creditor has charged-off your debt, or is likely to charge-off your debt, it may be willing to listen. Most creditors would rather get paid late than not at all. You may be able to work out a deal where you make periodic partial payments, and the creditor, consequently, makes periodic improvements in the information it provides to your credit bureau.

Caution:  Remember, most creditors are pretty unhappy with customers who have defaulted on their debts. Your creditor may not be interested in talking to you at first. The most difficult part will be getting someone to listen. Be persistent. If you don’t get the answer you want when talking to one customer service representative, politely ask to speak to a supervisor. Keep trying until you get someone’s attention, then get your agreement in writing.
Add a statement to your credit report describing your side of the story

You have a right to include a 100-word statement to your credit report to tell your side of the story. Write your credit bureau a letter and include your identifying information. Ask the bureau to include your 100-word consumer statement in your credit file. Mail your statement with the letter. Make it shorter than 100 words, if possible. The more concise the letter is, the better. State the facts. Perhaps you were hospitalized for a period of time and were unable to pay your bills. Perhaps your employer went bankrupt and you were suddenly left without a job. Perhaps the item you bought on credit was defective, but the merchant refused to replace or repair it. Perhaps the delinquent account has now been paid in full. If your credit history shows that you typically pay your bills, such a statement can explain away an isolated instance or period of derogatory credit.
Wait out your credit problems

With a few exceptions, derogatory credit information will be purged from your credit record within seven years. You can wait this period out, then start over. However, in most cases you shouldn’t have to wait that long to obtain new credit. The key is to avoid incurring any more derogatory credit. Every time you do, the seven-year clock gets reset and starts ticking again.

If you can show income stability and prompt payment patterns going forward, your situation will improve within one to three years. Even if you have filed for bankruptcy, you are likely to be offered charge cards and credit cards within a year or two if you have a steady income. If you can obtain a couple of charge cards, then you are on your way.

What about companies that guarantee they can fix your credit?

If your credit report contains errors, these credit-fixing companies can dispute those errors using the reinvestigation process provided for under the Fair Credit Reporting Act. However, many of these companies use the reinvestigation process to erroneously dispute derogatory credit that is correctly reported. They rely on the fact that most creditors don’t have the time or manpower to respond to every credit bureau reinvestigation request received. As the law now stands, if a creditor does not respond to a reinvestigation request, the disputed information must be removed from your credit report. The result is that a consumer can have correctly reported derogatory credit information removed from his or her credit report quite easily.

Typically, half of all disputed items are removed from a credit report every time a dispute is filed. There is no limit to the number of times you can dispute the same item of credit information. If the credit fixer follows up each dispute with another in 30 to 60 days, eventually all of the derogatory credit information in your credit report will be gone. The problem with this system is that it is dishonest. The credit fixer, acting as your agent, lies when he or she disputes derogatory credit information that is correctly reported. The next time you apply for credit, the creditor will be relying on a credit report that you, working through your agent, fraudulently altered through lies and misrepresentations.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.