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A Worksheet to Determine Your Life Insurance Needs

7/2/2020

Life insurance can help provide funds to meet your family’s immediate and ongoing needs in the event of either spouse’s premature death.

But how much life insurance do you actually need?

You can use the handy worksheet below to determine how much life insurance you and your spouse need to help protect your family’s standard of living.

July 2020 PFwise.com Newsletter

7/1/2020

July 2020 PFwise.com Newsletter

For archived newsletters, please visit here.

Hit the Road to Retirement With Confidence

6/30/2020

With the powerful life insurance options that are available today, you can do much more than provide a death benefit to your loved ones.

An index universal life insurance (IUL) policy can help provide tax-free income over time allowing you to withdraw cash value or borrow against the policy for any reason.

Watch the “Road to Retirement” video below to understand how the modern day life insurance can be an important destination on your retirement journey – providing an extra source of cash while you are living.

Use Fidelity's Stock Screen Tools to Search Stocks Amid COVID-19

6/29/2020

The original article is here -

A chart of US stocks—as measured by the S&P 500—shows they have recouped much of their COVID-19 losses, as of June 25, 2020. But a closer look into what's actually driving the stock recovery reveals that the S&P 500's 5 largest companies, which make up more than 20% of the market-cap weighting of the index, according to data from FactSet, have accounted for much of those gains over the past few months. This suggests the breadth of the rebound has not been broad based.

More importantly, a recent surge in new coronavirus cases in several US states, as well as in countries like Brazil and India, underlies fears that the worst of the pandemic may not be over yet.
This is a market unlike any in history. Consequently, active investors may need to rethink how typical tools and strategies are utilized. If you are seeking new stock ideas, one tool that is commonly used is a stock screener. Here are 3 stock screens using Fidelity's Stock Screener that illustrate how you may want to approach screening for stocks, plus top results for each.

Looking for income
One of the most common screening characteristics on Fidelity.com is dividend yield. The top 10 results of a screen of common stocks with a market cap of at least $3.92 billion and a dividend yield of 5.96% or higher (sorted by dividend yield), as of June 25, 2020, were:

Ares Capital ( ARCC )
Oneok ( OKE )
Owl Rock Capital ( ORCC )
CenturyLink ( CTL )
Hess Midstream ( HESM )
Gap ( GPS )
Altria ( MO )
Williams ( WMB )
TFS Financial ( TFSL )
Wells Fargo ( WFC )

Let's dig into these screen results. While there are a few retailers and energy exploration companies that have been significantly impacted by coronavirus, as nearly all business have been to varying degrees, there are no companies in industries that have been hit the hardest—like restaurants, airlines, and hotels.

This is noteworthy for this screen because of how dividend yield is directly affected by stock price. It is calculated as the annual dividend per share divided by the stock price. If a stock price were depressed by coronavirus, that might artificially inflate the dividend yield (because the denominator decreased). While you would always want to explore if and why a stock price is depressed relative to its historical price range, this can be particularly important amid the umbrella of uncertainty introduced by COVID-19.

Even though this screen appears not to generate any stocks that are among the most impacted by coronavirus, you may want to add additional filters to strengthen your search results/align with your objectives. For example, if you want to add the insights of professional analysts, you might consider adding the Equity Summary Score (ESS) from StarMine from Refinitiv. Doing so produces the following list, sorted by highest ESS:

CenturyLink ( CTL )
BCE ( BCE )
Janus Henderson Group ( JHG )
People's United Financial ( PBCT )
Altria ( MO )
Philip Morris ( PM )
PPL ( PPL )
AT&T ( T )
Comerica ( CMA )
Dow ( DOW )

Searching for value
Screening for stocks using value as a primary objective can be more complicated than usual. For instance, value filters might produce a screen of stocks whose price has been beaten down due to the economic exposure of COVID-19, potentially resulting in its value appearing better than during more "normal" times (assuming the underlying earnings impact is not also factored in).

On the other hand, some stock prices may be inflated as investors anticipate benefits from changing COVID-19 dynamics. An example of this type of stock might be a pharma company that is working on vaccines and treatments. This could result in a higher-than-normal stock price that would make it appear like it has lower relative value.

One of the most popular value filters on Fidelity.com is price-to-earnings (P/E). The top 10 results of a screen of common stocks with a market cap of at least $3.92 billion and a P/E ratio of 8.78 or lower, as of June 25, 2020:

NRG Energy ( NRG )
Equitable Holdings ( EQH )
Vornado Realty Trust ( VNO )
MGM Resorts ( MGM )
Aercap Holdings ( AER )
Metlife ( MET )
Jefferies Financial ( JEF )
Synchrony Financial ( SYF )
Delta Air Lines ( DAL )
Ameriprise Financial ( AMP )

Unlike the first income screen above, this screen produces hotels and airlines, among other companies, that have been deeply impacted by the pandemic. Again, you may want to add additional filters, such as ESS. Here is that list, sorted by highest ESS:

Biogen ( BIIB )
Metlife ( MET )
CenturyLink ( CTL )
Seagate Technology ( STX )
Bank of New York Mellon ( BK )
Aercap ( AER )
HP ( HPQ )
People's United Financial ( PBCT )
Hartford Financial ( HIG )
First American ( FAF )

This list is dominated by financial services and technology companies, which are not immune to the adverse impacts of a worsening in the pandemic, among other risk factors. Again, it's important to do additional research to evaluate screen results. You might consider looking at a multiyear price chart to see if these companies were exhibiting trends before the crisis that might help explain why their value appears as it does (e.g., is there a long-term price drop that is causing the stock's P/E to appear relatively attractive).

Tailoring preset independent expert screens
P/E is primarily used to compare a stock with another comparable stock. While that can provide useful information, many professional investors attempt to determine the intrinsic value of a stock. On Fidelity.com, there is an expert screen from third party research firm ISS-EVA that looks for attractively valued stocks in relation to their intrinsic value within their sector. This screen is based on the widely known "value at a reasonable price" methodology. It looks at a firm's ability to earn and increase economic profit, which measures profit after deducting the cost of all capital. The screen adjusts for risk and excludes stocks trading under $5 a share, as well as those with minimal trading volume.

As of June 25, 2020, the top 10 results of this screen, sorted by the highest ISS-EVA score of common stocks with a market cap of at least $3.92 billion, were:

Agco (AGCO)
Amdocs (DOX)
Flowers Foods (FLO)
Icon (ICLR)
MDU Resources (MDU)
Magna International (MGA)
Northern Trust (NTRS)
Oshkosh (OSK)
Booking Holdings (BKNG)
Reliance Steel & Aluminum (RS)

Of course, even if you have determined the intrinsic value of a stock, that may not account for how the investment might perform while the coronavirus pandemic persists. Several stocks from this screen have significant exposure to the pandemic's impact on the economy, including a restaurant/travel reservation site. Even though this is an expert screen, you still might want to include additional screening filters. Adding in ESS may provide a qualitative aspect that the intrinsic value criteria isn't capturing. Here is that list, sorted by highest ESS:

Qualys ( QLYS )
Amdocs ( DOX)
Schneider National ( SNDR )
J.M. Smucker ( SJM )
Tech Data ( TECD )
Northern Trust ( NTRS )
Flowers Foods ( FLO )
Icon ( ICLR )
Allison Transmission ( ALSN )
MDU Resources ( MDU )

Dig deeper
With any stock screen strategy, more research is needed to determine if any of these investments are right for you. You should fully understand the risks involved, and each investing opportunity should be considered within the context of a well-diversified investment strategy that conforms to your specific time horizon, objectives, and risk parameters. Given the rising risk of a resurgence in coronavirus infections around the world as global economies attempt to open back up, you may need to adjust how you normally use screeners and other strategies.

Can I Still Have an IRA If I Don't Qualify for Tax-deductible Contribution?

6/28/2020

Q. I don't qualify for tax-deductible contributions, can I still have an IRA?

A. If you're covered by a retirement savings plan at work - like a 401(k) or 403(b) - and your modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.

But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA.

If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

How Can I Estimate My Tax Liability on an IRA Conversion?

6/27/2020

To figure out how much of a conversion from a traditional IRA to a Roth IRA may be taxable, you'll need to know the types of contributions you made to any one of your traditional IRAs (not just the one that's being converted). There are 2 types of contributions.

Deductible contributions. These are contributions that are deducted from your taxable income for the tax year in which the contributions were made.
Nondeductible contributions. Any contribution for which you do not take a tax deduction is known as a nondeductible contribution. Such contributions create what is sometimes called "basis" in your traditional IRA.

Your tax liability is based on 2 things:

the taxable income generated by the conversion, and
your applicable tax rate.

Estimating the taxable income from a conversion is straightforward if you've never made nondeductible contributions to any traditional IRA. If that is the case, whatever amount you convert will all be taxable income.

Note that earnings are always taxable when converted, whether they come from deductible or nondeductible contributions, so for purposes of figuring out taxes on a conversion, you can think of your balances as falling into just 2 categories:

nondeductible contributions, and
everything else

According to IRS rules, you cannot cherry-pick and convert just nondeductible contributions, leaving deductible contributions and earnings in the account, in order to avoid taxes. Instead, you must figure out the proportion of your total traditional IRA balances that is composed of nondeductible contributions, then use that percentage to find out how much of your conversion will not be taxable. Note that inherited IRAs are excluded in this calculation.

Keep state taxes in mind too. A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will generally be treated as taxable income by your state as well as by the federal government.

If your spouse has IRAs with mostly nondeductible contributions and you have IRAs with mostly deductible contributions, you might consider converting your spouse's IRAs before yours to reduce the potential tax impact of conversion.

The Top 6 Most Impactful SECURE Act Changes for Consumers

6/26/2020

The SECURE Act became effective January 1, 2020. This flyer from AIG summarizes the top 6 most impactful changes for consumers to take notice:

5 Conditional Orders An Investor Could Use

6/25/2020

A conditional order allows you to set order triggers for stocks and options based on the price movement of stocks, indexes, or options contracts.

There are 5 types of conditional orders:

contingent (CO)
multi-contingent (MCO)
one-triggers-the-other (OTO)
one-cancels-the-other (OCO),
one-triggers-a-one-cancels-the-other (OTOCO)

We will illustrate each of them in 5 graphs below:

How to Satisfy a Margin Call?

6/24/2020

Q. What is a margin call and how to deal with it?

A. Trading on margin offers a variety of potential benefits, as well as some additional risks, including margin calls, which is a demand from your brokerage firm to increase the amount of equity in your account.

How to satisfy a margin call?
Brokerage firms are not required to notify customers of margin calls, although most do. In some cases, a firm may simply sell shares without notifying the customer in order to bring the account equity up to or over the minimum house maintenance requirements. This usually happens in volatile markets or when there is an extreme movement of a concentrated position. Still, in many cases investors have an opportunity to choose the method and time at which they meet a margin call.

If an investor has a $2,000 margin call, here are 3 options to use in order to meet a margin call:

Deposit cash: simply deposit $2,000 into her account.
Deposit marginable securities: deposit fully paid-for shares of stock as additional collateral for the margin loan. To determine how many shares would be necessary to meet a $2,000 margin call, divide $2,000 by the loan value of the stock you plan to deposit. The loan value is equal to 100% minus the maintenance requirement for that stock. Assuming the maintenance requirement is 30%, you can divide $2,000 by 0.70 to arrive at the figure of $2,857. That's the amount of marginable stock you must deposit to cover a $2,000 margin call.
Sell shares of stock: Similar to the calculation for depositing securities, you multiply the value of the stock sold by the maintenance requirement for the shares that remain in the account. Assuming a 30% maintenance requirement, you can sell $6,670 worth of the company stock to satisfy the $2,000 margin call.

A Tool Helps Consumers to File Financial Complaints

6/23/2020

If you want to file a complaint about financial services offered by a bank or any other financial companies, here is a powerful online tool from the Consumer Financial Protection Bureau: www.cfpb.gov/complaint

You can use the tool to check up on a bank, lender, or other financial firm before you do business with it. You will find a link to the database of published complaints, which allows you to search by date, company name, and key words. The tool will also forward your complaint to the company in question, and most reply within 15 days.

How to Use Beneficiary Protection Plans to Protect Your Legacy

6/22/2020

You have a nonqualified deferred annuity policy, your goal is to control distributions to beneficiaries without expense of a trust. How to do it? You can use the beneficiary form to restrict beneficiaries' spending of their inheritances.

In fact, you have several options, including:
1. Full restriction

Life annuity
Life annuity with period certain
Period certain

2. Partial restriction (determined by percentage or dollar amount)

How to Use Annuities in Trusts to Create a Legacy and Save Taxes

6/21/2020

Irrevocable non-grantor trust is taxed at trust rates, see table below.

Benefits of Non-grantor irrevocable trusts –

Credit shelter trusts
Revocable living trusts upon death of the grantor

A case study
Ann Weston has two children

Jon – son of Ann’s second husband, Robert, and his first wife
Julie – daughter of Ann and her first husband
Wish to leave a legacy for their two children
Upon Robert’s death, trust was funded with $6M

Trustees discusses benefits of using a nonqualified deferred annuity.

What are the benefits?

Avoids higher trust income taxes until distributed
Avoids 3.8% net investment income tax, if applicable

How does it work?

Trustee buys nonqualified annuity contract to benefit trust beneficiary
Trust is owner and beneficiary of annuity
Trustee names annuitant

There are two options to consider.

Option 1. Purchase one nonqualified deferred annuity for $1M with Ann as the annuitant

Trust purchases one $1M annuity
50% of death benefit distributed and taxed to Jon at Ann's death
50% of death benefit distributed and taxed to Julie at Ann's death

Option 2. Purchase two nonqualified deferred annuities for $500K each

Jon named as annuitant on one
Julie named as annuitant on the other
Trust purchases two $500K annuities
Jon and Julie each is named as the annuitant of one annuity contract
Trustee distributes annuity contract to Jon and Julie respectively at Ann's death - no taxation

How to Use Nonqualified Stretch to Stretch Out An Annuity's Tax and Income

6/20/2020

Upon death of owner of Non-Qualified (NQ) deferred annuity, there are potentially four options –

Lump-sum payment
Annuitization
Five-year deferral
NQ stretch

Lump sum election –

Distribution of contract value: $248,000
$110,000 gain*: ($25,505)
Net after-tax benefit: $222,495

* Part taxed at 22% and the balance at 24%.

Five-year deferral –

Entire amount must be distributed before the fifth anniversary of date of owner’s death
Partial withdrawals or a full withdrawal permitted

NQ stretch –

Distributions taken over life or a period not longer than their life expectancy
Distributions must be taken at least annually
First distribution must begin within one year of owner’s death
No regulations under Section 72(s) • Only private letter rulings

PLR 200303016 – outlined three methods for satisfying requirements: 1) RMD calculation method 2) Amortization calculation method 3) Annuitization method
PLR 201330016 – permitted a non-spousal beneficiary to do a 1035 exchange of one inherited NQ deferred annuity for another one

How to Use Qualified Charity Distribution to Ensure Tax Benefits

6/19/2020

A taxpayer over age 70½ may transfer up to $100,000 per year from their pre-tax IRA directly to most charities – it's not included in income and can satisfy RMD.

Charitable contribution limit for cash contributions to charity increased from 50% to 60% of AGI. Unfortunately, the charitable deduction is a “below-the-line” deduction, a taxpayer must itemize in order to get the deduction. The reality is fewer taxpayers will be eligible to itemize today.

The following example illustrates how to use qualified charity distribution (QCD) to ensure a tax benefit.

Adam is single and 72
Lives in a low-tax state and has no mortgage
Only significant itemized deduction in 2020 would be $10,000 charitable contribution
No tax benefit because Adam is better off using the standard deduction of $12,400, plus $1,650 for being over age 65

If Adam directly transfers from his IRA to a qualified charity as a QCD, he gets income exclusion for the $10,000 distribution and still gets the $14,050 standard deduction.

A few caveats:

QCD must be made from pre-tax IRAs only
Must occur after IRA owner turns 70½
IRA owner must receive timely written acknowledgment of receipt of IRA distribution from charity
Will be reported as a taxable event on 1099-R
Burden on taxpayer and tax preparer to report distribution as non-taxable

What happened after the SECURE Act?

Age for eligibility to take QCDs remains at 70½
Deductible IRA contributions after 70½ reduce QCDs
Example: Under new law, Jason makes deductible contribution of $7,000 to his traditional IRA in 2020 when he is 70½. He makes another deductible contribution of $7,000 in 2021. When Jason turns 72 in 2022, he decides to make QCD of $20,000. Amount of QCD that will be tax-free is reduced by previous post-70½ deductible contributions. Result: Only $6,000 of QCD will be excluded from his 2022 income.

How to Leave a Legacy? A Case Study

6/18/2020

How is legacy defined? There are two definitions:

Money or property left to a person by someone who has died
Something that is a result of events in the past

Life insurance can combine these two legacy definitions and make sure your plan is complete. But if leaving an IRA was part of the plan, the SECURE Act changed the ability of some beneficiaries to stretch the money in the account over their lifetime.

If your legacy plan involved a “stretch IRA”, it’s a good idea to do a beneficiary review and see how you might be affected by the SECURE Act.

Here is a case study about how to leave a legacy.

IRS Proposes New Rules for Retirement and Annuity Payments

6/17/2020

The Internal Revenue Service and the Treasury Department issued proposed regulations recently to update the income tax withholding rules for periodic retirement and annuity payments made after Dec. 31, 2020.

Before Congress passed the Tax Cuts and Jobs Act in late 2017, if no withholding certificate was in effect for a taxpayer’s periodic retirement and annuity payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions.

The TCJA changed that rule so the rate of withholding on periodic payments when no withholding certificate is in effect would instead be determined under rules prescribed by the Treasury.

Earlier this year, in Notice 2020-3, the IRS said that, for 2020 the default rate of withholding on periodic payments will continue to be based on treating the taxpayer as a married individual claiming three withholding allowances when no withholding certificate is in effect. But now, under the proposed regulation issued Wednesday for 2021 and future years, the Treasury and the IRS will be providing the rules and procedures for determining the default rate of withholding on periodic payments when a taxpayer has no withholding certificate in effect in applicable forms, instructions, publications and other guidance.

The Treasury and the IRS have issued several sets of regulations over the years going back to at least 1982 to provide guidance regarding withholding on periodic payments, non-periodic distributions and eligible rollover distributions under section 3405 of the Tax Code. This appears to be the latest iteration, and probably not the last as most of the individual tax provisions of the TCJA are set to expire in 2025.

Term Life Coverage More Than 30 Years?

6/16/2020

Q. Is there a term life product with coverage more than 30 years?

A. Yes, recently Protective just introduced 35 and 40-year term life products, making it one of 3 national carriers offer term life longer than 30 years.

Below is Protective's brochure. If you are interested in term life more than 30 years, please contact us.

10 Reasons Why Linked-Benefit Life Insurance / LTC Products Are Attractive

6/15/2020

Just as one size doesn't fit all, some people will favor different strategies, but many people in post-COVID-19 era may favor linked-benefit life insurance / LTC products (LB), and are eager to fund such products by transferring, or re-allocating assets from low-performing or risky assets.

People will find LB products very attractive now, for the following reasons:

Many LB policies are guaranteed. At this time of increased risk and conservatism, guarantees look great to both analytic and emotional buyers.
The death benefit immediately replenishes some of the policyholder's estate that has withered in the recent stock market.
LB products also protect against long term care needs. There has been increased costs of long term care business. The long term care industry will be a magnet for such higher expenses, which means that the cost of long term care services will increase. In turn, those higher costs mean that people will be more inclined to insure.
LB policies are a better way to self-insure as the policy's beneficiaries risk their death benefit (generally over the first two years of needing long term care) but then inexpensive catastrophe coverage kicks in. The value of such a “stop-loss” type coverage is more appreciated in an era when asset value and income are less secure.
Maximum long term care benefits can compound at three percent or according to a medical cost index depending on product. An index could be particularly attractive for those who fear inflation.
Some LB products permit (out-of-work, perhaps) family members to be paid for providing care, which can be a nice alternative for generations who are concerned about one another or simply wish to be together.
An inability to afford separate LTCI and life insurance protection may also accelerate interest in linked-benefit products.
LB policies can do well in any economic environment. In a deflationary economy such as the 1930s, the increasing benefit is further leveraged by reduced cost of care. In an inflationary economy, a medical cost index helps. In a gyrating muddle economy, steady performance is appreciated.
For people looking for guaranteed rates, this could be another safe haven for them.
The tax advantages for employer-paid coverage may have increased value in the future if the USA grapples with spiraling debt by increasing tax rates.

3 Reasons Why Annuities Might Be Popular Again

6/14/2020

Q. Why should I consider annuity products given the low rate environment?

A. Just as in the wake of the 2008 financial crisis, there is a rising interest in annuity products among financial advisors and their clients. The overall macro-environment creates undesirable rates for all financial products, annuities are about risk transfer rather than rate return ...

Specifically, there are 3 reasons why people should consider annuities:

Despite undesirable returns, annuities is all about a bond alternative, because your alternatives' returns are even lower.
Like any insurance products, annuity is about protection, it protects your assets from further losing value in market turmoils.
The most unique feature of annuity is its income for life, this is something no other products could replace.

AIG's Power 5 Protector As an Accumulation Tool

6/13/2020

If you are looking for a powerful solution for your retirement asset accumulation needs, AIG's Power 5 Protector is a great product, see its highlights below.

Below is Power 5's illustration.

Using Annuity to Pay For College Expenses? Part B

6/12/2020

In last blogpost, we discussed the drawbacks of 529 plan. Now let's see why annuity could be a viable alternative to pay for college expenses.

Using an annuity
One tool to consider as part of an overall college saving strategy is a fixed or fixed indexed annuity. A significant benefit of these products is your account value can grow tax-deferred and is protected from downside market risk. So when the market is up, your money can grow, but when the market is down, you do not lose any of your hard-earned savings. Plus, if your child receives a scholarship or decides to pursue another path besides college, the money in your annuity can be accessed for other purposes.

Keep in mind that annuities are designed to help you reach long-term savings goals. While most annuities allow you to withdraw a certain amount each year without penalty, you'll likely pay charges on withdrawals over that amount during the annuity's withdrawal charge period. This period typically ranges from five to 10 years or more, depending on the annuity.

Helping pay tuition
As with many financial plans, there is no time like the present to begin saving. An annuity purchased when your children are young can assist with tuition costs down the road. One option would be to purchase an annuity with a withdrawal charge period that coincides with the length of time it takes for your child to reach college age. For example, if on your child's 8th birthday you purchase an annuity with a surrender charge period that ends in 10 years; your child will be 18 and entering college. At this time, you'll be outside the withdrawal charge period, meaning you'll have full access to the annuity's value to supplement tuition payments.

It's important to remember that withdrawals from an annuity may be subject to state and federal income tax. In most cases, withdrawals taken before age 59½ will also be subject to a 10 percent IRS penalty.

Paying off student loans
Graduating with student loan debt comes with tremendous responsibility, especially since interest continues to accumulate as time goes on. More than 2.5 million students have student loan debt greater than $100,000 and repaying those loans can be a significant hurdle. One way to help reduce a student loan balance is using income payments from an annuity. Over time, your premiums grow tax-deferred and then at a later date, you can elect to begin receiving payments. Depending on the type of annuity you choose, you can receive income immediately or several years later. These funds can then be used to help reduce any remaining student loan balance. Remember that annuities specify that you must be a certain age before starting income payments.

As you begin to take steps toward saving or paying for college, talk to your financial professional about which solutions can help make higher education accessible and more affordable. By starting the conversation now, you can bring the dream of your child's or grandchild's education within reach while still meeting your other long-term goals.

Using Annuity to Pay For College Expenses? Part A

6/11/2020

Saving and paying for college can be a challenging goal and you may be among the many people who worry about the financial pressure that funding higher education can bring. The cost of college continues to rise: average tuition and fees are $35,676 at a private school, $9,716 for state residents at public colleges and $21,629 for out-of-state students at state schools. Thankfully for parents and grandparents, it's never too early to start saving and there are many options to help you prepare for one of the most important milestones in the lives of your children or grandchildren.

529 plans
A common option used for paying for college and educational expenses is a 529 plan, which is an education savings plan sponsored by a state or state agency. A 529 plan can be purchased not only by parents, but also grandparents and other relatives. When you purchase a 529 plan, your earnings grow tax-deferred and any qualified withdrawals are tax-free. As a child reaches college age, he or she can use the accumulated funds to pay for qualified expenses including tuition, room and board, books and computer equipment. While 529 plans have many advantages and can be useful in preparing for the future, there are limitations to consider as well.

Limitations of 529 plans include:

An account can lose value due to market downturns
You pay penalties if the money is not used for education purposes
The account earnings can affect an application for financial aid
Many plans include yearly fees and administrative costs

Plus, if your child receives a scholarship, you will likely only need a portion of the money saved in your 529 plan. If you end up with remaining funds or if a child decides not to enroll in school, the beneficiary can be changed to another family member. However, if you do not have other family members looking to attend, you may have to pay significant penalties to withdraw your savings for other purposes, depending on the rules of your state's 529 plan.

In next blogpost, we will discuss why annuity could be a viable alternative to 529 to pay for college expenses.

Looking For Term Life Length More Than 30 Years?

6/10/2020

Q. Are there any term life products with term length longer than 30 years?

A. Yes! While 30 years is usually the longest term life coverage length, a few top carriers have started offering term length longer than 30 years. The latest one is Protective, see its announcement below. Another one is AIG. Also Banner has competitive product too.

Where to Find Yields - Part 7 High Yield Bonds (5%-9%)

6/9/2020

In last blogpost, we discussed closed-end funds. Now we will turn to high yield bonds.

7. High Yield Bonds (5% - 9%)

What are they?
High yield bonds also called junk bonds, they are issued by sub-investment grade companies. Investors receive high yields for taking the extra risk of lending to these lower-rated businesses.

What are the risks?
Recession could lead to surge of defaults of high yield issuers. The high yields reflect the high risks.

Examples

Index funds, such as SPDR Bloomberg Barclays High Yield Bond (JNK)
Actively managed funds, such as PGIM High Yield (PHYZX), and Vanguard High Yield Corporate (VWEHX)

Where to Find Yields - Part 6 Closed-end Funds (5%-8%)

6/8/2020

In last blogpost, we discussed dividend stocks. Now let's take a look at closed-end funds.

6. Closed-End Funds (5% - 8%)

What are they?
Closed-end funds sell a set number of shares and investment the money in stocks, bonds, loans, MLPs, and other types of securities. Most closed-end funds use leverage, or borrowed money, which is a double-edged sword. Depending on investor demand, a closed-end fund's price could be below or above its NAV.

What are the risks?
If a closed-end fund's NAV declines too much, driving its leverage ratio too high, it could violate regulatory limits, which would be forced to lighten its debt load by dumping assets and/or delaying or cutting dividends, like some MLP closed-end funds today.

Examples

EV Senior Floating Rate (EFR): it trades at a discount to NAV and has a relatively high leverage ratio.
Flaherty & Crumrine Dynamic Preferred & Income (DFP)

In next blogpost, we will discuss High Yield Bonds.

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To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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