SOLE PROPRIETORSHIPS

A sole proprietorship is owned by a single owner and is an unincorporated business .
It is easy to set up and requires no legal form to fill or pay registration or attorney fees like in partnerships and corporations. Taxation is easy too. All income is reported as individual’s income, filed on a Form 1040, Schedule C. Sole proprietorship is an unlimited liability of the individual, if the business is sued or goes bankrupt, the liability covers all – the house, the car, retirement, etc. During extreme profits, individual tax brackets can exceed the corporate tax rate.

PARTNERSHIPS

Partnership businesses have multiple owners. The profits diverge through as personal income to the individual
partners for tax purposes.

The three main partnerships:

GENERAL PARTNERSHIP (GP)

In General Partnership (GP) all the partners have unlimited liability for the business and the other partners. Some states require general partnerships to be registered with the state, while others only require the partnership agreement.

LIMITED PARTNERSHIP (LP)

Limited Partnerships (LP) must have at least one general partner with unlimited liability. The general partner is either a corporation or a limited liability company. Limited partners are liable to the amount they invested and any recourse financing agreed upon.
The limited partner cannot be actively engaged in partnership management, otherwise he or she will lose the limited liability status.

Most states require limited partnerships to be registered. The business name should include the one of the following: Limited, Ltd., Limited Partners, or LP. LPs are common with real estate, development, and some investment companies.

LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership (LLP): partners are liable for their own actions but not liable for the actions of the other partners or the firm itself. States require LLPs to be registered with the State. The
It must include Limited Liability Partnership or LLP in the business name.

LIMITED LIABILITY COMPANY

A Limited Liability Company (LLC): The owners of an LLC are called “members.” Members have limited liability to the amount they invested like corporations, but the profits of the LLC pass through to the individual members like partnerships. LLCs can be “member-managed” – or “manager-managed,” like a board of directors for a corporation. LLCs profits and voting percentages are based on the amount invested, or specified in the company agreement (some states call it an Operating Agreement). LLCs must be registered with the state and include either Limited Liability Company or LLC in the business name.

C CORPORATIONS

C corporation is taxed separately from its owners and is owned by shareholders who own company’s shares of stock and elect board of directors. The shareholders have limited liability. Shareholder voting rights are based on the number of shares owned. Corporation’s profits are taxed at the corporate rate. Shareholders receive profits as dividends. Profits are taxed at the corporate and individual level referred as “double taxation.”

S CORPORATIONS

S Corporation has filed a special status with the IRS. S Corporations shareholders have limited liability. Profits pass through to individual shareholders for tax purposes. To qualify as an S Corporation:
• It must have only one class of stock.
• It must not have more than 100 shareholders (spouses and family members of common ancestors count as one   shareholder).
• All shareholders must be a U.S. citizen and a natural person (no corporations, trusts, partnerships, etc.)
• Profits and losses must be allocated proportionately to shareholders based on number of shares.

TRUSTS

The grantor establishes the trust for the beneficiary. The trustee is appointed by the grantor. The trustee has a fiduciary duty to act in the best interest of the trust and the beneficiary. The grantor can abolish the revocable
trust or change the beneficiary. If the trust income is paid in the year it was earned, irreovocable trusts are taxed at the individual beneficiary's income otherwise at the trust income. If the beneficiary is the grantor or grantor’s spouse, all revocable trust income is taxed as the grantor’s individual income. This prevents high-income individuals from establishing a trust just to reduce their tax liability.

ESTATES

An estate comprises assets of a decedent. The executor/administrator has a fiduciary duty to the estate and its heirs to act in their best interest. Estates are temporary entities exist if bills are to be paid and assets are to be distributed. The executor/administrator must avoid long-term investments or funds with large loading costs because of the estate’s temporary nature. Estates (2014) below $5.34 million in assets are exempt from federal taxes. Any amount over $5.34 million is taxed at 40%.

FINANCIAL CONSIDERATIONS for the registered representative to consider :

• Income
• Net Worth
• Taxes
• Associated Risks

Evaluate client’s current income sources, and current expenditures, such as mortgage payments, groceries, utilities, and other bills. Consider money left over also called discretionary income or “excess cash flow.” It is the maximum amount available to invest each month. Consider client’s retirement income, disability or life insurance policies that would pay in the event of death or disability.

Taxes: Individuals in higher tax brackets may invest in municipal bonds because the interest is tax-free at the federal level. An individual in the middle tax brackets with less discretionary income may invest in a traditional IRA to reduce his or her tax liability (and the increase in tax return can be used to invest even more). Calculate client’s net worth (assets- liabilities) from his balance sheet. If a client has a low liquidity, encourage investments with liquidity, such as money markets, mutual funds, or heavily traded stocks. Associated risks: Investing a huge percentage of a portfolio in one company exposes the investor to that company’s business risk. Diversification eliminates non-systemic risk and increases the chances of earning returns equal to or greater than the market.

NON-FINANCIAL CONSIDERATIONS

Non-financial considerations like client’s age, investment experience, marital status, employment (and spouse’s employment), number and age of children, educational needs of children, family health care needs, participation in retirement plans, and their attitudes and values help to know the client’s level of risk tolerance. Individuals with higher income and net worth take more risk, but consider the source and reliability of income along
with short-term and long-term liquidity needs of the portfolio.
Young investors can tolerate more risk because they have a longer investment horizon (i.e. retirement). Building a personality profile assists in determining the client’s investment objectives.

INVESTMENT OBJECTIVES

• Capital preservation protects client’s capital, and prevents loss. U.S. Treasury securities offer capital preservation
  by providing interest checks on time and guaranteed return to clients.
• Liquidity can quickly convert an investment into cash when needed. For e.g. Money market funds but provide
  little returns.
• Diversification reduces the risk through diversification. Investors can diversify by geography or industry/sector.
  Index funds are diversified but the holdings face the market risk.

• Current income seeks regular, dependable income. Bonds and bond funds can produce a regular, dependable
  income if they make interest payment. Preferred stock, utilities, and equity income funds also provide current
  income.
• Capital appreciation is rise in assets’ market price and take years to accumulate. This investment objective
  requires a long investment horizon and investor patience.
• Growth and income objective is used when stock is purchased for growth and dividend income. These stocks
  are less volatile than pure growth funds.
• Aggressive growth seeks capital growth at a higher rate than other investments.
• Tax-exempt is for investors subjected to high taxes and seek investments that offer tax relief,
  such as municipal bonds.

INVESTMENT CHOICE: RISK AND REWARD

Investment decision is a choice of risk and reward. For example, stocks are inherently riskier than bonds. Stocks do not have any guaranteed return and have no claim to anything if the business busts. Bonds have a guaranteed return and have a first right to claim on assets of an insolvent company, but stocks have higher rates of return than bonds.

INVESTMENT STRATEGIES: AGGRESSIVE VS. DEFENSIVE

An aggressive investor makes riskier investments, but expect greater returns. Aggressive investors have longer
investment periods, such as young professionals investing for retirement. They look for aggressive growth funds, emerging market funds, small cap funds, sector funds, and growth stocks. Defensive investment strategy seeks blue chip companies for investment because they perform well even during the economic downturn.

INVESTMENT STRATEGIES: VALUE VS. GROWTH

Value investors look for underpriced stocks. Valuing a company is tough, so they look for companies with low price-to-earnings (P/E), price-to-book, and price-to-sales (revenue) ratios. Value investors look for stocks with high dividend yields.

Growth investors focus on capital appreciation and invest in companies with high profit margins and growth rates and pay little or no dividends, but reinvest earnings back into their expanding businesses. The stocks have high price-to-earning (P/E) ratios. Growth companies are volatile and susceptible to market risk. These funds are suitable for long-term investors who can sustain short-term fluctuations in their investment.

INVESTMENT STRATEGIES: INCOME VS. CAPITAL APPRECIATION

Income investing focuses on dividends and interest producing securities. For e.g. Preferred stock, common stock, and bonds are income-paying securities. Capital appreciation focuses on security’s performance, not what the security pays out. Investors look for stocks that grow faster than the rate of inflation. Investing in blue chip stocks that grow faster and have a long history of stability and profitability – is one easy way to achieve
capital appreciation.


INVESTMENT STRATEGIES: ACTIVE VS. PASSIVE

Active investing requires frequent trading that allows an investor to achieve greater investment gains but increases the risks of loss. Multiple transactions increase costs like commission, trading costs, and taxable events. Passive investing like Index funds are a passive investment, because it requires limited buying and selling to maintain the portfolio of a given index. Less trading means lower commissions, lower transaction costs, and less turnover which reduces the risk.

INVESTMENT STRATEGY: BUY AND HOLD

“Buy and hold”: stratergy is for investors with long-investment horizon. Value investors buy undervalued stocks expecting their growth in future. Growth investor waiting for that new high-tech company to take off or an income investor holding on to a stable blue chip that pays good dividends, follow this strategy. Some investors purchase index funds that appreciate at the same rate as the market. The “buy and hold” strategy benefits from fewer taxable events but the risk of the portfolio becomes out of balance.

INVESTMENT STRATEGIES: ASSET ALLOCATION

Asset allocation reduces systematic risk. Investors allocate their investment portfolio based upon their age and risk tolerance. Investors counterbalance their riskier stock securities with lower risk bonds and money market securities. Higher risk tolerance investors invest in stocks promising better capital appreciation. Asset allocation can occur within a class of assets. Higher risk investors seek out growth companies in the technology and bio-medical sectors for potential outsized gains. Investors with lower risk tolerance stick to stable stocks like blue chips or value stocks. Assets allocations change with increase in value of asset classes while other classes decrease in value. Investors then rebalance their assets, or buy and sell securities to return to the original asset allocation percentages. Asset allocation should be changed as per change in investor’s age or risk appetite. An investor can change his/her asset allocation based on recent or expected changes in the market. Changes in asset allocation based on market timing is called Tactical Asset Allocation.
One form of tactical asset allocation is sector rotation, which means investing into different industries/sectors based on market conditions.

DIVERSIFICATION

Diversification is achieved by investing in different type of securities (asset allocation), by geography (domestic vs. international), by different sub-categories (risk level, industry/sector, market cap, etc.) ETFs and mutual funds, index funds provide instant diversification.

FUNDING THE ACCOUNT: AVERAGING

Many investors fund their investment portfolio over time. Because the securities’ value fluctuates, the cost basis of the securities varies at different times. The resulting cost basis is called averaging.

The several ways to increase an investment portfolio’s holdings over time:

Dollar cost averaging is where the investor invests the fixed dollar amount of a security each month, regardless of
share price. This means the investor buys more shares during low price, and fewer shares during high price. The investor’s average cost per share is lower than the average price share during that period. In other funding programs, an investor continue to make investments until a capital goal is achieved within a specified time for e.g. Annuities.
Mutual funds and some blue-chip stocks allow their investors to re-invest their dividends back into the fund or the stock in fractional shares, and it is called Dividend re-investment program.

CAPITAL MARKET THEORY

Capital market theories suggest that the securities in an investment portfolio are less important, than the risk/return and diversification of the portfolio.

CAPITAL ASSET PRICING MODEL (CAPM)

The Capital Asset Pricing Model (CAPM) calculates expected returns on investments. It assumes that investors
should be compensated for the risk involved with the assessment more than the riskless rate of return –
a risk premium. The expected rate of return for CAPM is calculated by adding the riskless rate of return to the product of the risk premium multiplied by beta. Here, the risk premium is the expected rate of return for the market as whole less the riskless rate of return.

MODERN PORTFOLIO THEORY(MPT)

The Modern Portfolio Theory (MPT) attempts to maximize the expected return of a portfolio based on the
investment risk of the portfolio. In the risk/reward determination, MPT determines the reward based on the risk.
Optimal Portfolios get the highest possible return depending on the volatility, and risk tolerance of an investor.
A graph called the Efficient Frontier tracks the required rate of return for the varying degrees of risk based on historical data. An efficient portfolio has a return equal to the risk on the efficient frontier. The process of choosing a portfolio’s investments to achieve the maximum rate of return for the level of risk is called Portfolio Optimization.

EFFICIENT MARKET HYPOTHESIS (EMH)

As per The Efficient Market Hypothesis (EMH), the financial market reacts to publicly available information and adjust investment prices based on all known information and therefore, the financial market is informally inefficient.
The three versions of Efficient Market Hypothesis:

• Weak: Prices on traded investments reflect all past publicly available information.
• Semi-strong: Prices on traded investments reflect all publicly available information and prices instantly change
  to reflect new publicly available  information.
• Strong: Prices on traded investments reflect even nonpublic or “insider” information.
   
Under EMH, an investor should invest in a diverse portfolio to limit the diversifiable risk and will only face non-
diversifiable risk which is offset by an  increased rate of return or “risk premium.”

TAX CONSIDERATIONS

Taxes can help determining better investment choices.

TAX FORMS

• Interest on bonds is reported on Form 1099-INT.
• Accretion on zero-coupon or original issue discount (OID), bonds are reported on Form 1099-OID.
• Dividends and capital gain distributions from stocks, mutual funds, and IRAs are reported on Form 1099-DIV.

TYPES OF INCOME

Ordinary income and capital gains are taxed at different levels and can have real consequences based on an investor’s choices.

ORDINARY INCOME

Interest payments from bonds and non-qualified dividends are taxed as ordinary income, as are withdrawals from traditional IRAs. Municipal bonds are exempt from federal taxes and zero-coupon bonds do not have interest rates, but the accretion of par value is taxable.

CAPITAL GAINS

Most capital gains are the profits earned by selling an investment, but can also include qualified dividends. Capital gains have preferential tax treatment.

HOLDING PERIOD

The preferential tax treatment of capital gains depends on the holding period. The holding period is the amount of time the investor holds the security.
•Short-term capital gains are profits from investments held for less than one year and are taxed as ordinary
  income.
• security held for more than a year, any profit from selling the investment is considered a long-term capital gain
  and is taxed at 0% for lower tax brackets, 15% and 20% for higher income brackets.

QUALIFIED DIVIDENDS

Previously, all dividends were taxed as ordinary income, but qualified dividends are taxed at 0% for lower tax
brackets, 15% and 20% for higher income brackets.

TO BE A QUALIFIED DIVIDEND:

•the dividend must be paid before December 31, 2012;
•the dividend must be paid by a U.S. corporation or foreign stock traded on a U.S. exchange (e.g. ADRs);
•the investor must have held the stock for more than 60 days during the 121-day period that beginning 60 days
  before the ex-dividend date and ending 60 days after the ex-dividend date.

CALCULATING CAPITAL GAINS

Capital Gain = Proceeds of the Sale – Cost Basis

COST BASIS

Reinvested dividends and capital gain distributions are taxed as ordinary income in the year they are received, but they are added to the cost basis. For example, the cost basis of mutual funds increases when an investor reinvests dividends received. When a mutual fund investor redeems shares (sales the shares back to the mutual fund), the investor receives a report of sales proceeds on Form 1099-B. The investor is responsible for figuring out the cost basis and capital gain or loss.

CAPITAL LOSSES (NET CAPITAL GAINS)

Capital gains have tax benefit of being offset by capital losses. Only capital losses that are realized (the security
was sold for a loss) can offset capital gains. The result will be a net capital gain or a net capital loss, with net short-term capital gains taxed as ordinary income and net long-term capital gains are taxed up to 15% or 20%. If an investor has both long-term gains and short-term losses, they must be netted together before the preferential tax treatment. If an investor has a net capital loss (short-term or long-term), the investor can offset his ordinary income on a $1 to $1 basis, up to $3,000 per year. Any capital losses over that $3,000 limit can be carried forward until it can be offset by a capital gain or ordinary income.

WASH SALES

Wash sales occur when an investor sells or trade stock or securities at a loss, and within 30 days before or after the sale, the investor: An investor sometimes sell a stock he or she wants to keep holding so the investor can realize the loss in that year and offset his or gains. The investor would repurchase those shares either before or after the sale. The IRS does not allow wash sales to offset an investor’s capital gains.

WASH SALE RULE

When an investor realizes a capital loss, he must wait at least 30 days before repurchasing the same company’s
stock and 30 days before selling a stock for a loss. This means there is a 60-day window around the time of the sale of a stock for a loss, 30 days before and 30 days after, that the investor must wait to repurchase the stock if the investor wants to offset his capital gains or ordinary income.

DISALLOWED LOSS AND COST BASIS ADJUSTMENT

If an investor repurchases a sold security for a loss in less than 30 days before or after the sale of the stock,
the investor’s loss will be disallowed for that year. The disallowed loss from the old security will be added to the newly purchased security’s cost basis, which postpones the loss deduction until the new security is sold.

ESTATE TAX

An estate of a legal “person,” represents the net worth of a deceased person. Estates have assets and liabilities,
as well as income and expenses. The net worth of a deceased person’s estate equals all the assets and income (real estate, cash, investment accounts, insurance) less all liabilities (debts) and expenses. Currently, there is a $5.34 million lifetime tax credit for estates. That means any estate with a net worth less than $5.34 million is exempt from estate tax. Any amount of the $5.34 million is taxed at 40%.

ESTATE TAX

An estate of a legal “person,” represents the net worth of a deceased person. Estates have assets and liabilities,
as well as income and expenses. The net worth of a deceased person’s estate equals all the assets and income (real estate, cash, investment accounts, insurance) less all liabilities (debts) and expenses. Currently, there is a $5.34 million lifetime tax credit for estates. That means any estate with a net worth less than $5.34 million is exempt from estate tax. Any amount of the $5.34 million is taxed at 40%.

SECURITIES AS GIFTS

Gifted securities have the same cost basis as the donor (individual who gifted the security), and the recipient
(individual who receives the gifted security) recognizes a capital gain or loss based on the donor’s cost basis. If the market value of the security at the time of the gift is less than the donor’s cost basis, the recipient’s cost basis is the market value. Gains on gifted securities are classified as short-term or long-term based on the original purchase date.

GIFT TAX

Donors can give up to $14,000 per recipient per year as tax-free gifts. Any gifts over that amount are deducted from a $5.34 million lifetime gift exclusion. The donor does not pay any gift tax until the tax credit has been depleted. Married couples can “split the gift,” allowing them to give gifts of up to $28,000 per recipient per year without any gift taxes or reducing the tax credit.
A higher cost basis means lower capital gains and, thus, lower taxes:
• Inherited securities use the market value as cost basis and are considered long-term capital gains.
• Gifted securities use the original cost basis unless the market value is lower, which means a lower cost basis
  and higher tax liability. Gifted securities receive long-term status if the original purchase date is over one year
  from the eventual sell date.

This means inherited securities have a better tax treatment than gifted securities. However, there are limitations
placed by estate and gift taxes listed above.

ALTERNATIVE MINIMUM TAX (AMT)

The AMT is a flat tax rate on incomes over a certain amount. Any income under that amount is exempt. That means taxpayers with incomes above the exemption whose regular federal income tax is below the AMT amount must pay taxes at the higher AMT rate.

MUTUAL FUND TAXATION

Mutual funds and other registered investment companies are taxed as a “regulated investment company” (RIC).

CONDUIT OR “PIPELINE” TAX THEORY

Mutual fund taxation is based on the conduit or “pipeline” theory, where the taxes on the fund’s earnings are paid by the shareholders and not the fund. Subchapter M of the IRS Code requires mutual funds to distribute 90% of net investment income to avoid paying taxes.

CAPITAL GAINS AND LOSSES ON MUTUAL FUNDS (SHORT-TERM GAIN DISTRIBUTIONS)

The purchase and sale of mutual funds can create capital gains, but some mutual fund distributions can be
treated as capital gains too. Fund managers are always trading securities within the fund, creating capital gains and losses. If the fund ends the year with a net capital gain, those gains are distributed to the fund’s shareholders. Some gains are long-term and some are short-term, depending on the holding period of the stocks sold from the fund. This means that the tax treatment of those distributions has nothing to do with how long the investor holds the mutual fund shares, but rather how long the fund held the securities. The investor’s statement from the mutual fund identifies which portion of the distribution is long-term and what part is short-term. Short-term capital gain distributions are taxed differently than short-term capital gains from other investments. Short-term capital gains distributions may not be offset by other short-term capital losses. Instead, they are reported on the Form 1099-DIV and are taxed as ordinary income.

COST BASIS FOR REDEMPTIONS

When a mutual fund investor redeems shares (sales the shares back to the mutual fund), the investor receives a
report of sales proceeds on Form 1099-B. The investor is responsible for figuring out the cost basis and capital gain or loss. The capital gain is calculated by subtracting the share’s cost basis from the proceeds of the sale.

Capital Gain = Proceeds of the Sale – Cost Basis

The cost basis is the original cost of the security, but for mutual funds the cost basis includes any sales charge. Reinvested dividends and capital gain distributions are taxed as ordinary income, but they are also added to the cost basis. For example, the cost basis of mutual funds increases when an investor reinvests dividends received.

METHODS FOR DETERMINING THE COST BASIS

The three main methods to determine the cost basis: the first-in, first-out (FIFO) method, the identifying shares method, and the averaging method. An investor selects a method to determine the cost basis of shares and must use that method for that fund in the future.

FIFO (FIRST-IN, FIRST-OUT) METHOD

Mutual fund investors use the FIFO method when the capital gain is calculated by subtracting the cost basis of the first purchase of the mutual fund shares to the current sale of shares. If the investor does not choose a method, the IRS requires the investor to use the FIFO method.

IDENTIFYING SHARES METHOD

Mutual fund investors use the identifying shares method by providing the broker-dealer with specific certificates of shares to be redeemed or sold back. This method is not available for most mutual fund investors, because they do not receive certificates of shares – their shares are recorded on a book-entry basis.

AVERAGING METHOD

Mutual fund investors can use the averaging method to determine the cost basis of shares. The investor calculates the average costs of all shares in the account and uses the average cost as the cost basis for the shares being redeemed regardless of initial cost. This is a lifetime election.

EXCHANGE OF SHARES

Mutual funds allow investors to exchange in one fund for another fund without sales charge. The IRS views these exchanges as the sale of shares in the first fund with the proceeds reinvested in shares of the second fund and are taxable. A capital gain or loss calculation is based on the shares redeemed from the first fund and the cost basis of the redeemed shares.

TAXATION OF VARIABLE ANNUITIES

In non-qualified annuities, investments are made with after-tax dollars. Qualified annuities allow an investor to invest with pre-tax dollars, but are mainly for nonprofits and schools to provide a retirement investment for its employees.

ACCUMULATION AND ANNUITIZATION

The accumulation phase is when investor wants to grow annuity contribution, then receiving any distributions. Any capital gains and dividends earned are used to purchase more accumulation units and are tax-deferred.

The annuitization phase is when the investor begins to receive withdrawals or payments from the annuity. Withdrawals are taxed on a last-in, first-out (LIFO) basis, meaning that earnings (interest and capital gains) are withdrawn first and taxed as ordinary income. Amounts withdrawn more than earnings are tax-free because that is the cost basis. The investor decides the method to receive payments during the annuitization phase, such as monthly payments for life or by choosing a beneficiary. Once the annuity period starts, the annuitant cannot surrender, withdraw, or borrow money from the annuity contract.

DEATH BENEFIT

If the annuitant dies during the annuity phase, the death benefit pays the beneficiary. If the beneficiary receives more than the annuitant contributed, the excess amount is taxed as ordinary income.

QUALIFIED ANNUITIES PENALTY TAX FOR EARLY ANNUITY PAYMENTS

Qualified annuities are tax-deferred annuities means contributions are tax-deductible and growth is tax-deferred, but withdrawals are taxed as ordinary income.

PENALTY TAX FOR EARLY ANNUITY PAYMENTS

Qualified annuities are subject to a 10% penalty if withdrawals are made prior to age 59½ without good excuse, such as death, disability, or qualified medical or education expenses. The early withdrawals must continue for five years or until the investor reaches age 59½.

SECTION 1035 EXCHANGES

Owners of variable annuities can exchange one variable annuity for another without paying income taxes. This is
called a Section 1035 Exchange, named after the statute that permits such transactions.

TAXATION OF VARIABLE LIFE INSURANCE POLICIES

Life insurance premiums are made after-tax, meaning the premiums are not tax-deductible, and grow tax-deferred, meaning any capital gains or interest earned are not taxable until the withdrawal. Variable life insurance is taxed on the FIFO method, meaning first withdrawals are the cost basis. On withdrawing some money called a partial surrender, the withdrawals are taxed only if the amount exceeds premiums paid. The death benefit is tax-free; however, it is added to the deceased investor’s estate, so that if the total estate exceeds $5.34 million, it becomes taxable to the estate.

Tax deductible contributions are eligible to reduce earned income dollar for dollar when made into an employer-sponsored retirement plan or to an individual retirement plan.

Tax deferred any income or growth that is earned but will be received in the future, is tax deferred until the earnings are received.

Non-deductible contributions are not eligible to reduce taxable income, and are made into non-qualified plans.
Earned income include wages, salaries, tips, and other taxable pay. Only earned income can be contributed into a qualified plan. The Employee Retirement Income Security Act of 1974 (ERISA) is about federal control of the retirement and health plans in private industry.

Adjusted gross income as per the IRS, is gross income minus all adjustments.

QUALIFIED PLANS

o Contributions are made from earned income and are currently tax deductible, except for Roth IRAs and Roth         401(K)s.
o Must conform to the form and operational requirements of the IRS and ERISA.
o Are subject to ERISA eligibility requirements, and cannot discriminate, or be top-heavy.
o Accumulated earning grow tax deferred.
o 100% of all withdrawal are qualified to be taxed as ordinary income. Except for Roth IRAs and Roth 401(K)s          whose withdrawals will be tax free if the rules are followed.

These plans operate as a trust with custodian requirements.

NON-QUALIFIED PLANS

o Contributions are made from post-tax money and these contributions are not currently deductible.
o Are not subject to the requirements of the IRS or ERISA.
o Are not subject to ERISA, and can discriminate, and be top-heavy (greatest rewards to key employees or
    officers).
o Accumulated earning grow tax deferred.
o The non-qualified contributions when withdrawn are the non-taxable portion, the accumulated earning on the     contribution are taxable as ordinary oncome upon withdraw.

These plans do not require the formation of a trust.

INDIVIDUAL RETIREMENT PLANS

For individual retirement accounts, focus on contribution eligibility and limits, tax benefits, tax consequences, transfers versus rollovers, penalties and eligible versus ineligible investments. Individual retirement account is tax deferred until retirement, and one can be in a lower tax bracket upon retirement.

TRADITIONAL IRAs

Individuals with earned income under the age of 70 ½ are eligible to own an IRA. Funds for an IRA can be invested in stocks, bonds, mutual funds, annuities, and interest-bearing accounts, and newly minted U.S. or state gold or silver coins, but not life insurance policies or collectibles such as art, antiques, stamps or rare coins (numismatics). Contributions to traditional IRAs are tax-deductible, and the gains earned are tax-deferred until withdrawal. Traditional IRAs are ideal for individuals who expect to have lower tax margins in retirement than during the contributions.

TAX-DEDUCTIBLE CONTRIBUTIONS

If the individual or a jointly-filed spouse does not have a retirement plan maintained by his employer, the entire contribution is deducted from taxable gross income up to the annual contribution limit, regardless of the individual’s AGI (adjusted gross income). However, if a person is covered by an employer-sponsored retirement plan, the deduction for contributions to a traditional IRA is phased out based on modified AGI.

WITHDRAWALS TAXES AS ORDINARY INCOME

Distributions are taxable as ordinary income upon withdrawal in the tax year of withdrawal. Distribution of funds must begin by April 1st of the year after the individual reaches age 70½, and then every year thereafter. Failure to distribute or inadequate distributions at the required age result in 50% penalty on the shortfall.

EARLY WITHDRAWAL PENALTY OF 10%

Distributions made prior to age 59½ are subject to an additional 10% IRS penalty. An individual may make early withdrawals, subject to tax, without penalty if the individual dies or becomes disabled or uses the money for a down payment on a “first-time” home, post-secondary education expenses, or catastrophic medical expenses, or an unemployed people’s medical insurance exception, qualified reservist exception, or a withdrawal is based upon an annuity schedule.

Beneficiaries: If the investor dies prior to withdrawals and without beneficiary, the total interest earned must be paid to the deceased investor’s estate within five years. Otherwise, the interest must be paid to the beneficiary in annual payments beginning no later than the year end following the investor’s death. Spouse as beneficiary, can opt to begin receiving annual payments within a year following the owner’s death or continue accumulating interest tax-deferred until the year in which the deceased investor would have reached age 70½. Distributions are subject to ordinary income tax upon withdrawal.

Roth IRA

Contributions to Roth IRAs are not tax-deductible, but distribution benefits are tax-free. Roth IRAs are ideal for
individuals who expect higher tax margins in retirement than during the contribution made.

CONTRIBUTIONS NOT TAX-DEDUCTIBLE

Contributions to Roth IRAs are not tax-deductible and maximum contributions are limited as traditional IRAs.
• In 2014 and 2015, an individual may contribute a maximum of $5,500 per year or the amount of taxable
  compensation for 2014 and 2015 for individuals below age 50.
• The limit is $6,500 or the amount of taxable compensation for 2014 and 2015 for individuals age 50 and above
   (the additional $1,000 is often referred to as a “catch-up” contribution). Individuals or married couples with
  annual earnings exceeding certain amount are ineligible for Roth IRAs.
• A prorated contribution is permitted if an individual’s income falls within the range and not permitted when
   annual income exceeds the upper limit.

Roth IRA

Contributions to Roth IRAs are not tax-deductible, but distribution benefits are tax-free. Roth IRAs are ideal for
individuals who expect higher tax margins in retirement than during the contribution made.

CONTRIBUTIONS NOT TAX-DEDUCTIBLE

Contributions to Roth IRAs are not tax-deductible and maximum contributions are limited as traditional IRAs.
• In 2014 and 2015, an individual may contribute a maximum of $5,500 per year or the amount of taxable
  compensation for 2014 and 2015 for individuals below age 50.

• The limit is $6,500 or the amount of taxable compensation for 2014 and 2015 for individuals age 50 and above
   (the additional $1,000 is often referred to as a “catch-up” contribution). Individuals or married couples with
  annual earnings exceeding certain amount are ineligible for Roth IRAs.

• A prorated contribution is permitted if an individual’s income falls within the range and not permitted when
   annual income exceeds the upper limit.

TAX-FREE DISTRIBUTIONS

Distributions are tax free on reaching age 59 ½ and if the account is held for at least five years. Roth IRAs aren't subject to the minimum distribution requirements as traditional IRAs and no withdrawals are forced from at 70½ age. Tax-free distributions can be received before age 59 ½ without penalty if:
• disabled, a beneficiary, first-time home purchase, part of a series of substantially equal annuity payments, used
  to pay major medical expenses, used to pay medical insurance premiums during a period of unemployment, or

• post-secondary education expenses, the distribution is due to an IRS levy on the qualified plan, the distribution
  is a qualified reservist distribution. so long as the individual has held the account for at least five years.
    Any other distribution is subject to taxation and an additional IRS penalty of 10% if the withdrawal is made
    prematurely.

BENEFICIARIES

• If the annuitant dies or is disabled, tax-free distributions may occur if the account has been held for five years. If
 the beneficiary is not a spouse, the Roth IRA cannot be contributed to, combined with, or rolled over into
  another Roth account.

• The Roth IRA must be distributed within the lifetime of the beneficiary and requires minimum distributions
  based on the beneficiary’s age and the IRS life-expectancy tables. If the minimum distributions do not begin by
  December 31 of the year following the death, the  account must be liquidated within five years.

• If the beneficiary is a spouse, the Roth IRA can be treated as or retitled in the spouse’s name. No minimum
 withdrawals are required. If spouse dies, the spouse’s beneficiary receives the Roth IRA.

• If the account has been held for five years, the beneficiary must begin minimum distributions based on the
  beneficiary’s age and the IRS life-expectancy tables by the end of the following year or liquidate the account
  within five years.

CONVERSION TO ROTH IRA

Traditional IRA can be converted to Roth IRA, but the investor must pay taxes on the tax-deductible contributions
and any tax-deferred growth in the traditional IRA. Depending on how long the person has been investing in the traditional IRA and how much the account has grown, the taxable income can bump some investors into the next tax bracket. Prior to 2010, only investors with a modified AGI less than $100,000 could convert their traditional IRA to a Roth IRA. However, in 2010, Congress removed the limit, allowing conversion from a traditional IRA to a Roth IRA regardless of income. Some people convert because they believe their tax bracket will be higher in retirement than while they are working. Due to market collapse in 2007 and 2008, stock market hasn’t recovered, the taxes on conversion are less than otherwise in the market rise. Consider all the tax implications before converting a traditional IRA into a Roth IRA.

ROLLOVERS AND TRANSFERS

To avoid early IRAs withdrawal taxes and penalties, individuals moving funds from one tax-deferred plan or to
another account must do so by rollover or fund transfer. Rollovers are a tax-free distribution of cash or other assets from one IRA to another or one qualified plan into another. Rollovers are subject to a 20% tax withholding rate, after funds are deposited into a new IRA or qualified plan within 60 days of funds transferred, the withholdings can be reported on tax return, and are reimbursed. One rollover per year is allowed. In IRA transfer funds are moved from one trustee/custodian to another, such as transferring funds from one bank to another. Transfers can be unlimited per year, and no 20% tax withholdings.

EMPLOYER-SPONSORED RETIREMENT PLANS

Many people invest in retirement plans provided by their employers, such as 401(k), pension plans, and profit sharing. The two types of retirement plans: qualified and nonqualified.

QUALIFIED VS. NON-QUALIFIED RETIREMENT PLANS

The Employee Retirement Income Security Act (ERISA) provides minimum standards for employee retirement plans. Qualified retirement plans offer special tax benefits and are approved by the IRS. To qualify for a retirement, it must be:

• approved by the IRS;
• established for the exclusive benefit of employees and/or beneficiaries;
• cannot discriminate in favor of highly-paid employees, officers, or stockholders;
• written and communicated to employees in writing;
• explicitly defined the plan’s contributions or benefits;
• must be permanent; and
• meet vesting and benefit requirements.

ERISA ISSUES:

Employer contributions for qualified plans are tax-deductible as a business expense and are made with pre-tax dollars while the interest earned is tax-deferred. Distributions are taxed as ordinary income upon withdrawal.
Nonqualified plans do not require IRS approval. Contributions are not tax-deductible, but interest earned is tax-
deferred until withdrawal. Nonqualified plans allow employees to discriminate by offering retirement plans to key employees, only. Nonqualified plans include split dollar plans, deferred compensation, and executive bonus plans.

FIDUCIARY RESPONSIBILITIES OF QUALIFIED PLANS

Fiduciaries (plan administrators) are obligated to execute their duties in the best interest of the plan and its beneficiaries.

WITHDRAWALS FROM QUALIFIED PLANS

Distributions from a qualified retirement plan can be made regardless of employee’s age at retirement, if employee ceases the employment, or if the plan is terminated. If distributions from a qualified plan are made prior to the age of 59 ½, a 10% penalty tax is imposed. An individual can make early withdrawals, subject to tax, without penalty if the individual dies or becomes disabled or uses the money for a down payment on a home, post-secondary education expenses, or catastrophic medical expenses. Plan loans and rollovers also constitute penalty-free withdrawals.

REQUIRED MINIMUM DISTRIBUTIONS (RMDs)

Distributions must begin by April 1 in the year after the plan participant reaches the age of 70 ½ or a nondeductible 50% penalty is assessed on the difference between the amount withdrawn and the required benefit amount.

VESTING RULES FOR QUALIFIED PLANS

ERISA requires vesting rules for qualified plans on how participating employees become entitled to ownership of contributions made by employers. The longer an employee works for an employer, the greater the percentage of ownership the employee has over the employer’s share of contributions, resulting in the employee eventually having 100% ownership of the employer’s contributions after a certain number of years. Contributions by the employee are 100% vested immediately and cannot be forfeited. The two types of vesting: cliff vesting and graded vesting. Cliff vesting gives the employee ownership of employer contribution all at once, like jumping off a cliff. Graded vesting allows equal portions of employer contributions each year after a certain number of years. The number of years for vesting varies depending on the type of retirement plan (defined benefit or defined contribution).

VESTING RULES FOR QUALIFIED PLANS

• 5-Year Cliff vesting: The employer’s contributions are completely vested after the employee has worked for
   five years. During years one through four, employer contributions are 0% vested and by the end of year five and
   in future years, employer contributions must be 100% vested.
• 7-Year Graded vesting: After three years of service, employer contributions must be 20% vested. Each year
   thereafter, the plan must vest 20% until employer contributions are completely vested after the employee has
   worked seven years. In years one and two, employer contributions are 0% vested, but each following year,
   the employee vests 20% of employer contributions (i.e., Year 3: 20% vested; Year 4: 40%; Year 5: 60%; Year 6:
    80%;Year 7: 100% vested).

DEFINED CONTRIBUTION PLAN VESTING

• 3-Year Cliff vesting: The employer contributions must be fully vested after the employee has worked three years.
  In years one and two, employer contributions are 0% vested, but by the end of year three and in future
  years, employer contributions must be 100% vested.
• 6-Year Graded vesting: After 2 years of service, employer contributions must be 20% vested. In each year,
  thereafter, the percentage vested increases 20% until employer contributions are 100% vested by the end of
  year six (i.e., Year 1 :0% vested; Year 2: 20%; Year 3: 40%; Year 4: 60%; Year 5: 80%; Year 6: 100% vested).

DEFINED BENEFIT VS. DEFINED CONTRIBUTION PLANS

Defined benefit plans promise specific benefit amounts upon employee retirement, such as $100 a month at
retirement. The benefit amount depends on employee’s years of work and annual earnings. A formula to determine the benefit amount must appear in the plan. The maximum annual benefit for defined benefit plans is the employee’s mean annual earnings, but no more than $200,000 in 2014. Defined benefit plans must provide retirement benefits. The funding tool used for defined benefit plans is deferred annuities. The benefits of the traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Defined contribution plans do not promise an exact benefit amount, but guarantee a specific amount of
contributions to be made by the employer. The benefit amount is unknown until distribution begins. The two types of defined contribution plans are profit-sharing plans and pension plans. Cash or deferred arrangements are a variation of both. The maximum contribution under a defined contribution plan is the lesser of the employee’s annual earnings, or $50,000 per year in 2014. Defined contribution plans include 401(K) plans, 401(B) plans, employee stock purchase plans, and profit sharing plans.

TYPES OF QUALIFIED RETIREMENT PLANS

PROFIT-SHARING PLAN:

Profit-sharing plan is a flexible plan because employer contribution is based on the company’s profits and may vary from year to year. The plan must provide a clear formula for how profits are contributed to participants. The employee receives all contributions plus interest upon retirement. Contributions and interest are tax-deferred until withdrawn, then taxed as ordinary income.

In stock bonus plan, also called an Employee Stock Ownership Plan (ESOP), employer contributions are based on the company’s stock. The employer establishes a trust fund and uses the cash to purchase existing shares.

PENSION PLANS

Employer contributions to a pension plan are based on the employee’s compensation and years of service with the company, not the company’s profitability or the employer’s preference. A top-heavy plan is a pension plan providing 60% or more of its benefits to the company’s key employees. For a top-heavy plan to remain qualified, all non-key employees must receive employer contributions in an amount of 3% of compensation or a percentage equivalent to the highest paid employee’s contribution rate.

MONEY-PURCHASE PENSION PLAN

In a money-purchase pension plan, the employer contributes a fixed amount to the plan every year, and this amount is apportioned among each participating employee’s account. Upon retirement, the employee’s benefit amounts are based on the funds in his or her account.

CASH OR DEFERRED ARRANGEMENT (CODA) PLANS

Cash or Deferred Arrangement (CODA) plans are modified profit-sharing or pension plans. These plans are termed CODA because part of the participant’s compensation is deferred by putting it into the plan. Deferred compensation refers to a cash bonus deposited into the account on a pre-tax basis or a reduced salary with the reduction placed into the account on a pre-tax basis. CODA plans defer taxation until the participant is retired; when the funds are disbursed, they are taxed.

401(K) PLANS

Participants in a 401(k) plan can contribute through a salary reduction, cash bonus or thrift plan. Contributions made into a 401(k) plan are pre-tax and not part of the employee’s adjusted gross income (AGI). The employee elects a percentage of salary to be withheld. Employer contributions, sometimes called matching contributions, are based on a percentage or amount of the employee’s contribution. Interest earned on contributions is tax-deferred until withdrawal, then taxed as ordinary income. In 2014 individuals age 49 and below can contribute a maximum of $17,500 to their 401(k) plan. People age 50 and above can contribute $23,000 per year by adding the catch-up amounts of a maximum of $5,500 per year.

403(B) TAX-SHELTERED ANNUITIES (TSAS)

403(b) tax-sheltered annuities are available to employees of nonprofit 501(c)(3) organizations and public school employees. The employee makes contributions to the TSA by salary reduction pre-tax, which reduces the employee’s AGI by the amount of salary reduction. The employer purchases a deferred annuity with the employee’s contributions. Contributions made by the employee and interest earned are not taxed until withdrawn, then at ordinary income. The maximum that can be contributed to a TSA in 2014 is $17,500 for individuals age 49 and below. The limit is $23,000 for individuals age 50 and above that includes “catch-up” contributions of $5,500 per year. 403(b)(7) are the exact same, but are comprised of mutual funds instead of annuities.

457: DEFERRED COMPENSATION PLANS

A 457 plan is a nonqualified deferred compensation plan for government and nonprofit employees. The employee defers compensation into the plan on a pre-tax basis. The maximum amount of compensation that may be deferred is the lesser of 25% of gross earnings, or $17,500 in 2014. People age 50 and above can contribute $23,000 per year by adding the catch-up amounts of a maximum of $5,500 per year. A person whose employer has a 401(k) or 403(b) and a 457 may defer the maximum contribution to both plans instead of meeting a single limit amount. Thus, a participant can contribute the maximum $17,500 into their 401(k) and the maximum $17,500 into their 457 plan. If the person is over age 50, he or she can contribute $23,000 into both the 401(k) and 457 plans by making catch-up payments of $5,500 into each plan. A person whose employer has a 401(k) or 403(b) and a 457 may defer the maximum contribution to both plans instead of meeting a single limit amount. Thus, a participant can contribute the maximum $17,500 into their 401(k) and the maximum $17,500 into their 457 plan. If the person is over age 50, he or she can contribute $23,000 into both the 401(k) and 457 plans by making catch-up payments of $5,500 into each plan.

QUALIFIED PLANS FOR SMALL EMPLOYERS OR SELF-EMPLOYED

SIMPLIFIED EMPLOYEE PENSIONS (SEPS)

Simplified Employee Pension plans, (SEPs) or 408(k), are qualified plans for small employers. SEPs are a mix of an IRA and profit-sharing plan. Each employee has his own IRA. The employer makes contributions into employees’ IRAs. An employer may deduct up to 25% of the total contributions made to all employees (this is a SARSEP – salary reduction SEP; the maximum amount is $53,000 per year in 2014). Contributions made by the employer are not part of the employee’s gross income. SEPs allow a greater annual contribution amount compared to IRAs. Employees age 21 and older who have earned a minimum of $550 over three of the past five years must be included in the plan. In 2014, the maximum annual contribution to a SEP is $53,000 or 25% of an employee's salary, whichever is smaller. Employees who are part of the plan can also make annual IRA contributions of up to $5,500; $6,500 for employees ages 50 and older; or 100% of their compensation, whichever is less for the tax year.

SIMPLE PLANS

Savings Incentive Match Plan for Employees (SIMPLE) are qualified retirement plans available to small businesses.
The employer must have no more than 100 employees earning more than $5,000 during the prior year. The employer cannot have another qualified plan in effect. SIMPLE plans may be organized as an IRA or 401(k) established by the employer. Employees may make contributions by salary deferral up to an annual maximum. The employer has two choices for contributing to employee accounts:
• contribute 2% of employee’s compensation without regard to whether the employee makes contributions; or
• match the employee’s contributions dollar-for-dollar up to a maximum of 3% of the employee’s annual
   earnings.

Contributions are fully vested immediately. Contributions and interest earned are tax-deferred until withdrawn. The employer can tax deduct contributions and are not part of the employee’s taxable income. Withdrawals made from a SIMPLE within the first two years are subject to a 25% penalty tax. In 2014, the maximum contribution amount is $12,000. Individuals age 50 and above can make catch-up contributions in an amount of $2,500 per year.

KEOGH PLANS

Keogh Plans, also known as HR-10 plans, are qualified retirement plans for self-employed individuals like sole-proprietors, partnerships, physicians, attorneys and farmers. Keogh plans may be organized as a defined
contribution plan or a defined benefit plan. For 2014, the elective deferrals are $17,500, with a catch-up provision limit of $5,500; the contribution limit from all sources is $52,000 and the amount of employee compensation that can be considered in calculating defined contribution plans is $260,000. Contributions are tax-deductible if the maximum contribution limits are not surpassed. Dividends and interest are tax-deferred. Employees working for a self-employed individual who has a Keogh plan must be included in the Keogh plan if they are at 21 years old, been employed for at least one year and worked over 1,000 hours a year.

ROLLOVERS AND TRANSFERS

To avoid early IRAs withdrawal taxes and penalties, individuals moving funds from one tax-deferred plan or to another account must do so by rollover or fund transfer. Rollovers are a tax-free distribution of cash or other assets from one IRA to another or one qualified plan into another. Rollovers are subject to a 20% tax withholding rate, after funds are deposited into a new IRA or qualified plan within 60 days of funds transferred, the withholdings can be reported on tax return, and are reimbursed. One rollover per year is allowed. If an individual chooses to move funds from one plan or account to another, the individual may choose to allow the first plan to directly transfer the funds to the other plan. Transfers avoid situations where the 20% withholding tax is assessed.

NONQUALIFIED DEFERRED COMPENSATION

A non-qualified deferred compensation plan or agreement simply defers the payment of a portion of the employee’s compensation to a future date. The amounts are held back (deferred) while the employee is working for the company, and are paid out to the employee when he or she separates from service, becomes disabled, or dies. If the plan is structured correctly, the employee will not pay taxes on the deferred compensation until it is paid. Unlike qualified plans,however, the employer cannot claim a deduction until the benefits are taxable to the employee at distribution.

OTHER ERISA CONSIDERATIONS:

ERISA imposes a fiduciary duty on the investment managers of a qualified plan to:

• act solely in the interest of the plan and its participants;
• make investment choices using care, skill, prudence, and diligence under the circumstances;
• diversify the investments to minimize the risk of large losses; and
•make investments only in accordance with the documents governing the plan – the investment policy
  statement. This investment managers must avoid conflicts of interest and make prudent investment decisions.     It limits the investment choices of investment managers, which can be a heavy regulatory burden.

OTHER TAX ADVANTAGED PLANS

Section 529 College Savings Plan are tax-advantaged savings plans to fund higher education costs. Contributions are not federally tax-deductible, but some states allow the contributor to deduct all or part of the state income tax. Interest is not subject to federal tax. In some states, interest earned in 529 plans is exempt from state income tax as well. Distributions used for college costs are tax-free. If withdrawals are not used for eligible college expenses, tax and a 10% federal penalty on the interest portion applies. To avoid taxes and penalties, withdrawals must be made strictly for eligible college expenses. The plan is managed by an educational institution or by the state. The special benefits of section 529 plans: income tax breaks; state tax breaks; funds may be reclaimed by the plan owner at any time and for any purpose; and the amount of deposit is large – up to $300,000 for each plan beneficiary. The two types of section 529 plans: savings plans, like a 401(k) plan or IRA, or a prepaid plan, where the investor pays for the entire cost of education at a discounted rate (often the current cost of education).

COVERDELL EDUCATION SAVINGS PLAN

Education IRA was renamed as Coverdell Education Savings Plan in 2002. It acts as a savings account for
non-deductible cash contributions up to $2,000 per child per year, up to age 18, for education expenses. It allows the funds to be used for college, elementary, and secondary education (K-12). The contributions are not tax-deductible.
The account’s growth is tax-deferred, and if withdrawals are for qualified education expenses, the withdrawals are tax-free. The account is distributed to the child if not used for college and is taxed as ordinary income. The account must be fully withdrawn by the time the child reaches age 30, or transferred into the name of another family member (out to first cousin), or be subject to tax and penalties. The low contribution limit means even small maintenance fees can significantly affect the overall investment return, and coordinating withdrawals with other tax benefits, such as the Hope or Lifetime Learning tax credits, can be extremely complicated.

TYPES OF ACCOUNTS


INDIVIDUAL ACCOUNTS

Individual accounts are the simplest accounts registered to one person who can only execute transactions in the
account; any other person needs written authorization.

JOINT ACCOUNTS

Joint accounts have multiple owners. All owners must provide the required and requested information. Each account owner must sign the new account form. All the owners can execute transactions in the joint account.

JOINT TENANTS IN COMMON (JTIC)

For joint tenants in common, if one party dies, his portion reverts to his estate, and the account must be probated. JTICs are 50-50 splits, but the account can be divided any way the clients determine, that percentage ownership is subject to claims in divorce.

TRANSFER-ON-DEATH (TOD) ACCOUNTS

Transfer-on-Death (TOD) accounts can be passed directly to another person or entity upon the death of the account owner without probate. The account owner is responsible for designating the TOD beneficiaries who will receive the account assets and can change the beneficiaries. Upon death of the account owner, TOD beneficiaries must send in a copy of the death certificate. Prior to the death of the account owner, the beneficiary has no ownership, being a beneficiary does not subject the account to the claims in divorce and cannot direct any action into the account.

PAYABLE-ON-DEATH (POD) ACCOUNTS

A Payable-on-Death (POD) account deals with a person's bank assets instead of their stocks, bonds, mutual funds, or other assets. The beneficiary cannot act in the account, nor act as an owner, and therefore is not subject to claims in the divorce of the beneficiary. Both individual and joint accounts may have a TOD or a POD provision.


CUSTODIAL ACCOUNTS FOR MINORS

Custodial accounts are investment accounts opened on behalf of a minor. Children cannot open accounts in their
own name because they are not legally responsible for contractual decisions and could disavow the transactions
when they become of age.

UTMA/UTGA

Custodian accounts are regulated by the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).

• No Joint Accounts: There can be no joint UGMA or UTMA. UGMA/UTMA accounts can have only one custodian
  and one minor.

• Prudent Man Rule: Custodians are fiduciaries and must act with caution and consideration to seek reasonable
  income and preserve capital, and cannot margin the account (create debt), or establish uncovered options.

• Gifts are Irrevocable: Donors (gift-givers) may not take back gifts given to minors. (gift taxes apply on any gifts
 over $14,000).

• Age of Majority: Custodian makes sure the account is transferred to the minor upon reaching
 the age of majority in UGMA accounts but never later than age 25 in   UTMA accounts.

• “Kiddie” Tax Rule: If the child is age 18 or under, a portion of earnings is reported at the child’s income tax
  bracket, and a portion is reported at the parent’s tax   rate. when the child reaches 19, all earnings are reported at his or her tax rate.


THREE ACCOUNT TITLES:

o Custodian name (one per account)
o Child name (one per account)
o Child’s state (residency, not if they are happy or sad)