June 2009 Archives



Yes, I know it's still June. Kids have barely been on summer vacation for 3 weeks so it truly is too early to even discuss back to school shopping. I want to talk about a different kind of school shopping, purchasing post-secondary education. Across the nation, parents, teachers and school boards promote the concept of college to their students. The overwhelming message is that in order to be successful, you must have a college education. And while it is true, many successful people DO have a college education, not all students will succeed in college, not all career fields require a college education and not all families can afford to pay for post-secondary education. There are many successful adults who have varying levels of education and I am one of those people working in a field quite different from my undergraduate degree.

Since I work for a land grant university, I don't mean to diminish the importance of further education, just noting that college is not for everyone and the first school you choose may not be right for you. College costs should be a factor in making the post-secondary decision, not just how great the football team is or the average salary of graduates in your chosen field. I find many students and parents who shoot first and ask questions later. Parents expected their students to excel in academics and that their kids would go to college. For many, getting accepted was the easy part - paying for it could be their downfall. The December 3, 2008 Christian Science Monitor online report citing the National Center for Public Policy and Higher Education nearly 50% of  American students attending four-year colleges don't finish within six years. Why? Numerous reasons including financial.


Have you priced the costs of colleges Junior plans to attend? Here is something to think about. Note that Clarion and Penn State are just projections of 2009-2010 pending passage of the Pennsylvania state budget and approval of rates by the respective institution's boards of trustees.





4 years


6 years





















out of state

















Penn State










out of state



























When costing out attendance at state related universities, remember that the difference between the out of state rates and in-state rates is financial aid provided by the taxpayers of our fair Commonwealth. The out of state rate is the ACTUAL rate of tuition and fees. Even with this significant "savings" the total cost of college for one student is sizeable, but consider if you have several children planning to attend. Oh, and this chart doesn't consider tuition inflation.


Without proper planning and actions, students and their families are taking on a sizeable financial burden that can hobble them for 10 years or more. Following graduation, many students, as early adults are thinking of buying cars, homes, marriage, starting a family, starting a business or returning to grad school. Will they be able to accomplish those goals and repay their student loan debts?


Here's the latest news on student loans. Consider how it fits into your family's financial picture as well as your student's future. Each July 1 interest rates on new Stafford loans are announced. These interest rates remain in effect for the loan term. This July 1, undergraduate subsidized (for students demonstrating financial need) Stafford loans drops to 5.6% from the current rate of 6%.  Unsubsidized Stafford loans 6.8%. However, all Stafford borrowers will get a break on upfront borrower fees, On July 1, the maximum fee that lenders will be permitted to charge on Stafford loans disbursed between July 1 and June 30, 2010, will drop to 1.5% from 2%. Upfront fees are deducted from the loan amount when the loan is disbursed.

Previously unconsolidated federal student loans issued before July 1, 2006 interest rates will drop from 4.21% to 2.48%. Interest rates on federal PLUS loans -- Parent Loan for Undergraduate Students -- issued before July 1, 2006, will also be reduced from 5.01% to 3.28%.

Borrowers who consolidate these loans after July 1 will lock in a rate of 2.5% for the life of the loan. Borrowers who are in their grace period, the six-month interval between graduation and the start of repayments, can lock in a rate of 2%. PLUS loan borrowers who consolidate can lock in a rate of 3.38%. While it may be difficult to find a lender willing to consolidate loans in today's market you can still consolidate your loans through the Federal Direct Loan Program.

There are two types of student loans: Federal Family Education Loans, which are offered by private lenders and guaranteed by the government, and Federal Direct student loans, which are offered directly to students at schools that participate in the direct lending program. You can consolidate FFEL loans through the Federal Direct Loan Program. You can find more information at www.loanconsolidation.ed.gov.

If your student will be starting college in the summer or fall of 2010, it's not too early to familiarize yourself with the financial aid process including completion of the Free Application for Federal Student Aid, or FAFSA. Advanced preparation in knowing what information is required will save you time and frustration the first time you complete the FAFSA. The online version carries forward some of your data year to year which reduces some of the frustration. To learn more check out www.fafsa.ed.gov.


The federal tax code allows individuals to save for their retirement with pre-tax money. You avoid taxes while you are working (and possibly in a higher tax bracket) and pay the taxes on the principal plus any interest or capital gains (but not at the capital gains rate since you avoided the tax bit up front) when you withdraw the money usually in retirement (when you possibly will be in a lower tax bracket). So because of this preferential tax treatment of retirement accounts (401K, 403B, Traditional IRA's) you are strongly encouraged to save and invest for your future retirement.

This tax deferral does come with a caveat. By the time you reach the age of 72 1/2 (and you need to read the IRS version to determine exactly when you need to take action) you are expected to take out a certain portion of your investments and pay the taxes on them. This amount is referred to as RMD or Required Minimum Distribution and is based on your retirement assets as well as actuarial figures. IF you fail to take the RMD, there is a 50% penalty of what you should have taken! (More specific details are available on the irs.gov website) Because these are unique times, RMD for 2009 have been suspended with no penalty for those folks who are in a position to take advantage of this change.

Prior to leaving office, President Bush signed this legislation lifting the RMD requirement for 2009. You should have received information about this change from your retirement account holders. Many of the folks I work with can't take advantage of this legislation - our VITA project showed of the 300+ people we served, including a good majority of retirees, the Average adjusted gross income was under $13,000 PER HOUSEHOLD. But, if you are fortunate enough to be or know someone who is financially stable in retirement, they could take advantage of this provision. This change was brought about due to the Recession to allow folks to avoid "selling at a loss" - People whose retirement investments had lost considerable value would not be forced to sell at the bottom, but to try to ride out the low spot in the economic cycle.

Bottom Line: If you are or know of retirees who DO NOT need to take money from their retirement accounts in 2009 except for the RMD provision, ask them to consider researching the benefits of stopping payments for the remainder of 2009 and how their account holders will deal with their decision. For some retirees, they receive a monthly distribution while others receive an annual one. If they have already taken some distributions, it appears they have a 60 day lookback period where they could return any distributions received in that time frame. If they receive their distribution at the end of the year, they can take action now to prevent this payment from happening. Each household's situation is different so care must be taken to consider how this suspension of RMD for 2009 affects them.

Don't open your mail...well at least not at 10:00 PM when you left for work at 6:30 AM and have driven about 250 miles throughout your day...especially if your mail contains at thick (14 pages) notice from the IRS regarding your taxes from 2 years ago. Particularly when it is a bill for $8,500 plus another $1,200 in interest and penalties! But I did! Starting to deal with the IRS when you're tired and cranky is not the best way to handle a situation. But, thinking I'm a pretty good recordkeeper and that I had provided my CPA with all appropriate information, instead of waiting until the next morning, I retrieved the 2007 tax file from the spare bedroom and set to work reviewing my records against the deficiencies in the IRS mail audit. My point here is due to keeping my records in one place, I saved time searching. Ultimately my recordkeeping should vindicate me, but that comes later in the story. In 2007 we bought a different home and sold numerous investments to help reduce the mortgage including an early distribution of principal from my Roth IRA . I also cashed in a 529 college savings plan to pay for my daughter's last semester of college. The audit focused on these two transactions as well as questioning the dividends I reported. I sorted through my files to find the documentation for the three issues in question and slept fitfully that night, with a 99% assurance that the 2007 1040 was accurate.

The next morning I got to work composing an explanation to the IRS but decided that it would be a good idea to consult my CPA... remember that 1% of uncertainty? I gathered up all my materials and headed downtown. It is the middle of June and my guy was still in Ireland on a vacation, but his partner graciously met with me to review the situation. He assured me that their office would handle the paperwork which is due in a month. He carefully reviewed the IRS letter and then my supporting documentation.

1. I had failed to provide my CPA with the 1099-R for the Roth withdrawal - knowing that it would not be taxable, but not realizing that it still needed to be reported. My financial institution reported the withdrawal, but it was up to me to indicate on my 1040 the action taken and that it was NOT a taxable event.

2. The 529 college withdrawal - interest was taxable IF not used for qualifying tuition expenses. Since my daughter was claimed as a dependent on the 1040, we just needed to indicate the money was used for her rather than the information that the IRS received that she as beneficiary did not directly receive the money, I as the account holder did.

3. the dividends from the various stocks I hold. Not really sure what happened with the auditor on this one because in their review they correctly indicated the amount of dividends I recieved from Verizon and Coca Cola, but later in the document show those same two stocks with different amounts of dividends. (We only hold one account with each stock company)

So, this next week when my CPA returns home, my file will be one of the files stacked on his desk waiting for action.

BOTTOM LINE: DO NOT PANIC when you receive letters from the IRS, they are only doing their job. Don't assume they are correct. BUT, if you don't have accurate records to back up your assertions, you'll have a very difficult time proving your case. 

No, this entry isn't about the 25 cents quarter, but rather a quarter of the year, more specifically from March 5 to June 4, 2009. The media continually blares how bad the national economy is, national car manufacturers are declaring bankruptcy, dealerships are told they no longer have a franchise.... Gloom and doom abounds. Only if you believe it. I'm working on some home finances and keeping up with my records using Quicken software. I own some stocks that I participate in their dividend reinvestment plans (DRPS) so I'm trying to update my holdings. In March, each share was worth $16.16 and as of June 4 those shares are now worth $36.98 an amazing 129% gain in just 3 short months. Its been said that, "figures lie and liars figure." First off, that 129% gain is just for a quarter so you could multiply by 4 to get 516% annual gain if you follow the figures lie and liars figure model. Also I didn't buy at the $16 level but several years ago at $45.45 so my value is still less than I paid and the $36.98 is about where I was November 19. If I could have predicted the market, I should have bought many shares in March. Why didn't I? Well, I can't predict the future so who knew this particular stock would make such a strong comeback. I DO know that my mortage interest rate is 7.25% - a sure thing and because this is a newer mortgage, most of my monthly payments go toward interest. So in addition to the monthly payment, any "extra" money I find goes to paying down the principal which results in a significant reduction in the next months interest amount.

This past tax season I helped an older couple who, after watching the value of their retirement funds decline, liquidated their holdings, not only missing out on a rebound, but shifitng themselves into a higher tax bracket by moving so much money. Yes, their investments had lost money, but possibly it hadn't lost as much as they thought. If they, like you, participate in a employer sponsored defined contribution plan, each month they made purchases regardless of what the PRICE of the investment was, Going back to my example of my DRP. Each quarter, the dividends are reinvested to purchase more shares or in my case fractional shares of the stock. If the price has dropped, I get more shares. As the price rises, my dividend purchases less. So over time, the value of your holdings does fluctuate based on market performance and how much you contribute. So while this couple cashed out at say $75,000, they may have seen their value drop from a high of $120,000 but may actually have purchased the investments over the years spending a total of $50,000. Depending how you interpret it, when they cashed out, they didn't LOSE money, they gained $25,000! As they saw it, they LOST $45,000, the difference between the $120,000 high and selling price of $75,000.  They say hindsight is 20/20. If their retirement fund performed like my stock (NOTE: not recommended to keep all your $$$ in a single stock!) today their retirement fund would have rebounded to $96,750.

Bottom line message: keep your perspective on your finances. Work to defeat debt and build wealth by using the various types of savings and investment strategies for the purposes they are best used for. Have an emergency fund of 6 to 9 months of living expenses in a relatively liquid account, contribute to your employer sponsored retirement plan at least to the level of their maximum match.  

July 2009

Sun Mon Tue Wed Thu Fri Sat
      1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31