Your Money Matters
A Consumer Financial Column
Understanding Medicare
March 15, 2010
By Jason Alderman
Most people are somewhat familiar with Medicare, since it’s likely they or a family member are already covered by the government-provided health insurance program. But with its alphabet soup of options and complex rules, Medicare can be daunting to the uninitiated.
If you’re approaching 65, here are some Medicare basics you’ll need to know:
Medicare provides benefits to people age 65 and older and those under 65 with certain disabilities or end-stage renal disease. Most people’s initial enrollment period is the seven months beginning three months before the month they turn 65. If you miss that window, you may enroll between January 1 and March 31 each year, with coverage beginning July 1.
Medicare offers numerous plans and coverage options, including:
Part A helps cover in-patient hospital, nursing facility and hospice services, and home health care. Most people pay no monthly premium and are automatically enrolled upon turning 65, or after receiving Social Security disability benefits for 24 months.
Part B helps cover doctor’s services, outpatient care and some preventive services. It’s optional and has a monthly premium. Most people are automatically enrolled at the same time as Part A. To opt out, follow the instructions that accompanied your Medicare card (mailed about three months before your 65th birthday). Weigh opting out carefully because there’s often a sizeable penalty if you enroll later, unless you’re currently covered by an employer’s plan.
Part C (Medicare Advantage) plans are privately run HMO or PPO Medicare plans that provide coverage similar to Parts A and B, but may also include additional benefits such as prescription drugs, dental and vision coverage. In exchange for lower out-of-pocket costs and additional benefits, you’re usually required to use the plan’s provider network, which may be more restrictive than providers you could access through regular Parts A and B.
Part D helps cover prescription drugs. It’s optional and carries a monthly premium. These privately run plans vary widely in terms of cost and medications covered. As with Part B, you may be charged a late-enrollment penalty if you don’t sign up when first eligible and later decide to enroll. If you’re in a Part C plan with drug coverage, you don’t need Part D.
Many people purchase additional Medigap (or Medicare Supplemental) insurance, which is offered by private insurers and follows strict government coverage guidelines. Medigap helps pay for many items not covered by Medicare, including deductibles, copayments, coinsurance and, sometimes, coverage when traveling abroad.
Medigap coverage is already included in Part C Medicare Advantage plans; plus some employers and unions offer it to their retirees. Medigap plans can vary widely in terms of cost, covered benefits and states participating so compare your options carefully.
Understanding and choosing the right Medicare options for your individual situation can be a complicated process. For assistance, call 1-800-633-4227 or visit www.medicare.gov, where you’ll find:
- Helpful publications, including “Medicare & You 2010”
- Tools to compare prescription drug plans, hospitals, nursing homes and Medigap plans in your area
- A resource to find local doctors and other health practitioners who participate in Medicare
- Services covered by various Medicare plans
- Enrollment instructions
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit go to www.practicalmoneyskills.com/summit2010.
Identity thieves’ latest scams
March 8, 2010
By Jason Alderman
If the financial consequences weren’t so damaging, you might almost find humor in how identity theft has butchered the English language in recent years. “Phishing,” “pharming” and “vishing” are just a few ways criminals access personal information they’ll use to open illicit accounts, rent apartments, or even charge medical procedures to someone’s insurance plan.
Unfortunately, every time authorities plug one hole, crafty criminals figure out new ways to trick unsuspecting victims. Some now even steal children’s Social Security numbers, ruining their credit long before they’ve opened a single account.
To protect yourself and your family, beware of these scams:
Phishing: Where you receive an email, purportedly from a trusted source like a government agency or your bank, asking you to supply or confirm account information, log-in IDs or passwords. Legitimate outfits never ask you to verify sensitive information by email (or over the phone). When in doubt, contact the organization yourself. And never click on the link provided within the email – it could take you to a copycat website capable of infecting your computer.
Smishing (for “Short Message Service”): Like phishing, only it uses text messages sent to your cell phone.
Vishing (voice phishing): An automated voice message that directs you to call your bank or credit card company. Under the pretext of clearing up a problem (like theft), you’ll be asked to share personal or account information. Keep a list of company toll-free numbers handy so you can call them directly without fearing you’ve been given bogus information. I also program my banks’ and credit card issuers’ phone numbers – but not account numbers – into my cell phone in case I’m traveling.
Pharming. Where hackers redirect you from a legitimate website to an impostor site to harvest (farm) personal data you’ve been asked to provide. Social networking sites like Facebook and Twitter increasingly are being targeted.
Skimming: Where crooks use an altered ATM slot and cameras to record account information; also, when dishonest store or restaurant employees use a portable card reader to skim credit or debit card information.
Spyware: Illicit software you unknowingly download when you open an email attachment, click on a pop-up window or download a corrupted song or game. The spyware can then record your keystrokes to obtain account information or ferret out confidential information on your computer.
Don’t forget good-old-fashioned pickpocketing, mail theft and rooting through your trash.
To reduce your risk of identity theft, always:
- Shield keypads from the eyes of “shoulder surfers” at stores and ATMs.
- Shred paperwork and receipts containing personal or account information.
- Lock up your Social Security card and unneeded credit cards.
- Carefully scan monthly credit card and bank statements for erroneous charges.
- Monitor your credit reports for errors or fraudulent activity. You can order one free report per year from the three major credit bureaus at www.annualcreditreport.com.
- Refrain from making online purchases from unfamiliar websites; and look for “https” in the address.
These are only a few of the precautions you should routinely take to protect your personal information. For more tips, visit Practical Money Skills for Life, Visa Inc.’s free personal financial management program (www.practicalmoneyskills.com/security).
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit go to www.practicalmoneyskills.com/summit2010.
Credit card reform goes live
February 22, 2010
By Jason Alderman
One major piece of legislation President Obama signed last year was the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which made fundamental changes to credit card agreements. Some provisions were adopted last summer, but the bulk of them took effect February 22, 2010.
Here’s an overview of a few major changes:
Restrictions on interest rate increases. The annual percentage rate (APR) for interest on new credit card accounts cannot be increased during the first year unless:
- A clearly disclosed introductory period (teaser rate) ends; also, such introductory periods now must be at least six months long;
- It’s a variable-rate (vs. fixed-rate) card and the APR is tied to an index that increases (e.g., U.S. Treasuries);
- You enter a debt repayment workout plan and don’t comply with its terms; or
- You are over 60 days late making at least the minimum monthly payment. Note: the new rules say the previous APR must be restored after you’ve made six months of on-time payments.
More advance notice. After the first year, banks and credit unions that issue credit cards may raise the APR on new transactions, or make other significant account changes, only after providing 45 days’ advance notice. Also, you must be given an opportunity to cancel the card before these changes take effect and pay off the balance at the old rate.
Interest rate review. Every six months, card issuers must review accounts whose interest rates were increased based on market conditions, cardholder creditworthiness or other factors; and, if warranted they must reduce the rate or provide written notice why the increase should still apply. (Effective August 22, 2010.)
Bill and payment timing. Credit card statements must be mailed at least 21 days before the balance is due. Also, payments must be credited as on-time if received by 5 p.m. on the due date.
Order of balances paid. When one card carries balances at different interest rates – such as one rate for purchases and another for balance transfers – payments must be applied to the highest-rate balance first.
Enhanced statements. Credit card statements must clearly post how much you’ve paid in interest and fees for the year, the upcoming due date and potential late fees, and how long it would take to pay off your bill making minimum payments – including total interest charges.
A few other highlights:
- Over-the-limit fees cannot be charged unless you have previously agreed (opted in) to allow charges over your credit limit.
- You cannot be charged additional fees for paying your bill online or by phone.
- Card issuers may no longer factor in average daily balances from a previous billing cycle that wasn’t fully paid off when calculating current interest charges (known as “double-cycle billing”).
- People under 21 must have an adult co-signer in order to open an account unless they can prove their ability to repay their account balance.
To learn more about particular changes to your credit card agreements, contact the bank or credit union issuing your card, or visit www.fdic.gov. In addition, always read mailings from issuers to ensure you’re up-to-date on any account changes.
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Tax deadline approaches
February 15, 2010
By Jason Alderman
April 15 is right around the corner. If a chill just went down your spine, chances are you haven’t yet organized your income tax paperwork, let alone filed your return.
Even if you can’t file or pay your taxes by April 15, it’s vital to at least request an extension by then; otherwise, the penalty on taxes owed increases dramatically – generally an additional 5 percent of taxes owed for each month you’re late, plus interest, up to a maximum penalty of 25 percent.
However, if you file your return or request an extension by April 15, the penalty drops to 0.5 percent per month, plus interest. Contact the IRS early if you won’t be able to pay on time; they may even waive the penalty, depending on your circumstances. Call 800-829-1040 or visit www.irs.gov for more information.
Another way to avoid a penalty: The IRS does accept payment by credit or debit card, with a small convenience fee that is tax deductible. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty.
Here are several 2009 federal income tax changes to keep in mind as you fill out your return:
New homeowner tax credit. If you bought a home in 2009 and hadn’t owned one during the previous three years, you may be eligible for a credit of up to $8,000; in addition, existing homeowners who bought a new primary residence after November 7, 2009, may also be eligible for a credit of up to $6,500. Eligibility rules and deadlines are complicated, so read “First-Time Homebuyer Credit” at www.irs.gov for details.
New vehicle tax deduction. If you bought a new (not used) car, RV or motorcycle between February 17 and December 31, 2009, you can deduct state and local sales and excise taxes, with certain limitations, even if you don’t itemize deductions. Read “Sales Tax Deduction for Vehicle Purchases” at www.irs.gov for details.
Expanded college tax credit. For 2009 and 2010, Hope Scholarships have been replaced by the more robust American Opportunity Tax Credit. Enhancements include:
- Maximum tax credit increases to $2,500.
- Credits can now be claimed for all four years of undergraduate college, instead of only the first two.
- Those with modified adjusted gross income under $80,000 ($160,000 for joint filers) qualify for the full credit; it phases out between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
- Lower-income families who owe no taxes may file a return anyway and receive a refund for up to 40 percent of the credit amount, up to $1,000.
- Read “American Opportunity Credit” at www.irs.gov for details.
Unemployment benefits. Up to $2,400 in unemployment benefits is tax-free for 2009.
Numerous free or low-cost tax-preparation services are available to seniors, military and low- and middle-income taxpayers, including:
- IRS-sponsored programs. (Search “Free Tax Preparation” at www.irs.gov).
- AARP volunteers provide free tax preparation to low- and middle-income taxpayers, particularly those over age 60 (www.aarp.org/money/taxaide.)
- Military personnel and their families worldwide can get free assistance through a program overseen by the Armed Forces Tax Council. (Check with your base for details.)
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Don’t count on an inheritance
February 8, 2010
By Jason Alderman
Earlier this decade, headlines blared that trillions of dollars soon would begin changing hands in the largest wealth transfer in history, as depression-era parents began passing along their nest eggs to Baby Boomer offspring. Fast forward a few years and all bets are off.
If you are among those expecting to build your retirement security on the foundation of a robust inheritance, you may want to rethink that strategy. Here are a few reasons why many seniors are revising their estate distribution plans:
Plunging account values. People heavily invested in the stock market saw their retirement account values decline significantly in 2007-2008. Although younger savers still have many years to catch up, it may be difficult for retirees – or those on the verge of retirement – to recover. Many will likely have to draw on their account principal to make ends meet, thereby depleting their savings much more rapidly than planned.
We’re living longer. As average life spans increase, so does the period we’ll need to survive on our retirement savings. On average, today’s 65-year-old man will live until 82; a woman until 85. Many people never imagined their savings would have to last that long and didn’t plan accordingly.
Misguided early retirement. When the market was booming, many people retired early, assuming they could afford the gap before Social Security and Medicare kicked in. But plummeting home equity and 401(k) balances have forced many to aggressively withdraw savings, trim expenses or even return to work.
Government programs are overburdened. Baby Boomers are beginning to use their Social Security and Medicare benefits and far fewer younger workers now fund those programs, so it’s possible that benefits will decrease, premiums will rise or taxes will increase – or a combination of all three; all options will strain fixed incomes.
Skyrocketing healthcare costs. Even if they buy Medicare prescription drug and Medigap coverage, seniors, like everyone else, spend an ever-increasing percentage of income on medical care. Such costs often far outpace benefit cost-of-living increases and interest earned on investments – especially from low-risk investment vehicles many seniors favor.
Tapping home equity. Increasingly, seniors are using reverse mortgages and more traditional home equity lines and loans to draw on home equity for living expenses, thereby lessening their estate’s future value.
Spreading the wealth early. Many seniors help their children and grandchildren pay for high-ticket expenses like home down payments, college and student loans. Although such gifts reduce the eventual value of their estate, there are certain tax advantages (lower estate taxes, state tax deductions for those contributing to a 529 Plan, etc.) – not to mention being able to help loved ones. Just be sure that if you’re the recipient you don’t take such assistance as license to assume additional debt.
Long-term care. Unless they’ve purchased comprehensive long-term care insurance, which is quite expensive, your folks may end up burning through much of their savings should they ever require assisted living. Medicare will only pay for a nursing home once they’ve exhausted most of their assets.
Bottom line: It’s probably risky to depend on an inheritance to provide your financial security.
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Teachable Money Moments for Kids
February 4, 2010
Over the past 18 months, Americans have done a better job learning the basic concepts of money management, according to several studies. But are these important lessons being shared with their children? There is often debate amongst parents as to what their kids should or should not be expected to pay for. While the answers depend on the age of the child and are personal to each family, here are some factors to consider:
First, you will need a child that has their own source of income. Whether it is an allowance or income earned from a job, there needs to be a way for them to pay for items with their own money.
Secondly, a decision should be made as to what lesson is being taught. Some general lessons are:
How to divide money between saving and spending.
Importance of setting a budget and how much things cost.
The decision-making process for prioritizing expenses.
Responsibility and care for purchased items.
Each of these lessons plays a role in determining what children pay for with their own money.
Some examples of what children can pay or help pay for include:
Birthday presents for friends – If a child has been invited to their sixth birthday party in two months, this becomes expensive for the parents. This is a good opportunity to work with a child on setting an overall gift budget for the year, then deciding what to buy and how much to spend on each friend.
Clothes or entertainment – Parents will buy basic clothes and other necessities for their children. The question becomes should the child pay for brand name clothes, or the extra purse, or the extra entertainment out of a pre-set budget?
Lost items – Maybe the parent paid for the original cell phone or hand-held electronic game, but should they pay to replace the item if it is lost due to carelessness?
College tuition – Post-high school education is expensive and parents should consider whether they will require their children to work during college. This may be during school, summer only or simply weekends. It depends on each family’s personal situation.
Vacations – Some families encourage their kids to help contribute to a family vacation or outing. While the children won’t pay for a majority of the expense, this provides the opportunity to teach them the cost of this type of entertainment and share in the decision of how that money is spent while on vacation.
However a parent chooses to do it, allowing children to manage their own money and make financial choices will benefit them tremendously in the future and teach them critical life-long financial habits.
First-time homebuyer tax credit expanded
January 11, 2010
By Jason Alderman
When deciding whether to save for retirement using a traditional or Roth IRA, many people wrestle with the question, “When I retire, will my tax rate be higher or lower than it is today?”
This is a crucial distinction because with a Roth your contributions are taxed today, while withdrawals, including investment earnings, are tax-free at retirement. Conversely, contributing to a traditional IRA lowers your current taxable income; then, in exchange for that present-day favorable tax treatment, you later pay taxes on your balance when it’s withdrawn at retirement.
Some financial experts presume that because your income will likely be lower at retirement, your tax bracket probably will drop as well. Others, more pessimistic about the current economy, predict that record budget deficits could lead to higher future tax rates.
So, how to choose? Despite their more immediate tax burden, Roth IRAs have a couple of longer-term advantages for many folks. For example:
- The younger you are when you start saving in a Roth, the longer your money will compound, tax-free.
- Unlike traditional IRAs, Roth’s have no mandatory minimum annual withdrawals beginning at age 70 ½, so your account can continue to grow tax-free during your lifetime. (Mandatory withdrawals from traditional IRAs were waived for 2009 only.)
- Heirs who inherit a Roth IRA do not pay income tax on withdrawals as they do with an inherited traditional IRA.
Either way, IRAs are still a good vehicle for retirement savings, particularly if you don’t participate in a workplace 401(k) plan. And now, thanks to two tax code changes effective January 1, 2010, you have additional options regarding IRAs.
First, people (single or married) whose modified adjusted gross income (MAGI) exceeds $100,000 can now convert part or all of their existing traditional IRAs – or workplace savings plans from an old employer – into a Roth IRA. Previously, these higher-income folks were excluded from such conversions. (Note that certain MAGI limits do still apply for new Roth contributions. See IRS Publication 590 at www.irs.gov for details.)
Although such conversions may indeed provide long-term tax advantages, they can be difficult to swallow in the short term, since the converted balance is added to your taxable income, thereby increasing your taxes – and possibly boosting you into a higher tax bracket – for the year.
For 2010 conversions only, half of the converted amount will beadded to your 2011 taxable income and half to your 2012 taxable income. Or, if you prefer, you may have the entire amount added to your 2010 taxable income.
As always, you can undo, or “recharacterize,” a conversion later on if needed. For example, if your Roth IRA balance significantly decreased after conversion (as many did after the 2008 stock market crash), you would be taxed on account value that no longer exists; so, you are allowed to undo the conversion and then reconvert at a more favorable time. Recharacterization rules and deadlines are complex, so refer to Publication 590 for details.
Better yet, always consult a tax or investment professional for help weighing your options before making any major changes to your retirement savings habits.
Jason Alderman directs Visa Inc.’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
