Bbr Volume 2 Issue 8

BRUINBUSINESSREVIEW

VOLUME II ISSUE VIII

PERSONAL FINANCE

2008-2009 BBR STAFF Shannon Kung President

Grace Chan Vice President of Finance

Gloria Ho Marketing Department

Fred Kim Advisor

Christine Liu Vice President of Marketing

Stefanie Ju Finance Department

Joanne Hou Editor

Julie Chen Corporate Relations Department

Eric Park Marketing Department

Benjamin Lo Assistant Editor

Sonia Bhasin Marketing Department

Jaeman Kim Vice President of Corporate Relations

Sunny Wong Vice President of Operations

Erika Solanki Creative Development Department Head

ABOUT US Bruin Business Review is a student-run online publication established in 2007 for the purpose of providing the UCLA student body with a convenient source of business news and career information. We publish every two weeks on the Internet and by subscription, allowing our content to be accessible to everyone. Our goal is to enrich our readers’ knowledge of the business world and the career options within it by presenting a wide range of business-related topics in a non-technical style. Our broad range of topics encompasses current business news, resume tips, employer and MBA program profiles, industry insight, and others. For more information about BBR, visit www.bruinbusinessreview.com. QUESTIONS, COMMENTS, CONCERNS? E-mail: [email protected] Mailing address: Bruin Business Review 118 Kerckhoff Hall 308 Westwood Plaza 2 Los Angeles, CA 90024-1641

February 2009

Stock Market Competition Start Date: January 29, 2009 End Date: March 9th, 2009 Email: [email protected] Description: Learn about investing in the stock market! Teams of 3 students put together a portfolio using a base of $100,000; winners get cash prize.

March 1 PricewaterhouseCoopers-So Cal and National Summer Leadership Programs- Resume Drop deadline Description: Takes place from June 29-30 in Los Angeles. All sophomores interested in accounting should apply. Minimum GPA: 3.0. Submit by 11:59pm.

March 4 Student Accounting Society- Mentor Application Due Description: A great way to help other students going through the recruiting process and meet new people. Future Business Leaders of America- Phi Beta Lambda Training Grounds: Delivering Effective Presentations Time: 7pm Location: Royce 152 Description: Hosted by UCLA Phi Beta Lambda and Kaplan. Kaplan will show what it takes to create an effective and impressive professional presentation. Members will then form teams to present and analyze a simple case study.

April 11 Ernst & Young Summer Leadership Program- Resume Drop deadline Description: All sophomores interested in accounting should apply. Minimum GPA: 3.2. Submit by 11:59pm.

April 15 Deloitte- National Leadership Conference -Resume Drop deadline Description: Takes place from July 14-17 in Scottsdale, Arizona. All interested sophomores should apply. Minimum GPA: 3.25. Submit by 11:59pm.

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table of CONTENTS 5

News of the Week: The Housing Bailout

6

News Briefs

9

The Budget: A Guide to Your Personal Finances

11

Financing Your College Degree

13

How to Deal With Your Credit Score

15

Credit Cards 101

19

Tax Credits & Reductions for College Students

21

Seeking Help from Tax Professionals

23

“Nothing is certain but death & Taxes” -B.F.

25

Buying A House? How About Renting?

29

The Future of Social Security

31

Individual Retirement Accounts 4

THE HOUSING BAILOUT By Jaeman Kim Staff Writer In a move sure to help many, and also anger others, President Barack Obama promised to help up to nine million homeowners to refinance or modify their mortgages. The plan, which could cost up to $275 billion, will allow homeowners who have little to no equity, or worth, on their homes to refinance their loans through Fannie Mae and Freddie Mac, the two mortgage giants that were taken over by the government last year. It is important to note that the only people who qualify for this are those who currently have a loan through Fannie Mae and Freddie Mac. The government will also spend $75 billion dollars to encourage lenders to modify mortgages for at-risk lenders. Those who might benefit from the $75 billion are homeowners who are behind on their payments, or those who are currently in foreclosure proceedings. Others, who are still on time with their payments, may also qualify if they have a high debt-to-income ratio. The other $200 billion will be used to help homeowners who’s mortgages are worth between 80-105% of their home’s value, which makes it difficult to make payments. Also, as stated earlier, the only people who qualify for the plan are those who currently have loans through Fannie Mae and Freddie Mac. Unfortunately, people who have already lost their homes will not receive any type of aid. While the plan has drawn praise from some, it is also receiving criticism from others who say that it does not address loans that are a part of securities, or packages of different types of debts that are traded on the market as investments. Another criticism is that the plan does not do enough for the people that have been hit the hardest, owing much more on their mortgages than their houses are actually worth. These people would be those whose mortgages are about the 105% threshold for qualifying for aid. Given that those who want to take advantage of the plan must not have too much negative equity, most people in hard hit states such as Florida and California will not qualify for the plan. Yet another point that people are disappointed with is the fact that the housing bailout plan does absolutely nothing to remedy the problem of the excess supply of homes. Many economists were hoping that President Obama would push a plan that would subsidize an interest-rate reduction for borrowers, which would help increase demand for homes. One particular group of people who are angry, however, are homeowners who have made all their payments and can continue to afford to do so, despite how much their homes have lost value. Many are angry at the fact that their tax money is being used to help those who cannot afford their payments, while they are forced to continue making payments on their own. Others say that people who have lived their lives conservatively are being punished by being forced to help homeowners who bought houses that they could not afford to begin with. Even President Obama has stated that there may be a potential backlash from homeowners who have so far been making their payments. Still, despite all criticism, this plan may be the beginning of the path towards the nation’s recovery. 5

NEWSBRIEFS Grace Chan Staff Writer

GLOBAL ECONOMIC CRISIS POSES A SECURITY THREAT Dennis Blair, the new Director of National Intelligence warns that the global economic crisis could threaten trade wars, increase political instability in several countries, and undermine the ability of American allies to help with war and reconstruction efforts in Afghanistan and other places. Already, at least a quarter of the world’s countries have experienced some form of low-level instability, such as anti-government demonstrations or shifts in power. For example, Pakistan has lost some control in parts of its North-West Frontier Province, as economic hardships have radicalized groups all over the nation. On Feb. 19, a truce was signed between Pakistan’s Taliban and the secular Pakistani government. It is likely that American allies will no longer have the money to aid defense and humanitarian obligations. U.S. intelligence analysts also worry that there will be a backlash against American promotion of free markets, largely because this crisis was triggered by the United States.

JAPAN’S FOURTH QUARTER GDP POSTS LARGEST DROP IN NEARLY 35 YEARS Japan’s 4Q gross domestic product fell 3.3% between October and December of 2008, or 12.7% on an annualized basis, reflecting the worst drop in three decades. This is the fastest contraction since 1974, when the oil crises pushed up inflation and weakened demand. These grim numbers show how exports play a large role in driving Japan’s economy, and how this reliance on exports has disproportionately affected its GDP in comparison to other industrialized nations. The global recession has hit all of Japan’s biggest export markets, with exports falling 13.9% in the fourth quarter as overseas demand for Japanese automobiles and electronic gadgets plummeted. This sharp decline in exports has also pushed business investment down by 5.3%.

$787 BILLION DOLLAR STIMULUS PACKAGE SIGNED After a month of intense debate, Congress voted to pass an economic stimulus package comprising of spending programs, tax cuts, and unemployment benefits. In the House, no Republicans voted for the package while seven Democrats joined their side. The final vote in the House was 246-176. In the Senate, three Republicans broke ranks to join the Democrats making the final vote 60-38. Key components of the package include: tax-cuts for businesses and individuals, a measure to keep 26 million middle-income Americans from getting hit with the alternative-minimum tax, and incentives for automobile purchases and first time homeowners. Additionally, President Barack Obama has decided to let the Bush tax cuts expire by the end of 2010 instead of ending them earlier. Money was 6 also set aside to help cash-strapped states avoid cuts in education, health care policies, and other important social programs. A large emphasis was placed on job-creation in many sectors such as scientific research and renewable energy.

MAJOR INDEXES FALL MORE THAN SIX PERCENT Despite the $787 billion dollar stimulus package recently signed into effect as well as talks of a mortgage bailout, bleak fourth quarter reports, high unemployment levels, fears of bank nationalization, and reports showing the GDP falling at a faster than expected annual rate of 6.2% at the end of last year spooked investors, pushing major indexes to close at their lowest levels in six years. Bank stocks tumbled as investors feared that nationalizing banks would have wiped out any interest held by shareholders. On Feb. 27, the U.S. government converted $25 billion of its Citigroup preferred stock into common stock, raising its ownership share from 8% to 36%. The government’s investment has already fallen to half of its worth to about $11.5 billion. Congressman Brad Sherman (D-CA) said, “Taxpayers are being ripped off. The only thing worse than nationalizing a bank is to pay for the entire bank and only get one-third of it.” This is Citigroup’s third rescue, and it might not be its last. Staggering numbers:  The DJIA closed at 7,062.93 its lowest level since May 1, 1997. It is down 50.1% from its all time high of 14,164.53 reached in Oct. 2007.  S&P 500 fell to 735.09, to its lowest level since Dec. 1996  NASDAQ closed at 1,377.84  The Russell 2000 index fell to 389.02  Since its October 2007 peak, the Wilshire 5000 is down 52.7 percent, or $10.4 trillion.

CALIFORNIA’S BUDGET BATTLE After a frustrating deadlock lasting longer than 100 days, Governor Schwarzenegger signed a $130-billion dollar budget that raises sales and income taxes for the first time in 17 years, while sharply slashing spending. This measure erases the projected $41.6 billion dollar projected deficit through a scaled back budget and $6.7 in immediate cuts. The gap will be closed through 36% in spending cuts, 30% in new taxes and other revenue, 19% in federal money, 13% in new borrowings and 2% in vetoes. While this ends the immediate crisis, California still remains in a precarious financial situation. If $2 billion more dollars in federal aid is not secured by April, it would result in major cuts to welfare, aid to the blind and disabled, and money given to colleges and university. As the world’s eighth-largest economy, California’s woes stem in part from its inability to sell bonds for several months. Additionally, the budget deadlock occurred because California requires 66% majority support, and no Republicans were willing to vote for a plan that increased taxes, as it would have resulted in political suicide. Ultimately Senator Dave Cogdill (R-Fresno), was ousted as the Senate Republican leader after agreeing to tax hikes. Unfortunately, the UC and Cal State systems will take a considerable hit. At the 23-campus Cal State system, Chancellor Charles B. Reed said plans to reduce enrollment by about 10,000 students will go ahead.

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$8 BILLION DOLLAR FRAUD PERPETUATED BY R. ALLEN STANFORD Stanford International Bank (SIB), an offshore bank based in Antigua, claims that $8B of investors’ money has disappeared. Its founder, Robert Allen Stanford, has been accused of running a multi-billion dollar fraud at his offshore bank in Antigua and his Houston-based brokerage firm. Apparently for several years the SEC, FBI, DEA, IRS, and other regulators have been investigating allegations of fraud and other illegal activities. Stanford was first investigated over 20 years ago as part of a joint Scotland YardFBI investigation. The small Caribbean island of Montserrat had been targeted by criminals who quickly set up 300 banks and became a center for worldwide money laundering operations. One of the banks was Guardian International Bank, created by non-other than Stanford himself. The bank supposedly laundered drug money from the Medellin and Cali drug cartels. Eventually the investigation ended, due to lack of man power. Stanford then switched his attentions to the neighboring country of Antigua, and went on to foster a close relationship with the Antigua’s former Prime Minister Lester Bird. During the late 1990s, members of the Juarez (Gulf) cartel opened 10 accounts at SIB to launder $3M amassed under one of Mexico’s most infamous drug lords, Amado Carrillo Fuentes. In 1999, Stanford turned over the $3M from his bank after federal authorities discovered that it had come from a drug cartel, his cooperation won him praise from authorities. SEC investigations beginning in 2006 were hampered, because Antiguan authorities did not fully cooperate. Additionally, last summer two employees filed lawsuits citing irregularities, prompting the Financial Regulatory Authority (FINRA) to take action. The investigation against Stanford intensified after the Madoff scandal came to light in December. In January, clients tried to redeem $500M and the bank rushed to liquidate its private equity and real estate assets. On Feb. 19, FBI agents found Stanford in Fredericksburg, Virginia, and served him with civil papers after trying unsuccessfully to flee the country; Stanford agreed to turn in his passport to authorities. Banking authorities in Antigua have seized control of the bank. On Feb. 26 the Department of Justice arrested Laura Pendergest-Holt, the chief investment officer on charges of obstructing the SEC's investigation.

US LAWSUIT CLAIMS THAT UBS HELPED 52,000 CUSTOMER CONCEAL ACCOUNTS Feb. 19: Swiss investment bank UBS agreed to pay $780M in fines and disclose the names of 250 U.S. clients that had committed tax fraud. Despite tough Swiss laws protecting privacy, Switzerland had no choice but to let UBS hand over the names and data to avoid a criminal lawsuit which would have imperiled the bank’s existence and consequently, negatively affect the Swiss economy. Tax fraud is a criminal offense, while tax evasion is a civil offense. Feb. 20: In a separate case, the Department of Justice is trying to force UBS to disclose the names of 52,000 account holders, who have allegedly hidden an estimated $14.8B in assets. The Department of Justice launched a civil lawsuit alleging that UBS helped customers set up dummy offshore companies. UBS said that it would challenge the “John Doe” summons, because Swiss law protects banking privacy. Banking details of eight additional American clients were released, despite a Swiss court order blocking the move. The tribunal “forbade Swiss bank regulator FINMA from giving the plaintiffs' ‘banking documents to third parties, particularly US authorities,’” or else they would risk legal proceedings. This pits the Swiss tribunal against the U.S. Department of justice. Switzerland’s strict bank secrecy laws have made the country the world’s largest offshore banking center. Nearly one-third of the money accumulated in tax havens are in Swiss bank accounts, an estimated $2.2 trillion. Tax-dodging schemes are being more closely scrutinized by governments trying to find revenue to finance economy recovery programs and packages. Feb 27: Oswald Gruebel, a former Credit Suisse CEO known 8 as “Saint Ossie”, becomes the new CEO of UBS. UBS stock rose 16%, as investors strongly believe in Gruebel’s ability to return the company to profitability. When Gruebel took over as sole CEO of Credit Suisse in 2004 he doubled the bank’s profit and share price in three years.

The Budget: A Guide to Your Personal Finances By Dmitry Shuster Staff Writer You have a limited amount of money to spend, so how do you manage it wisely? Budgeting. In today’s economy, a personal budget is perhaps the most critical component of one’s finances. The main purpose of a budget is to effectively manage your income in a way that enables you to cover your expenses, while simultaneously saving a portion of income and using another part to repay debt.

Step 1: Goals and Objectives The first step towards an effective budget is to identify your financial goals and objectives. Do you want to minimize your debt upon graduation? Do you desire to own a home within a certain period of time? Do you want to pay off your credit card debt before a specific date? Do you want to pay for your daily expenses and still have money left to put into a savings account? If so, you need to maintain a budget for your income, as well as enough savings for unexpected emergency situations. Another important goal to consider is to stay out of debt (especially for the long term) as this can negatively impact your credit score as well as your future ability to cover all expenses.

Step 2: Identification of Revenues and Expenses A personal budget begins with the total income that you earn on a monthly basis. After taxes are deducted, you are left with your net spendable income, which is the amount of income that you can spend on expenses, bills, leisure, savings, and debt. After you determine your monthly income, you need to identify your expenses. This is often difficult because expenses can vary from month to month and it is not so easy to determine exact expenditures. You can use a spreadsheet to organize your expenses into different categories (i.e. Housing, Food, Automobile Insurance, Debt Repayment, Entertainment, Recreation and Clothing). You should also account for ‘hidden’ or unexpected expenses.

Step 3: Recording Revenues and Expenses The next step is to record the revenues (inflows of cash) and expenses on monthly basis. Most budgets are on a monthly basis because this is the most convenient and reasonable time period. You can later choose to split your budget into weekly periods. As we learned from our accounting professors, record revenues and expenses in the period in which they are incurred. This way, you will be able to match your (incoming) revenues with your (outgoing) expenses, thereby allowing you to determine if your monthly income exceeds your expenses or vice versa. 9

Step 4: Estimating Expenses When creating a budget, most people do not know exactly how much they allocate or spend for every expense. It is easier to estimate reoccurring expenses (i.e. food, telephone, college tuition, insurance payments) rather than variable expenses or expenses that may vary month to month (i.e. credit card bills). It is wiser to overestimate rather than underestimate the expenses, because the latter will provide added financial pressure and you may come up “short” while the former will leave you with flexibility and a positive cushion. It is also beneficial to split up certain expenses, such as dividing the “utilities” expenses into specific categories of electricity, water, and gas.

Step 5: Keep Consistent Track of Expenses The last part of maintaining an effective budget is to keep track of the expenses that you incur. You can record actual expenses once the bills arrive, although it is more difficult to keep track of and manage the cash expenses that occur spontaneously. For those small out-of-pocket expenses, it is best to either estimate them or to write down the expenses in a small notebook. Regardless of how you do it, it is important to make your estimates as close as possible to make your budget as accurate as possible. Fortunately, there are many tools and programs designed to help you maintain a budget. The easiest way is to create a spreadsheet using Microsoft Excel, iWork Numbers or OpenOffice.org. There is also a convenient budget calculator located at: http://cgi.money.cnn.com/tools/budget101/budget_101.jsp

Sample Budgets

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FINANCING YOUR

COLLEGEDEGREE By Stefanie Ju Staff Writer

Paying for college has become increasingly difficult for students with less money. Not only are tuition costs constantly on the rise, but after adding the costs of books, room and board, and spending money, few students can actually afford attending an institution of higher education. However, there is hope for students determined to go to college; there are resources available in the form of scholarships, student loans, and government grants that are helping students finance their education. However, because students are busy with schoolwork and filling their resumes, not many have time to research what these types of financial aid have to offer or how to go about applying for them.

LOANS Many college students apply for and receive countless student loans within their four years in college. An education loan is a form of financial aid that must be repaid with interest. These loans come in three major types: student loans, parent loans, and private loans. The federal government handles many student loans; this allows relatively low interest rates and a greater variety of payment options and extended repayment terms. One of the main federal student loans is called the Stafford Loan. This specific type of loan is available in order to supplement personal and family resources, scholarships, grants, etc. Stafford Loans are convenient because nearly all students are eligible to receive them, regardless of credit or financial need. But for students who demonstrate pre-specified levels of financial need, there are government subsidized loans that cater to them; in these cases, the government pays interest (currently fixed at 6.8%) while the student is attending school. In order to receive this loan, students should submit a Free Application for Federal Student Aid (FAFSA). Students are generally expected to pay these loans off in 10 years, although, as aforementioned, the government works with students who struggle with this deadline—usually extending their repayment terms.

London Stock Exchange

Parent loans require parents of dependent students (those who depend on their parents to finance their education) to take out loans to supplement a student’s financial aid, up to the full cost of attendance. The federal Parent Loan for Undergraduate Students (PLUS) has a yearly limit on borrowing, which equals the cost of attendance minus any other financial aid received. The interest rate for PLUS loans is fixed at 8.5%, and parents have from 60 days after the loan is given to 10 years to repay it in its entirety. In order to be eligible for PLUS loans, parents taking these loans for their children are subjected to a modest credit check; they must then file a loan application and sign a promissory note. 11

Private education loans exist to help students bridge the gap between actual costs of schooling and the limited amount that government programs provide to students. Private lenders offer students loans, and they do not require any federal forms. Many students turn to private loans when the government loans do not cover education costs in their entirety, or they are looking for more flexible repayment plans. Private lenders have the time to try to help tailor repayment plans based on students’ needs. Because the government handles such large volumes of loan requests, it has more stringent rules. However, the downsides to private loans are the more expensive interest rates and thus higher payments students will have to contend with after graduation. Eligibility for a private loan depends on student and cosigner credit scores. Credit scores measure past ability to make timely payments and are used by lenders to determine how likely someone is to pay back money loaned to them. These are also used to help determine interest rates and fees that students will be charged. In order to apply for these loans, it is pertinent to research each private lender’s application process and later fees and repayment plans in order to determine a best fit.

SCHOLARSHIPS Undergraduate scholarships and graduate fellowships are types of financial aid that help students pay for their education fees; however, unlike loans, scholarships do not need to be repaid. Generally, scholarships are reserved for students with specific qualifications. Depending on what a sponsor is looking for, a student’s academic, athletic, or artistic talents may be highlighted. A few of the main types of scholarships can be classified as merit, need, and institutional. Merit based scholarships may be determined by any special talents that a student may possess that sponsors are looking for. Needbased scholarships look closely at a student’s financial situation— students that need more aid are given more consideration. Institutional scholarships are usually awarded by specific universities to students that plan on attending. The amount of scholarship money that a student receives is usually closely related to the number of hours put into searching for scholarships and the number of applications a student completes. Scholarship search engines such as FastWeb have been created to connect sponsors and students who need aid. Most universities have their own financial aid offices where students can get information about different scholarships. Here in UCLA, students can find help at the scholarship resource center, located in 233 Covel Commons. There are a great number of sponsors waiting for students to apply; it is simply a matter of students taking the time to find specific scholarships they are eligible for, and putting the effort into completing applications.

GRANTS Lastly, there are federal grants, which differ greatly from both scholarships and loans. Unlike loans, federal grants do not need to be repaid, and unlike traditionally merit-based scholarship, grants are primarily need-based. The majority of grants are funded through federal and state governments, universities, and public and private organizations. The Pell Grant is one of the most important grants for college students, and is funded by the federal government. Through this grant, the U.S Department of Education provides students with financial aid that does not require repayment. The Pell Grant is awarded to students who can prove the most financial need; in order to apply, students must complete paperwork to determine their Estimated Family Contribution (EFC) for college. Based on this assigned number, the grant is awarded to millions of students annually. In order to apply for a federal grant, students must first fill out a FAFSA. Most federal grants are awarded based on the information given on this application.

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HOW TO DEAL WITH YOUR CREDIT SCORE By Shannon Kung Senior Staff Writer Every time you turn on the television, there are commercials asking you if you know your credit score, or questionable ads promising to lend you money despite your credit. With such a large emphasis on the three digit number known as a credit score, it is important to have a good grasp on what it entails. A credit score is a number based on information from a credit report, which is a compilation of an individual’s past borrowing history. Lenders such as banks utilize this score to see if a person qualifies for a loan, the interest rate, and the credit limits. The credit score lets banks evaluate whether loaning money to someone is risky or not. The higher the credit score, the better. Credit scores are based on credit reports from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Although the three credit bureaus each have their own credit scores, VantageScore, Experian’s PLUS score, TrasnUnion’s credit score, and Equifax’s ScorePower, the most popular credit score is the FICO score. The FICO score was developed by the Fair Isaac Corporation and uses a system to gauge risk in order to conclude whether or not the borrower is likely to default on, or not pay back, any monetary sums owed to the lender. Aside from banks, many other organizations such as insurance companies, landlords, etc. use credit scores. Thus, having a low FICO score could potentially make or break a potential loan and subsequent purchase. FICO scores are traditionally between 300 and 850, with around 60% of the scores between 650 and 799. The median of these scores, according to the Fair Isaac Corporation, is 723. Credit scores are not free, although Americans can receive one free credit report each year from annualcreditreport.com, which is run by the three credit bureaus. Credit scores can be added on to the report for a fee. Borrowers used to be able to obtain FICO scores from all three credit bureaus, but as of February 14, 2009, Experian has decided to only provide their data to lenders. Borrowers will be at a disadvantage because lenders can pull their Experian FICO score, while they cannot.

Breakdown of the Credit Score:

The exact formula for calculating a credit score is closely  35%- punctuality of payment in the past guarded as each bureau uses a slightly different method  30%- the amount of debt of calculation. However, the Fair Isaac Corporation has  15%- length of credit history released a rough estimate of the different weighted com 10%- types of credit used ponents of a credit score. Looking at the percentages, however, show that there still is much clarification  10%- recent search for credit and/or amount needed. For example, the 10% impact that “types of of credit obtained recently credits used” has on the credit score gives no indication of what type of credit is better or an optimal mix of types of credit. Also, certain factors such as bankruptcies, foreclosures, and judgments are not included in the breakdown provided by the Fair Isaac Corporation, although they would undoubtedly affect a person’s credit score. The first component of the credit score, weighing in at a hefty 35% is determined by past payment history. Basically, this means that to keep a high credit score, you should, above all else, make sure to pay your bills on time. Your credit report will actually show whether you were 30, 60 or 90 months late with a payment. A history of late payments can hurt your score dramatically, so if you forget to pay the bills every month, it might be wise to look into automatic bill pay. Conversely, your score can dramatically improve if you pay your bills in a timely manner. 13

The second part of the credit score is the amount of debt you owe, which has a 30% bearing on your overall credit score. The amount of debt is usually shown as the ratio of current revolving debt (i.e. credit card balances) to total available revolving credit (i.e. credit limits). Thus, it is important, for this component, to focus on two aspects- your outstanding balances and your credit limit. If you are reaching or even exceeding your credit limit, this is seen as risky behavior, which lowers your credit score. However, even if you are not anywhere close to your credit limit, you want to make sure that your credit limit is in proportion to your income. If your credit limit is much higher than lenders think you can reasonably afford to pay, your credit score may suffer. The third component of a credit score, worth 15%, depends on how long you have had a credit history. The greater number of years you have had credit building, the better. However, this area also takes into account how long you have or have not used certain accounts. For example, if you opened a credit card 10 years ago, but do not use it at all, it is not going to improve your credit score very much. On the other hand, be careful not to open too many new credit cards all at once, as it will lower the average account age factor and thus lower your score. The fourth component of your credit score is the types of credit used, which is worth 10% of the overall score. Types of credits can include credit cards, retail accounts, car loans, mortgages, etc. Some people erroneously think that using, or overusing these types of credit will show that they are good borrowers, and that it racks up credit score points. However, this is often seen as risky consumer behavior to lenders. On the flip side, if you do not have any credit, lenders will see you as an even higher risk that someone who has managed their credit responsibly. This is because having no credit makes you an unknown variable and the lenders can not predict whether or not you will display risky consumer patterns. The fifth factor that credit scores are based on revolves around the amount of new credit that you have. Every time you apply for new credit, whether it is a new home loan or a new credit card, an inquiry shows up on your credit report. Too many of these inquiries may cause your score to be negatively affected. Having so much new credit causes worry because lenders are unsure if you will all of a sudden use all of this newly available credit in a spending binge. This unpredictability makes them veer on the side of caution, and thus they will take the new credit into consideration. To help deal with these inquiries in your credit, it is important to note that there are two types of inquiries, hard and soft. Hard inquiries typically come from lenders when you apply for a loan and stay permanently on your credit report. Soft inquiries, on the other hand, happen when you request a copy of your credit report. However, soft inquiries do not stay on your credit report. If you are shopping around, for example, a mortgage loan, there will be a lot of hard inquiries made on your report. However, if they are made in a concentrated period of time (i.e. a month) FICO will not count it against you. Nonetheless, it still might be wise to ask lenders if they are going to making a hard inquiry into your credit history. The Fair and Accurate Credit Transactions (FACT) Act entitles all United States residents to one free credit report each year. This report can be obtained an annualcreditreport.com, by calling 1-877-322-8228, or by mailing an Annual Credit Report Request Form.

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CREDITCARDS101 By Eric Park Staff Writer

It is the beginning of the quarter, and your checking account is running on empty after paying for tuition, books, and rent. You are sitting at home watching T.V. and your stomach begins to growl. It is then you realize that there is no food at your apartment. Luckily, you just received your first credit card in the mail and you decide to use it to quell your hungry stomach. Credit cards can provide college students with financial flexibility in tight situations, but these benefits also come with potentially negative consequences as well.

WHAT IS A CREDIT CARD? Credit cards serve primarily as agreements between its holder and the issuing company. In exchange for a promise to re-pay charges, the holder can use a credit card to make purchases, and even cash advances. A credit card has a spending limit or credit line based on numerous factors such as credit scores, annual incomes, and current debts. It extends a specific amount of available credit to a borrower. Credit cards have due dates for payments which are dependent on the terms of the contract between the holder and the company. The period between when a transaction is made and when the payment is due is known as the grace period. After the full balance has been paid, the card holder again has his/her full credit line available for use. Cash advances are options to withdraw cash using the credit card at a selected interest rate. They are usually significantly lower than the credit limit on a given card but allow holders the options for emergency cash withdrawals.

CARD TYPES AND BENEFITS When applying for a credit card, consumers have a wide range of options to choose from. Many retail companies such as Bloomingdales and Costco offer rewards programs for its company’s credit card holders. These rewards are not limited to but usually range from gift certificates, coupons, and discounts. Other types of rewards cards are designed to give travel points, rewards points, and even cash back. There are travel cards sponsored by various travel related companies such as Hilton Hotels and American Airlines. There are also credit cards that provide few to no rewards but provide lower interest rates on card balances. For those who have high credit scores and high incomes, there is the black card offered by American Express which has no designated spending limit. Finally, there are cards specifically designated towards college students. For example, Visa offers a dividends card with Citibank that gives money back on purchases and is geared towards college students. These cards have lower spending limits but provide the opportunity for its holders to raise his/her credit score and spending limits by practicing financial responsibility. This occurs when individuals develop a history of mak15

CREDIT CARD GIMMICKS AND PITFALLS Credit card companies send out card offers to households in hopes of securing another card applicant. On top of offering various reward incentives such as gift certificates and vouchers many companies offer personalized credit cards with their favorite sports teams, schools and pictures. However a strong method of drawing in customers for credit card companies is offering 0% interest rates. These 0% rates are only fixed for a set amount of time and can lead consumers into the trap of credit card debt. Many individuals become more willing to spend on these cards due to the low interest rate. However, they are unable to pay off the balance when the introductory rate is set to expire. If a balance is not paid off at the end of each month’s grace period, a charge based on the interest rate is added to the balance. The debt then continues to grow monthly until the balance is paid in full. Credit card debt is a common and widespread problem in the U.S. In 2007, the average American household’s credit card debt was $9,840. Major credit card companies such as Visa and American Express are only able to generate revenue from consumers and offer rewards through the interest received on their cards. Credit card companies have come under fire by various publications such as USA Today by increasingly targeting college students. They argue that college students are already in debt due to loans. This can handicap their future ability to attain loans because of decreased credit scores. The card balances can grow due to interest, but if students are late on payments or unable to make the minimum payments, then their credit scores will be lowered.

CREDIT CARD SECURITY ISSUES Credit card numbers are 16 digits long and contain a designated expiration date, security code, and holograms. These pre-cautions are all used to protect against credit card theft. However, credit cards are still an easy target for identity thieves. They do this by simply hacking into the systems of retailers and by phishing. Phishing is the act of thieves creating emails that contain websites similar to bank websites in order to gain login information. 16

If identity thieves are able to acquire your credit card information, they will be able to create counterfeit credit cards and make purchases as if they were you. Also, they can use your credit card information to find out personal information such as your address, credit history, and social security number. They can also use this information to sign up for other credit cards and further damage your credit. However, most card companies do offer full refunds on authorized purchases and issue new cards when cards have been reported stolen or missing. Personal finance companies are taking prevention measures against phishing by creating measures as personalized pictures and other user specific security items. Many companies have also taken initiative to raise awareness and education about credit card theft to its holders by distributing information about the issue. Many browsers such as Microsoft’s Internet Explorer and Mozilla Firefox have warnings when a site is detected as a possible threat to personal security. 17

WHAT TO DO WHEN YOUR CREDIT CARD IS LOST OR STOLEN As previously mentioned, stolen or lost credit card information can cause a significant amount of potential damage to your credit. If this happens the first action a credit card holder should take is to immediately contact his or her issuer. During contact with the company, cardholders should explain that their card has been lost or stolen and the company will take action by suspending or canceling the card. This prevents the use of the card and protects the card holder from unauthorized transactions and purchases. If the card is cancelled the account is closed and the card holder has the option of attaining a new credit card. The company will issue a new card with a different number, and security code. The balance and all other aspects such as rewards point balances of the previous card will be transferred as well. Consumers are protected from having to pay for unauthorized purchases under the Fair Credit Billing Act. If unauthorized purchases are made with your card the maximum liability you can have is $50. If the charges are made after you have reported a card stolen, you have no liability for unauthorized purchases.

CONCLUSION Credit Cards can provide financial flexibility, a means to build your credit, and various rewards for spending. However, if you get in the habit of making purchases that you cannot pay back, you can also severely handicap your financial future by creating increasing debts, which lowers your credit score. If an individual is responsible he or she will increase their credit scores, along with other possible benefits. It is up to the card holder to control debts and spending on the way to developing financial responsibility.

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TAX CREDITS & DEDUCTIONS FOR STUDENTS By Sonia Bhasin Staff Writer Contrary to popular belief, there are ways for cash-strapped students to save money through tax breaks from the money they spend to finance their education. These deductions were implemented by the federal government to assist students, who already struggle financially. However, most of these available deductions are unknown or misunderstood to students. Here we attempt to eliminate the confusion and describe some of the most relevant tax breaks available.

The Hope Scholarship Tax Credit The Hope Scholarship is a tax credit that reduces the amount of taxes a student owes to the government. This credit is only available to a student in their first two years of postsecondary education, which would be during the first two years they are pursuing an undergraduate degree. To be eligible, a student must be enrolled at least half-time in college, must file a tax return and owe taxes. That is, if a student does not end up paying taxes, he/she cannot receive this tax credit. In addition, a student can only claim the credit if he/she has not been claimed as a dependent by another taxpayer, such as a parent or guardian. The exact amount of the credit that a student receives is dependent upon their income, the amount of tuition and fees paid, and the amount of scholarships a student receives, but can only receive up to $1,800 in each of the two years for which the student is eligible. A taxpayer cannot claim this credit if his/her modified adjusted gross income is greater than $58,000 for a single filer or $116,000 for those married couples filing a joint return. To apply for this credit, a taxpayer must report the amount of tuition and fees paid, as well as the amount of scholarships, grants, and income used to pay the tuition. Schools are required to send this information to the student each year in the form 1098-T. Taxpayers fill out IRS form 8863 to claim the credit. A student cannot claim both a Hope Credit and a Lifetime Learning Credit, described next, in the same year.

The Lifetime Learning Tax Credit. This tax credit, like the Hope Scholarship, is also subtracted directly from the taxes a student owes. To be eligible to receive this tax credit, a student must file a tax form and owe taxes. That is, if a student does not pay taxes, they cannot receive this tax credit. Also, a student cannot claim this credit if they have been claimed as a dependent. The amount of the Lifetime Learning credit is 20% of the first $10,000 spent on qualified educational expenses, so a student can claim up to a maximum of $2,000 per tax year, for an unlimited number of years. This credit differs from the Hope Credit because it is available for all years of postsecondary education, not just the first two years of pursing an undergraduate degree, and is also available for courses taken to acquire/improve job skills. Also, unlike the Hope Scholarship, the Lifetime Learning tax credit can be taken by graduate students as well. The actual amount of this credit is also dependent upon income, tuition and fees paid, and the amount of scholarships and allowances a student receives. To be eligible, a student must be enrolled in college, pursing either an undergraduate or graduate degree, or be taking instructional courses to acquire job skills. To apply for this credit, a taxpayer must report the amount of tuition and fees paid, as well as the amount of scholarships, grants, and income used to pay the tuition. Schools are required to send 19

this information to the taxpayer each year in the form 1098-T. Taxpayers fill out IRS form 8863 to claim the credit. Once again, a student cannot claim both a Hope Credit and a Lifetime Learning Credit in the same year. Students who are eligible for both should claim the Hope Credit first, since it is only available for the first two undergraduate years. Hope First 2 years of Undergraduate Education Must go to school at least half time for one academic period for the tax year Must be pursing an Undergraduate Degree

Lifetime Learning All years of Postsecondary Education

Amount

100% of first $1,200 spent on qualified expenses 50% of the second $1,200 spent on qualified expenses No more than $1,800 per year

10% of first $10,000 of qualified expenses Up to $2,000 per year

Restrictions

Must not have a felony for possession of distribution of controlled substance Subjected to phase out for single filers making btw 48-58K (96-116k for MFJ) Not available for dependents whose parents claim them

Do not have to be pursuing any degree Subjected to phase out for single filers making btw 48-58K (96-116k for MFJ Not available for dependents whose parents claim them

Availability

Tuition & Fees Tax Deduction This tax deduction was supposed to expire in December 2008, but has been extended for one more year, until December 2009, as a result of the recent Economic Stimulus Package. Unlike a tax credit, this tax deduction reduces the amount of taxable income by up to $4,000, and may be available to taxpayers who do not qualify for either the Hope Credit or the Lifetime Learning credit because of the higher income cap. The exact amount is dependent on the amount of tuition and related expenses paid. The amount of the deduction is $4,000 for those single filers making a modified adjusted gross income of $65,000 or less (or $130,000 or less for those filing jointly), and $2,000 for those single filers making a modified adjusted gross income of between $65,000 and $80,000 (or $130,000 to $160,000 for those filing jointly). Single taxpayers with a modified adjusted gross income of $80,000 ($160,000 for married filing jointly) or greater are not eligible to receive this tax deduction. A student must be enrolled in one or more courses at an eligible postsecondary institution to receive this deduction. A student cannot claim this deduction if they paid their tuition and fees with tax-free scholarships and grants.

Student Loan Interest Deductions Students can deduct the interest they pay on their qualified student loans from their taxable income. The loans must have been taken out to pay for the cost of attending college. Many loans qualify for this deduction, such as the Federal Stafford, PLUS, and Consolidated Loans. Some private loans may also qualify, but students should check directly to verify if the interest paid on their private loans is tax deductible. Students may deduct up to $2,000 paid per year for the interest on student loans. This deduction only applies during the first five years of loan repayment. If you are a single tax filer making more than $60,000, or a joint filer with income greater than $80,000, you are not eligible for student loan interest deductions. Income Caps

Hope

Lifetime Learning

Tuition & Fees

Student Loan

Single Filer

$58,000

$58,000

$80,000

$60,000

Joint Filer

$116,000

$116,000

$160,000

$80,000

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SEEKING HELP FROM TAX PROFESSIONALS By Gloria Ho Staff Writer With tax season coming around the corner, workers across the U.S. have begun receiving W-2s (statement of yearly wage earnings) and 1099s (statement of income other than wages) in preparation for their federal and state income tax returns. Yet, when faced with the daunting prospect of having to file taxes and knowing the inevitable forms and sometimes complexity that is involved, some individuals have elected to have their returns filed by third parties. With a thriving industry centered on federal, state, and local taxes, such individuals have no shortage of options to choose from.

H&R Block Perhaps one of the most well known tax service companies, H&R Block offers a variety of venues from which customers can do their taxes. Employing 90,000 tax preparers and claiming more than 22 million customers worldwide, H&R Block has proclaimed itself the Nation’s Tax Leader. With 12,500 retail offices nationwide and another 1,400 abroad, this 54 year old company offers in-house services as well as an online tax preparation and electronic filing service on its website. With so many locations around the country, one of the advantages H&R Block offers is its easy access to trained tax professionals at nearby local offices. In addition to these services, the franchise has also produced its own tax preparation software (available online or as a CD) called TaxCut, which helps individuals prepare their tax returns. With TaxCut online, customers are encouraged to file their federal taxes online free of charge for simple returns only (excludes: self-employment income, rental and royalty income, farm income, and shareholder or partnership income or loss). Customer can also upgrade the online service by purchasing a Premium package that includes itemized deductions and investments for $40, or a Signature package that includes a tax professional’s oversight for $80.

Liberty Tax Service Liberty Tax Service, like H&R Block, is also a franchise company specializing in income tax preparation services for individuals and small businesses. The company was founded in 1972 in Canada and began expanding into the United States in 1997. Currently the fastestgrowing international tax preparation company in the world, Liberty Tax claims to have over 3,000 offices in North American and to have 21

prepared over six million individual returns. Ranked number one by Entrepreneur Magazine for tax preparation, Liberty Tax Service provides computerized income tax preparation, electronic filing, and even loans for tax refunds. Emphasizing quality customer service, accuracy, and a money back guarantee, Liberty Tax Service proclaims itself the best choice for tax preparation services. The firm also offers audit assistance and complimentary checking of completed income tax returns.

IRS Volunteer Income Tax Assistance Program Volunteer Income Tax Assistance (VITA) is a program created by the Internal Revenue Service (IRS) to help low and moderate-income individuals file their federal and state income tax returns at zero cost. Every year, volunteers receive multiple month-long training from the IRS to help prepare basic tax returns in communities across the U.S. Usually situated at local libraries, community centers, schools, and shopping malls, VITA sites generally aid people with incomes below $42,000, those who are eligible for the Earned Income Tax Credit, Child Tax Credit, Credit for the Elderly or other low income tax benefits. Sites usually offer both paper and electronic filing services. Individuals interested in visiting a VITA site should bring with them their: ID, Social Security card, W-2s and 1099s, Bank Routing Numbers and Account Numbers for Direct Deposit of returns, and other documentation of income and expenses. For UCLA students and others near the Westwood are, there is a VITA site located on campus in Ackerman Union during the first two and half weeks of spring quarter, as well as offcampus sites around the West LA area from early February to April 15th.

Turbotax Turbotax is an income tax preparation software package designed to lead taxpayers step by step through their state and federal returns. Like H&R Block, Turbotax offers a free downloadable version of the software for simple returns (1040EZ), and upgraded versions ranging from $30 to $110. There are four different upgrades, each adding more complex tax situations. These products target different tax players from those who itemize, to those who own investments and investment properties, to those who have some sort of business, whether sole proprietorships or corporations. Though tax services are limited to the software, this do-it-yourself option is usually cheaper than hiring tax professionals.

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“Nothing is certain but Death and Taxes” -Benjamin Franklin By Christine Liu Senior Staff Writer Even in death one can not escape taxes. In addition to all the taxes the government imposes on us during our lifetime, we still have to pay taxes after death. The estate tax (also known as a death tax or inheritance tax) is imposed on a person’s “taxable estate,” which is the portion of all his/her net worth (total assets minus liabilities) that exceeds a certain amount set by law. Included in the taxable estate are all assets, including insurance, businesses, stocks, and real estate. However, if the deceased leaves the assets to his or her surviving spouse or to a charitable organization, then the estate is not taxed at all.

But if you think you are smart enough to just give away all your property and assets before you die, the government has another tax for that—the gift tax. The gift tax is imposed on the transfer of property during a person’s life, which prevents people from avoiding the estate tax by giving away their estate just before dying. Thus, the gift tax rate is generally the same as the estate tax rate, which is 45% in 2009. In order to avoid the gift tax, an individual has to give no more than $13,000 worth of gifts to each recipient, not to exceed a total of $345,800 for the entire year. Also, over a person’s lifetime, the total nontaxable gift allowed is $1 million. The estate tax must be paid within nine months after death. This can be a problem for estates that consist largely of real estate because there is not enough actual cash from life insurance or liquid assets to pay the tax. In many cases, loved ones and heirs are forced to sell property or other belongings at below market value in order to pay for the estate tax. But because the minimum amount of an estate ($2 million) is so high, the estate tax only affects the wealthiest two percent of the population. According to the Tax Relief Act, the estate tax will be repealed for one year, 2010. If it is not renewed, the rate will go up to 55 percent in 2011. 23

Inheritance Taxes Inheritance taxes are imposed by the states and are separate from the federal government’s estate taxes. While the estate tax is levied on the deceased’s estate as a whole, the inheritance tax deals with those who receive a portion of the deceased’s property. Each beneficiary is responsible for paying his/her inheritance taxes. The tax rate is a graduated rate and differs from state to state, but the spouses and children of the deceased are usually taxed at a lower rate than other beneficiaries.

Ways to Avoid Federal Estate Taxes For most people, estate taxes do not apply to them. But if your assets are above the $3.5 million minimum of 2009 or even the $1 million of 2011, you can reduce your taxable estate by giving money to a charity or by paying someone’s tuition or medical bills. Another way to avoid estate taxes is to set up trusts. A trust is an agreement where the property or assets of the creator of the trust are managed by another person, the trustee. Here are the different types of trusts you can set up:

AB trust In an AB trust, or marital bypass trust, spouses can leave property in a trust for their children, but the surviving spouse has the right to use it for life. Basically each spouse puts his/her assets, including half of jointly-owned assets, into his/her own trust, so that there are two trusts, A and B. Although the surviving spouse does not technically own the decreased spouse’s assets in the trust, he/she usually has full rights to use the assets in the trust of the deceased until death, when both the A and B trusts go to the final beneficiary, who are usually the children. This allows each spouse’s taxable estate to be half the size of the total assets between the two because the assets got divided into two separate and independent parts.

“QTIP” trust A QTIP trust is like an AB trust with more restrictions. Basically, the spouses still divide up all the assets into an A and B trust, but the surviving spouse has limited access to the money in the trust. The survivor cannot make decisions regarding the assets in the trust and usually cannot touch the principle of the trust; they just get some predetermined income from it. This type of trust is used to make sure that the trust property is eventually received by the final beneficiaries. However, it still allows the surviving spouse to make use of the trust property tax-free.

Life Insurance trusts If you own a life insurance policy, the proceeds of the policy are subject to the estate tax. However, if the ownership of the policy is transferred to a trust, the surviving spouse or children can receive the proceeds free of tax. In a life insurance trust, the beneficiary of the life insurance is the trust, and the proceeds are managed by a trustee, who then hands out the life insurance money according to the deceased’s wishes. The insurance proceeds can go to as many people as the deceased wants and relieves the beneficiaries from having to deal with a large sum of money right after the death.

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BUYING A HOUSE? HOW ABOUT RENTING? By Joanne Hou Senior Staff Writer When it comes to finding a place to live, people often debate whether to buy or rent the place. For many, the American Dream may be to own a dream house with a white picket fence. Indeed, since the beginning of the formation of the United States, public officials have extolled the virtues of homeownership, and a large proportion of the American population has actually realized that goal. However, owning a home, especially in an areas of expensive real estate, like California, can be a tremendous financial burden and not affordable to many. The alternative becomes renting a house or apartment. Let us now take a deeper look at the advantages and disadvantages of owning versus renting a home.

WHY HOMEOWNERSHIP IS ATTRACTIVE Why is it that for over four decades, 60-70% of Americans have owned their homes? In fact, according to the Census Bureau, 68% of all Americans were homeowners in 2005. What is it about buying ones own house that has been so attractive? There are a number of factors that lead people to prefer to buy their primary residence instead of renting one.

PRIDE OF OWNERSHIP For many Americans, owning a home goes beyond any tangible benefits such as tax savings or a means of investments. The American Dream of private homeownership is still a big motivator in people’s decisions to buy houses. By buying a house, the homeowner feels a sense of personal ownership that comes about as a result of years of work and savings. The feeling of owning something, especially something as important financially and sentimentally as a home, is very strong and is actually one of the biggest driving factors for home ownership. There is no such sense of ownership for renters. They make monthly payments to a landlord, but the rent is not accumulating towards ownership of the housing unit. For many Americans, there is less pride and sense of accomplishment from paying others and not getting any closer toward owning the piece of property. They also know that payments for rent will not stop as long as they continue to live on a property they do not own. For homeowners, the mortgage is expected to be paid off sometime in the future and it is possible to go into retirement without monthly mortgage payments. 25

TAX BENFITS One major benefit of owning a house is the tax benefits afforded to homeowners. Homeowners get to deduct the interest payments of their mortgages from their taxable income, which lowers the income amount on which income taxes are calculated. That means that the interest payments are not taxed for income tax purposes. Homeowners are also able to deduct the cost of property taxes that are levied by local governments. This reduces the real out of pocket cost of homeownership since the tax burden of those who own homes can be significantly reduced. The benefits are especially pronounced in California, where home prices are traditionally high, and buyers have to borrow more, as well as face higher property taxes. These tax policies are also costly to the government. It is estimated by the Congressional Joint Committee on Taxation that just the deductibility of mortgage interests has cost the government $403 billion on tax revenue foregone between 2006 to 2010. Another tax benefit of homeownership is the favorable tax treatment upon the sale of the house. For most homeowners, under current tax law, capital gains from selling the house is mostly, if not all, tax free. For single tax filers, the capital gain from selling the personal residential home is tax free for up to $250,000. This means that unless you made over $250,000 in gains from selling your house, the entire proceeds from the sale is essentially tax free. If you are married and filing a joint return with your spouse, the tax free allowance for capital gains on selling the residence doubles to $500,000. You can then take the entire net proceed from the sale to put into your next house, and in this way, you can

increasingly pool your money into buying ever more expensive property without paying any taxes in the interim. In contrast, there are no tax advantages of renting. The rent paid is not tax deductible, nor does it have any preferential tax treatments. However, California does have a Nonrefundable Renters’ Credit in which $60 in tax credits are given to qualified residents who pay rent to nongovernment housing. This includes regular apartments and private homes, but excludes housing like school dormitories. The tax credit is basically a $60 off coupon on your California state income tax and is taken when you file a tax return. 26

INVESTMENT OPPORTUNITY Another important reason for some people to own houses is that residential real estate is a vehicle of investment just like stocks and bonds are. People pour their savings into their primary residence and gradually pay off the house until they own it completely. Having a mostly or wholly owned home is often the biggest part of one’s personal wealth and the most valuable asset one owns. The current housing market notwithstanding, housing prices in the long run tend to increase steadily and usually does not end up in permanent losses in value. In this sense, a house is a safer asset than say the stock market where prices are volatile and stock values can sometimes plunge, leading to permanent loss on that investment. This does not mean that one cannot lose big on housing, but when considering the very long run, housing prices tend to recover. Thus, residential real estate is thought to be a safe place to put one’s money and have it grow over a lifetime. Having a home can also mean having an extra asset that can be used to borrow money to fund more spending. This is known as home equity loan. When housing was boomed a few years ago, many people took out loans that were backed by the equity in their houses. Home equity refers to the part of the house that the owners have already paid for either in the down payment or from the mortgage already paid in the past. If the home is considered a company, then home equity is the equity section of the balance sheet. The mortgage is the total liability, and the purchase price of the home is the asset. Because those who have made some mortgage payments already own part of their home, they then have this financial asset to use to borrow money. The lenders would take the house if the borrower defaults on payment. Thus, home ownership affords owner another means of financing themselves. For renters, their residence is not an investment asset at all. They continue to pay rent, but the rent does not go towards a part of their financial assets. They cannot use it as a means of getting money, and the rent paid never accumulates to anything that belongs to them. In this sense, homeownership does offer some more financial options of flexibility, though it is also very inflexible in some other aspects.

WHY RENTING IS ATTRACTIVE While homeownership has its benefits, renting also has advantages that owning does not have. As the housing market continues to plummet, more and more people are returning to renting. And because the housing market has been so poor for a couple years now, many of the advantages that are traditionally associated with home buying are temporarily, if not permanently, gone. 27

FINANCIAL FLEXIBILITY One of the main problems that have surfaced with respect to homeownership is the lack of financial flexibility with keeping up mortgage payments. One good thing about renting an apartment or home is that if rent gets too high for the renter, then he/she can easily move out and find another place to live. There are generally no strings attached to moving, and so there is less pressure on the renter to have to keep up rent payments each month. There is always a way out—find a cheaper place. The same cannot be said about owning a home. Mortgages are not easily forfeited. Banks lend to home buyers with the serious expectation that they would be repaid with interest at a preset schedule and this becomes a business transaction with serious financial implications for both sides. When homeowners can no longer continue mortgage payment for their agreement with the bank, the bank can take possession of the home in a foreclosure. The homeowners would then be without a home and also lose all the mortgage payments they had already paid. In addition, their credit rating is likely to suffer significantly, which is bad because bad credit means higher risk of default, which leads to higher interest rates charged by lenders to compensate for this increased risk. Having really high interest rates make borrowing expensive for the individual, and sometimes the individual is not able to afford the extra interest payments. Foreclosures in areas of high real estate prices are especially painful to the owners. In Southern California, for example, a decent home in a relatively safe neighborhood is much more costly than a comparable home in say the Midwest. Consequently, homeowners in Southern California tend to take out bigger mortgages to pay for the house. The monthly mortgage payments can be a few thousand dollars, which can double or even triple the monthly rent of an apartment unit if the buyers rented instead. When foreclosures happen to these home buyers carrying expensive mortgages, the mortgage payments lost to the foreclosure is far greater than the rent paid per month. This makes the financial loss of homebuyer greater than the rent expense by not buying a home. On the flip side, the sense of loss when people move or are kicked out their homes during foreclosures can be quite pronounced. A purchased home represents an important asset that is bought with accumulated savings over many years, as well as a symbol of accomplishment financially and personally. Homeowners tend to take better care of the place they have bought and now own, and many are willing to put more money and effort into building that home into their dream home. Enormous amounts of money are spent each year remodeling, adding to, landscaping, and otherwise beautifying the home. It is ownership at its greatest height for ordinary people, and to lose that property is understandably one of traumatic loss both financially and emotionally. If they then have to move to an apartment, the downgrade in life quality and status is also a potential source of humiliation or embarrassment among peers and co-workers. The overall emotional effect is very negative when they involuntarily leave their homes. Some people would then prefer to not buy a home and rent instead. They do not have to worry about the maintenance aspect of homeownership. The insurance, regulations, fixes and repairs are the responsibility of the apartment owners. They can live in the home relatively without care. When they need to move or walk away from the unit, it is usually easier emotionally. They lose little and their quality of life is not so significantly impacted. These advantages are sufficient to outweigh the decision to buy a home.

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THE FUTURE OF SOCIAL SECURITY By Julie Chen Staff Writer

Social Security’s future problems approach slowly, but their arrival is inevitable. As millions of baby boomers approach retirement, the program’s annual cash surplus will shrink and then disappear. Soon, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will need to consume ever-growing amounts of general revenue dollars to meet its obligations. Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security. Presently, Social Security collects more in taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. Social Security currently pays an inflation-adjusted monthly retirement, disability and survivors' benefit based on a worker's highest 35 years of earnings. Past earnings are indexed for average wage growth in the economy before calculating the benefit. The benefit formula is progressive, meaning that lower-income workers receive a benefit equal to a higher proportion of their average income than higher-income workers receive. In other words, low income individuals get more back for each dollar they contribute than high income individuals do. Social Security's financing problems are long term and will not affect today's retirees and near-retirees for many years, but they are very large and serious. People are living longer, the first baby boomers are nearing retirement, and the birth rate is lower than in the past. The boomer retirements are estimated to cost $50 trillion in future obligations over the next 75 years. The number of taxpaying workers is shrinking. The result is that the worker-tobeneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio there will not be enough workers to pay scheduled benefits at current tax rates. Demographic trends do not change rapidly. It takes about 25 years to grow a new taxpayer. Most reform plans preserve scheduled benefits, including cost-of-living increases, for near-retirees. A "nearretiree" is defined as someone aged 55 and older. However, without change it is expected that the program will no longer be able to pay current benefits in full starting 2041. At that time it is expected that only 78 percent of currently scheduled benefits will be payable. Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on a "three-legged stool" of Social Security, pensions, and savings. American workers should be saving for their retirement on a personal basis and through employer-sponsored or other retirement plans. Today, about half of all workers are covered under an employer-sponsored pension, and many people are not saving as much as they should. While Social Security replaces about 40 percent of the average worker’s preretirement earnings, most financial advisors say that you will need 70 percent or more of pre-retirement earnings to live com29

fortably. Even with a pension, you will still need to save. If you will not have a private pension, you will need to save more—and start saving sooner. The 2008 Trustees Report states that without Social Security reform, payroll taxes will have to be increased around 2041, while the benefits of today's younger workers will have to be cut, or some other source of revenue, like transfers from general revenues, will be required. Addressing the problem now allows the burden of reform to be spread over more generations, and gives younger people more time to adjust their own retirement planning decisions. Rather than trying, probably unsuccessfully, to redeem the trillions of dollars in bonds accumulated over several decades, policymakers would likely enact a package of revenue increases and benefit reductions that would bring Social Security's income into balance in 2018 or shortly after. The four basic alternatives that are likely to be included in such a package are: (1) increasing payroll taxes, (2) decreasing benefits, (3) using other financing sources such as general revenues or (4) prefunding future benefits through either personal savings accounts or direct investments of the trust funds.

Principles for Social Security Reform:     

 

The benefits of current retirees and those close to retirement must not be reduced. The rate of return on a worker's Social Security taxes must be improved. Americans must be able to use Social Security to build a nest egg for the future. Personal retirement accounts must guarantee an adequate minimum income. Workers should be allowed to fund their Social Security personal retirement accounts by allocating some of their existing payroll tax dollars to them. For currently employed workers, participation in the new accounts must be voluntary. Any Social Security reform plan must be realistic, cost-effective and reduce the unfunded liabilities of the current system.

To help plan and secure your retirement, visit www.socialsecurity.gov today!

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INDIVIDUAL RETIREMENT ACCOUNTS

By Sunny Wong Senior Staff Writer An individual retirement account (IRA) is a retirement plan that provides individuals tax-free or tax-deferred ways of saving for retirement. Therefore, anyone who receives some form of taxable compensation is eligible for an IRA. One can open up an account at a variety of locations, including banks, insurance companies, and brokerages. There are a number of IRA plans, which may either be provided by one’s employer or self-provided. Because each plan has its own special characteristics, it may be helpful to consult the advice of a financial advisor to determine the one that caters the best to one’s needs. Although there are officially 10 types of IRAs, the following are some of the more widely-used and known IRAs.

TRADITIONAL IRA The traditional IRA allows earnings and tax-deductible contributions to grow tax-deferred, but is fully taxed at regular rates upon withdraw during retirement. In other words, this enables one to bypass income taxes on the earnings and tax-deductible contributions until the money is taken out in the future. Individuals can invest the money they put into a traditional IRA in a variety of investment vehicles including mutual funds, stocks, bonds, and CDs (certificate of deposits). Investments in a traditional IRA are also tax-deferred until the time of withdrawal, which is after the age of 59 ½ . If money for whatever reason is withdrawn before the age of 59 ½ , there will a 10% penalty on whatever amount has been withdrawn, in addition to the regular income tax that is levied on the withdraw. The main advantage of the traditional IRA is that contributions are tax-deductible. For instance, if an individual contributes $4,000 to their traditional IRA in a year, he/she can lower his/her taxable income by $4,000 that year.

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Contribution amounts vary from year to year. For 2009, one may contribute up to $5,000 or 100% of one’s income, depending on which one is less. Individuals over 50 can typically contribute $1,000 more each year in order to “catch-up.” Therefore, the maximum contribution in 2009 for people over 50 was $6,000. Although one can set up multiple IRAs, these maximum contributions limits apply to the aggregate contribution amount, not to the individual account. Contributions can be made to the account beginning January 1st until the taxfiling deadline, usually April 15th of the next year.

ROTH IRA In general, the Roth IRA offers more flexibility than the traditional IRA, and is in many ways, the reverse of a traditional IRA. Unlike the traditional IRA, contributions to a Roth IRA are not tax-deductible. However, because taxes have been paid on the contributions, withdrawals are tax-free, which can be beneficial for investors with a longer-term focus. Like the traditional IRA, the contribution rules for the Roth IRA are identical. For instance, individuals can contribute up to $5,000 or 100% of earned income, depending on which one is less. But in the case of the Roth IRA, no minimum withdrawal age is set. Contributions can be withdrawn at any time without a tax or penalty. Therefore, a Roth IRA is a good choice for individuals who expect to end up in a higher tax bracket and for those who need to withdraw their money before the 59 ½ . Additionally, it benefits those workers who plan to retire much later. Individuals can contribute to their Roth IRA account beginning January 1st through the taxfiling deadline, usually April 15th of the next year.

TRADITIONAL VS ROTH Traditional IRA

Roth IRA

Contributions are tax deductible

Contributions are not tax deductible

Withdrawals begin at age 59 ½ & mandatory by 70 1/2

No mandatory withdrawal age

Regular income tax upon withdraw

No withdrawal taxes

Available to everyone (no income restrictions, but if income gets too high, the contribution is no longer tax deductible) Any withdrawal (including principal) withdrawn before 59 ½ is subject to a 10% penalty

Income restrictions (MAGI $116,000 for single filers, MAGI $169,999 for married filing jointly) Contributions can be withdrawn anytime without penalty

SEP IRA A variation of the traditional IRA, the Simplified Employee Pension IRA (SEP IRA) is a retirement plan designed specifically for small-business owners and self-employed people. The primary difference between the SEP IRA plan and a traditional IRA is the contribution limit. For instance, up to 25% of one’s compensation or $46,000 can be contributed to the account while the maximum for a traditional IRA is $5,000. One of the main advantages of this retirement plan is the absence of complicated forms that need to completed, such as annual reports that need to be filed to the IRS. 32

SIMPLE IRA The Savings Incentive Match Plan for Employees (SIMPLE IRA) is an employer-sponsored retirement plan that allows for both employee and employer contributions. Like the SEP IRA, this plan functions much of the same way as a traditional IRA. The main difference is the contribution limit. Up to $10,500 can be deposited into the account provided that one is under 50.

COVERDELL EDUCATION SAVINGS ACCOUNT Originally known as the Education IRA, the Coverdell Education Savings Account (ESA) allows the individual to contribute up to $2000 in any year, no matter how many accounts are established. The contributions are taxfree as long as they are used for legitimate education expenses, such as tuition, required books, and room and board. There is also no tax on distributions if the funds are used at eligible educational institutions. This includes many public, private and religious schools as determined by state law. Once the beneficiary reaches the age of 30, the contributions must be distributed or rolled over to another family member.

401k A 401k is an employer-sponsored retirement savings plan that allows eligible employees to contribute a portion of their paycheck to this account before they pay their taxes. These contributions are exempt from the federal income tax and are allowed to grow federally tax-free and usually state income tax-free as well. However, it is important to note that a withdrawal of these funds before 59 ½ is subject to a federal income tax as well as a 10 percent penalty. In some special and dire circumstances, such as a death within the family, individuals can withdraw contributions without penalty.

The 10 Types of IRAs The individual Retirement Annuity Employer and Employee Association Trust Account Simplified Employee Pension ( SEP IRA) Savings Incentive Match Plan for Employees IRA (SIMPLE- IRA) Spousal IRA Rollover (Conduit) IRA Inherited IRA Education IRA (Coverdell Education Savings Account) Traditional IRA

Roth IRA Like an IRA, a 401k plan allows investors great flexibility in choosing their preferred investment vehicle. Selections include mutual funds, bonds, annuities, and stock. However, targetfunds (investments that gradually become more conservative when one is heading towards retirement) tend to be the most popular option available. For the most part, companies allow their employees to enroll in a 401k right away. However, there are some smaller companies that might delay the process for a year or more. If this is the case, it is advisable to contact the Human Resources department to file a complaint.

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