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Archive for August, 2011

As college costs continue to rise, parents continue to search for ways to lower the pain in their wallets from getting a college degree.

What could be better than having the money saved to pay for college?  How about having help from Uncle Sam?  But with so many choices, how can you most effectively accomplish the twin goals of paying for college and saving your retirement nest egg? I discuss many in my College Planning Service.  Here is a little primer on some popular options.

With a qualified tuition plan, like a 529 Plan, you have a tax-free incentive to save for college.  For years the investment industry has promoted the benefits of saving for college using these qualified tuition savings plans.  But are they really the best or most beneficial option for you and your student?

WHAT IS A QUALIFIED TUITION PLAN and CAN IT HELP YOU?

Created under the Small Business Job Protection Act of 1996, qualified tuition savings plans (QTP) include a number of options that provide tax incentive savings for college savings.

The most popular of these options is the 529 Plan (named after the section of the code where they appear).  But there are two varieties of these plans and understanding the differences may help you avoid some costly mistakes.

Generally, a QTP is an investment vehicle that allows someone to set aside money that can be used towards the expenses incurred at an eligible school or college. It can be used to cover the tuition and fees of an undergraduate degree or vocational program.

Two Options

There are two key options:  a prepaid tuition plan or an investment plan.

Prepaid Tuition Program

With this option, you can set aside a predetermined amount that the program manager agrees to use to cover the expenses for a particular time period.  These options are limited to certain schools.  And the school contractually accepts the amount set aside to cover the expense with the funds set aside.  If a participant chooses not to attend, then the market value may be withdrawn (subject to limitations) and used at another school.  But the value of the account may not be enough to cover the actual expense.

College Savings Plan

This is the classic version of a QTP.  Money is invested for a particular beneficiary but can be used at any eligible school or program.  The biggest difference is that the investment burden falls on the shoulders of the participant.

The Upside

Investing in a 529 means that your student-beneficiary can  withdraw the funds tax-free when it comes time to pay college costs.  In some cases states offer a tax deduction for setting money aside (but not in Massachusetts).

Problems to Consider

A common complaint: It limits withdrawals to cover only eligible expenses. The money invested into the account is restricted to “qualified” expenses specific to your education. While this list is broad, certain school-related expenses may not be eligible.

If money from a 529 account is used on something not qualified, the investor is subject to income tax and a ten percent early distribution fee.

  • Limitation on investment choices: You are limited to the plan menu offered by the state sponsor.
  • Limitation on investment changes or rebalancing: You can only switch investments once per year.  Or you can enroll in an auto-rebalancing feature (quarterly, semi-annually or annually) but there may be a cost.
  • Fees and expenses may be high: In addition to the underlying mutual fund expenses (about 1% – 1.5% for actively managed funds), there is an advisor and state management fee. These can run about 1% to 1.5%. (A cheaper alternative involves low-cost Exchange Traded Funds). And in some cases, you may be paying a commission for the purchase of shares.
  • Financial aid eligibility may be impacted:  Assets held in such plans are assessed by financial aid.  If you have a large enough balance, you may reduce your odds for receiving financial aid. The titling of the account can be critical to helping avoid this potential problem.
  • Improper tax planning: If you’re in a low enough tax bracket (marginal rates under 15%), you may not benefit as much compared to the costs of the plan.  These plans are better suited for those in higher tax brackets. And for estate planning purposes, they are ideal for grandparents looking to move large amounts of money out of their estate for the benefit of the living.

 

Need Help Understanding Your Options?

 

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COLLEGE HELPLINE:  978-388-0020

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Exchange Traded Funds (ETFs) have been growing in popularity with investors and their advisers.  They offer low costs and opportunities to more precisely create an asset allocation or take advantage of trading and hedging ideas.

Currency Exchange Traded Funds have grown popular over the course of 2011 to investors who are attempting to gain exposure to foreign currency while avoiding the cost and complexity of the foreign exchange (Forex) market. Investing in foreign stocks and bonds can be a good investment when looking for a financial diversification and also offer the potential of producing substantial returns.

Up until recently, an investor’s only choice to hedge foreign exposure has been through the Forex markets. These markets can be complex for most investors and require substantial capital at risk.  Investing in Forex is promoted by some as a speculative way to make profits.  But an investment in foreign currency comes with the risk of losing money through exchange rates.

ETF’s that focus on currencies are a less complex way to hedge an overseas investment. They give the average investor the opportunity to invest away from the US dollar. ETF’s are also used as ideal instruments for investors to diminish the loss of money due to exchange rates.

Why Invest in Currency Exchange Traded Funds?

Investing in an ETF is much less complex than investing in the Forex market. Although the Forex is the most liquid market (trillions are traded each day), it can be difficult for the average investor to get a seat at the table considering the capital that may be needed and the trading costs incurred. ETF’s offer a simpler way to invest in foreign markets.

If an investor feels as though there is potential economic growth overseas or in an emerging market, ETF’s are a perfect vehicle for international exposure.  Buying individual stocks overseas may be difficult for US investors and may be costly as well.  Mutual funds are a great way to gain access but they have higher costs compared to ETFs.

Why invest in currencies?  Consider this:  Living in the US means that your source of income and most of your investments are denominated in US dollars.  If your portfolio is loaded with domestic investments (and most investors tend to be woefully under-allocated in foreign equity positions), adding a currency ETF to your portfolio can help balance your investments and add diversity to your portfolio away from the US dollar.

Let’s say you are investing overseas through mutual funds in your 401(k) or brokerage account.  Most of these portfolio managers tend to not hedge their exposure to currency changes.  This can turn a positive fund return into a loss when converting back to the US dollar.

Now an investor may want to hedge by holding a position in a foreign currency.  But investing in foreign markets can be risky because of the constant fluctuation of currency and exchange rates. The currency market never closes and is open twenty-four hours of everyday. For the average investor, constantly keeping up with the currencies to figure out the best times to sell and buy may not be worthwhile and result in a loss in money (as well as sleep).   ETF’s offer a more efficient opportunity to manage these risks of foreign investments.

Why bother?  Well, just look at the news headlines.  There continues to be debt crises in foreign and US markets.  This tends to lead to potentially higher interest rates as investors demand a higher return for attracting their money to a particular country.  Higher interest rates in turn will negatively impact the value of the currency and lead to a “weaker” currency. (The upside, on the other hand, is that a weak dollar, for example, will make our exports more competitively priced and help those business dealing overseas).

Investors may be interested in “safe haven” currencies during poor financial times. Countries with strong political stability, low inflation, and stable monetary and fiscal policies tend to be magnets for money in tough times. While that doesn’t necessarily describe the US right now, we are still considered the best option out there as a “safe haven.”

Hedging Examples

According to this article appearing on Investopedia, “a weakening currency can drag down positive returns or exacerbate negative returns in an investment portfolio. For example, Canadian investors who were invested in the S&P 500 from January 2000 to May 2009 had returns of -44.1% in Canadian dollar terms (compared with returns for -26% for the S&P 500 in U.S. dollar terms), because they were holding assets in a depreciating currency (the U.S. dollar, in this case).”

Disadvantages of ETF’s

No investment comes without risks and ETFs and currency ETFs in particular are no different. As is the case with many ETFs, there is always the issue of liquidity of the ETF.  (An ETF without a deep market or volume can produce exaggerated and volatile price changes). And in the case of currency ETFs there is the added issue of dealing with foreign taxes.

The Bottom Line

Whether or not a currency ETF makes sense for your particular situation is something that only you with the help of a qualified professional can determine.

But you should at least be aware of the tools available that may help you protect your portfolio. At the very least, it makes sense to hedge overseas investments especially during volatile times.

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When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled.  Unfortunately, when the markets hit bad weather, there is rarely such a warning.

You might want to call it “Black Thursday.”

Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.

On the radar, we’ve seen the storm clouds moving in for a while now:

  • lower than expected GDP in the US last quarter,
  • downward revisions of the GDP to a negligible 0.4% for the first quarter,
  • lower business and consumer confidence surveys,
  • sharply lower than expected new jobs created,
  • higher unemployment,
  • foreign debt crises weighing down our Eurozone trading partners.

There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else.  Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.

Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday.  No one thing seems to have caused it.  It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.

All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies.  And doubt leads to uncertainty.  And if there’s one thing we know for certain, it is that markets abhor uncertainty.

While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure.  And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.

What’s An Investor to Do?

Don’t panic.  It may be cliché but it’s still true.  If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.

So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.

If you sell now — especially without a plan in place — you’re setting yourself up for failure.

Here’s a simple plan to consider:

  1. Hold On:  You can’t lose anything if you sell.
  2. Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge.  There are lots of tools available to investors (and advisers) to help:  Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
  3. Rebalance:  If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term.  Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
  4. Keep Your Powder Dry and in Reserve:  Cash is king – an oft-repeated phrase still holds true now.  Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time.  With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
  5. Seek Professional Help:  Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth.  Avoiding emotional mistakes improves an investor’s bottom line.

As a side note:  The old stockbroker’s manual still says “Sell in May and Go Away.”  Probably for good reason.  Historically, the summer months are filled with languid or down markets and volatile ups and downs.

 

While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in.  Stand and fight instead.  But fight smart. Have a plan and consider a professional navigator.

If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.

 

Let’s Make A Plan Together:  978-388-0020

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Recently, a blog visitor was searching on the term “EE Savings Bonds,” “Tax Free” and “parochial school.”

Evidently, this visitor has a child in a private elementary or secondary school.  With good planning and generous help from family and friends, he has a number of EE series savings bonds in the child’s name.

Given the tax breaks available for certain higher-education expenses and the increasing costs of private elementary and high schools, it’s a very valid question.

The answer:  No.

Unfortunately, there is no tax advantage for cashing in EE Savings Bonds to pay for private or parochial school tuition and expenses.

The Internal Revenue Code does provide a tax-free incentive to cash in Savings Bonds for qualified higher education expenses subject to certain adjusted gross income limits.  These qualified education expenses are broadly defined and include tuition, fees and certain equipment incurred in pursuing a post-secondary school degree or vocational program. Theses expenses must be incurred at an eligible institution of higher learning which includes virtually all accredited public and private colleges and vocational programs in the US as well as certain participating programs overseas.

Education Savings Bond Programs are described in IRS Publication 970 and can generally be found on page 60 and also on Form 8815 “Exclusion of Interest From Series EE and I US Savings Bonds Issued After 1989.”

The better bet for this parent will be to hold onto the Savings Bonds until after the child is enrolled in college.  Because of certain financial aid requirements it may actually be best not to sell them during the student’s high school senior year because of the base year calculation of the Expected Family Contribution.

For more specific help in developing a tax and financial aid plan, consider my exclusive College Planning Services.

Call the College Planning Helpline at 978-388-0020.

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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Like a deer caught in headlights, individuals faced with too many choices in their company-sponsored plan freeze up and may end up taking no action for their retirement.  They may end up making costly choices – or worse, no choices – for their retirement savings dollars.

Common costly choices typically include buying too much company stock or a mutual fund representing the same industry of the employer or loading up on small cap or growth stocks and avoiding bonds.  Even young investors (under age 30) have as high a probability as older workers of not choosing any equity funds and only choosing a money market or bond fund for the bulk of their retirement savings.

Recent research completed by Columbia Business School and the University of Chicago Booth School of Business indicates that workers who are faced with too many investment options end up making decisions that can adversely impact their retirement.  Often individuals will either make asset allocations that are unbalanced or choose to do nothing and leave their savings in cash and money markets.

This research highlights the need for individuals to seek out help from professionals who can offer guidance in allocation and rebalancing decisions.

Unfortunately, company sponsors do not have the staff, time or resources to provide this type of service.  And sponsors – who are indeed acting as trustees for the participants in their plans – may simply believe that they are “all set” because the investment firm offering the investment menu can provide the needed help through their toll-free customer service lines or websites.

People need tailored help and guidance which is not something that either employers or investment firms are prepared to offer.

While not discussed specifically in this study, the increased use of auto-enrollment in company plans and Target Date funds has helped.  At least individuals are “paying themselves first” by employers automatically enrolling them.  And target date funds can at least offer a glide path with preset rebalancing decisions to the asset allocation mix.

But these one-size fits all solutions may not be best for everyone.  This is where a fiduciary adviser can help out.

And this is why Clear View Wealth Advisors offers customized help for plan participants.  Through one of my flat fee financial planning programs, individuals can receive customized help in choosing a proper mix of funds from among the plan choices and receive guidance on periodic rebalancing actions.

To see details of the benefits study, go to www.BenefitNews.com or click here.

Help with Retirement Planning or 401ks is a Click Away with Clear View

Get Personal Help with Your Retirement Plan Choices

 

 

Retirement Plan Helpline:  978-388-0020

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