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Posts Tagged ‘IRA’

Saturday was a beautiful spring day in New England. Temperatures were moderate.  No humidity.  It was bright and sunny with languid puffy clouds hanging in the noon time breeze.  A beautiful day to be outside especially after the gloomy weather that Mother Nature has thrown at us during the winter and spring so far. A beautiful day for gathering with family and friends and celebrating the milestones of life whether a birth, a marriage, a graduation or connecting with others.

It so happened that I was attending the funeral celebration for a friend and client. Celebration is the right word.  While sadness always is part of these things, it truly was more fitting and proper to highlight and remember the qualities that we all should aspire to.

In this case we were gathered to celebrate a sister, aunt, daughter and friend who lived fully during her short 50 odd years.  A global traveler, talented cook and baker, gifted woodworker and gardener and charitable sort who always thought of others less fortunate.

Regardless of one’s religious persuasion, the celebrant of this service, a Roman Catholic priest, expressed it best when he said that many of us think a long life is synonymous of a good life.  But in reality, he emphasized, the teachings of many religions focus on the quality of life as opposed to its length. And this person, my friend and the sister of my very best friend, truly made her short time in the temporal world full and rich.

Like a light switch, one moment someone’s vivacious smile is there and in the next instant it is gone leaving us only with the warm glow of memory.  Whether it is better to have a sudden death or have time to prepare for the inevitable is a constant debate.  In this case, my friend was there one moment and in the next she was gone.

Inevitably, when confronted with such sudden tragedy, we tend to think of our own mortality.  I recall after the Twin Towers came down in NYC, how families were drawn closer together even if they didn’t have a direct connection to the victims of the terrorist attack.  And the interest in insurance and estate planning was at a high point.  Lawyer friends reported doing more wills and guardianship plans.  Insurance agents were fielding calls for new insurance policies.

It shouldn’t take a tragedy – whether public or personal – to get people motivated to act in their best interests but we are frail humans and tend to look at the present disregarding the future.

But we do that at our own peril.

Someday is Today

A person with friends is truly rich – remember “It’s a Wonderful Life.” While I truly believe that sentiment, it doesn’t mean abdicating one’s responsibility to care for family and friends by skipping the planning.

It is frustrating to be a financial planner and in trying to deal with such issues receive either blank stares or promises to deal with it later. At other times there is the all-encompassing answer to all: I’m All Set.

  • Someday, I’ll draft a will.
  • Someday, I’ll check my insurance coverage.
  • Someday, I’ll talk to my brother (or sister or friend) about guardianship of the kids.
  • Someday, I’ll deal with all these financial planning issues.

Someday is now.

Planning for the inevitable is not for you.  It is to help others.  It is selfish to think that things will just take of themselves.  Sure, plans will together.  But the stress on the family, friends and loved ones left to deal with picking up the pieces is not something you should burden someone with lightly when taking a few steps will help smooth the transition.

  1. At the very least, get a Will.  You don’t need to be rich to have one of these.  Better yet, make sure you have a Durable Power of Attorney in place so that your financial affairs can be coordinated.
  2. Review and update your Will periodically. Even if you do have a Will doesn’t mean that it still works for you.  Times change and so do tax and estate laws.
  3. Include written instructions.  Do you want to be buried or cremated? Who do you want to have certain sentimental, personal effects?
  4. Have a list of online passwords for your banking and social media accounts in a safe but accessible place.  Without them your heirs will have trouble dealing with some of your financial matters or your social media accounts could possibly be shut off.  And since most of our lives and communications are now so much online, your family might not be able to notify your extended network of your passing unless they can get online.
  5. Review your insurance as part of a comprehensive financial needs analysis regularly.  Too often people simply think that what they have in place covers them regardless of the simple fact that personal circumstances change and dictate changes in coverage.
  6. If you own property and have a mortgage or have young kids who would be raised by someone else when you’re gone, make sure you have insurance that at least covers the bills.  This means having a term insurance policy for at least the balance of the mortgage.  And if you have kids, figure out the costs to raise them (and pay for college maybe) and put a policy in place to equal that.  Otherwise, you may be leaving a spouse, friend, family member or business partner with trying to carry the costs without benefit of the resources.
  7. Check and update the beneficiaries on insurance policies, annuities, company-sponsored 401ks and personal IRAs. Maybe you had a divorce and never updated this so your ex-spouse may be the unintended recipient.  Or new kids, nieces or nephews have been born since the last time you did this.

In my banking and financial planning careers, I have seen both personally and professionally the impact on survivors left behind to pick up the pieces.  There was the client who needed to refinance to help pay for an elder parent’s funeral.  There was the friend who battled bravely against cancer but eventually succumbed leaving behind a wife, a three-year old toddler and a mortgage.

The pain caused by the loss of a loved one doesn’t need to be compounded by the stress, frustration and confusion of having to unexpectedly deal with financial challenges.

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June 2011 ViewPoint Newsletter

The current issue of the ViewPoint Newsletter from Steve Stanganelli, CFP(R) and Clear View Wealth Advisors is available for download from the SlideShare.net website.  A copy can also be found at the Clear View website newsletter archive.

In this issue, I focus on the key themes of the newsletter:  Retirement, College, Investing Strategy and Taxes.

  1. Retirement:  Using an “endowment” strategy to sustain withdrawals in retirement
  2. Investing: The value of dividend investing strategies for a total return investor and a discussion of how dividend payouts may predict future stock prices
  3. Taxes:  Real estate owners and especially those going through divorce may find these tips useful.
  4. College Planning:  On Thursday, June 9 there will be another free webinar with this one focused on Paying for College – Debunking Financial Aid Myths.

CLICK BELOW to VIEW the NEWSLETTER

Make Sense of Your Money with the ViewPoint Newsletter

Click Here to Download June 2011 ViewPoint Newsletter

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For college-bound students, funding retirement has to be the farthest thing from their minds. Yet, with a little planning, parents may be able to kill two birds with one stone. Unfortunately, most parents of college-bound kids tend to overlook some obvious ways to lower the cost of college but wisely using the tax code and some retirement planning techniques can help.

It may be a low-priority item, but this strategy can help parents when it comes to planning how to pay for college. How?  By lowering the Expected Family Contribution (or EFC) of the family and sheltering assets in a retirement account, there is the potential for qualifying for more needs-based financial aid.

Roth IRA

Consider using a Roth IRA for any earnings that a student has from part-time work.  For students over 16 they can put away up to $5,000 each year (or up to their total earnings, whichever is less) from all those part-time or summer jobs. Students already in college can also use this same strategy.

A Roth IRA allows any wage earner regardless of age to put money away now and then later withdraw money without paying taxes on the earnings. When you contribute to a Roth IRA, there is no tax deduction as there is with a traditional Individual Retirement Account (IRA) but there are other advantages.

If a student earns money and the parents leave it commingled in one of their accounts, the balance will potentially be assessed at the student’s higher rate as an asset available for paying for school.  Parents may want to maintain control over funds and have the earnings put into an account in their name but this will show up as a parental asset subject to assessment by the financial aid formulas used by colleges.

On the other hand, funds in a Roth IRA are not counted and will not affect financial aid calculations.

Follow the Road Map

The key to this strategy is following the rules of the road. Any funds placed in the account as a contribution may be withdrawn at any time free of taxes or penalties.

For earnings that may accrue on the account balance, these may be subject to income taxes or penalties but there are exceptions.

Converted Assets

For amounts that were converted from another IRA and recharacterized as a Roth, there are special rules.  For amounts that meet the five-year holding test (from the date the account was first opened) then no income taxes or early withdrawal penalties apply. If a withdrawal is made within five years, then a 10% early withdrawal penalty applies unless it is for a special purpose.  One of the eight special purposes is withdrawals used for higher education expenses.

Withdrawals of Earnings

While income taxes will apply, no 10% early withdrawal penalties apply when the proceeds are used for one of eight special purposes including higher education expenses.

Distribution Rules

For distributions from a Roth IRA you need to note that Roth contributions are always considered to be the first amounts withdrawn.  These are not taxable.  Then any amounts that were converted from other IRAs are considered to be withdrawn second and subject to the time line noted above.  Finally, earnings on the account are considered to be withdrawn last.

Ideal for the Self-Employed Parent

Consider employing your kid in your business and paying them instead of just giving them an allowance.  I write about this on a previous blog found here. This way you can lower the taxable profit from your business which may help you qualify for more financial aid.  And by diverting the wages earned into a Roth IRA as a contribution, your child will not have this asset exposed for the financial aid calculations.

Use It Now or Later

This strategy can be used for late-starters, those who haven’t saved enough for upcoming college bills.

But it can also work very well if you start early.  Since there is a five-year rule in place, open a Roth IRA account even while the child is in middle school and working part-time outside the home or in the family business.  Then by the time the child is ready to enter his third or fourth year of college, he may be able to withdraw some of the earnings to pay for costs without paying any penalties.

By using this strategy, parents can help their students learn to save and the funds can be available in a tax-efficient way during college to pay qualified education expenses.  Or they can skip the withdrawals while in college and use them later for graduate school or to help pay for their first home purchase.

Advantages of This Strategy:

  • Shelters assets from financial aid calculations
  • May help lower family Expected Family Contribution (EFC)
  • Instills value of saving early for goals
  • May help accumulate capital that can be used later for school with tax efficient withdrawals
  • May help save for future home purchase or better yet … retirement

 

For more tips, check out my free webinar offered monthly. For a current schedule visit the Clear View website.

 

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A key component of a diversified income-oriented portfolio is dividends. This is what I have noted in the past during my presentations, blogs and online musings. They are a key part of a solid retirement income strategy.

The total return from stocks is derived from two key components:  price appreciation and the cash flow from dividends.

Most investors are certainly familiar with the concept of price appreciation (or depreciation as was evident during the financial crisis and Flash Crash for instance).  This is what the media each night focuses on when they report on “The Market.”

But less noticed is the value of dividends to the longer-term success of an investor.

The Value of Dividends to An Investor

Below is a chart of various recent periods of stock market performance compiled by Thornburg Investment.

The “Dividend Aristocrats Index” refers to an index of companies that consistently lead the market in paying dividends and regularly increasing their dividends.

Annualized Total Return Period Dividend Aristocrats Index S&P 500
1990-94 12.58% 10.4%
1995-99 19.48% 28.54%
2000-04 9.79% -2.29%
2005 – 9/2009 2.32% -0.08%
1990 – 9/2009 10.97% 8.41%

Dividend-paying stocks have shown these positive attributes over this period:

  1. Historically higher yields than bonds
  2. Historically higher total returns compared to bonds because of the stock appreciation potential of the dividend-payers.
  3. Higher income, capital appreciation and total return compared to the S&P 500 Index in almost all of the periods noted above and a near 20-year annualized total return of nearly 11% versus 8.4.

Dividend-paying stocks are probably not as sexy as most aspects of the stock market.  They are part of “value investing.” They are the stuff of “conservative” portfolios built for “widows and orphans.”  They are the basic building blocks used by Benjamin Graham, the author of Intelligent Investing and the principles on which Warren Buffet built Berkshire-Hathaway.

But for an income-oriented investor (such as a retiree) looking at ways to manage income in retirement, they should not be overlooked.  In fact, recent research reveals that those companies that pay out higher dividends also tend to have higher stock prices because they also have higher earnings growth. And earnings growth is another key component in valuing stocks.  This research indicates this as a global tendency.

Searching for Yield

Unfortunately, seeking out high dividend-paying companies in the US is not so easy.  Unlike managements of Euro-based companies where paying dividends is a sort of badge of honor, US companies tend to be much more stingy in paying back earnings to owners of the company (the stockholders).

And the trend in dividend yields is one that continues to decline. A research note by Vanguard (May 2011) shows this trend.  From 1928 through 1945, the average dividend yield was around 5.6% and dividends represented about 67% of company earnings (aka dividend payout ratio). From 1945 to 1982 the average yields dropped to 4.2% and the payout ratio to 53%.  In the more recent period from 1983 through 2010, the average dividend yield has dropped to 2.5% with a payout ratio of about 46%.

As you can see finding “Aristocrats” that pay out higher than these averages makes a big difference.  And the higher payouts may also portend higher future earnings as well as stock price appreciation.

But even those companies which are “stingier” will still help out a portfolio.

Do Lower Dividends Mean Lower Stock Prices?

The question that investors may be asking themselves now is “will these lower dividend yields (historically and compared to Europe for instance) be an indicator of lower stock prices?” Because the market’s dividend yield is below its historical norm, is that an indicator of lower total returns in the future?

While the stock market is certainly not without bubbles and crashes, it is unlikely that this is a factor in possible future stock price levels. Lower dividend yields are not necessarily an indicator of lower total returns.

There are other reasons that are more likely the cause of this trend toward lower yield payouts.  Part of this is based on US tax policy.  Another is the culture of US corporate management that has opted toward share repurchases instead.

In the US, there is a bias in favor of long-term capital gains over receiving dividends and paying income taxes.

When dividends are paid out all stock holders receive the income and are subject to tax. When management opts for a “share repurchase” program, only those who tender their shares are paid out.  So this may be more agreeable to investors who are trying to manage their tax bill from investing. For those who are longer-term stock holders, they may receive more favorable capital gains treatment by holding the stock and waiting simply for appreciation.

Admittedly, there may also be an incentive by management not to declare dividends so that they can hold onto the capital to “reinvest” in the business – which may or may not be a good thing.  (The same argument can also be seen in political terms in Washington when both parties are arguing about whether or not to have tax cuts).

And management may also have an incentive to repurchase stock because such programs provide the company with flexibility to change the terms – something that is frowned upon if management were to lower or cancel a declared dividend.

How to Use Dividends in Your Portfolio

In any event, using dividend-paying stock is something that makes sense in retirement portfolios.  To provide tax efficiency, it makes sense to include these in your qualified accounts (like IRAs).  And to boost income, it makes sense to add global dividend-paying stocks which tend to have higher yields and payouts.  Nothing in these current research notes indicates that the lower US yields and payouts are an indicator for lower future stock prices.  There are enough other things going on in the economy locally and globally that can impact do that.

To Build a Better Mousetrap or Get More Information

For more ways to build a retirement income portfolio, please feel free to give me a call directly at 978-388-0020 and stay tuned to the company website for upcoming webinars that will cover this topic too.

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College costs continue to escalate.  The burden on families grows every year.

Even before the Great Recession trying to balance the competing and emotional needs of paying for college while trying to save for retirement was a struggle. Let’s face it: Paying for college is as much a retirement planning issue as anything else.  Don’t ever forget that.

So how much is a college education worth to you? The average price keeps going up and is the only part of the economy not showing any slowdown in price increases (besides gas prices of course).

  • Average public 4-year school tuition is now $16,000 per year
  • Private colleges are at $32,000 per year
  • Elite private colleges are near $50,000 per year

And this doesn’t include tuition, room, board, fees and “extras.”

Again, how much is this worth to you? Will you be satisfied eating Mac and Cheese or working as a Wal-Mart greeter during your “Golden Years” knowing that your child got the most expensive education that money could buy?

If the answer to that is “hell no,” then you’re at the right place.

Become an Informed Buyer of Education

Welcome to my latest blog where I will endeavor to bring you insightful and creative tips on how to be an informed consumer of higher education.

Trying to get a handle on what to do is difficult.  Let’s face it:  Unless you’re Octa-mom or do this everyday, you’re flying blind when it comes to figuring out how to manage paying for college. Have you actually seen a FAFSA form lately? Do you really want to?

Sure, if you have a couple of kids within a couple of years of each other, the rules might be the same.  Sure, you can rely on what your neighbors did for their kids who graduated a few years ago.

Or you can have a plan tailored to your situation.

Look, just like tax laws, financial aid rules and how college admissions officers work their magic change every year.

So you may as well have a plan and be a part of making it happen.

This blog and my website are here to help.

Stop by and let me know your thoughts.  Shoot me a question.  And feel free to try out the exclusive college planning service website on your own. And then let me know when you’re ready to get serious about this by calling me directly at 978-388-0020.

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This is a common question from many folks.

There are many valid reasons to consider a 401k rollover.

While changing jobs can be stressful and life can otherwise get in the way, you really should not neglect this.  Oftentimes, out of sight is out of mind and you could be losing money and not even know it.

Costs

While it may not seem like it, you are paying for your funds to stay with your old employer’s sponsored plan.  You just don’t see it.  Fees for employer plans are not very transparent.  While you may not see an actual bill, your employer is probably paying for the administration of the plan through hidden fees assessed on the balances held in it.

I have seen sponsored plans that had these back-end hidden fees and charged the participant a piece for each contribution.  A little here, a little there all adds up.  And the more it is, the less there is to compound for your retirement.

While there are few things that you can control in life and investing, fees are one of them.

In a rollover IRA, you’ll have more choices of platforms which may offer low loads and costs so you can keep more in your pocket.  So control what you can when you can for successful investing.

Choice and Access

While some employer plans may offer a variety of funds which may be top of the line, you’re still limited to the menu selected by your employer.  More often than not this is influenced by the broker associated with the plan.  And this can be influenced by the restrictions placed on the choices by the broker’s company or administrator because there may be an incentive to fill the menu with one fund family.

I’ve seen plans offered through national payroll companies that required more than 50% of the fund choices to be from one particular fund family.  Not every choice in a management company’s fund line up may be stellar so you’re limiting yourself by staying with the old plan.

When you rollover you’ll have a much larger universe to choose from.  (Like most independent fee-based advisers, my registered investment adviser company has access to more than 14,000 non-proprietary mutual funds with no loads or loads waived).  You’ll typically even have access to individual stocks, bonds, Unit Investment Trusts, Exchange Traded Funds and bank CDs.

The Self-Directed IRA Option – Not Available in Your 401(k)

Have you ever considered investing in something besides stocks, bonds or mutual funds? Maybe you might want to invest in real estate or buy judgments or invest in a business by being its lender or providing a friend with start-up capital.

Well, you can’t do that with a typical 401k plan.  But you can with a self-directed IRA.  And such an IRA can’t be done through the Big Box financial firms.  There are specialized bank and non-bank custodians who handle such transactions and work through independent financial planners to help their clients learn more about such options.

Risk Controls & Broader Choice of Investment Strategies

While you may have online access to your company-sponsored plan so you can make trades or switches of your funds periodically, there really are no risk controls that you can use given the limitations of the platform the 401k is using.

Let’s put it this way:  Investors make money when they don’t lose it.  At least that’s my working philosophy.  Having options and systems in place means that you stand a better chance of protecting your retirement nest egg.

It’s always easier to not lose money in the first place than it is to try to make up for lost ground.  Your money has to work harder to get back to breakeven — much less get ahead for your retirement goals.

Consider this:  If you think that Treasurys or munis are in their own bond bubbles, what can you do to protect yourself through your 401k?  Probably, not much.

But in your own IRA you’ll be able to build a more all-weather portfolio that includes inflation hedges like convertible bonds, foreign dividend-paying stocks, master limited partnerships or even managed futures.   All come in mutual funds or ETFs which offer the advantages of diversification without the tax and cost structures of direct investment options.

Want to lower costs and control your investments more? You can even buy individual corporate or taxable municipal bonds and build an income ladder with the help of a professional financial planner.

Or maybe you want to minimize the impact of another downdraft in the market.  Using ETFs and trailing stop-loss orders you may help protect your gains.  Not an option in your old 401k.

So when you roll your account over, you’ll also have access to professional help, tools and direct management options tailored to your specific needs that you just can’t get within your old 401k.

Actionable Suggestions – Things to Consider:

iMonitor Portfolio Program: We prepare the allocations, select the funds or other investments and monitor.  We will make changes and rebalancing decisions as needed for you.

Money Tools DIY Program: We prepare the allocations and select the funds.  We will offer recommendations on Exchange Traded Funds as well. Periodically, we send you updates for rotating funds or rebalancing. You manage the funds directly on whatever custodian or trading platform you choose.

For more information, please call Steve Stanganelli, CFP® at 978-388-0020 or 617-398-7494.

Check out the website and newsletter archives for more on this and similar topics:  www.ClearViewWealthAdvisors.com

Adapted from ViewPoint Newsletter Archive (January 20, 2011)

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Girish asks, “I have heard people talk about ‘taking advantage of’ or ‘minting money from’ a recession. How does one do it?”

If you have cash you can find great bargains in almost any market or asset class – whether it is a stock, bond, mutual fund, buying tax liens or judgments or even real estate.  This is the classic sort of value investing espoused by Benjamin Graham and practiced masterfully by Warren Buffet.

Certainly, when stock prices are down you can pick up shares in companies with strong brands, franchises, marketing and cash flow but which may be temporarily out of favor because of investor fear.  This is certainly what happened during the Great Financial Meltdown.  Those who had the stomach for it and the cash to back it up could buy up many companies at bargain prices.

The key is having the cash and not being over-leveraged. There are lots of stories (most recently in BusinessWeek) about developers who are mortgaged to the hilt and unable to maneuver now as they are caught in a foreclosure squeeze.   Liquidity is really the key to crises.

If you have the cash and the stomach for the risks, you can buy into distressed areas of the market: tax liens, providing capital as a loan with equity kicker to an operating business that may be short of cash because banks are too timid to lend, real estate to fix up and rent (and later on use as a vacation property if you properly structure a 1031 exchange for example.

Some of these tactics can be done with non-qualified money. But one can even consider doing it through a self-directed IRA. Not every custodian is set up to allow this but there are some specialized non-bank custodians that will help set up such accounts. (One such custodian is PENSCO Trust). And the income that may be generated can be tax deferred allowing for more capital to be available for investment or to compound longer.

This is not a substitute for a broadly diversified investment portfolio but a supplement; you could call it the “opportunity” or “tactical” bucket.

The key is cash and an understanding of your personal risk profile. And most require a time horizon longer than a typical day trader’s.

Sure, the key to investing success is to buy almost anything low and sell it higher later.  But don’t limit yourself to just stocks.  There are opportunities beyond just stocks where astute and risk-tolerant investors can take advantage of what arbitrageurs call “information asymmetries.” And they may even be in your local market.

This is where a good financial adviser can help.

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Black Friday is traditionally the day that can make or break a retailer’s bottom line.  But don’t let enthusiasm for the season, the sales or the advertising hype end up putting you into the Red.

Black Friday is here.  Even before you may have had a chance to digest your Thanksgiving feast or recover from a day of football, you may have already been lured into the local mall.  Maybe you were one of those early bird shoppers preparing for a marathon day of shopping at 1 AM.  (It’s not too late to consider these tips for the rest of your shopping season or to teach your kids).

I was not one of them.  I slept in and have probably missed a host of specials and discounts on every imaginable thing sold. While I don’t feel bad I know that I’ll probably be picking on the leftovers like a I will be with the Thanksgiving turkey in the refrigerator.

Although I’m not the best marathon shopper, I thought I’d share a few tips that may help you avoid turning this holiday’s shopping season into a budget-busting hole for your family budget that you’ll be paying for and digging out of long after that snazzy do-dad you bought for Uncle Charlie is lost or breaks.

Have a Budget

No one says that you have to go and take out a second mortgage on your home to buy gifts for the entire world (that’s even assuming that you can qualify for a Home Equity Loan or HELOC).

It’s probably reasonable to budget somewhere around 1% of your gross income for holiday purchases of gifts for others in your family and friend network. Unless you’re buying an engagement or anniversary ring for your significant other, there’s no need to bust the budget here – even then there are limits. (And you really should not be spending more on stuff than you’re putting away in your IRA or 401k).

Are you afraid you’ll be considered the cheap skate relative or office mate? Who cares?  Are those folks going to bail you out if you’re in financial trouble?  Do you really want to be one of the folks who’s still paying off the credit card charges you incurred for this holiday by the time you serve next year’s Thanksgiving turkey?  All of those great savings you got will simply be replaced by interest charges on the balance you carry.

Gifts are barely remembered while memories of sharing time with friends and family have more meaning to most folks.

Make a List and Check It Twice

Just like Old Saint Nick, you should prepare a shopping list. Have a written list of who’s going to be receiving gifts.  If you know them well, you can jot down a few ideas of types of gifts to try to find.  Before you even open up your web browser or step foot in the store, get this done.  Without a list you’re more likely to become an impulse buyer.

Have a Shopping Plan

Experienced shoppers know that it pays to have a plan of attack when those doors open.  You’ve been scouring the newspaper inserts (you do still get the newspaper, right?) and browsing the websites.  You’ve been in the stores before and know the floor layout.  You can bypass all the stuff you don’t need and just go straight to the department in the store where that perfect gift for Aunt Sally is.

Hey, store merchandisers know that you’re only human and easily distracted.  That’s why they’ll stack up stuff near cash registers.  That’s why grocery stores force you to walk through the entire store to get to the dairy case and that quick stop to pick up milk costs you $30 because you pick up a “few things.”

I prefer to use shopping sites that will find and compare items.  Whether you use Amazon.com or MySimon.com or a host of other shopping robots, you can narrow down the price range to expect to pay for an item.  And for the Smartphone set, “there’s an app for that.”  You can download an app that will allow you to scan a product’s UPC which can then pull up product information and comparative prices.

Consider Charity

You might want to give back instead of simply consume.  Sure, we need consumers to buy more stuff to get the economy moving again (we also need corporations to invest their $2 trillion in cash back into their businesses by buying equipment and hiring folks but that’s a different discussion).

But nothing says that you have to stimulate the economy single-handedly.

There are causes and people who need your help throughout the year and providing a donation in lieu of a gift made in China will help them, make you feel good, provide you with a tax deduction, and reduce our trade imbalance which will ultimately improve the strength of the US dollar.

Remember the Spirit of the Season

What do you really want your family to remember about the season?  What values do you want to pass down to your children or grandchildren?

Sure, it can be all about the ostentatious display of holiday lights and some of those displays are really nice and others are just way over the top.

Sure, it can be about buying the biggest, best new shiny thing.

I’m not trying to be Scrooge here. Far from it.  I believe that the holiday is about family and friends.  And more particularly, I think that playing Santa for young kids is magical – for you and them.

When I was growing up, my brother and I typically received one gift each from our parents, aunts, uncles and grandmother. And after we opened them up, our parents let us keep one toy out to play with while the others were put away so we didn’t end up overly distracted and bored with the toys all at once.

On the other hand, I remember going to a cousin’s house and they had TONS of packages under the tree.  Their parents would wrap all sorts of little stocking-stuffers – candy, marbles, even tooth paste and socks.  It was all about showing the quantity of gifts even if they were mundane, everyday sort of things.

I think that I enjoyed our holiday more and better because we weren’t focused on tearing off lots and lots of wrapping paper.

And I think that’s what I want my soon-to-be 15-month old son, Spencer, to take away as part of his understanding of the holiday and our new family’s traditions.

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The holiday season is almost upon us.  Before we all get caught up in the spirit of the season (or mayhem, depending on your perspective), consider taking time to get your fiscal house in order with these tips.

The Year of the RMD

Last year, required minimum distributions (RMDs) were not required as Congress granted a reprieve to not force clients to take distributions from severely depressed retirement accounts.

That free pass is not available this year.  So if you or someone you know is over age 70 1/2, you have to take a distribution from your IRAs.  This also applies to those who are beneficiaries of inherited IRA accounts as well.

Distributions don’t have to be taken from each IRA account but a calculation must be made based on the value of all accounts at the end of last year.  Then a withdrawal can be made from one or more accounts as long as it at least equals the minimum amount.

Think Ahead for Higher Taxes

In all likelihood, taxes will be higher next year.  As things stand, the Bush-era tax cuts are set to expire and marginal income tax rates and estate taxes will increase.

So look to booking capital gains this year if possible since tax rates on both long-term and short-term gains are certainly lower this year.

Reduce Concentration

There’s obviously enough going on to distract any investor but what I’m talking about here is concentrated stock positions.  Many clients may take advantage of company-sponsored stock purchase plans or have inherited positions concentrated in just a few stock positions.

Regardless of one’s age, this is risky.  This is especially risky to concentrate your income and your investments with your employer.  Remember Enron?  How about WorldCom?  Or maybe Alcatel-Lucent?

So given the lower capital gains tax rates that exist definitely now (versus a proposed but illusory extension later), it makes sense to reduce the highly concentrated positions in one or more stocks.

I know a widow who inherited the stock positions that her husband bought.  These included AT&T and Apple.  While AT&T was once a great “widow and orphans” stock paying out a reliable dividend because of the cash flow generated from its near monopoly status in telephone services, it broke up into so many Baby Bells.  The dividends from these have not matched the parent company and the risks of these holdings have increased as the telecom sector  has become more volatile.

And while Apple has been a soaring success for her (bought very low), it represents over one-third of her investment holdings.

Like most people I come across, she has emotional ties to these holdings.  And while she and others like her would not think of going into a casino to put all their chips on one or two numbers at the roulette wheel, they don’t find it inconsistent to have a lot of their eggs in just one or two investment baskets.

Since she relies on these investments to supplement her income, she needs to think about how to protect herself.  Although people may recognize this need, it doesn’t make it any easier to get people to do what is in their best interests when their emotions get in the way.

‘Tis the Season for Giving

Right now the highest marginal income tax bracket is 35% which is set to rise to 39.6%.  And capital gains tax rates are set to rise as well.  And come January 1, the capital deduction on gifts will be reduced from 35% to 28%.  All of this makes giving substantial gifts to charities a little more costly for your wallet.  So if you’re planning to make a large charitable donation, it pays to speed it up into this year.

To Roth or Not to Roth – Year of the Conversion?

This year provides high-earners an opportunity to convert all or part of their tax-deferred accounts to Roth IRAs which offers an opportunity to pay no income tax on withdrawals in the future.

The decision to take advantage of this opportunity needs to be weighed against the availability and source of cash to pay taxes now on previously deferred gains in the tax-deferred IRAs or 401ks. It also must consider the assumptions about future income tax rates and even whether or not future Roth IRA withdrawal rules might be changed by Congress.

Create an Investment Road Map

To really help gain clear direction on your investing, you really should consider sitting down with an adviser who will help you draft your personal investment road map (an Investment Policy Statement) that outlines how investment purchase and sale decisions will be made, what criteria will be used to evaluate proposed investments and how you will gauge and track results toward your personal benchmark.

This exercise helps establish a clear process that minimizes the impact of potentially destructive emotional reactions that can lead you astray.

Rebalance and Diversify

Just as you might plan on changing the batteries in your smoke detectors when you reset the clocks in the spring and fall, you should rebalance your investments periodically as well.

Now is as good a time as any to reassess your risk tolerance.  Research has shown that an investor’s risk tolerance is dynamic and influenced by general feelings about yourself, your situation and the world around you.  With the world’s stock markets showing many positive gains, this may lead some to become more willing to take risks.  This may not be a good thing in the long run so really question your assumptions about investing.

Armed with your investment road map and a risk profile, you will be in a better position to determine the mix of investments for diversification.  Don’t be afraid of adding to the mix investment asset classes that may not be familiar.  The idea of diversification is assembling investment assets that complement each other while potentially reducing risk.  And just as the economy has changed and the types of industries that are dominant rise and fall, it’s fair to say that what is “in” now may be “out” later making it important to reconsider your mix.

For this reason, this is why looking abroad to developed and emerging markets still makes sense.  Many of these economies are not bogged down by the after-effects of the great financial meltdown. And the rise of their consumerist middle classes means the potential to take advantage of demographics favoring growth sectors like natural resources, telecom, agriculture and technology.

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Lots of ink has been spilled discussing one of the most hyped retirement and tax strategies: Roth IRA conversions.  The prospect of future tax-free withdrawals is enticing.  But there are lots of issues that need to be considered whether it is right for you.

According to Google, there has been a surge in interest about Roth IRA conversions as it has become one of the top search terms this fall. (1)

This is hardly surprising considering that starting in 2010, all taxpayers, regardless of income, are eligible to convert tax-deferred retirement assets to a Roth IRA.

Prior to the change, the law prevented taxpayers with household incomes above $100,000 from converting assets to a Roth IRA.

Starting this year, tax code changes allow conversions of other tax-deferred retirement accounts regardless of income. This broadens the opportunity for those who did not have these choice before. It should be noted that there are still annual income limits in place for determining eligibility to contribute to a Roth IRA. (There are no limits to use a Roth 401k provision in your employer’s plan).

The majority of Americans believe their own taxes are going to increase.  Given government deficits and entitlements for an aging workforce, taxes may certainly be needed to cover these commitments.

As it stands, tax rates are scheduled to increase in 2011. Unless Congress acts to delay reversion to the prior tax rates, taxes on Roth IRA conversions will be higher after 2010.

A Roth IRA conversion offers an opportunity for future tax-free income.2

But does it make sense?

Does Roth Conversion Make Sense

Whether or not a Roth conversion makes sense really depends on an individual’s circumstances.

Money in all types of tax-deferred accounts like IRAs, 401ks and such are all jointly owned by the participant and Uncle Sam as silent partner.

Although the tax tail shouldn’t wag the dog, you should cut the best deal with the least impact on your personal tax situation.

It makes the most sense for those who expect to have more than enough assets and income for retirement and don’t want to be forced to take Required Minimum Distributions (RMDs) on IRA accounts.  It also makes sense for estate planning purposes as a way to build a multi-generational legacy of tax-deferred wealth accumulation.

And for most who believe that their marginal income tax rates in retirement will be higher whether because of tax policy or because of their own success with work and investments, then it may make sense to lock in the tax liability now.

It also makes sense for those who expect a low income year in 2010 because of retirement or unemployment for example.  Being in a lower tax bracket may reduce the tax bite on the converted funds.

While income and earnings may be withdrawn in retirement tax-free, an investor will still need to pay Uncle Sam now for that future privilege.

And all of this analysis assumes that Congress doesn’t change the rules down the road and even tax Roth accounts.  Consider the fact that during the 1980s, Congress changed the rules about taxing Social Security benefits.

Keeping that in mind, it still may make sense as a way to hedge against future tax policy to do a partial conversion of some of your tax-deferred retirement accounts especially if you have money from non-IRA accounts to tap.

If you use the funds from the tax-deferred account and you’re younger than 59 ½, you’ll be hit with an early withdrawal penalty and your investment will be starting from a lower base making the payback of the strategy more complicated.

Because the tax is assessed on the gains in the account, an ideal time to do this and minimize the tax impact is when account values are off their highs.  With the gains over the past year, this may make a conversion less attractive.

Another thing to consider is that by doing a conversion, your adjusted gross income will increase and potentially result in loss of COBRA subsidy or education credits which are subject to income phase outs.

You Can Change Your Mind Later

Unlike most things in life, you can get a “do over” called a recharacterization that converts everything back to the way it was. The assets would be converted back to tax-deferred status and you can file an amended tax return seeking a refund of the income taxes you paid on the conversion.

Roth IRA conversions offer the potential for tax-free income in retirement for taxpayers at all income levels. If you want more information about converting to a Roth IRA, call 617-398-7494 or email today.

It’s critical to review your individual situation before making a decision about moving important assets.
1) InvestmentNews, November 16, 2009
2) Rasmussen Reports, September 3, 2009

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