Seasonal Weight Gain

The holidays are upon us yet again, a time of year filled with friends, family, celebrations and an abundance of food. The end result? The average American will gain approximately eight pounds between now and New Year’s Day.

Unfortunately, there is another type of weight gain that also happens this time of year, one as difficult to shed as those extra holiday pounds. I’m talking about the additional weight added to our credit card balances as we party our way through the holidays.

We all know that preventing weight gain isn’t exactly rocket science. To keep off the extra pounds, we know we should exercise more and watch what we eat. Financial weight gain is no different – we need to save a little more and spend just a little less.

So how do we prevent added financial “weight” on our credit cards? Like exercise, it’s all about discipline. Some of you may remember the old “Christmas Club” accounts that local banks once offered. The truth is there was nothing magical about these ventures, they were simply forced savings accounts. By saving a little each month, come December you had a lump-sum of money to buy holiday gifts with. A similar approach will help you avoid credit card shock next year. Here it is, in seven and a half* steps.

1.	In January, after all the dust has settled, your credit card statements have arrived, and you’ve regained consciousness after the shock of your increased card balances, add up what you spent on gifts, decorations and entertaining.
2.	Adjust the number from Step 1 up (or down) based on what you would like to spend next Christmas. This is your target for next year.
3.	Divide next year’s target number by 12 to calculate how much you need to set aside each month to reach your target.
4.	Establish a separate savings account specifically designated for holiday expenses.
5.	If you are an employee, have your human resources department set up a direct deposit for the amount you came up with in Step 3. If you are self employed, simply direct-deposit from your checking account yourself. We find that most people, after a few weeks, don’t notice the money that’s being diverted into the savings account.
6.	Now, the tricky part: Stick to your budget you established in Step 2.
7.	Pay your credit card bills IN FULL when they arrive in January.
*7½.	The added benefit of this approach is: With your seasonal financial weight under control, you can spend more time at the gym.

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Have You Considered Charitable Giving?

Many people, once they’ve reached a point in their lives where their basic financial needs are met, start thinking about giving something back to society. Not only does it feel good to give money to help those that are less fortunate than us, but a gift to charity may also prove to be a smart financial move. When structured properly, some charitable gifting methods offer you excellent tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). Often, people are hesitant to sell appreciated assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Well, a CRT might just provide a solution.

CRTs are simply tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: 1) a tax deduction for the present value of your future charitable gift, 2) income payments from the CRT for up to 20 years, and 3) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate.

How do they work? While you’re alive, once you’ve transferred the assets to the trust, you will receive an annual income from those assets for up to 20 years. After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice.

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your charitable donation could markedly reduce your gift or estate tax liability.

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors and the concept has been around since the mid-1800s. Basically, you donate money to a university or charity in exchange for a flow of income. You (and optionally, your spouse) receive lifelong annuity payments. After you pass away, the balance of the money you have donated goes to the charity. You can also claim a charitable deduction on your income tax return in the year you make the gift.

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. So essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year.

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. Since only interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from a highly appreciated stock or piece of property through such a fund. You get an immediate income tax deduction for a portion of the gift, which can be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death may be greater than if a charitable gift annuity is used. Another nice option: you can put more assets in the fund over time, whereas a charitable gift annuity is based on one lump sum gift.

Donor advised funds (DAF). A DAF is a variation on the “family foundation” concept. Unlike a private foundation, it is not subject to excise taxes, and it does not require employees and lawyers to implement and administer. You establish a DAF with a lump sum gift to a public charity. The gift becomes property of the charity, which manages the assets. Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity how to spend the money. DAF contributions are tax-deductible in the year that they are made. You may avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create one.

Life insurance and life estate gifts. Some people have life insurance policies that they may no longer need but may end up increasing the size of their taxable estates. In such cases, a policyholder may elect to donate their policy to charity. By doing this, the donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death, or they can tap into the cash value of the policy to meet current needs.

Life estate gifts. This interesting option allows you to gift real estate to a charity, university, or other non-profit and live there the rest of your life. Upon your death, the charity will receive the property. You can take a tax deduction based on the value of property, avoid capital gains tax, and live on the property for the rest of your life.

Give carefully. If you are thinking about making a charitable gift, remember that the amount and availability of any tax deductions will ultimately depend on the kind of assets you contribute, and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Be sure to consult qualified financial, legal and tax advisors for more information before you decide if, when and how to give.

Understanding Your 401(k) Plan’s Costs

Much has been written lately about the importance of understanding how much you’re paying in fees in your 401(k).  Much of this recent interest is the result of a change in regulations that will be coming shortly.  Starting July 16, 2011, Department of Labor regulations will require that plan providers report the direct and indirect costs of the plan to the plan sponsor, generally the employer.  Additionally, on January 1, 2012, all fees, including administrative and investment fees, will have to be fully disclosed to the individual employees.

Why 401(k) Fees are Important

The level of fees can vary from one plan to another, depending on how the plan is structured.  A difference of even 1% per year, seemingly a nominal amount, can make a tremendous difference in how much an employee has available for retirement.

As an example, take an employee that has 35 years left until retirement with a current $25,000 401(k) balance.  If the employee earn 8% per year over the full 35 years, here’s the difference in account balance at retire using a .5% fee versus a 1.5% fee:

Original Amount            Ending Value @ .5%   Ending Value @ 1.5%

$25,000                                  $314,000                 $227,000

As you can see, an increase in costs of 1% per year will reduce the amount available in retirement by $87,000 or 28%.

Types of Fees in a 401(k)

•  Plan Administration Fees:  these will include record keeping, accounting, legal and trustees.
•  Investment Fees:  these fees will include the management fees for the mutual funds in the plan and 12b-1 fees, which are used to pay for advertising and broker commissions.  Often times your fund returns are stated NET of the fees charged so they may be hard to determine.
• Insurance Charges:  if your plan has at its core an annuity, there will be an additional charge for the cost of the insurance guarantees.
•  Target Date Funds:  these funds, while convenient, often are a single fund made of up several underlying funds.  The result is that the Target Date Fund may have investment fees in addition to the investment fees attached to the underlying funds.

When you originally signed up for your 401(k) you were handed a lot of paperwork, including paperwork that spells out your plan’s costs.  If you can’t find the paperwork, you can find more information in the following places:

• Summary Plan Description:   this document was given to you when you originally enrolled in the plan and then every 5 years thereafter.  It  may tell you if administrative expenses are paid by the employer or employee and how they’re allocated among participants.  If you don’t have the original, just ask your plan administrator for a copy.
• Your account statement:  it may show plan administrative expenses allocated to your account.
• Form 5500:  Every 401(k) plan must file a Form 5500 with the government.  This document will show liabilities, expenses and income for the plan as a whole, but it won’t show what was deducted from your specific account.  This can be accessed at sites like http://www.freeerisa.com.

Five Questions to Ask Yourself Regarding Fees

1. Do I have all the available documentation about the investment choices in my plan as well as all the fees charged to my plan?
2. Do I use most or all of the optional services offered by my plan such as loans, insurance, etc.?
3. If administrative services are paid separately from investment management fees, are they paid for by my plan (me), the employer or both?
4. Do any of the investment options include sales charges, loads or commissions?
5. Do any of the investment options include any fees related to specific investments such as 12-b1 fees, insurance charges or surrender charges, and what do they cover?

At the end of the day, your employer is providing you a tremendous benefit by offering a 401(k) plan for its employees, but it is YOUR responsibility to fully understand your plan so that you can make the best decision for your individual circumstances.

Take Advantage of the Homebuyer Credit Before It Expires

 

In an attempt to jump start the real estate market, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009, which was extended earlier this year.

 What Is It?

 Here are some highlights of the legislation as it stands now: 

• A “first time home buyer” tax credit of up to $8,000.
• A “repeat home buyer” tax credit of up to $6,500.
• If the home was purchased in 2009 or later, the credit does not have to be “repaid”.
• The credit is “refundable”, meaning that even if you don’t owe taxes, you can still claim the credit.

 Who Qualifies?

 To qualify as a New Home Buyer you must have not owned a home in the past 3 years.  To qualify as a Long Time Resident, you must have owned a home as your primary residence for 5 consecutive years out of the last 8 years.

 The Fine Print 

As with any government program, there’s always fine print: 

• Both credits come with income limitations.  The credit begins to phase out if your Modified Adjusted Gross Income (MAGI) is $125,000 for single tax payers and $245,000 for married taxpayers filing jointly.  You become completely ineligible if your MAGI exceeds $145,000 and $245,000 respectively.
• The credit is not an automatic $8,000 or $6,500 but is actually 10% of the sales price up to a maximum of $8,000 or $6,500.
• Homes over $800,000 do not qualify.
• You can’t claim the credit if you’re being claimed as a dependent on somebody else’s tax return or if you’re under the age of 18.

 Why Act Now? 

• It’s a TAX CREDIT, not a tax deduction.  This means that it will offset your tax liability dollar-for-dollar.
• It’s highly likely that the government WON’T extend this legislation further.
• Many real estate markets have become affordable, but they won’t stay that way.  Most experts feel that the real estate markets in many areas are at or near bottom.

 Conclusion 

As a Wealth Manager, I would never encourage a client to buy a home simply because of a tax credit.  If however, you’re already looking for a home, have found one that you can afford, and plan to stay in the home for more than a couple of years, now is a great time to buy.

As with any large purchase, always check with your CPA, realtor and other financial professionals before entering into a contract.

What Is Fiduciary Responsibility and Why Should It Be Important To You?

 

Lost in the shuffle of President Obama’s recently proposed regulatory overhaul is the proposal to hold all brokers to the same fiduciary standard as registered investment advisors.

First, a little background.  A quick check of Wikipedia finds this definition of fiduciary duty as ‘… the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the ‘principal’): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.  The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust’.

Under current regulations, registered investment advisors, like our firm, are required to accept fiduciary responsibility in all our actions.  Brokers, like those found in most of the large brokerage firms aren’t held to the same high standard.  The only requirement they have is to recommend investments that are ‘suitable’ for the client. 

Sounds like the same thing, right?  While the difference in responsibility between the Investment Advisor and Broker might seem like semantics, it can mean a real difference in practice.  

For example, your advisor at XYZ Brokerage has determined, correctly, that a mutual fund that invests in Large Cap companies is a suitable investment given your risk tolerance, age and circumstances.  Among her many fund choices, your advisor at XYZ has available to her Fund A and Fund B.  Fund A is a proprietary fund run by the firm and Fund B is a fund run by an independent mutual fund company and both have similar performance results.  Fund A, though successful and clearly suitable, carries a higher expense ratio and higher turnover than Fund B but also pays the advisor more.  Both of the funds are ‘suitable’ for your portfolio and the advisor would be well within the rules to recommend Fund A over Fund B.  

If your advisor worked for a Registered Investment Advisor (RIA), they would have a fiduciary responsibility to recommend a fund that is not only suitable, but that is in your overall best interest.  That means that despite the fact that they would make more money recommending Fund A, they are obligated to recommend Fund B since it carries lower overall expenses.

If adopted, this proposal could fundamentally change the way the brokerage business operates.  Firms would be required to change their compensation structure to de-emphasize proprietary products and would most likely cause them to reduce expenses and improve the performance of those same proprietary products in order to make them more compatible with the fiduciary standard.  The result would be better protection for the consumer, something the Obama administration is pushing aggressively for as part of this overhaul.

This article was written to illustrate one aspect of President Obama’s regulatory overhaul proposal and to highlight some of the differences between advisors that work for Investment Advisors and those that work for brokerage firms.   It is in no way intended to imply that advisors at the brokerage firms are anything but ethical.  I truly believe that the vast majority of people in the financial services industry, whether they are technically subject to fiduciary responsibility or not, act in the best interest of their clients on a day in and day out basis.

If you’d like more information on fiduciary responsibility or if you’d like to schedule a portfolio review to ensure that your current advisor is adhering to the standard, drop us an email at info@rtjfinancial.com or call our office at (310) 587-3370.

Health Insurers Are Shooting Themselves In The Foot

 

If the large health insurers are trying to improve the chances of nationalized health care, they’re doing a fine job.  Tesitfying before Congress, the heads of Wellpoint, United Health and Assurant when asked if they would stop rescinding policies unless they could determine the misrepresentation was intentional, replied ‘No.’

As a wealth manager, I spend more time than I care to calculate dealing with health insurance issues for my small business clients.  Premiums continue to increase while coverage is decreased and deductibles/co-pays rise.  Add to this the chance that , when the coverage is needed most, namely in the case of serious illness, the policy could be rescinded due to a simple oversight and it’s no wonder there’s animosity toward the carriers.

There are legitimate cases where an applicant fails to disclose health issues that would impact the pricing or acceptability of the policy.  Instead of looking for ways to avoid paying claims through use of recission, the insurers should limit their recissions to cases where:

1. The applicant clearly knew about the condition and concealed it from the insurer.
2. The insurer would not have issued the policy had they known the information.
3. The unreported information is directly related to the illness the policyholder is currently being treated for.

In all other cases, the insurers should be allowed to deduct the additional premium they WOULD HAVE received had they known about the undisclosed condition but should be required to pay the claim as indicated in their contract.

By taking a short-term profit view and using technicalities to avoid paying claims, they simply shooting themselves in the foot.  This type of bad ‘corporate behavior’ is making it easier and easier for the public to decide that a government-run, single-payer system is preferable to the shenanigans of a for-profit system.

Does Money Bring Happiness?

 

The financial news has been decidedly grim for the better part of the last 18 months.  Many people have seen their wealth, both actual and perceived diminish substantially over that time frame.  While many more people are concerned about their financial future than they were before, has this reduction in wealth led to a reduction in happiness and it again raises the question of whether there’s a correlation between money and happiness.

 

Most psychologists and sociologists will tell you that happiness derives primarily from social interaction.   Those with good relationships with their family and friends generally describe themselves as happy.

 

As to the link between increased wealth leading to increased happiness, surveys have shown the following:

 

·         American wealth has increased dramatically in the 20^th century, but on average,
Americans are no happier than they were a century ago.

·         Once your level of wealth allows you to have basic creature comforts, happiness doesn’t increase markedly as wealth increases.

 

So, if more acquiring more wealth doesn’t increase happiness, does increased spending help improve happiness?  We all know somebody that loves to indulge themselves in a little ‘retail therapy’ when they’re feeling down.  The reality is that spending can increase happiness, but it depends on where the money is spent.  For example:

 

·         Spending money on oneself can actually decrease happiness.  Too many people fall into the trap of having to work so hard to achieve the appearance of ‘wealth’ that their happiness is actually decreased due to stress.

·         Study after study has shown that $1 given to somebody else provides much more happiness than the same $1 spent on oneself.

 

Finally, from my completely unscientific standpoint as a financial planner helping clients acquire and maintain health, it is my firm opinion that money does not lead to happiness but instead simply magnifies your innate state of happiness.  If you are a generous, happy person when you have no money, there’s a strong likelihood that you will be equally or even more happy with more money.  If you are a naturally unhappy person, the increase in wealth will simply provide you more reasons to be unhappy and more things to complain about.

 

Money is clearly an emotional topic for a lot of people and this topic is one that has fascinated me since I started working in the financial services field and I would love your thoughts on the topic.

 

 

Is Now The Time to Convert Your Traditional IRA to a Roth IRA?

 

With great adversity comes great opportunity. While nobody likes to see the account balances in their IRA drop 40% or more, the reduced value in your IRA may make it an opportune time to convert your Traditional IRA to a Roth IRA since it will cost you much less in taxes than it would have in any of the past 4 years.

Traditional IRA vs. Roth IRA Basics

A Traditional IRA allows you, with some limitations, to deduct your IRA contribution when you make it. Over time, your account grows tax-free until you start taking distributions. Once you begin to take distributions, the amount you take each year after age 59 ½ is taxed at your rate at your current income tax rate.

A Roth IRA on the other hand, does not provide you with an up-front tax deduction. Like the Traditional IRA, your account grows tax-free but, unlike a Traditional IRA, when you take distributions there is NO tax liability.

Why Convert?

Roth IRA’s have four big advantages:

1. Tax-free growth. Like a Traditional IRA, the growth in your account is not taxes.
2. Tax-free withdrawals. As long as you’ve owned your Roth IRA for five years or have reached age 59 ½, the amount you take out of the account is not taxed.
3. Contributions can be made after age 70 ½. While you can longer make contributions after age 70 ½ in your Traditional IRA, there is no such restriction for the Roth IRA.
4. No mandatory distributions. In a Traditional IRA, one you reach age 70 ½, you must start taking Required Minimum Distributions (RMD’s) each year from the account. Because you didn’t get an up-front tax deduction for your Roth IRA, you’re not required to take RMD’s.

Reasons Not To Convert

1. Taxes. When you convert from a Traditional to a Roth IRA, you’ll need cash to pay taxes on the earnings and pre-tax contributions you made. Warning: you can’t use your IRA to pay the taxes since the amount you use for taxes would be considered an early withdrawal, subject to income tax and a penalty.
2. You anticipate being in a lower tax bracket in the future. If you’re currently in the 35% tax bracket and you think you’ll be in the 25% bracket in retirement, you’ll be paying taxes at your higher current rate.

Who Is Eligible to Convert?

In 2009, in order to be eligible to convert your IRA, you must have an Adjusted Gross Income (AGI) of less than $100,000. In 2010, there will be no income limitation on a Roth conversion.

Do-Over

If the market continues to tank through 2010, the government has provided you with the ability to take a mulligan. Otherwise known as a ‘re-characterization’, this give you until October 15, 2010 to reverse your decision to do the conversion in 2009 and re-do it on the new lower amount in your IRA.

Consult a Professional

The tax code is a fluid, complex animal. Before undertaking this type of conversion, be sure to consult your CPA or tax professional to ensure that you do everything right to avoid an unnecessary complications.

What’s a Terrified Investor Supposed To Do?

The Dow Industrial Average is down more than 35% so far this year, with an almost 679 point drop today alone.  There’s not doubt about it, but this market is in the midst of a full-blown panic.

Stocks are down, bonds are down or barely hanging on, oil and gold are down, real estate is down.  So given all the doom and gloom, what’s a shell shocked investor supposed to do?  Here are few tips to help you ride out the current market.

• Don’t panic. Now is not the time to sell all your stocks.  If you were going to do that, the time was 12 to 18 months ago.  By selling now, you’ll simply lock in what is still a paper loss.
• Remember your time horizon. If you’re young, this market will provide a great buying opportunity.  If you’re nearing retirement, you may want to follow the next piece of advice.
• Scale back your equity exposure. Don’t sell everything, but it would be wise to have a little more cash than usual.  We currently have our clients with a lot more cash than usual so we can start buying again when the panic subsides.
• Review your asset allocation. Some asset classes have gotten hit harder than others.  Now is a great opportunity to reallocate your portfolio without the tax bite you might get under more normal circumstances.
• Talk to your advisor. If you haven’t spoken to, or heard from, your advisor, now is the time to be proactive and schedule an appointment to review the above items.  You’ll most likely leave that meeting knowing you’re doing everything in your power to minimize the damage of our current situation.

This has undoubtedly been a brutal market that has tested the stomachs of even the most seasoned professionals.  While you may have to make small adjustments to your current portfolio to reflect current circumstances, remember that your investment portfolio is built for the LONG TERM and that, over time, your patience and fortitude will be rewarded.

Now Is Not The Time To Panic

If you read the newspaper, listen to the radio or watch TV, you can’t help but wonder if our financial system, as we know it, is coming to an end.  With record high oil and gas prices, falling real estate markets and bank failures, it’s no wonder that American consumer confidence is at its lowest level in 40 years.  In fact, many people now seem to be in full panic mode.

Now, however, is not the time to panic.  Why?  For a number of reasons.  First, there are protections in place against the failure of your bank or brokerage company, second, the government is being pro-active to try to prevent a full-scale meltdown and finally, the fact that this market will, as have others, rebound at some point.

Government Protections

Banks

In the middle of the Great Depression, in 1933, the Federal Government created the Federal Deposit Insurance Corporation (FDIC) to protect the depositors who kept money in banks.  The FDIC provides insurance of up to $100,000 per depositor, per bank to guard against bank failure.  In 2006, they increased the protection on IRA’s to $250,000, which is in addition to the basic $100,000 coverage.  Also, with the correct use of trusts, you can increase the insured amounts further.

When a member bank fails, the FDIC steps in to run the bank, ensuring that you will have access to the insured amounts.  That means that your checks won’t bounce (assuming you have enough money to cover them!) and that you’ll have access to your cash.  There may be a short period of disruption, but, if you have deposits under the limits, there’s no reason to go down to the bank and pull your money out.

Brokerage Accounts

On the brokerage side, your investments are protected by the Securities Investor Protection Corporation or SIPC.  The SIPC replaces missing cash and securities from failed brokerage firms.  The limits of SIPC coverage are $500,000, with a maximum of $100,000 for cash accounts.

If you’re sold a stock that becomes worthless, the SIPC won’t step in, however, if a broker steals your money, the SIPC will step in.

Not all brokerages are members of SIPC so you need to be sure to ask your advisor if the brokerage firm they used is or isn’t an SIPC member so you’re ensured that you’ve got coverage.

Current Government Action

The Federal Government is doing as much as it can to minimize the damage.  In order to calm the mortgage markets, which are currently still a large part of the current market turmoil, they have pledged to bail out both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which provide funding for a huge percentage of home loans in the market.

The stimulus checks issued in the earlier part of this year, were intended to pump some more money into the economy, in an attempt to avoid a recession.  There is some evidence that this is in fact working.

Markets Go Up, Markets Go Down – This One Will Eventually Go Back Up

Investing in the stock market is intended for the long term because over short periods, markets go up and markets go down.  By responding to each market gyration, the average investor almost always gets it exactly backwards.  Their emotions tell them to buy more when the market is up and to sell once the market drops.  Many savvy investors know that what the average investor thinks is, in fact, what’s called a ‘contrary indicator’.  Since most investors get it wrong, the logic goes that when the public is incredibly positive on the market, we’re near a top so the professionals sell, and when average investors are at their most pessimistic, we’re at a bottom, presenting a buying opportunity.

One of the key tenets of successful investing is not to let your emotions drive your investments.  Studies have show, time and again that the important thing to long term growth is not TIMING the market but TIME IN the market.

Now is the time to review your portfolio to ensure it’s still allocated the way you want, take some losses to lower your taxes and position yourself to benefit from the next bull market.

The moral of the story here is to not pay attention to the doomsday scenarios presented by the popular press, make sure that you live within your means and that you maintain a long time horizon for your investment portfolio.  If you do all three of those things, you’ll sleep better and ride out our current economic challenges.