Ideas for Change in America

There's a movement of citizens inspired by the presidential campaign who are now submitting ideas for how they think the Obama Administration should change America. It's called "Ideas for Change in America."

One idea is to fix the financial regulators by imposing a fiducary standard on all who offer financial advice. You can read more and vote for the idea by copying and pasting the following link in your browser.

http://www.change.org/ideas/view/fix_the_financial_regulators_by_imposing_a_fiducary_standard_on_all_who_offer_financial_advice

The top 10 ideas are going to be presented to the Obama Administration on Inauguration Day and will be supported by a national lobbying campaign run by Change.org, MySpace, and more than a dozen leading nonprofits after the Inauguration. So each idea has a real chance at becoming policy.

2009 Retirement Plan Contribution Limits

The IRS has announced the cost of living adjustments applicable to dollar limitations for 401(k), profit sharing, IRAs, and other retirement plans in 2009. The new limits are as follows:

-401(k) limit will increase from $15,500 to $16,500.

-401(k) "catch-up" limit for individuals age 50 and over will increase from $5,000 to $5,500.

-Defined contribution plan limit will increase from $46,000 to $49,000.

-Defined benefit and cash balance plan annual benefit limit will increase from $185,000 to $195,000.

-Contribution limit for benefit and contribution calculation will increase from $230,000 to $245,000.

-Highly compensated employee definition will increase from $150,000 to $110,000.

-Key employee compensation definition will increase from $150,000 to $160,000.

-Simple plan contribution limit will increase from $10,500 to $11,5000. "Catch-up" contribution remains $2,500.

-IRA and ROTH IRA contribution limit will remain the same at $5,000, and the "catch-up" limit will remain $1,000.

-In 2009, married individuals who file jointly can contribute $5,000 ($6,000 if 50 or older) to a Roth IRA if their modified adjusted gross income (MAGI) is below $166,000. If their MAGI is between $166,000 and $176,000, then they can contribute some amount less than their full limit. If their income exceeds $176,000, they are not eligible to contribute to a Roth IRA for 2009. In 2008, this phase-out range is $159,000 to $169,000.

-For single individuals, the Roth IRA phase-out limit is lower: $105,000 to $120,000 for 2009. In 2008, a single individual’s income restriction is between $101,000 and $116,000.

An independent, NAPFA - registered CFP can clearly illustrate how these adjustments effect your financial planning efforts.

Know Your Investment Horizon

Market volatility since October 2007 has cause some individuals to question whether equity ownership is an appropriate investment vehicle. In fact, most major benchmarks are mirroring their values from 10 years ago. The last 15 months has reminded many close to retirement that equities can drastically decrease in value from time to time, and such a decline can have a severe effect on a retirement plan.

For those entering the retirement stage of their lives, I apologize, but this article is not for you. Hopefully, this market pull back has encouraged you to closely examine your tolerance for risk, and develop a portfolio that is properly diversified and appropriately allocates assets between cash, bonds, and stocks.

For those with 7 years or more before retirement, listen up. Nearly one hundred years of market data suggest that the market will return an average of 10% over time. Clearly, as the last decade has illustrated, it may take time for the law of averages to take effect, but ultimately, we have always been able to count on 10% returns in the long run. Consequently, I would argue that for individuals with a long investment horizon, now is a perfect time to invest in stocks. Think of today's market condition in terms of a chart: We know that over time, market returns are going to be a positively sloped line that increases in value over time. The longer market returns are insignificant or even negative, the larger the gap between actual returns and historical returns. The larger the gap, the more gain stocks will ultimately need to achieve to catch up to historical norms. Thus, the larger the gap, the more inexpensive stocks appear to be.

Expanding on this idea, let's picture an ideal situation for a 40 year old individual with 25 years until retirement. The best thing that could happen for this individual is for stocks to not provide any gain, or even decline in value until the day he retires. If stocks stayed the same price for 25 years, that individual could continue to collect assets at a cost that is inexpensive compared to the historical price trend line. Ideally, after collecting as many assets as possible at this price, the value of these stocks would shoot straight up in order to catch up to the historical trend line the day this individual retires.

Of course, this situation would never actually occur, but hopefully it illustrates how poor market performance can be a blessing for those who are years away from needing their invested funds. Clearly, there is currently a gap between the market's actual performance and the historical trend line of market performance. People with the appropriate investment horizon should take advantage of the market sell off and allow time for the law of averages to bolster market returns back to where past market performance indicates values should be.

Visit a fee only CFP with a fiduciary responsibility to do what is in the best interest of their clients to start taking advantage of these favorable investment conditions.

House and Senate Pass Legislation Waiving 2009 RMDs

Late Friday night, both the U.S. House of Representatives and the U.S. Senate passed a bill that would waive required minimum distributions (RMD) in 2009. Normally, individuals over the age of 70.5 are required to withdraw an amount calculated by dividing the prior December 31st balance of the retirement account by the individual's life expectancy as determined by the Internal Revenue Service. The government requires these distributions to ensure that money in retirement accounts is ultimately taxed. Failure to withdraw the required amount subjects the individual to a 50% penalty on the amount that should have been withdrawn in addition to income taxes that should have been paid on withdrawn funds.

For example, an individual who is in the 25% tax bracket who failed to take a $10,000 minimum distribution would face a $5,000 penalty for not taking the withdrawl in addition to $2,500 in income tax for a total penalty of $7,500.

The House and Senate have waived these RMD rules in 2009 to allow retirement accounts that have been drastically reduced due to poor market conditions more time to recover. Requiring individuals to still take RMDs would be forcing retirees to sell their investments at a time when their market value is low.

President Bush has not signed this bill into law, but is expected to do so soon.

These changes will have a significant impact on your financial planning efforts. Speak to an independent financial advisor to appropriately adjust your investment strategy.

Retirement: Time to Get Nervous?

The following is an article that I contributed to the April 2008 issue of Business Connect Magazine. It is reprinted here in the event you missed it.


Do you often lose sleep, or hair, predicting the size of your nest egg? Everyone recognizes the need to save for retirement, but very few of us feel comfortable with the amount we are actually able to consistently invest for our future. So how do your saving habits compare with the average individual?

Every three years, the Congressional Research Service Department of the Library of Congress publishes data containing statistics and trends concerning American's savings and retirement patterns. It should be noted that the most recent information was published in May, 2006 and utilizes data collected in 2004. However, considering the urgency of this topic (and that a new study with 2007 data will not be available until mid-2009), it is worthwhile to examine the insights that can be extrapolated from the 2006 survey. The following table[1] indicates total retirement savings at the household level:

While many might be surprised by the low percentage of households that contribute to a retirement plan, and by the low average account balances that Americans will rely on for support throughout retirement, there is an equally shocking and alarming trend that is not conveyed in the above table. The overall percentage of households that maintain a retirement account actually diminished to 50.2% in 2004 from 53.4% in 2001. Thus, by one unfortunate measure, any individual who currently contributes to a retirement account is ahead of the curve.

So how well prepared for retirement is the typical American? Let's consider a 65 year-old retirement account participant with an account balance of $250,000. According to the National Vital Statistics Report[2] published by the Centers for Disease Control and Prevention, a 65 year-old individual can expect to live another 18.7 years. Assuming an investment return of 10% (near average for the S&P 500 since inception) and inflation of 3%, the retiree's household will have an inflation-adjusted income of $24,012 throughout his or her life expectancy.

Before analyzing whether an inflation-adjusted annual income of $24,012 will be enough to support your family, consider that our hypothetical retiree's nest egg is 100 percent invested in a market index. Traditionally, financial planners would recommend that individuals continually shift a larger proportion (as much as 80%) of their retirement dollars to less risky investments as they age because retiree's investment horizon is too short to endure the vast fluctuations that the stock market often experiences. Less risk equates to less return. Thus, reducing the proportion of your investments in the stock market (reducing risk), although sound financial planning, will reduce the expected return. Additionally, this retirement account will provide no income beyond the retiree's life expectancy, and if the individual lives any more than 18.7 additional years, there will be no funds left in the account to pay for funeral expenses or pass to the retiree's heirs.

Sound like the plush retirement you were hoping for? Fortunately, it's never too late to beat the averages. With the wide array of IRAs, 401k plans, and other tax-advantaged investment vehicles available, investors have ample opportunities to invest for a bright future. Consult your financial advisor to get started or give your retirement investments a shot in the arm. Wise decisions now may even enable those hair implants to become a reality, or at least allow you to sleep more soundly.

[1] Retirement Savings and Household Wealth: Trends from 2001 to 2004. May, 2006. http://assets.opencrs.com/rpts/RL30922_20060522.pdf
[2] http://www.cdc.gov/nchs/data/nvsr/nvsr55/nvsr55_19.pdf

Best Christmas Ever pt. 4

Uniform Transfer to Minors Act (UTMA)

Uniform transfers to minors accounts allows someone to make a gift or a transfer of property to a minor without setting up a trust. All transfers to UTMA accounts are considered irrevocable and the donor cannot reclaim the gift or change the beneficiary of the account.

An adult is designated as the custodian to manage the account for the benefit of the minor until the child reaches the age specified in the statute. Custodians have certain powers and responsibilities under these laws and they should consult with legal counsel to understand their obligations with respect to the account. Once the child reaches the designated age (usually age 18, 21, or 25), the custodian is responsible for distributing the assets to the minor.

An attractive benefit of setting up a UTMA account is that there is no penalty if the child does not utilize the funds for education. If the child would rather use the funds to establish a business or cover medical expenses, he or she could do so without incurring a 10 percent penalty. Additionally, no income restrictions exist. An individual may contribute to a child’s UTMA account regardless of their personal income. There is no limit on the amount that can be contributed to these accounts, but in 2008, only $12,000 can be gifted without gift tax consequences. Lastly, all earnings are taxed to the minor. Annual earnings under the “kiddie tax” limit ($1,300 in 2008) are taxed at the minor’s appealing marginal rate. However, earnings over the “kiddie tax” limit will be taxed at the parent’s marginal rate.

Unfortunately, these benefits are not without costs. Once the child reaches the designated age, the funds become theirs to use however they like. There is nothing to prevent the child from purchasing a sports car rather than pay for college. Another major drawback of UTMA accounts is that they do not present any tax advantages. Finally, the account may be included in the child’s assets when determining financial aid eligibility.

ROTH IRA

ROTH IRA funds may be withdrawn without penalty for a small handful of reasons aside from retirement, and higher education fits within these requirements. Contributions to ROTH accounts are not deductable, but may be withdrawn tax-free if used for a qualified expense. ROTH accounts are a great option in that if the funds are not used for education, they can continue to grow tax-free until the individual reaches age 59.5 or retires and commits to taking substantially equal payments.

Unfortunately, contributions to a ROTH account can only be as much as the child’s earned income for the year. Consequently, this education funding method is not an option until the child is old enough to have a job that produces income, which will limit the time to attain tax-free growth before college.

Contributions to ROTH accounts are limited to $5,000 in 2008, and can be made up to the time of the child’s tax filing without extensions.

Best Christmas Ever! pt. 3

Coverdell Savings Accounts

Unlike 529 plans, the rules governing Coverdell Savings Accounts are dictated by the IRS. Thus, there is no variation in these plans from state to state.

Contributions to Coverdell accounts are not deductible on either a federal or state income tax return. However, similar to 529 plans, earnings withdrawn from these accounts are tax-free if used to cover qualified education expenses. Also similar to 529 plans, funds withdrawn that are not utilized for education expenses are taxed as ordinary income and subject to a 10 percent penalty.

Coverdell accounts offer several advantages over 529 plans. First, the definition of qualified education expenses are broadened to include not only college, but kindergarden thru 12th grade. If you are uncomfortable with guessing whether a child will attend college, but still want to invest in their education, a Coverdell account might be an attractive option. Interestingly, the cost of a computer for elementary and secondary education is counted as a qualified expense under IRS rules (computers are generally not covered under 529 plans unless a college REQUIRES the student to own a computer). Another advantage Coverdell accounts have over 529 plans is that investment options are not limited to only funds offered by the 529 plan. There is a much wider universe of investment options offered in Coverdell accounts.

Coverdell accounts require funds that have not been utilized by age 30 to be distributed, causing the beneficiary to pay taxes and the 10 percent penalty. However, the beneficiary can choose to roll the funds into another Coverdell account for a younger family member to avoid taking distributions. Notice the lack of control by the donor. Once the contributions is made, the donor cannot refund the money to himself or herself, and the beneficiary, not the contributor, has the power to change the beneficiary on the account. Although the contributor lacks control of the funds, note that the account can be owned by either the donor or the student. This decision should be made with care, as it may have an impact on the student's ability to obtain financial aid.

The main drawback of Coverdell accounts is the contribution limits. Although an unlimited number of accounts can be opened for a beneficiary, the total that can be contributed to all accounts each year is only $2,000. A donor can create several Coverdell accounts with different beneficiaries, but the most that can be contributed to each beneficiary is $2,000 per year.

Contributions to Coverdell Savings Accounts can be made up to the date of the donor's tax filing, excluding extensions.

The Best Christmas Ever! pt. 2

Utah 529 College Savings Plans

Utah offers one of the most attractive 529 plans in the country. Like all 529 plans, contributions to a Utah 529 plan are not deductible on a federal income tax return. However, the State of Utah will allow the contributor to claim a 5 percent tax credit on up to $1,650 per beneficiary if the contributor is single, or $3,300 if the contributor is married filling jointly. A tax credit is a dollar-per-dollar reduction of a tax liability, and is thus more valuable than a tax deduction. Consequently, the state will pay as much as $82.50 of a single contributor's State tax liability, and as much as $165 of State tax liability for a contributor who is married filling jointly. Additionally, the Utah 529 plan offers a range of diversified options from Vanguard, which can be purchased without a sales charge and are inexpensive to own.

529 plans are a great savings tool because, although contributions are not deductible on a federal tax return, earnings withdrawn from the plan to pay for qualified higher education expenses such as tuition, books, and room and board are tax-free. This can lead to incredible tax savings. For instance, if a father contributed $12,000 to his daughters 529 plan the day she was born, assuming a 10 percent interest rate, the account will be valued at $66,719 the day the daughter turns 18. That is $54,719 of tax free growth!

529 plans also offer the donor additional estate planning options. These plans are unique in that the gift removes the assets from the contributor's estate, yet the contributor still controls the funds. The removal of the funds from the donor's estate is an advantage because if the donor dies, funds contributed will not need to go through the probate process, which can be timely, expensive, and confusing. However, the donor still controls the funds and can change the beneficiary of the account or even refund the money to himself or herself at anytime. Of course, if the donor chooses to refund the money, taxes and the 10% penalty will need to be paid.

The last advantage of 529 plans are derived from the plan's contribution limits. In 2008, an individual can contribute up to $12,000 per beneficiary. An individual can make a contribution to an unlimited number of beneficiaries, and an unlimited number of individuals can contribute to the same beneficiary. Even more advantageous, an individual can contribute five years-worth of funds in any given year, as long as the combined five year contribution limit is not breached. For instance, an individual could contribute $60,000 to a plan in year one, but would then be prevented from contributing to the plan during years two thru five.

However, a drawback of the 529 savings plan is that if the funds are withdrawn for a purpose other than for higher education, all growth will be taxable as ordinary income AND will be hit with an additional 10% penalty. So what happens if the child does not attend college? Of course, the child can withdraw the funds and pay the taxes(kiddie tax laws may apply, causing the child to pay taxes at their parents marginal income tax rate) plus the penalty. A far more attractive option would be for the person who contributed the funds to change the beneficiary on the account. The beneficiary of the funds can be changed at anytime, as long as the new beneficiary is a member of the original beneficiary's family. The new beneficiary can then reap all the tax advantages of the 529 account, as long as the funds go towards qualified higher education expenses.

Contributions to a 529 plan must be completed by the end of the calender year.

The Best Christmas Ever!

It is widely accepted that the U.S. economy has entered a recession. Reports of stock market turbulence are all over the media. Somewhat quietly, the national unemployment rate has been constantly rising, and was last reported at 6.5 percent (Utah has the fourth lowest unemployment rate in the nation at 3.5 percent). Despite these alarming economic indicators, as Christmas approaches our minds are consumed with identifying what gifts will bring the most joy to those we love. Rising unemployment figures point to one gift that will bring the most happiness to our children’s lives: a college savings plan.

I know education accounts aren’t above a new playstation on most Christmas lists, but consider this: in October, the national unemployment rate for people who lack a high school degree is 9.3 percent. That figure drops to 5.9 percent for people who hold a high school diploma and 3 percent for those with a college degree. If Christmas is about making others happy, what could possibly make your children happier than a lifetime of employment and the ability to support their families?

During the next week, I’ll be posting a three-part series. Part one will cover the benefits and drawbacks of the Utah 529 College Savings Plan, part two will explore the strengths and weaknesses of Coverdell Savings Accounts, and part three will discuss other options for investing in your child’s future.

Remember, all the knowledge in the world won't help your financial circumstances. Be sure to speak to a financial planner to implement the college savings plan that is right for you.

The Power of Compounding

Remember all the time we spent as children dreaming about what it would be like to be a millionaire? Surprisingly, if we had spent that same amount of time running a candy store or a lemonade stand, we would all be on track. Why didn’t anyone tell us it was so easy! Of course, many adults don’t comprehend the power of compound interest, so I suppose we should give ourselves a bit of a break, but here is the secret: assuming historical investment rates of return hold steady, a 10-year old would need to invest only $25.52 a month during his lifetime to be a millionaire by age 65.

Regardless of your investment goals, the key to collecting wealth is to invest early and often. The S&P 500 has averaged an annual return of 10.36% since 1926. That average includes such tumultuous times as the Great Depression, the inflation crisis of 1973-1974, and the bursting of the tech bubble in 2001-2002. Assuming this rate of return, a 25-year old would only need to invest $141.66 a month to have a million dollar portfolio upon retiring at age 65. Compare these figures to a 55-year old who must invest $4,781.89 a month to have a million dollar nest egg at retirement and the benefit of investing early and consistently are clear.

These numbers are yet to incorporate one very important factor: inflation. After accounting for an inflation rate of 3%, which is representative of historical norms, the 25-year old investing $141.66 each month will have a nest egg of $387,866 upon reaching age 65. Assuming the individual will live until age 90, these savings will provide approximately $33,734 of inflation-adjusted income annually. This is a substantial amount, especially if these savings will be supplemented by an employer sponsored 401(k) or social security. (If you’re curious, a 25-year old would need to invest $365.23 a month to have an inflation-adjusted net egg of $1,000,000 upon reaching age 65, and that would grant the retiree an annual income of $86,973 until age 90). Further, assume the individual is married and their spouse followed a similar investment strategy since the age of 25. That couple would have an inflation-adjusted income of $67,468 annually until reaching age 90. This amount should be sufficient to support the couple even without additional benefits from social security or employer contributions to retirement accounts.

Armed with this knowledge, individuals should closely monitor their spending and savings habits. Ideally, investors should save between 10% - 15% of their gross earnings. If you are still having a hard time saving, consider this: a general rule of finance is that your investments should double in value every seven years. Thus, a 25-year old has the option of spending $200 on the new Rock Band video game, or investing that $200 and watching it grow to $400 at age 32, $800 at age 39, $1,600 at age 46, $3,200 at age 53, $6,400 at age 60, or $12,800 at age 67. I’m sure the game could provide hours of entertainment, but is it really worth $12,800 at retirement?

Developing a strategy to meet income goals is what financial planning is all about. Speak to a financial advisor to determine the amount you should be investing monthly to provide you with the retirement you envision.

Your Financial Advisor: Friend or Foe

The following is an article I wrote for Business Connect Magazine. It will appear in the December issue.

The volatile market of 2008 highlights the importance of focusing on controllable variables. A basic factor investors often overlook is the value added by their financial advisor. Here are five questions to ask your financial professional:

1. What education does your advisor possess?

Insurance representatives, annuities salespeople and stockbrokers all refer to themselves as “financial advisors.” Are these individuals qualified to provide objective, comprehensive financial advice and act in their clients’ best interest? While these salespeople are well equipped to illustrate how their particular product is appropriate for any given client, they may not have the education or financial motivation to present possibly superior alternatives.

The Certified Financial Planner (CFP™) designation is widely recognized as the “platinum standard” of financial planning expertise. Unfortunately, only seven percent of “financial advisors” are CFP™ certified. A CFP™ has the education, knowledge and access to financial tools necessary to evaluate all potential investment options and make recommendations based on an individual’s specific circumstances.

2. How is your advisor compensated?

It is important to realize your advisor’s behavior is influenced by his or her compensation. Advisors are generally paid either by commission on products sold or by fees charged to their clients. Commissioned advisors have financial motivation to sell products that may not be the best option for their clients. Fee-only advisors are prohibited from collecting product commissions and are exclusively compensated by their clients. Thus, a fee-only planner’s compensation encourages objective advice and behavior that is always in the client’s best interest.

Know how much you pay your advisor. Remember that your advisor’s compensation is in addition to the fees charged by your actual investments. Total fees, covering both your investments and advisor, should be less than two percent.

3. Does your advisor act as a fiduciary?

Planners who accept a fiduciary responsibility to a client are legally obligated to act in that client’s best interest. Advisors that don’t accept a fiduciary responsibility only commit to act in a manner which does not harm their client. Big difference! If your advisor isn’t familiar with the term “fiduciary,” look elsewhere.

4. Does your advisor provide adequate service?

When was the last time your advisor called you? Is your advisor aware of changes in your goals, family, or personal situation that would affect your financial future? Advisors must be up-to-date on the rapidly changing lives of their clients and should meet with their clients at least once per year.

Service is impacted by compensation. Commissioned advisors generate income by continually selling products to new clients. Consequently, they often don’t have time or motivation to adequately service previous customers. When the advisor is only compensated by the client, the advisor has tremendous motivation to continually exceed client expectations.

5. Does your advisor provide you with a comprehensive financial plan?

A financial plan detailing insurance needs, investment options, tax consequences, retirement projections and estate planning should be the basis of all financial action. Having a comprehensive long-term plan will minimize emotion and emphasize logic when making financial decisions. However, beware of financial plans that are simply a sales pitch. A financial plan should be objective in nature and investment decisions should be based on the plan; the plan should not be a tool to steer you toward predetermined and limited investment options.

Enduring today’s market is challenging. Make sure you have an educated and knowledgeable financial advisor who is compensated to act in your best interest and has financial motivation to ensure your perpetual satisfaction.