Prepping for the College Savings Test

If you’re saving for a child or grandchild’s college education, brace yourself. The annual cost at the typical private university now exceeds $38,000, and the annual cost at the typical public college is greater than $17,000.1 Multiply those figures by four, and you might wonder if it’s worth it to send Junior to college. In most cases, the answer is yes. Fortunately, there are ways to make your college savings work harder for you.

Developing Your Plan

The hefty price tag of a college education means families need any help they can get when saving and investing for this important financial goal. Consider 529 College Savings Plans. These increasingly popular plans allow you to invest in professionally managed portfolios of stocks, bonds, and other securities.

Most plans let you invest in portfolios that are based on a child’s age. As the child ages, the portfolio’s mix of securities changes. Some plans also let you choose individual mutual funds and assemble your own portfolio. The best part? Earnings can accumulate without taxes, and distributions are currently tax free if used to pay for qualified higher education expenses.2 Many plans have lifetime contribution limits of more than $200,000 – an important consideration given the pace at which college costs are rising. And you, as account owner, control withdrawals.

Another factor for some families: There are no income limits for contributors. And if your designated beneficiary chooses not to attend college, you may be able to transfer the accumulated contributions to the beneficiary’s sibling, first cousin, or other qualified, college-bound family member – even yourself. Contributions, which are treated as gifts for estate and gift tax purposes, qualify for the $14,000 annual gift tax exclusion ($28,000 per married couple) for each beneficiary. If you prefer, you may make a lump-sum contribution of $70,000 ($140,000 per couple) in the first year of a five-year period without owing federal gift taxes. If you choose this approach, you can’t make additional tax-free contributions to the same beneficiary in the following four years.3

The main point? Begin investing as soon and as much as possible. If you later decide to use a different savings vehicle, rules may allow penalty-free transfer of assets.

^1^Source: The College Board, October 2012. Cost includes tuition, fees, and room and board.

^2^Nonqualified withdrawals are subject to regular income taxes and a 10% penalty. State tax rules vary.

^3^If the contributor dies before the end of the five-year period, the portion of the contribution allottable to the remaining years would be included in his/her gross estate.

_Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.
Financial Planning Association

Six Essential Aspects to Understanding Annuities

Mark your calendars for Wednesday, July 24th at 10 a.m. for my workshop on Annuities.

Six Essential Aspects to Understanding Annuities will be an informational session, helping you understand annuities and whether it is right for you. This is information that is crucial if you are considering buying or already own an annuity. We will cover the good, the bad, and the ugly about a product that is seeing ever increasing sales.

Pass on the information to someone that may be considering one or nearing retirement. The event will be at the Corvallis Benton County Library meeting room from 10 to 11 a.m. and is open to anyone.

Register at Eventbrite

Asset Allocation: What exactly does that mean?

Every Financial Advisor talks about asset allocation, but what does that really mean to me?

In simple terms it means that we try to make sure your stocks, bonds, exchange traded funds and mutual funds are set up to maximize the different asset classes in a way that gives you returns without risk you can’t handle. Too many people buy mutual funds and stocks and lose sight of the type of asset classes they own.

Most common asset classes for stocks are Large Cap (capitalization or market value greater than $10 billion), Mid-cap (medium size or market value between $2 billion to $10 billion) and Small Cap (small size or market value less than $2 billion). There are developed international stocks (Europe, Canada, Austrailia) and emerging market international stocks (Brazil, China, India,etc…). Then there are the alternative markets (real estate, commodities). For bonds there are short term (less than 2 years to maturity), intermediate (longer than 2 years but less than 10 years) and long-term (over 10 years to maturity).

Think of it as a large garden salad. Too much of one thing can overpower the taste and change the nature of the salad. But the right mix of ingredients and dressing can enhance your experience and leave you wanting more.

How to Stretch Your IRA

  • Stretch IRA: A Handy Estate-Planning Tool
    A stretch IRA is a traditional IRA that passes from the account owner to one or more younger beneficiaries at the time of the account owner’s death. Since the younger beneficiary has a longer life expectancy than the original IRA owner, he or she can “stretch” the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA with the potential for continued tax-deferred growth, which could provide significant long-term benefits.

Creating a stretch IRA has no effect on the account owner’s RMD requirements, which continue to be based on his or her life expectancy. Once the account owner dies, however, beneficiaries begin taking RMDs based on their own life expectancy. Whereas the owner of a stretch IRA must begin receiving RMDs after reaching age 70 1/2, beneficiaries of a stretch IRA begin receiving RMDs after the account owner’s death. In either scenario, distributions are taxable to the payee at current income tax rates.

Beneficiaries have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner’s death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA and tax-deferred growth throughout his or her lifetime.

Other key considerations to note:

· New rules allow beneficiaries to be named after the account owner’s RMDs have begun, and beneficiary designations can be changed after the account owner’s death (although no new beneficiaries can be named at that point).

· The amount of a beneficiary’s RMD is based on his or her own life expectancy, even if the original account owner’s RMDs had already begun.

Note that the information presented here applies to traditional IRAs bequeathed to a non-spousal beneficiary. Special rules apply to spousal beneficiaries. Contact your financial advisor or tax professional for more information.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved. Material from the Financial Planning Association.

High-Yield Bonds: Income Potential at a Price

High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks. 1 High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.

These bonds – often referred to as “junk” bonds – are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely – from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.

As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.

These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.

The Risk-Return Equation

In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here’s a summary of some of the most common risks.

• Credit risk: A high-yield bond’s above-average credit risk is reflected in its low credit ratings. This risk – that the bond’s issuer will default on its financial obligations to investors – means you may lose some or all of the principal amount invested, as well as any outstanding income due.

• Interest rate risk: High-yield bonds often react more dramatically than other types of debt securities to interest rate risk, or the risk that a bond’s price will drop when general interest rates rise, and vice versa.

• Liquidity risk: This is the risk that buyers will be few if and when a bond must be sold. This type of risk is exceptionally strong in the high-yield market. There’s usually a narrow market for these issues, partly because some institutional investors (such as big pension funds and life insurance companies) normally can’t place more than 5% of their assets in bonds that are below investment grade.

• Economic risk: High-yield bonds tend to react strongly to changes in the economy. In a recession, bond defaults often rise and credit quality drops, pushing down total returns on high-yield bonds. This economic sensitivity, combined with other risk factors, can trigger dramatic market upsets. For example, in 2008, the well-publicized downfall of Lehman Brothers squeezed the high-yield market’s tight liquidity even more, driving prices down and yields up.

The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.

1 Diversification does not ensure a profit or protect against a loss in a declining market.
From the Financial Planning Association®

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

How to Help Your Kids and/or Grand Kids Understand Investing

h2. One way is to set up a custodial account

Setting up a custodial account can be a savvy move for adults who want to either teach their kids to invest with their own money or for parents to gift their assets and help their children under the age of 18 to become financially independent.

But there are many considerations – and consequences – to weigh before opening an account.

The Account Options

The two types of accounts you can use to set up an investment account or to gift assets to your youngster are called a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Which one you use will depend on your state of residence. Most states – with the exception of Vermont and South Carolina – have phased out UGMA accounts and now only offer UTMA accounts.

UTMA accounts allow the donor to gift most security types, including bank deposits, individual securities, and real estate. UGMA accounts limit gifts to bank deposits, individual securities, and insurance policies. Here are some points to consider.

1. There are no contribution limits. Parents, grandparents, other relatives, and even non-related adults can contribute any amount to an UGMA/UTMA at any time. Note that the federal gift tax exclusion is currently $14,000 per year ($28,000 for married couples). Gifts up to this limit do not reduce the $1 million federal gift tax exemption.

2. The assets gifted are irrevocable. Once you establish an UGMA or UTMA, the assets you gift cannot be retrieved. Parents can set themselves up as the account’s custodian(s), but any money they take from the account can only be used for the benefit of the custodial child. Note that basic “parental obligations,” such as food, clothing, shelter, and medical care cannot be considered as viable expenses to be deducted from the account.

3. Taxes are due – potentially for both you and your child. Some parents may initially find custodial accounts appealing to help them reduce their tax burden. But it’s not that simple. The first $1,000 of unearned income is tax exempt from the minor child. The second $1,000 of unearned income is taxable at the child’s tax rate, which could trigger the need for you to file a separate tax return for your child. Any amounts over $1,900 are taxable at either the child’s or the adult’s tax rate, whichever is higher. Note that state income taxes are also due, where applicable.

4. Your child will eventually gain complete control. Once your child reaches the age of trust termination recognized by your state of residence (usually 18 or 21), he or she will have full access to the funds in the account. Be warned that your child could have different priorities for the assets in the account than you do. Money that parents had earmarked as paying for college tuition could instead be used to purchase a sports car or fund a suspect business venture. This is where you need to make sure your child understands the account and how it works. Make them responsible for attending meetings with your adviser.

5. It could impact financial aid considerations. For financial aid purposes, custodial assets are considered the assets of the student. If the assets in the account could jeopardize your child’s chances of receiving financial aid, speak to your tax and/or financial professional. One of your options could involve liquidating the UGMA/UTMA and establishing a 529 account.

Before making any decisions about establishing a custodial account, be sure to talk to your tax and financial professionals.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

3 Diversification Mistakes that cause Dysfunction

Every adviser talks about diversification. Basically having your investments spread across a variety of asset classes, such as large companies, small companies, international, etc… The weightings assigned to each asset class mainly depends on your time horizon, goals, and risk tolerance.

One of the largest mistakes investors make is thinking they are diversifying their portfolio by diversifying the advisers or companies managing their money. Having your assets spread across companies may seem diversified but actually can be destructive to your goals.

When one person isn’t seeing the whole picture, advice becomes centralized on what they know. The more spread out you are, the narrower the scope of the advice. Be open with your advisers about what you have, and where.

The second mistake is concentrating on one asset, gold comes to mind. Whenever anyone wants “to sell everything and buy gold.” it usually sends chills down my spine. The whole point of diversifying is making sure you are not relying on one asset to fund your goals.

Every asset class has bad years and good years. No one can accurately predict the ups and downs. When everyone invests in the same asset a bubble can occur when emotion trumps fundamentals. Remember when people say real estate “always goes up”? Or technology can only go higher? Beware of concentrating money in only one area.

The last diversification issue is diversifying your taxes. Not only do you have options on where and how you are taxed, most people forget to think about it as they plan for retirement. Tax deferred and tax free can be the difference in a few hundred dollars a month in income. Although the tax situation is still uncertain right now, it’s not a bad idea to explore Roth IRA‘s and whether you should hold growth stocks in a taxable account or not.

Remember an IRA is great for tax deferral but eventually you will pay income tax on every dollar coming out when you begin receiving distributions.

The Sticker Shock of Medicare Part D – Why you should shop around

The enrollment season for Medicare prescription drug Part D and Medicare Advantage Part C runs from October 15th through December 7th. Reevaluating coverage annually can make the difference of hundreds of dollars in your pocketbook.

The suprise is that you may be facing double-digit premium increases if you stay with your current plan.

So start with your statement, review the annual notice of change that you should have received in September. This will explain any basic benefit changes for 2013.

Dig deeper, if you are currently taking any prescription drugs look for statements that the insurance company has the right to ask the ordering physician about cheaper alternatives, this could delay prescription drug fulfillment. Also pay attention to how much the plan charges for the drugs you need.

The doughnut hole is shrinking. Good news for those caught in the middle of spending $2,970 – $6,733. Enrollees will receive discounts on brand name drugs and a higher discount on generics.

Many plans are moving to a “preferred delivery network”. That means you must agree to receive your drugs through a specific retail or online pharmacy network. Make sure it works for you.

For those of you still working be aware of the high income surcharges on Medicare. This year the surcharges affect individuals with annual income starting at $85,000 (single filers) or $170,000 (joint filers), and move up from there. And there is a two year lag in income reporting so your 2012 surcharges are based on your 2010 tax returns.

The best online tool is the Medicare Plan Finder on the Medicare website. Fill in your medicare number and drugs you are using to find the right plan. Another site for one on one help is medicare counseling, a network of non-profit Medicare counseling services. And if you prefer to talk to someone on the pone there is the Medicare Rights Center offering free counseling by phone at 1-800-333-4114.

The Two Things You Can Depend On? Death and Taxes

First taxes, I discovered a website that is interesting and interactive. Just enter your income to see how your income is affected by the different tax proposals. The nonpartisan Tax Foundation provides an interactive calculator that can estimate your federal tax burden. It also shows you state taxes, so if you are looking to retire or move to a different state you can see what the tax rates are. I just finished a projection for a couple thinking of moving to San Diego, which showed what the effect of a pay raise in California has on the bottom line. We determined the pay raise was enough to make the move, and projected the cash flow needed to live.

Taxes have a large impact on your ability to spend and save. That’s why it is important to review your tax situation with your planner and tax preparer. If you do your own taxes, check in with a professional to make sure you are maximizing your deductions. If you are changing jobs, got a raise, or aren’t sure what percentage you are putting in retirement, a review can help you make better decisions. A recent couple came to me and although they knew what percentage of wages was going into their retirement plans, we discovered it was much less than they thought. By underestimating the percentage, they were missing out on the matching funds from the employer. Plus the additional savings into the plan also lowered their taxable income, thus enabling them to pay themselves more in the future.

Now death, a topic no one likes to discuss but a very important topic for all families. Everyone should have health directives and a simple will. For the more complicated estate planning, including trusts, anyone with children, blended families, or complicated investments should consult an attorney specializing in estate planning.
To be prepared for that meeting make a family tree and look at how you would want you’re hard earned assets to be distributed. Protect those that are important to you and they will be grateful that you took the time to think about them. Create a notebook with the things important to you, how to contact advisers, and how you want to be treated and who is responsible for specific matters. Write letters to family members, those are the most cherished items, not the amount of money you leave.

Challenges of Aging and Healthcare

This August 15 th, a Wednesday, I’m teaming up with Brian Robertson of Willamette Investment Advisors to discuss the “Challenges of Financial Planning and Investing as You Age”. This free event will be held at the Corvallis Public Library from 10 am to 11 am and is sponsored by Regent Court Memory Care.

Healthcare planning is an integral part of financial planning and is getting some well deserved attention. Many people are unprepared for life’s unexpected events. The emotional stress and the ability to make wise decisions can be difficult. And even when you think you’re prepared, there is always the unexpected that throws you off. Many people find the topic hard to talk about and even more difficult to share with your children, no matter their age. However, it never hurts to get the conversation started. The easiest place to start putting the pieces together is with your financial planner.

Not only is it important to be invested accordingly, you also need to have a plan in place as you age. A plan should never be static and it’s vital to have a thorough review every few years. Tasks such as checking beneficiaries on all contracts (retirement plans, annuities and life insurance), ensuring you have durable powers of attorney for health care, and having proper documentation are just a few of the things to look at. Medicare doesn’t cover custodial care and may not cover everything you need.

These are a few of the items we will discuss, as well as how to be prepared.