In a previous Market Commentary from last summer, I reminded investors of the “potential for more declines in store for us” and to “grab some popcorn and sit back…because we’ve seen movies like this before”. For those of you that followed our advice, you had a bumpy ride indeed. From the writing of that document through the end of the 3^rd quarter, the U.S. stock market declined 14.33%, with many international markets performing worse than that. And yet the same investor would have just as quickly recovered those losses in early 2012 in an almost as fast rise. Except, on the way up, no one seemed to be proclaiming how good stocks were as an investment as they were bad on the way down.

This is, in fact, the exact scenario we are to protect ourselves from. When we meet with clients individually, we prepare a financial plan that is to serve as a strong guide for future investment decisions for years to come. It’s a core framework that guides us in good times and in bad, and drives the daily decisions investment choices we must make. Without it, we would be just as prone to succumb to the emotions of the daily events of any given moment in time. Instead, we make decisions with two goals in mind: your long term growth and income needs, and your short term tolerance for volatility (decline in value). A delicate balancing act it is indeed, particularly so given the unique environment we’re in today.

Our investment philosophy starts out broadly, only considering the varying and unique objectives of each of our clients. Our clients regularly ask us to evaluate assets of varying types (relying on our absence of any conflicts of interest), and includes stocks, bonds, bank accounts, real estate and many derivatives of these four. Their characteristics of risk and return can be widely different, but we ultimately buy them all for the same reason- to return more money back to us than what we started with.

We therefore build investment portfolios as a whole and not by its pieces, believing different types of investments can complement another. This couldn’t be truer today than with investments with a fixed rate of income. Bonds, for example, like a certificate of deposit from any bank, generally pay a fixed rate of interest for a fixed period of time. Simplified, their value is generally guaranteed by the entity issuing the bond, along with a commitment for the stated rate of interest.

This steadier pattern had historically made the frantic herd of media and investors find it a little too boring for their tastes. Maybe they just prefer the excitement or story of stocks to bonds. But bonds, and more significantly their interest rates, actually serve as the core of our valuation of all of our other assets. This is because all investment returns must be thought of in the context of what we can get without bearing additional risk- or the rate of interest we can earn on some government’s guaranteed offering. In reality, it is the interest rate implied by these very bonds that can tell us the most information about the rest of our investments.

It is this more than anything else that will influence the rate of return you receive on your stocks, bonds, savings and real estate. While it is not necessarily the cause, it is certainly the effect. Consider the yield on U.S. Treasury bonds just 12 years ago, where they yielded 5-6% greater a year than that of today, across almost all investment time horizons. While the risk premium we pay for stocks has been volatile, it has been interest rates that influence overall expected returns. It is therefore interest rates that are more important in determining what the financial markets are telling us.

This difference causes tough decisions. It has forced us to make more realistic expectations for our long-term rates of return, but also makes the probability of achieving it likely greater (since it turns out our expectations were just an illusion, anyways). If we are to earn a positive “real” rate of return (that is, after taxes and inflation) on our money, it also means we must invest for longer time commitments in our bonds, and expect more volatility in our stocks (implied by other factors). If nothing else, the inverse relationship between the two investment classes may serve as a better hedge than any of the others we have available today. This has forced both aggressive and conservative investors alike to make a decision: do I accept more economic risk or inflation risk.

So it turns out we can’t have our cake and eat it too, but that was the case all along. It just seems there is no way of denying it anymore. Now that that is out of the way, we can really do the heavy lifting and get serious about preparing for our future.

As a refresher, let’s start with a quick note on what Mutual Funds are:

• An Investment Company that invests shareholders money in a (usually) diversified portfolio of securities like individual stocks or bonds.
• Assets are held in custody at a third-party bank, and are subject to regular inspection by the SEC in addition to any independent auditors to the bank and mutual fund.
• The Investment Company (the Mutual Fund) is overseen by an independent Board of Directors whom are charged with ensuring the fund is managed in the best interest of the fund’s shareholders (investors).
• The idea is to make diversification easier by grouping investments together, and to reduce the costs associated with investing by spreading transaction costs amongst thousands of investors. A Mutual Fund can either be “actively” or “passively” managed. This refers to whether an individual or team have discretion over day-to-day investment choices on your behalf, or they simply follow an index of stocks meeting a specific predefined criteria. The majority of Mutual Funds are actively managed.
• Their well implemented, managed and regulated nature allows for their day-to-day liquidity. This means you can see their updated market price daily and always know the value of your portfolio, in cash, at any given time. The Mutual Fund stands ready to buy back your shares from you at the set-daily market price.
• Mutual Funds have annual expense ratios anywhere from 0.10% to 3.00%. This is the percentage of your money that goes towards paying for the investments each year and pays for all the expenses associated with maintaining the fund. The average annual expense ratio in 2010 for a stock mutual fund was 0.84%.
• Mutual Funds are commonly sold with a sales commission, known as a sales charge or “load”, ranging from 1.00% to 8.50% of your investment. This is in addition to your annual expense, but can be avoided with good planning or assistance from a Fee-Only Financial Advisor (the “Fee-Only” means you pay an Advisor a flat fee, typically hourly or annually, for advice instead of a sales commission).
• Finally, income taxes can be incurred through capital gains, dividends or interest earned from investments the fund owns (reported and distributed annually) or by a gain made upon the sale of the fund.

Mutual Funds have become an important part of saving, with more than half of Americans having reported owning them. There are more Mutual Funds in the U.S. today than there are individual stocks.

ETFs, on the other hand, are relatively new. Whereas Mutual Funds date back to 1924, ETFs didn’t appear until 1993. There are several advantages and just a few (potential) drawbacks. The important thing to remember with ETFs, like Mutual Funds, is there are several types with differing characteristics.

Here are the basics of ETFs:

• Like Mutual Funds, ETFs are an Investment Company that invests shareholders money in a (usually) diversified portfolio of securities like individual stocks or bonds.
• Assets are held in custody at a third-party bank just as with a Mutual Fund, and are subject to regular inspection by the SEC in addition to any independent auditors to the bank and ETF.
• The Investment Company (the ETF) is overseen by an independent Board of Directors whom are charged with ensuring the fund is managed in the best interest of the fund’s shareholders (investors).
• The idea is to make diversification easier by grouping investments together, and to reduce the costs associated with investing by spreading transaction costs amongst thousands of investors. Until recently, investing in an ETF always meant “passive” management. While “active” management starts to become available in ETFs, the vast majority simply follow the investments that make up whatever index they are supposed to follow. With the surge in popularly of ETFs, there has been a similar corresponding increase in the availability of specialized indexes to follow, often created just for a new ETF.
• Their day-to-day liquidity comes in a different format. Instead of the option to sell your shares back to the Investment Company once every day, you can sell them at any time to a willing buyer on a stock exchange, just as you can with an individual stock. As with stocks, the level of marketability/liquidity is relative to how many buyers/sellers there are available for a specific security. This means the bigger the ETF, the more liquidity. Additionally, ETFs typically have a “creation and redemption” process that, in the absence of a willing buyer/seller, allows you to convert an ETF for its underlying shares or vice-versa. This helps keep pricing close to the value of the investments and keeps transaction costs low.
• ETFs are known for their tax efficiency. This is primarily due to the creation and redemption process, which in effect has mostly limited capital gains to transactions done by an ETF owner, but not within the fund itself. There are some exceptions to this rule, however. Theoretically done properly, one could own a successful stock ETF for decades and not have to pay income taxes until sold (assuming no dividends).
• ETFs have annual expense ratios anywhere from 0.05% to 1.00%.  The average annual expense ratio in 2010 for a stock ETF was 0.41%, less than half of the Mutual Fund average (with most ETFs actually available for much less than 0.41%, even).
• ETFs are always sold without a sales commission or load, but may have transaction costs (trading commissions) at the brokerage you purchase them through.

Aside from a few exceptions (such as ETNs, commodity or futures ETFs) basic ETFs can reduce the cost of investing significantly, provide better clarity and control over what investments you own and incur less income taxes with ownership.

If you have questions about investing in ETFs, a Fiduciary, Fee-Only Financial Advisor at Callahan Financial Planning can help.

Here at Callahan Financial Planning we simply define a budget as providing for your needs within scarcity, which is the limited amount of money available to you. This means living within the amount of money you earn while taking care of your needs. The goal of having a budget isn’t to restrict your spending, but to cover all your necessities and focus any remaining money on what is most important to you. Budgeting forces you to take an in depth look at where your money is currently going and decide if that’s where it should go in order to accomplish your true goals.

In order to create your budget, follow these five simple steps:

1. Determine your monthly net income: The total amount of take home money from each paycheck (your gross pay less your deductions). -Remember that if you are paid bi-weekly multiply your average paycheck’s net income by 26 then divide that by 12.
2. Identify your spending: To do this simply gather your bank and credit card statements as well as any receipts on cash purchases. Then separate your spending by discretionary and non-discretionary. The main object of a budget is to ensure that all of your necessities are covered and then allocate your remaining funds according to your goals. It’s important you identify all spending for a month, so you can truly understand where your money goes (you’d be surprised how much a few value meals and gourmet coffees can add up to in a month). This will also help you finds areas where you can reduce or increase spending if needed.
3. Outline your goals: Write down specific goals and what you estimate it will cost to achieve them. Now that you have an understanding of your spending habits, you can determine if your spending is in line with your short and long term financial goals, and make any necessary changes.
4. Plan out your ongoing budget: After you have detailed exactly where your money is going and what your goals are, prioritize your spending by what is most important. Whatever your goals may be such as: preparing for retirement, paying for college, paying off debt, investing or saving for a home, you need to have a plan and stick to it in order to be successful.
5. Track your progress: This will allow you to hold yourself accountable, and also see how significant the effects of a sound budget really are. This is where the transformation starts to happen, when your current spending habits are in line with your goals, you will begin to see them come to fruition.

Everyone needs a budget. Whether you make $30,000 or $300,000, you will be much better of with one. It may take some discipline and a few changes when you start but controlling where you spend your money will allow you to prepare for and help you accomplish your financial goals. To find out how one of our Professional Financial Planners can help you identify your goals and guide you towards accomplishing them click here.

The world’s bond markets fared much better. For the quarter, the broad U.S. bond market returned 2.30%, providing the bulk of the year’s return so far. U.S. Government bonds, U.S. corporate bonds, and U.S. inflation-protected bonds (TIPS) all had strong returns during the period. Even in Europe, despite the struggling sovereign debt situation, the diversified zone as a whole showed a strong performance for bonds. This was also the case in emerging nations and much of Asia.

This serves as a strong reminder as to the incredibly important role that bonds play in a portfolio. We can’t predict so many things about the world’s economies and their financial markets, but we can look to history to see the frequent inverse relationship between stocks and bonds long-term. Just like their returns today, their long-term prospects are also likely to be inverse to that of stocks- but more on that below.

Throughout 2011, our firm’s research has caused us to use caution when considering the overall levels of stock investment as a part of our design and management of portfolios. In regards to our overall exposure, we continue to have concerns, but as we write this we are seeing prices improve on stocks, allowing us to increase stock investment to more normalized levels.

Investing in equities, as you know, does not come without risk. Among other things, it includes the risk of a decline in value after an investment is made. As we have seen in the past, no price level can permanently prevent a further decline. However, we believe there is strong support for buying through volatile markets. It can be more stressful at the time (as it seems our natural instinct is almost always the opposite, buy when things seem good, sell when things seem bad), but history tends to treat investors that practice this discipline better.

One only needs some simple statistics to see this point illustrated. Over the last 20 years, the U.S. stock market (as measured by the S&P 500) returned an annualized 9.1% to investors, and yet the average American investor during the same time period earned a mere 3.8% each year. This data depicts the negative effects of buying high (when things seem good) and selling low (when things are bad) commonly seen among investors today. We diligently remind ourselves of this each day at our office. It is our job, as professional financial planners, to provide the clarity and guidance that keeps those human (inverse) tendencies at bay.

Unfortunately for investors, we don’t have a crystal ball that predicts the future. Fortunately, however, neither does anyone else. That at least evens the playing field for all, and history has shown that the long-term rational investor is more likely to be treated better in the end. We try for nothing less at Callahan Financial Planning Company for each and everyone one of our clients.

The rest of 2011 has plenty of uncertainty and the potential for more declines in store for us. The bond markets, seemingly unshaken by the debt ceiling troubles, appear to be pricing in an economic slowdown, and potentially a further decline in global stock markets. The reality today is that investors must choose between a negative real yield savings account, historically low-yielding bonds or stocks in the midst of economic uncertainty. If you’re concerned about stocks today, for the good reasons shown above, there is a silver lining: We see a much better investing environment today than that of the late 1990′s/early 2000′s. So, those of you who own stocks for the long term, buckle up, grab some popcorn and sit back. We’ve seen movies like this before.

Sincerely,

William Callahan, President and Chief Investment Officer

Callahan Financial Planning Company

Whether or not you choose to keep your previous employer’s 401(k) where it’s at, roll it over to your current employer or move it to an IRA, you will still be responsible for its management and investment direction.  As discussed in the previous post, that can be a challenge if investing is not your specialty.  Don’t worry – we can help.

Our investment management service, Conflict Free Planning, ensures that a Financial Planner can help you identify the advantages and disadvantages to holding your investments in a employer retirement plan or an IRA.

How would this service benefit you?

• You are provided with continuous management of your previous and/or current company retirement plan(s) by experienced, skilled financial planners based locally here in Omaha.
• There is no more guesswork for you when trying to reallocate your portfolio.  We do all of the research for you and make the investment changes as necessary using our state of the art research tools. Our ongoing research is done with our local Investment Management Committee, and is integrated with each clients financial plan separately.
• You have peace of mind knowing that all portions of your portfolio are being actively managed with no conflicts of interest or emotional decision making.

How does this service work?

All clients start with a comprehensive financial plan and Investment Policy Statement (IPS) that outlines exactly what we’ll do, why we’ll do it and when we’re going to do it.  This ensures all emotions are left out of investment decisions and only suitable investments within your plan’s available options are selected.  Once we have this set in place, you authorize Callahan Financial Planning to access your company retirement account or IRA.

Next Steps…

If you haven’t looked at your company retirement account for a few months or haven’t reallocated your portfolio for several years, it might be time to consider active management from skilled financial planners.  To talk with a Financial Planner, call 402-341-2000 or request an appointment online.

Now that you understand at the pros and cons of leaving your 401(k), 403(b), or other employer sponsored retirement plan with a previous employer let’s take a look at another option, rolling over your retirement account(s) from your previous employer into an IRA.

The advantages of converting your retirement account(s) to an Individual Retirement Account (IRA) include:

1. Opening your IRA with a discount brokerage to receive much lower transaction costs.
2. More visibility of your current investments and more detailed record keeping.
3. The ability to invest in thousands of different securities instead of just selecting from a pre-selected list of 5-15 options. This allows you to create a specific portfolio designed to fit your unique needs, not just be lumped together with 100′s to millions of other investors.
4. In most cases much lower administration costs. In a self-directed IRA you may be able to greatly reduce your expenses by removing the extra administration fees present in your previous retirement account.

The disadvantages of converting your retirement account(s) are related to what is necessary to make it beneficial. This typically means:

1. Creating an Investment Policy Statement to guide your investment choices.
2. Conducting initial education/research of investments and tax implications.
3. Actively monitoring the investments for necessary changes.
4. Rebalancing regularly to ensure the allocation stays where it should be for your timeline and risk tolerance.
5. Not selecting a lower cost investment as compared to your previous options.

In most cases the disadvantages of a rollover can be avoided if the right amount of care is given to your retirement account. While no one can guarantee that your investments will always have positive returns, there are steps that can be taken to significantly reduce your risk and potentially increase your return; especially those outlined above.

For some individuals this presents an exciting challenge as they enjoy taking the time to research, understand, compare and finally determine the direction of their own investments. For others this can be time consuming and they may wish to entrust this responsibility to someone else. If you don’t have the time or present knowledge to manage all of these factors then you may consider seeking out a professional, specifically one that is held to a fiduciary standard of care to their clients. Visit with a Fee-Only Fiduciary Financial Planner to learn more.

Read our final part of the series, Selecting Investments or an Investment Advisor to learn more about making investment choices within your Individual Retirement Account.

Are you one of the many people that still have company retirement plans (401(k)s, 403(b)s, etc.) held at your previous employer(s)?  As with all decisions we face, the decision to rollover a company retirement plan must be done with adequate information and disclosure so that you know in detail all of the advantages and disadvantages related to each possible choice.  With that in mind, lets discuss the pros and cons of keeping your retirement funds in your previous employer’s 401(k).

Pros/Advantages:

1.) Does your 401(k), or other company retirement plan, have individual company stock held within it?  If so, keeping your 401(k) at that company could potentially offer preferential capital gains tax treatment.  Typically, when we take a distribution from a retirement account, the funds distributed are taxed as ordinary income (typically a higher rate).  However, company stock is handled differently and when distributed from the retirement account is currently taxed as a long-term capital gain.  As the current capital gains tax rate is 0% or 15%, depending on your income, you could have this stock taxed at a lower rate.  An important fact to remember though, this advantage is only relevant if there are in fact material gains to be had in the stock.

This benefit can also be maintained if you select a rollover as well, but must be done at the time of the transaction.

Cons/Disadvantages:

1.) General management expenses in 401(k)s are almost always higher than those of traditional IRAs (Individual Retirement Accounts).  Your actual costs will vary depending on your specific plan, but according to the Investment Company Institute, management expenses generally range between .35% of assets to 1.72% of assets, with 1.5% a year near the industry median.  These fees cover expenses related to administration fees, management fees, lawyers, etc for your company’s plan.

2.) Transaction costs are another expense that are typically higher than those of traditional IRAs (Individual Retirement Accounts).  Transaction expenses are charged if your retirement plan is “open”, or allows you to choose which securities to buy or sell within your 401(k) .  This cost is generally higher in 401(k)s because most plan sponsors are not associated with discount brokerages that may offer lower commission rates.  Transaction costs within your 401(k), when applicable, generally range from $19.99 to $35.00 per transaction.

3.) Only limited investment options, generally only 5 to 15 funds, are typically offered within most company plans.  With the limited selection, you may not be investing in the funds appropriate for you based on risk, underlying investments, overlap, expenses or other factors.

4.) You cannot choose the plan sponsor, custodian and/or the person responsible for managing the funds.

Because every personal financial situation has a significant number of variables, it is important to remember that your situation may be different. The only sure way to answer the question for yourself is to conduct necessary research or speak with a professional, Fee-Only Financial Planner whose compensation won’t change depending on their recommendations. Callahan Financial Planning Company only has Fee-Only Financial Planners.

Read part three of our series, Should I Convert My Retirement Account(s) to an IRA?

What do you think about when you get a new job?

If you’re like most, you’re focused on what the new employer expects from you, learning your position, new processes and dozens of other details that come along with a new position.

This can be a very stressful time for any individual and although it’s the last thing anyone wants to think about, it’s important to remember your company retirement plan(s).  These include 401(k)s, 403(b)s, SIMPLE IRAs, Thrift Savings Plans and more.  If you’re not consciously thinking about your 401(k) or other employer sponsored plan it can be easy to think “I’ll get around to it later” and eventually forget about it all together.

According to the U.S. Department of Labor, the median number of years that wage and salary workers had been with their current employer was 4.1 years in January 2008.  This means the average person will have 7 to 10 jobs in their lifetime.  That’s a lot of 401(k)s to keep track of.  So what do you do and how do you decide to do it?

Here are your options, each with their own pros and cons:

• Do nothing and leave it it at your old employer (not-taxable)
• Roll it over to your new employer, if available (not-taxable)
• Roll it over to an individual retirement account (IRA) (not-taxable)
• Take the money (taxable)

First let’s address the option that could have the biggest impact if chosen, that is if you withdraw the funds altogether outside of the retirement account. Unfortunately, statistics show this is happening more and more, and illustrates two underlying problems 1. The average American is still experiencing financial stress and 2. A lack of understanding as to how these accounts are to be used and their true intent and purpose.

The tax code was written around retirement accounts to ensure they are used similarly to your pension and Social Security. That is, you build and save funds now to draw regularly from in retirement. So for example, if you planned to retire at 65, live your expected lifespan (we’ll say 90 for this exercise), in a simplified way you’ll draw 1/25 of your savings each year and taxed accordingly. On the other hand, let’s say you are 42, accumulate credit card and other debts, and decide it’s getting out of hand and wish to withdraw $20,000 from a retirement account after changing jobs. In addition to this taking away a significant portion of your future retirement fund, unfortunately there’s more.

If you make $42,000 a year, your federal marginal income tax liability on the withdrawal is 25%, and in Nebraska another 6.84% income tax. Because you’re not yet 59 1/2 (the minimum retirement age according to the IRS, although there can be exceptions to this), there is another 10% tax by the IRS for early withdrawal. So 25% + 6.84% + 10% = 41.84% tax. In other words, you started with $20,000 (100%), paid $8,368 (41.84%) in immediate taxes and kept $11,632. Had you kept that same amount invested just until retirement and earned 7% annually, you would have $94,810 and likely have annual withdrawals taxed at approximately half that rate in the future.

This, of course, has several assumptions included. It does mean, however, that it is rarely the best solution to withdraw the funds altogether. Even some of the highest annual interest rates on credit cards today don’t match the 41.84% income tax. If you feel your situation warrants further analysis to know for sure, it may be a good idea to visit with a Financial Planner.

Read more on your options at the next post in this series, Should I Leave my 401(k) With my Previous Employer?

• Do you feel you make good money yet have little to show for it?
• Are you confused about the vast array of investment options?
• Are you unclear about how your current investments are performing?
• Do you and your spouse differ over how to handle your money?
• Are you uncertain if you have the right kinds and amounts of insurance?
• Have you delayed creating an estate plan?
• Do you feel you pay too much in taxes?
• Are you worried about not having enough money to retire?

If you answered ‘yes’ to any of the following questions, there’s a good chance you should consider financial planning.

Now, how do you know where to start?  Do you go at it alone or do you see a professional?  The Financial Planning Association lists the following circumstances when it is in your best interest to see a professional financial planner:

• You have little or no experience with finances
• You don’t have the inclination
• You want an outside perspective
• You have a complex financial situation
• You don’t have the time

A while back I heard a speaker compare the above circumstances to lawn work.  I will never forget the simplistic terms he used, but it made sense.  To summarize, he said that there are 5 types of people when it comes to mowing their lawns.

Type 1: The too busy person.  They are physically capable, they know to mow and they like mowing.  They just don’t have time. 

Type 2: The not physically capable person.  They have time, they know how to mow and they like mowing.  They just aren’t physically capable.

Type 3: The person that doesn’t like mowing (this is me).  They have time, they are physically capable and they know how.  They just don’t want to.

Type 4: The person that just doesn’t know how.  They have time, they are physically capable and they want to to mow;  they just don’t know how.

Type 5: The person that physically can mow, wants to mow, has time to, knows how and so they mow their yard themselves.

Now insert the words financial planning above instead of the word mowing.  If you fall into Types 1,2, 3 or 4 you should consider seeking the advice of a professional.

Whether you choose to partner with a financial planner or go at it alone, the steps of financial planning are the same.  Stay tuned to discover the 10 steps you need to know while creating your financial plan.

a) You don’t have an account eligible for conversion (i.e. your current 401k that you cannot withdraw from), or;
b) You haven’t had the time to analyze it further.

If you’re in the first camp, this post won’t apply to you. If you’re in the latter camp, it’s likely worth your time to analyze this further. Let’s start with a summary of the opportunity and what this year’s deadline means:

Conversions from a Traditional IRA (and it’s various forms – 401k, 403b, SIMPLE, SEP) to a Roth IRA had previously been limited to those whose Modified Adjusted Gross Income (MAGI) did not exceed $100,000 in a year. Now, converting from a Traditional IRA to a Roth IRA in 2010 and beyond does not have any income (MAGI) cap, so it is available to everyone. So why would we even want a Roth IRA instead? Let’s explore the benefits through a basic comparison:

Traditional IRAs and employer retirement plans are typically tax-deferred, meaning you receive a tax deduction now but pay taxes on the entire balance in the future.

Traditional IRA / Employer Retirement Plans

• Tax-deferred, income tax paid on entire distributions.
• Generally distributions must come after age 59 1/2 or you will pay income taxes and a 10% penalty (There are a few exceptions to the penalty rule, but never any exceptions to the income taxation)
• Distributions from a traditional IRA can cause you to enter a higher income tax bracket, potentially increasing your marginal income tax rate.
• Once you reach age 70 1/2 you must begin “Required Minimum Distributions (RMD)”, meaning an annual forced withdrawal and taxed at your normal rate.

Roth IRAs have tax-free earnings when you follow some basic rules and other small things to note.

Roth IRA

• The amount you contribute to a Roth IRA can be withdrawn at any time, without tax penalty or income tax. You do not have to wait until age 59 1/2 for this.
• The amount you convert to a Roth IRA can be withdrawn at any time after age 59 1/2 without penalty under the FIFO (first in, first out) rule. You do not have to wait 5 years after a conversion to withdraw your basis of conversions or contributions. If you’re under age 59 1/2, you’ll have to wait until after January 1st of the 5th year after the conversion.
• Reduce your taxable income in retirement, potentially reducing the rate of taxation on income (including social security income).
• There are no required withdrawals in your lifetime (and your spouses). Continues to earn tax-free for non-spousal beneficiaries even during distributions.
• It can potentially reduce the size of your taxable estate upon death, beneficial for those whose estate would exceed the annual exemption amount.

Potential Conversion Notes

There is a significant potential advantage to converting to a Roth IRA. With the news of a likely extension of present tax rates for the next two years, one converting to a Roth IRA before December 31st, 2010 can spread their tax liability over more than 2 years from today. For those of you wondering whether to convert, it’s all about time and tax rates. Here are some of our analysis points:

• How long do we expect the life of the investment account being converted to be? In other words, do you expect to save for 5 more years, withdraw over 20 years, and then pass it on to a child who will use it for 30 more years? Or will all the funds almost certainly be spent over the next 10 years?
• What is your current marginal income tax rate, and what would it be throughout Traditional IRA distributions or Roth IRA distributions?
• What else would improve if you had less taxable income during retirement (lower medicare premiums, less taxation of social security income)? What is the specific dollar difference today?

Many people get caught up on currently losing access to the funds used to pay the current income tax liability. This is the cost of a Roth IRA conversion, and should be a part of every calculation. But if you calculate the aggregate value of the tax-free income, the adjustments in retirement benefits and taxation (including social security and medicare rates) and the expected return and life of your investment portfolio, you can turn all of these overwhelming variables into an apples to apples comparison.

If you’ve been plagued by indecision and keep putting the conversion off or simply have questions on the process, you have three options to get started. Our firm does not solicit financial products or earn compensation for specific recommendations. We’re paid only by our clients, always in full transparency. To get answers, you can:

1. Request our free information kit. This will tell you about what we do for clients, explain our process and tell you how you can get started.
2. Schedule your first visit with a planner. These are held at our beautiful new offices at Midtown Crossing, and the initial session has no cost or obligation. You’ll have a chance to describe your situation with a planner and they’ll tell you what your next steps would be on your specific concerns.
3. Call us at 402-341-2000. We can help.