As a reminder the Roth IRA accepts after tax contributions which accumulate tax deferred. Distributions are received income tax free as long as the owner is over age 59 ½ and the account is at least five years old. The tax advantage is that income tax is never paid on any growth over the contributions.

Like most good tax deals, eligibility to contribute to Roth IRA's diminishes as income increases. In 2007, assuming a couple who are married and filing jointly, eligibility to contribute to a Roth IRA started to phase out at $156,000 and was eliminated once adjusted gross income passed $166,000. For 2008 the phase out range is $159,000 - $169,000.

Suppose you find yourself in the same position one of my clients did. Business at the end of 2007 was very good. His bank balances were high and he wanted to take advantage of the sharp market decline by buying low. In early February he made both a maximum 2007 and his 2008 contribution to a Roth IRA by purchasing a mutual fund.

In March he called me in a panic. "I just got back from my accountant's office" he explained. "My CPA told me I put too much money in my Roth. Apparently I can only contribute $X,000." He asked, "How do I fix it?"

"Relax", I told him. "It's not a big deal. All we need to do is remove the excess contribution and any associated earnings. It's fairly common and routine."

In his case we contacted the mutual fund company. Since he liked the investment and the purchase price, he opened an individual account as the fund family transferred the excess shares from his Roth IRA into the non-qualified account. In his case the fund had not reinvested any dividends or capital gains since his purchase so that was not a factor. If they had we would have simply had to transfer the shares purchased on reinvestment too.

From a tax perspective things are somewhat different. Now, any gains in the non-qualified account are fully taxable and not tax deferred. We lose some of the advantage, but not they underlying investment.

His accountant wanted him to remove his 2008 contribution too. But when he discovered how easy it is to adjust his contribution, he decided to wait a year and see what eligibility he ends up with for 2008. Even if he ends up ineligible for any contribution, his only penalty will be the taxes due on the income and growth accrued.

My Fountain Runneth Over by Vox Efx

It doesn't matter what kind of life insurance you own. Periodically you need to ask your agent (or the company) to provide you with an inforce illustration. These are just like the ledgers an agent may show you before you purchase a policy but now, since the policy is in force, it starts with the policy's current values.

All life insurance illustrations show a "current" scenario and a "guaranteed" scenario.

The current inforce scenario starts with the current policy values and assumes future premium payments will be made as planned. Interest rates, insurance charges and other fees/costs will be projected to remain the same as they are now.

The guaranteed inforce scenario starts with the current policy values and also assumes future premium payments will be made as planned, but the interest rate is lowered to the contractual minimum while the insurance charges, fees, and costs are raised to the contractual maximums. In other words, the guaranteed scenario is the worst case situation.

If the policy pays dividends, the current scenario assumes the dividend scale will remain unchanged but since dividends are not guaranteed, the guaranteed scenario assumes no more dividends will ever be paid.

When reviewing your inforce illustration, pay extra attention to the death benefit. If at any time the death benefit reaches 0, that means the policy has lapsed. If the death benefit is gone, I would bet the cash value is gone too. That leaves you with no residual value and no future benefit.

Also look over the premiums. Is there a change in premium? Has the assumption been made that you will increase (or decrease) your premium in the future?

Always remember that illustrations are projections. Unless the insurance company is already at minimum interest and maximum charges, the policy has potential to perform better than the guaranteed scenario but current projections could end up being better or worse than policy will actually perform. Personally, since I do not believe in life insurance as an investment, I tend to focus on the guarantees. Anything that happens better than that can never hurt.

Inforce illustrations also offer the ability to ask "what if?". For example, ask the agent (or company) to re-run the inforce illustration if you stopped paying premiums when you now, or when you plan to retire. You could even ask them to calculate the premium required for you to stop paying the premium in a particular year but still have a guaranteed death benefit.

Reviewing the inforce illustration every five years or so will keep you aware of any issues with your life insurance while you have enough time to prevent the problem.

The Prudential by ambimb

How Well Do You Know Your Own Life Insurance?

1. How much do you pay for your policy?
2. Can the rate ever change? If so, when?
3. Does your policy build cash value? If so, how much cash value is there? Is the policy subject to any surrender charges?
4. If you keep paying your premium the same as you are now, how much coverage would you have when you are 65? 80? 100?
5. Is there ever a time when your death benefit will decrease?
6. If you stopped paying your premiums today, would you still have any coverage? If so, how much and for how long?
7. Who are the beneficiaries?
8. What would happen if your beneficiary dies before you (or with you)?

There is no scoring system. If you can answer these 8 questions (even most of them) then you know more about your life insurance than most people do. If you do not know the answers, be sure to read my next post on where to find them.

The Prudential by ambimb

To illustrate the concept, let's just assume my client sold 1000 shares of XYZ fund a couple years ago and now he needed to establish his cost basis.

I started with my files. He did not buy the mutual fund through me. We just transferred the shares from the fund family. There were some dividends and capital gains which had been re-invested so we called my old firm. Once the identification process was completed, we gave them information about the account and position. They were able to give us specifics about the sale of the shares and were able to provide the cost basis for the shares which were purchased by reinvestment of dividends and capital gains under their tenure. That accounted for about 150 shares.

Our next step was to call the fund family where the shares were transferred from. Apparently, they did not sell the investment either. In 1991 about 200 shares were transferred to them from a stock broker. They do not keep cost basis information on file for many years, but they were able to send the client copies of his year end statements from 1991 – 2001. Those statements would show all transactions while the shares were in their custody and we could establish cost basis on approximately 650 shares. The also gave us the name of the firm which transferred the shares to them and the account number the shares came from. They also were able to tell us that the initial purchase of the shares they received was at some time in 1987.

Unfortunately, this is where the lead went cold. The stock brokerage firm had been sold and consolidated in to a larger firm. The larger firm kept records for several years, but today they had no records from the previous firm for an account closed in 1991.

It took several phone calls but within an hour we had been able to establish cost basis for about 80% of the sale. Since we knew the other shares were purchased in 1987 we looked at the funds historical prices. I suggested he take the information we had to his tax preparer and use the firm data we had for 80% of the shares and assume he purchased the remaining shares at the low price of 1987.

Will he still owe some taxes? Of course he will. But we are hoping that we reduced his tax liability by several thousand dollars. Good use of a couple hours time. Of course, he should have kept records on his investments from the date of initial purchase through date of sale and have kept those records for at least three years after the sale.

Record keeping is important. Failure to keep records can be expensive.

Tax Time! by Cayusa

Here is what happened. He became a client of mine in 2001. He had some investments scattered with several fund families and we transferred his shares from the individual fund companies onto my broker dealer's brokerage platform so he could consolidate everything into one account. I left that firm in January 2006 and, at that point, it did not make sense for him to transfer his investments to my new firm. We ended our business relationship for the time being but remained friends.

Apparently he sold one of his mutual fund positions in February 2006 for (let's call it) $XX,000. The IRS has no idea how much of that sale is a taxable gain, and how much of it is a return of the investment. The amount of money which was invested and therefore has already been taxed is called the cost basis. Any amount received over the cost basis is taxable when the investment is sold. The basic gist of the IRS's letter was that he either had to document his cost basis or they were going to tax 100% of the sale proceeds (which would be about $11,000 in taxes).

Obviously he does not want to pay any more in taxes than he legitimately owes. When he called he asked "Do you know what my cost basis was in the XYZ mutual fund?" Since I had already left the firm when he sold his position, I had nothing in my records to document the sale but that was okay. I told him that together, we should be able piece together most of the puzzle.

Tune in tomorrow to find out how.

Tax Time! by Cayusa

I was quoted in a Des Moines Register online article titled "How much life insurance do I need?" which is part of the Your Money Team series written by Suzanna DeBacca, CFP®. Every week Suzanna seeks input from fellow financial planning practitioners to address common money issues. I've met Suzanna twice. The first time we were both volunteers for Business Horizons at Simpson College in Indianola, Iowa. The second time we were at a Financial Planning Association meeting, I hope to collaborate with her more in the future as she is smart and has great credentials and experience.

And while we are on the topic of associations, I was quite surprised last week at the NAIFA – Central Iowa (formerly the Des Moines Association of Insurance and Financial Advisors) meeting last Friday. April is the annual awards presentation. While recognition is always nice, I tend to downplay awards. However, unbeknownst to me, the committee of past recipients selected me to receive the association's 2008 Gene Hilton award. Gene Hilton passed away while he was President of the association in the 1970's and since then one member a year is recognized for their values, dedication, leadership, and service. It is the highest honor the association gives and I was humbled to be selected from the several hundred local members. The occasion was made even more wonderful as my wife was in on the surprise and had secretly come to the meeting to present the plaque to me. I am happy we were able to share the moment together. The icing on the cake was that the keynote presenter for the luncheon was Rita Perea. Rita gave a wonderful presentation on communicating across generations. I learned a lot which I think will make me more effective.

Another program I attended recently was presented by John P. Huggard. Mr. Huggard is an attorney (Board Certified Specialist in Estate Planning and Probate Law), CFP®, and retired professor from North Carolina State University where he taught introductory and advanced classes in law and personal finance for 32 years. His perspective on variable annuities is fresh and unique. I am not sure if I completely agreed with him during his presentation but I was curious enough to buy his books which document his research. I'll report once I have read and considered his work.

Tax time has come and gone and several of the issues I assisted clients with will make for future blog posts including:

• The Importance of Record Keeping
• Contributing Too Much to a Roth IRA

Of course if there are topics or issues you have questions about, let me know and I would be happy to answer all reader questions in a way that protects your anonymity.

Down the trail we go!

Antelope Island Horse Ride – April 12 2008 by a4gpa

Many investors were cautious during the first quarter of 2008, preferring to wait out market developments and watch the effects of recent actions taken by the Federal Reserve Board ("Fed") and responded to the market's volatility by seeking safety in treasury bonds. Overall, economic signals were mixed, but the Fed's quick and decisive actions to inject liquidity in the system were taken by many as a strong positive signal of government.

First Quarter Markets

The markets saw a few trend reversals, including value stocks taking the lead over growth, as well as emerging markets declining within most equity styles. The 'flight to quality' continues as investors favored treasuries over credit. The US dollar lost terrain against both the Euro and the Yen by 7.59% and 10.76% respectively (source: Bloomberg).

The graph below shows returns for the first quarter of 2008 for the major indexes. Here are a few of the trends and returns that are particularly noteworthy:

• Within the overall U.S. equity market, value stocks outperformed growth stocks. However, the results were mixed by capitalization. (source: Russell indexes).
• Aided by the weakness of US currency, developed markets outperformed the broad US equity markets in dollar terms. It is important to note that the differential between local currency and US dollar returns was around 6% for the quarter (source: mscibarra.com).
• Emerging markets underperformed the US and Developed equity markets. The biggest laggards were India, China and Turkey, which had been the drivers of strong positive returns in 2007. (source: mscibarra.com).
• Real estate, as measured by the Dow Jones Wilshire REIT Index, provided a modest positive return fueled mainly by the Self-Storage and Apartments sector. (source: djindexes.com)
• In the fixed income space, US corporate spreads widened against treasuries near all time high levels as a result of a massive re-pricing of risk combined with the lack of liquidity. The Federal Reserve Board continued to reduce both the discount rate and Fed Funds Rate (sources: Lehman Brothers, Bloomberg; Federal Reserve Board).
• According to the US Department of Treasury, yields continued to decline during the first quarter across all durations as follows:
  • 30-day T-Bill yields declined from 3.09% to 1.22%
  • 10-year note yields declined from 3.91% to 3.45%
  • 30-year bond yields declined from 4.35% to 4.30%.

     

U.S. Economic Report

Cuts in the Fed Funds rate at the January and March meetings of the Federal Reserve Board brought the rate down to a current level of 2.25% and analysts anticipate another 25 bps cut to the Fed Funds rate (source Bloomberg survey on March 11, 2008). The revised Gross Domestic Product (GDP) number for the fourth quarter of 2007 came out at a 0.6% growth rate (source: Bureau of Economic Analysis) which, while basically flat, can not be considered part of a recession. Expectations for the first quarter of 2008 (according to the Bloomberg survey conducted on March 11, 2008) are for GDP to check in at a modest 0.1%.

Oil prices continued to trend higher and ended the quarter 5.83% over year-end 2007 levels. Commodities, as measured by the Dow Jones/AIG Commodity index, were up 9.60% for the period. (sources: Federal Reserve Board; Bloomberg, closing prices at the end of trading date on March 31, 2008).

While the slowdown in the housing market and tightening in the credit markets remain problematic, economists are now watching consumer sentiment and unemployment as major concerns. A mild recession seems to be already priced into the markets as the second half of the year offers a more optimistic outlook based on expected GDP growth and the confidence that the Fed has injected into the markets (source: Bloomberg)

Staying on track

Today's valuations suggest that patient investors with a long-term investment horizon and a diversified portfolio will be rewarded. In times like this, it is important to stay the course and avoid emotional reactions.

Of course, as the markets shift and your needs and goals evolve, a reassessment and "fine tuning" of your portfolio may be appropriate. If you would like to reassess your portfolio, please contact me at (515) 457-1222. I welcome the opportunity to spend time with you reviewing your financial objectives and answering any questions you may have.

I wrote about it back in February and recently Free Money Finance highlighted a quote from my post and added some links to supporting our message. Instead of reading a post here today, check out what FMF writes about financial freedom.

Often, we feel as if financial problems are unique to us individually. We think that the world around us only knows financial peace and harmony, while we deal with budgeting, saving, and concerns about our investments. As a Certified Financial Planner ^TM I know just how common these feelings are, but confidentiality prohibits me from sharing. This particular couple wants to share so that others can learn from their experience. So with their permission, this is part of their situation.

They have a bit of credit card debt which not only carries a pretty high interest rate, but the monthly payments are a burden on their budget. I offered that a short term goal should be to eliminate the credit card debt as soon as possible. I also mentioned that I thought their interest rate was high and suggested that they call the credit card company and ask (insist?) that they lower their rate. After doing that, the wife asked me this question:

"I finally got my credit card company called and they lowered the interest rate to 10.9% from 14.9%. We have budgeted to have this debt paid off by year end, but is it worth transferring the balance to another card? One company is offering us a free transfer with a 0% rate for the first 12 months and another offers 5.99% fixed for balance transfers. It will be paid off soon anyway, but we could save $50 a month. What do you think?"

To begin with, they saved 4% on their interest rate just for asking! It never hurts to ask.

Before doing any balance transfers, I advised them to pay extra attention to the fine print. Balance transfers between credit cards often involve a 3% fee. That fee is upfront and on the entire balance transferred. If we assume that the balance decreases lineally over a year that would have the same effect as 6% interest charged monthly. The fee alone often makes a balance transfer unrealistic.

If the first company is offering no transfer fees and 0% for 12 months, that becomes a no brainer. Then they could choose to either budget less to the card and still have it paid off by the end of the year, or pay the amount they have already budgeted and be done with it sooner.

See also:

• How to Avoid A Major 0% Balance Transfer Credit Card Mistake @ Money Blue Book
• Balance Transfer Cards and Their Rewards @ The Poetry of Marketing
• How to Get Zero Percent Balance Transfer Credit Cards @ Debt Views
• 0% Balance Transfer Cards Part 1: The Trap @ The Penny Mine

What's in my wallet? Not you any more you lousy stinky usurious credit card from hell by yksin

76% of every dollar MDA raises goes directly to research, health care services and education.

• $25 pays for a flu shot for someone for whom respiratory disease could be very dangerous
• $100 covers a vital support group meeting
• $150 provides for an expert consultation in physical, occupational or respiratory therapy
• $200 covers a diagnostic workup at one of MDA's 235 clinics
• $650 sends a kid to one of MDA's 90 summer camp sessions
• $1,200 pays for 12 months of support group meetings helping families cope with the challenges of neuromuscular disease
• $2,000 assists someone with the purchase of a wheelchair, leg braces or communication device
• $3,900 pays of an hour of MDA's research seeking treatments and cures for more than 40 neuromuscular diseases
• $6500 would send 10 of "Jerry's kids" to MDA summer camp for a week of fun and recreation geared to their abilities

I am grateful that this blog reaches such a large and diverse audience. If you find it in your heart, could you please help me help the Muscular Dystrophy Association? Thank you.

Back to financial planning in my next post.