Just yesterday I was informed by Fidelity Investments that the IRS granted them an extension to the Feb 15th mailing deadline.  Fidelity made this request due to delays from certain third-parties, causing tax information to not being available yet.  The deadline extension was approved by the IRS and Fidelity says they are committed to mailing the documents by the end of February.

The good news is that this extension will likely reduce the number of corrected 1099′s that will be sent out in March or later.

If a public official did not use a blind trust for his or her investments, the only other way to avoid conflicts of interest would be to simply not invest in anything.  They would be limited to owning bank CD’s or treasury bills, etc.  Blind trusts help these individuals avoid being accused by others of conflicts of interest, and also avoid being tempted to take advantage of information they may have.  It’s called a blind trust because the beneficiary cannot see what is held inside the trust.

A blind trust is not just for someone who is super rich or wealthy.  Anyone who is a public official, or who is in a sensitive public position could protect themselves from scrutiny by using a blind trust.  In the trust they would be able to specify the general perameters for investing such as asset allocation (the mix of stocks, bonds and cash), and the timeframe for the investment to be used.  But beyond that, the trustee will manage the particular investments, and would be paid for their services.

Credit unions are overseen by the National Credit Union Administration, a U.S. government agency.  They have their own insurance fund similar to FDIC that all the credit unions pay into.  They also have their own form of the Federal Reserve system, which is a smaller group of larger corporate credit unions who serve the smaller individual credit unions.  When the smaller credit unions have excess funds, they can deposit the money with the larger corporate credit unions.  Then the corporate credit unions can loan out the money to other credit unions who have higher loan demands, etc.

A few of the larger corporate credit unions got caught up in buying mortgage backed securities issued by Wall Street in an attempt to earn higher returns.  This of course resulted in some huge losses, which are now being passed on to all the smaller credit unions.  In the credit union world, they all share in the losses of each other.  So now, huge assessments are being made to all the smaller credit unions, which are eating up their profits, and putting some on the verge of collapse.  Because of this, the number of credit unions is expected to fall sharply.  It could take decades to pay off the huge losses that have occurred.

The nations credit unions total deposits are about $729 billion.  The losses from these mortgage backed securities are estimated to be between $8.3 billion and $10.5 billion.  So far, they’ve only been assessed with about $1.3 billion in losses.  The rest will be spread out over the next decade.

The questions now that remain are:  How many credit unions will be brought down by these loss assessments?  And will credit unions be able to continue to pay higher rates and have lower fees than commercial banks?

You can look up the financial strength of any credit union in the country by going to:  http://banktracker.msnbc.msn.com/credit-unions/

We all want to retire early. Rule 72t may be the answer.

Some of you out there may be interested in how to retire early using Rule 72t, or 72(t) of the internal revenue code. As you all know, if you take money out of your 401k or other tax-deferred retirement accounts prior to age 59 1/2, you will not only be taxed on that distribution as ordinary income, but you’ll also pay an additional 10% penalty tax on top of that.  After you add on state taxes, you could end up losing more than 1/2 of your withdrawal to taxes.

Rule 72t provides an exception to the 10% penalty tax so that you can avoid it, as long as you follow some straitforward guidelines in taking these early withdrawals.  Another name for Rule 72t is “substantially equal periodic payments (SEPPs).

The requirements for taking SEPPs are fairly simple.  You can begin taking SEPPs out at any age, but you have to continue taking out the same amount (at least annually) for at least 5 years, or till age 59 1/2, whichever comes later.  You have to make sure you do the following things:

• You need to take out the payments at least once per year
• The payments much be calculated according to one of the IRS-approved methods for determining SEPPs
• You cannot make contributions, transfers (in or out) or rollover into the account from which you are taking SEPPs, nor can you take extra withdrawals from that account.

While these 72t rules are fairly simple, the penalties for not following them are severe.  If you don’t follow these rules, the entire amount that you take out prior to age 59 1/2 may be subject to a retroactive application of the 10% early withdrawal penalty, plus interest.

What are the IRS-approved calculation methods?

There are 3 IRS-approved methods for calculating SEPPs, or 72t distributions.  Keep in mind that once you choose a method of calculation and determine a payment, you cannot change that withdrawal amount for 5 years, or until age 59 1/2, whichever comes later.

Amortization method

The amortization method requires that a “reasonable” rate of interest* be used in the calculation.  Using your retirement account balance (generally as of 12/31 of the year before you start the 72t plan) and the account owners single life expectancy (or joint life expectancy of the account owner and a beneficiary) taken from IRS life expectancy tables, this method calculates the equal payments that can be taken.

Annuity method

Using the annuity method, distribution amounts are calculated by dividing the retirement account balances by an annuity factor based on the account owner’s single life expectancy and a reasonable rate of interest*.  This method essentially turns your retirement account into a lifetime stream of income payments.  Like the amortization method, these 72t payments must remain the same from year to year.

MRD method

The MRD method recalculates your payment every year.  The annual payment is generally the 12/31 account balance divided by the life expectancy from the applicable IRS Life Expectancy Table, based on your age or the age of your beneficiary.  Because the MRD method recalculates the distribution amount every year, this method reacts to teh changes in your overall account balance, so you are less likely to rapidly deplete your account if the balance has dropped due to market decline.

*Note:  IRS guidance provides that the interest rate that may be used is one that is not more than 120% of the federal mid-term rate for either of the two months immediately preceding the month in which payments begin.

If you think you might like to use a Rule 72t distribution to help you retire prior to age 59 1/2, it is very important that you consult a professional financial planner.  You don’t want to make a mistake in how you set this up, the IRS will punish you for it.  Call us today at 1-866-943-4222 for assistance in setting up a 72t plan.

The biggest fear that we all face with regard to long-term care insurance is, if you end up not needing it (which you hope that you won’t) then all your insurance premiums have gone down the drain.  So when you buy long-term care insurance, you’re betting that something bad is going to happen to you, but at the same time hoping that it doesn’t.  But that’s the reality of buying any kind of insurance.  It’s protection against a risk that could potentially damage your financial well-being.

A New Way To Protect Yourself

A few years ago, insurance companies started developing a new type of protection against the risks of long-term care that eliminate the biggest fear people have about buying insurance for it.  That is, the fear that if you end up not needing long-term care, you’ve wasted your money.  This new type of protection is called “Asset-based” long-term care benefits.  The concept is very simple, and yet very different from paying traditional long-term care insurance premiums.

Asset Based Long-Term Care Benefits

This type of protection combines a deferred fixed annuity with build in long-term care benefits.  A deferred fixed rate annuity is a financial planning tool that can help you save more money for retirement.  It earns a fixed rate of interest and grows tax-deferred until you start taking income payments from it.  And, in addition to helping you save more money, it can provide you with up to three times the annuity value in long-term care benefits if you need them.  This will help preserve your other hard-earned assets while it pays for up to 6 years of long-term care.  It will also protect your spouse and children from the emotional, physical, and financial toll of caregiving.  And with it, you have a choice of care options which include in-home care, assisted living, adult day care, homemaker services, personal care, respite care, hospice care, and nursing home care.

What If You Don’t Need The Care?

If you end up not needing any of this type of care (which is a very good thing), your money is not gone or wasted.  In fact, this is the best part of this type of long-term care protection.  If you don’t need the care, you’ve still:

1.  Earned a guaranteed rate of interest on your savings

2.  Taken advantage of tax-deferred growth (this will be more important as tax rates go up)

3.  Had access to your principal through partial withdrawals or lifetime income options

4.  Had a death benefit for your beneficiaries that is equal to the annuity value at the time of death

5.  Avoided probate on these funds

The chances of a 65 year old person needing some type of long-term care during retirement is very high, above 50%.  And the cost of this care is very costly.  The average nursing home in our country today costs about $5000 – $6000 per month, depending on where you live.  This can eat up a retirement nest egg in no time at all.  But still, many people hesitate to pay the premiums each month for traditional long-term care insurance.  You can see that the benefits of asset-based long-term care are many.  You have the protection if you need it, and if you don’t need it, you get all your money back.  I think everyone should consider puting part of their “safe money” into one of these types of vehicles.

If you would like more information on this, and other types of asset-based long-term care protection, please contact us today.

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.

12b-1 Fees

These are another kind of internal fee that some funds will charge you. You’ll never see these fees show up on a monthly or annual statement.  In fact, the only way you’ll know if you’re paying them is to look in the fund prospectus.  Most loaded funds have 12b-1 fees, and a few no-load funds do too. These are basically an annual trailing commission that goes to the broker who sold you the fund. It’s supposed to be his or her incentive to continue to take care of your account. It’s generally .25% per year, so it’s not going to break you. But when you add that on to an up front commission of 5.75%, and an expense ratio of 1.50% or 2.5%, and it starts to become very difficult to keep up with the market. If you’re looking for the best mutual funds, try to avoid 12b-1 fees.  The more you pay in fees, the less your returns will be.

No-Load Funds

No load funds are funds that have no commission for the investor to pay at all. So every $1 that you invest goes right into the fund. Some famous no-load mutual fund companies are Fidelity Investments, Vanguard, and the Dimensional Funds. The only way a no-load mutual fund makes money is from the internal expense ratios. But that doesn’t mean that their expense ratios are higher. In fact, quite the opposite can be true. No-load funds are in our opinion are some of the best mutual funds available today.

Most full-cost brokers (ie. Merrill Lynch, Edward Jones, bank guys, etc.) won’t ever educate you about the way fund companies charge fees and make money. They will usually tell you that the best mutual funds are their own, which are generally loaded with fees and commissions. Knowing this can save you thousands of dollars and make a huge difference in the size of your account years from now.

ACTIVELY Managed Funds

Actively managed mutual funds have fund managers who are actively buying and selling securities inside the fund in attempt to outperform the market. Many people think that actively managed funds are the best mutual funds. Keep in mind that each time a trade is placed, the fund has to pay a commission. These commissions are in addition to the funds expense ratio and 12b-1 fees, and are only reported in the annual report. Morningstar says that these trading commissions can run as high as 1% – 2% of the funds assets per year if the manager is a very active trader. You can get a feel for how much trading is going on by looking at the funds turnover rate, which is also reported by Morningstar. If a fund has a turnover ratio of 50%, that means the manager is selling and then buying again 50% of the funds assets each year. Many stock funds commonly have turnover ratios of over 100% per year.

Also, when a stock inside a fund is sold by the manager, any capital gains that are realized from that sale will be passed on to you as the shareholder. So even though you didn’t do anything, you could be paying taxes on your investment at the end of the year. Funds will estimate the amount of capital gains that they plan to pay out at the end of each year. It’s important to look at those estimates (usually published in November) and see if you should sell your shares before they pay it to you. This way you can avoid taking that gain and getting taxed on it. Yet, some of the best mutual funds are still actively managed.

PASSIVELY Managed Funds

A Passively managed fund, usually called an index fund, is a portfolio of stocks or bonds that replicate a major market index. The S&P 500 or the Lehman Brothers Aggregate Bond Index are two major indexes that most people have heard of. There are a lot of people who now agree that the best mutual funds are passively managed. Passively managed funds are very low cost funds to own because there are not a lot of analysts doing research on what stocks to buy and sell. These kinds of funds generally don’t do much trading of the stock or bonds they own, so this keeps the trading commissions and taxes low. Expense ratios of passively managed funds are usually in the 0.08% – 0.5% range, much lower than actively managed funds. These are an excellent choice for an investor who is satisfied to match the performance of the index.  And for most investors, index mutual funds will perform better than actively managed funds in the long run.

A personal financial plan does the same thing for anyone heading into an unknown future such as retirement.  Your plan will tell you what action steps you need to take to achieve your destination and calculate how long it’s going to take to get there.  If you get off lost for a while, your plan can help you get back on track to reaching your goals.  A financial plan is a dynamic document that can be updated and changed whenever needed.  A good financial planner who understands your needs and is acting in your best interest will be worth his or her weight in gold.  With a little help, you’ll get to your desination faster with a lot less trouble and wasted time.  It will be the best money you ever spent.