Trading Costs Continue to Fall

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If you’ve ever talked to me about investing, you’ve likely heard me stress the importance of keeping your costs low. Part of your investing costs are the commissions you pay to buy and sell.

I encourage my clients to use a broker, the firm that holds your investments, that offers low cost investments and low to no trading fees. One of the brokers that I often suggest is Vanguard because it offers a broad array of its own index mutual funds with no transaction fees.

Follwing other discount brokers, Vanguard recently announced that it is lowering its commissions for stocks and exchange traded funds (ETFs.) Vanguard clients will now pay no commission for Vanguard ETFs and will pay $2 t0 $7 per trade for non-Vanguard ETFs and stocks.

This is good news for investors for a few reasons:

  • Trading costs for self-directed investors continue to fall and are becoming trivial for investors who trade infrequently.
  • Vanguard becomes a viable option for investors who like to buy ETFs and individual stocks.
  • Investors can build well-diversified portfolios at Vanguard using ETFs for less initial investment than they can using Vanguard mutual funds, most of which require a $3,000 minimum investment.

Still, many other brokers are now offering very low trading costs for stocks and ETFs. Below are links to stock and ETF commission schedules at other well-known brokers:

When choosing a broker, keep in mind that there are other factors to consider such as its customer service reputation, the ease of use of its website and statements, and any other costs like per account or low balance fees.

Want to know the main differences between mutual funds and ETFs? Check out a Vanguard presentation on the subject at this link.

Make the Best of a Bad 401(k)

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Penelope Wang wrote an article for CNNMoney and the March issue of Money Magazine on how to Make the Best of a Bad 401(k). It includes solid advice on how to work around limitations and poor features in employer-sponsored retirement plans. I am mentioned in the section on what to do if your employer does not provide a matching contribution.

Numbers to Know for 2010

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With 2010 just around the corner, it’s time to get familiar with the key numbers that may affect your financial planning in the coming year. Below is a list of the essential numbers and phaseout ranges for 2010.

  • Maximum contribution to a Traditional or Roth IRA: $5,000 + $1,000 catch-up if age 50 or over (no change.)
  • Maximum contribution to a 401(k) or 403(b) plan: $16,500 + $5,500 catch-up if age 50 or over (no change.)
  • Maximum income to convert a Traditional IRA to a Roth IRA: No longer applicable. See my post on converting.
  • Income (modified adjusted gross income) phase out range for deductible Traditional IRA contribution, married filing jointly and covered by employer sponsored retirement plans: $89,000-$109,000 (no change.)
  • Income phase out range for deductible Traditional IRA contribution, married filing jointly and spouse covered by employer sponsored retirement plan: $167,000-$177,000.
  • Phase out range for deductible Traditional IRA contribution, filing single and covered by employer sponsored retirement plan: $56,000-$66,000 (no change.)
  • Phase out range for Roth IRA contribution, married filing jointly: $167,000-$177,000.
  • Phase out range for Roth IRA contribution, filing single: $105,000-$120,000 (no change.)
  • Social Security Cost of Living Adjustment: 0%
  • Annual gift tax exclusion: $13,000 (no change.)
  • Marginal income tax rates

Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Year-end Financial Planning Tips

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Even though the end of the year is rapidly approaching, there is still time for you to take advantage of these year-end financial planning tips:

  • Use up any balances in your Medical Flexible Spending Account. Remember that you will lose any balances that you do not use. Check with your plan provider for eligible expenses and for any grace period into the new year.
  • Schedule medical appointments and procedures before year-end if you have already met your health care plan’s out-of-pocket deductible.
  • Offset capital gains and losses in your taxable investment accounts.
  • Avoid buying any mutual funds that are planning a year-end capital gains distribution. Most mutual fund families will publish a list of estimated year-end distributions like this one from American Funds.
  • If you are over age 70½ and have an IRA or other pre-tax account, be sure to take your required minimum distribution for 2009 or opt out this year. You also have until the end of the year to make a tax-free charitable rollover to a qualified non-profit organization.
  • Maximize your annual gift tax exclusion. If you’re fortunate enough to be able to gift money to your loved ones, you can give each individual up to $13,000 this year with no gift tax ramifications. If you’re married, you and your spouse can each give $13,000 to anyone you want. But you need to do so by year-end.
  • Fund your 529 plan to maximize your state’s tax deduction. For example, a married couple who are Michigan residents can deduct up to $10,000 of contributions to the State’s MESP 529 Plan made during 2009 from their 2009 Michigan income tax return.
  • Create a 2009 tax file if you haven’t already so you have a one place for all of your tax documents to land when they start arriving in the mail.

If you have other year-end tips you would like to share, feel free to e-mail

me at [email protected].

Please keep in mind that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

In Case You Missed It – CFA Magazine

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I was quoted in the July-August 2008 edition of the CFA Magazine in an article (PDF) about reconciling different points of view between clients and advisers. I discuss educating a client about the expense and diversification ramifications of choosing value-based investments.

Converting to a Roth IRA in 2010

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If you are like many of my clients, you may be wondering if you should convert your Traditional IRA or old 401(k) to Roth IRA next year in 2010. As you may know, the income limitations for conversion are repealed in 2010, and you can choose to pay the taxes owed on a 2010 conversion over two years in 2011 and 2012. On the surface, it seems like a pretty sweet deal. And for many it is. However, it’s not in everyone’s best interest. How are you to know if it makes sense for you to convert? Here are some considerations.

  • If your income tax bracket is likely to be higher in retirement than it is today, you may be a good candidate for conversion.
  • If you think tax rates are on the rise, you are nearing or in retirement, and you do not expect your tax bracket to drop significantly, conversion may make sense for you.
  • When you convert, you have to report the converted amount as income and the additional income may push you into a higher tax bracket. Consider a partial conversion if this is the case.
  • You will need cash to pay taxes on the additional income if you convert. A good rule of thumb is to not convert if you don’t have the cash on hand from another source to pay the taxes owed from the conversion.

Generally speaking, I think it’s a good idea to be diversified from a tax perspective by holding both pre-tax (401k, Traditional IRA) and after-tax (Roth IRA, Roth 401k) retirement assets. It’s a way to hedge your bet, since no one truly knows what tax rates will be in the future.

However, taxes should not be your only consideration if you are thinking about converting. What you eventually plan to do with the money is also important. For example, if you plan to leave the money to your kids when you die, converting would allow you to grow the account throughout your life since Roth IRAs do not have required minimum distributions as do Traditional IRAs.

If you would like to more details on this subject, I suggest a FundAdvice.com article . If you would like to learn if converting to a Roth IRA makes sense for you, you are welcome to schedule an appointment.

Please keep in mind that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.