Numbers to Know for 2011

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Happy 2011! Below is a list of the essential numbers and phaseout ranges for this year.

  • 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).
  • Income (modified adjusted gross income) phase out range for deductible Traditional IRA contribution, married filing jointly and covered by employer sponsored retirement plans: $90,000-$110,000.
  • Income phase out range for deductible Traditional IRA contribution, married filing jointly and spouse covered by employer sponsored retirement plan: $169,000-$179,000.
  • 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 deductible Traditional IRA contribution, filing single and not covered by employer sponsored retirement plan: no limit.
  • Phase out range for Roth IRA contribution, married filing jointly: $169,000-$179,000.
  • Phase out range for Roth IRA contribution, filing single: $107,000-$122,000.
  • Social Security Cost of Living Adjustment: 0%.
  • Annual gift tax exclusion amount: $13,000 (no change).
  • Marginal income tax rates.
  • Tax changes passed in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
  • Maximum deductible contribution to the Michigan Education Savings Program for Michigan residents: $5,000 single, $10,000 married (no change).

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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 Planning Tips

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With the end of 2010 right around the corner, I offer the following year-end financial planning tips:
  • Contribute to your state’s 529 Plan by the end of the year. Many states, such as Michigan, offer a state income tax deduction if you make contributions to the plan that the state sponsors.
  • Convert your Traditional IRA to a Roth IRA by year end. The IRS created a special election for conversions made in 2010 that will allow you to spread the income from the conversion over 2011 and 2012. You can learn about Roth conversions at Vanguard and use its Roth IRA Conversion Calculator to decide if conversion is right for you.
  • Lock-in capital gains and pay at current capital gains rates. Long-term capital gains rates are scheduled to increase in 2011 unless new laws are enacted. If you have unrealized capital gains in a taxable investment account, consider selling your long-term winners and pay at the 15% rate (or 0% if you are in the 10% or 15% ordinary income tax brackets). You can even sell and immediately re-buy the same security to reset its cost basis. The wash sale rule does not apply to gains. You can learn more about this strategy and whether it is in your best interest by reading this article at Fairmark.com.
  • Avoid buying mutual funds in a taxable account late in the year. Mutual funds are required to distributed realized gains each year, and you should avoid paying taxes on distributions when you were not around to participate in the gain. Many fund companies report their expected distributions prior to year-end. Check for planned distributions before you buy or wait until the new year.
  • Take Required Minimum Distributions (RMD) from your IRAs or employer-sponsored retirement plans if you have reached age 70 1/2. Failure to take a required withdrawal can result in a 50% penalty on the amount not withdrawn.
  • Make annual exclusion gifts before year-end. You can give $13,000 in 2010 to an unlimited number of individuals free of gift tax. You cannot carry over unused exclusions from one year to the next.

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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.

Variable Annuity in an IRA

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In my profession as a Certified Financial Planner™, nothing gets my blood boiling faster than blatant acts of self-interest by other financial advisers. One of the most obvious examples of this type of behavior is when advisers invest their clients’ Individual Retirement Arrangements (IRAs) in variable annuities.

In my view, variable annuities are almost always a bad idea as a stand-alone investment. Most are exceedingly expensive, complicated, and illiquid. Occasionally, a low-cost variable annuity can be justified as an additional way to invest on a tax-deferred basis if an investor is already maximizing her other tax-deferred investment options. But this situation is a rare exception to the rule.

Yet I regularly work with new clients whose former advisers recommended they invest their IRAs in variable annuities even though an IRA is already a tax-deferred investment vehicle. In these cases, the investors are stuck (due to many years of high surrender charges) in high-fee products for no good reason and I’m left to help them make the best of a bad situation.

I was recently working with a colleague on a project for a new client, and he asked me why the client had bought a variable annuity in his IRA. I replied that he was asking the wrong question. Investors put their trust in financial advisors to steer them in the right direction. The appropriate question, I said, was why had the so-called advisor sold it to the client. Unfortunately, the answer to that question is all too clear to those of us in the industry – for the large commission.

But don’t take my word for it. The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority have written investor alerts on the subject.

If your financial adviser recommends that you invest your IRA in a variable annuity, he almost certainly does not have your best interest in mind. It’s time to find a new adviser.

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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. 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.

529 Plan Red Flag

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There are a number of clear signs that your financial advisor may not have your best interest in mind. Is your IRA invested in a variable annuity? Red flag! Do the names of your mutual funds end in “A” or “B”? Red flag!

When it comes to saving for college education expenses, it’s hard to beat 529 tuition savings plans. I regularly recommend them to my clients. Each state has its own plans and it usually makes sense to use a plan sponsored by your state. If your advisor recommended that you use another state’s plan, it’s another red flag that he or she may not be working in your best interest.

I’m advising new clients who are residents of Ohio but are using a 529 Plan from Maine. I happen to know that Ohio has a very strong 529 Plan that offers low-cost investment options and a state tax deduction for Ohio residents. It’s a no-brainer for Ohio residents to use it. So why is this couple using one of Maine’s plans? The answer is clear to me – because their former advisor can’t sell Ohio’s plan and earn a commission. Instead, he directed them to an advisor-sold plan that did pay him a commission.

Unfortunately, I see this breach of fiduciary duty on a regular basis. I’m not saying that there aren’t reasons to use another state’s 529 Plan, but when I see it, it’s usually for the wrong reasons.

How can you make sure that you are using the right 529 Plan?

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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.

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.

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.