Message from CFP Board

-Eleanor Blayney, CFP^® Consumer Advocate, CFP Board

You may have heard about the special rules going into effect in 2010 regarding IRA to Roth conversions. Next year, there will be no more income limitations on eligibility to convert your traditional IRA accounts into Roths. Further, while the amount converted is taxable income, you will have two years to pay the resulting tax.

People are already beginning to line up to take advantage of these new rules. It can be a great way to set yourself up for tax-free income in your retirement.

But in your hurry to get to 2010, don’t forget to take a good look at 2009. Many of us have taken pretty big income whacks this year, due to being out of work, losses in our investment accounts, and appallingly low interest rates on our savings or money markets. Or, perhaps like me, you started a business in 2009 and have plenty of expenses, building toward a hopeful future of plenty of income.

It’s possible that you have extremely low or even negative taxable income, given that your deductions and exemptions did not fall with your income. But before you do a happy dance, anticipating a big refund next April, settle down, sharpen your pencil, and do some calculating before year end. Because it is likely that your modified adjusted gross income is well below the maximum amount, you may want to convert your IRA accounts this year, rather than waiting for the more favorable rules of next year. Yes, a current year conversion will likely increase your tax liability relative to doing nothing, but you can gauge the amount of the conversion to keep your tax rates at the lowest 10% or 15% brackets.

Here are the numbers to work with: for a single taxpayer, the 10% rate applies to taxable income up to $8,350, 15% kicks in up to $33,950. For married couples, 10% applies up to $16,700 in taxable income, 15% up to $67,900. Assuming either a single or married taxpayer converts an IRA to a Roth to bring his or her income up to the maximum amount in the 15% bracket, the blended rate would be 13.8%.

Given the massive amount of government stimulus we have seen this year, it is hard to imagine that tax rates will long stay as low as they are today. Furthermore, the value of your IRA account is probably down – affording you the opportunity to convert now and let your assets recover in a tax-free Roth mode.

This year has, by any estimation, been a losing game for most people’s finances. But before you throw in the towel altogether and walk off the field to a new season, consider if you have these three bases to bring home before year end: low income, low tax rates, lower IRA account values, as a result of investment losses. You may have the possibility of a grand slam in the form of a Roth conversion before year end, leaving you a winner in your retirement.

Top News Stories

Tweaks Suggested for 529 Plans
Wall Street Journal (10/05/09) Mincer, Jilian

The Obama administration is considering making changes to 529 college-savings plans to make higher education a reality for more students from low- and middle-income families. The Treasury Department released a report in September that says more states should make use of index funds in their 529 plans to lower the expenses for investors. Also, capping contributions per beneficiary would enable the federal government to make education aid available for more families. The Treasury Department did not offer a dollar amount. What is more, the White House wants states to provide the same tax benefits to residents who invest in out-of-state plans, in an attempt to give consumers more investment options. Assets in 529 plans fell to about $98.6 billion in 9.1 million accounts at the end of June, compared with a peak of $112 billion in 2007, according to Financial Research Corp. in Boston. "There's a general recognition in Congress and the Treasury that these programs are working well for a lot of families and that states have done a lot to encourage families to use these programs," says Joe Hurley, founder of Savingforcollege.com.

New Credit Scoring Model May Boost Some Borrowers' Scores
Lansing State Journal (MI) (09/21/09)

The newest version of the FICO credit scoring system de-emphasizes minor delinquencies in calculating the creditworthiness of borrowers. Small, missed payments lingering in collections with original amounts of $100 or less will no longer damage the credit scores of borrowers. "There's more flexibility with missing a payment," Careen Foster, director of global scoring product management for FICO, formerly Fair Isaac Corp., says of the updated scoring model, called FICO 08. "If you have a more habitual pattern of paying accounts late ... you're more likely to get penalized for that." And high credit usage is more likely to hurt the scores of borrowers under the new system. FICO 08 has been available at Experian Group, TransUnion, and Equifax since July. However, the new model has not been adopted by all lenders.

Personal Finance News

Planning Goes Beyond Investing
Monroe News Star (La.) (08/18/09) Stephenson, Alan

True retirement and future planning should consider not only future plans, but also the challenges that may keep one from reaching those goals. One thing that hinders financial planners is the procrastination that delays individuals from making some critical life decisions. In reality, many people wait until the year of their retirement to figure out how they are going to receive their pension benefits or how they will budget their retirement funds. Unfortunately, workers may not be able to keep all of their employer-sponsored benefits upon retirement. By that point, there is often not enough time to make up for any financial deficiencies. A worker should consider whether they will require life insurance post-retirement. Another financially precarious risk everyone faces is the expense tied to long-term care. According to the National Association of Insurance Commissioners' "Buyer's Guide to Long Term Care Insurance," roughly 44 percent of people over the age of 65 are expected to enter a nursing home at some point, and 53 percent of those will remain there for a year or longer.


Seven Insurance Myths That Can Cost You
CBS News (09/30/09) SanSone, Arricca

Frequent misconceptions and fuzzy truths about insurance can cost consumers some serious cash if they are not careful. Here are seven common insurance fictions: My job's disability coverage will extend to me; my homeowner's insurance will cover me; I do not have to think about long-term-care coverage; only the exorbitantly wealthy need to think about umbrella coverage; low deductibles are preferable for home and automobile policies; I should take out a life insurance policy worth several times my income; and, my auto coverage pays for a rental car in the event of an accident. When it comes to homeowners coverage, policy owners tend to make a lot of assumptions about what is covered by their contract, says Kim Holland, Oklahoma insurance commissioner. "But you usually need additional riders for losses from events such as sewage backup, food spoilage from power outages, earthquakes, and wind damage," she adds.


Workers Discover 401(k) Plans Are Failing Them in Retirement
Detroit News (09/28/09) O'Connor, Brian J.

Experts say there are a number of reasons why relying on 401(k) plans may not provide a sufficient retirement for many workers. For instance, many 401(k) plans have limited investment choices, and often charge large hidden fees, some experts say. Others, including author Dan Solin, say that 401(k) plans offer so many investment choices that it is almost impossible for investors to assemble an intelligent portfolio. In addition to problems with 401(k) plans themselves, investors do things that can hurt their efforts to save for retirement. For example, many investors borrow money from their 401(k) plans to pay off their credit card accounts after the holiday season, says Byron Beebe, the U.S. retirement market leader of the consulting firm Hewitt Associates. Other workers hurt their retirement savings by pulling their money out of stocks after the market declines, and not putting the money back in until the market has already started going back up. A study by Hewitt found that 20 percent of workers moved their assets out of stocks last year, often the day after large declines in the market. However, employees can still build a successful retirement with a 401(k) plan if they stay disciplined about saving and educate themselves on how to make the right investment choices, says Ted Lakkides, CFP^®.


Old Truths Need Not Always Apply
The Journal Gazette (IN) (09/28/09) Green, Lisa

Some financial advisers say that strictly adhering to the traditional strategy of "buy and hold" does not yield optimal returns. "The way you have to view investments today, you need to separate out some of this noise from the past: Dividends don't go down, bonds are safe," says Cornerstone Wealth Management CEO David Hefty, CFP^®. "You really have to approach a portfolio and look at those investments and look at where we are now and where we think we're going to be in three months." Christopher Moore, CFP^®, says shareholders should disregard investing clichés and focus on the basics, comprehend their strategies, and make appropriate plans that have specific goals in mind. Deb Romary, CFP^®, says greed was the driving factor in the past year's financial implosion. "We all got used to in excess of 10 percent returns in a year and we forgot that 6 [percent] and 7 percent look good," she notes. "For me, traditional wisdom always had to do with the intimate nuances of the client's personality. I have always tried to realize the risk tolerance level of a client and then be aware that that changes as we age."


Preparing for the Worst
Wall Street Journal (09/27/09) Marte, Jonnelle

A will and other legal documents should be created after a major life change, which means younger workers who are getting married also should be thinking about these documents. Moreover, such documents should be updated when you buy a house, have children, or get divorced, according to financial planners and attorneys. "It's not something you write up once and put in a drawer and wait till you die," says tax attorney G. Scott Haislet. If you are married you should update your will if you want to leave some assets to your parents or siblings, and you should also update the beneficiaries for any life-insurance policies and retirement accounts as you review your estate. A will also allows you to name legal guardians for your children. Meanwhile, a healthcare directive, also known as a living will, allows you to designate someone to oversee your medical wishes if you are unable to make the decisions for yourself. A durable power of attorney allows you to choose someone to handle financial matters such as paying bills, overseeing your financial portfolio, and filing tax returns.


Don't Underestimate Your Value When Picking Life Insurance
NY1 News (09/23/09) Wagner, Tara Lynn

Financial planners say that when a client is deciding on a life insurance plan they should be careful not to underestimate their family’s needs after their death. MetLife senior financial planner Dwight Raiford says the client should be asked how much money they would need to never work again for the rest of their life, and the amount they settle on is the amount of insurance they need. New York Life Executive Vice President Mark Pfaff agrees, and says the client should consider immediate cash needs, which means the cost of a funeral and paying off a mortgage or paying for college, as well as income replacement, which refers to how much the family will need to live many years into the future. Many may think that $1 million sounds like a lot of money, but a 35-year-old male making $100,000 per year for 30 more years would make $3 million. A $1 million policy will cost about $70 per month, and while that is not tax deductible, the death benefit is tax-free. Planners also suggest that people get private insurance as well as the group plan offered by their employer, because they will lose that benefit if they lose their job and trying to obtain private insurance later in life is more expensive.


Why Retirement Savings Should Trump College Savings
ABC News (09/22/09) McPherson, David

Parents with children should focus more on saving for retirement than on accumulating tuition dollars that would enable the kids to graduate without any debt. Parents should keep in mind that they will be able to rely on only Social Security and Medicare if they have not saved for retirement, but there are scholarships, grants, and loans to help pay for school, and their children can also attend a public university or a community college. Moreover, their children should have 45 years of income-earning potential to pay off any tuition bills. Time is the key to a sizeable retirement nest egg, considering a person who begins saving $500 a month at age 30 can accumulate more than $900,000 by age 65 if they assume a 7 percent annual rate of return, but a person who waits until age 50 to begin saving would have to save more than $2,800 a month to accumulate that same amount. The upfront tax savings of contributing to a 401(k) or similar retirement savings plan plus any employer matching contribution would allow parents to accumulate more money faster in a retirement plan than even in a 529 college savings plan. Saving for retirement would give parents the flexibility to cut back when they have built up a healthy retirement portfolio, and they can help with the education bill then. Years from now, the children may even thank their parents for not having to rely on the kids for retirement.


10 Ways to Lower Your Taxes
Kiplinger.com (09/09) Lankford, Kimberly

Kiplinger's Personal Finance's contributing editor Kimberly Lankford offers a number of tax-reducing strategies. She suggests increasing one's 401(k) contributions and maximizing one's flexible spending account. Purchasing a first home can net a tax credit of $8,000 under the economic-stimulus plan, which also provides a tax break for new-car buyers. Tax breaks for paying college bills have additionally been enhanced by the stimulus. Selling off losing investments can lower taxes, as can maximizing tax credit and deductions. Charitable contributions yield tax breaks as well if the taxpayer itemizes his or her deductions. Self-employed taxpayers should make the most of their tax breaks, and Lankford's last suggestion is to keep tabs on one's medical expenses, some of which are deductible.


Auto Insurance: Top Things to Know
CNNMoney (09/01/09)

Auto insurers view people as a set of risks, and their decision to insure you will be based on your "risk factors," including your occupation, who you are, what you own, and how you live. Insurance products can have different prices, depending on the company, and although comparison shopping can help save money, you should consider more than the price, such as the insurer's record for claims service and financial stability. You should not settle on the minimum of auto-insurance liability coverage required by your state, and you should not forget to ask for discounts because insurers reward behavior that reduces risk. Moreover, you should keep your policy updated and review it before you file a claim, and keep in mind that the insurer's focus is to restore you financially and not to prove your losses so you can get the money you need. Quality could be an issue with some of the shops in the insurer's network of preferred providers, and you should ask for parts from the original equipment manufacturer. Good records are the key to the claims process. You can save money by combining your auto and homeowners' policies, paying for repairs under $1,000 out of your own pocket, increasing your deductible, driving safely, picking cars that do not cost a lot to repair or are not frequently stolen, and naming teenagers as only occasional drivers of your least expensive car.


4 Low-Risk Inflation Strategies
Bankrate.com (09/09/09) Burnette, Margarette

Author Michael Kresh, CFP^®, says investors--retirees especially--should prioritize inflation. "When you are trying to accumulate money long-term, you have to try to beat the rate of inflation," he says. "That means real [inflation-adjusted] growth in your portfolio, not just nominal growth." Strategies investors can follow to protect themselves against inflation include achieving equilibrium between choosing safe, low-yielding investments and taking risks. Advisor Software President and chief operating officer Neal Ringquist suggests that people define their goals and map out a strategy to fulfill them by taking a hard look at their age, assets, liability, and cash flow. Another strategy is to opt for Treasury Inflation-Protected Securities, which ensure a return that increases in tandem with the rate of inflation, as defined by the Consumer Price Index. A third strategy is to hold on to equity investments; financial adviser Richard Staszak recommends retirees place at least some of their money in stocks. "If you have money that you don't plan to use for the next five to 10 years, why should you penalize yourself in an investment vehicle that pays only a half a point percent?" he asks. A fourth course of action suggested by Financial Planning Services President Larry Rosenthal applies mainly to younger shareholders. "Maintain adequate cash reserves and use dollar cost averaging for investing," he advises. "When we have economic expansion, it can create volatility in stocks, especially if inflation increases. Younger investors can start dollar cost averaging now to limit volatility concerns."

---

Abstract News © Copyright 2009 INFORMATION, INC.