Financial Symmetry News & Views

Archive for ‘Take Charge of your Finances’

When we start working with a new client, one of the first steps is typically consolidating the number of accounts they have outstanding.  In our experience this makes your finances easier to manage by reducing the mental accounting that needs to take place every time a financial decision is made.  While this has always made sense to us from a simplification standpoint, it also seems to result in lower overall spending.  Recent research from the University of Utah found that “consumers who use multiple accounts spend more money than those with a single account.”

Don’t Bucket Your Savings

While this process ultimately simplifies financial management for our clients, the transition from multiple accounts to just a few is not always an easy one.  Most of us want to use a “bucketing” strategy to save for different life goals.  However, in the event of a true emergency or change of plans, money may need to come from a fund with another intended purpose.  This is why we feel consolidating the number of accounts outstanding offers the greatest flexibility in terms of cash flow and investment, not to mention it may also help with your budgeting goals.

Photo Credit: A National Acrobat

Many illustrations of investment performance calculate the growth of a hypothetical investment from a given starting point.  Typically there is a benchmark, such as the S&P 500 index, charted alongside for comparison purposes.  The models show that had you invested a specific dollar amount, for example $10,000, you would have the initial $10,000 plus whatever growth through dividend re-investments and asset price appreciation at the end of the evaluation period.  This measures an investment’s total return for the period and is based on a buy-and-hold strategy that is quite different from how most people invest.

Controlling Your Emotions?

Morningstar, an independent investment research company, compiled returns for how the average mutual fund investor did during the 2000’s. The research added a layer of analysis to the total return calculation by also tracking the cash flows in and out of the mutual fund.  They wanted to see what the performance looked like if you took into account additional buys and sells in the fund during the same time frame.  Then they compared the findings to the buy-and-hold strategy that mutual funds use to report investment performance.  What the findings show is that most investors suffer from bad timing as they get in when prices are high and get out when prices are low.  This is a reflection of how market forces can drive investor emotions and result in behaviors that cause poor relative investment performance.

Slow And Steady

Another interesting discovery is how fund companies provide different investing experiences for the average investor.  The institutions that stick to fundamentally sound investment principles were proven to have better investor returns relative to total returns than those companies that use a short-term, current-trends marketing strategy to attract investors.

Financial Symmetry’s composite results for the decade were an average annual rate of return of 4.93% compared to the average annual investor return of 1.68% across all funds.

Photo Credit: TheGiantVermin

While we emphasize the importance of annual tax planning, it’s also important to not let tax avoidance override your other financial goals.  Liz Davidson, of Forbes.com, wrote a nice piece describing how people lose money when they let tax issues dominate their investment decisions. The article does a great job of examining why payments to the IRS can be such a tough pill to swallow and identifies traps most of us fall into in an attempt to shrink our tax bill.

Please contact us if you have questions about appropriate strategies for reducing your tax bill while also staying on track for your long term goals.

Have you ever had the pleasure of receiving an audit letter from the IRS?  You walk back from your mailbox with the fearful nervousness that you may owe more in taxes than you had originally thought.  You slowly remember that you rolled over your old 401k to an IRA last year, and are confused as to why you now may owe money for this action.  Understanding the communications sent from the custodians where the accounts are held and knowing which IRS forms you will need, should help to put this issue to bed.

Know Your IRS Numbers

Unfortunately, there’s no rhyme or reason that will help you to remember the different IRS form codes.  But, remembering the following two will assist you greatly if you encounter a situation like we described above.  After you initiate a rollover of a former 401k or 403b, you should expect to receive a Form 1099R.  This form is used to report distributions from IRAs whether they are taxable or not.  The second form, Form 5498, you will need is not as well-known but equally as important.  This form’s purpose is to report the rollover contribution made to your new IRA.  These two forms work from opposite ends in the event of a rollover, conversion or recharacterization.  Be especially vigilant when reviewing this information when a transaction starts at one trustee and ends up at another.

For example, if you completed a direct trustee-to-trustee rollover out of a Fidelity 401k into a Vanguard IRA you should receive a 1099R from Fidelity and a form 5498 from Vanguard.  The Fidelity 1099R should show the total amount in box 1 and a code G in box 7 for the direct rollover.  The Vanguard 5498 should show the same amount in box 2 Rollover contributions.

If you completed the rollover within 60 days, where you received a check from one trustee and then made the rollover contribution within that time frame you’ll want to make sure that the form 5498 is accurately reporting the rollover in box 2.  More than likely the trustee issuing the 1099R for the distribution will report a taxable transaction.  You should indicate “rollover” on your tax return and the IRS will get the form 5498 to back that up.

May 31st Tax Deadline?

The trustee that maintains your individual retirement accounts (IRAs) is required by the IRS to report contributions, required minimum distributions and the fair market value of the account by May 31.  This date may seem like an odd time to receive a tax form since you’ve probably already filed your return.  However, form 5498 reports contributions made to an IRA during the tax year as well as those made after December 31, but before April 15^th for the previous tax year.  Make sure that those contributions match up to what you have reported on your tax return. If not, contact the trustee that sent the form 5498 and request a correction.

RMD’s not WMD’s

Another place to be sure that the information provided by the trustee matches your records is Required Minimum Distributions.  There are some fairly complicated rules regarding RMDs, especially if the account was inherited, so it makes sense to double check the accuracy on form 5498.

Understanding how this form is used by the IRS can help keep your tax headaches to a minimum.

Watch out for scammers trying to take advantage of the current confusion on the new health care law.  They are banking on folks not knowing enough of the details in order to con them into buying bogus policies.  If you are contacted by anyone trying to sell you a health insurance policy by saying it is a requirement under the new health care law don’t believe them.  If possible, try to get them to provide contact information.  Call our office and we will relay that information to the appropriate authorities.

http://www.lifeandhealthinsurancenews.com/News/2010/4/Pages/Sebelius-Warns-Of-Health-Care-Reform-Scams-.aspx

With the end of the first quarter of 2010 behind us, now is a great time to review your budget.

When checking up on your budget, it is important to look over a specific amount of time for comparisons to actual expenses. Comparing expenses on a monthly basis can be a source of frustration as there are many fluctuations that occur throughout the year (holidays, vacation, etc.).

Therefore, it is important to measure your progress against a rolling year period.  For example, if you have been using a budgeting tool for one year or longer, you would want to compare from February 1, 2009 to March 31, 2010.  If you are just getting started, looking at smaller increments of time, like three or six months, can also be helpful.

No matter what your time frame is, here are a few tips to help streamline and update your budget:

• Budgeting software often has trouble correctly categorizing a few expenses.  Take a quick look at your transactions and identify and correct those that are mislabeled. If you are using Mint.com, be sure to take advantage of their easy to read ‘trend’ section.  You can see where you’ve spent money over specific categories in charts that allow you to drill down to the transaction level, helping to spot inaccurate transactions. If you don’t use budgeting software, compiling data from your receipts and statements will be a good way to get you started.  Remember, you are trying to identify how to spend less than you earn.
• Revisit the items you have budgeted.  Now that you have been tracking for a few months or longer, are your budgeted items realistic? Maybe some adjustments need to be made to common expenses like household utilities, food and dining, transportation costs (including gas and regular maintenance), and discretionary (misc. spending).
• It is common for your expenses to fluctuate over time and for some expenses to occur only during parts of the year.  Some items, like car insurance, homeowner association dues, and professional fees may be paid quarterly or semi-annually, so be sure to include those expenses in your budget now.
• If you are spending more than your budgeted amount on a regular basis, take some time to plan out ways to reduce your spending.  Little things like taking your lunch to work once or twice a week, making coffee at home, or planning errands around one trip can all add up over time.
• Have you had any lifestyle changes that should be reflected in your budget?  A home purchase, renovation or new child can increase (or decrease) spending and should be accounted for.  Adding new expenses to your budget while taking time to review your overall spending picture can help set you back on track.

If you invest in your employer sponsored retirement plan you have probably heard of Target-Date funds.  These funds are characterized as investments that change the allocation of stocks, bonds, and cash according to your specified retirement date.  In theory, these funds should progressively reduce risk exposure as the target date approaches.  However, there are no universal allocation standards, so the returns have varied widely from plan to plan.  This was highlighted by the market downturn in 2008 when funds with a target date of 2010 lost an average of 25%, with some posting losses of over 40%.

While the concept of these funds is great; taking the guesswork out of retirement planning for the average investor; further research, transparency, and likely regulation is required.  To that aim the Senate Special Committee on Aging will be introducing legislation that would require fiduciary responsibility for target-date fund managers. This is a step in the right direction, but there are still many other concerns that warrant attention.  In October 2009 Morningstar’s vice president of research Jon Rekenthaler testified before the Senate Special Committee on Aging.  You can read his testimony here:

“Five Concerns About Target Date Funds”

http://advisor.morningstar.com/articles/article.asp?docId=17632

When Congress left town on Christmas Eve, it failed to address a major issue – the repeal of the federal estate tax.  The result of this inaction meant that after midnight on December 31, 2009 the wealthy would die knowing that their assets could pass to their heirs without the federal government receiving a penny.  However, as with anything related to the federal tax code, nothing is ever that simple.

The repeal of the federal estate tax is only in effect for 2010.  After this year, the estate tax is scheduled to be reinstated at levels prior to President Bush’s tax cuts becoming law.  So, rather than receiving a $3.5 million exemption per person and a top tax rate of 45% as was available in 2009, 2011 estate tax law will offer only a $1 million exemption and a maximum rate of 55%.  You don’t have to do the math to realize how big of a change this is.

Secondly, there are some unintended consequences that may come into play as a result of this repeal.  A common estate planning strategy is to use something called a “bypass trust” with the intention of taking advantage of the maximum estate tax exemption.  This strategy was used based on the federal estate tax law being in effect.

Since there is no estate tax for 2010, the wording in the legal documents that are the basis for creation of the trust could be problematic.  They might say something like, “Place all of my assets that are not subject to the estate tax into a trust for my children, then leave everything else to my spouse.”  In the worst case scenario, a spouse could be left with nothing as all of the assets are directed into the trust because they aren’t subject to any estate tax.  Most states have some protection afforded the spouse, however, the potential litigation involved could certainly drain the assets being contested.  This could get especially nasty if there were children from a previous marriage involved.

Another consequence of this repeal is the impact on the “step-up in basis” rule.  This rule basically said that whatever valuation an asset had on the owner’s date of death is the value that the heirs could use as their new tax basis.  For example, if Mrs. Smith died in 2009 while owning stock in IBM that she purchased thirty years ago, under the step-up rule, her heirs could use the stock price as of the day of death to calculate basis for any future sales of the stock.

For 2010, things are a little bit different.  Heirs are only able to use the step-up rule for $1.3 million worth of asset appreciation.  Spouses get an addition $3 million in appreciation.  If Mrs. Smith dies in 2010, depending on the size of her estate, her heirs would need to know what amount Mrs. Smith purchased the IBM stock for, any dividends that were reinvested, and stock splits received in order to assign tax basis.  Not only is this a costly change for heirs, but also a documentation nightmare for tax preparers.  Like the estate tax, the unlimited step-up is scheduled to return in 2011.

Many observers of this mess think that Congress will retroactively impose a fix to undo the estate tax repeal.  However, that is certainly not a given and even if it does happen, what new, unintended consequences will be inflicted on otherwise well-laid plans?

In response to the many fears and uncertainties that arose during the recent economic crisis, The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation sponsored multiple financial advice events around the country as part of the “Your Money Bus” tour.  On Tuesday January 19^th, the “Your Money Bus” rolled in to downtown Raleigh, in partnership with NC State Treasurer Janet Cowell’s office.

With unemployment hovering around 10% and dramatic swings in the stock market, the need for financial advice was very apparent in the crowd of more than 85 that showed up at the State Government Complex in downtown Raleigh.  The impressive turnout of people came with a wide mix of questions that dealt with everything from how much and in which accounts they should be saving to which debts they should be paying down the quickest.

Partners of Financial Symmetry, Allison Berger and Chad Smith, participated in the event for the second consecutive year.

“We’ve really enjoyed being involved with the ‘Your Money Bus’ tour over the last two years.  It’s a great opportunity to spread financial literacy and make a difference in our community.” -Allison Berger

“Volunteering our advice has been a neat way to provide people with action steps that can help them gain some peace of mind when dealing with their finances.” -Chad Smith

Have you made your 2009 Roth IRA contribution?

If you have not yet made the maximum contribution, you still have time!  Tax payers have until April 15^th of 2010 to make their Roth contributions for the 2009 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.  For 2009, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2010 contributions, contribution limits for this year have stayed the same.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Qualified Plans	2009	2010
401k, Roth 401k, and 403b plans	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
457 Plans of tax exempt employers	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
SIMPLE IRA or SIMPLE 401k plans	$11,500	$11,500
Catch-up for ages 50 & over	$2,500	$2,500
Limits on annual additions to SEP Plans	$49,000	$49,000
Traditional and Roth IRAs	$5000	$5000
Catch-up for ages 50 & over	$1000	$1000

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.