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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

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

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:

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.

Should I be trying to hit the same number every month?

Comparing expenses on a monthly basis can be another source of frustration. There are many fluctuations that occur throughout the year, like holidays, summer vacation, and surprise home/car maintenance issues.

This is why it’s most helpful to measure your progress against a rolling year period. For example: You’ve just finished November, so you will want to measure December 1st of last year to November 30th of this year against the calendar year amount of your budget. If the amount is more, then you know you are a little ahead of pace and you should scale back.

If you’ve been diligent enough to hang in there for a year of budgeting, then you are fortunate enough to have a full year of meaningful comparison points.  So for this month, it would be best to investigate how January 2010 is comparing to January 2009’s data.  Barring any unusual spending activities in Jan. 2009, you should have some useful targets to compare to this year’s spending.

Performing this exercise monthly can greatly improve your overall financial picture as it allows you to have greater control over your regular expenditures.

How many categories should I be using?

Trying to determine which category your expense should go can be very confusing when you have forty to choose from.  Add in multiple subcategories for each of the main categories and you’re about ready to pull your hair out.

Luckily, Quicken allows you to edit the category list which should be your first action step when loading the software.  We recommend using 8-10 categories that will capture all of your spending.  This list includes:

• Clothing
• Communication (Phone, TV, Internet)
• Discretionary (Cash, Travel, Fun, Church/Charity Contributions)
• Food (Dining Out, Alcohol, Groceries)
• Debts (Mortgage, Equity Line, Car Payments, Credit Card or Student Loan Payments)
• Education (Books, Private School, College Tuition)
• Health & Hygiene (Gym Membership, Doctor Visits, Prescriptions)
• Household (Maintenance, Home Improvements)
• Investments (Roth/IRA Contributions)
• Risk Management & Financial Services (Bank Charges, Insurance)
• Taxes
• Transportation (Gas, Repairs, Car Insurance)

By practicing these two steps you should be well on your way to becoming a successful budgeter.

• Should you take losses or pull in capital gains?  It depends on your likely tax bracket…Take a look at your 2008 tax return. The IRS will allow taxpayers to deduct a maximum of $3000 in investment losses against ordinary income.  Many investors had a lot more than $3000 in realized losses in 2008 and, as a result, have a carry forward of the unused losses to 2009.  The opportunity now is that the IRS allows an unlimited amount of realized investment gains to be offset by realized investment losses.  So if you held on to an investment that has recovered much of its value this year, now may be a good time to sell.  If you don’t have any losses from 2008 to use consider selling something at a loss now.  Like we said above, the IRS allows $3000 of realized investment losses to be used as a deduction against ordinary income.  If you are in a higher tax bracket, that can be a valuable tax savings.

• If you are in the 10 and 15 percent tax brackets you can realize capital gains on investments held for more than a year at a zero percent tax rate in 2009.

• Watch out for the social security bubble – Up to 85% of your benefits could be subject to income taxation depending on other sources of income.

• Taxpayers normally subject to required minimum distributions from tax deferred accounts have been granted a waiver for 2009. It may make sense, however, to take some amount from those accounts depending on tax bracket.  Also, remember that you have sixty days from the distribution date to rollover into an IRA if you change your mind.

• Look at making a Roth conversion.  Because of the tax-free nature of the withdrawals, you need to consider your current tax bracket vs. your future tax bracket.

• Consider donating appreciated stock rather than writing a check.

• Make your property tax and estimated state income tax payments by December 31 if you want the write off for federal tax purposes.  Make sure that you consider the implications for alternative minimum tax.

• Weigh 2009 and 2010 together.  For example, you might want to wait until January to make property tax and state estimated tax payments if you think you will be in a higher tax bracket in 2010.

• If you are in the position to do so, you can gift to as many individuals as you wish up to $13,000 as the allowed gift tax exclusion.  If you are married, your spouse can gift $13,000 to those same individuals.

• The Hope Education Credit was renamed the “American Opportunity Tax Credit” for 2009.  This maximum credit for the first four years of postsecondary education is now increased to $2500.  This includes course materials costs in addition to tuition and fees.

As many of you know, it can be hard to create a budget and even harder to stick to it.  The key to sticking to your planning is continuous monitoring.  To do so, we generally recommend using software like Quicken that is designed specifically for expense tracking.

Protecting What You Have

1:00 pm – 2:00 pm ET

Instructor Roseann Bove, CFP, CLU

NAPFA-Registered Financial Advisor

Your health, family, and home are important and need to be kept safe. Roseann will provide information on how you can protect the things you have through life, health and medical insurance.

Click here to register for this Webinar.

Click here to view archived Webinar sessions.

This issue is actually gaining more momentum in the media and in Congress of late.  We’ve provided some information below on recent progress in the efforts being taken to fight this predatory fraud. The following article, published in the Wall Street Journal, provides a real example of elderly fraud and tips of how best to avoid incidents in the future.

A Family’s Fight to Save an Elder From Scammers

Tips for Avoiding Telemarketing Criminals

Some telemarketing pitches are blatantly fraudulent, and you should know the signs, which include:

• Asking you to pay for a prize you’ve won. It’s illegal for any company to ask you to pay or buy something to win a prize, or to claim that paying will increase your chances of winning.
• Asking for upfront fees. It’s illegal for telemarketers to ask for a fee upfront if they claim it’s likely they’ll get you a credit card, loan, or to “repair” your credit.
• Pressure to act immediately.
• Refusal to send written info. Legitimate agencies, charitable or otherwise, should not be reluctant to send you written information about their program or organization.
• Requests for personal financial information. Requests for your personal bank account numbers, or other private information, is a huge warning sign. Never give out your information to an unknown caller.

Ways to fight Elderly Fraud

NC Attorney General’s Consumer Protection Office 1-877-5-NO-SCAM

Fraud Fighter Line 1-800-646-2283

NC Task Force Chair 919-716-6000

Website that compiles recent scams:

The NC Division of Aging and Adult Services Senior Consumer Fraud Task Force

New legislation has also been introduced recently in Congress that would accomplish the following objectives to fight elderly fraud…

• Charge an additional $50,000 civil fine for each violation that is targeted or is committed against a senior.
• Create a national grant program for states to protect seniors from misleading financial advisors claiming to specialize in seniors
• Direct the FTC to establish a one-stop-shop for consumer education on mail, telemarketing and Internet fraud against seniors.
• Establish a grant program to give states and local organizations the resources they need to initiate local mail, telemarketing and Internet fraud prevention and education programs for seniors.
• Declare a “National Senior Fraud Awareness Week” in May – coordinated with Elder Abuse Awareness Month – to increase public awareness of the enormous impact that mail, telemarketing and Internet fraud have on senior citizens in the U.S.
• Initial workshops to educate seniors on how to recognize risk factors and learn about who can help them if they are exploited.

Remember if something sounds too good to be true, it probably is!

“Seniors should be aware that the issue is not if, but when they will be targeted by sophisticated scam artists. Sharing information about how best to prevent these communications and where to report it when they occur, empowers seniors with the tools to fight back.” Chad Smith, CFP®

To request Chad as a speaker at your event, contact him at csmith@finsym.com.