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Financial
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What Is Your Real Hourly Wage?
Do you ever feel like the harder you work, the more if costs you to live? Consider that every decision we make, whether it is where we live, what car we drive, what we read, or whether we save, should be based on what we value most in our lives. Think of money as something we trade our life energy for.
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Are We Turning the Corner Yet?
We have finally seen some positive news on the financial front, and many optimists think the stock market has hit the bottom and bounced off its low point. It's pleasant to be able to take a breather from the brutal onslaught of bad news over the past year.
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Taking Responsibility For Retirement
For retirees facing a sudden loss of pensions and benefits, there are really very few options save going back to work or turning home equity into a personal bank. So the time to start taking on the lion’s share of your retirement responsibility is now, whether you’re five, 10, or 20 years away from hanging it up, if that’s your plan.
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Preparing
Financially for Disaster
Disasters – be
it hurricanes, earthquakes,
terrorist attacks,
or wildfires – are
sadly an inevitable
fact of life. And just
as you might protect
in advance your house
and personal belongings
from disasters, so
too you must prepare
your personal and financial
information.
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Tips
for College Graduates
For many of our “kids,” this
summer is their first
after graduating
from college. They
have either started
their first real
job or are still
looking. What steps
do they need to do?
Here are a few ideas.
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Tips
for Freshman Year Finances
If
your son or daughter
is planning to go to
college next September,
you are probably making
a list of all the things
to bring: sheets, towels,
desk lamp, and backpack. Their
list may be more elaborate
and include a TV, microwave,
and refrigerator. However,
there is one item more
important than all
of these – a
budget.
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Are
Your Old Savings Bonds
Still Earning Interest
Do you, your parents, or elderly relatives have old
E bonds, H or HH bonds, or the rare Savings Notes,
lying around? If so, it may be time to cash in some
of these bonds because they are no longer earning interest,
and in some cases could have tax problems.
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Tips
For Financially Helping
Your Adult Children
You can help your
children financially
in many ways, even
after they are well
into their adult
years – and
most of those ways
don’t involve
giving them money.
Here are a handful
of tips about how
to make your children’s
financial lives a
little easier, often
in ways you might
not expect.
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Go
Easy On Home-Equity
Loans
Homeowners are unlocking the equity built up in their
homes like never before. But before opening the home-equity
loan door, be certain you don’t overextend yourself
and put your home at risk.
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IRS
Eases Retirement Account
Rollover Nightmares
The IRS eased some
of the nightmare
financial consequences
of mishandled tax-free
rollovers from individual
retirement accounts
and retirement plans – but
taxpayers need to
remain vigilant to
avoid unnecessary
taxes and penalties.
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Roth
Conversions Become
More Attractive For
Retirees
Affluent retirees
who have wanted to
convert sizable traditional
individual retirement
accounts into Roth
IRAs but weren’t
eligible because
of income restrictions
may find 2005 the
year to make the
conversion.
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Insurance
For Young Adults
You recently graduated from high school or college,
or just finished a brief stint in the military. For
the first time, you’re truly on your own. Having
adequate insurance coverage is undoubtedly not uppermost
in your mind.
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Should
You Stay in Your Old
401k
Every year millions
of workers who are
retiring or changing
jobs struggle with
a difficult decision
regarding their old
employer’s
401k. They don’t
want to cash in yet
they are unsure what
to do.
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How
to Cut Your Insurance
Costs
Add up what you pay in insurance premiums each year:
medical, auto, homeowner’s, life, and so on.
Here are some ideas about how to reduce your insurance
costs.
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Investment
Options for Education
Funding
One of the biggest challenges for families saving for
their children’s college is that there are so
many options for saving, and one size does not fit
all. Which options are right for you depend in part
on the age of your child, family income, potential
for financial aid, and the expected cost of college.
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Winning
the Lottery - Lump
Sum or Annuity
A Massachusetts woman recently won one of the largest
lottery jackpots ever: $294 million. Like most lottery
winners, she took her winnings in a single-check lump
sum. But is taking the lump sum always the best choice?
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Buying
a Long-Term Care Insurance
Policy
Buying a long-term
care insurance policy
is a complicated
process involving
many decisions about
which features are
right for you and
what price you can
afford. Among the
many choices will
be five factors with
the largest impact
on price: your age,
daily benefits, inflation
protection, benefit
period, and the elimination
period.
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Choosing
a Small Business Structure
Small-business owners have more factors and choices
to consider than they once did when choosing the best
business structure for their company. Yet many owners
casually pick off the shelf “what everybody else
is doing” instead of what’s best for them.
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Start
Planning Now to Avoid
the AMT
The dreaded alternative minimum tax may soon
be coming to a tax return near you – perhaps your own.
But don’t wait until next spring, when it’s
too late, to find out whether you’re subject
to the AMT. Take steps now to minimize or avoid the
impact of this tax.
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How
Grandparents Can Help
Pay for College
One of the best
gifts grandparents
can give their grandchildren
is to help pay for
their college education.
Yet many grandparents
don’t realize
the most effective
ways of going about
it.
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Treasury
Bonds for Inflationary
Times
The smell of rising inflation is in the wind, and some
investors are taking a look at a type of investment
they’ve generally ignored during these low-inflation
times: inflation-adjusted government bonds.
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How
to Make the Most of
Your 401(k) Plan
Let’s get one thing straight: 401(k) plans, and
similar employee-funded retirement plans, are here
to stay. These plans have been battered by the sour
stock market of 2000-2002, corporate scandals, and
the mutual fund scandals. Despite this, employee-funded
retirement plans will remain the primary source for
building retirement assets for millions of workers.
Here are eight key ways to make the most of your 401(k).
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Making
Your Own Health Decisions
When You Can't
Like most people,
you probably would
want to exercise
control over decisions
about your health
care even when you
are physically or
mentally unable to
do so. You can accomplish
that with the combination
of a living will
and a durable power
of attorney for health
care.
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The
Challenges of Being
an Estate Executor
At some point in your life, you may be asked to serve
as an executor of a loved one’s estate, spouse,
a parent, a good friend. Actually you may not even
be asked, but simply find yourself named in the deceased’s
will. But before accepting out of love and duty-bound
honor, be aware of the many duties and challenges of
this job.
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Insuring
a New Marriage
Reevaluating their
insurance coverage
isn’t uppermost
on the minds of most
newlyweds, and it
won’t ensure
a long and happy
marriage. But the
right insurance can
go a long way toward
shielding you against
the kinds of financial
calamities that can
strain and sometimes
break a marriage.
Here are several
key insurance areas
that newlyweds review.
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9
Business Succession
Mistakes To Avoid
Most business owners expect to pass on some day their
pride and joy – mostly likely to their children,
but possibly to an employee or an outside buyer. This
change in ownership is what will fund the owner’s
retirement and carry the owner’s creation down
through the generations. Yet many small-business owners
make mistakes when it comes to succession planning
that can thwart their dream.
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Financial
Planning for Life
Life’s full of financial surprises – and
many of them we can see coming. Many people prepare
for life’s unexpected financial surprises: insurance
for health problems or an auto accident, estate plans
for death, an emergency fund for the unexpected loss
of a job. Yet people frequently fail to anticipate
and prepare for financial “surprises” they
can see coming: an impending marriage or divorce, a
terminal illness, the birth or adoption of a child,
an inheritance, a career change.
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What
To Do if Your Pension
Plan is in Trouble
Is your pension plan in trouble? And if it is, what
can you do about it? Traditional pension plans are
defined benefit plans in which the employer promises
to pay a specific amount, usually monthly, based on
years of service and salary in the last years before
retirement. In the wake of the recent stock market
decline, the defined-benefit pension plans of many
private and public employers are under funded, and
some may not be able to meet their pension obligations.
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New
Tax Act Aids Small
Businesses
While attention has focused mostly on individual taxpayers
and investors, the new Jobs and Growth Tax Relief Reconciliation
Act of 2003 provides several direct and indirect benefits
for the small business-owner.
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Do
You Know Where Your
Universal Life Premiums
Are
Do you know how your universal life premiums are doing?
Consumers are feeling the impact of the bear market
and low interest rates in many ways, but one way they
may not yet be aware of is the impact on their insurance
policies.
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Should
You Buy or Lease a
Vehicle
Americans love their
cars, and automobiles
typically rank as
one of the highest
expenses in a family’s
budget. Should you
lease or own?
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Planning
for a Retirement Paycheck
While most workers
live on their paycheck
during their working
years, few plan for
a “paycheck” that
will provide a dependable
stream of monthly
income during their
retirement.
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College
Savings Strategies
for Retirees
Saving for college isn’t just for kids anymore.
Or grandkids, for that matter. It’s also for
retirees. While most people don’t move when they
retire, some move to retirement communities and an
increasing number are retiring in college towns. And
they won’t be just moving to college towns, they’ll
be attending classes – in some cases, earning
degrees. That means that just as they saved money for
college for their children, they’ll need to save
money for their own education.
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Are
You Psychologically
Ready to Retire Early
The thought of early
retirement probably
sounds wonderful,
doesn’t it?
But early retirement
may be not all that
it’s cracked
up to be. It’s
not just the money:
it’s the whole
psychology of early
retirement.
MOST RECENT
ARTICLE
Three Crucial Numbers for Roth Conversions
We can see some of the most interesting benefits of Roth conversions by looking at three numbers: investment years, marginal tax rate, and tax drag.
Investment Years
What are your plans for the account you're going to convert to a Roth? Will you tap it as an income source during your and your spouse's lifetime? Or do you want to pass it on to your children or grandchildren?
Depending on your longevity, you could have quite a few investment years ahead of you. The number of investment years describes how long the account will be able to accumulate value.
A 45-year-old investor (who happens to be converting an IRA to a Roth this year) could very well live to age 85. In those 40 years, a $10,000 Roth conversion, left untapped and earning 7.5% per year, would grow to about $180,000. If left to grow to age 95, the value would reach about $370,000.
The accumulation doesn't have to stop there. Because Roth accounts aren't subject to Required Minimum Distributions (RMDs) until after the original owner dies, you could let it continue to grow, taking nothing for yourself and leaving it to your children or grandchildren. The number of investment years would then extend for the remainder of your life, plus the number of years your beneficiaries live on. You might be creating an account that will grow for more than a century!
Of course, once the beneficiaries receive the account, they are required to take out RMDs over their lifetimes. But these distributions start out as fairly small compared with the growth of the account. For instance, a 25-year-old beneficiary needs to take an RMD of only about 1.72% of the account balance, leaving the remainder to grow until the next year. A 35- or 45-year-old would need to take only about 2.06% or 2.58%, respectively. This leaves the great majority of the account untapped, accumulating value for your beneficiaries.
Marginal Tax Rate
You may know that for your traditional IRA, you must take your own RMD when you reach age 70½. (Beneficiaries must take RDMS no matter what their age.) These distributions are taxed at the recipient's marginal tax rate, the income tax rate applied to additional income they receive.
But distributions from a Roth account aren't taxable (assuming you've met all the requirements, like the five-year holding rule and being at least age 59½). Roth assets don't require RMDs from the original account owner, and it's nice to have a Roth account to dip into for an unexpected expense. Whether you have a chance to take a trip or you need to deal with an emergency repair, you don't have to worry about the tax consequences of taking a Roth distribution the same way you do for a traditional IRA.
If it's your heirs who will be taking the distributions—and they will be required to take RMDs—the non-taxability of these distributions can be expecially beneficial. If the kids or grandids have been successful in their own right, they could be in the top income tax brackets. For 2010, this means a Roth distribution saves the beneficiary up to 35% in federal tax, compared with having to take money from a traditional IRA. These savings would only increase in 2011 when the tax reductions put in place in the early 2000s expire and the top tax bracket jumps up to 39.6%.
And that's just for federal income tax. Traditional IRA distributions can be subject to state tax as well. Although future income tax brackets are impossible to predict accurately, we can be quite sure we'll be glad to have assets to draw on that won't increase our tax liability or that of our beneficiaries.
Tax Drag
Closely related to marginal tax rate is tax drag, the tax cost associated with assets that could be put into a Roth account.
For instance, suppose you are in a fairly high tax bracket (perhaps 28% in 2010, which will be going up to 31% at the start of 2011). You may have assets that generate interest, or unqualified dividends, or capital gains. Those streams of income create tax liability each year at your marginal tax rate or capital gains tax rate, as the case may be. That part of your tax bill from the IRS (and the state, if applicable) is the tax drag on your net investable assets.
The new federal health-care legislation will only magnify tax drag for some investors. Beginning in 2013, the law imposes an additional 3.8% tax on all unearned income for high-income earners (those earning more than $200,000 per year for single taxpayers or $250,000 for married couples). That means additional tax on rents, royalties, dividends, capital gains, interest, and annuities. So your tax drag will grow as your taxable assets grow. Using a Roth could shelter future retirement distributions from taxation, reducing tax drag and thereby enhancing overall investment performance.
These three numbers—investment years, marginal tax rate, and tax drag—have something in common: we don't have direct control over any of them. Like many aspects of personal finance, we often need to make decisions without being able to completely predict the outcome. Roth conversion decisions bring with them lots of possible issues that can affect families in different ways. Your advisor can help you evaluate how these three numbers affect your Roth conversion plans.
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This column was written by Jo Anne Paynter, CFP® and is provided by Patricia A. Konetzny.
Wondering
what unique
blend of professional
and personal experience Patricia
Konetzny brings to her
clients?
Learn
more about Patricia, her
background and personal
approach to working with
her clients.
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