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Be Careful About Picking Beneficiaries for Your IRAs and 401(k)s

December 29, 2008 by John

Inheriting IRA or 401(k) proceeds from a friend or relative can be a potentially huge windfall, but it can also be a sizable tax headache. For both the giver and the recipient, it’s worth getting some advice.

Bank accounts, stocks, real estate and life insurance proceeds generally pass to heirs free of income tax. However, inherited retirement benefits can be a different story. Beneficiaries have to pay ordinary income tax on distributions from 401(k) plans and traditional IRAs after they are inherited. (You don’t see the same problem with Roth IRAs – their benefits can be free of income tax to your heirs if all tax requirements are met.)

A financial planning professional or an experienced tax advisor can work with you based on your personal tax and estate circumstances to determine an inheritance strategy that is best for you. Some general guidelines:

Spouses are the first stop: Federal law dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a waiver to redirect those funds. Even with a traditional IRA, naming the spouse as the primary beneficiary may be an appropriate option. Should the surviving spouse have his or her own IRA, this approach would allow them to simply roll over the assets from the decedent’s IRA into their own. Furthermore, if the surviving spouse is significantly younger than the deceased, the surviving spouse would receive the added benefit of stretching out distributions from the IRA until he or she turns 70 1/2. The stretch-out allows the assets to continue to grow on a tax- deferred basis, thereby maximizing asset value and delaying any income tax due.

When might you want to rethink a spousal beneficiary? When the surviving spouse’s estate is expected to be large enough to exceed the applicable exclusion amount for federal and state estate taxes. The applicable exclusion amount after allowable expenses is $2 million in 2008 and above $3.5 million in 2009. It should also be noted that in addition to federal estate tax, many states impose a state tax on estates with considerably lower asset levels (often anything over $1,000,000). Proper estate planning may alleviate this issue.

What about non-spousal beneficiaries? Today, non-spouse beneficiaries may be able to roll over all or a part of inherited 401(k) benefits to an inherited IRA. A recent change in IRS regulations still requires non-spousal heirs to withdraw a minimum amount from Inherited IRA assets every year, but it’s based on the age of the recipient rather than the age of the decedent.

Establishing a Stretch IRA: Due to recent changes in the minimum distribution law, taxpayers may now establish IRAs designed to stretch out the time period over which a non-spouse beneficiary (i.e. child) is required to take minimum distributions from an inherited IRA. Proper use of this vehicle may potentially allow for continued growth of tax-deferred earnings over multiple generations and can have a substantial impact on the future value of the family portfolio.

Naming trusts or charities as beneficiaries. Placing IRA assets in trust can have substantial advantages but can be complex. It should only be considered after receiving tax advice from a competent professional. It is particularly important to get tax advice related to this issue. Trusts can be complex instruments with which to bequeath assets, and even though naming a charity as one’s primary beneficiary will not affect distributions in your lifetime, it could affect the tax consequences for non-charitable beneficiaries who are sharing the same asset upon your death.

Read the disclosure.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Gay, CFP®, a member of the Dallas-Fort Worth chapter of FPA.

Posted in Estate Planning, Income Taxes, Personal Finance, Retirement | No Comments »

John Gay, CFP® of Frisco Financial Planning Named to Dallas-Fort Worth (DFW) “Best Financial Planners List”

December 19, 2008 by John

John Gay, CFP® was recently named by his colleagues to the D Magazine List of the Best Financial Planners in Dallas-Fort Worth (DFW).

Frisco, TX: December 19, 2008 — John Gay, CFP®, a Certified Financial Planner(tm) practitioner in the Dallas suburb of Frisco was named by his peers in the January 2009 issue of D Magazine as one of the Best Financial Planners in Dallas-Fort Worth.

D Magazine surveyed over 1,000 Certified Financial Planner(tm) professionals in the DFW metroplex and asked them “to which financial planner would you send your close family members?” The resulting list includes 68 planners, down from 69 planners in 2008, 87 planners in 2004 and 106 planners in 2002.

John Gay, CFP®, CLU, CEBS, has been advising individuals and families on financial matters for over twelve years. John is a member of NAPFA, the largest association of professionals dedicated to fee-only financial planning. John has contributed to articles in the Wall Street Journal, Newsweek, Investment News, Kiplinger Personal Finance, and other local and national publications.

John serves as the Director of the Dallas-Fort Worth (DFW) branch of Kingdom Advisors, a national association of Christian financial advisors. He has completed in-depth training on all facets of Biblical financial principles under the teaching of Ron Blue, President of CFPN, and notable Christian financial planner and author (and contemporary of the late Larry Burkett, founder of Crown Financial Ministries).

John Gay’s firm, Frisco Financial Planning LLC, offers its financial planning services on a “flat-fee, pay as you go basis” and does not impose any minimum income or net worth requirements on its clients. The firm is compensated solely by its clients and receives no payment from third parties or through commissions from the sale of financial products. As a Registered Investment Adviser governed by the Investment Advisers Act of 1940, the firm has a legal fiduciary duty to serve the best interests of its clients.

Frisco, Texas is one of the fastest-growing cities in the country and is located twenty minutes north of Dallas near Plano, McKinney, and Allen.

About D Magazine: D Magazine is a long-time fixture in Dallas with over 250,000 monthly readers. D is one of the best-selling magazines per capita in the United States on local newsstands. Known for its devotion to editorial quality, D Magazine has been named the “Best City Magazine” in the nation three times in the past five years by the City and Regional Magazine Association. Recently, D Magazine won five of the Press Club of Dallas 2005 Katie Awards, including the awards for “Best Magazine” and the “Visual Communications Award for Magazine Design” for the March 2005 issue.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Posted in Cashflow & Budgeting, Income Taxes, Insurance & Annuities, Investments, Personal Finance, Retirement, Saving for College | No Comments »

Beware of the Doghouse

December 10, 2008 by John

Guys: before you buy that “perfect” Christmas gift for your wife, watch this video to make sure you don’t get thrown in the doghouse!

Posted in Personal Finance | Tagged | No Comments »

Ask the Experts: What is an expense ratio?

November 21, 2008 by John

Every mutual fund must disclose certain costs associated with running the fund. Those costs, which are expressed as a percentage of the fund’s assets, represent a fund’s expense ratio, which can be found in its prospectus. For example, a fund that has $100 million in assets and annual expenses of $1 million would report a 1% expense ratio (1% of $100 million equals $1 million).

An expense ratio includes the following:

Management fees: Fees paid to the fund’s investment manager or advisor, which manages the fund and makes investment decisions. These often represent the single largest portion of a typical fund’s expense ratio.

Marketing costs: Also known as 12b-1 fees, named after the legal provision that permits them. These were originally designed to let funds recoup costs associated with distribution and advertising, on the theory that attracting new investors and additional assets would help make a fund more cost-effective for each investor. In recent years, there has been discussion of whether 12b-1 fees should be eliminated–especially for funds that are closed to new investors and therefore should have little need to market themselves–but they are still very common.

Administrative fees: Includes the cost of record keeping, custodianship, taxes, and legal, accounting, and auditing services.

A fund’s expense ratio can help you gauge how efficiently it operates. You do not need to deduct a fund’s expense ratio from the returns quoted in its prospectus; the figures that measure average annual and cumulative return have already taken them into account.

Before investing in a mutual fund, carefully consider its investment objectives and risks as well as its charges and expenses. This information is available in the prospectus, which can be obtained from the fund. Read it carefully before investing; a fund’s expense ratio can affect your long-term net returns.

Posted in Investments, Personal Finance | No Comments »

Unprecedented? Yes. Uncommon? No.

September 30, 2008 by John

The recent credit crunch, financial meltdown, and congressional inaction are unprecedented in market history.

Or are they?

We’ve never seen anything quite like this, and yet, market history is littered with “unprecedented” events.

Here’s a list of some events that have caused short-term volatility (and in some cases panic) in the markets:

  • The Cuban Missile Crisis (1962)
  • Arab oil embargo (early 1970’s)
  • Wage and price controls (1971-1974)
  • Nixon’s Resignation (1974)
  • Sky-high interest rates and inflation (early 80’s)
  • Stock Market Crash of 1987
  • The S&L Bailout (1989)
  • Foreign Currency Crises (1994-1998)

In the aftermath of all of these events (and too many others to name), the markets swiftly and decisively rewarded those who stuck with a diversified and deliberate strategy and ruthlessly punished those who threw in the towel.

Burn this series of events into your memory. Buy today’s newspaper and save the headline. Keep a journal of your daily emotions as this saga unfolds. The memory of events like these will make you a much better investor if you seize the opportunity to learn its lessons.

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Five Ideas for Staying Sane in a Crazy Market

September 30, 2008 by John

A key part of managing your money is managing your emotions, particularly when the stock market is going through a period of uncertainty. Being able to keep your cool is one of the most valuable skills you can have as an investor.

Stay on course by continuing to save

Even if the value of your holdings fluctuates, regularly adding to an account that’s designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging.

If you’re using dollar-cost averaging–investing a specific amount regularly regardless of fluctuating price levels–you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.

Stick with your game plan

Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Diversification can’t guarantee a profit or protect against a loss, but it can help you balance risks.

Look in the rear-view mirror

If you’re investing long term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years, though past performance is no guarantee of future returns.

Think about why you made a specific investment in the first place. That can help you determine if it still deserves a place in your investing strategy. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity. If you don’t know an investment’s purpose in your overall strategy, now’s the time to find out.

Remember that everything’s relative

Most of the variance in the returns of different portfolios is generally attributable to their asset allocations. If you’ve got a well-diversified portfolio, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are at least matching those benchmarks, that realization might help you feel better about your overall strategy.

Remind yourself that nothing lasts forever

Ups and downs are normal for the stock market. If you regret not selling at a market peak, or missed a bargain, remember that you’re likely to have other opportunities at some point. Having predetermined guidelines for buying and selling can prevent emotion from dictating investment decisions.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Posted in Investments, Personal Finance | No Comments »

College Admission: Early Decision and Early Action

September 30, 2008 by John

What’s the difference between early decision and early action?

If you and your child think the early decision process is too limiting, one alternative might be for your child to apply to college under an early action plan.

Early action plans are similar to early decision plans, but are less restrictive. First, a student can apply to more than one college early action. Second, if a student is accepted under an early action application, he or she can either commit to the college immediately or wait until the spring to do so.

Early action thus offers a huge advantage over early decision–your child gains the peace of mind that comes with early acceptance (and may even have several early acceptances by December or January), but can take a wait-and-see approach to making a commitment to any one school. This gives you and your child the opportunity to review the financial aid packages that come in from all the colleges your child has been accepted at, both under the early action process and the regular admissions process.

Not all colleges offer early action (or early decision) applications, however. In fact, in recent years, a handful of highly selective colleges have dropped their early action and/or early decision programs, believing that the process favors affluent students who are less likely to rely on financial aid. For a list of colleges that offer early action or early decision programs, visit www.collegeboard.com.

Considering the flexibility of early action plans, why would a student apply early decision? The answer is commitment–colleges likely consider the early decision applicant more committed, since he or she is bound to attend if accepted.

Students who apply either early action or early decision will need to have all applications and teacher recommendations completed by October or November of senior year.

Should my child apply to college early decision?


In the college early decision process, your child applies early to a particular college (typically in November of senior year), and hears back early (usually by December or January) as to whether he or she has been accepted.

For the student who has his or her heart set on a particular college that’s also a good fit, applying for admission early decision can be a favorable way to get a leg up on the competition. It’s also a good way to try to avoid the anxiety that typically comes with having to wait until spring for an acceptance letter. A student who gets accepted early may better enjoy his or her senior year, since there’ll be more time for hobbies, courses, work, or activities that he or she might not otherwise have the time or inclination to pursue.

However, there’s a catch: an early decision application is a binding contract. If the college accepts your child (and offers an adequate financial aid package), your child must agree to attend that college. Consequently, a student can apply to only one college early decision.

There are two situations where applying early decision may not work in a student’s favor. First, if a student needs senior year grades or extracurricular activities to boost his or her chances of admission, early decision will preclude consideration of these items. Second, if a student wants or needs to compare financial aid packages from several schools, early decision is not the route to go. Not only will the student have just one financial aid package to review, but the package may not be as generous as it would be for a traditional applicant. Why? Because the college knows that it’s the student’s first choice–in effect, the student has shown his or her cards.

Keep in mind that if your child does apply to one college early decision, he or she can still apply to other colleges through the regular admissions process as a backup–those applications are typically due by December or January.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Posted in Money & Children, Personal Finance, Saving for College | No Comments »

Should You Roll Your 401(k) Money Into an IRA?

September 30, 2008 by John

If you’re entitled to a distribution from your 401(k) plan (for example, because you’ve left your job), and it’s rollover-eligible, you may be faced with a choice. Should you take the distribution and roll the funds over to an IRA, or should you leave your money where it is?

Across the universe

In contrast to a 401(k) plan, where your investment options are limited to those selected by your employer (typically mutual funds or employer stock), the universe of IRA investments is virtually unlimited. For example, in addition to the usual IRA mainstays (stocks, bonds, mutual funds, and CDs), an IRA can invest in real estate, options, limited partnership interests, or anything else the law (and your IRA trustee/custodian) allows. (Certain investments may not be right for everyone, and some may have adverse tax consequences, so be sure to consult your financial professional.)

While the investment flexibility that IRAs provide can be a benefit for some people, it may be a drawback for others. If you lack investment knowledge and experience, you may be more comfortable with the limited investment alternatives your 401(k) plan provides.

Take it easy

The distribution options available to you in a 401(k) plan are typically limited, usually to a lump-sum payout, or installments payable over a period of years. And many plans require that distributions start if you’ve reached the plan’s normal retirement age (often age 65), even if you don’t yet need the funds.

Similarly, 401(k) plans often require that a beneficiary take a lump-sum payment shortly after the plan participant dies. This may not be a problem if your beneficiary is your spouse–he or she can roll the funds over to an IRA after your death. But a nonspousal rollover is possible only if your 401(k) plan allows it. And some don’t, forcing your beneficiary to take a distribution he or she may not yet need.

On the other hand, you can access the funds in an IRA at any time. You–and your beneficiary after your death–can take out as much, or as little, as you want. While you’ll need to start taking required minimum distributions (RMDs) after you reach age 70½ (and your beneficiary will need to take RMDs after you die), those payments can generally be spread over your (and your beneficiary’s) lifetime. (You aren’t required to take any distributions from a Roth IRA during your lifetime, but your beneficiary must take RMDs after your death.) A rollover to an IRA lets you and your beneficiary stretch distributions out over the maximum period the law allows, letting your nest egg enjoy the benefits of tax deferral as long as possible.

Note: Distributions from 401(k)s and IRAs may be subject to federal income tax. In addition, a 10% early distribution tax may apply if you haven’t reached age 59½. (Special rules apply to Roth 401(k)s and Roth IRAs.)

Gimme shelter

Your 401(k) plan may offer better creditor protection than an IRA. Federal law currently protects your total IRA assets up to $1,095,000–plus any amount you roll over from your 401(k) plan–if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in a 401(k) plan generally enjoy unlimited protection from your creditors under federal law, whether you’ve declared bankruptcy or not.

Let’s stay together

Another reason to roll your 401(k) funds over to an IRA is to consolidate your retirement assets. This may make it easier for you to monitor your investments and your beneficiary designations, and to make desired changes. You may also want to consolidate all of your IRAs. However, make sure you understand how Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) limits apply if you keep all your IRA funds in one financial institution.

Fools rush in

* While some 401(k) plans provide an annuity option, most still don’t. By rolling your 401(k) assets over to an IRA annuity, you can annuitize all or part of your 401(k) dollars.

* Many 401(k) plans have loan provisions, but you can’t borrow from an IRA. You only can access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.

* If you were born before 1936, lump-sum distributions from your 401(k) may be eligible for special 10-year averaging or capital gains treatment. A rollover may make you ineligible for these tax rules.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Posted in Investments, Personal Finance, Retirement | No Comments »

Buying a Home in Foreclosure

September 30, 2008 by John

They’re not all in run-down neighborhoods, and they’re not all in complete disrepair. As the housing market’s woes continue, more homes go into foreclosure, and more real estate investment opportunities open up. While a buyer still has to prepare and beware, it may be possible to purchase a property in foreclosure at a discount off its market value.

Foreclosure is a legal process whereby a lender terminates a borrower’s right to redeem a property, generally because the borrower has defaulted on the mortgage. Once the foreclosure process is complete, the lender can sell the property to repay the mortgage.

If you’re considering buying a foreclosed property, keep in mind that there are many pitfalls to watch out for, and laws vary from state to state. You’ll want to work with an experienced real estate attorney.

The three stages of foreclosure

Depending on state law, foreclosure can be a relatively short or lengthy process. You might be able to buy a property in pre-foreclosure, at a foreclosure auction, or (if it didn’t sell at auction) in the real estate owned (REO) phase.

Pre-foreclosures

In order to identify properties that are in a pre-foreclosure status, you’ll need to locate loans that are in default. To do this, you may need to spend time in the courthouse researching foreclosure filings or subscribe to an online foreclosure reporting service that will do this for you. Once you find a property you’re interested in, you’ll need a title search performed to determine what liens are against the property, and you’ll need to contact the owner to negotiate a purchase. You’ll also need to have the property inspected (it may need some repair work) and then determine its market value. In making an offer on the property, consider the cost of paying off liens, repairing the property, and any other fees you’ll need to pay (such as those associated with securing financing to make the purchase).

This option requires a lot of legwork on your part and (preferably) the services of others experienced in the process. Contacting an owner (especially one who hasn’t listed the property for sale) can be difficult and stressful. However, pre-foreclosure sales may require minimum down payments, and you may be able to acquire a property at a good discount off its market value.

Auction sales

Once the foreclosure process is complete, the foreclosing lender (usually the holder of the first mortgage) may attempt to sell the property at auction–a fast-moving, public proceeding. Before you buy, you should have the title researched just as you would when making a pre-foreclosure offer. However, you generally won’t be allowed to have the property inspected beforehand (which precludes the possibility of obtaining a mortgage to purchase it), so you’ll be buying it “as is” and may not know all of what that entails. If you’re the successful bidder, you’ll need to make at least the required minimum down payment in cash (or with a certified check) on the spot and pay or finance the balance within 30 days, sometimes sooner.

Because you can’t first inspect the property and arrange financing, and because you must buy it “as is,” buying a property at auction can be very risky. However, you can receive a substantial discount off the market value of a property when it’s bought at auction.

Real estate owned (REO) properties

If a foreclosed property doesn’t sell at auction, the foreclosing lender takes possession of it. As a result, junior liens (such as second mortgages or home equity lines of credit) that may have encumbered the property’s title are discharged, and any taxes owed are paid. Any occupants remaining in the property are evicted, and the property is usually listed with a real estate agent.

At that point, the property becomes available for inspection. You may be buying an REO “as is,” but you’ll be able to find out what that means, and can adjust your purchase offer accordingly. While the lender holding the REO will try to get as much as possible for the property, it may consider discounts off market value in order to get the property off its books.

Purchasing an REO is probably the least risky way to buy a foreclosed property. You have time to arrange financing, and you may be able to obtain some discount off the property’s market value. However, the discount off market value will generally not be as substantial as with the other options for buying foreclosed property, and working with the bank can be a lengthy process.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Posted in Cashflow & Budgeting, Debt, Investments, Personal Finance, Real Estate | No Comments »

Why Work With a Financial Professional?

August 29, 2008 by John

If you’re like most people, you probably bring your automobile to a professional mechanic for routine maintenance. You see a doctor when you have concerns about your health, and for regular exams. When the need for legal counsel arises, you consult an attorney. All of us rely on the expertise of others. It’s no different when it comes to personal finances–most people could benefit from working with a financial professional. Here are some good reasons to do so:

You don’t know what you don’t know

No one can be an expert on every subject. Managing your finances on a day-to-day basis is one thing; implementing a comprehensive investment plan to fund your retirement while setting aside funds for your child’s education is something else. That doesn’t mean that you’re not capable of doing it, only that you shouldn’t underestimate the expertise needed to put together an effective plan. If you’re going to go it alone, you’ll need to educate yourself, and that brings us to the next point …

You have good intentions, but never set aside the time

There’s an entire industry built around providing individuals with the tools they need to do their own financial planning. Books, magazines, websites, calculators, worksheets, and videos all empower individuals to take a more active role in their financial future, whether they’re working alone or with a financial professional. Not one of these tools, however, will help unless you set aside both the time to learn to use the tool, and the time to apply the tool to your own situation. Working with a financial professional forces you to stop procrastinating, and shifts the time commitment from you to the professional.

Doing it all yourself isn’t efficient

There’s a long list of things that we could do ourselves but choose to pay someone else to do for us instead. For example, you could paint your house, but you may be happy to pay someone else to do it. Why? It’s more efficient. You can spend the time working on other things and, if you choose the right professional, it will probably be done faster and better than if you did it yourself. The same goes for working with a financial professional.

You’re not objective

It’s hard to look at your own situation objectively. Having someone else with experience analyze your financial condition can be extremely helpful. And, in cases where you and your spouse aren’t on the same financial page, a financial professional can listen to all concerns, identify underlying issues, and help you find common ground.

Keeping up with change is a full-time job

In the last two years, there have been at least five major pieces of tax legislation signed into law. Even seasoned financial professionals have had a difficult time keeping up with the changes. Not understanding how these changes might affect your financial plan could be dangerous, but understanding the changes takes time and effort.

You see the trees, but not the forest

A good financial professional can help you see the big picture. He or she can show you how your financial goals are related–for example, how you might save for both your child’s college education, as well as your own retirement. He or she can work with you to prioritize your goals, implement specific strategies, and choose suitable products or services. A financial professional can also stay on top of your plan to make sure it remains on track, recommending changes when conditions, or your circumstances, dictate.

Read the disclosure.

Copyright ©2008 Forefield Inc. All Rights Reserved.

Posted in Investments, Personal Finance | No Comments »

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