Roth IRA - Fast Facts for 2010

Many Financial Advisors will agree, the Roth IRA may be the single best retirement vehicle available to the individual investor. Here are the facts:

Key Features:

• Qualified withdrawals of earnings are tax free.
• Contributions can be withdrawn @ any time.
• Contributions are permitted after age 70 1/2.

Roth IRA's may be Suitable for:

• Individuals who do not qualify for Traditional IRA accounts.
• Individuals who anticipate being in a higher tax bracket @ retirement.
• Individuals who plan on leaving an inheritance (stretch IRA).
• Individuals who need the ability to withdraw contributions @ any time.
• Individuals who do not want to be mandated by IRS required minimum distribution rules (RMD). The Roth does not have to be distributed by age 70 1/2.
• Individuals who simply want to compliment their existing retirement savings with a more flexible investment vehicle.

Tax Year Contribution Limits (2010):

• Lessor of $5,000 or 100% of earned income.
• Participants age 50 and older may contribute an additional $1,000.
• Contributions are not tax deductible.

Eligibility Requirements (2010):

For individuals filing as an individual:

• Full contribution allowed for owners with Modified Adjusted Gross Income (MAGI) of less than $105,000.
• Partial, phased-out contributions for MAGI between $105,000 and $120,000.

For account owners filing jointly:

• Full contribution if MAGI is less than $167,000.
• Partial, phased-out contributions for MAGI between $167,000 and $177,000.

Distribution Requirements:

• Distributions are tax and penalty free after account owner reaches age 59 1/2 or the account has been open five years, whichever comes later.
• Early withdrawal penalties of 10% may be waived for certain qualified expenses.

Contribution Deadline (2010):

• April 15, 2011.
• Extensions may be granted for the Armed Forces. Please see the Armed Forces Tax Guide for more details @ irs.gov.

Tax Season = Retirement Funding

Every year @ this time, individuals scramble to get their taxes filed before the April 15th deadline. A large percentage of you will get refunds while many self-employed individuals may owe a few dollars.

If you don't fund your retirement accounts on a monthly basis, this is a great time to make a lump sum contribution to your IRA account for 2009.

Every $1,000 contribution will save an individual in a 25% tax bracket $250. So, should you be one of the unfortunate soles who will owe money this year... or simply want a bigger refund... adding to your retirement nest egg is beneficial. It helps your current tax situation AND provides for your future well being. A win/win situation! Each person can invest $5,000 and individuals 50+ can contribute a total of $6,000 ($1,000 catch up provision).

Should you be lucky enough to qualify for the Roth IRA... there are income restrictions... this may be the best option of all. You won't get to lower your income taxes for 2009, but the tax free growth is a huge gift. Our country's current budget deficit isn't going anyway anytime soon and the likelihood of higher taxes in the future is inevitable. Everyone should have a Roth IRA as part of their retirement nest egg.

Another opportunity worth considering? Use your tax refund this year to fund your IRA account for 2010. Why wait until March/April of next year? Markets go up more than they go down (contrary to recent popular belief!) and investing @ the beginning of each year allows for more compound growth. Put time on your side!

Call your Accountant and/or Certified Financial Planner (CFP) to learn more.

Living The Dream

I've been posting a weekly blog now for just about a year and have covered financial topics with universal appeal.

This week, I'll try something a little different. I'll briefly discuss myself! Believe it or not, I do follow my own financial advice!

Having just returned from skiing in Winter Park, Colorado, I can truly say, life is good! It's amazing how vacations allow you to relax, reflect and simply enjoy life.

Having essentially been born on skis, I've had the good fortunate of skiing most of my life. My travels have taken me to several continents and most of our beautiful western mountain ranges... Rockies, Wasatch, Sierra Nevadas & Grand Tetons.

The humbling nature of the mountains is something I yearn for every year. So, my annual ski pilgrimage is part of my budget. The down time is always enjoyable & holistic in nature. It allows me to cleanse my soul and refocus my energy.

Personally, I'd love to take more than one ski vacation each year. The balancing act though of living in the present and planning for the future takes priority. So, with other goals to consider; retirement planning being one... one ski vacation per year will have to suffice.

To my friends Anthony & Sal who have shared many a journey with me, until next year... "The Dream Lives on!"

Roth IRA Conversions 2010

The income limitations and filing status requirements for Roth IRA conversions are eliminated in 2010. This is great news for many investors. However, before converting your Traditional IRA account, make sure the option is right for you!

Because there is no 'one size fits all' analysis, everyone should consider their personal goals, financial situation and tax bracket.

Here are a few reasons to consider a conversion:

* Long time frame before needing the money.

* Able to pay the tax with funds outside the IRA.

* Expect to be in a higher tax bracket in the future.

*Want to have both tax-free and tax-deferred funds for retirement needs.

*Don't need the funds to live on and want to leave you beneficiaries an income-tax free inheritance.

Reasons NOT to consider conversion:

* You will need the funds now or in the future for your own retirement.

* Have no outside assets to pay the conversion tax.

*Expect to be in the same or lower tax bracket in the future.

*If charity is beneficiary, they will receive the money tax-free anyway.

*Adverse to paying taxes sooner than later.

* You don't mind if your heirs pay your taxes.

After personally analyzing several situations, there are some ideal scenarios for converting for IRA account(s).

1. Individuals who feel they will not need the money in their lifetime should seriously consider converting for estate planning purposes. Their legacy will provide tax free income benefits to their beneficiaries.

2. Individuals under the age of 35. A growth oriented portfolio after conversion is pretty much required to recoup both income taxes paid at conversion and allow for future tax free growth. Younger investors have longer time horizons and more risk tolerance to allow time to work for them.

Before doing anything, consult with your Financial Advisor to see if a Roth IRA conversion is right for you!

Retirement Planning 101

As most of my business is centered around retirement planning, I feel obligated to post more on this topic than any other subject. We live in an era where company pensions have been replaced by 401k plans. While this is great from a company perspective, it puts the burden on you to save for your future AND make smart investment decisions.

Getting Started: How much should I be saving? How much will I need? Will socking away 5% of my pay get me the hammock on the beach? Tough to tell. Whether you are working on your business plan, personal goals or a retirement dream... everything starts with a plan! Put it in writing.

Author Stephen Covey of the popular "7 Habits of Highly Effective People", has it right when he says "Begin with the end in mind." Basically, you have to know the end objective. One of my favorite expressions comes to mind... 'Without a destination, you're probably going to get lost!' Similar to driving a car, we simply don't pull out of the driveway and figure out where we're going an hour later. Retirement planning shouldn't be any different.

Don't be too Conservative: Some investors seem to think their retirement money is sacred and should never be put at risk. This is understandable and true to a certain extent. But, everyone needs some growth to simply outpace the rate of inflation. Some amount of risk is required.

Parking your retirement dollars in a money market account is too conservative. You will not reach your goal with little or no growth. Today's money market accounts are paying around 1%. If we follow "Rule of 72" it will take 72 years to double your money (72/1)! Repeat... 72 years! A well-diversified investment of mutual funds earning 8% over time will require 9 years (72/8). Your principal will vary year-by-year, but you are outpacing the rate of inflation which historically has averaged 3.5% over the last 20 years.

Diversification: Cash/bonds/stocks/real estate/commodities should all be considered when creating a well-diversified portfolio. The low correlation between each group allows for higher returns and less volatility over time. The idea of having 5 different mutual funds does not mean you are well-diversified. If the funds have similar holdings, they will move up/down in tandem. Selecting the percentages (%) of each one for your situation depends upon your risk tolerance, investment experience and time frame.

Should you require guidance in getting started, creating/reviewing a retirement plan or reviewing your current asset allocations, contact your financial advisor.

Remember...... "Begin with the end in mind."

Alternative Investments

The market volatility of 2008 & 2009 have investors questioning their asset allocation. What should go into my retirement plan to enhance long-term returns and yet reduce volatility?

Traditional investments are generally considered to be cash, bonds & stocks. By definition then, Alternative investments are everything else. This would include; real estate, commodities (gold, oil, copper, etc.), hedge funds, private equity, wine, art, etc. However, as time evolves, several of these alternative products are now becoming more common.

There was a time when 401k, 403b and 457 plans would never offer a real estate option. Several plans now offer real estate choices in the form of mutual funds or exchange traded funds (ETF). In addition, I'm hearing of more corporations offering commodity investments as well. Considering these same companies cut or eliminated pensions plans, I guess offering you, the valued employee, good choices for your retirement is the LEAST they could do!

Many investors weave Robert Frost's "The Road Not Taken" into literal meaning. Going off the beaten path is their road to riches. This may be true in some cases. But, it takes a LOT of work. Let me repeat that last part.... a LOT of work!

The simple fact remains: Mutual funds, or ETF's, represent managed money. For a small fee, you pay a Portfolio Manager to watch your investments and report to you on a quarterly basis. His full-time job is to manage a collective pool of money! If we assume a typical investment charges 1.5% for operating expenses, a $50,000 investment would dictate a $500 annual fee. You could certainly manage your own portfolio of wines, gold bullion, forest land, real estate, etc., but you are going to do a LOT of work to stay on top of your investments.

Your time and energy alone will probably require more than a $500 expense on your part. How you value your time... $$$... is another consideration. But, the shear expense of researching, attending meetings, legal expenses, etc. will probably surpass $500 each year.

Lastly, liquidity should be a vital concern. Everyone has emergencies from time-to-time and has to access money beyond their rainy day account. Cash/bonds/stocks can be liquidated the turned into cash often the same day. This cannot be said for real estate, wine, fine art, etc. Months are often required to buy & sell these assets and you have little control over the time frame. In the last couple of years, real estate is a prime example. How many of us know friends who sold a home and waited 9 months or more to complete the sale?

Alternative investments have a place in everybody's portfolio. How they get into the asset mix is your choice.

Market Predictions for 2010

As another year begins, all the market pundits are actively making their predictions for 2010. "International is the place to be... "stick with gold"... "buy tech"... "municipal bonds are attractive due to higher taxes on the horizon."

It's amazing how everyone has an opinion and everyone is the expert. Oddly, some will be correct and many will be dead wrong. But, they will still make predictions every year!

What do I think will happen in the capital markets in 2010?

I HAVE ABSOLUTELY NO IDEA!

One thing I do know for sure though, asset allocation does work and should be a part of every one's portfolio. Conventional wisdom states cash/bonds/stocks/real estate & commodities should be included in every ones portfolio. Your allocations will vary based on goals & risk tolerance.

Similar to a baseball team, you should have someone at each position. After all, if everyone is playing first base and the ball gets hit to center field, you missed the action! This isn't to say you couldn't shift the left fielder a little towards center or move the third baseman in just in case there's a bunt.

Matter of fact, this could be a good strategy for 2010. Volatility was running wild in both 2008 and 2009. Unfortunately, the downward pressure of 2008 left people queasy. Along came 2009 with upside volatility and everyone felt better.

So, if we're back to some sort of equilibrium point in the capital markets, what comes next? Once again; I don't know, but I think quality of earnings will be a huge factor this year. Predictable, high quality earnings from large companies with a history of solid earnings & dividends should be rewarded this year. In the mutual fund world, this means large cap domestic equity funds should benefit.

International/emerging market exposure would have to be considered a good investment class as well. The weak US dollar will continue to plague our nation until the budget deficit is addressed. Unfortunately, correcting this issue will take years. I'm certain the U.S. dollar will rally from time-to-time simply based on news flow, but this will probably be short lived. Competing against currencies such as the Australian, New Zealand & Canadian dollar will prove challenging.

While our gross domestic product (GDP) struggles to show positive growth, several emerging market countries are showing GDP growth of 5%-8% per year. Some countries are simply in better financial shape than we are due to import/export balances. The US continues to import more than we export, so our trade balance is never favorable. Too many people consuming products not readily available in our country is a problem.

So, increasing your international and/or emerging market equity exposure would seem prudent. Not only should this enhance your long-term performance, it should lower your portfolio risk or volatility due to the lower correlation with US equities.