What is Diversification?

What Is Diversification?

Virtually every investment has some type of risk associated with it. The stock market rises and falls. An increase in interest rates can cause a decline in the bond market. No matter what you decide to invest in, risk is something you must consider.

 

The key to successful investing is managing risk while maintaining the potential for adequate returns on your investments. One of the most effective ways to help manage your investment risk is to diversify. Diversification is an investment strategy aimed at managing risk by spreading your money across a variety of investments such as stocks, bonds, real estate, and cash alternatives.

 

The main philosophy behind diversification is really quite simple: “Don’t put all your eggs in one basket.” Spreading the risk among a number of different investment categories, as well as over several different industries, can help offset a loss in any one investment.

 

Likewise, the power of diversification may help smooth your returns over time. As one investment increases, it may offset the decreases in another. This may allow your portfolio to ride out market fluctuations, providing a more steady performance under various economic conditions. By reducing the impact of market ups and downs, diversification can go far in enhancing your comfort level with investing.

 

Diversification is one of the main reasons why mutual funds are so attractive for both experienced and novice investors. Many non-institutional investors have a limited investment budget and may find it challenging to construct a portfolio that is sufficiently diversified.

 

For a modest initial investment, you can purchase shares in a diversified portfolio of securities. You have “built-in” diversification. Depending on the objectives of the fund, it may contain a variety of stocks, bonds, and cash vehicles, or a combination of them.

 

Whether you are investing in mutual funds or are putting together your own combination of stocks, bonds, and other investment vehicles, it is a good idea to keep in mind the importance of diversifying. Diversification does not eliminate or guarantee against the risk of investment loss; it is a method used to help manage investment risk. The value of stocks, bonds, and mutual funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost.

 

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

This material was written and prepared by Emerald.
© 2010 Emerald

The 529 Lesson Plan!

529 Lesson Plan: High Scores for 529 College Savings Program
Looking for a tax-advantaged college savings plan that has no age restrictions, no income phaseout limits, no residency requirements — and one you can use to pay for more than just tuition?
Consider the 529 savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades — with annual costs of more than $35,000 per year for the average private four-year college.¹ Named after the section of the tax code that authorized them, 529 plans (also known as qualified state tuition programs) are now offered in almost every state. 

Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today's rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. It's practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state's eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).
The newer variety of 529 is the savings plan. It's similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.
In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers — many well-known investment firms — to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. In 48 states, earnings are exempt from taxes.² And there are even new consumer-friendly reward programs popping up that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.
Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone — even non-relatives — can contribute up to $13,000 per year (in 2010) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner's estate, therefore avoiding estate taxes upon the owner's death.

Major Benefits
These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn — and, if desired, can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary. A 529 plan is also extremely simple when it comes to tax reporting — the sponsoring state, not you, is responsible for all income tax record keeping. At the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student's tax return. 

Benefits for Grandparents
The 529 plan is a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student's college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a grandparent — as well as anyone, for that matter — could elect to use five years' worth of annual exclusions by making a single contribution of as much as $65,000 per beneficiary in 2010 (or a couple could contribute $130,000 in 2010), as long as no other contributions are made for that beneficiary for five years.*  If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.
As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing. 
By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.
* If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor's estate.

Sources:
1) The College Board, 2009
2) SavingForCollege.com

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. 

This material was written and prepared by Emerald.
© 2010 Emerald

Will Social Security Retire Before I Do?

Will Social Security Retire Before I Do?

People have traditionally seen Social Security benefits as the foundation of their retirement planning programs. The Social Security contributions deducted from your paycheck have, in effect, served as a government-enforced retirement savings plan.
However, the Social Security system is under increasing strain. Better health care and longer life spans have resulted in an increasing number of people drawing Social Security benefits. And as the baby boom generation (those born between 1946 and 1964) approaches retirement, even greater demands will be placed on the system.
In 1945, there were 41.9 active workers to support each person receiving Social Security benefits. In 2000, there were only 3.4 workers supporting each Social Security pensioner. And it is projected that by 2030, there will be only 2.2 active workers to support each Social Security pensioner.¹
You should consider that as your income gets higher, Social Security replaces a proportionally smaller percentage of retirement benefits. It used to be that you could receive full benefits only after you reached age 65. But in 2003, the age to qualify for full benefits began to increase on a graduated scale. By 2027, the age to qualify for full Social Security benefits will have increased to age 67, where it is scheduled to remain.

That means in the future, you will probably have to wait longer to qualify for full Social Security benefits to start replacing a smaller percentage of your pre-retirement income.

Your long-term retirement planning program should recognize Social Security benefits as playing a more limited role when calculating required retirement income. Indeed, some financial professionals suggest ignoring Social Security altogether when developing a retirement income plan.
Source: ¹ Social Security Administration
Note:  The Social Security Administration will now assist you in calculating your projected retirement benefits. You can call 1-800-772-1213 and ask for Form SSA-7004, the “Personal Earnings and Benefit Estimate Statement,” or you can access the form on the Internet at www.ssa.gov. Complete the form, return it to the Social Security Administration, and you will receive an estimate of your benefits.

This material was written and prepared by Emerald.
© 2010 Emerald

Having trouble understanding Estate Tax??

What Is the Estate Tax?

 

 

The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the total value of your estate — your home, stocks, bonds, life insurance, and other assets of value. Everything you own, whatever the form of ownership, regardless of whether the assets have been through probate, is subject to estate taxes. 

 

Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its long history, this tax remains controversial. 

 

By working in much the same way as marginal income tax brackets, estate taxes claim a graduated percentage of the total value of your estate. For estates of greater value, the percentage amount due in taxes is generally higher.  

 

The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions. 

 

The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.  

 

The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However, because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts and top estate tax rates.)

 

 

Year	Applicable Credit	Top Estate Tax Rate
2006	$2 million	46%
2007	$2 million	45%
2008	$2 million	45%
2009	$3.5 million	45%
2010	Tax repealed	0%
2011	$1 million	55%

                                                    

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

 

 

This material was written and prepared by Emerald.
© 2010 Emerald

Double your Money! The ultimate "Rule of 72"!

How Long Will It Take to Double My Money?

Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.

With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.

But just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.

For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.

While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.

Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.

The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.

The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.


The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost.The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually. Actual results will vary.
This material was written and prepared by Emerald.
© 2010 Emerald Publications

Textbook September as Economy Passes Test

Dear Valued Clients and Blog Readers,

The first few days of September revealed much of what the economy did with its summer vacation. The economic data for the summer months through the end of August provided a report card that argues not for a return to recession, but instead for the return of slower—but stable—growth that often comes one year after the start of a recovery. The U.S. economy created 235,000 private jobs this summer (June through August), bringing the total to 763,000 jobs created through August of this year. As the time came to go back to school, it was also time for more people to go back to work.

Students of market history know that September is a tough month for investors. In more than half of the years since 1950, the month of September has resulted in losses for the S&P 500 Index. This has taken place despite gains, on average, in the first few trading days of the month when the key economic data was released. In fact, when the first three trading days of September resulted in gains for the stock market, those gains were followed by losses over the rest of the month 60% of the time.*

The stock market remains close to where it began the year. We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that this soft spot lingers and weighs on the markets is significant—especially given the historically weak market performance in September and October. Looking closer to the end of the year, the months of November and December have historically provided some of the best returns of the year*, on average, and this year’s seasonal bounce may be helped by clarity around the legislative environment with the outcome of the mid-term elections on November 2. This may lead to more of a political balance in Washington and slow the pace of legislative change due to the “gridlock” the market has historically favored. The market’s reaction to mid-term elections, as the uncertainty begins to fade, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years since 1950.

With it shaping up to be a textbook September, investors should brace for the price volatility that has defined this year to continue. We believe losses will be recouped by a late-year rally. However, in the meantime, we give high marks to yield-producing investments which offer investors a return while waiting out the price volatility in the stock market. As always, we encourage you to contact me if you have any questions.

Best regards,

Janet L. Barr, ChFC, CLU


IMPORTANT DISCLOSURES
This research material has been prepared by LPL Financial.
*Source: Bloomberg, LPL Financial
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing may involve risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
LPL Financial, Member FINRA/SIPC

2011 Tax changes at a glance!

Federal income tax brackets

Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.

2010 Income Tax Brackets--Married Filing Jointly

Taxable Income

Marginal Tax Rate

Not over $16,750

10%

Over $16,750 to $68,000

15%

Over $68,000 to $137,300

25%

Over $137,300 to $209,250

28%

Over $209,250 to $373,650

33%

Over $373,650

35%

As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.


Long-term capital gains tax rates



For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.

However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.


The estate tax

There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.

Year

2009

2010

2011

Estate tax exclusion

$3.5 million

N/A

$1 million

Top estate tax rate

45%

No tax

55%


Other important changes

Other changes for 2011 include:

Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011

The Domino Effect??

http://www.collaborativefinancialsolutions.com/files/LPL/Research/RES%202354%200610.pdf


Many investors and market pundits prescribe to the Domino Theory, which states that one bad event tips over another issue that eventually causes everything to fall just like dominos.

The thought is that the already fallen dominos, such as unemployment, home losses, Greece, and others, have created a wave that will spread through the global economy.
While the Domino Theory certainly makes sense in the realm of little black stones with white dots on them positioned in an orderly pattern, it is based on assumptions that frankly do not hold water in the complex world of global markets.
While there has been much focus on the negative effects of the crisis in Greece and other European nations, the markets have not factored in that positive events have also sprouted as a result of these issues.

Consumers have lower mortgage rates, lower gas prices, and employment has posted job growth to the tune of 1.1 million net new jobs (not including census workers) in six of the last seven months.

Global central banks in economic powerhouse countries like the U.S., China, and Brazil once again have a reprieve from inflation concerns.

Valuations are now set at attractive levels, and fundamentals of the market continue to trend towards the transition to sustainable growth.

But do not expect a straight up rally from here — volatility will likely remain very elevated.

Leaving your job? Put an IRA to work!

After leaving a job, workers generally have three options when it comes to the money they have saved in their former employer’s retirement plans. They can keep the money in the plan, roll the money directly to an individual retirement account, or cash out and take a lump-sum distribution.

The way in which you handle your retirement plan assets when leaving a company is an important decision that could affect your retirement savings considerably. One of these choices may result in current taxes and penalties. One may end up limiting flexibility and your investment options. Rolling your money directly to an IRA may enable you to avoid the hassle and cost of the other two options while you continue saving for retirement.
Cashing Out

Taking a lump-sum distribution not only subjects the withdrawal to income taxes plus a 10% federal income tax penalty for someone younger than 59½ (with certain exceptions), but companies will withhold 20% for taxes. Despite these disincentives, 46% of workers who left their jobs in 2008 decided to cash out and pay the taxes and penalties.1
Staying Put

Although leaving money in your former employer’s plan may avoid current taxes and penalties, it may not be the ideal saving situation for you. Not all plans allow former employees to remain, so you might get the boot. If your plan allows your funds to stay, you may be subject to certain restrictions and will continue to be limited by the investment options offered by that plan.
Rolling Over

By transferring funds directly to a traditional IRA, you can preserve tax deferral and avoid penalties. Beyond that, IRAs offer benefits that aren’t available with many employer-sponsored plans.

IRAs tend to have more flexible rules than workplace plans. This can affect everything from customizing your investment selections to naming your beneficiaries. IRAs generally have fewer restrictions when it comes to inherited plans, which could make it easier for your heirs to stretch the account into possibly decades of tax-deferred growth potential. Finally, the range of investment options with an IRA vastly outnumbers that of most employer-sponsored plans.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty, except in cases of the owner’s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum).

1) Hewitt Associates, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.
Santa Barbara Financial Consultant, Janet L. Barr

Why should you avoid probate?

Avoiding Probate: Is It Worth It?

When you die, your estate goes through a process that manages, settles, and distributes your property according to the terms of your will. This process is governed by state law and is called probate. Probate proceedings fall under the jurisdiction of the probate court (also called the Surrogate's, Orphans', or Chancery court) of the state in which you are domiciled at the time of your death. This court oversees probate of your personal property and any real estate that is located in that state. If you own property located in a state other than the state in which you are domiciled at the time of your death, a separate "ancillary" probate proceeding may need to be initiated in the other state.

Note:"Domicile" is a legal term meaning the state where you intend to make your permanent home. It does not refer to a summer home or a temporary residence.

Items that are subject to probate are known as probate assets. Probate assets generally consist of any property that you own individually at the time of your death that passes to your beneficiaries according to the terms of your will. Nonprobate assets include all property that passes outside of your will. Examples of nonprobate assets include property that is owned jointly with right of survivorship (e.g., a jointly held bank account) and property that is owned as tenants-by-the-entirety (i.e., real property owned jointly by a husband and wife). Another example is property that passes to designated beneficiaries by operation of law, such as proceeds of life insurance and retirement benefits.
Why avoid probate?

Most wills have to be probated. The rules vary from state to state, but in some states, smaller estates are exempt from probate, or they may qualify for an expedited process.

Probate can be slow. Depending on where your executor probates your estate and the size of your probate estate, the probate process can take as little as three months or as long as three years. Three years can be a long time to wait for needed income. It can take even longer if the estate is a complicated one or if any of the heirs are contesting the will.

Probate can be costly. Probate costs usually include court costs (filing fees, etc.), publication costs for legal notices, attorney's fees, executor's fees, bond premiums, and appraisal fees. Court costs and attorney's fees can vary from state to state. Typically, the larger the estate, the greater the probate costs. However, if a smaller estate has complex issues associated with its administration or with distribution of its assets (e.g., if the decedent owned property in several states), probate can be quite costly.

Probate is a public process. Wills and any other documents submitted for probate become part of the public record, something to consider if you or your family members have privacy concerns.
Why choose to go through probate?

For most estates, there's usually little reason to avoid probate. The actual time and costs involved are often modest, and it just doesn't make sense to plan around it. And, there are actually a couple of benefits from probate. Because the court supervises the process, you have some assurance that your wishes will be abided by, and, if a family squabble should arise, the court can help settle the matter. Further, probate offers some protection against creditors. As part of the probate process, creditors are notified to make their claims against the estate in a timely manner. If they do not, it becomes much more difficult for them to make their claims later on.

In addition, some states require that your will be probated before the beneficiaries under your will can exercise certain rights. Among the rights that may otherwise be limited are the right of your surviving spouse to waive his or her share under the will and elect a statutory share instead, the right of your surviving spouse to use your residence during his or her remaining life, the right of your surviving spouse to set aside certain property, and the right of your surviving spouse to a family allowance.
How to avoid probate

An estate plan can be designed to limit the assets that pass through probate or to avoid probate altogether. The major ways property is passed outside of probate are by owning property jointly with rights of survivorship; by ensuring that beneficiary designation forms are completed for those types of assets that allow them, such as IRAs, retirement plans, and life insurance; by putting property in a trust; and by making lifetime gifts.

(C) Forefield Inc. LPL MEMBER FINRA/SIPC

What you should know about trusteed IRA's!

The tax code allows IRAs to be created as trust accounts, custodial accounts, and annuity contracts. Regardless of the form, the federal tax rules are generally the same for all IRAs. But the structure of the IRA agreement can have a significant impact on how your IRA is administered. This article will focus on one type of trust account commonly called a "trusteed IRA," or "individual retirement trust."
Why might you need a trusteed IRA?

In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.

Or it may be your wish that your IRA "stretch" after your death--that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis--for as long as possible. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.

Even if your beneficiary doesn't deplete the IRA assets, in a typical IRA you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. So, in a typical IRA, if you name your spouse as your primary beneficiary, your spouse could name children from a previous marriage, or a new spouse if he or she remarries, as the ultimate beneficiary of your IRA assets. A trusteed IRA allows you to control the ultimate beneficiaries of your IRA, by letting you specify contingent beneficiaries that cannot be changed by your primary beneficiary.

With a trusteed IRA, you can't stop the payment of required minimum distributions (RMDs) to your beneficiary but you can restrict any additional payments. You can direct the trustee to pay only RMDs to your beneficiary. Or you can provide the trustee with discretionary authority to make payments to your beneficiary in addition to RMDs, e.g., for your beneficiary's health, welfare, or education. Or you can impose restrictions on distributions that last only until your beneficiary reaches a specified age. Trusteed IRAs can also be set up to qualify as marital, QTIP, and credit shelter (bypass) trusts, potentially simplifying your estate planning.

A trusteed IRA can also be a valuable tool during your lifetime. It can be structured so that if you become incapacitated, the trustee will step in and take over the investment of assets and distribution of benefits on your behalf, ensuring that your IRA won't be in limbo until a guardian is appointed.
Is a trusteed IRA right for you?

While trusteed IRAs can be as flexible as a particular trustee will allow (not all provide the same level of IRA planning services), they aren't right for everyone. The minimum balance required to establish a trusteed IRA, and the fees charged, are usually significantly higher than for other IRAs, making trusteed IRAs most appropriate for large IRA accounts. You may also incur attorney's fees and other costs.

And in some cases, another approach might be more appropriate. For example, you may be able to assure that your IRA "stretches" after your death by instead naming a trust as the beneficiary of your IRA. If specific IRS rules are followed, RMDs can be calculated using your trust beneficiary's life expectancy (this is commonly called a "see-through" trust).

See-through trusts are generally more expensive, and more complicated, than trusteed IRAs. It's important that you consult an estate planning professional who can explain your options and make sure you choose the right vehicle for your particular situation.

(c)Forefield Inc.
LPL financial
Member FINRA/SIPC

One way to boost retirement income!

Social Security: File-and-Suspend for Higher Benefits
If you're married and looking for opportunities to
increase retirement income, you may want to
look closely at your Social Security benefits.
One opportunity for maximizing Social Security
income, called "file-and-suspend," may enable
a married couple to boost both their retirement
and survivor's benefits.


What is file-and-suspend?
Generally, a husband or wife is entitled to
receive a Social Security retirement benefit
based either on his or her own earnings record
(a worker's benefit), or on his or her spouse's
earnings record (a spousal benefit), whichever
is higher. But under Social Security rules, a
husband or wife who is eligible to file for
retirement benefits based on his or her
spouse's record cannot do so until his or her
spouse begins receiving benefits. However,
there is one exception--someone who has
reached full retirement age may choose to file
for retirement benefits, then immediately
request to have those benefits suspended, so
that his or her eligible spouse can file for
spousal benefits.

File-and-suspend is a strategy that may be
used in a variety of situations, but is commonly
used when one spouse has much lower lifetime
earnings, and thus will receive a higher
retirement benefit based on his or her spouse's
earnings record. (A husband or wife's spousal
benefit may be as much as 50% of what his or
her spouse is entitled to receive at full
retirement age.) Using this strategy not only
allows the eligible spouse with lower earnings
to immediately claim a higher (spousal)
retirement benefit, but can also increase the
amount of available survivor protection. The
spouse with higher earnings who has
suspended his or her benefits can accrue
delayed retirement credits at a rate of 8% per
year (the rate for anyone born in 1943 or later)
up until age 70. Because a surviving spouse
will generally receive a benefit equal to 100% of
the retirement benefit the other spouse was
receiving (or was entitled to receive) at the time
of his or her death, suspending a benefit to
accrue delayed retirement credits may
substantially increase the survivor's benefit.


Example
Let's look at one hypothetical example of how
filing for, then suspending, Social Security
benefits might help a married couple increase
their retirement income and survivor's benefits.
Henry is about to reach his full retirement age
of 66, but he wants to postpone filing for Social
Security benefits. At full retirement age his
monthly benefit will be $2,000, but if he waits
until age 70 to file, his benefit will be $2,640
(32% more) due to delayed retirement credits.
However, his wife Julia, who has had
substantially lower lifetime earnings than Henry,
wants to retire in a few months at her full
retirement age (also 66). Based on her own
earnings record, Julia will be eligible for a
monthly benefit of $700, but based on Henry's
earnings record she will be eligible for a
monthly spousal benefit of $1,000 (50% of
Henry's entitlement).

So that Julia can receive the higher spousal
benefit as soon as she retires, Henry files an
application for benefits, but immediately
suspends it. That way, he can also continue to
earn delayed retirement credits, which will
result in a higher monthly retirement benefit for
him later.

Using the file-and-suspend strategy not only
increases Julia and Henry's retirement income,
but it also offers increased survivor protection.
Upon Henry's death, Julia will be entitled to
receive 100% of what Henry was receiving (or
was entitled to receive) at the time of his death.
So by suspending his own retirement benefit in
order to increase it through delayed retirement
credits, Henry has ensured that Julia will
receive a survivor's benefit that is up to 32%
higher for the rest of her life should he die first.
(Note, though, that this hypothetical example is
for illustrative purposes only and does not
account for cost-of-living adjustments or taxes.)
Points to consider
• Deciding when to begin receiving Social
Security benefits is a complicated decision.
You'll need to consider a number of
scenarios, and take into account factors such
as both spouses' ages, estimated benefit
entitlements, and life expectancies. A Social
Security representative can help explain your
options.

• Using the file-and-suspend strategy may not
be advantageous when one spouse is in poor
health or when Social Security income is
needed as soon as possible.

• The spousal benefit will be reduced if the
spouse claiming it is under full retirement age.

Rolling GRATs Are Rockin'

A grantor retained annuity trust (GRAT) is an irrevocable trust into which you make a one-time transfer of property and from which you receive a fixed amount annually for a specified number of years (the annuity period)..At the end of the annuity period, the payments to you stop, and any property remaining in the trust passes to the persons you've named in the trust document as the remainder beneficiaries (e.g., your children) or the property can remain in trust for their benefit.
A GRAT is generally used to transfer rapidly appreciating (or high income-producing) property to heirs with the main goal of transferring, free from federal gift tax, a portion of any appreciation in (or income earned by) the trust property during the annuity period.
Because a GRAT is an irrevocable trust, when you transfer property to the GRAT, you're making a taxable gift to the remainder beneficiaries. The value of the gift is discounted because of your retained interest. The amount of the discount is calculated using IRS valuation tables that assume the property in the trust will realize a certain rate of return during the annuity period. This assumed rate of return is known as the Section 7520 rate, discount rate, or hurdle rate. If the property in the trust grows more than the IRS assumed rate of return, any excess growth will pass to the remainder beneficiaries gift tax free.
The catch to this strategy is that you must outlive the annuity period. If you die before the annuity period expires, the value of the property in the trust on the date of your death will be included in your estate for estate tax purposes. This, however, merely puts you in the same position you would have been in had you not used the GRAT (except for the costs to create and maintain the trust). GRATs are typically created with a long term (5, 10, or 20 years), especially when the Section 7520 rate is low. The longer the term, the more growth that can potentially be removed from an estate. However, the longer the term, the greater the risk that you'll die during the trust term and that all of the GRAT assets will end up back in your estate.

What is a rolling GRAT? A spinoff of the GRAT is a strategy known as a "rolling GRAT." A rolling GRAT is actually a series of GRATs with short terms (i.e., 2 to 5
years). For example, say you establish an initial GRAT (GRAT 1) for a term of 2 years. At the end of Year 1, you receive your first annuity payment, and with that payment you fund a second GRAT. When GRAT 1 terminates at the end of Year 2, you take your second annuity payment and fund a third GRAT. Any assets remaining in GRAT 1 are excess returns that are distributed to the beneficiaries. Depending on how the GRAT is initially funded, excess returns on GRAT assets may consist of interest, dividends, and any market increase (appreciation) in the value of the assets. The creation of subsequent GRATs can go on for as long as you want.

The benefits of rolling GRATs
The main purpose of the rolling GRAT is to maximize return and minimize risk. One benefit is that if one GRAT loses money or the growth of trust assets fails to surpass the
Section 7520 rate, you can start over with another GRAT. Rolling GRATs are typically
funded with specific stocks or asset classes. This segregation of assets can be an investment hedge, for example, to help prevent losses, if any, on one stock from offsetting gains on other stocks.
Additionally, you can reduce the risk of having all of the GRAT assets included in your estate because of an early death. If, for example, you die 5 years into an arrangement as described above, any excess returns from 3 of the GRATs would have been removed from your estate. Further, assets from the rolling GRAT strategy are distributed to the beneficiaries earlier than with a long-term GRAT. With a 10-year GRAT, for example, assets are distributed only at the end of the 10-year period. With a series of 2-year rolling GRATs, some assets start to become available to the beneficiaries after the second year.
Finally, you can stop creating the GRATs whenever you want to. For instance, you may
feel that you have gifted enough already or that you need to focus instead on rebuilding your wealth due to poor market performance.

The drawbacks
The use of rolling GRATs assumes that you do not need the annuity payments for other
purposes. Additionally, there is a risk that the Section 7520 rate may increase and keep increasing after the first year. Whereas a long-term GRAT can lock in a low initial Section 7520 rate for the entire GRAT term, rolling GRATs may be subject to fluctuating Section 7520 rates. You'll need an attorney to draft the GRAT

Managing Cash

How Can I Better Manage My Short-Term Cash?

For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments. 

For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow. 

If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal. 

Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured up to $250,000 by the FDIC.*


Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.

This material was written and prepared by Emerald.
© 2010 Emerald

Is having a living trust beneficial?

How Can a Living Trust Help Me Control My Estate?

Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.
A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.

When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away. 

Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process. 

There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes. 

When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.

This will create two taxable entities, each of which will be entitled to use a personal exemption.
The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance. 

On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.

The information provided here is to assist you in planning for your future. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

This material was written and prepared by Emerald.
© 2010 Emerald

Looking for a smart way to refinance?

What Are Some Smart Ways to Refinance? 

Recently, fixed mortgages were near their lowest rates in almost 30 years. And if you are one of the many people who took out mortgages in the few years prior to that, you may be wondering if you should look into refinancing.
If your mortgage was taken out within the past five years, it may be worthwhile to refinance if you can get financing that is at least one to two points lower than your current interest rate. You should plan on staying in the house long enough to pay off the loan transaction charges (points, title insurance, attorney’s fees, etc.).
A fixed-rate mortgage could be your best bet in a rising interest rate environment, if you plan to stay in the house for several years. An adjustable mortgage may suit you if you will be moving within a few years, but you need to ensure that you will be able to handle increasingly higher payments should interest rates rise.
One way to use mortgage refinancing to your advantage is to take out a new mortgage for the same duration as your old mortgage. The lower interest rate will result in lower monthly payments.
For example, if you took out a $150,000 30-year fixed-rate mortgage at 7.5 percent (including transaction charges), your monthly payment is now $1,049. Refinance at 6 percent with a 30-year fixed-rate mortgage of $150,000 (including transaction fees), and your payment will be $899 per month. That’s a savings of $150 per month, which you can then use to invest, add to your retirement fund, or do with it whatever you please.
Another option is to exchange your old mortgage for a shorter-term loan. Your 30-year fixed-rate payment on a $150,000 loan was $1,049 per month. If you refinance with a 15-year fixed mortgage for $150,000 — including transaction costs — at 6 percent, your monthly payment will be $1,266. This payment is only $217 more than your previous mortgage, but your home will be fully paid for several years sooner, for a savings of more than $150,000! And some banks around the country are beginning to offer 10- and 20-year mortgages.
Either way you look at it, it’s an attractive idea. 

If you’re considering refinancing your mortgage, call for an appointment with me at (805) 965-0101 and i can help determine whether refinancing your home would be a good move for you.

This material was written and prepared by Emerald.
© 2010 Emerald

College planning? psh, piece of cake!

How Can I Save for My Child’s College Education?
Once you’ve determined how much it will cost to send your children to college, your next prudent step is to develop a systematic investment plan that will enable you to accumulate the necessary funds.
What are your funding options? Which would be best for your situation? We’ve listed several below, along with a brief description of each.
UNIVERSAL LIFE INSURANCE
Universal life insurance policies build cash value through regular premiums and grow at competitive rates. These policies carry a death benefit. In addition to providing cash to your heirs in the event of your death, this death benefit gives universal life insurance policies their tax-free status. Money can usually be withdrawn from these contracts through policy loans, often at no interest. These withdrawals may reduce the policy’s death benefit.
ZERO-COUPON BONDS
Zero-coupon bonds represent the ownership of principal payments on U.S. government notes or bonds. Unlike traditional bonds, zero-coupon bonds make no periodic interest payments. Instead, they are purchased at a substantial discount and pay face value at maturity. The value of these bonds is subject to market fluctuation. Their prices tend to be more volatile than bonds that pay interest regularly. And even though no income is paid, the inherent interest is still taxable annually as ordinary income.
MUTUAL FUNDS
Mutual funds are established by an investment company by pooling the monies of many different investors and then investing that money in a diversified portfolio of securities. These securities are selected to meet the specific goals of the fund. The value of mutual fund shares fluctuates with market conditions so that, when sold, shares may be worth more or less than their original cost.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
INDEPENDENT COLLEGE 500-INDEXED CERTIFICATES OF DEPOSIT
The I.C. 500 is the College Board’s index of college inflation based on a survey of the costs at 500 independent colleges and universities. I.C. 500-indexed Certificates of Deposit are a relatively new funding vehicle offered by a few savings institutions. Their rate of return is directly linked to the I.C. 500 index.
SECTION 529 PLANS
Section 529 Plans are also known as Qualified State Tuition Programs. These plans are sponsored by individual states and offer higher contributions than Coverdell IRAs along with tax-deferred accumulation. Once withdrawals begin, they are tax exempt as long as the funds are used to pay for qualified higher education expenses.
As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Before investing in a 529 savings plan, please consider the investment expenses, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.
 The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

This material was written and prepared by Emerald.
© 2010 Emerald

Interest Rates; Be ready for anything!

Most economists expect the Federal Reserve to keep interest rates fairly low in 2010 in order to encourage job growth.1 Yet in reacting to the banking crisis in 2008, the Fed also created conditions that some say are ideal for reigniting inflation. If inflation were to become a serious threat to the economy and job creation, the Fed might have no other choice but to raise interest rates.


In other words, anything can happen. Current conditions make it difficult to anticipate where interest rates will be even a year from now. Where does this leave bond investors? Same place they have always been: unable to accurately foretell the future.



Fortunately, there is a strategy to help bondholders limit the risk of continued low rates and put them in a position to benefit if rates go higher.



Get Ready to Stagger

Individual bonds, when held to maturity, are generally not subject to interest-rate fluctuations. The terms are fixed when the bond is issued, allowing the bondholder to know exactly how much income the bond should generate and when the principal will be returned (assuming the borrower does not default).





However, once a bond matures, there is the risk that the investor will have to reinvest the principal at a lower interest rate. Likewise, there is also the risk that interest rates will rise after an investor has purchased a particular bond and subsequently doesn’t have cash to reinvest at the higher rate.



One way to help manage rate volatility is by building a bond ladder. This strategy involves purchasing bonds with staggered maturity dates so that at least one bond matures every year or two. If rates have fallen, only a portion of the principal is reinvested. If rates are heading higher, the investor has an opportunity to reinvest at least some principal at the higher rate. Think of it as another form of diversification, one that spreads risk over time. Diversification does not guarantee against loss; it is a method used to help manage investment risk.



The principal value of bonds may fluctuate due to market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.



A bond ladder has no effect on the risk of bonds themselves, but using a ladder strategy may put you in a better position to benefit from attractive rates as well as protect against falling rates. By purchasing bonds that mature at intervals, rather than all at once, you may be structuring your portfolio to help withstand the inevitability of interest-rate fluctuations.

What is a Roth IRA?

A Roth IRA is a retirement savings vehicle that differs from tax-deferred retirement accounts such as traditional IRAs and most employer-sponsored retirement plans. With a Roth IRA, you make contributions with after-tax dollars, but qualified withdrawals after age 59½ are tax-free. Furthermore, a Roth IRA does not require minimum annual withdrawals after age 70½. It should be noted that there are still annual income limits in place for determining eligibility to contribute to a Roth IRA. The income limitation was eliminated only for conversions.


To qualify for the tax-free and penalty-free withdrawal of earnings and amounts converted to a Roth IRA, the account must be in place for at least five tax years and the distribution must take place after age 59½ or as a result of death, disability, or a first-time home purchase ($10,000 lifetime maximum).

Taxing Choices

When you convert tax-deferred assets from a traditional IRA and/or a former employer’s 401(k), 403(b), or 457 plan, the amount you convert in a given year needs to be declared as income on your tax return. If you are younger than age 59½ and pay the taxes from money that is not in the tax-deferred account (the recommended option), you can avoid a 10% federal income tax penalty.

Fortunately, you have options when it comes to paying the taxes on a Roth IRA conversion. In 2010 only, you can convert eligible retirement assets to a Roth IRA without having to claim the amount as income on your 2010 tax return. If you elect to do this, you must declare half of the converted amount as income in 2011 and the other half as income in 2012. In this way, you wouldn’t have to start paying taxes on a 2010 Roth IRA conversion until April 15, 2012.

However, by deferring the taxes on a 2010 conversion, the converted amount will be taxed at the income tax rates in effect in 2011 and 2012. As it stands, tax rates are scheduled to increase in 2011. Unless Congress acts to avert the tax rate increase, the taxes on Roth IRA conversions will be higher after 2010.

Also consider whether converting a sizable amount to a Roth IRA could move you into a higher tax bracket. If so, you may decide to convert smaller amounts over a period of several years.

If you have IRAs into which you have made both deductible and nondeductible contributions, the tax implications of a Roth IRA conversion can become complicated. It may be prudent to consult a tax professional.

You Can Change Your Mind Later

If you change your mind after utilizing a Roth IRA conversion, you can elect a “do over,” called a recharacterization. The assets would be converted back to tax-deferred status and you can file an amended tax return seeking a refund of the income taxes you paid on the conversion. In order to qualify, you must recharacterize the funds before October 15 of the year following the year in which you converted.

Roth IRA conversions offer the potential for tax-free income in retirement for taxpayers at all income levels. If you want more information about converting to a Roth IRA, call today. It’s critical to review your individual situation before making a decision about moving important assets.

10 Financial Terms Everyone Should Know

Understanding financial matters can be
difficult because of the jargon used. Becoming
familiar with these ten financial terms may
help make your financial picture clearer.

1. Time value of money
The time value of money is the concept that
money on hand today is worth more than the
same amount of money in the future because
the money today can be invested to earn
interest. Why is it important? Understanding
that money today is worth more than the same
amount in the future can help you evaluate
and compare investments that offer returns at
different times.

2. Market volatility
Market volatility measures the rate at which
the price of a security moves up and down. If
the price of a security historically changes
rapidly over a short period of time, its volatility
is high. Conversely, if the price of a security
rarely changes, its volatility is low. Why is it
important? Understanding volatility can help
you evaluate whether a particular investment
is suited to your investing style and risk
tolerance.

3. Inflation
Inflation reflects any overall upward movement
in the price of goods and services in the
economy. Why is it important? Because inflation
generally pushes the cost of goods and
services higher, any estimate of how much
you'll need in the future--for example, how
much you'll need to save for retirement--
should take into account the potential impact
of inflation.

4. Asset allocation
This strategy means spreading investments
over a variety of asset categories, such as
equities, cash, bonds, etc. Why is it important?
How you allocate your assets depends
on a number of factors, including your risk
tolerance and your desired return. Diversifying
your investments over asset classes can
potentially help you manage risk and volatility.

5. Net worth
Net worth is what your total holdings are worth
after subtracting all of your financial obligations.
Why is it important? Your net worth will
probably fund most of your retirement years.
Therefore, the faster and bigger your net
worth grows, the earlier and more comfortably
you will be able to retire. Once retired,
preserving your net worth to last through your
retirement years is your goal.

6. Five C's of credit
These are character, capacity, capital, collateral,
and conditions. They're the primary elements
lenders evaluate to determine whether
to make you a loan. Why is it important? With
a better understanding of how your banker is
going to view and assess your creditworthiness,
you will be better prepared to deliver
appropriate information to obtain the loan you
want or get a better interest rate.

7. Sustainable withdrawal rate
Sustainable withdrawal rate is the maximum
percentage that you can withdraw from an
investment portfolio each year to provide
income that will last, with reasonable certainty,
as long as you need it. Why is it important?
Your retirement lifestyle will depend not only
on your assets and investment choices, but
also on how quickly you draw down your retirement
portfolio.

8. Tax deferral
Tax deferral refers to the opportunity to pay
income taxes in the future for investment interest
and appreciation earned in the current
year. Why is it important? Tax-deferred
vehicles like IRAs and annuities produce
earnings that are not taxed until withdrawn.
This allows those earnings to compound,
further adding to potential investment growth.

9. Risk/return trade-off
This concept holds that, in order to achieve a
higher personal investment return, you must
be willing to accept greater risk. Why is it important?
When considering your investments,
the goal is investing to get the greatest return
for the level of risk you're willing to take, or to
minimize the risk involved in trying for a given
return.

10. Annuity
An annuity is a contract where you pay money
to an insurance company in return for the
insurer's promise to pay it back, with interest,
in the future. Why is it important? You can
supplement other retirement savings with taxdeferred
annuity funds, and you can add to
your retirement income with payments from
your annuity for a fixed period of time or for
the rest of your life

New rules designed to limit credit-card issuers from quietly raising interest rates and fees will undoubtedly help consumers become more aware of the terms and conditions on their credit cards. But the real news is that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD) may actually be making credit cards more expensive to use.

The CARD Act placed strict limitations on how and when the credit-card companies can raise interest rates and fees, but the credit-card companies are pushing back — with higher rates and fees. All this is a good reminder that although credit cards are a convenient way to help manage your spending, it may be more important than ever to use them with caution.

Meet the New Rules

Under the CARD Act, which took effect in February, credit-card issuers:

• Must give a 45-day advance notice of an increase in interest rates, fees, or other significant charges.

• May not increase the interest rate for the first 12 months after an account is opened unless the card was offered with an introductory rate, which must last for at least six months.

• May raise rates on existing balances only when a payment is 60 days or more past due, when a promotional rate expires, when the consumer either completes or fails to complete a workout plan, or when a variable rate increases because of movement in the underlying index. If a rate hike is the result of a late payment, the lower rate must be reinstated after the consumer makes six months of on-time payments.

• May not charge an over-limit fee without first obtaining the cardholder’s consent and disclosing the amount that will be charged for exceeding the credit limit.

Watch for Higher Rates and Fees

As you might expect, these new rules pose obstacles to profitability for credit-card issuers. Because they have known for some time that the restrictions were coming, many companies have already raised their interest rates and existing fees or have put new fees in place.

For example, one year before the CARD rules took effect, the average annual percentage rate on credit cards was 11.8%. Since then, the average APR has been climbing steadily, reaching 13.5% in the fourth quarter of 2009 and 14.2% the week before CARD took effect, the highest rate in five years. Subprime borrowers have seen an even steeper increase: the APR rose from 14.3% in the third quarter of 2009 to 25% the week before CARD took effect.1

The outlook for variable-rate cards is also daunting. The spread between the prime rate and the average APR is more than 10%, the widest in a decade. In 2007, the spread was a mere 4.8%.2

The prime rate is the federal funds rate plus 3%. Although the Federal Reserve is not expected to raise the fed funds rate soon, an increase is bound to occur eventually. When it does, interest rates in all variable-rate cards tied to the prime rate will also rise. Experts are expecting an average APR in the high teens by the end of 2010, possibly surpassing 20% in 2011.3

Annual credit-card fees, once on the verge of extinction, are also making a comeback. Roughly 35% of cards now carry an annual fee, the highest level of the decade.4 Others are expected to join in, and several are imposing new fees for balance transfers and account inactivity. Also, keep an eye out for rising late charges, plus new fees for cash advances, paper statements, and foreign transactions.

How Will You React?

We’ve all known smokers who were inspired to stop when legislators piled on new tobacco taxes. In the same way, the CARD Act may motivate people who are dependent on their credit cards to finally kick the habit. However, most of us will still need to use credit cards. Just try renting a car or booking a commercial flight without one.

It’s more important now than ever to keep a close eye on your statements. If your card issuer informs you of a pending rate increase, you’ll have plenty of time to pay down your balance or close out the account. If your issuer decides to levy an annual fee, you may want to consider switching to a new card. Research shows that three out of four card users will either cancel or consolidate cards that impose an annual fee, and there’s bound to be a company that sees an opportunity to pick up these new customers with a fee-free card.5

Perhaps more important is the need to reevaluate the role that credit cards play in your overall financial picture. Credit cards will probably always remain an important tool for consumers, but as they become more expensive, some users may want to consider other options for financing larger purchases.

Helping to Create Peace and Understanding...

At Collaborative Financial Solutions, our purpose is in helping you create an environment that leads to a better understanding of, and more ease around your finances. Money decisions are important, but they do not need to be stressful. Let us help you look at what you have and where you want to go in life.

We will educate you about your finances, organize financial documents and offer choices so that you can make solid, informed decisions.

We are the "GO-TO Financial coordinator" to help integrate the multi-dimensional aspects of your finances.

Our promise is to provide a caring environment that will help you manage your financial situation and support the path to your personal dream of freedom.

Our specialties include:

Wealth management, socially responsible and green alternative energy investing, estate planning, divorce settlement planning and financial life planning .