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 Money can usually be withdrawn from these contracts through policy loans, often at no interest.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