Faith Based Investing

Cha-Cha-Change is coming!

With changes coming to Coverdell Education Savings Accounts in 2011, some parents are wondering if they should convert Coverdells to 529 plans. With that mind, here is a brief look at how both of these accounts work.
Why were Coverdell ESAs so popular in the past decade? Imagine a Roth IRA used only for college savings. That’s basically the concept behind a Coverdell. In fact, the Coverdell ESA (created in 2002) evolved from the Education IRA (created in 1998).

Contributions to a Coverdell ESA aren’t deductible, but you get tax-deferred growth. Withdrawals from Coverdells are (currently) tax-free if used for qualified educational expenses such as tuition, fees and books. The funds can also pay for certain K-12 education costs.

You can allocate Coverdell account assets among many different kinds of investment vehicles, and many banks, credit unions and mutual fund providers offer these accounts. However, Coverdells have some drawbacks. The (current) annual contribution limit to a Coverdell is $2,000, and phase-outs kick in at $95,000 for single filers and $190,000 for married filers.

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Why Warren Buffett is optimistic

What don’t you know? Many Americans know about Roth and traditional IRAs … but there are also many other types of IRAs. Here’s a quick look at several basic classes of IRAs, as well as some variations and additional information.

Traditional IRA.

A traditional IRA (or deductible IRA) is an individual savings plan for anyone who receives taxable compensation. IRA assets may be invested in any number of vehicles, and contributions may be tax-deductible. Earnings in a traditional IRA grow tax-deferred until withdrawal, but they will be taxed when withdrawal begins – and withdrawals must begin by the time the IRA owner reaches age 70½. If these Required Minimum Distributions (RMDs) are not taken at that age, a 50% penalty will be assessed on the amount not distributed. You cannot contribute to a traditional IRA after age 70½. The IRS considers all IRAs other than Roth and SIMPLE IRAs as traditional IRAs.

Roth IRA.

A Roth IRA offers you a) tax-free compounding, b) tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, c) the potential to make contributions to your IRA after age 70½ without having to take RMDs. While contributions to a Roth IRA are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals.  For 2010, anyone with a traditional IRA may convert it to a Roth IRA.

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“Certified Financial Planner” – what does that title really mean? When you search for a financial advisor, it means everything. Let me explain why the CFP^® designation is so important.

Today, the financial world is full of credentials and designations. Some are respected, some aren’t. The CFP^® designation is easily the most respected. You really have to earn it. (There are some financial credentials simply conveyed to people after the completion of a glorified sales course. The CFP^® designation is not one of them.)

It denotes education. To become a Certified Financial Planner™ practitioner, you have to study financial planning at a college or university (or at the very least, through an educational program) that offers a comprehensive financial planning curriculum. You also have to pass a 10-hour exam administered over two days (kind of like a bar exam) which covers financial planning, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance topics.

It reflects ethical and experiential standards. Before you can be certified as a CFP^®, you must pass a strict ethics review and agree to work by the CFP Board’s Code of Ethics and Professional Responsibility. As a CFP^® practitioner, you must put the interests of the client first, and act “fairly and diligently” when providing financial planning advice and services. Those services must be based on the client’s needs, and delivered with objectivity and integrity. You must also have at least three years of experience working within the financial planning field before you can even earn the CFP^® certification.

You must maintain these standards. As a CFP^® certificant, you have to be recertified every two years. That requires at least 30 hours of continuing education, so that you may stay informed of the latest developments affecting the financial planning profession. Two of those 30+ hours must be spent studying the CFP Board’s Code of Ethics and Professional Responsibility or Financial Planning Practice Standards.

This is why the CFP^® designation is so respected. Knowing all this, would you settle for any less qualified financial advisor? I doubt it.

The critical difference. Many people today call themselves “financial planners” without having this kind of experience and knowledge. Many of them work with a sales-based mentality. Often, they will suggest an investment product as a financial solution. Quite often, they get a nice commission off the sale of that product.

On the other hand, CFP^® practitioners know that investments are simply components in an overall financial plan, not financial solutions in themselves. We have the education and experience to create integrated financial plans using not only investments, but also strategies for tax reduction, wealth accumulation, wealth preservation and tax-efficient wealth transfer. We have the knowledge to plan for the long-term goals of our clients, and the experience to implement, oversee and revise these plans through the years.

Choose a CFP^®. If you are searching for financial planning advice, you should first see a Certified Financial Planner™ practitioner. Talk to a CFP^® practitioner today, and enjoy the confidence that comes from meeting with a truly educated and qualified financial advisor.

Is greed good?

I just got back from seeing the new Wall Street movie.

Gordo Gekko is back!  Yet his defining statement “greed is good” has now turned more into a question  “Is greed good?” Now that Gordon has had time to reflect on his life after a lengthy prison stint, he seems to do a lot more soul searching in this sequel.

We know the bible is pretty harsh on greed:

1 Corinthians 6:9, 10 and Ephesians 5:5 tell us that ‘greedy persons will NOT inherit God’s Kingdom’.

In Ephesians 5:3 Paul said: “Let fornication and uncleanness of every sort or greediness not even be mentioned among you”

Also in Ephesians 4:17-19, 28 we’re told that rather than becoming greedy, wanting something that’s not ours, we should work hard to buy our own, and have extra to give others in need.

1 Corinthians 5:11 tells Christians not to even associate with a greedy person,

I could go on and on as God’s Word speaks much about the dangers of greed. You see some of the dangers play out throughout the movie as corporations and the financial system come to the brink of disaster.

Wall Street hits a little too close to home as director Oliver Stone’s storyline very closely resembles the 2008-2010 economic meltdown.  The movie often feels more like a documentary about how the collapse happened and how dangerous our financial system was from being completely wiped out.  Though you would love to think that Oliver exaggerated the story, the sad part is, there is enough similarities that you begin to wonder how close this is from the truth?

Being a stock market junkie, I really enjoyed the movie.  There was enough side stories and non-financial market content to keep a wide audience entertained.  The biggest win for the movie in my eyes was Gordon’s quest to repair his damaged relationship with his daughter and make up for much of the harm he caused.  The quest for redemption is something we all long to see.  You can’t help but like Gordon but at the same time you don’t want to get too close to him cause you know you’re headed for another heartbreak!

I highly recommend this film, especially if you’re like me and love financial movies.  Just a warning though: if you are upset with the shenanigans that went down on the real Wall Street the past few years, you may find yourself asking quite a few more questions about what really went on during the crash.  It also helps you see that greed isn’t good and that life really is all about relationships.

Want to watch the trailer?

Investors seriously need to look at rebalancing their portfolios as a part of the investment process. For clarification this post will define investors as those who:

* participate in a 401(k) plan

* have a variable annuity

* Own an ETF, stock, or mutual fund account

* Have a IRA or Roth IRA

If you fit this profile, you should look at rebalancing your portfolio at least once a year.  Why might this be important?

An automatic check-up for your portfolio. Here’s why. When you first contributed to that retirement plan, ETF, IRA or variable annuity, there was a specific asset allocation in mind. Your assets were fractionally allocated across different investments – a certain percentage in this class, a certain percentage in that class, and so on. You did this in a way that suited your tolerance for risk.

But over time, those percentages subtly change. Some investments outperform others, and as a result, the asset allocation may stray from the targets you once set.

Annual rebalancing may remedy this.

A way to keep you on track. How does it work? Well, just as an example, let’s say you have assets initially allocated in a typical 60/40 ratio: 60% in stocks, 40% in non-stock market investments. If stocks do poorly and, say, bonds do well, that 60/40 balance may approach 50/50. You now have a greater percentage of your invested assets than you initially wanted in a certain investment sector.

Now you may be thinking, “If that investment sector is doing well, what’s the problem?” The problem is that you are drifting away from the guideposts you started investing with. If more and more of your assets end up in one investment class, your portfolio becomes less and less diverse and more heavily weighted in one category. So your risk exposure may increase, or conversely, your portfolio assets may not be poised to earn a large enough return to meet your goals.

The age-old idea behind annual reallocation. Five words really sum it up: “buy low and sell high.” In the rebalancing process, some of the assets within an overachieving investment category are sold off and a bit more of the assets in an underachieving investment category are bought in order to regain the original asset allocation. This is the other important effect of automatic rebalancing.

If you want a better understanding of the potential benefits of annual rebalancing/ asset reallocation, or if you just have questions about your retirement plan or investments, be sure to talk with a qualified financial advisor today before making any moves. What you learn may help you in the years ahead.

Have you changed jobs?

Do you have a 401(k) from a former employer?

Have you wondered what to do with it?

There are many misconceptions about what must be done with a 401(k) when someone leaves a company. Some people think they have to cash out their 401(k) upon leaving a job. Others think they must “roll it over” into a new 401(k). Still others believe that they must leave the 401(k) where it is. None of these are true … and none are false. These aren’t “musts”, they are options. The big question is, which option is the right option for YOU?

If you have enough money in your current 401(k) to meet the minimum requirement, you could leave your money where it is. Should you? Well, it depends. If you feel the plan has good investment choices and the annual fees are reasonable, leaving your money there to mature could be a good option for you.

If your new employer offers a 401(k), you could choose to “roll” your money into that plan, but then you will be limited to the new plan’s investment options. So should you? Once again, it depends. You’ll want to look into the structure of the new plan, the fees and the investment options.

If managing where your account is held and how it is invested is important to you, moving your money into an IRA rollover account could give you a great deal of flexibility. It also offers you more distribution options, once you are eligible. Additionally, you could open a brokerage account or purchase a CD, provided the account is titled as your IRA Rollover Account.

The temptation to get a lump sum of money can be too great for some, especially if they have just lost their job or feel that they are in some sort of financial bind. They may choose to cash out their 401(k) upon leaving a job. But what are they giving up? Well, 10% for starters. If they are younger than 59 ½ years old and cash out their 401(k), most of them will incur a 10% penalty. Additionally, they will owe taxes on the amount they cash out. But here’s what really hurts: they are giving up part of their retirement fund or (in many cases) starting over from zero.

Fighting temptation now could lead to big rewards later …

For example, let’s say a 35-year-old leaves a job and rolls over $15,000 from a 401(k) into an IRA earning an average of 7% annually, letting the money mature over 30 years … by the time of retirement, that money could potentially grow to over $100,000.

If you’re unsure which choice is best for you, or if you’d like to learn more about your options, I would be happy to speak with you.