Try and Avoid These Stupid IRA Mistakes

Fortunately, Dec. 31 is not the final decision date for what we do with our individual retirement accounts – the final 2007 IRA contribution deadline comes on April 15 next year – but it’s a good time to review the do’s and don’ts of successful IRA management.

Mistake No. 1 – Failure to start: Do you have either a traditional or Roth IRA as part of your retirement strategy? If not, get some advice – a Certified Financial Planner™ professional is a good start – to review your overall retirement options and give you some ideas where to start.

Mistake No. 2 – Not comparing the advantages of traditional IRAs and Roth IRAs: The biggest differences between a traditional IRA and a Roth is the way Uncle Sam treats taxes on both types of IRA investments. If you put money in a traditional IRA, you’ll be able to deduct that contribution on your income taxes. In a Roth, you don’t receive the tax deduction for those contributions, but when it’s time to take the money out, you won’t have to pay taxes on it.

Mistake No. 3 – Forgetting income limits for a Roth IRA: The income limits for establishing a Roth are as follows: for a married couple filing jointly or a qualified surviving spouse, you can’t contribute if your modified adjusted gross income exceeds $166,000; if you’re filing single, you can’t contribute if your modified AGI exceeds $114,000, and for married people filing separately, you can’t contribute if your modified AGI exceeds $100,000. If you exceed those income limits and make a deposit, you might be subject to a penalty.

Mistake No. 4 – Failing to make sure your beneficiaries are correct: Starting in 2007, a direct transfer from a deceased employee’s IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity, 403(b) plan or a governmental deferred compensation plan to any qualified IRA can be treated as an eligible rollover distribution if the beneficiary is not the deceased’s spouse. That means your kids or any other designated recipient can inherit your IRAs without negative tax consequences at that time. Non-spouse beneficiaries need to check with a tax expert when they must begin distributions from an inherited IRA. Of course, no matter what the investment, make sure your beneficiaries are always current.

Mistake No. 5 – Not knowing the maximum contribution: For both traditional and Roth IRAs, the maximum annual contribution for 2007 is $4,000 unless you are age 50 or older, when you can add an additional $1,000 to that total. But review the income limits for contributions as you go.

Mistake No. 6 – Frittering away your tax refund: Did you know you could deposit your tax refund directly into your IRA? It works for a health or education savings account as well. While many people use their tax refund as a bonus to buy a treat or pay off bills, consider filing your taxes a bit early and arrange to e-file a direct deposit to your IRA so you can note that deposit for the 2007 tax year by next April 15.

Mistake No. 7 – Forgetting retirement savings benefits for active military personnel: The 2006 Heroes Earned Retirement Opportunities (HERO) Act allows active military personnel and their families to put a potentially greater contribution toward their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income to determine the contribution amount for traditional and Roth IRAs – it hadn’t before. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA. This change is retroactive to 2004 and affected military personnel have until May 28, 2009 to make their contribution, though amended returns may be filed.

Mistake No. 8 – Withdrawing money early from an IRA of blowing a rollover: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59 ½ years old and do not put it back into an IRA within 60 days. When moving assets, most of the time a trustee-to-trustee transfer can be more efficient and with less margin for error. If the IRA distribution check is made payable to you, there is a greater chance you’ll miss the 60-day deadline and you’ll face taxes and penalties.


December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Say Goodbeye to 2007 with Some Smart Tax Moves

December’s a busy month, but it’s not too late to focus on last-minute tax savings. Consult a tax or financial advisor such as a Certified Financial Planner™ professional to see if these might work for you:

Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.

Check investment gains and losses: If you have some capital losses in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you've realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.

Prepay property taxes: If it makes sense to accelerate that deduction, pay those early 2008 taxes before the end of the month.

Prepay state taxes: Again, if it makes sense based on your tax situation, consider making a fourth-quarter estimated state tax payment due in January this month to accelerate the deduction.

Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2007 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.

Got time to go green? December isn’t exactly everyone’s favorite month for home renovations, but if you are inclined to replace windows, insulation or heating/air conditioning systems that meet particular energy conservation standards, you might qualify for a credit up to $500.

Consider the sales tax/income tax tradeoff: Taxpayers in 2007 will again have the option of claiming either state income tax paid or state sales taxes paid as itemized Schedule A deductions. If your state doesn’t have an income tax, definitely start totaling all the sales taxes you’ve paid. However, if you do pay a state income tax but have purchased such big-ticket items as cars, boats or construction supplies and equipment during the year, run the numbers anyway. The total sales tax deduction is figured on an amount from the IRS state sales tax tables in addition to the actual sales tax amounts paid on the major purchase items. The alternative is to ignore the IRS Tables, and simply add up all sales tax payments.

Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year, you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.

Make sure donations are documented: As of January 1 this year, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.



December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Business Not So Good? Here’s How to Protect Against Job Loss in a Financial Plan

In September, Chicago outplacement firm Challenger, Gray & Christmas announced that August layoffs had rocketed 85 percent to 79,459 in August from 42,897 in July, continuing a steady march upward in job cuts since spring.

What does this mean to you? As Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.”

So, are you ready for a depression?

A financial advisor such as a Certified Financial Planner™ professional will insist you build a cushion in case of job loss – it’s part of their job to make sure you understand the worst-case financial scenarios in all areas of your life. Even if times are good at your employer, use these stress-free moments to plan for a rainy day:

Build that emergency fund: If you don’t have 3-6 months worth of living expenses already saved in an interest-bearing account for emergencies, start socking it away. Try to find an account with an automatic deposit feature so you never have to worry about missing a week of savings. And make this account separate from any other savings or investment account. Wondering where you’ll find that extra money? Start tracking your spending and you may readily notice areas where you can economize.

Slash your high-interest debt: While times are good, cut your spending so you can eliminate credit card, auto and home equity debt – these are the kinds of debt that are particularly punishing if you’re out of work. The sooner you can learn to manage debt and use it only for reasonable purposes, the sooner you’ll be on your way to a savings and investment cushion that will protect you in good times and bad.

Keep networking: It’s always a good idea to get to know your peers in the city or town where you work. It’s particularly wise to make the time to network while you’re still employed because you might get the lead on your next job well in advance of the time when you may need it. The money you spend on membership in a group or association key to your industry may be the best money you’ve ever spent. Plus, it may be tax-deductible.

Get a line of credit while you’re still working: If you own a home, consider taking out a home equity line of credit and vow never to touch it unless you run into a serious cash flow problem if you lose your job. If you don’t touch it, it won’t cost you anything. Make sure you apply for the line while you’re still working – lenders want to see that steady salary.

Use your company’s education dollars: Sharpen your skills on the company dime. Take classes that will improve your skills at this company or other employers down the line. You might get a promotion with those added smarts, and that could make you more invaluable to your employer.

Apply for disability coverage while you’re still working: Personal disability coverage is increasingly important as companies continue to pare benefits. Group disability coverage can be threadbare if you have a lengthy illness or disability. Plus, it makes sense to buy personal disability coverage based on your current income. You won’t be able to buy as much if your income goes down.

Apply for your child’s college financial aid while you’re working: If you have a child in college or ready to go to college, make sure you have filled out the FAFSA – the Free Application for Student Financial Aid – on time. Even if you don’t need the money now, there are hardship forms that can be filled out later in case your child needs the aid and you’re without a job. Even if you’re in relatively good shape now with your child’s tuition now, consider this college insurance for your kid.

Understand your benefits: If you are laid off, you will qualify for a continuation of your employer’s health insurance benefits through COBRA. The federal Consolidated Omnibus Budget Reconciliation Act allows an individual to buy coverage from his former company for 18 months (or more in certain situations) due to employment termination or reduction of hours of work. You’ll end up paying the amount of your total premium since the boss doesn’t have to pay his share anymore, but at least your coverage won’t change. If you’re married, see if you can switch to your spouse’s health coverage – it might save more money than going COBRA. Also, check out what your unemployment benefit will be ahead of time so you can budget.

Stay away from your 401 (k): The possibility of losing your job is an excellent reason never to take out a 401 (k) loan. You’ll need to pay it back before your last day at work. And don’t even think about tapping retirement savings if things get tough. Find another way to shore up your cash flow – take on a part-time job if necessary until you find your next full-time position. It’s not uncommon for a part-time or temporary position to lead to a rewarding full-time job.


November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Will Your Kid’s Inheritance Make Her a Monster? Not If You Plan Carefully

The airwaves are full of cautionary tales of young people with too much money too soon – wretched excess is in, and responsibility seems, well, pretty boring. And your last name doesn’t have to be “Hilton” for you to worry.

Inheritances, trust funds and other benefits from hard-earned family fortunes of any size can affect the children of wealthy individuals in incredibly positive and negative ways.

Most financial experts, such as Certified Financial Planner™ professionals, will tell you the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:

Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the No. 1 goal of protecting those assets, but passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?” Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.

Start basic money training early: In most households, kids start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a popsicle. Obviously, your kid might have some idea already that his parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all kids need no matter what their circumstances. You don’t need to lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Your job should be to introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your kid is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.

Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the kids will repeat those patterns as teens and adults. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect children to do the same, that’s a powerful lesson about wise choices in time and money for a lifetime.

Do a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.

Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it is entirely fair to bring them into the process of the care and feeding of that wealth at a significantly earlier age, possibly in their early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested and what efforts are taken to protect its principal are essential if they are going to take over responsible management of those funds someday. Kids need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.

Raise the suggestion that wealth should stay invested. Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to understandably want to have some fun with it. But it’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (advanced education, starting a business or their own philanthropy) or have wealth to pass on to their families.

Get them some independent training: The wealth management industry – including financial planners – are directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about training your kids can receive when you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise to continue their learning in an adult environment where they can take the lead in a discussion.


November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

A Family Mission Statement Can Keep Family Goals First and Money Squabbles at Bay

When rich families squabble over the family legacy, it becomes headline news. Witness the recent battle over the ownership of the Wall Street Journal between members of the Bancroft family. When approached by media titan Rupert Murdoch, various family members fought over whether to preserve the family legacy at the legendary daily business paper or take the money and run. Money eventually won.

For most average Americans, such stories are an illustration not only of how money doesn’t buy happiness, but how it breeds dissention and distance between people who could be enjoying their wealth and moving in concert. With all that money, how can people be so unhappy and contentious?

Families with substantial assets – or the promise of substantial assets as a business grows – might consider creating a family mission statement. While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. When a family sits down to discuss what is really important to them, it’s an opportunity to take the machine apart and see how it works. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but to their surprise, money can take a back seat. Families discover particular strengths, weaknesses and unexpected courses of action within their ranks. The process might identify future leaders of the family.

Trained financial advisors, such as Certified Financial Planner ™ professionals, can explain and guide the process. Some planners may be trained to facilitate such discussion based on the size and goals of the family involved.

The general creation of a family financial mission statement should have four key touchpoints: estate issues, philanthropy, business direction and family dynamics.

Here are some questions that should be asked of everyone in preparing the family’s financial mission statement. They should focus on relationship issues first, and then move into business and money matters.

• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?

Structurally, the written mission statement can be whatever you agree it should be – a few paragraphs or a page or two. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps your family establish its identity and the variety of voices within. It can help set goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.

As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.

For a handy resource on writing a family mission statement, go to this site: http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle


November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

What You Can Do Before the Kiddie Tax Loophole Closes

When President Bush signed new legislation in May to limit gifts to children that take advantage of their lower tax rate, it was the second time in just over 12 months that Congress extended the reach of the so-called kiddie tax, which subjects a child’s income to his/her parents’ higher tax rate.

Maneuvering around the kiddie tax has helped parents save for college educations for years, and given the changes, it’s a good idea to consult a financial or tax adviser to discuss your options.

Congress apparently got fed up with a particular tax strategy used by wealthy families who transfer large piles of stock, mutual fund shares and other assets to their kids (who are typically in the lowest two income brackets of 10 percent and 15 percent) so they could sell those securities at a low capital gains rate. The top rate on long-term capital gains and qualified corporate dividends is 15 percent, but since 2003, those in the lowest two income brackets had a shot at a 5 percent capital gains, which is scheduled to drop to zero for those low-income taxpayers in 2008.

So here’s what’s happening this year and next. During 2007, investment income for a child 17 years old or younger (measured as of Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before 2006’s changes in the law, the kiddie tax applied only to kids younger than 14.)

Starting in 2008, the age limit for the kiddie tax will rise to 18 and under, or 23 and under if the child is a full-time student. There are some exceptions for kids with paid jobs – the expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support needs.

What you can do now

If you had put appreciated securities in your child’s name and the child is a full-time student under the age of 23 but at least 18, your child can sell those securities this year and still claim the 5 percent capital gains rate. There won’t be a zero capital gains rate available to your student next year, so you need to act before the end of the year to take advantage of the 5 percent rate before it becomes the parents’ 15 percent rate in 2008 via the kiddie tax.

You may also want to start or redouble your efforts in the 529 college savings plans you’ve set up for your kids. Qualified withdrawals for education are tax-free and therefore wouldn’t be subject to the kiddie tax. The same is true for qualified withdrawals from Coverdell education savings accounts.

Outside of 529 plans, you might consider investments that generate little or no taxable income such as municipal bonds.

Watch out for financial aid

Whatever gift and tax strategies you apply to your college savings strategy, make sure those assets don’t undermine any efforts your child is making to secure financial aid.


October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Couplepreneurs: Starting a Business with Your Better Half Can Reap Huge Rewards – And Unique Problems

It’s a familiar scene: A couple comes home after a long day at their respective workplaces. They spend their takeout dinner recapping the day and how much they hate their jobs. In a brainstorm, they decide to start a business where they’ll be able to determine every step of their future from now on.

After all, they love each other – why shouldn’t they be able to work and live together?

For many couples, this major decision is the ticket to wealth, self-determination and happiness. For others, it can lead to severe financial and relationship stress. Such a move takes more than planning – it requires a full assessment of your personalities and your money issues to determine whether working and living side-by-side is right for you. A good start is a visit to a trusted financial adviser.

Here are some key steps to consider:

Give yourselves a timetable to startup: You might be tempted to give notice tomorrow morning, but it’s much wiser to lay out a timetable over the coming months with specific components:

Study the viability of your business model: Talk about worst-case scenarios. Bring in some trusted advisers to ask tough questions of what you’re planning to do and the viability of your idea. Convincing each other you’ll make it work isn’t enough. You need to understand the marketplace you’re walking into and the roles each of you will fill in its success. Most of all be realistic about your workload and when you can get breaks.

Understand how your tax situation will change: Depending which business structure you choose – and you should get tax and legal advice on this before you start -- you will need to plan for income tax and self-employment tax and payroll taxes, if applicable. Payroll tax requirements are more stringent than income taxes.

Set a budget for your business and personal life: A planner can help you establish a budget for supporting your business as well as your life at home that will make cash flow more predictable. Conserving cash is critical in the startup phase of any business so critical long-term goals can be met. Couples need an emergency fund of six months to a year of expenses since successful businesses take months or years to turn a real profit. And if the two of you haven’t revised your estate plan to accommodate the business, it’s time to make that plan now.

Plan for your kids in the business. There may be very cost-effective ways to employ children in the business for work commensurate with their skills.

Get your insurance in order: Before you leave your current employer, figure out the cost of insurance you’ll need to take on for the entire family if you take on health, life, home, business, disability and if you’re over 50, long-term care coverage. These expenses may be enough to encourage one of you to stay at your old job at least for a while to keep those benefits going while the other devotes more time to the startup.

Set targets: Talk through critical milestones of the business – both good and bad. Do a proper business plan with income and cash projections. Decide what factors would lead to expansion or closing your doors. If you’re doing so well that potential buyers of the business start sniffing around, figure out a point in advance at which you’d sell.

Talk about an exit plan if you break up: It may be hard to imagine now, but a breakup of your relationship with no financial plan for the business can be devastating. Whether you’re married or living together, a successful business is an important source of wealth, and you need to plan for the day one side of the relationship wants out and potentially wants to buy the business or be bought out. If one spouse put more capital into the business than the other, provisions should be made to safeguard that investment.

Write it down: Documents and legal covenants are important – make sure you have the right ones in place.


October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Thinking About Borrowing from Family or Friends? Do It The Right Way.

Whether it’s for a business, a home or a new car, there’s something very attractive about the idea of asking friends or family for a loan. Nobody’s worried about a credit check or the other lengthy documentation and you can still hang out with your lenders at the holidays.

In 2005, the National Association of Realtors reported that about 9 percent of first-time homebuyers made their purchase with help from a friend or relative, up from 5 percent in 1999. About 25 percent of new homebuyers get money from a relative or friend, a portion that’s remained fairly constant over the past decade.

Yet there are good and bad aspects to private loans. The good news first:

• Terms can be significantly friendlier than a borrower would qualify for in the open market. For example, the rate charged on the loan can be higher than the lender would receive in a deposit account but lower than the borrower would pay a commercial lender.
  
• They can require little or no collateral.
  
• It’s a way to keep money in the family.
  
• It’s a way for a borrower to be able to buy a home, a car or other critical assets even if they have a poor credit rating.
  
• There’s no loss of tax benefits to the borrower or lender if an agreement in the case of a mortgage loan is structured and reported properly.

Then the bad news:

• Unclear agreements can lead to missed payments or default.
  
• If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed.
  
• Jealous relatives could say they weren’t treated fairly.
  
• Disagreements between borrower and lender could kill an important relationship.
  

The best arrangements are formal – written in proper legal language, notarized and recorded in the county where the property resides. A financial adviser can talk to both parties about what such loans – particularly real estate loans – can mean for their respective finances. It also makes sense for both parties to visit their respective tax professionals to make sure they know the correct ways to document the loan transaction over time for tax purposes.

A detailed document – prepared with the help of an attorney – can also lay out specific scenarios if either the borrower or the lender has to break or alter their agreement. Such trained experts can talk you through the benefits and pitfalls of a private loan arrangement as it affects your particular situation (either as lender or borrower) and specific laws and requirements in your state you have to follow if both borrower and lender are going to derive tax advantages from the agreement.

Generally, any private loan transaction should include a promissory note that establishes how the debt will be repaid. That’s true for business loans or loans for most types of property. In the case of a business loan, it makes sense for the potential borrower to get specific advice on how lenders in their business will be treated not only in terms of repayment, but default.

In the case of a loan made for real estate, a mortgage or “deed of trust” statement (depending on the state you live in) or an agreement specific to the type of loan that binds the property as collateral for the promissory note will be necessary. It basically says that if you don’t fulfill all the terms in the agreement the lender has the right to foreclose or repossess the property.

Even if a friend or relative makes an offer of help, it’s proper for the borrower to take the initiative to structure the arrangement in a way that’s responsible and beneficial to both. If a relative is drawing income from the loan, special provisions should be made for prepayment and other contingencies.

The most important thing to remember and plan for? When two people who are close to each other enter into such an arrangement, the most valuable thing really isn’t the money. It’s the relationship.

October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

How Your Personality Affects Your Financial Decision-making

The recent volatility in the stock market has everyone a little jumpy. If you’ve never worked with a planner before, one of the first things he or she will do is make you fill out a risk analysis questionnaire.

Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.

The most important thing a risk questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty, are you willing to take a little risk or let it roll because “you can always make more of it?”

A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:


1. What’s important about money?
2. What do I do with my money?
3. If money was absolutely not an issue, what would I do with my life?
4. Has the way I’ve made my money – through work, marriage or inheritance – affected the way I think about it in a particular way?
5. How much debt do I have and how do I feel about it?
6. Am I more concerned about maintaining the value of my initial investment or making a profit from it?
7. Am I willing to give up that stability for the chance at long-term growth?
8. What am I most likely to enjoy spending money on?
9. How would I feel if the value of my investment dropped for several months?
10. How would I feel if the value of my investment dropped for several years?
11. If I had to list three things I really wanted to do with my money, what would they be?
12. What does retirement mean to me? Does it mean quitting work entirely and doing whatever 13. I want to do or working in a new career full- or part-time?
14. Do I want kids? Do I understand the financial commitment?
15. If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to afford their college education?
16. How’s my health and my health insurance coverage?
17. What kind of physical and financial shape are my parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!


September 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

When Real Estate’s in Trouble, Spruce up Your Home and Finances

As the subprime lending mess sorts itself out, there will be plenty of conflicting signals in weeks ahead on what you should do with real estate and your investment picture as a whole. Most of the advice will be knee-jerk.

Your response shouldn’t be.

If you’ve been working with a financial adviser you trust, you should already have a plan that insulates you from the worst the market is dishing up now. When it comes to real estate those with spotless credit, ready cash and absolutely perfect properties are the ones who will be in the best position to successfully cope with this challenging market.

If that doesn’t describe you, you should consider doing some spruce-up work around the house, strengthening your credit report, and taking a hard look at your long-term plans. Some ideas:

Should you sell? Do you have a job opportunity in another city or country you can’t refuse? If the answer’s a yes, then it’s probably unavoidable that you need to be in the market. Of course, that job opportunity should pay you well enough or give you a moving allowance to blunt your hardship level while you’re trying to sell. However, if it’s just a matter of wanting to take advantage of a relatively good price on another piece of property and you need to put your current residence on the market, definitely think twice – in certain markets, homes prices have begun to fall.

Should you buy? Many economists and financial professionals believe that the pain isn’t over in the housing market. The enormous price increases of the last few years went unmatched by increases in personal income and were fueled by rampant speculation, historically low interest rates and lenient lending standards. If you plan to live in the new house for at least 4-5 years and have established a solid financial foundation then you’re probably in the best position to make your investment work long-term.

Is your property in good shape? If you’re not in an immediate position to make a move, then consider improvements. When the market does recover, buyers won’t revert to the mentality of late 2004 when people wanted property in virtually any condition at any cost. Buyers will want property in clean, move-in condition when you decide to put it on the market, so make sensible investments in landscaping and cosmetic repairs inside and outside the house.

Should you renovate? Be really careful here. People always expect renovations to pay off big, and rarely does that happen – it may take years to recoup your money, much less show a profit. For a reality check, go to Remodeling magazine’s annual Cost vs. Value report online (http://www.remodeling.hw.net/content/CvsV/CostvsValue-project.asp?articleID=381305&sectionID=173) and check 2006 project cost averages for your region of the country. In any event, never believe that in a good or bad market a renovation is going to buy you immediate profits on a home.

Know how you're going to handle capital gains: When you sell, remember that married couples can exclude from their taxable income up to $500,000 of gain and individuals filing separately can exclude up to $250,000. It’s required that you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is generally applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.

Clean up your credit report: If you’re not planning to borrow now, make sure you’re in good shape to borrow later. Start with your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. Also, a bad credit score can raise the total cost of your mortgage.


September 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

The Ins and Outs of Audits

According to the Kiplinger Letter, random federal tax audits are starting up again in October after a brief hiatus – about 13,000 taxpayers will receive letters. These are the infamous “line” audits, designed to provide a database to be used in designing guidelines for more efficient inspection of returns. Agents will reportedly be looking specifically for hidden or underreported income and exaggerated credits and deductions listed on Schedules C (profit or loss from business) and F (profit or loss from farming).

The government has been focusing for awhile on the increasing number of self-employed individuals. Even if you dodge the bullet for now, it’s always smart to be vigilant against the expensive and stressful possibility of a tax audit. A qualified tax professional can assist you in the preparation of your return to minimize the chances of an audit coming your way.

There are three types of audits:

• Correspondence audits happen when the IRS sends a letter asking for clarification on relatively simple items. It’s usually handled and completed through the mail.
  
• Office audits are conducted on the IRS’s turf. You meet with an examiner who wants to see documentation intended to answer their specific questions. It’s wise not to volunteer any other information beyond what they ask.
  
• Field audits are the stuff of TV cop shows. That’s when the IRS comes to your home and starts nosing around to see why that Bentley is sitting in the driveway of someone who reported $28,000 in income last year. These tend to be pretty serious.
  
  There are some obvious no-no’s that shift your return to the audit pile. The following measures won’t guarantee you’ll avoid an audit, but they’re key issues that the IRS focuses on when deciding which returns to target:
  
  Messing up the basics: This is an obvious point, but remember to sign the return, add the Social Security Number and double-check the math. Fill out every applicable line on the return, or better yet, get a tax preparer to do it since professionally prepared returns tend to be easier to read and understand because you’re paying qualified people to get it right. Bottom line -- sloppy returns tend to draw scrutiny.
  
  Rounding can be a problem: Precise numbers suggest precision. It’s always best to show conservatism to the IRS. Round down to cut off the pennies, but rounding up to the next hundred or thousand tends to draw attention.
  
  Note sales of investments carefully: Anytime you sell stocks or bonds, the IRS and the taxpayer receives a 1099 noting the sale price. Your tax professional can go over the proper way these should be noted on your return. Also remember that income items such as interest, dividends and other sources of income are matched with the return from documents that are already on file with the IRS.
  
  Scores are everywhere: In case you didn’t know, the IRS – like the lending industry – assigns you a score. It’s called the Discriminate Information Function (DIF), a computer program that compares, among other things, the deductions you’re taking against others in your income bracket. It’s the way an increasingly technology-driven IRS is screening for suspicious returns. One of the best ways to avoid a high DIF score is to report all income – don’t let yourself think that any amount is not worth reporting.
  
  Be wise about itemized deductions: You should claim every deduction the law entitles you to, but a good tax professional can advise you of reasonable limits that are less likely to trip your return. In particular, the IRS looks for overblown charitable deductions – make sure you make cash contributions by check or credit card so there’s a record, and just make sure that all your donations have receipts or other acknowledgement from the charity – that’s a strict requirement of the Pension Protection Act of 2006.
  
  If you do get audited, you need to prove the original value of the items donated and their fair market value.
  
  Keep scrupulous mileage records: If you use your vehicle for work or business, keep a notebook or chart in the car so you can record mileage information as soon as you complete it. The records should list beginning and ending odometer figures, location and reason for the trip. Keep the same records for mileage claimed for medical expense and charitable purposes.
  
  Watch that home office: Even though the government loosened restrictions on home office deductions in 1999, make sure you can substantiate that business area of your home if you’re asked.

September 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Should You Consider an HSA?

The Tax Relief and Health Care Act of 2006 (TRHCA) that went into effect this year made it a bit easier for both employers and their workers and self-employees to obtain Health Savings Accounts, a kind of IRA for health care expenses.

Health savings accounts were created as part of the Medicare Modernization Act of 2003 but have not been wildly popular because they’re complicated. Anyone under age 65 who buys a qualified high-deductible health plan (HDHP) can open an HSA. However, you can still own an HSA and be covered under other types of insurance policies that cover liability, dental, vision and long-term care needs, as long as the same expenses are not covered by both your HSA and the insurance policy.

How do I find a qualified policy? If you’re employed, your employer obviously selects a qualified option and makes that available to you. However, for individuals or sole proprietors buying such policies, you need to put in some research to make sure you get the right plan for you. You need to ask if your current insurer has a qualified plan, and there are Web sites you can search for ideas -- www.hsainsider.com and www.healthdecisions.org.

Will I automatically qualify for the HSA option at my company? No. Under the new law, employers have the right to offer such plans to those who own 5 percent or less of the company or make less than $100,000 a year. However, if you are self-employed, there are no income restrictions.

What are the maximum contributions? In 2007, individuals can deposit up to $2,850 in their HSA, even if the minimum single person deductible of $1,100 is selected. Insured individuals with family coverage can deposit up to $5,650, even if the minimum family deductible of $2,200 is selected. For HSA holders 55 and up, they’re allowed to make an extra catch-up deposit each year until the date they enroll in Medicare. In 2007, the maximum allowable catch-up deposit is $800. This catch-up amount will increase to $900 in 2008 and will remain at $1,000 beginning in 2009.

How do I get started? The new law allows employees the one-time opportunity to roll over their existing balances in flexible spending accounts or health reimbursement accounts into an HSA. The new rules also allow a one-time opportunity for an individual to transfer in funds equal to the relevant HSA contribution maximum for the year.

If I find a policy, should I automatically buy it? No. Since this is a tax issue as well as an insurance issue, it makes sense to discuss this decision with your tax adviser or financial planner.

What’s the difference between an HSA and a medical flexible spending account (FSA)? One important difference is that HSAs allow balances to be carried forward year-to-year, growing on a tax-free basis as long as they’re used for medical expenses. On the other hand, Medical FSAs generally require that the money you contribute each year has to be spent by a particular date (yearend or otherwise) or you’ll lose it. But in certain cases, such as when you incur medical expenses early in a year, you can be reimbursed by your FSA without having to fully fund it – so FSAs might be a better deal. Get help from your tax or human resources professional.

Can I have both an HSA and a flexible spending account? It depends. In any one year you may maintain both accounts but each year the FSA must be used up and can’t be carried forward. You may want to split your money between both to cover non-qualified expenses under the HSA rules. If your FSA provides for limited reimbursement for items not covered by your health insurance plan (such as dental, vision, or wellness care), you can use an HSA for items covered by your plan and your FSA for medical expenses that are not. Obviously, double-check this with an expert.

What happens if I need to use my HSA dollars for any non-medical reason before age 65? You’ll get hit with additional tax of 10 percent, plus any withdrawals will be taxed at ordinary income tax rates. After age 65, you’re free to use the funds for any purpose without penalty, but non-medical withdrawals are still taxable.


August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Think it’s Time to Tap Your HELOC for an Investment? Get Some Advice First

Any bank or mortgage broker who wants to loan you money for a home equity line knows it’s in their best interest to lend right up to your credit limit. They make more money that way. Yet just because you qualify for a home equity line doesn’t mean you need to use it, particularly as a bank for investment purposes.

Quite a few things need to go your way for you to use your home equity line effectively. There’s plenty of risk in plowing loan money into investments that may suddenly lose their value if they mirror the Dow’s drop over recent weeks. While home equity loan interest rates may cost you less than borrowing from your investment brokerage firm by purchasing investments in a margin account, you still need to be very careful.

To borrow home equity effectively, you need stable interest rates and rising home values that go with a strong economy. Remember that mortgage professionals are not investment professionals or financial planners – that’s why they’ll always encourage you to borrow if you have the flexibility to do so. For balanced advice, you should consult a financial planner.

In all honesty, most planners would tell you that if you need to borrow from home equity, you may not be in the strongest financial position to make an investment in the first place.

It makes sense to go over a few home equity borrowing basics. There are two primary kinds of home equity debt. A home equity loan is a one-time, lump sum that is paid off over a particular amount of time with a fixed rate and number of payments. A home equity line of credit (also known as a HELOC), works more like a credit card because it has a revolving balance – interest is due on the outstanding balance and that rate may vary over time.

Here are the things you should discuss with a trusted financial adviser before you tap home equity to put in real estate, securities or any other form of investment.

Will your investment deliver a greater after-tax return than you’ll be paying for the loan on an after-tax basis?

Does your home equity loan or line carry an adjustable rate? If so, a jump in interest rates may make what you owe even more expensive and further offset any gains you make in your investment. If rates fall, it’s good news, but given current conditions, it makes sense to be cautious.

How much is your property appreciating each year in your neighborhood on average? Is it enough to further offset the cost of your investment? Keep in mind that no one is predicting the type of double-digit property appreciation we saw before 2004.

How will this loan work for you from a tax perspective? Keep in mind that home equity loans over $100,000 are generally not tax-deductible.

What if you need your home equity borrowing power later for an emergency (the real reason most of us should open a home equity line and then avoid using it)?

Could you handle that emergency if your borrowing was strained to the maximum?

How liquid is this investment? If you had a sudden major expense or lost your job, could you turn it into cash without major hardship?

How are your other debts? Do you have significant balances on credit card or auto debt? That may raise the rate you pay on your loan – another potential cut in your investment profit potential. As long as you can deduct the interest, you might just be better off consolidating and paying off debt rather than taking a flyer on an investment.

How close are you to retirement? From a cash flow perspective, will you be able to handle the loan payments assuming your investment using the home-equity funds doesn’t work out?

Home equity is a good option for many important financial goals, but you have to balance risk against potential reward. In most cases, it is always good to hold home equity in reserve for a real rainy day.


August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Thinking About Going Back to College? Make a Plan First

You’re in your 40s, 50s or beyond and you’ve either always dreamed of going back to school or realized you need a degree or extra preparation to get to the next level of your career. The mid-career college plan should be very different than the one you and your parents had in place when you were 18 – and that’s probably a good thing.

A July/August 2006 story in AARP Magazine by noted workplace and career expert Rosabeth Moss Kanter pointed out that retirement-phobic mid- or late-career types may retreat to college campuses instead of the golf course to prepare for the next phase of their life. Why? They want to train for completely new careers in all-new professional fields or public service. According to the piece, “Traditional volunteering is not what leading-edge boomers have in mind. They want to be leaders and to help improve the world.” Education will be a part of that movement.

The back-to-school movement for older Americans is an interesting one, but it goes beyond purely financial considerations. It makes sense to discuss your ideas with a tax professional and a financial planner before you make a move:

Do you really need the degree? Depending on the field, many employers will look at an experienced worker and take their particular work and life accomplishments into consideration when hiring. An MBA or other advanced degree may be personally fulfilling, but you have to consider whether your future plans really require it and whether the degree will pay for itself in the end in salary, opportunity or both.

Are you planning to attend school while working or will you take time off? Going for an aggressive degree program while working full-time can be financially, mentally and physically draining. Obviously, if you plan to take a sabbatical and go to school full-time, that’s a more complex set of financial issues you need to consider well in advance, and you should get help planning for it. Beyond finance, you need to be prepared for the demands of school on your time with family, friends and your personal relaxation. Time is an opportunity cost you can’t get back.

Check your qualifications for federal and state tax credits. Both the federal Hope Credit and the Lifetime Learning Credit are among options you may consider to help cushion the tuition blow if you qualify – discuss these credits and other ways to afford college with your tax expert as well as your planner.

How prepared are you to take on debt? It would be wonderful to pay cash for a college degree, and with time and planning you might be able to do it. But if you need to take out debt to pay for your coursework, make sure your credit cards and other debt are paid off first. You’ll put yourself in the best position to afford any student debt you take on.

Will your company pay? Take advantage of every educational break you can take before you leave your company. If they require you to stay a certain amount of time after attaining your degree, work that into your plan.

How’s your retirement and health plan? It might seem like a good idea to raid the retirement plan or milk the home equity to go back to school, but you need to research whether that makes sense for you. Despite your current energy and determination, no one has a guarantee of perfect health through the last half or third of their lives. Also, you need to plan to keep funding retirement if you’re still working and managing your retirement plan if you’re heading back to school.

Consider a functional degree. All sorts of colleges – even the nation’s most prestigious schools – are considering abbreviated graduate and post-graduate programs that give students exactly the amount of education to upgrade their skills and head back into the workforce. If a one-year program will do, why pay for two or three?

Are your school choices friendly to older students? It’s your money. Make sure you’re attending an institution that considers its older students a valuable addition to its campus and makes you welcome.

August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

An All-Weather Strategy to Real Estate Investing

Despite some positive stirrings in real estate in various parts of the country, it’s wise to take cautious steps when strolling back into the investment property market that was so overheated just a couple of years ago.

A good first step is consulting with a tax or financial adviser, such as a CERTIFIED FINANCIAL PLANNER™ professional, who can help you assess your own financial situation before you begin. Getting your own financial house in order first is critical.

Some thoughts:

Remember that real estate investment is part of an overall financial plan. Investing in real estate requires specific tax, spending, budgeting and people management advice. Based on your other assets and your overall financial plan, investment property might be a worthy goal, but only if it fits your investment strategy and if you’re willing to put the time and effort into creating a successful business.

Don’t spend until you study: If you don’t have an intimate knowledge of neighborhoods, rental rates, commercial traffic or any of a dozen more factors that make real estate investments a particular success in one community and not in others, don’t even start. The most successful people in real estate investment have taken the time to learn about the properties they’re buying, sensible ways to borrow and economical ways to manage the buildings they have. Make sure you assemble a good advisory team around you starting with your financial planner, your tax adviser and an attorney knowledgeable about real estate transactions. They’ll teach you and keep you from making serious mistakes.

A slower market doesn’t mean a bargain market. Even though the gains of the past 15 years aren’t what they used to be, keep in mind many sellers aren’t terribly desperate to sell and they’re not dropping their prices all that much. Make sure you take the time to study a particular market not only for gains in price, but for stability in rent and overall quality of the property and neighborhood you’re examining. You might hear about a downtrodden neighborhood ready to “turn,” but that rotation might take years – start slow and pick properties with the best chance of appreciation.

Home ownership is not real estate investment. If you’re thinking about leapfrogging from one residence to a new one in hopes of huge gains when the market returns, give yourself a reality check. An investment is something you can sell when the moment is right without any hesitation. Is that something you can really do with a home you’ve grown comfortable in? When the market goes up or down, we don’t necessarily think of dumping our principal residence. There are emotional ties as well as physical ties to a home – whereas real estate bought as an investment must produce income during ownership or a profit at the time of sale without exception.

Real estate is not an automatic ticket out of financial trouble. Some people have gambled their way out of debt by buying distressed properties and reselling them at a profit. They’re the lucky ones – and after hearing so much about the “flipping” phenomenon, many of those success stories might be apocryphal. Be aware of your risk tolerance at all times.

Enter the foreclosure market carefully. With all the reports of subprime borrowers losing their homes in recent months, don’t think those foreclosure numbers will automatically provide you with a can’t-miss opportunity in real estate. Taking advantage of the foreclosure market is both a learning exercise and an emotional one. It takes time to learn all the correct avenues in a community toward investing successfully in failed properties, and actual contact with families losing their homes can be wrenching even if you do know what you’re doing. Foreclosure and pre-foreclosure investing is not for the faint-hearted.

Cash is king. During the white-hot real estate market, people were buying and selling property for little or no money down because lenders were willing to take that risk. Today, in a higher rate environment, that’s definitely changed. While many successful real estate investors choreograph borrowing seamlessly into their strategy, cash is an important decision for down payments and covering ongoing expenses. This is where your advisory team comes in.

Keep your credit report clean: Only borrowers with the highest credit scores will find the best lending deals if they need to borrow. Make sure your credit report is clean before you enter the market.


July 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Divorce Can Sink Your Health Coverage – What To Do First

When a marriage comes undone, so can an ex-spouse’s health insurance safety net. For the spouse facing a loss of coverage, it’s a double whammy. First, they’re in a rushed position to find coverage. Second, they’ll be shocked to find out how much it costs.

Buying individual coverage is a huge wake-up call today, and it’s a particularly harsh reality to scramble for coverage in a divorce situation if they’re less than 65 years of age (when Medicare kicks in). A February study by the Henry J. Kaiser Family Foundation said that in 2006, annual insurance premiums for individuals averaged a total $4,242. For a family, that average was $11,480. For those in group plans, workers picked up 16 percent of that total for individual coverage and 27 percent for family coverage.

For individuals stuck paying for their own coverage, those numbers can be unaffordable. It’s a particularly big problem for women because they are more likely than men to be covered as dependants. Kaiser reported that in 2004, one in six privately insured women reported she postponed or went without needed care because she couldn't afford it.

Here are some important things individuals can do to assure they have affordable health coverage when facing a divorce:

Try to get on your own plan at work: If you are employed but have been on your spouse’s plan, make your first phone call to human resources at your employer and ask if and when you can enroll. If you can’t enroll immediately, see if you can keep your ex-spouse’s plan through COBRA, which we’ll discuss next. You and your dependent children may be eligible for a special enrollment period under provisions of the Health Insurance Portability and Accountability Act (HIPAA).

Go COBRA: In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA), which provides employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. This coverage, however, is only available when coverage is lost due to certain specific events – fortunately, divorce is one of them. Buying coverage under COBRA means you’ll be paying the full premium for coverage (sometimes up to 102 percent). You’ll have up to 36 months to keep COBRA coverage, which is a good period of time to find a better option. Remember that companies with under 20 workers don’t have to comply with COBRA.

See if your spouse can keep the kids on his or her plan: It’s traditional -- though far from guaranteed -- that the higher-earning spouse agrees to put the kids on his or her health plan. To force the spouse who’s losing coverage to absorb the cost of health insurance for themselves and their dependents can be financially devastating, so if you are in this position, make it a key point in your divorce settlement negotiations.

Seek out coverage at associations: If you are a part-time worker not eligible for work-based coverage, consider coverage through an industry or professional association that markets health coverage to its members. The coverage is typically very basic and you need to scrupulously check out the quality of benefits, but for basic coverage, it’s a Band-Aid until you can qualify for something better.

Go for a high-deductible policy if you can afford it: High-deductible policies (policies with a deductible of at least $1,000) are a better deal for healthy individuals who want to keep their monthly premiums lower. Insurance agents who market individual health insurance sell these health policies, which are called “catastrophic” insurance because they cover major medical expenses as long as policyholders pay for routine care out-of-pocket. With many of these plans you have the option to open a health savings account (HSA) to help you offset the amount of that big deductible in a tax-advantaged account.

Get necessary healthcare expenses out of the way: With so many details individuals face during a divorce, it might be easy to forget this, but if you need glasses or if you planned on any elective medical procedures, get them done before you go off your spouse’s coverage or have to switch to COBRA. That goes for spending out your share of the dollars in the medical savings account (MSA) you have under your spouse’s coverage. Don’t be sneaky about it; just make it part of your agreement.


July 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

The Best Time for a Business Disaster Plan? Before the Disaster Happens

Before 9/11 and Hurricane Katrina, the concept of a business “disaster plan” was envisioned mainly in terms of weather- or fire-related disasters and heavy on the notion of evacuation.

The concept of business risk today is so much wider – legal threats from inside and outside the company, computer-related losses, regulatory threats, and of course, the potential of human and facility losses due to natural disasters or the possibility of terrorism. There really is no one-size-fits-all approach to dealing with business risk – variables like your business size and structure and personal issues like your age, health and your time to retirement also factor into what should be a very customized risk management plan.

If you are starting a business or already own or co-own a company, the first steps in creating a disaster plan should involve separate visits to tax, insurance and qualified financial advisers. A CERTIFIED FINANCIAL PLANNER™ professional with specific expertise in helping business owners plan their finances is a good place to start. Here are some general issues you should consider in developing an overall business disaster plan:

Your plan depends in large part on your industry and business structure. A three-person law partnership may have a completely different risk profile than a sole proprietor working out of his attic or the owner of a body shop. Whether you use expensive equipment in your business or if all you produce is valuable ideas on paper, you need to take specific steps to protect the value of your business assets in tandem with your personal finances. This process should start with a financial review to review how to protect your home, your income stream and your retirement savings if particular scenarios happen.

Develop a “what if” list. Be as imaginative and as negative as possible about this. Consider every possible event that could hurt you or your business – what hurts one automatically hurts the other. The first question – what if you died or became disabled tomorrow? Others might refer to some specific physical plant or computer risks as well as employee or customer risks that could affect your future operations. A good way to make the list is to draw a line down the middle. On the left side, list every possible risk, while writing every possible remedy for those risks on the right side. Prepare this list before you meet with experts.

Protect yourself first. If you’re a good boss, you care about your employees and your customers, and we’ll get to them in a moment. But the first step in a business disaster plan is to review your list of worst-case scenarios and review how you would protect your home, your health, your retirement, your kids’ education and your estate priorities first. If your business fails for any reason, all of those critical necessities could be jeopardized. Make sure you have appropriate life and disability insurance coverage in addition to a current estate plan.

Protect your employees second. In a natural or man-made disaster, lives can be lost. But if you’re closed for weeks and months, key employees may leave and that might be a greater long-term danger to your company. Talk to your insurance company about every physical and employment risk your staff could face in a disaster and see what safety nets are available.

Protect your customers third. If you faced a lengthy business interruption, how would you serve the customers who are depending on you? Are there specific customer service and inventory procedures in place to keep them informed, supplied and most important, loyal once you’re up and running again? Do you have options for alternate office and production space as well as resources for temporary workers?

Protect your information. You don’t have to be some high-tech firm to understand the value of proprietary information that keeps your company running. From proprietary databases and research to customer credit information, this data is critical fuel for your business. What’s to keep a burglar from stealing your computers and taking all your valuable financial, inventory and customer data with them? Better yet, what’s to keep a computer hacker from stealing the information and leaving the machines behind? Data security and backup procedures are increasingly important as disaster-planning priorities. Get help finding the protective measures that fit your industry.


July 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Thinking About Private School for Your Kids? The Earlier You Start the Better

Considering private grammar and high school is a parent’s first introduction to a lifetime of saving for a child’s education.

Depending on where you live, you might face a decision to choose between private and public schools, and there might not be much of a choice. It’s an expensive proposition made even more complicated by the fact that you have to save for college at the same time. Some are able to pay for private school today plus save for college. For others they may have to plan on ‘paying as they go’ for all schooling – today and for college.

How do parents make it work? Some have the money to make anything work, but for those who don’t, it’s essential to plan from the time your child is very young. From the beginning, keep abreast of every possible resource for scholarships, discounts, loan programs and other forms of financial aid.

It makes sense to find a financial planner, such as a CERTIFIED FINANCIAL PLANNER™ professional, who can link a child’s pre-college education planning to the financial planning necessary for college, grad school and beyond. Here are some ideas to start with:

How much? The National Association of Independent Schools (NAIS), a national organization representing private pre-schools, elementary and secondary schools, estimates that the median tuition in 2006-07 for all grades of private day schools was $15,894. For boarding school, the price is almost double.

How much aid? A little more than 18 percent of all private school students are receiving some form of aid at an average grant of $10,871. Financial aid grants for private elementary and secondary schools works roughly the same as college – they are awarded on the basis of need. Grants are the best form of financial aid because they don’t have to be paid back.

Applying for aid: Most schools use the Parents' Financial Statement (PFS) from the School and Student Service for Financial Aid (SSS). This is a service owned by NAIS that helps schools determine how much a family can afford to pay for school tuition and other educational expenses. If the school you are considering does not use SSS, be sure to ask what steps you need to follow in order to apply for assistance. The form considers how many children you’re paying tuition for in K-12 or college and how high the cost of living is in your area.

Don’t forget to plan for retirement: You’ll do anything for your kids, but you have to pay yourself first. Talk to a financial planner to see how much you’ll need in retirement and how much you’ll need to save weekly to make that goal. Keep in mind that your greatest potential for a successful retirement comes from starting savings early and you can’t forfeit that in favor of your child’s education.

Consider a Coverdell Account: This is not a universal recommendation because some families may benefit more from savings plans customized to their situation. Coverdell Education Savings Accounts – formerly known as education IRAs – are trusts created to save money for a child’s primary, secondary or college education. Contributions are relatively small -- $2,000 per beneficiary from all sources during the year – though there may be exceptions for certain types of rollovers. Yet since Coverdell Education Savings Accounts are considered the asset of the account owner, you may want to keep it in your name since an account in the student’s name could adversely affect financial aid eligibility.

Enlist the grandparents: If your parents can afford to help, they have several options to help you save for your child’s education without triggering their gift tax obligation. First, each grandparent can give up to $12,000 tax-free to each child or they can give money up to any amount directly to the school without triggering the gift tax. Also, they can give up to $2,000 annually to a Coverdell account you’ve set up for the child. For college, they can also gift money to a 529 College Savings Plan or a Uniform Transfers to Minors Act (UTMA) account for your child.

Don’t use debt as a Band-Aid: Avoid the trap of being forced to use debt while trying to “do it all.” Stay within your means. If you find yourself close to using your debt options, enlist the help of a financial planner to talk through ways to adjust your spending or find student aid.


May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Lenders May Give You a Break on Debt, But Uncle Sam Might Not Be So Forgiving

There’s a good news/bad news story if you’re a borrower in trouble with mortgage debt. The good news is that your lender might be willing to renegotiate your loan to give you a break on your payments or even forgive a portion of the debt. Foreclosure is expensive and it’s also bad publicity throwing people out of their houses – lenders simply don’t like to do it.

The bad news? The IRS is watching.

Lenders are required by law to report to the Internal Revenue Service (IRS) any amount of debt forgiven to customers. That means that unless you file bankruptcy or are otherwise declared insolvent in court, you’ll very likely owe federal tax on the amount forgiven. Also, the IRS is watching if you’re a homeowner benefiting from something called a “short sale” – a quick, speedy sale of your home to avoid foreclosure. At the present time, those full proceeds would be a target for a bill from Uncle Sam as well.

There is no question that thousands of Americans are in trouble with mortgage debt, particularly those who might have gotten low- or no-down payment loans that have actually raised monthly payment amounts as interest rates have risen. Some of these loans were structured in a way that as rates have gone higher that the loans were sent into “negative amortization” – where any equity is erased and the borrower finds they actually owe more on the loan than the amount they originally agreed to.

Add a potential tax debt to that situation and you see an entire class of borrowers risking the loss of everything they own.

Congress is trying to deal with the problem. Right now, a bill in the U.S. House of Representative entitled “The Mortgage Cancellation Tax Relief Act of 2007” (HR 1876) would amend the tax code to exempt debt forgiveness on principal home mortgages from being treated as income. The legislation would also help another class of troubled borrowers who negotiate pre-foreclosure "short sales" or deeds in lieu of foreclosure, or whose foreclosure proceeds are insufficient to pay off their mortgage debt.

If you think you’re running into this kind of trouble, it’s essential to speak with a CERTIFIED FINANCIAL PLANNER™ professional or a tax professional not only to estimate your tax risk, but also to find out if there might be other approaches to your individual situation. It’s not wise to count on a guaranteed break from Congress, particularly since the bill is in the early stages.

Some things you might want to discuss with your tax expert or financial planner:

Is refinancing an option? If you haven’t made a late payment and your credit is in relatively good shape, you may still have the option to refinance instead of going for loan forgiveness. Make sure you’ve checked your credit reports for accuracy before you make this application.

Selling the house quickly. If you have some equity in your home and your credit is still in relatively good shape, it makes the most sense to get out from under your house payments before you risk default or your payments go higher. You’ll be able to pull out some of your equity to put in savings to reinvest in another home or condo someday.

Set a budget, rent cheap and rebuild your savings. There’s no shame in getting rid of a massive loan and starting over. Granted, renting doesn’t have the same tax advantages as owning, but with proper planning, you can pick up the pieces and start again.


May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

An Annual Insurance Checkup Can Save You Money Without Hurting Your Coverage

As we go through life, our insurance needs change. It makes sense to put certain dates on the calendar each year to see if your home, auto, umbrella liability, life, health, business and disability coverage not only fit your current needs at the right cost but protect you and your family in case of a disaster.

It really hasn’t been that long since Hurricane Katrina underscored the need for individuals and families to think about how insurance fits into an overall financial plan. Weather-related disasters, however, should be only one part of your assessment – it’s wise to consider if you are adequately insured in case a spouse or partner dies suddenly or becomes disabled or if your business is damaged or destroyed.

Here are some ways to examine the coverage and cost issues unique to your situation:

Homeowners’ insurance: It’s always good to see if you can afford to take a higher deductible to get a lower premium, but first, review whether you have the maximum home replacement coverage on your house and its contents. Go to several agents to see what you would get for maximum replacement coverage in your community. This particular coverage is particularly important since so many homeowners carry big mortgages and probably won’t have enough in savings to cover the difference of what insurance won’t. Also, be clear that “replacement cost” means the amount that it will cost to replace your home on the land where it stands – that usually means an amount considerably less than the market value of your home.

Also, make an effort to inventory your collectibles, home office equipment or additional furniture or assets you’ve acquired since you last took an inventory of your home. Make a list of those changes to review with your agent. Then take photos of all significant items and keep them in a safe place -- possibly outside the home.

Auto insurance: If you’re driving an older car that if totaled wouldn’t result in a financial burden to you, you might want to drop collision coverage and/or boost the size of your deductible. Take the money you save and put it in an account for your next new car in case your car is totaled. Also, if you consolidate your home and auto insurance at the same company, you’ll generally get a discount.

Health insurance: Do you fully understand all your deductibles and co-pays? If you’re getting ready to have kids, emergency room visits happen. Does your current plan provide for out-of-network care? Check your prescription coverage -- see what options your health coverage provides you for prescription discounts and prescription-by-mail availability so you can have uninterrupted access to important medications wherever you are. Also, if you travel frequently for work or vacation, check to see what your employer or individual health plan provides in the way of coverage across state lines or outside the country. One uncovered travel-related medical bill can leave you thousands of dollars in debt.

Disability insurance: Many people get disability coverage through work, but some advisors think you should have separate coverage because group policies can be more restrictive and therefore inadequate if you’re out of work for a considerable period of time.

Life insurance: Talk to a trusted advisor, such as a CERTIFIED FINANCIAL PLANNER™ professional, about the right coverage to protect your spouse and children with enough money to help them continue their lifestyle and their educational goals if you die. That includes money for ongoing expenses, mortgage payment and tuition. Your spouse should also consider similar coverage, particularly if he or she is working. You might also consider life insurance for the children if only for burial coverage.

Lastly, remember how external forces affect your ability to buy insurance. For instance, if you buy in a high-crime area or an area hard-hit by weather disasters, you’ll find home and auto insurance tougher to afford. Separate of all local factors, though, you’re going to have to keep a very close eye on your credit report. Your ability to handle credit is pricing your attractiveness as an insurance buyer, a homebuyer, even as a prospective employee. If you really want to save money on insurance, keep your credit record clean.

May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Market Volatility Shouldn’t Rattle a Good Financial Plan

On Feb. 27 this year, the Dow Jones Industrial Average slid 416 points, the biggest drop since the market reopened after the 9/11 attacks. By early May, the market had more than made up those losses and stood at record highs.

How did you react? Did you turn off the news? Did you call your broker in a panic? Or did you call your financial planner to see if your plan was solid?

It’s easy to succumb to the urge to sell if the market takes a header or buy if it’s headed upward. But sudden action is usually a mistake. In the late 1980s, Harvard psychologist Paul Andreassen made news with a research project that found that people who listened to market news actually made lower returns. Why? Because those who sold – or bought – during a market swing probably found a day later that the market was really running on hype, not fundamentals.

You pay a financial planner to devise a financial strategy that matches your risk tolerance and long-term financial goals. No, there is absolutely no way to guarantee that you’ll never lose money. But if a plan truly matches you, the noise level on TV shouldn’t make a difference. So the next time the Dow spikes or slides, ask yourself:

What’s my plan? If you’ve worked with a good financial planner, you should be able to articulate those goals all by yourself or refer to an investment policy statement you made together. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

What’s my risk tolerance? At your first meeting with a planner, you should have discussed – and later filled out – a form asking you a number of questions about how you handle risk and what your expectations were about investment returns. You might have had to do this more than once if your risk tolerance was low but your investment expectations were high – low-risk investors can’t expect the highest returns. That’s part of the education process when you visit a planner.

Am I prepared to stay invested – no matter what? We all remember the “Tech Wreck” of 2000. At the worst of that downturn, investors bailed out of the stock market or drastically cut back, only to get back in after they were “convinced” that the market was rebounding. In reality, they missed out on stock market gains during the early stages of recovery, and that’s costly in the long run. Of course, some investors looking for that late 20th century investment high also got into the real estate market, and they perhaps learned a similar lesson when that market started heading south two years ago.

In 2004, SEI Investments studied 12 bear markets since World War II. Investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (not counting dividends) during the first year of recovery. Investors who missed even just the first week of recovery saw their gains that first year slide to 24.3 percent. Those who waited three months before getting back in gained only 14.8 percent.

Am I diversified? The NASDAQ lost 39 percent of its value just in 2001, and another 21 percent in 2002. Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002, and had an excellent 2003. Bonds also returned well during the bear market. Your planner, based on your risk profile, should have you in diversified investments that fit your goals.

Do I still feel the same way I used to about returns? Having a long-term investment plan doesn’t mean make the plan and leave it to gather dust. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but life events like death, divorce, kids moving out and illness are good reasons to do a head-to-toe review of a financial plan.

May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Making Your Employer a Partner In Your Financial Planning

People who look to their employers for nothing more than a weekly paycheck and basic health care insurance are missing the boat.

It makes the most sense to ask a future employer about benefits before you agree to come to work. But even if you have been working for the same company for years, it’s never too late to go to human resources to make sure you’re getting the most mileage out of your current benefits and maybe pick up a new perk or two. See if you have the following options available, and check with your tax professional or a financial adviser before you make a selection:

Look at health savings accounts: If your employer has converted to a high-deductible healthcare plan, you may have the option of starting a health savings account (HSA). These accounts help workers to save and spend money tax-free for medical expenses not covered by the plan or your deductible. Why are they a good idea? Because you can sock away money tax-free that will cover the amount of the deductible (at least $1,050 for individuals, $2,100 for families) if you need it, and it will grow tax-free over time if you don’t.

See if a Roth 401(k) works for you: In 2006, the government gave employers clearance to offer Roth 401(k)s, employer-sponsored retirement plans that allow workers to put all or part of their 401(k)s into a Roth, which allow after-tax money to grow tax-free. Roth 401(k)s allow higher contribution limits -- $15,500 in 2007 plus an additional $5,000 if you’re over 50 – compared to traditional Roth IRAs that limit annual contributions to $4,000 with an extra $1,000 for those over 50.

Look for a finders’ fee: Companies rarely like to give away money unless they know they’re saving some in the process. Many companies are now offering finders’ fees to employees who successfully bring new workers in the door. Why? Because it costs considerable money and time to hire people, and employers are happy to see their best employees bring friends and former co-workers in the door. Also, some companies give away special bonuses for bringing in new clients, so don’t miss a chance to earn them. However, keep in mind that substantial bonuses may change your tax liability, so keep an eye on that issue.

Check your target bonus amounts: This is usually not a problem for most people who receive annual bonuses, but it makes sense to doublecheck the minimum bonus you should earn annually and what it will take to exceed that limit.

Get flexible: If your company has a flexible spending account for medical, commuting or child-care costs, estimate carefully what you’ll need to spend and get on board. While workers can get a chance to spend out their accounts into the next tax year, it’s very important to project exact numbers so you won’t lose funds at the end of the eligibility period.

Get smart: More than three-fourths of U.S. companies offer education benefits, so if you have the time and inclination, finish that degree or complete a particular course of study to prepare you for your next job or for your enjoyment. Most companies will ask you to stay a certain length of time after receiving such benefits, which is only fair. But education is worth far more than the dollar cost of tuition, so don’t pass it up.

Get fit: Some companies negotiate membership discounts to gyms and other fitness facilities, and that’s a worthwhile benefit. But these days, with company health care premiums going through the roof, some employers are actually paying employees to lose weight, quit smoking or take other steps to improve their health and lower their boss’s costs.

Have some fun: Companies get discounts to a variety of entertainments – the local amusement park, sports events, theaters, restaurants, auto shows and other local events. If they interest you – and particularly if they interest your kids – you’d be foolish to pass up such discounts.

Be proactive: If you hear friends or clients boasting about particular benefits or incentives at their companies, quiz them to find out as much as you can about how their companies afford those benefits. If the story checks out, then go to your own company and ask them if they might consider it.

May 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA