Thursday, March 12, 2009
This Wealth Management Blog Has Moved
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Thursday, January 29, 2009
Thinking About Munis? Make Sure You’re Making Wise Picks
Municipal bonds have long been a safe haven for higher-income investors looking for safety and greater tax efficiency. The credit squeeze put the municipal bond market through its paces like other competing markets this year, but it may be time to take a second look at both municipal bonds and muni bond funds.
Let’s start with a definition of what a municipal bond is. A municipal bond, or muni, is a bond issued by a local government or their agencies to raise funds for a host of reasons tied to keeping the government going. The potential issuers may include cities, counties, redevelopment agencies, water and sewer projects, school districts, publicly owned airports, seaports and other transportation entities. They pay for everything from immediate government expenses to new roads and various public projects. Municipal bonds come in two flavors—general obligation bonds and revenue bonds. General obligation bonds are intended to raise immediate capital to cover government expenses; revenue bonds are the ones that fund infrastructure projects.
As an incentive for investors to buy these bonds, interest income is often exempt from federal income tax as well as the income tax of the state in which they are issued. Mutual funds that invest in municipal bonds also offer the same tax treatment.
This year has held lots of excitement for muni investors and those who were hoping to be. The credit crunch sucker-punched funding sources for public projects as well as private investments–many municipalities ended up dropping certain projects because investors weren’t there to buy the paper and other sources of financing had dried up as well.
Who’s fled the muni market? Hedge funds, issuers of structured notes and municipal bond mutual funds trying to keep up with redemptions from tapped-out investors. Right now, the best source of demand for munis is individuals, who can account for only so much business. But in the absence of other buyers, that’s potentially good news for you.
Keep in mind that even during the Great Depression, no state defaulted on its general-obligation bonds, and while some munis have defaulted, overall, such defaults are very, very rare.
So where’s the opportunity for you? Look at some of the highly rated outstanding bonds. You’ll find some amazing yields that you certainly won’t find in CDs and other investments. Even though their prices have plunged, some municipals late last year were offering long-term, tax-free yields of five percent and above, which translate into the equivalent of nearly seven percent for taxpayers in the 28 percent bracket and nearly eight percent for someone in the top 35 percent bracket when the tax exemption is considered.
That’s a very nice return relative to U.S. Treasuries, considered the safest investments of all.
But before you buy, here are some things to know and steps to follow.
Are munis right for you? The first call you make shouldn’t be to a broker. It should be to your tax professional and your financial adviser. A CERTIFIED FINANCIAL PLANNER™ professional can take a look at your entire taxable investment portfolio (there’s no point in putting tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine whether they’re the right approach to take for your investments.
What munis are in trouble? There are some governments who issued a hybrid muni known as a variable-rate demand note. These were sold mainly to institutions with maturities of up to 30 years that were paying at rates reset as frequently as once a day. During the crisis, the rates on these notes have shot up to double-digit territory, putting the municipalities that issued them under particular strain due to short-term interest rates that can be reset as frequently as once a day.
Keep an eye peeled for the AMT: While most munis pay interest that’s free from federal income taxes, some may pay rates that are subject to the alternative minimum tax, known as the AMT. It’s a little more complicated than we have space for here, but this is absolutely why you need to talk to your tax professional or financial planner before making a move into munis.
Don’t forget to ladder: “Laddering” is a portfolio structuring term. To ladder bonds means that you are buying them with maturities occurring at regular intervals, so when they mature, you’ll have money to reinvest at those same regular intervals.
Watch those ratings: Yes, the main private investment ratings firms–Moody’s and Standard & Poor’s among them–have been in the doghouse for rating many battered investments highly, not just munis. But most municipals rated AA or AAA are generally safe to consider. It’s also important to check the issuer’s long-term ratings history. If they’ve been consistently highly ranked over decades and the municipality has no financial scandal (something that can be checked through news archives on the Internet), that’s another good way to research a bond issuer before making a purchase.
January 2009 — 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.
Let’s start with a definition of what a municipal bond is. A municipal bond, or muni, is a bond issued by a local government or their agencies to raise funds for a host of reasons tied to keeping the government going. The potential issuers may include cities, counties, redevelopment agencies, water and sewer projects, school districts, publicly owned airports, seaports and other transportation entities. They pay for everything from immediate government expenses to new roads and various public projects. Municipal bonds come in two flavors—general obligation bonds and revenue bonds. General obligation bonds are intended to raise immediate capital to cover government expenses; revenue bonds are the ones that fund infrastructure projects.
As an incentive for investors to buy these bonds, interest income is often exempt from federal income tax as well as the income tax of the state in which they are issued. Mutual funds that invest in municipal bonds also offer the same tax treatment.
This year has held lots of excitement for muni investors and those who were hoping to be. The credit crunch sucker-punched funding sources for public projects as well as private investments–many municipalities ended up dropping certain projects because investors weren’t there to buy the paper and other sources of financing had dried up as well.
Who’s fled the muni market? Hedge funds, issuers of structured notes and municipal bond mutual funds trying to keep up with redemptions from tapped-out investors. Right now, the best source of demand for munis is individuals, who can account for only so much business. But in the absence of other buyers, that’s potentially good news for you.
Keep in mind that even during the Great Depression, no state defaulted on its general-obligation bonds, and while some munis have defaulted, overall, such defaults are very, very rare.
So where’s the opportunity for you? Look at some of the highly rated outstanding bonds. You’ll find some amazing yields that you certainly won’t find in CDs and other investments. Even though their prices have plunged, some municipals late last year were offering long-term, tax-free yields of five percent and above, which translate into the equivalent of nearly seven percent for taxpayers in the 28 percent bracket and nearly eight percent for someone in the top 35 percent bracket when the tax exemption is considered.
That’s a very nice return relative to U.S. Treasuries, considered the safest investments of all.
But before you buy, here are some things to know and steps to follow.
Are munis right for you? The first call you make shouldn’t be to a broker. It should be to your tax professional and your financial adviser. A CERTIFIED FINANCIAL PLANNER™ professional can take a look at your entire taxable investment portfolio (there’s no point in putting tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine whether they’re the right approach to take for your investments.
What munis are in trouble? There are some governments who issued a hybrid muni known as a variable-rate demand note. These were sold mainly to institutions with maturities of up to 30 years that were paying at rates reset as frequently as once a day. During the crisis, the rates on these notes have shot up to double-digit territory, putting the municipalities that issued them under particular strain due to short-term interest rates that can be reset as frequently as once a day.
Keep an eye peeled for the AMT: While most munis pay interest that’s free from federal income taxes, some may pay rates that are subject to the alternative minimum tax, known as the AMT. It’s a little more complicated than we have space for here, but this is absolutely why you need to talk to your tax professional or financial planner before making a move into munis.
Don’t forget to ladder: “Laddering” is a portfolio structuring term. To ladder bonds means that you are buying them with maturities occurring at regular intervals, so when they mature, you’ll have money to reinvest at those same regular intervals.
Watch those ratings: Yes, the main private investment ratings firms–Moody’s and Standard & Poor’s among them–have been in the doghouse for rating many battered investments highly, not just munis. But most municipals rated AA or AAA are generally safe to consider. It’s also important to check the issuer’s long-term ratings history. If they’ve been consistently highly ranked over decades and the municipality has no financial scandal (something that can be checked through news archives on the Internet), that’s another good way to research a bond issuer before making a purchase.
January 2009 — 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.
Friday, January 23, 2009
One Good Thing about a Tough Market—It’s a Good Environment for Roth IRA Conversions
Most of us will not start the New Year happy about our investments. But if you are looking for a bright spot, it’s not a particularly bad time to consider converting a traditional IRA to a Roth IRA.
Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).
Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your tax professional about doing a full or partial Roth IRA conversion.
Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. But, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them.
Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status.
The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. But anyone considering such a move—regardless of his or her income status—should first review their current retirement asset strategy with a tax or financial adviser such as a CERTIFIED FINANCIAL PLANNER™ professional.
Things to consider:
The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59 1/2 to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains.
Time to retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them.
Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes.
A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings.
January 2009 — 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.
Right now, anyone with modified adjusted gross income of less than $100,000 a year (individual or joint income) can convert a traditional IRA account to a Roth IRA. Higher-income Americans will get the same break in 2010 if Congress doesn’t reverse its 2006 approval of provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).
Keep in mind that this also might be a good idea for people who were also unemployed or disabled during the past year and therefore had lower income. Talk to your tax professional about doing a full or partial Roth IRA conversion.
Remember that when you do a conversion, you must pay income tax on the amount you are converting, which can be all of the funds in the traditional IRA or just a portion of those assets. But, subject to certain restrictions, you won’t pay tax when you finally need to withdraw your money. That’s where the silver lining comes in for you or for your heirs if you pass that money on to them.
Take another look at your statements and how much your investments are down. Assuming that the markets perform historically and fight their way back, your tax-free amount available for withdrawal could accumulate significantly under that Roth status.
The conversion issue is a potentially attractive retirement and estate-planning idea for all Americans who want to make sure they maximize the assets they have for themselves and for their heirs on a tax-free basis. But anyone considering such a move—regardless of his or her income status—should first review their current retirement asset strategy with a tax or financial adviser such as a CERTIFIED FINANCIAL PLANNER™ professional.
Things to consider:
The difference between a traditional IRA and a Roth IRA: Traditional IRAs allow investors to save money tax-deferred with deductible contributions (within certain income limits if either spouse is eligible for a qualified plan at work) until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If you leave your savings in the Roth for at least five years and wait until you're 59 1/2 to take withdrawals, you'll never pay taxes on the gains. You can convert a traditional IRA to a Roth, but you must pay taxes on any pre-tax contributions, plus any gains.
Time to retirement matters: If you have more than five years until you plan to withdraw your retirement funds, conversion of traditional IRA assets to a Roth IRA might make sense. The longer the time span where earnings can grow tax deferred, the greater the benefit of being able to withdraw those earnings without paying tax on them.
Your tax rate at retirement is important: Many people, such as business owners, may be paying taxes now at a fairly low rate. So they might pay higher taxes at retirement. If that’s the case, converting to a Roth might make a lot of sense. Additionally, with Social Security benefits being taxable at certain income levels, Roth IRAs can allow you to limit or eliminate such taxes.
A Roth conversion can be expensive: You’ll have to pay taxes on contributions that you previously deducted, as well as taxes on the accumulated earnings. Also, you need to be aware that conversion could push you into a higher tax bracket, especially if you've accumulated sizeable earnings over the years. This is why a conversion needs to be planned with a tax expert. Why? It may trigger the Alternative Minimum Tax (AMT) due to those high earnings.
January 2009 — 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.
Friday, January 16, 2009
Whether You Call It a Budget or a Spending Plan, It’s a Good Way to Start 2009
Granted, the New Year is a time for best intentions. People vow to stick to a diet, knuckle down at work, spend more quality time with people they care about, start scratching off that long list of key chores around the house, and of course, keep a closer watch on their pocketbook.
If you find you can do only one of these things, focus on that last item–making and sticking to a budget. It might help you handle the rest of those resolutions:
If you find you can do only one of these things, focus on that last item–making and sticking to a budget. It might help you handle the rest of those resolutions:
- Being in control of one’s finances reduces stress. Stress can make people eat more and spend more.
- Having a spending plan in place means you’ll have already prioritized the key activities, expenditures and projects you’ll need to make for the year and the money you’ll need to afford them.
- Spending less time worrying about money means you’ll have more time to think about the people in your life.
Here are some ideas you may want to incorporate into that process.
Don’t be afraid to ask for help: Do you know where you need to be? A financial planner can ask the right questions and develop a customized plan to figure out your starting point and where you’ll finish based on your age, earnings potential and the new habits you’ll develop.
Start tracking every dime you spend: Whether you do it with a pen and a notebook or a computer program, make a concerted effort to track your everyday spending. Physicians say overweight people should track every morsel of food they eat; with money, it’s the same thing. Knowing where every penny goes gives a quick picture where certain pennies can be saved or invested.
Prioritize… When it comes to spending, there are needs and wants. Try this exercise. You can do this on a big 2009 desk calendar (or an electronic calendar that allows space for lots of notes to yourself). Mark down at the appropriate dates and times of the year items for which you need to spend and those for which you want to spend. What are needs? In part, food (not carryout or restaurant meals), monthly mortgage, tuition, auto or rent payments; monthly utilities; home, auto, life or disability insurance; retirement savings; property taxes and credit card payments. What are wants? Non-essential items like vacations, non-essential home improvement projects, restaurant meals (you can cook at home) or treats like clothing splurges or electronics. Compare these total expenditures to your total income. What will this crowded calendar tell you? That by attacking debt, making certain sacrifices and spending and saving smarter, you can eventually un-crowd that calendar and your financial life.
…then zero in each month: There has to be a living, breathing side to budgeting that accommodates change. Do this: Near the end of each month, make a list of the specific “needs” and “wants” you’ll face next month, and figure out how much money you’ll have for wants after needs are addressed. For example, if your car needs a necessary repair, that’s certainly going to boost the “needs” side of the page. If you find due to a one-time event (paying off a particular credit card, for example) that you have more to spend in the “wants” column, then it’s time to decide whether it’s time for a treat or to throw more into savings, investments or attacking any other debt.
Identify and plan for long-term goals: You need to think about the things you really want to do with your life and what those things will cost. Putting goals in writing gives them a formality and a starting point for the planning you must do. If these goals require saving, make sure you put those savings dates on the financial calendar you made.
Build failure and recovery into the plan: How many diets have evaporated with the words, “I blew it!” The fact is, with food or money; everyone goes off course at times. The important thing is to have a plan for corrective action – if you’re about to make an impulse purchase; implement a three-day spending rule. That means you should give yourself three days to check your budget and think through the purchase before you make it. If you can minimize the damage and get back on course, your progress will continue.
January 2009 — 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.
Friday, January 9, 2009
Consumer Borrowing in 2009 Will Mean Making a Plan
If you’re planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment. So that means you’re going to have to work harder—and possibly wait a little longer—to make those key purchases.
What’s a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850, according to reports; that minimum is roughly 20 points higher than it would have been a year ago.
Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.
The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years. These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers–and they’re having trouble too.
If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:
Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It’s always good to determine what your limits should be.
Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization–how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.
Set a credit report review schedule: 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. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. By the way, all those ads that advertise free credit reports? Most of them will demand a credit card number from you, which means at some point those reports won’t be free. The aforementioned Web site is the best place to get reports that are truly free of charge.
Pay on time and pay more than the minimum. If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.
Cut up cards, but don't close the account: Closing accounts—even those that have had zero balances for years—is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.
No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backwards to lend to people with unverifiable income, that gravy train is mostly over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.
January 2009 — 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’s a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850, according to reports; that minimum is roughly 20 points higher than it would have been a year ago.
Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.
The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years. These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers–and they’re having trouble too.
If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:
Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It’s always good to determine what your limits should be.
Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization–how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.
Set a credit report review schedule: 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. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. By the way, all those ads that advertise free credit reports? Most of them will demand a credit card number from you, which means at some point those reports won’t be free. The aforementioned Web site is the best place to get reports that are truly free of charge.
Pay on time and pay more than the minimum. If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.
Cut up cards, but don't close the account: Closing accounts—even those that have had zero balances for years—is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.
No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backwards to lend to people with unverifiable income, that gravy train is mostly over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.
January 2009 — 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.
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