John's Blog

Financial Planning Tips for Traveling

2008-06-07T15:05:29Z

Traveling Smart During the Hot, Pricey Summer of ‘08

Summer is when we hope to get time off to relax. But with regular gasoline prices nearing $4 and energy prices pushing tourism expenses higher on everything from plane fare to meals out, paying for this year's summer vacation might be a significant source of financial stress.

A recent GfK Roper Reports survey indicated that 55 percent of respondents said they are limiting "discretionary expenses like eating out and vacations."

If that sounds like your agenda, here are some ways to save on travel this summer:

Stay closer to home: Is it that boring around home? Rather than flying across the country, check out the tourism website for your state or the nearest adjoining state to yours and just see what looks interesting. Those websites offer coupons, too. Also, sign up for e-mail from your local transit agencies and check their websites - you might hear about special deals at local museums or parks and free parking sites where you can leave your car before you pick up the train or bus.

Get smart about your travel points: If there's a particular hotel chain you're going to stay in, see whether they're part of a larger network where you can earn points or other incentives toward future stays. Also, rather than multiple credit cards, try and narrow your usage to plastic that carries the best points plans toward hotels, airlines and car rental agencies you use all the time for fun or business.

Go off-season: Admittedly, it's tougher with kids since they can only travel when school's out, but if you don't have a family, start traveling out-of-season all the time. Vegas and Aruba might be hotter than blazes in July, but as long as you have sun block and access to good air conditioning, then you can take solace counting what you'll save on hotels, meals and other expenses that dip in price when the crowds are low.

Let travel opportunities find you online: If you have a favorite airline, resort or hotel chain, get on their mailing lists online and be ready to react if they offer a great deal. Look for value weeks on the calendar: For family friendly venues, you might want to check prices on the edges of summer when schools are still letting out or going back into session. It's not a bad time for grownups to travel either - you'll beat the crowds.

Check out your motor club: Major organizations like AAA negotiate good prices on popular tourism locations around the country, even places like Disney World. Again, even if you don't have kids, check your motor club's offerings on hotel, destination, rental car and even train discounts.

Merge errands into your trip: This is not just vacation advice, but good everyday advice - if you can pack regular errands into your vacation time in the car, do it. For example, when returning from a trip, consider incorporating your regular errands on the drive home (consider stopping in states or counties with cheaper sales taxes that might save money on similarly priced items).

Leave or return on a Monday or Tuesday: Play around with the days of the week that you can schedule your trip just to see if you can find significant savings on hotel and airfares. Fighting to get home on a Saturday or Sunday can cost you money.

Pinch those gasoline pennies: If you're driving your own car on trips, focus on maintenance and when and where you're buying your gas. Keep your tires inflated and make sure your engine is in good shape for maximum fuel economy. Also, don't carry tons of stuff - heavier cars burn more gas. Consider joining a wholesale club that sells their own gas onsite - you might save a considerable sum not only at home, but in out-of-town locations where you're staying (hit the Internet and check before you go). Also, buy gasoline mid-week when prices generally stabilize from spikes entering the weekend and starting the workweek. Last but not least, buy gas when daytime temperatures are lowest. Why? Because during cool hours, gasoline is densest and packs more fuel power.

June 2008 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS MBA MS http://www.investments.mn 952-929-2577, a local member of FPA.

Financial Planning Tips for Heading Back to School-Like EVERYTHING-plan first!

2008-06-07T14:58:40Z

Heading Back to School? Make a Plan First

It was the physicist Rosalyn S. Yalow who said, "The excitement of learning separates youth from old age. As long as you're learning you're not old."

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 might 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 expert such as a CERTIFIED FINANCIAL PLANNER^TM professional 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.

Check scholarships and grants: See if there are sources of grants and scholarships not only in your community, but also within your industry. Go online and do a general search for such aid.

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, 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. You can't forego retirement or healthcare planning simply because you need the money for 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 one year of college will do, why pay for three or four?

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.

Why a Business Owner's Exit Plan Is So Important-Provided by MN financial planner

2008-05-10T18:02:00Z

Why a Business Owner's Exit Plan Is So Important

There are plenty of days when we want to "take that job and shove it." But what happens when we're sick of a job we've created for ourselves in a business we've founded?

The idea is to make a plan that allows you to get out before you tire of your company or before you are overwhelmed by personal, industrial or economic factors that force you to sell, transfer or close a company. This is called an exit plan.

Everyone glamorizes creating a business as a way to completely control one's own destiny. But it's ironic how many businesses go on day-to-day without any thought to a proper ending. An exit plan is not only a set of mental notes about how one should pack up and move on. It is a way to focus an owner's thinking about:

•· A family legacy - should a business be passed on to family or associates, or should it simply be sold or closed?

•· The owner's own career goals - does an owner want to do this for the rest of his or her life, or should they make way for other professional or personal directions?

•· The creation of wealth - too many people think of a business as a job and a paycheck instead of a creator of wealth that can support one or more generations of a family. A paycheck supports short-term goals; wealth is accumulated money that can either be invested smartly in the business or outside the business to support philanthropy, or family and personal goals.

•· A retirement strategy that allows an owner to do everything they've dreamed after they quit.

An exit plan isn't born in a day. In fact, many financial experts in investment, tax and estate planning disciplines think it's wise for business owners to come up with an exit plan when they start a company if possible, and if not, within 3-5 years of the date they'd like to exit. A CERTIFIED FINANCIAL PLANNER^TM professional with specific expertise in working with business owners could be a helpful partner in helping you determine the following:

How many more years do I want to run this business?
What's the optimal way to get rid of the business when I'm ready to go? Do I want to sell it, transfer it to family or associates or just close it down?
What if I got a fantastic offer on the business tomorrow? What would I do?
If I sold my business, how would I protect myself from a personal and business tax standpoint?
How do I communicate my wishes and ideas with my spouse, kids and other family members with a stake in the business?
What about my employees, clients and customers? How do I protect them if I die or decide to leave?
How much money do I want in my life after my business, and what would I do with it?
What should I do to make my business as valuable as possible?
How do I plan the tax implications of my actions toward the end?
If I have investors, how do I make them happy as I leave?
Are there any specific accomplishments I want this business to make before I leave?

An exit plan allows you to not only to change your own employment, but to help you change your whole career if you choose. No one has to stay in the same industry - or company - for life, and with an exit plan, you can leave open the possibility for an endpoint that will allow you to travel, do philanthropy or any number of new activities in business or other walks of life.

The financial planning aspect of the exit plan will align your monetary needs with your career or post-career needs. Your exit plan can do whatever you want it to. Some entrepreneurs build sabbatical time and other arrangements for study and learning into the timeframe leading up to their exit to help them refresh their minds and decide what their next career or vocation will be.

The bottom line is that it's never really too early to start thinking of an exit plan for a business you've formed. Today, smart entrepreneurs start asking themselves those questions as they're organizing and forming companies. Get some good advice to start that discussion.

May 2008 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS http://www.investments.mn 952-929-2577 , a local member of FPA.

Why Going Green in a Blue Economy Can Be a Smart Investment

2008-05-10T17:57:10Z

Why Going Green in a Blue Economy Can Be a Smart Investment

While the real estate market is slow and high energy prices are challenging everything from the way we heat our homes to the way we get around, it might make sense to bring a green approach to a tough economic environment.

If you want to save money with energy-conscious moves inside and outside the house, replace your current automobile with a hybrid, or add some greener features to your existing home to make it more attractive for sale when times improve, why not check these options:

Hybrid automobiles: While 2008 models of the Toyota Prius - probably the best-known gas/electric hybrid automobile on the market - no longer provides a tax credit, there are still a number of foreign and domestic hybrid models that do. For those models and their credit amounts, go to the IRS Web site at http://www.irs.gov/irs/article/0,,id=176409,00.html

Residential energy credits: A bill is currently before the U.S. Senate to renew or revise many of the tax credits offered to taxpayers in tax year 2007. Be on the lookout for any news of passage on this bill, and use the following tax year 2007 credits as a point of reference:

Exterior windows (regular and storm) and skylights: Up to 10 percent of cost or $200.
Exterior doors (including storm doors): Up to 10 percent of cost up to $500.
Metal roofs: Up to 10 percent of cost up to $500.
Home insulation that meets current International Energy Conservation Code (IECC) requirements: Up to 10 percent of cost up to $500.
Qualified heating and air conditioning systems as well as heat pumps: Up to $200.
Qualified gas, oil, propane furnaces or hot water boilers: Up to $150.
Qualified circulating fans: Up to $50.
Qualified gas, oil or propane water heaters as well as heat pump water heaters: Up to $300.
Qualified Solar Energy Water Heaters as well as photovoltaic systems that provide electricity for the residence: Up to 30 percent of the cost or $2,000.
Qualified fuel cells (natural gas-propelled generators): 30 percent of the cost up to $1,000 per kilowatt of power that can be produced.

Try compact fluorescent bulbs: While you may have to do a bit of comparison shopping to find the best bulbs for the light you need, check out compact fluorescent bulbs (CFLs) which are coming down a bit in price ($2-$3 per bulb in 2007 compared to $9-$25 in 1999) and improving in quality. A typical incandescent bulb lasts 1,000 hours, while a CFL lasts 3,000 hours on average, according to Consumer Reports.

Get a programmable thermostat: During work or other hours in the day when you're away from home- get a thermostat that you can program to raise and lower the temperature of your home to cut your heating and cooling bills. (Obviously keep temperatures livable for pets while you're away.)

Adjust your water heater: A simple lowering of the thermostat on your hot water heater from 145 to 120 degrees isn't going to be very noticeable, and it could save you more than $20 a year on a gas heater and $50 a year on an electric one.

Change the way you drive: Driving slower can improve the mileage on any car, so stay at the speed limit. If you have to idle for a lengthy amount of time at a train crossing or in a holding area to pick up someone in the airport, turn off the engine until it's time to go. Lastly, do a better job planning the use of your car - try and work necessary errands into a commute so you won't have to drive as much after work or on weekends. And if you have teens driving alone, tell them they have to practice the same behavior if they want car privileges - do an odometer check if you have to.

Do alternate transportation one or more days a week: If you have the ability to walk, bike, carpool or take public transportation to work or for after-work transportation, make a commitment to do it at least once a week. It will not only save you money, but the exercise options may help you improve your health and possibly lower the costs of your health insurance and doctors' fees related to fitness-based health issues.

A Long-term Care Insurance Primer

2008-04-01T22:53:37Z

As millions of Baby Boomers head into their retirement years, it's surprising how few actually know that the government provides little more than a few weeks of financial support for home-based or nursing home care when the average person needs it for at least a year.

A 2006 Genworth Financial Survey says the national average private room rate at a nursing home - the most expensive care option - was $194.28 per day/$70,912 annually.

Long-term care insurance (LTC) may be one solution for those who need to bridge the gap between their savings and the actual costs they'll face.

Determining and paying for long-term care is almost too complex a topic to be covered in a short article like this, which is why it makes sense to discuss your individual situation with a Certified Financial Planner ^TM professional. Here are some of the questions you need to answer before investing in long-term care insurance or other options:

What resources do you have? We're not just talking about money here. While care giving puts a strain on family, it's important to consider whether family and friends are truly willing and able to help with your care, which can provide a considerable financial and emotional benefit. Also, if you live in a community with reliable volunteer resources to help, that's something to note, though today's services may not be there tomorrow.

How old are you and your spouse and what's your health history? People in good health purchasing long-term care insurance at the age of 55 usually get the most affordable deal in LTC insurance. But an individual's family health history and current health status are the real determinants of what your LTC insurance policy will cost - or if you'll qualify for coverage at all. Also, it's important to note that 40 percent of long-term care is provided to individuals between the ages of 19 and 65, so the need for care can strike at any time.

Are you a single female? Again, personal and family resources come into play here, but since women typically live longer than men - and they still earn less on average than men - women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.

What types of services are covered? Over the course of time, long-term care policies have evolved to place more emphasis on home-based care or assisted living, since most people would choose to recover or live out their last days in a familiar environment. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence, and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered and other services as listed in the policy.

What triggers coverage? A qualified LTC policy won't go into effect until the covered individual can't perform two tasks of daily living for a period, typically 90 days, or when that person needs substantial supervision related to cognitive impairment. This is where you have to read the fine print since some policies are more restrictive than others. More affordable policies generally take longer to kick in. See if coverage for other physical ailments is available as part of the policy and what per-diem or monthly allowances are offered.

What if I never want to go to a nursing home? The idea is to cover every eventuality. The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home. Some policies do offer reduced percentages for home health care versus nursing home care, but it's a better idea to keep full percentages on home health care benefits since most people would rather stay in their homes.

What's the record of particular companies in this business? Over the past generation, more companies have gotten involved in the LTC insurance business, and it makes sense to see not only who the leaders are at the time you're buying and what they're offering, but how financially healthy these companies are and have been over the course of time. You've probably heard of insurance companies that have gone out of business and stranded customers. There's no restriction on that happening with LTC providers, so check their ratings and financial history very carefully.

April 2008 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS http://www.investments.mn 952-929-2577 a local member of FPA.

With the Market So Uncertain, Are Immediate Annuities A Good Way To Preserve Your Retirement Savings?

2008-04-01T22:48:32Z

One day, the market is up 400 points. The next day, down 300. Stocks in 2008 haven't won any points for stability. In periods of market uncertainty, you'll hear a lot about safe harbor investments that will supposedly guarantee income for life. One of these alternatives is an immediate annuity.

Here's how they work. Any annuity is a contract offered by an insurance company that promises you a set amount of annual income for life. An immediate annuity is an insurance contract you put money into and soon after starts paying a portion of the agreed-to amount on a set schedule. Retirees who use this option successfully are not pouring their whole retirement savings into an annuity - optimally, they are breaking off only a piece of their retirement savings to place in this option. For example, a 65-ear-old individual might buy an annuity with $100,000 or more that will come back to her in predictable form - maybe $6,000 or $7,000 a year for the rest of her life.

This option is a good one if you luck out and buy one at age 65 and live past 90 - that way, you'll pull out more money than you put in. But depending on how the annuity contract is written, if you die before your principal is paid out, that money may go into the pocket of the insurance company.

As with other aspects of your retirement strategy, it's a good idea to discuss such a move with trusted financial experts such as a certified public accountant or a financial planner such as a Certified Financial Planner^TM professional. It makes sense to ask the following questions of your own financial circumstances and the annuity product you're considering:

Before you lock up money in an annuity, how well are your other retirement assets working for you? Perhaps you plan to work a significant number of years in retirement if your health and your will hold out. Those are two big "if's." But if you want a part of your retirement money to be "secure," you still need to have a substantial portion of your assets continuing to grow for you as your life continues. A visit to a CFP® practitioner before you retire can help you balance how you invest your assets as you age.

Does the immediate annuity have inflation protection? It's not a big surprise to know that $6,000 today won't be worth $6,000 five years from now. See if the immediate annuity product you're considering automatically increases your payout each year in accordance with inflation.

Does it make sense to ladder annuities based on your age? If annuity products make sense for you and you have the financial freedom to purchase more than one, it might make sense to buy them in staggered form with amounts and terms that allow you to get larger payouts as you age. That could keep other assets more liquid to invest for your heirs or for other purposes. It's also a good idea to go with more than one AA-rated (or higher) insurer since the fortunes of such companies may be great now but can change later. Also, remember that immediate annuities can be bought with specific terms such as 10 or 15 years that would allow your estate to recoup unspent assets if you die before the end of that payment term. It's very important to seek advice here.

Have you projected what your actual income needs will be? Again, you need to ask yourself whether you choose to work or not, and then what your living expenses might be in retirement. This is why an annuity decision should be discussed from both a tax and general financial planning standpoint.

Are your long-term care needs covered? Before you start talking about locking up assets in annuity products, make sure you have money in reserve or long-term care insurance in place should you need to pay for temporary disability or end-of-life care.

Are you fully informed about all the fees? Keep in mind that inflation protection and other features added on to an immediate annuity cost more money than those without. Compare the costs.

Disability Insurance-Most People Don't Have Enough Disability Insurance ─ Don't Make That Mistake

2008-03-04T17:59:01Z

Disability Insurance-Most People Don't Have Enough Disability Insurance ─ Don't Make That Mistake

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and all your basic living expenses if you are injured or sick for an extended period. It is called disability Insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to be disabled for some period of time than to die.

Think your employer's coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn't last more than 12 weeks. There are employers that offer long-term disability coverage, but if you've never checked the terms of that coverage, you should.

It never hurts to consult a financial advisor with expertise in this subject, such as a Certified Financial Planner^TM professional.

Basic components of long-term disability coverage:

Monthly benefits: Long-term disability insurance is generally structured to pay 70 percent of your income up to age 67 or your normal retirement age. See if the policy you're buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term: For each disabling incident, your policy may pay benefits for a certain period - two, five years or until retirement. It's all in how your policy is constructed. Many policies may pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper: Like health and life insurance, the younger you buy, the less you'll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, it will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether you smoke.

Premium cost: The premium will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions: Make sure that once you're approved, the insurer can't cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can't raise your rates.

Guaranteed renewable: Like the category above, it means you can't be canceled, except if the insurer stops writing insurance for your job category. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation: If you have "own occupation" coverage, it is intended to go into effect if you can't perform the functions of the job you're now in. "Any occupation" coverage pays only if you can't work at any job where you've been reasonably trained to do the tasks. For example, if you're working a desk job, you could easily be transferred to a receptionist's job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits of (specify) "own occupation" coverage.

Elimination period: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will kick in after 30 days after you've been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don't start accumulating until you've been laid up a month after the ruling date and you won't get your payment until a month after that. Be very clear with your insurer when you'll get your first check based on what elimination period you choose, and funnel the money you'll need in the meantime to your emergency fund.

Partial payments/Residual benefits: Some policies may offer you 'residual benefits' or a partial payment if you're less than 100 percent disabled, but still can't perform all the duties of your job.

If you're thinking about self-employment: You'll likely need disability coverage. But the time to buy is while you're still in your current job. Why? Because you won't be able to prove your income once self-employed, so consider obtaining your desired coverage as you can before you leave.

March 2008 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS http://www.investments.mn 952-929-2577 , a local member of FPA.

Investing Smart in a Health Savings Account

2008-02-05T11:18:19Z

Last year, new provisions went into effect on Health Savings Accounts (HSAs) that not only give individuals a better nest egg for serious health situations, but a nest egg that can serve them in other ways as well.
Now that the rules allow people to contribute more than their deductible, you can start to use HSAs for greater long-term savings. You can contribute pretax money to the account, where it grows tax-deferred and can then be used tax-free for medical expenses. That's a triple tax benefit.

More companies are letting individuals and families invest HSA money into mutual funds or directly into stocks, and over time, banks and investment firms are expected to enter the HSA business.
Here's a basic overview of HSAs and how you might get the most out of them:
The basics: Health savings accounts were created as part of the Medicare Modernization Act of 2003. 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.

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 search time since HSAs haven't gotten much of a marketing push. Obviously, ask if your current insurer has a qualified plan, and there are websites you can search for ideas, such as www.hsainsider.com.
What are the 2008 HSA limits? The following cover the maximum contributions you can place in an HSA and the minimum and maximum deductibles for an HDHP insurance plan:

· Maximum HSA contribution: $2900 for individual, $5800 for families

· Minimum HDHP deductible: $1100 self-only coverage, $2200 family coverage*

· Annual out-of-pocket maximum: $5600 self-only coverage, $11200 family coverage

· If you are 55 or older and your HDHP is in effect, you are eligible to deposit catch-up contributions, and in 2008, the additional amount is $900.

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 or financial advisor, such as a Certified Financial Planner ^TM professional.
What's the difference between an HSA and a medical flexible spending account (FSA)? One important difference is that HSAs allow balances to be rolled over from year-to-year, growing on a tax-free basis as long as they're used for medical expenses. On the other hand, Medical FSAs require that the money you contribute each year has to be spent by year-end (or a brief grace period if provided by the plan) 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 bit more flexible in this regard. Get help from your tax or human resources professional.

Can I have both an HSA and a flexible spending account? It depends. 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 a 10 percent penalty, 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.
Can I use my IRAs to fund an HSA? Yes, on a one-time basis. The new rules let individuals roll over money from an IRA once so people can use the money tax-free for medical expenses, but the amount of the rollover is limited to the HSA maximum contribution for the year minus any contributions already made.

February 2008 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS http://www.investmentadviser.com 952-929-2577 , a local member of FPA

When Recession Fears Surface, Check Your Plan – Or Make One

2008-02-05T11:15:49Z

It's been a wild week on Wall Street. When trading reopened on Tuesday after the Martin Luther King holiday, the Federal Reserve Board responded to world pressure and swooped in with a rate cut to put a floor on Dow losses that were approaching 20 percent since last October. By today, things seemed to be stabilizing.

But what about tomorrow? And then next week, and the weeks after that?

If this question fills you with worry, then it's pretty clear you're operating without a plan, or at least one you haven't recently checked. That's OK. When worldwide market worries surface, it's easy to get scared. It's particularly easy when we've had such major market calamities as the U.S. mortgage debacle and the lingering disarray in the banking and investment industries.

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 shouldn't make a difference, particularly if you don't need the money today.

So the next time world markets spike or slide, ask yourself:

What's my plan? If you've worked with a financial planner such as a Certified Financial Planner^TM professional, 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 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 are a team. Both of you should talk and decide when it's time for a detailed review of your investment goals and whether or not they should change. 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.

If you're worried this week, there's no reason why you shouldn't call your planner to calm your nerves and confirm what you're doing. And if you've never talked to a planner before, now might be a pretty good time to start.

Afraid of the AMT? Now’s the Time to Get Some Help

2008-01-23T14:29:04Z

Unless Congress acts, the number of taxpayers hit by the Alternative Minimum Tax (AMT) in 2007 will jump to about 23 million from about 4 million in 2006. The AMT is an alternative, separate tax calculation created in 1969 to make sure the wealthiest Americans paid a fair amount of taxes. The AMT is applied to particular taxpayers' regular taxable income when particular activities and deductions add up.
Basically, Uncle Sam wanted to keep taxpayers from writing off their tax responsibilities forever.
But why is the AMT spreading lower and lower on the tax rolls to the middle class? There are two reasons. First, since its introduction in 1969, elements of the AMT have not been adjusted for inflation while the regular income tax has. According to the Tax Policy Center of the Urban Institute, this means that if an individual's income tax just keeps up with the annual rate of inflation, his or her income tax would remain constant in real terms while the potential AMT liability would continue to increase. Second, it's also important to note that since its inception, the government has dropped the top tax rate from 70 percent at the start to 35 percent in this decade while the AMT rate has risen by several percentage points. The intersection of AMT and regular tax over the past 40 years is as much as story of changing tax brackets as it is the adjustment of the exemption amount.

The approaching election year might finally force some permanent change on the AMT situation, but until then, it makes sense to consult a qualified tax advisor or a Certified Financial Planner^TM professional on your risk factors for the AMT. It's too complicated to fully explain here, so advice is essential. There are many reasons people get pushed into the AMT zone. Here are some key facts and situations related to the AMT:

Who should check for the AMT? If your income is above $75,000 and you write off personal exemptions, state income taxes, property taxes and home equity loan interest, it's best to see if you're at risk. And if you're simply earning over $100,000, you definitely should check for AMT eligibility no matter what your deduction status. Form 6251 requires you to add back some deductions and income exclusions to your regular taxable income in the process of computing AMT. Among them: Your personal- and dependent exemptions, or your standard deduction if you don't itemize. You will also lose your state local and foreign income and property tax write-offs and potentially your home equity loan interest if you don't use your home equity line for home improvements. Once computed, if the AMT is higher than your regular tax liability you pay the additional amount (in addition to regular taxes). The hit could be surprising.

Watch those stock options: If you're thinking of exercising incentive stock options, keep an eye on the spread between the market value at the time of exercise and the exercise price. Although not immediately subject to regular tax, the spread is subject to AMT. Based on advice particular to your situation, you might want to keep those options still and not exercise them until early 2008 to gain some tax flexibility.

If you own a business, get advice: If you own a business, rental properties or hold an interest in a partnership or an S corporation, certain business depreciation deductions might be a critical trigger for the AMT lens.
Tax-free bonds can be a trigger: The AMT counts as income interest earned from municipal bonds designated as private activity bonds, so there goes that tax edge. Many tax-exempt money market funds and high-yield tax-exempt municipal bond funds may hold relatively large percentages of these bonds.
Know your AMT exemptions: For 2007, if Congress does not extend the act increasing the exemption (the so-called AMT "patch" legislation), the AMT exemption will be decreased to $33,750 for an individual, $45,000 if married filing jointly or if that person is a qualifying widow or widower and $22,500 if married filing separately. These exemptions were higher in 2006 after Congress came to the rescue. As of this year, the exemption for Hurricane Katrina victims is scheduled to expire as well as the additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina.

More bad news: The following credits won't be allowed against the AMT unless Congress rides to the rescue: Child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits and the mortgage interest credit. Also, if you live in the District of Columbia, its first-time homebuyer credit will no longer be allowed against the AMT.

The key is to work with your advisors to determine if you are a likely target and include the AMT as part of the planning process. Often, it is more something to be aware of than to be avoided. Because the AMT is so complicated (and may complicate financial decisions), the IRS provides an AMT Assistant for Individuals-an electronic version of the AMT worksheet in the 1040 instructions-go to: http://www.irs.gov/businesses/small/article/0,,id=150703,00.html

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS http://www.investments.mn , a local member of FPA.

Do Income Replacement Funds Make More Sense Than Annuities?

2008-01-23T14:20:34Z

It's getting to be the case that virtually any standalone investment product sold to individuals can be repackaged into a mutual fund. It makes a lot of sense - everyone already knows what a mutual fund is, and all that's left to explain is the objective, availability of capital, specific risks and fees.

Such is the case with income replacement funds that aim to replace annuities as a way for retirees to manage their spendable assets during the years they expect to be in retirement.

Aimed at the Baby Boomer Market, mutual fund leaders Fidelity and Vanguard are among others getting into this product, which are a bit like target-date retirement funds in that they start with a pile of stocks, bonds and cash that grows more conservative based on the dates you'll need to draw those assets. Essentially, that means if you're retiring in 2020 and you want money available through 2040, you pick a fund that's labeled for that withdrawal window, and you accept that such funds are invested properly for that timeframe.

Generally, after taking an expense fee, the fund pays the investor a rising percentage of their account value each year until the balance runs out in the termination year. The idea is that you'll get a relatively stable income stream that may keep up with inflation.

Unlike many annuities, however, you can cash out whenever you want.

It all sounds good, right? Beware of the following, and seek some advice from a financial expert like a Certified Financial Planner^TM professional:

· There's no exact guarantee on how big the payments will be, unlike most guaranteed annuities that set fixed payments. That means that if the market slides, so will your payments;

• It is possible to outlive your money, so be very careful in planning how and for how long these payments will be made.

There's nothing wrong with investigating these mutual funds, and depending how much retirement savings you have and what your needs will be, they may be one of a series of options you use as interlocking parts of your overall portfolio to arrange a flow of income in your non-working (or partially working) years. But like all mutual fund choices, they are not one-size-fits all solutions, and it's good to get some advice that fits your situation.

Keep in mind that a qualified financial planner should go beyond telling you whether to put your money in an income replacement fund, an annuity or other investment choice. One of the big benefits of seeking qualified financial help is assessing how much income may be required in view of your various goals in retirement - whether you plan to work part-time, whether health issues might affect your income needs, or any one of a host of issues unique to an individual's retirement.

Back to income replacement funds. Keep in mind that investment products are a lot like new car models - sometimes it makes sense to wait a year or two to see that the kinks are out. Products attempting to address various financial concerns are being designed daily. By all means study the advantages of such products, but keep in mind that these products might be reconfigured to make later versions more attractive and always note that there are product costs to having "concerns or risks" addressed in product design which should be weighed against costs, and perhaps flexibility, of "active" oversight.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP CLU CHFC CEBS CMB MBA MS-Financial Planning Associates 952-929-2577 http://www.investments.mn , a local member of FPA.

REAL ESTATE MORTGAGE ANALYSIS -THE MISSING COMPONENT OF WEALTH MANANGEMENT AND FINANCIAL PLANNING

2008-01-23T14:15:33Z

Written by John Mazzara CFP CLU CHFC CEBS CMB MBA MS
http://www.investmentadviser.com 952-929-2577

Why is this topic important to you and your clients?
Real estate and mortgage planning should be a key component in the wealth management services offered to your clients. Your client's homestead and investment property are often some of the largest assets within their estate. Mortgages are almost always involved in a real estate portfolio. Many planners tend to focus on "investable" assets and overlook the real estate that may be the cornerstone of a person's wealth leading to poor or nonexistent recommendations in this area. Mortgage planning should be involved in the planning process beginning with the pre-acquisition period, continuing during the holding period and culminating with the ultimate disposition of either the primary residence or investment property. With proper recommendations by the financial planner/wealth manager will come a stronger client relationship. Ultimately, you will end up with a happier client, more investable assets and probably more billable hours.

There are other benefits too. Your clients need the expertise that you can provide in this area. Even if you prefer not to do the following analysis, you should at least understand the talking points and suggest or coordinate a meeting with the appropriate tax and legal counsel. This paper will explain common mortgage products within the marketplace today. In addition there are real world applications and examples which you can use in your practice immediately.

What are the problems I need to think about?
The following are just a few of the questions you might want to consider. I don't expect that you will have all of the answers. There also is no absolutely "right" answer to some of these questions. These are talking points that will probably involve other professionals on the financial management team. (1) Should a property be sold, gifted or refinanced to access the equity? (2) Is it better to die with a property in your client's estate in order to get a step up in basis? Remember that gifting property involves the recipient acquiring the original basis. Selling property instead of 1031 exchanging it can subject the client to taxes that could have been avoided. Refinancing gives the client access to capital on a tax deferred basis-while the interest may or may not be deductible. (3) What type of loan options are available for my client today? (4) Are there any creditor protections that would be better afforded my client by having greater leverage on their home?

Let's break down some of the basic considerations involving a primary residence. How long will the person own the home? How adverse to risk or change in payment will my client be over their projected holding time frame? The answers to these questions will give you the basis to begin exploring options. A common problem lies in mismatching the product to the holding period. Client goals can be maximized if you take the time to understand the products and then see how they fit into the client's financial plan. For example, if the client has a 100% certainty that they will move out of their home in 7 years, you may want to look at a product that matches exactly that time frame, or create a hedge of 2-3 years either side of 7 years in case things change. Under this example there would be no reason to recommend a 30 year fixed mortgage unless the pricing was identical or cheaper than one of the other available shorter term products.

What mortgage products exist in the marketplace today and what problems do they solve for my clients?
First mortgage products today consist of 5 primary products and variations thereof. Most first mortgage products assume a thirty year amortization. It is what can happen over those thirty years that varies. Let's make that assumption for this article. I will highlight 5 primary first mortgage products and mention one unique second mortgage option. All the options are available for your client's primary homestead. They all may not be available for a second home or investment property. The mortgage note rate is generally .5-1% higher when financing anything other than a primary homestead.

1) FIXED RATE AMORTIZING MORTGAGES Your payment with this type of loan is made up of principal and interest. Each is a component of the payment. The entire mortgage will be paid off at the end of the thirty years. Following the rule of 78, the loan will be paid off with the last and final payment. The most common variation of this type of loan is the 30yr fixed mortgage, but there are 10yr, 15yr, and 20yr loans too. The main idea here is that these loans are fairly simple. They are meant for the risk adverse with a very long term prospective of being in their home.

2) ADJUSTABLE RATE MORTGAGES(ARM) With these loans the monthly principal and interest payment is based upon a rate and amortization period that is fixed for a period of time within the overall 30 year time frame. It could be six months to ten years. The overall loan term is again 30 years. After the initial fixed interest period of time, the loan payments adjust up or down, subject to a formula. This formula uses a fixed constant called a margin. A typical margin on today's ARM's will have a number of 2.5-3.5. The margin is a fixed number and is arbitrary and established by the investor when the loan is originated. The margin is added to a variable which is called an index. The most common index is either the average of the yield on 1 year treasury bills or the 6 month Libor index. The value of the index will change over time. There are many other indexes and versions of the two I just mentioned. Most ARM's have "caps". Caps prevent the margin + index rate from exceeding a certain limit. These caps adjust on the adjustment date which happens upon the end of the fixed interest period. After the initial adjustment the loan payment will adjust according to the formula either annually or more frequently. It all depends on the product and how often the adjustment is made. For example, a five year ARM might have a fixed rate of 5% for the first 5 years. The loan is a 30 year loan. After the first five years the rate is subject to change. The loan has caps of 6/2/6. The first number, six, refers to the initial cap adjustment after the first five years. This means the rate upon initial adjustment can't exceed 11 % (calculated as the initial 5% rate plus the 6% capped rate). The next number, two, refers to the adjustment period every year after the first. A cap of two means the rate for every subsequent adjustment after the initial adjustment can't exceed two percent over the previous rate. Lastly, the third number, six, refers to the lifetime adjustment. This means that anytime the loan payment is adjusted, regardless of the math, you can't have a rate that exceeds six percent over the initial rate-which would be 11%. An ARM is best used to match a mortgage with a projected holding period. These can greatly enhance cash flow when looking at an investment property and should be considered as the preferred loan for short term holding periods.

3) HYBRID OPTION MORTGAGES These loans usually involve a combination of an interest only payment period of time after which the loan retains a fixed rate and amortizes itself over the remaining balance of 30 years. For example, a loan may allow an interest only payment period during the first 10 years of total 30 years. At the end of the first 10 years the remaining loan balance must be amortized fully over 20 years. The interest rate remains constant over the entire 30 years. These products are trying to combine the best features of both fixed and adjustable loans all rolled into one loan.

Within this category of loans there is a unique product called the Option ARM. It goes by other names too-Choice ARM, Pay Option ARM, etc. This type of loan generally allows repayment on a flexible basis that usually involves four repayment choices. Generally speaking, you can choose how you want to pay with the ability to change the payments each and every month. The mortgage payments can be interest only, negatively amortized based on a rate of 1-3%(depends on the loan and investor) with the deferred interest added to the back of the loan, 15 year amortization, or based on a 30 year amortization. The deferred interest (negative amortization) is the double edge sword of leverage. If the property is appreciating at a rate greater than the growth in the deferred interest the equity will exceed the amount of negative amortization. In the event that the market is flat or declining, the negatively amortized loan balance may exceed the value of the property. This is the "upside down" risk associated with one of these ARM's. This type of loan is often used by speculators in highly appreciating areas or on second homes where people want a low payment today and are banking on appreciation occurring in the future. The key benefit to this loan is the payment flexibility, which can be very important if your cash flow is erratic or you want to achieve the lowest repayment rate. Normally, the fully indexed rate (margin plus index) will probably be higher than the prevailing fixed rate mortgage or traditional ARM. This type of loan may also carry a prepayment penalty. As mentioned previously, an ARM is best used to match a mortgage with a projected holding period. Option ARMs can greatly enhance cash flow if you utilize the minimum payment option which will result in negative amortization. Utilization of the minimum payment (negative amortization) will allow you to control a more expensive property than could be controlled with any of the other payment options.

4) INTEREST ONLY MORTGAGES These loans allow for only the accrued interest to be paid-no principal payment is required. Prepayment of principal may or may not be allowed without a corresponding penalty. This will depend on the product and program. Mortgage payments may "recast" to reflect any extra payments that are credited towards principal reduction. Terms and conditions of all these loans are lender and program specific. Most programs that allow for interest only have an interest only time period of anywhere from 6 months to 15 years. Buying a home with an interest only payment will allow you to purchase 15% more home for the same payment. Your mortgage becomes 15% larger than an amortizing 30 year loan with the same interest rate. This is yet another tool of leverage. The safety net with this loan is that while it doesn't decline in balance, it doesn't increase through deferred interest/negative amortization either.

5) REVERSE MORTGAGES Having recently been improved, these products are experiencing tremendous growth. Based on an expanding demographic, the aging population will demand these loans. In the future, I predict growth in the number of lenders offering these loans and a more diverse set of loan products being developed.

Consider these loans for clients who have a lot of equity locked up in their home but have a lower income than they desire. Reverse mortgages allow the homeowner to access their equity either by a lump sum, a line of credit available for draws at will or in a series of payments. In essence you are able to unlock equity and have the home generate an income back to the homeowner. This allows the senior to use "dead equity" for living expenses, home improvements, gifting or even investing. The loan qualifying criteria are that the person applying for the reverse mortgage must be over 62 years old and own his/her home. Other than age, the lender has NO credit or income criteria and repayment with interest occurs upon the sale of the property. The amount of equity available for this loan is determined by the borrower's age. Suffice to say that the older you are the more equity/credit is available for the reverse mortgage. What I have found is that the largest objection has come from the heirs fearing they will lose their inheritance. Sad but true. Whose equity is it anyway and whose life should be improved because of it?

6) 125% SECOND MORTGAGES There are a few lenders that still write this type of mortgage. This loan allows the borrower to exceed 100% of the value of their property. The loan is a second mortgage that allows the total combined first and second mortgage loan balance to reach up to 125% of the value of the underlying property. This loan is unique in that the loan exceeds the value of the home. While the loan is collateralized against the home, the interest may not be deductible because the underlying security is worth less than the amount of the loan. There may be no equity at risk once you exceed 100% of it's value. This can be a good product, especially if used for debt consolidation. For example, someone who has more consumer or business debt than equity left in their home might still have a need for further consolidation and a lower payment. Let's assume your client happens to have non deductible credit card debt. Let's assume the credit card debt is somewhat usurious, blending somewhere between 20-30% APR. A new 125% loan will be priced today with a rate tied to the prime lending interest rate. The loan rate will adjust by adding a margin to prime. In this example, prime is the index. The adjuster to prime depends on the amount of the loan and the credit score of the borrower. The pricing variables are credit score and loan to value. The higher the credit score and the lower the loan to value, the better the interest rate will become. Today you might find a typical 125% loan to be in the 10-17% range depending on the variables I just mentioned. You can do the math specific to your client's situation and see how much he/she may be able to save by lowering his/her interest rate on non deductible debt.

Talk to me about the tax considerations.
There is also a change in our tax law that has just taken affect regarding mortgage insurance premium deductibility. In the past, borrowers would combine a first mortgage with a second mortgage if they wanted a combined mortgage balance greater than 80% of the properties value. For example, a property that someone wanted to finance at 100% loan to value might have been split between two loans. The loans might have a ratio of 80/20-split between a first and second mortgage. The blended rate provided a payment that often was better than one loan at 100% LTV that involved paying mortgage insurance, especially when you factor in the deductibility of the interest vs. the non deductibility of the mortgage insurance. Now, for loans closed in 2007, if the borrower's adjusted gross income is under 100K, they will be able to deduct the mortgage insurance premium. This will change how you make recommendations. In this new environment, a loan with mortgage insurance could be better than a combination first and second mortgage without mortgage insurance.

Another question that may come up concerns the advantage or ability to deduct interest that accrues on the mortgage. For purposes of this article, let's assume that interest is going to be deductible and that we have a loan amount that allows us to take the maximum deduction. Please go to www.irs.gov and download publication 936 "Home Mortgage Interest Deduction". This will give you the rules on deducting first mortgage interest and home equity interest. You will want to know the rules as they pertain to your specific client's situation.

The 1098 statements sent from lenders at the end of the year reports the interest paid on that mortgage over the previous year. Principal reduction is not deductible. In my opinion, reduction of principal becomes a forced savings plan with an after tax dollar. Yes, this helps build equity. But, is this the best use of your clients after tax capital? Should a client pay down the mortgage, thereby decreasing the loan balance and accelerating the loss of a mortgage interest rate deduction? Are there higher and better uses for the capital that fit into the clients desire for wealth accumulation? Let's examine this further.

What about investment arbitrage? Show me the money!
Consider this. What if a client borrowed the maximum mortgage allowed and repaid it based on an "interest only" payment? This would give them the maximum interest deduction. Assuming that they can benefit from this, they will save on taxes. The amounts of capital that would have been used alternatively for the down payment or paid on principal reduction through a principal and interest mortgage payment on a traditionally amortizing loan can now be allocated to either an after-tax or pre-tax investment that might have better growth potential.

What if the client took the differential savings from an amortizing principal and interest payment vs. an interest only payment and instead increased their contribution to a tax deductible plan, such as their employer's 401K plan? My premise is that they would accumulate more wealth. The problem for the majority of people is having too much month at the end of the money. Not everyone is able to make their house payment and maximize their retirement plan contributions. Switching to an interest only payment from an amortizing loan payment will keep the loan balance the same but increase the available cash in the budget. Another use for this payment savings would be the repayment of non deductible debt such as credit cards. Your job as their advisor will be to see that they understand the options and alternatives available. In order to do this you need to understand how the loan products work and where they are most appropriate.

We just discussed an example of the lost opportunity of incorrectly investing capital. You can explore this further with your client. Let's look at another example. When you pay down a mortgage or prepay a mortgage, you are essentially earning the interest rate that you are paying off. Next I'd like you to compare this rate of return on an after tax benefit basis to an alternative investment on an after tax or before tax basis. Consider this. If the client desires to have their home paid off upon retirement, you may be able to demonstrate how they can accomplish their goal better using an appropriate asset allocation portfolio based upon some historical rates of return. If they were to fund their investment on a monthly basis with the cash savings from a refinance and/or interest only payment, they may find that not only will they be able to pay off their house at retirement but they will have additional dollars remaining.

"I'm an estate and retirement planner-why should I care"?
Initially we asked some questions about mortgages and real estate as they relate to estate planning. Sometimes people default to selling property as the only way to raise capital. Selling property will often accelerate the tax liability associated with any profit. It also takes away any further upside that may be available through appreciation. Proper guidance in this area could make you a hero. Borrowed money through a refinance is not taxable. You may find that a recommendation of a refinance will allow your client access to their capital without the associated taxes. Depending on the size of the estate and the estate tax laws in the future, you may also find it better to have your client die with highly appreciated investment property in their estate so that they can receive a step up in the tax basis upon death. This could be extremely useful for the real estate investor who has been acquiring and exchanging property over a long period of time. There are, of course, many different options including charitable gifting and setting up family limited partnerships. I just wanted to bring up the topic so that all options were explored. You may already do a Monte Carlo type analysis for your asset allocation of investable funds. I'm suggesting something similar with your client's real estate holdings and mortgages. You should discuss scenarios and give some options.

You may or may not be aware of the change in taxation regarding the profit in a primary residence. Every two years, a married couple can exclude 500K in profit and a single person can exclude 250K in profit. This is replenishable and doesn't require purchasing any replacement property. Capturing this profit tax free could be important in your client's estate and taxation outlook. See IRS publication 523 "Selling Your Home" for details. Mortgage planning may be involved if your client is moving frequently. If a loan is going to exist for approximately 2-3 years you may want to recommend that they consider a low closing cost or no closing cost loan. These types of loans would be identical to what we have already discussed. The difference would be realized in a higher interest rate on the loan. The savings depend on the size of the loan and the closing costs, but a rough rule of thumb indicates that you will save money by taking on a higher interest rate with lower closing costs if your holding period is short. A simplified analysis can be done by looking at the differential in payments from a loan with closing costs as compared to the loan that has no closing costs. Take the difference between the payments of each loan scenario and divide that number into the closing costs proposed for the loan with the lower rate. The resultant number will be the months needed to equal/recover the full amount of closing costs. In most instances, you will see that it is a 3-5 year break even point. This means if you plan to keep the property for a time exceeding the break even point it would have been more advantageous to pay the closing costs associated with receiving the lower mortgage rate vs. not paying closing costs and accepting a higher mortgage rate.

Do you see the applications within your practice?
In summary, I hope you've seen the value in adding mortgage and real estate planning to your wealth management practice. You don't need to be the expert, but you do need to recognize the problems in order to help guide your clients towards a solution. As financial planners and wealth managers our job is more than crunching numbers and setting up asset allocation models with various investments. You can't prescribe a client solution until you've done a complete diagnosis. We are our client's "financial doctor" identifying problems and offering options and solutions that meet the client's objectives and fit their comfort level.

Try and Avoid These Stupid IRA Mistakes

2008-01-23T14:08:43Z

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^TM 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 $10,000. 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. For 2008, the base amount has been increased to $5000.

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.

How Your Personality Affects Your Financial Decision-making

2008-01-23T14:05:02Z

The recent volatility in the stock market has everyone a little jumpy - even folks who have worked with a trusted financial planner for years. But 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 I want to do or working in a new career full- or part-time?
13. Do I want kids? Do I understand the financial commitment?
14. 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?
15. How's my health and my health insurance coverage?
16. 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!

Are Charitable Gift Accounts Right for You?

2008-01-23T13:56:53Z

Charitable gift accounts are popping up at major mutual fund companies and may be a good idea for individuals looking for a tax-advantaged way to support their favorite charities, improve their estate tax situation or bring more order to their gift-giving strategy. These are not necessarily inventions for the rich - some of these funds can start with an initial contribution of $10,000 and allow additional contributions of as little as $1,000.

Charitable gift accounts offered by the mutual fund companies come in two varieties -- donor-advised funds or pooled-income funds. Donor-advised funds allow a donor to deposit a specific amount in the fund for an immediate tax deduction equal to the full value of the contribution, allow the donor to direct the investments within the choices provided by the fund and then direct where the money is given over time. Pooled-income funds, meanwhile, allow the donors to receive lifetime income from the funds' investments while allowing the value of the account to go to designated charities after the last designated beneficiary dies.

Depending on a donor's particular situation, these two options can be a relatively attractive idea depending on whether the donor's focus is on obtaining the maximum tax deduction or retaining income for life. That's why it's a good idea to discuss either option with a trusted financial adviser such as a CERTIFIED FINANCIAL PLANNER® professional or a trained tax advisor to see if either of these choices or other tax advantaged charitable options are right for you.

Some general points about these options:

Know the kinds of assets you can deposit: Most funds will allow you to deposit cash (by checks), publicly traded stocks, bonds and mutual fund shares and, in some cases, life insurance policies. Highly appreciated securities are often a good choice since the tax deduction is based on the fair market value of the asset.

You can reduce the overall size of your estate: In 2009, the estate tax exclusion amount is scheduled to be $3.5 million, but it is set to be repealed in 2010 and re-set at $1 million in 2011. No one can know the future, but for taxpayers with significant estates, charitable gift funds might be a good way to reduce the size of a taxable estate.

You need to keep an eye on fees: These are not passively managed accounts, so you will probably be paying higher fees than the average index fund or similar pooled investment. Always consider management fees when considering any potential benefits. However, this option is typically cheaper than starting your own foundation or similar charitable giving vehicle.

This decision is irrevocable: Understand that your gift is final. Because of the tax-advantaged treatment, you're not going to be able to reverse this decision if you find you need the money later. Give careful consideration to how prepared you are for retirement and long-term care spending before you make this choice.

Watch the IRS: The Pension Protection Act of 2006 attempted to tighten some of the rules for donor-advised funds, and has directed the Internal Revenue Service to investigate these funds' personal uses in more detail.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by JOHN MAZZARA CFP CLU CHFC CEBS CMB MBA MS http://www.investmentadviser.com 952-929-2577 , a local member of FPA

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

2008-01-23T13:53:11Z

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^TM 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.

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

2008-01-23T13:49:59Z

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^TM 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.