Planning for Retirement? Don’t Overlook an IRA February 13, 2012

Nearly 50 million American households own an individual retirement account (IRA).¹ While the IRA has evolved into a popular retirement savings vehicle — with more than $4 trillion in total assets — it is often an overlooked component of most investors’ financial planning strategies. In fact, over the past two years, only 15% of households that were eligible to contribute to an IRA did so. ¹

Have you forgotten your IRA? Should an IRA be part of your overall investment plan?

Appealing IRA Benefits
Whether you are an active account holder or just considering opening an IRA, there are many appealing benefits to this retirement savings vehicle.

• Tax deferral: Traditional IRAs allow your investment earnings to grow tax deferred until withdrawn, typically at retirement. For 2011, the maximum contribution is $5,000, but for those aged 50 and over, the limit is $6,000. The limits are the same for a Roth IRA, but to be eligible to fully contribute, an investor must have a 2011 modified adjusted gross income of less than $107,000 for singles and $169,000 for married couples filing jointly. Singles earning up to $122,000 and couples earning up to $179,000 are eligible for partial contributions.
• Deductibility: If you are a single taxpayer who doesn’t participate in an employer-sponsored plan and you earn less than $56,000 in 2011, you can deduct your contributions to a traditional IRA off your income taxes. Couples earning under $90,000 are also eligible for a full deduction. Partial deduction limits also apply, up to $66,000 for singles and $110,000 for couples. Note that Roth IRA contributions are not deductible.
• Investment flexibility: IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans such as a 401(k). Depending on the financial institution you use to open your account, you can invest in a broad array of mutual funds, ETFs, individual stocks and bonds, CDs, annuities, even commodities and real estate.
• Convertibility: Traditional IRA holders can convert to a Roth IRA to enjoy some of the additional benefits listed below. But before you decide make a switch, be sure to investigate the tax consequences of such a move.

Additional Roth IRA Benefits

• Qualified tax-free withdrawals: Since Roth IRAs are funded with after-tax dollars, your withdrawals are tax free, as long as you have held the account for at least five years and are over age 59 1/2.
• No RMDs: Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) once the account holder reaches age 70 1/2.

¹Source: Investment Company Institute, The Role of IRAs in U.S. Households’ Saving for Retirement, December 2010 (http://www.ici.org/pdf/fm-v19n8.pdf).

IRA account owners should consider the tax ramifications and other restrictions in regards to executing a Conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to current year income taxation.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

Fixed-Income Focus: Bond Fund Basics February 13, 2012

Even during periods when equities are top market performers, bonds may still have a place in your portfolio. As a complement to the more volatile nature of stock funds, fixed-income funds may have the potential to generate a steady stream of income and add stability to a portfolio.

How Bond Funds Work
Bond funds are professionally managed pools of individual bonds. Depending on the fund’s investment objective, its manager will buy and sell individual bonds seeking the best possible returns and generate interest income.

Like individual bonds, a bond fund’s value generally moves in the opposite direction of interest rates and carries a variety of risk and reward characteristics. For example, funds that hold bonds with shorter maturities typically have lower risk profiles and lower return expectations than those with longer maturities.

Here is an outline of the most common types of bond funds:

• Government/Treasury bond funds are made up of bonds backed by the full faith and credit of the U.S. government and typically have lower risk levels and lower returns. Government bond fund returns may fluctuate in accordance with rising interest rates and economic conditions.
• Tax-Exempt municipal bond funds are made up of bonds issued by local municipalities, such as states, cities, and towns. The interest these bonds earn is generally exempt from federal taxes and, in some cases, state and local taxes; however, income derived from such funds may be subject to the federal alternative minimum tax.

As a result, they have the potential to offer higher after-tax returns for investors in higher tax brackets. Generally, municipal bond funds are affected by interest rate and market risk and fall somewhere in the middle of the risk/return spectrum.

• Corporate bond funds are made up of bonds issued by corporations. Depending on the issuer, credit ratings can vary considerably, resulting in higher levels of risk and potentially higher returns.

Diversify With Bond Funds
Whether you’re looking to reduce risk in an equity-heavy portfolio or generate a stream of income, you may want to consider diversifying your portfolio with bond funds. (Diversification does not guarantee a profit or protect against loss.) Consult a qualified financial advisor for more information on how to construct a fixed-income portfolio that suits your needs.

Investments in government bond funds are not insured or guaranteed by any government agency.  The funds performance will vary.  Interest rate changes will affect bond prices, which can affect the price of the fund.  The value of the shares, when redeemed may be more or less than their original cost.

 Mutual funds are offered with a prospectus.  Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing.  The prospectus contains this and other information about the investment company.  You can obtain a prospectus from your financial representative.  Read the prospectus carefully before investing.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

Four Steps to a Simpler Financial Life February 13, 2012

For many Americans, financial life seems to be getting more and more complicated. Perhaps that’s because more workers bear responsibility for their own retirement savings thanks to the proliferation of 401(k) and other plans. Or maybe it’s because there’s so much information and so many investment choices to sort through. Whatever the case, here are some suggestions that may help to simplify your financial life.

1. Start with a Plan

A little time spent planning now can benefit you later. First, determine short-term financial goals. Do you want to purchase a home in five years? Are your kids heading off to college soon? Is buying a car a top priority next year? Next, think about long-term goals, such as saving for retirement and, if your children are young, college expenses. Estimate how much money you’ll need to meet each of these goals.

2. Build a Better Budget

Next, look at your current monthly net income and then set up a budget. Creating a budget allows you to see exactly where all your money goes and to determine where you can scale back. After making cuts, invest that money to help pursue your financial goals.

3. Invest Systematically

You can take time and guesswork out of investing with a systematic investing program. With mutual funds, for example, you can make arrangements to automatically invest a specific amount of money on a regular (e.g., monthly) basis, a strategy also known as dollar cost averaging.^* In addition to making investing easier, dollar cost averaging could potentially save you money. You’ll buy more shares when prices are low and fewer shares when they’re high. Over time, the average cost you pay for the shares may be less than the average price.

4. Rely on an Investment Professional

While the financial world is far more complex than it was just a few years ago, you don’t have to go it alone. Think about tapping into your investment professional’s expertise before making any major change in your investments. He or she can help you to evaluate how new tax rules and changing market conditions may affect your portfolio and, in turn, your financial goals.

*Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in declining markets.

© 2011 Standard & Poor’s Financial Communications. All rights reserved.

Kids and Money: A Little Education Pays Off February 13, 2012

Just about anyone who’s ever watched a child or grandchild go from the crib to kindergarten and beyond has uttered the phrase, “They grow up so fast.” Although you can’t really freeze a youngster’s precious moments in time, you can take steps to make sure that his or her journey to adulthood starts with a sound understanding of money, investments, and personal financial responsibility. The following activities will help.

Count on Counting Your Change
Smart shopping might begin with a hunt for bargains, but it should end with a review of your transactions. To drive this message home, encourage your kids to unload the groceries and simultaneously compare price tags with the receipt. If they find a mistake, let them hold on to the refund.

Play “The Stock Market Game™”
Get online and go to www.smg2000.org. There you’ll find “The Stock Market Game.” Sponsored by the Foundation for Investment Education, it lets kids in grades 4 through 12 assemble and monitor a hypothetical $100,000 portfolio for 10 weeks.

Make a Matching Contribution
Want to motivate a child to save? Just offer to “match” a portion of each savings account deposit he or she makes. And don’t be afraid to set a few rules — for example, matching contributions can’t be spent on candy or pizza.

Take Stock of Household Products
If your child is old enough to understand the concept of stocks and publicly traded companies, go through the house together and identify favorite items, such as computers and clothing. Then look up the manufacturer’s stock price and monitor it over time.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

College Prep: Five Reasons to Study Up on 529 Plans February 13, 2012

Millions of families striving to meet the mounting costs of college have flocked to 529 college savings plans.

For most investors, the plans’ main attractions are the potential for federal tax-deferred earnings growth and federal tax-free qualified withdrawals.¹ The plans’ aggregate asset limits, which often exceed $200,000, also appeal to contributors concerned about the potential for a six-figure price tag on a four-year degree. But a closer look at the rules governing 529 plans may reveal other attractive reasons to consider putting them to work as you make one of your most important investments — in your child’s or grandchild’s future.

Avoid federal gift taxes and accelerate giving — You can contribute up to $13,000 (or $26,000 if you and your spouse give and file jointly) to a 529 plan each year without owing federal gift taxes, provided you haven’t made other financial gifts to the plan beneficiary in the same year. In addition, you can elect to make a lump-sum contribution of up to $65,000 ($130,000 for married couples filing jointly) in the first year of a five-year period, provided you don’t give the beneficiary additional taxable gifts during the five-year period.²

Create an educational funding legacy — A 529 plan offers the owner control over the plan, including flexibility in naming and changing its beneficiary. The beneficiary can be any age and generally can be changed to a qualified relative when needed. For example, if the original beneficiary decides not to attend college, you can designate a new beneficiary. This flexibility may enable you to establish a college funding legacy for current and future generations. For example, you could open a 529 plan account to pay your child’s college bills. Then, if there’s money left over after he or she finishes college, you can change the beneficiary to another qualified family member and perhaps later to a grandchild.

Consolidate assets — Consolidating college funding assets for one beneficiary in a single 529 plan can make them easier to manage. Depending on plan rules, you may be able to arrange transfers from a Coverdell Education Savings Account, a custodial account or another 529 plan without triggering federal income taxes. Be sure to review the tax implications with a tax professional, however. Transfers of assets from Series EE and I bonds may also be allowed under certain conditions.

Maximize financial aid eligibility — Money in a 529 account is usually considered by colleges to be the account owner’s asset, which often means the parents’ asset. As a result, a maximum of 5.6% of the balance is generally assumed to be available for college annually, compared with 35% if the assets were the student’s. With a custodial account, on the other hand, the assets are considered the student’s. And according to the Department of Education, qualified distributions from a 529 plan are not counted as parent or student income and therefore do not affect aid eligibility.

Look into state tax savings — Depending on the state you reside in, plan contributions to that state’s 529 plan may be eligible for state tax deductions. Don’t overlook this potential benefit when choosing a plan.
There may be other advantages of 529 plans to consider, as well. Be sure to talk with your financial advisor and tax professional for help assessing how a 529 plan may affect your tax situation.

¹The earnings portion of non-qualified withdrawals is subject to federal income taxes, a 10% federal tax penalty and possible state taxes and penalties.

²If you die before the end of the five-year period, a prorated portion of the contribution will be considered part of your taxable estate.

 Section 529 plans are established and maintained by state governments or agencies or eligible educational institutions. Contributions must be kept in a qualified trust in order to be treated as a qualified tuition program.

 You should consider a 529 Plan’s fees and expenses such as administrative fees, enrollment fees, annual maintenance fees, sales charges, and underlying fund expenses, which will fluctuate depending on the 529 Plan invested in the investments chosen within the plan.

 

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

Marriage: Entering a New Investment Life February 10, 2012

There are a lot of issues that couples need to think about when tying the knot — wedding preparations, family, and, of course, finances. Addressing personal finance and investment issues before the big day may help improve your odds of being together years later. Here are some financial issues that you should consider when embarking on a matrimonial journey.

Discuss financial styles before marriage — Start your marriage off on the right foot by having an honest discussion about financial habits and objectives. Are you a saver, but your prospective spouse lives paycheck to paycheck? Do you prefer investing heavily in stocks, but your fiancé’s portfolio is filled with bonds? What are each of your short- and long-term financial goals?

Think holistically — Consider each spouse’s investment portfolio as part of a whole. For instance, if both you and your mate contribute to 401(k) plans and IRAs, see how your investment choices match up. Depending on your goals for retirement, one or both of you might want to invest more aggressively. Or you might find that your combined portfolio is more exposed to risk than the two of you can tolerate. Either way, you can rebalance your asset allocation by shifting money from one asset class (stocks, bonds and money market instruments) to another or by adding new money to the underrepresented asset class.

Review documents — Along with other legal documents, remember to update your beneficiaries on life insurance policies, IRAs, employer-sponsored retirement plans and pensions. Also, be sure to either create or modify your wills.

Determine your tax status — Once married, you’ll need to decide whether it’s best to file your taxes jointly or separately. Usually, the “married filing jointly” status results in a lower tax liability, but in some instances — depending on deductions and income earned — “married filing separately” may be more advantageous.

Meet with a professional — Make a date with a qualified financial professional to discuss your financial goals, such as buying a home or investing for retirement. Then, after making sure that all of your financial bases are covered, relax and enjoy the beginning of your life together.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

401(k) Decisions – You CAN Take It with You February 6, 2012

If you are preparing to change jobs, do you know what your choices are for managing the money in your current employer’s retirement plan? Although many people choose to take a cash distribution, there are other options that may benefit you more.

Uncle Sam Loves Cash Distributions
Taking a lump-sum cash distribution may trigger an immediate 20% federal withholding tax. In addition, a 10% tax penalty may apply if you are younger than age 55.^* Taking your money in cash also means that you’ll no longer enjoy the potential benefits of tax deferral that a qualified retirement plan offers.

Depending on your circumstances, you may have several options that will allow you to maintain the tax-deferred status of your retirement plan assets:

• Leave the money in your former employer’s plan. Your former employer must allow you to leave the money where it is as long as the balance exceeds $5,000. You’ll no longer be able to contribute to the account, but you’ll still decide how the existing assets are invested.
• Roll over the money to your new employer’s plan. By “rolling” the money directly to your new plan, you’ll avoid the taxes that could eat away at a cash distribution. You’ll also only have one set of investments to monitor. Even if you’re not immediately eligible to contribute to the plan at your new job, you may still be able to roll over the money right away.
• Roll over the money to an IRA. If your new employer doesn’t offer a retirement plan or you aren’t yet eligible to participate, you can roll over the money directly to a traditional IRA. Again, you’ll avoid taxes that you’d incur if you took a cash distribution and still enjoy the potential benefits of tax deferral. Experts advise against commingling your retirement plan assets with other IRAs you may have set up. Instead, open a separate IRA account, known as a “conduit IRA,” which may allow you to move the funds to a new employer’s retirement plan at a later date.

Research Your Options
If you plan to change jobs, don’t just take the money and run. Since rules vary from company to company, find the time to explore your alternatives. If you have specific questions about your retirement plan distribution options, contact your employer’s benefits coordinator or a qualified financial consultant.

*If you’re age 55 or older and separate from service, the 10% penalty generally will not apply for lump-sum distributions taken from an employer-sponsored retirement plan.  Keep in mind that the 10% penalty may be incurred on distributions taken from an IRA prior to age 59 1/2.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.