Don’t Leave Free Money on the 401(k) Table

In this economy (or in any economy, for that matter!), none of us can afford to leave “free” money on the table.  So why -- and how -- are so many Americans giving away free money?

According to an article in the November 2011 edition of Financial Planning magazine, FINRA recently issued an investor alert urging approximately 30% of American workers who are not contributing enough to their 401(k) plans to receive their full employer match.  Failing to take advantage of this match compromises these workers’ ability to step-up their contributions and to potentially increase their eventually retirement savings.  One of the most common employer 401(k) matches is a dollar-for-dollar match of up to 3% of an employee’s salary.

While most of us will need to save much more than the 3% that may be matched to fund a successful retirement, it makes sense for all of us to do at least the minimum amount needed to get the “free” matching funds.   

Make sure your 401(k) contributions are set-up for 2012!!  Once you’ve taken the first step to start saving (and getting a no cost boost from your employer), meet with a financial advisor to form a strategy for saving additional funds to meet your future retirement goals.

Pay Now or Pay Later?

As if you didn’t have enough to do around the holiday, add this to your list … start thinking about contributing to your retirement plan, if you haven’t already. You have until April 15^th to make a contribution for 2011, but first you need to figure out what kind of IRA to fund … a traditional or a Roth. Do you take the tax hit now with a Roth or do you pay later with a traditional IRA? First things first -- consider that most people will have somewhat less annual income later in life, when they are done working.  If working years are typically our high income years, then why choose a Roth or convert savings to a Roth when we are working? Why pay a higher tax on retirement dollars now than you will later? 

It may come as a surprise, but there are some situations when it makes sense to go ahead and bite the tax bullet now. If you happen to have a special situation where your income is considerably lower now (or during a working year), then consider a Roth or Roth conversion. Maybe you have excessive business expenses or losses that can be deducted in a year, or perhaps you've had a very low income year due to the slow economy or due to a job loss. Maybe you or your spouse went back to school or stayed home with a baby and the household income has been cut in half … all are good reasons to go with a Roth. 

There is another important consideration. If you believe that the tax brackets and/or tax system will be changed on us, your decision could be much different depending on your expectation. For example, if you feel that tax rates on your retirement dollars will be increased substantially between now and retirement, you might want to hedge your bets and implement a larger Roth allocation into your overall tax strategy. Even if it means you pay some unwanted taxes now, obviously this could help you from paying an even larger tax later. 

It's important to consider a diversified tax strategy as you would a diversified portfolio and to treat each year as a new decision for contributions and/or conversions.  It’s never a one-time solution.

Withdrawals on a traditional IRA are subject to income taxes and, if withdrawn prior to age 59 1/2, may also be subject to a 10% federal penalty.  Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status and other factors.  In a Roth IR, contributions are made after-tax.  The account grows tax-deferred and qualified distributions are tax-free.  Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. 

In a Roth IRA conversion, each converted amount may be subject to its own five-year holding period.  Converting a traditional IRA into a Roth IRA has tax implications.  You should discuss any tax or legal matters with the appropriate professional.

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Laurie Renchik Honored to Share The Center's Wellness Efforts

The Center’s health and wellness initiatives were recently recognized by both the American Heart Association and Blue Care Network for building a culture of health and wellness in the workplace. 

A key factor in the program’s continued success since 2008 has been the positive power of wellness champions within the firm creating grassroots commitment within the firm.  

Accolades from Blue Care Network’s Healthy Blue Living program resulted in an invitation to sit on a wellness panel at a BCN’s recent five year anniversary event in Southfield.  

Planner Laurie Renchik represented the Center wellness initiative on the panel, sharing stories about activities and healthy practices adopted at the Center.

Sandy Adams Quoted in the Wall Street Journal – On Help for the Elderly

Sandy Adams, CFP

Voices: Sandy Adams, On Help for the Elderly 

Clients often don’t want to discuss elder care planning issues until something happens in their life that forces them to take action. But both older clients and middle-aged clients need to be proactive. 

For instance, a middle-aged client might suddenly realize that their parent can’t live alone anymore. If they haven’t developed a strategy for dealing with the cost of live-in care, then they have to find a way to manage the problem on an immediate basis. Elder care planning ends up becoming crisis planning.

One way advisers can help clients better prepare for elder care is by….Read More. 

Hold the Check, Please

Many of us will never need to worry about deferring compensation. In fact, the idea of waiting to get paid for work we do now until a year or more in the future would seem ludicrous. But if you're in a position where you're being offered a Nonqualified Deferred Compensation Plan, first count yourself lucky because you're likely a high-paid executive, then take a close look at your options. 

Simply put, deferred compensation is an agreement between an employer and an employee to hold back a portion of earnings for work performed today for payment in the future. Deferred compensation plans are a benefit most commonly offered in executive pay packages. Because the planning and tax implications associated with deferred comp are complex we recommend consulting with your financial advisor before making the decision to sign on. But the following points will help give you a basic understanding.  

Key takeaways from a tax and financial planning perspective: 

• Participation will reduce current taxable income
• Earnings grow tax deferred until distribution
• Consider maxing out 401k savings first; then NQDC, since this will provide the opportunity to save more, potentially filling the gap that can arise between income needed in retirement and income received from 401 (k) plans, pensions and Social Security
• Consider flexible distribution options - either during employment or in retirement. To qualify for a tax advantage, the IRS requires a written agreement stating the specified period of deferral of income.  An election to defer income must be irrevocable and must be made prior to performing the service for which income deferral is sought (Ex: An election to participate for 2012 must be filed in December 2011).            

A big challenge when it comes to saving for retirement is creating alignment between current income needs and saving for the future. If you are eligible to participate in a Nonqualified Deferred Compensation Plan then the next step is to see how this type of retirement savings fits into your overall plan for wealth accumulation and financial independence. 

The good news is that the decision is up to you and there is a great deal of flexibility. Plus, the impact of working now and getting paid later can be invaluable.  Talk with your financial advisor to see if it makes sense for you. 

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

You Know You're from Michigan If...

As Jeff Foxworthy so eloquently phrased it, “You know you’re from Michigan if”:

You’ve ever had your heat and air conditioning on in the same day.

You can use your hand as a map.

You can drive 65 mph through 2 feet of snow and a raging blizzard…without flinching.

During Michigan/Michigan State week at least one member of your household disowns you.

To people who live and work in Michigan it has always been with a sense of pride that we talk about our State.  In fact, we have one of the highest percentages -- over 76% -- of people who were born in Michigan that still live in Michigan.  However, this may not be by choice alone.   Over the past few years, the state of Michigan has come upon harder times than most.  Michigan lost 860,000 jobs from 2000 to 2009, almost half in the final two years.  Add to that the fact that real estate prices are depressed, and you may have a lot of people feeling stuck. 

Unfortunately, much of our state hinges on the health of automotive production. 

When the automotive companies are struggling, so is the economy of the state.  While it may seem like the downswing is here to stay, there are several signs pointing to better times ahead.  Recently, a Bloomberg index that tracks the pace of state growth shows the pace of Michigan’s recovery surpassing all but North Dakota -- thanks mostly to automotive industry recovery.  While our unemployment average is still well above the national levels, it has improved a full percent over this time last year.   

And you never know with Michigan. This past summer, while ratings agencies were downgrading US Government debt, they were making positive comments about Michigan debt, citing a balanced budget and an improving economy as the catalyst.

While the last decade has indeed been a lost decade for Michigan, there is hope on the horizon.  So next time you are driving coast-to-coast -- that is Muskegon to Port Huron -- remember how wonderful life in Michigan can be.

Sources:  The Geography of Stuck, http://www.theatlanticcities.com/housing/2011/11/geography-stuck/534/

No Free Lunch – But Maybe a Free Capital Gain?

fThe financial and investment profession is full of acronyms, jargon, and common phrases such as “buy low – sell high” and is “there’s no free lunch when it comes to investing”.  Believe it or not, some things are free in personal finance (and our role is to help you find them) such as the 0% capital gain rate for many taxpayers.  Yes…..0%....and hopefully we don’t have to argue that that is a good rate! 

Single taxpayers with taxable incomes of less than $34,500 and married couples filing jointly with taxable incomes below $69,000 are considered to be in the 10% or 15% marginal bracket.  One of the luxuries of being in the 10% or 15% marginal tax brackets is a 0% capital gain rate through the end of 2012. Those in marginal brackets higher than the 10% and 15% currently are subject to a 15% capital gain rate.   

Here are a few examples of who might benefit from such a rate: 

• Those holding appreciated securities that have been hesitant to sell because of the tax implications.
• Those interested in selling an appreciated security in order to reset the cost basis. (Don’t forget to avoid the wash sale rules)
• Those in higher tax brackets looking to make gifts to relatives that are in lower brackets (say a child that has moved back into their high school bedroom). 

Example:   John and Mary’s son Steven recently graduate and is finding full time employment illusive.  John and Mary expect to help Steven out with expenses for the near future.  John and Mary are in the 28% marginal bracket and Steven (with little income) is in the 10% marginal bracket.  John and Mary can gift Steven appreciated securities….Steven can then sell them and take advantage of the 0% capital gain rate. 

As always, work with your professional advisors before implementing any tax strategies….and possibly enjoy a free lunch thanks to a free capital gain.

Note: Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.

The Center Honored as AHA 2011 Start! Fit-Friendly Platinum Status Company

For four consecutive years the Center has been recognized as an American Heart Association Start! Fit-Friendly Company. 

For the most recent two years the firm received Platinum status, the highest recognition level.

To achieve this award the health and wellness program met the following criteria:

•  Physical activity options in the workplace
• Healthy eating options at the worksite
• Promotion of a wellness culture
• Implement at least nine criteria outlined by the AHA in the areas of physical activity, nutrition  and culture
• Demonstrate measurable outcomes related to workplace wellness.

Deck the Halls with Tactical Allocation

One of my favorite things during the Christmas season is to decorate my house.  When driving down the street, my house tends to be the eye-catching one... think the Griswold house. As we string lights, hum Christmas tunes, and watch my husband crawl around on the roof with his staple gun, we really get into the holiday spirit. 

Now, let's put my slightly over-the-top "ode to the holidays" in investment terms. I recently explained that strategic investing, when you pick the mix of stocks, bonds and cash to make up your portfolio, serves as the foundation of your house. Well, I like to think of Tactical Allocation as decorating or changing for the season.  Of course, it shouldn’t be as drastic of a transformation as the Griswold’s (we don't want to blow a fuse or catch the tree on fire). Rather, a Tactical Allocation approach provides for overweighting or underweighting asset classes as perceived market opportunities arise. In yard decorating terms, you're not leaving the inflatable Santa out in the yard all year, that would be the traditional investing “buy and hold on for dear life” approach. You're watching conditions and judging when it's the opportune time to deflate old Saint Nick,  pack him away and move on to the next holiday. The goal of Tactical Allocation is to reduce risk, increase returns or both. 

While we believe that the relationship of valuation between markets over long periods will be efficient and will correspond to fundamentals, we also acknowledge that over shorter periods, some markets may become overvalued, while other asset classes will become undervalued. This is where Tactical Allocation can be considered. A somewhat modified asset allocation can potentially offer better returns and less risk when executed correctly.[1]

A tactical asset allocation strategy can be either flexible or systematic.  In a flexible approach an investor modifies his portfolio based on valuations of different markets or sectors (i.e. stock vs. bond markets).  Systemic strategies are less discretionary and more model based methods of uncovering market anomalies.  Examples of these are trend following or relative strength models. 

All of these methods require knowledge, discipline and dedication to execute successfully; it's not like throwing a single strand of lights over a tree branch and calling it festive. And with Tactical Allocation, less can be more, which is an approach I sometimes wonder if I should apply to my Christmas decorations. So, talk to your Financial Planner to determine what may be appropriate to incorporate into your portfolio.

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[1] Keep in mind that all investing involves risk, and there is no assurance that this or any strategy will be profitable nor protect against loss.