Atlanta Planning Guys

The decision to convert Traditional IRA funds (or a 401k) to a Roth IRA can be a difficult decision.  In many cases it involves the use of several assumptions.  Changing those assumptions can change the decision an investor may make.  Rather than attempt to develop a calculator that will “give us the answer”, let’s explore the relevant issues involved with making such a decision.

Once you understand the most important variables (and their impact to the analysis), this decision should be less intimidating.

Generally speaking, conversion to a Roth IRA involves paying taxes sooner than ordinarily would have been the case.  A rational investor would rarely make this decision unless there was going to be some sort of payoff in the end.

The following is an example of parity between paying taxes now or later:

• An investor, age 60 has $10,000 in a Traditional IRA
• Assumed growth on the IRA is 10% per year
• Assumed tax rate is 35% for all years
• Investor pays taxes due on Roth conversion from funds within the Traditional IRA
• The Roth begins with $6500 ($3500 was sent to IRS to pay taxes on conversion)
• The investor has the same amount of money in either case if the tax rate is the same in all years and the taxes are paid from funds inside the Traditional IRA

Conclusion: If an investor can’t pay the taxes due on conversion from a source other than the Traditional IRA, it may not be a benefit to convert……unless the investor expects to be in a higher tax bracket when the withdrawal is made.

Same example as above, except:

• Assumed tax rate this year is 35%
• Assumed tax rate at withdrawal is 41%

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

Note from the author:  This is the first of many blogs dealing with the 2010 tax rule allowing anyone to convert traditional retirement funds into a Roth IRA.  The decision whether to convert is not an easy one.  There are many issues to consider.  Before I could write on the issues and factors surrounding this decision, I had to express frustration with my research thus far.  Just one blog as a vent, then moving on…….

I have spent the last two weeks searching for a top notch computer program or application.  All I want to do is be able to easily analyze whether a Roth conversion makes sense for any client, in any scenario, with any set of assumptions.  In this day and age, you would expect to be able to find such a tool in seconds.  The dream:

There would be several free programs or calculators that would be acceptable and could give you a “good idea” of your situation.  (note:  there are free programs and calculators, but they are terrible)

You also wouldn’t be surprised to find a few programs that cost money.  (note: there are, but they are terrible too)  For most people, the free calculators would be good enough.  For advisors like us (control freaks who just HAVE to leave no stone unturned), we would want the most advanced versions and would be willing to pay for them.  These programs would allow us more control over each and every variable…”What if” modeling would be a breeze.  The purpose of such a program isn’t as much to determine the “right answer” whether a Roth conversion is best as much as it is to get the client thinking about the relevant issues.

This would be accomplished with a graphic output that would be easy for any client to understand and simple to “tweak” as the situation called for.

Guess what?

There isn’t one…at least not a good one…and the financial services industry should be ashamed of themselves.

This doesn’t feel right.  In an era where there is an “app for everything”, the financial services industry has laid a big fat goose egg.

As we approach the kickoff for Super Bowl XLIV, I can’t help but wonder how many Americans are frantically trying to make those last few lineup changes to assure themselves of victory in their respective fantasy football league.  I’m constantly amazed by the passion and fervor on display around creating a ‘made-up’ team of athletes to compete every weekend.  The winner, in most cases, gets to keep a high percentage of the pot created by charging each participant to play in the league.  If only we were this passionate about our retirement savings…or are we?

2009 was certainly a year that tested the resolve of many investors.  If you hung in there well beyond the market lows of March 9^th, you were handsomely rewarded with solid gains across the equity and bond markets.  How did your portfolio perform?  Did you make some moves that paid off?  Chances are good that if you benched any of your players early in the year, you didn’t see the gains your fellow investors did.  Fantasy football is just that…fantasy.  You are allowed to go in and draft the players you feel are the best at their position.  One could draw the conclusion that investing is taking the fantasy and making it a reality.  Many platforms allow for you to pick and choose the investment styles that make sense for you.  Only here, everyone can draft the same player if they choose.

With the help of a sound financial advisor, you can draft the ideal portfolio for you.  Occasionally, changes will need to be made.  However, for the most part, you need to pick a sound team and stick with them.  I’ll grant you that it’s not likely you will see these folks suiting up in helmets on a Sunday and spending a few hours chasing around a pigskin pummeling one another.  However, that’s not what you’re paying them to do.  Talk to your financial advisor and make sure that your portfolio team is poised for success in 2010.

The American Recovery and Reinvestment Act was amended on December 19^th, 2009 (ARRA).  The ARRA has a provision that allows for the reimbursement of 65% of the premiums attributable the extension of health benefits for involuntarily terminated employees seeking to extend their coverage under Cobra.  Prior eligibility requirements allowed for this reimbursement if you were terminated between September 1^st, 2008 and January 1^st, 2010.  These changes also apply to Georgia state continuation of benefits (if your employer is not Cobra eligible).

 This eligibility period has been extended through to February 28^th, 2010.  Additionally, the reimbursement period has been extended from 9 to up to 15 months.  If you are currently participating in the Cobra Subsidy program, this is a tremendous change for you.  There are an additional 6 months worth of reimbursements that you are eligible for.

Please be sure and know your options for Cobra Continuation in the event you are involuntarily terminated.  Some things to consider when looking into Cobra:

• 1. You have a 60 day grace period to elect to continue coverage
  • a. If you elect, you will owe the premiums back to your termination date
• 2. You don’t have to take Cobra…weigh your options
  • a. If you’re not happy with your current plan…see #3.
• 3. Explore alternatives. You have a 60-Day grace period to shop coverage.
  • a. Be sure to consider if you’re eligibility for the ARRA reimbursement. The 65% savings could make the Cobra Continuation a much more attractive alternative.
  • b. Georgia is a “non-guarantee” issue state, meaning the insurance company doesn’t have to approve you for health insurance if you aren’t healthy.
• 4. You can only extend Cobra for 18 months.
  • a. There are special provisions that may allow for you to extend your coverage for up to 36 total months.
• 5. Call a knowledgeable Advisor
  • a. There are dozens of plan options out there.
  • b. You will need to consider deductibles, co-pays, etc.

Hopefully this post doesn’t apply to you.  However, if you or someone you know has recently lost their job, there is much to consider.  Don’t make an uninformed decision or wait too long to act.

Happy New Year to everyone!  As we are busy hanging up our new calendars, let’s take a moment to cover some basic ‘early year’ strategies and action steps that can get things started off on the right foot.

 Important Documents:  The tax man will be here before you know it.  Go ahead and pull out all the 2009 files and put them in a folder or box to get ready.  I save bills and receipts throughout the year.  If you start commingling 2009 and 2010 papers, it will just lead to more headaches when the time comes to start your taxes.

Add up those expenses:  If you are eligible for a Flexible Spending Account (FSA) or a Health Savings Account (HSA) through your employer, this is the time of year to elect how much you want to pull out of your paycheck to fund these accounts.  A good number to know is how much you spent on healthcare expenses in 2009.  You can use this as an excuse to get all those papers out (see above).

Retirement Plan Contributions:  Make plans now to increase/decrease your retirement plan contributions for 2010.  If you have a 401k at work, the contribution maximum isn’t changing for 2010 (still $16,500 for maximum employee deferral).   If your compensation is higher, your current contribution percentage may have you maxing out your plan early.  That’s a no-no!  Maybe you already have an amount you want to contribute in the coming year…do the math and make sure that you meet your goal for 2010.  Many plan sponsors allow for online changes to contribution percentages.  If you’re with a smaller employer, talk to your HR director and get this done.

Get Ready for the Roth: We have been gearing up for over 18 months for 2010.  In our world…we are dubbing 2010 the ‘Year of the Roth’.  If you have an IRA, you should be prepared to speak with your financial advisor this year about converting.  This won’t be for everyone…but everyone should discuss the opportunity.  Here is the article that Cass wrote about this in 2009.  You can expect much more on this from Chappell, Mayfield and Associates as the year unfolds.  There are going to be many things to consider with this decision.  Please talk to a professional that can clearly articulate the advantages and disadvantages for action.

Taking early steps in the year can lead to substantial benefits throughout the year.  Get a head start on your year and make 2010 one to remember with a smile.

So often, we lend ourselves to reflection as the new year approaches.  I’m always quite contemplative from Thanksgiving through the end of the year.  Usually, Cass and I reserve this blog for informative postings we feel are relevant to our clientele in addition to other consumers.  I’d like to take just a moment to look back on our practice and extend some extra special thanks to those that make our business all worth it.

Ups and Downs:  This year has certainly seen its share of challenges in the market.  From a historic low on March 9^th through a summer of negative headlines and positive returns…you have stood by our philosophy and strategy when it comes to managing wealth.  Our system for creating and maintaining wealth has been derived through the hands-on role we play in the lives of our clients.  Without your feedback and challenging of our methods, we would have very little to separate ourselves from other advisors in the marketplace.  The high standards for excellence and client education have come from the continued accountability our clients hold us to each quarter.

Life’s little changes:  2009 has seen much transpire within the Chappell, Mayfield Family.  Cass was blessed a few months ago with his first child (Olivia).  My life has been blessed this year with my engagement to Julie and we plan to wed in May of 2010.  Having the opportunity to share in countless blessings for our clients this year has only strengthened our commitment to providing world class guidance to the individuals and families we serve.  Thank you for allowing us to share in those magical moments these last 12 months.

The Road Ahead:  We don’t know what is in store for us in 2010.  Rest assured that we will be poised and ready to celebrate your victories and provide much needed guidance when the sky isn’t quite as bright.  Our efforts will continue to focus on bringing unique value and customized strategies to our clients.  It is through these efforts that we expect to continue to grow our service model and the population we serve.

Warmest regards and thanks for another special year.

There are certain inevitable truths to our business.  Much like in life, we should frequently be reminded of how certain aspects of the world work in order to save ourselves the aggravation and heartache that comes with miscalculated action.  In a recent review with one of our clients, I was shown a spreadsheet that the client had put together to keep track of his investments.  He stated that his philosophy was simple…compare the balance on each account from the beginning of the year to the end.  From this, he was able to deduce which investments had performed poorly versus those that had risen to the top.

On the surface this seems like a perfectly adequate way of assessing the success of your portfolio.  However, he is excluding a very important factor in evaluating his money’s performance…they aren’t all the same kind of investments.  You can’t fairly compare an apple to an orange in much the same way you can’t compare a equity money manager to that of a bond.

This Callan Chart details a number of asset classes and their performance over the last 20 years.  You’ll quickly notice several things:

1. Very rarely does any one particular style-box stay in the same place

a. In most cases, the top performers in one year move to the bottom of the chart in subsequent years

2. In most cases, bottom performance tends to be followed by a rise in relative performance in the years to come

3. There seems to be little rhyme or reason as to how these categories flow year to year

As we near the end of 2009, there is a good chance that many of you are pulling out your statements and trying to get a grip on what has been a pretty stellar year for investors.  Please heed my warning…don’t jump to ill-advised conclusions about the relative performance of your money.  Talk to your financial professional before you make any changes to your portfolio.  It could lead to that lemon.

No, I’m not talking about shopping for presents.  Hopefully, you have already knocked out all of your trips to the stores.  However, there are other matters which should be handled before the clock rolls over to 2010.  Here are a few things that you may want to remember to do before the New Year.

Charitable Contributions/Gifting:  Gifts to Charities are unlimited.  Some charitable contributions are even tax deductible, with certain limitations.  Making a gift to charity before the end of the year will usually provide you with a deduction for this year’s taxes.

Gifts to family members are never deductible, but there are limitations on how much you may gift in any given year.  You may gift up to $13,000 (the 2009 limit) to any person without it impacting your lifetime exclusion in 2009.  If you’re married, each spouse can exercise this right and bring your total gift up to $26,000.  Gifting is a tremendous tool in funding estate planning initiatives as well as future education spending for children.

401k Catch up Contributions:  If you’re over the age of 50 and are eligible for a 401k plan at work, you can defer an additional $5,500 into your retirement plan.  Talk to your employer about the opportunity to defer a larger percentage of your paycheck in the closing weeks of the year (perhaps use that year-end bonus check).

Flexible Spending Accounts (FSA’s):  Your employer may offer you a flexible spending account to defer money into for potentially qualified medical expenses.  If so, that money needs to be used up before the plan year is out. 

Some uses of that money could be for prescriptions, teeth cleanings & new glasses or contacts.  Many employers have a January 1^st deadline.  FSA money is a “use it or lose it” so make sure that account is empty before your deadline.

Not since the sultry sounds of Robert Palmer in 1986 has the term ‘Addicted’ been associated with much of anything positive.  It seems the term always carries a negative connotation and for good reason.  Addiction implies an unhealthy level of desire for something.  We can further that label by the common thread that addictions are typically closely related to the term vice.

Cass has been busy lately posting articles about the mental/behavioral side of investing.  In that same vein, I’d like to talk about the difference between a healthy and unhealthy addiction to our money.  There is likely to be a little push-back from readers when I make the statement that we are all addicted to our funds.  We are closing in on the end of the year and what better time to focus on making sound choices about our finances then now.

 Here are three areas where you can curb your addictions for less stress in 2010:

Online Access:  If you’re pulling up your 401k or investment accounts once a quarter or even monthly to see the balance that seems reasonable.  If the first thing you do at your desk every morning is pull them up while listening to a radio or television pundit spinning the latest opportunities and flops in the market…this has an unhealthy feel to it.  To make things worse, most online portals now allow you the ability to change your portfolio.  Now you’re reacting in the moment and most likely going to make a decision that is detrimental to your long term goals.  Put down the mouse!!!  If you have questions about how your investments should be doing, talk to your financial advisor to make sure the money is invested as it should be.  Review it periodically and don’t make any moves without talking to your advisor.

Spontaneity:  We all enjoy surprising our family or friends with an impromptu vacation or night out on the town.  Better yet, how about just doing something for you?  Spa treatments, weekend getaways & new toys are atop the list.  It is healthy and therapeutic to make yourself and loved ones feel special.  However, a constant barrage of eating out, theater nights and hotel stays can add up quickly.  Compound that with a tighter budget this year and you have a formula for financial disaster.  Stay spontaneous, but make a budget (monthly, quarterly or annual) to keep expenses in check.  We tend to spend more than we intended with little planning or research.  Money is atop the list of stressors in our lives.  You may be compounding your stress/anxiety by not keeping expenses in check when it comes to stress reducing activity.

The Vice:  For me, it was smokeless tobacco.  It could be coffee, soda or chocolate for someone else.  Odds are good that whatever that “unhealthy addiction” you have, it’s costing you money and probably your health.  Is it realistic to think you can completely remove something like tobacco from your life?  Absolutely!  Coffee or sweets may be a much tougher challenge due to less social stigma.  There are things you can do to cut costs.  Make your coffee/espresso of choice at home.    Create a reward system for eating that snack food.  For example, a balanced checkbook at the end of every month gets you that sweet snack.  Successfully running a 5k race earns you a trip to IHOP.  I had one client that was addicted to diet soda.  Her rule was simple…she couldn’t drink a diet soda until she had consumed 32 ounces of water during the day.  Not only did she save money from less soda purchases, she lost nearly 20 pounds in a month.

A few changes to how we live our lives can mean huge reductions in stress & expenses.  Try some of these on for size in the coming year.

In my experience, Mental Accounting is by far the most common bias exhibited by investors.  It can also do the most harm to an otherwise well conceived financial plan.

Basically, it works like this:  Investors assign different assets to different “accounts” in their minds.  Gain and loss is typically looked at separately.  The decision to buy and sell is rarely based on the effect it will have on the overall portfolio.  Instead, this decision is based solely on its impact to that “account”.  In effect, the investor has created silos for each investment they hold.

This bias is to blame when an investor hangs on to losing investments.  If they sell, that “account” will have realized a loss….something we KNOW that investors despise.  The opportunity to sell the loser and redeploy those assets with the hope of finding a winner is lost by the urge to avoid going “into the red” with that “account”.

Investors who mentally account may sell winning investments too soon.  Eager to “chalk up a win”, an investor may sell an investment with recent success (even though that success MAY continue).  To an investor swept up in mental accounting, success is defined by “wins” and “losses”.

Spending decisions can become clouded.  Consider the situation where someone finances a car at a high interest rate instead of paying with the ample cash in a savings account.  To deplete that account would be devastating as compared to paying finance charges…..in the mind of a mental accountant.  Even though, if she paid cash, that person could replenish the savings account (with interest) by figuratively making the car payment to herself.

“What’s the formula for successfully overcoming this bias?”

It is very difficult.  We are all guilty of this bias in some way. 

The easiest way is to constantly consider how financial and investment decisions impact your personal balance sheet.  Make your “mental account” bigger.  Don’t look at each investment as an account.  Instead, view all of your investment assets (CD’s, IRA, 401(k), checking account, brokerage account, college savings, gifts from Granny) as ONE account.  And……..try, as hard as you can, to remove emotion from the decision.