TIME FOR A MIDYEAR FINANCIAL CHECKUP - June 2005 Newsletter

You did what you were supposed to do financially at the start of the year. You established or reviewed your financial plan to be sure its goals and strategies were still appropriate, rebalanced your investment portfolio, made sure your estate plan was in place, checked your insurance coverage, and so on. Give yourself a round of applause.

You probably don’t want to think about your financial plan until next January. But you might consider doing a midyear mini-review just to make certain you're still on track and to tweak a few things. Here are some places to start.

Taxes. Did you either receive a sizable refund or owed a chunk of money in April? If either one happened, now’s a good time to correct that for 2005 by projecting your taxes for the year and changing how much you are having withheld from your paycheck or you're paying in estimated taxes.

A substantial refund suggests you’re overpaying taxes during the year. That's money you could have invested or saved. To reduce the size of the refund, increase the number of allowances you claim on your W-4 form at work (or pay a little less when estimated payments are due this June, September, and January). Do the reverse if you owed money.

Budget. Review your household budget or spending plan. Are you on track? Do you have a good handle now on where you are spending your money? Do some categories need adjustment? Are you saving 10 to 15 percent from each paycheck?

Fringe benefits. Many companies hold open enrollment in the fall for fringe benefits, so this summer is a good time to start thinking about them, especially health care. Your employer may have changed health care plans, for example, or the existing plans may have new wrinkles, prompting you to switch plans. Perhaps your family circumstances have changed, such as the addition of a child, so a new plan is preferable.
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Retirement accounts. Have you received a raise this year that might allow you to put more into your retirement plan at work, or if a plan’s not available at work, to contribute more to your individual retirement account? For example, you can put in up to $14,000 this year in a 401(k) or 403(b) plan, and another $4,000 if you’re age 50 or older.

Flexible spending accounts for health care. These employer-sponsored accounts allow you to divert wages into an FSA account tax free and take money out of them tax free to pay for qualified out-of-pocket medical expenses. They can be a very good deal for employees. The catch is that you forfeit any balance not spent by the end of the year—a deadline the U.S. Treasury has now extended from December 31 to the following March 15^th.

So now’s a good time to see what’s left in the account to be sure you use it up by the deadline and to help you estimate how much to have withheld for next year. Remember that you can use FSA money for such things as eyeglasses and many over-the-counter drugs.

Investments. You probably shouldn’t be making major changes to your portfolio at this point, but you might want to make some tweaks to it.

One tweak to consider is taxes. The decision to buy or sell an investment should generally be based on your needs and the economics of the investments themselves, not taxes. But say you’ve sold off some winners this year. Consider offsetting some of those taxable gains by selling off some losers. Or if you’ve sold off some losers, consider selling winners, which would offset their gains by establishing a new investment basis. You can then turn right around and rebuy the winners without worrying about wash-sale rules.

Assuming that your portfolio had the right mix of assets at the start of the year, you may not need to make adjustments until next year. But if a portion of your portfolio has done extremely well or extremely poorly, you may want to rebalance the portfolio to bring the proper mix back in line.

Charitable donations. Yes, you can wait to the end of the year to make planned donations. But consider avoiding the rush, which can lead to mistakes, and get a head start now. Perhaps appreciated securities will make the perfect donation.

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June 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

LARGE IRAS NOT FULLY PROTECTED FROM BANKRUPTCY OR LAWSUIT SEIZURE - June 2005 Newsletter

A recent U.S. Supreme Court ruling and new federal law have extended bankruptcy and lawsuit protection over most assets in individual retirement accounts. But the protection may not be complete for owners of large IRAs, caution financial planners.

Under federal ERISA law, assets held in most employer-based retirement plans such as 401(k)s, pension plans, 403(b)s, and profit-sharing plans have generally been beyond the reach of creditors. But IRAs were not protected on the federal level. Some states protected IRAs, but many provided no protection or only limited protection.

Also unprotected, unless by a particular state, were SIMPLE IRAs, used by small employers; plans established by the self-employed with no employees other than the owner and spouse, such as a simplified employee pension (SEP) plan or individual 401(k)s; and annuities not held inside a protected employer plan.

Consequently, workers retiring or changing jobs, or those most vulnerable to possible lawsuits, such as doctors, have often been reluctant to roll assets from protected employer-based plans into IRAs—even though that might have been the best strategy from an investment and estate planning standpoint.

Then, in the time span of a little over two weeks this April, all that changed.

First, the U.S. Supreme Court unanimously ruled that assets held in IRAs, both traditional and Roth, generally are protected from creditors. The case concerned a couple who had rolled their $55,000 in company pension and 401(k) assets into an IRA, only later to have creditors try to seize the IRA after they filed for bankruptcy protection due to hard times.

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But the Supreme Court ruling left an important issue unresolved. It said that assets in IRAs were protected only to the extent of what might be considered “reasonably necessary” to support the IRA owner and his or her dependents. Anything above that value could be seized by creditors (depending on the laws of the state of residence). But it didn’t define what constitutes “reasonably necessary.”

Slightly over two weeks later, Congress passed and President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Among its many provisions, the law resolved some questions left after the Supreme Court ruling and further strengthened protection of IRAs as well as plans for the self-employed.

Especially important to participants in employer-based retirement plans is that the bankruptcy act says that all assets rolled over from these plans into an IRA, and all subsequent earnings made inside the account attributable to the rollover, are protected from creditors, regardless of the amount of the rollover. That should remove much of the reluctance among investors to move most retirement plan assets into IRAs if they decide that’s the best financial strategy.

While IRAs have unlimited protection for certain rollover amounts, such is not the case for original (nonrollover) contributions by the owner to traditional and Roth IRAs. The bankruptcy act put a price tag on the “reasonably necessary” amount that might be protected in these IRAs—$1 million. That is, if the aggregated value of your original contributions and their earnings to traditional and Roth IRAs exceeds $1 million, the amount above $1 million (excluding any protected rollover amounts) could be vulnerable to creditors. That $1 million amount is indexed annually to inflation.

Most investors building an IRA from scratch won’t exceed the $1 million limit, since annual contribution limits to traditional and Roth IRAs have been relatively low for the past two decades. And the bankruptcy act allows bankruptcy courts to permit the IRA owner to keep more than $1 million if it is in the “interest of justice” (though the act did not spell out what constitutes an interest in justice).

All of this emphasizes the importance of making sure you roll any money from employer-sponsored retirement plans and pensions into separate “rollover” IRAs designed specifically for such rollovers. Try to avoid mixing rollover dollars inside a traditional or Roth IRA you’ve been funding from scratch because it makes bookkeeping complicated. Keep accurate records to document rollovers, too.

Nonqualified annuities—annuities not held within qualified retirement plans—do not fall under federal creditor protections established by the Supreme Court and Congress. Depending on state law, those assets may remain vulnerable to creditors.

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June 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

FINANCIAL MISTAKES TO AVOID IN A DIVORCE SETTLEMENT - June 2005 Newsletter

In a divorce settlement, it's common for both parties to focus on immediate financial concerns. Yet it is the long-term financial consequences of divorce that frequently are more devastating. Here are some of the most frequent mistakes and how to avoid them.

Taking the house. The spouse who will have custody of the children typically wants to keep the family home. While this may be desirable emotionally, it can be financially problematic, caution financial planners.

A home is an illiquid asset that costs money to pay for and maintain. The parent with the children—often the woman—may not have the income resources to take care of both the home and the children, particularly if they give up other financial resources in return for the house. Consequently, it may be better financially to sell the home and split the proceeds.

Assuming equal is equal. The family home is a good example of the mistake divorcing couples often make by “dividing things down the middle.” Frequently the wife takes the house and the husband keeps his pension or retirement accounts. Say both are valued at $400,000. The home is a cost-burden, while the retirement account is a liquid asset that can continue to grow tax deferred, probably at a faster growth rate than the home.

Not examining earnings potential. Often, one spouse has minimized a career in order to raise children. The settlement needs to take this into account, perhaps by providing extra money to the homemaking spouse to pay for additional career training or education.

Not thinking about taxes. Say it’s proposed that one spouse keeps a $150,000 individual retirement account and the other keeps a $150,000 taxable investment account. Sounds fair. But it’s not. The owner of the IRA will have to pay taxes on that money when it’s withdrawn, so the two accounts are not truly equal in value.

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Not following through with your attorney on the QDRO. A spouse who will be receiving part of his or her spouse’s qualified retirement accounts will need a court order called a “qualified domestic relations order.” (Nonqualified plans such as deferred compensation or stock options do not need a QDRO.)

But mistakes can cause major problems. First, be sure your attorney is aware of all retirement accounts and that the attorney examines what rules each plan has for QDROs, as they vary from plan to plan.

To expedite the QDRO, have your attorney obtain pre-approval from the plans before the settlement is final. The court must sign the order before an account can be divided. Be sure the order is sent to the retirement plan and is approved by the plan early in the divorce process. If not completed before the divorce is final, you’ll have to go back to the court later, and you run the possible risk of your ex-spouse cleaning out the account.

Not including survivor’s benefits in the QDRO. If you will be receiving retirement benefits from your former spouse’s pension, be sure the QDRO includes survivor’s benefits, if the plan allows them. Otherwise, those benefits could stop if your spouse dies before you do.

Also pay attention to Social Security benefits. For example, if your spouse makes significantly more money than you do and you’ve been married ten years or more, you will be eligible for Social Security benefits based on your spouse’s work history. That may mean higher benefits than if you have to rely on your own work history.

Not insuring the divorced spouse. If you will be relying on your ex-spouse for child support, retirement benefits, alimony, or other financial benefits such as a commitment to pay for the children’s college education, take out a life insurance policy on your spouse to ensure the money will be there. You should own the policy, so you know they are keeping up the payments. And buy the policy before the settlement is final, so you know whether they’re insurable.

Only using a lawyer. Have a CERTIFIED FINANCIAL PLANNER™ professional trained in divorce financial issues work alongside your attorney. A planner can objectively examine long-range issues such as budgeting, appreciation and tax ramifications of proposed settlement assets, and long-term costs associated with settlement proposals. By working with your attorney, a financial planner can help ensure the divorce settlement is financially fair to you.

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June 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.