By John Napolitano, Financial Planning Association of Massachusetts

John Napolitano is president of the Financial Planning Association of Massachusetts and chief executive of US Wealth Management. He will be hosting a live Boston.com chat on Friday, Nov. 9 at 3 p.m.

We all eventually clean out a closet or basement, and find things that you forgot about and deem useful or valuable. From a financial perspective, the same process may also yield unexpected treasures. Living proof of this is your home state's unclaimed property list. In my home state of Massachusetts, it is estimated that one in 10 residents has unclaimed property.

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By Christina Reinwald, Boston.com correspondent

How do you keep track of your financial information? Mint.com wants to help you improve it by importing your finances online. Stacy Rapacon, channel editor for personal finance website Kiplinger.com, said Mint.com offers the best overall online budgeting. What makes it even better? It’s free.

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It's an emotionally charged topic, and there are a lot of financial topics to consider during a divorce. Here are a few including college expenses, moving costs, and life insurance.

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If you are planning on purchasing a mutual fund before the end of the year, be sure to check when the mutual fund will make its distributions. Mutual funds are required to pay out any gains and income to its shareholders at least annually. If they don’t pay those out before the end of the year, they will be subject to taxes on those gains and income.

The “record date” is the date when the mutual fund distributes it gains and income to shareholders. When a mutual fund makes a distribution the share price of the mutual fund drops by an amount equal to the amount per share that is distributed. The shareholder is required to pay taxes on the amount of the distribution that they receive.

If you purchase the fund before the record date, your purchase price includes the gain or income that is yet to be distributed. When it is distributed, the share price of the fund will drop to account for the distribution and your tax liability will increase because you have to pay taxes on the distribution received.

In other words, the fund’s gains and income are included in the price per share that you pay when you purchase the fund (if you buy if before the fund’s record date). Once the gains and income are distributed – on the record date, the fund’s share price will drop by an amount equal to the gains and income distributed. In effect, you are receiving some of your purchase price back in the form of gains and income from the mutual fund. However, the gains and income that you received are taxable. In effect, you’ve purchased a tax liability.

If, on the other hand, you purchase the fund after the record date, the effect of the distribution (i.e., the reduction in the mutual fund’s share price) will already be built into your purchase price. And, since the distribution was made before you owned the fund, you won’t have any distribution to pay taxes on.

Do you have financial questions that you'd like an informed opinion about? Then join certified financial planner Dana Levit today at 11 a.m. for a chat about money. Dana is owner of Paragon Financial Advisors in Newton.

What is a Stretch IRA account?

A "stretch IRA" is a not an actual type of IRA account that you can “open” like you do for a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA. Rather, the term “stretch IRA” refers to a traditional IRA or Roth IRA that includes certain provisions that make it easier to keep funds in the IRA after the IRA owner dies. These provisions will generally allow the beneficiaries to continued the tax-deferred growth of the funds in the IRA over a longer period of time. An IRA or Roth IRA that does not have these provisions may be required to distribute the funds in the IRA account more aggressively than the beneficiary needs or desires.

Many people may know that owners of non-Roth IRAs are required to take minimum distributions from their non-Roth IRAs during their lifetime starting at age 70.5 (also referred to as “lifetime requirement minimum distributions”). However, many may not know that all IRAs (including Roth IRAs) are also subject to certain required minimum distribution rules after the IRA or Roth IRA owner dies. The amount and timing of these required minimum distributions are determined based on several factors including, who the owner names as his/her beneficiaries, whether or not successor beneficiaries are named, and whether or not the IRA owners dies before beginning his/her lifetime required minimum distributions.

Keep in mind that IRA “stretch” provisions and strategies are largely based on the required minimum distribution rules, which can be complicated and confusing. In addition, they are not the right solution for everyone. In general, “stretch” provisions are more useful in situations where the IRA’s beneficiary can afford to minimize the distributions from the inherited IRA and thus, extend the tax-deferred growth of the inherited IRA for their heirs. If you are considering the use of these strategies, you may want to consult with a financial planning and estate planning professional as part of your comprehensive retirement and estate planning work.

There has been lots of talk over the last few years about significant disruptions in the commercial real estate market. Large balloon payments on mortgages are coming due and the ability to refinance is not always available due to declining property values and reduced rent rolls. Fortunately, the commercial real estate market has not suffered as badly here in Massachusetts as it has in other parts of the country. Also, the U.S. Small Business Administration (SBA) has set up a new program to help small commercial real estate property owners refinance their existing mortgages. The following excerpts a realease on the SBA’s new program guidelines.

Small business owners with eligible commercial real estate mortgages maturing after Dec. 31, 2012, will be able to secure more stable, long-term financing through the SBA’s temporary 504 refinancing program. This new program will be available around April 6.

In February, SBA implemented a temporary refinancing program enacted under the Small Business Jobs Act of 2010, which allowed small businesses facing maturing commercial real estate mortgages or balloon payments before Dec. 31, 2012, to refinance with an SBA 504 loan. The SBA change will lift the date limitation and will allow more small businesses to secure stable, long-term financing and avoid potential foreclosure on mortgages approved before and during the recession that were based on inflated real estate values.

To be eligible for the temporary 504 refinancing program, a business must have been in operation for at least two years, the debt to be refinanced must be for owner-occupied real estate and have been incurred no less than two years prior to the date of application and the proceeds used for 504-eligible business expenses, and payments on that debt must be current for the last 12 months.

The refinancing loan is structured like SBA’s traditional 504 loan. Typically, a 504 project includes three elements: a loan (or first mortgage) secured with a senior lien from a private-sector lender covering 50 percent of the project cost, a second mortgage secured with a junior lien from an SBA Certified Development Company (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business borrower.

Borrowers are able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs. Loan proceeds may not be used for other business expenses. Existing 504 projects and government-guaranteed loans are not eligible to be refinanced.

Under the Jobs Act, Congress authorized SBA to approve up to $15 billion in loans under this program ($7.5 billion in both fiscal years 2011 and 2012). Together with the first mortgage, this temporary program will provide up to $33.8 billion of total project financing. SBA’s traditional 504 loan program is a long-term financing tool, designed to encourage economic development within a community. A 504 loan provides small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization.

I have done some work with the folks at the Bank of Canton, and they are currently supporting the SBA’s new program.

If I own stock in a company that files for bankruptcy, can I claim a loss on my income taxes without selling the stock?

In order to take a tax deduction for a security that has lost its value without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11 it continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

If stockholders do not receive any value for the shares they own and the stock loses all of its value (i.e., is deemed worthless) as a result of the bankruptcy, the stockholder may be able to take a tax deduction for any losses incurred when the stock became worthless. In this case, the stockholder would not necessarily need to sell the stock to have it considered worthless.

One thing to keep in mind is that even if a company emerges from bankruptcy as a viable business, the value of the company's stock held by investors prior to the bankruptcy may be deemed worthless. This often occurs as part of a company's reorganization plan if the existing common stock is canceled and new shares are issued after the company emerges from bankruptcy. Secured and unsecured creditors, such as bond holders, usually receive some of the new shares of stock as repayment of the company’s debts. Stockholders usually don’t receive any repayment until the secured and unsecured creditors are repaid in full.

For more information about how to determine if your security is worthless (for purposes of the IRS) visit the IRS web site at http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010315

Have questions about investing in bonds? Jason Lilly, vice president and director of portfolio management at Rockland Trust, will take your questions about bonds - or anything else money-related - today at 1 p.m.

This chat was coordinated by the Financial Planning Association of Massachusetts. For more info, visit www.fpama.org.

Employers sometimes match employee’s 401(k) contributions by using company stock. Once the stock is deposited to the account the employee can sell it (although they may be restricted to holding it for a certain amount of time first.) Employees also amass company stock through ESPP, or Employee Stock Purchase Plans, in which the stock is offered to the employee at a discount. I often find that employees hold on to company stock, letting it build up to become a large portion of the account. This is dangerous for a couple of reasons.

When a client comes to me in this situation he (or she) usually tells me that they “know the company” and are very confident in the stock. But how well do you really know the company? Unless you’re in a top management position you don’t know what decisions are being made that could affect the bottom line. And if you did know, the stock you would be given would come with a lot more restrictions on your ability to sell it. In addition, any company can succumb to poor or fraudulent management. Remember Enron anyone?

Another reason to diversify is that your income is dependent on that company. Why should your investments be dependent on the same risk? Why open yourself up to the risk of losing your income as well as some percentage of your portfolio, both for the same reason?

Finally your company may well be financially strong, with good long-term prospects. But forces beyond their control – like the market downturn we have just experienced – could reduce its value. I often think of a prospective client who walked into my office in 2007 with a $1 million 401(k), all in GE stock. He “knew the company” and wasn’t going to diversify until the stock hit $40 (it was around $36 at the time.) Needless to say he didn’t hire me because my advice was to diversify. I thought of him over the next few years as I watched GE hit $40 briefly – and then sink to about $5 during the recent recession. I certainly hope he sold when he said he would.

CDs are often recommended as good short term investments by financial planners. If you need to keep money aside for emergencies or an upcoming expense, CDs are an alternative to savings accounts or money market funds. Their yields, depending on the length of the CD, can be better than bank accounts. However, unlike bank accounts, most CDs come with a penalty for early withdrawal. And the penalty generally increases with the length of the term.

Bankrate.com conducted a survey of early withdrawal penalties at 100 banks in the top ten markets. They found that CDs with maturities less than 1 year generally had a penalty of 3 months interest. 12 month or longer CDs usually charge 6 months interest. But 5-year CDs had penalties as high as 20 to 25 percent. What might not be as clear is that “interest” means the total interest you would earn if you held the CD to maturity. Therefore if you withdraw your money before you’ve earned enough interest to cover the penalty, the bank will take some of the principal.

To avoid penalties, consider the purpose of your savings. If you are setting aside money you anticipate using for a particular purpose in the future, such as a down payment on a house, a tax bill or a new car, tailor the CD to that event. Buy a CD that will mature at the point that you need the money. If you have no definite purpose, then consider laddering your CDs – for instance buying several CDs that mature at 6 month or 12 month intervals. Laddered CDs are also a good idea in the current low-interest rate environment, so that you have more opportunity to roll over to a higher rate CD should interest rates begin to rise.

Since I graduated college at age 22, I have been following many of the rules of prudent living.   I have been “investing” ten percent of my income into a 401(k) account.  Additionally, I have been fortunate enough to save an additional 10 or 20 percent over the years and “invest” these into mutual funds, stocks, US Treasury notes, certificates of deposit and other paper investments.  Most of my assets were  name brand stocks, the S&P 500, target date mutual funds etc.  Pretty basic stuff.  Nevertheless, I considered this “investing”.

 

Last week I had an epiphany.  While reading Robert Kiyosaki’s book “Rich Dad’s Guide to Investing”, I learned that I am not really an investor, but merely a saver.  There is a significant difference.  I had come from the train of thought that to get ahead fianncially, I needed to put aside as much as possible for a long period of time and at the end of the day, I will be wealthy.  While I have succeeded in putting a significant amount of my income aside over the years, my investments have never really earned much of a return.  Under my approach investing in name brand stocks, bonds and mutual funds, my assets could never really do much more than mimic the market.  I had no control over any of the assets in which I had invested.  Furthermore, there are always, middlemen, brokerage companies, custodians, etc. ready to skim a little off the top for their own pocket. 

 

Here is how Mr. Kiyosaki defines a saver:

 

“These people save small amounts of money in low-risk, low return vehicles such as fixed deposits.  The prefer saving money rather than investing it.  They don’t like being in debt and not willing to take any financial risks.  Savers spend their time trying to save pennies instead of learning how to invest it.  In times of inflation they end up being losers.” 

 

This pretty much defined me to a tee.  Sometimes the truth hurts, but I am glad I learned this at 38 years old than to never have learned it at all.  According to Mr. Kiyosaki, a true investor spends his time looking for ways to get his / her assets to earn more money.  To increase investment returns and minimize risk at the same time, you need to understand the various ways to control investments.  The more of these investor controls you have the more likely your returns will increase.  Here are the ten investor controls that Mr. Kiyosaki discusses with some excerpts thereon:

1. The control over yourself – Being financially literate and understanding your personal financial statement.

2. The control over income/expense and asset/liability ratios – The wealthy gain control over their expenses and focus on acquiring or building assets.  Their businesses pay most of their expenses, and they have few, if any, personal liabilities.

3. The control over the management of the investment – The ability to control and choose the management of the company.

4. The control over taxes – One can influence the type of income generated (passive vs. active), timing of the income, etc.

5. The control over when you buy and when you sell

6. The control over brokerage transactions

7. The control over the E-T-C (entity, timing, characteristics) – There are significant benefits to choosing the right type of entity, the right year end and converting as much income into passive and portfolio income as possible.

8. The control over the terms and conditions of the agreements

9. The control over access to information – Insiders can obtain more information than outsiders.

10. The control over giving it back, philanthropy, redistribution of wealth

Mostly these controls are obtained by being directly involved in a small or medium sized business.  (If you want further information or details of these investor controls, they are further defined at this webpage.)

 

If you think about Warren Buffett, often referred to the world’s greatest investor, he maintains many or all of these controls in his investments.  He often buys entire companies or significant blocks of the company.  This allows him to influence / control the investment.  It is because of this that he has earned returns of over 20 percent per annum.  Additionally, he will tell you that he believes his company Berkshire Hathaway has done this without the need to take on significant risk.

Do you know how much your 401(k) costs you each year in expenses?  If your answer is "I have no idea", you are not alone.  401(k)s are famous for "burying" their costs.  It is rare that you see actual fees listed on a statement (and if you do, the odds are that there are other expenses that you are also paying which are not listed.)

So, how can you check up on how much your plan is currently costing you?  A recently launched website (www.brightscope.com) lets you see exactly what kind of expenses you are incurring. 

Brightscope, a San Diego firm that launced in January 2009, currently tracks over 35,000 401(k) and 403(b) plans and is adding more everyday.  The firm bases its ratings on over 200 data points including total plan costs, the size of the company match and the quality of investment options.  Originally, HR and benefits departments used Brightscope's data to compare plan features but now plan participants have become the big users of the data.

Brightscope lists all the firms it rates alphabetically so it is easy to find your company's plan.  Top plans include AARP, Abbott Labs, FedEx, and Microsoft.  The company reports that total costs for some plans are as low as 0.20 percent while some other firms have expenses as high as 5 percent.

You can get general information about your plan without having to log into the site but if you want detailed information about the specific funds that you hold, you will need to spend a few minutes getting an account on the site and entering your holdings.  You will need a recent copy of your 401(k) statement to help with this process. 

The result is a personal 401(k) fee report.  This report provides a thorough overview of all the plan's costs and an analysis of how the fees will ultimately impact your retirement.  If your plan's fees are high, the report tells you how much you "lose" over time in excess fees and how much longer you have to work to make up the loss. Plans are rated on a scale from 0 to 100 and the average plan rating is 58.  If you get the report and don't like what you see, you can approach your benefits or HR department and lobby for plan changes.

Many know that it is important to have a will but there is usually a lot of confusion about what wills can and cannot do. A will generally provides a person with an opportunity to control how his or her property and assets will be passed upon their death. Without a will, the decedent's property and assets will pass according to the state's laws of intestacy. The intestacy laws that apply are usually determined based on where the decedent resided and/or where the property/asset is located.

A will can generally be used to:

• Pass property/assets to heirs in a manner that differs from those stated in the state's intestacy law;
• Pass property/assets to those who would not normally inherit it under the state's intestacy laws;
• Prevent a person (other than a surviving spouse or minor child) who would normally inherit property under the state intestacy laws from inheriting it;
• Name a personal representative for the estate;
• Nominate a guardian for minor children;
• Name a custodian or guardian to hold or manage the assets of their minor children;
• Provide instructions on how to pass property in the event that a beneficiary child predeceases the decedent; and
• Establish a trust upon your death such as a Bypass Trust or Special Needs Trust.

A will cannot be used to avoid probate or to distribute non-probate assets - such as life insurance policies and IRA accounts. In addition, a will cannot be used to disinherit a surviving spouse if he or she is entitled to a share of the estate based on the state's intestacy laws.

Regardless of the size of your estate, I generally recommend that every adult have a will so they can control the passing of their property. If you have minor children, it is even more important to have a will so you can nominate a guardian for your children.

A recent article by US News and World Report shed some interesting light on just who really is "middle class' and who is not.  If you have always wondered how you fit in, check out these statistics from the article:

Income: Household income for the middle class ranges from $51,000 to $123,000 for the typical four person, two parent household with the median income being $81,000.

Housing: The median home size for those in the middle class is 2,300 square feet

Cars: The typical family has car expenses of $12,400 for two medium sized sedans.

Saving for College: The typical middle class family saves just over $4,000 per year for their two kids.  The article says that this amount of savings should cover 75 percent of the expenses at a state university.

Medical Expenses: It seems that the average middle class family spends just over $5,000 per year on health insurance and other out-of-pocket medical expenses and the article notes that this category is the fastest growing expense in a family's budget.

Vacations:  Now here is where it gets interesting.  The article says that the average cost of a family vacation for four is $3,000 and that families that are slightly more affluent spend about $6,100.

Retirement Savings: The study indicated that the target savings goal should be 3.2 percent of income.  (However, if you have ever run even very basic retirement projections, you know that, depending on your age and current savings, a much higher savings rate is probably much more appropriate.  Shoot for at least 10 percent if you can manage it).

Everyday Expenses: The average middle class family spends about $14,000 per year on the somewhat descretionary spending categories of food, clothing, entertainment and other expenses.

Net Worth: The typical household has a net worth of about $84,000 but obviously that number varies widely with age and other circumstances.

Mortgage Payments and Other Debt: The average family devotes 18 percent of their disposable income to mortgage payments, car loans and credit cards. 

 

 

 

 

If you listen to any TV news station you will hear the current day's market activity related in terms of the Dow Jones Industrial Index ("the Dow.") The Dow represents 30 of the largest public companies, but is it a good representation of the "market" and, more importantly, should you use it to guage the performance of your portfolio?

The companies that comprise the Dow are chosen by a committee. Some criticisms of this process include the argument that companies are added after they have experienced their prime growth period, and evidence shows that new Dow stocks lose, on average, 20 percent of their value in the first year of inclusion. In addition the index is weighted according to share price, thus stocks with a higher share price have a higher weighting in the index. A $1 change in value of a higher-priced stock counts more than a similar change in a lower-priced stock. Does this make the index a good proxy for the stock market in general? Most advisors think the S&P 500 Index or Wilshire 5000 Index make better benchmarks.

It is just as important to remember that if you have a diversified portfolio of stocks and bonds, no one market index is going to represent the activity in your portfolio for a given day. If you have 60 percent in large company stocks and 40 percent in bonds and you see that the Dow (or the S&P 500 Index) are down a point, it is likely that your portfolio changed by about 6/10 of that point. Add to the mix your bonds, small company and foreign stocks and you can see that the Dow or any other large company index is not a good illustration of your portfolio.

So watch the day-to-day changes of the Dow with mild interest, but don't take it as an indication of the performance of your portfolio.

Starting in May new rules imposed by the SEC may increase the quality of money funds but dampen their yields.

As of next month the SEC will require money funds to hold more liquid investments. The weighted average maturity of the fund's portfolio will be reduced from 90 days to 60 days, 10 percent of assets must be held in securities that mature in one day, and 30 percent in securities that mature in one week. In addition money funds will have to hold more securities with high quality. Most funds should not have to adjust their portfolios much to adhere to these new rules.

Because yields on money funds are currently very low – averaging about .05 percent, many funds have waived their management fees in order to avoid having negative returns. The new restrictions could lower yields (since shorter maturity and higher quality bonds have lower interest rates), putting more pressure on already rock-bottom yields. The decrease should be small – only a few basis points. But since January 63 firms have already either closed or merged with other funds, and the new rules may force more funds to exit the business.

In addition, in December money funds must begin to disclose the value of their assets, on a 60 day lag, every month as opposed to the current twice-a-year reporting. This will help investor assess the strength of the fund.

Don't expect yields to jump up if the Fed starts to increase interest rates. Analysts say that funds will be using the extra interest income to reinstate the fees they have waived. It may take several rate increases before you see yields rise.

You might be aware that IRAs have some creditor protection.  In fact, a 2005 bankruptcy law allows an individual to protect an IRA worth as much as $1M from creditors.  However, a recent court case seems to indicate that this bankruptcy protection does not apply to IRAs that are inherited from another person. 

The precedent-establishing Texas case involves a daughter who inherited an IRA from her mother and later filed for bankruptcy.  The daughter maintained that the inherited IRA should receive the same $1M in protection afforded to other IRAs.  However, the Texas court ruled that only the debtor's own funds qualify for the protection.  The case likely hinged on the fact that inherited IRAs remain titled in the name of the original account holder.  (When you inherit an IRA from anyone other than a spouse, you actually keep the name of the original account holder and add "for benefit of the beneficiary")

Finally, you should know that the $1M exemption put in place with the 2005 law has now increased to $1,171,650 due to the impact of inflation. 

It's frustrating to investors when a favored and well performing mutual fund closes. But closing the fund can be a good thing in the long run.

There are several good reasons why a fund manager shuts off the inflow of new money. It may be hard to believe, but having too much money to invest can hamper a fund. If there is more money coming into the fund than the manager feels he can invest wisely, he has to leave that extra money sitting in a low-paying cash account.

That can lower the overall return of the fund. Or investments have to be made in stocks that are not the manager's best ideas. In addition some funds that specialize in smaller companies just can't invest large sums of money. They don't want to buy so many shares of a company that their activity (buys and sells) influences the price of the stock or that prevents them from being able to buy or sell quickly. Consequently the fund decides not to accept any more new money. Mutual funds usually don't close forever – once they feel that the fund size is manageable they open their doors again.

Mutual funds close in either of two ways – they close to new investors, allowing those who are already invested to purchase more shares, or they close to all investors. Typically mutual funds will stay open within retirement plans even if they are closed outside the plan.

If a fund you like closes you'll have to find a fund with a similar strategy to meet your objective.

"I'm getting a bonus soon. Should I put it in my 401(k) and avoid the tax? My coworker told me it doesn't make a difference, since I have to pay tax on it when I withdraw it later."

Banking your bonus money is a great way to boost your savings. But the type of account you choose can also make a difference. I think your coworker is wrong – putting the money into your 401(k) makes a lot of sense.

Your ability to put some or all of the bonus into your company retirement plan depends on how much you're on track to contribute for the year without the bonus. The contribution limit in 2010 is $16,500 for individuals under age 50 and $22,000 for those 50 and older. Look at your most recent paycheck to see how much you've contributed to date and add to it the remaining contributions for the year. As long as you're under the limit you can add some or all of your bonus money. If your company matches your contribution then you don't want to hit the limit before December 31st because you will probably lose out on some of the match, so be careful not to put in more than is needed to get you just to the limit (besides, that excess contribution will have to be withdrawn anyway.)

Another benefit of the 401(k) is, as mentioned above, the company match. You may earn more of a match by increasing your contribution.

We can't know for sure what tax bracket you'll be in when you retire, but if you think it will be at or less than your current bracket then it makes sense to utilize the 401(k) instead of depositing the money into a taxable account. All of the growth that your money earns over the years will be able to stay in the account and compound, boosting the chances of long-term returns that exceed that in a taxable account.

As an alternative, if your income is less than $105,000 and you are single, (or $167,000 if married) and you are in a very low tax bracket you might consider using a Roth IRA. You won't get the tax deduction now but the money will grow tax-free for retirement.

My employer offers a 401(k) plan, and I participate. My company was recently acquired, and plans to change the mutual fund company that currently manages our 401(K) plan. I prefer the current mutual fund company because I have another 401k plan with them from a previous employer, can I move funds between the different 401(k) plans?

Based on my interpretation of your question, it sounds like you would prefer to move your funds in your current employer's 401(k) plan to your previous employer's 401(k) plan that is managed (or will be managed after the acquisition) by a different fund company.

In general, the ability to move funds between 401(k) plans is dependent upon the provisions of each employer's specific 401(k) plan. It is more common to allow employees the ability to transfer funds into their current employer's plan rather than transferring funds into a former employer's plan. In fact, most employer's have specific provisions in their plan which limit ongoing contributions by former employees and require former employees to withdraw, transfer, or distribute their 401(k) funds after they discontinue their employment with their company.

If you prefer to stay with the mutual fund company used by your previous employer, one option would be to rollover your 401(k) funds from your previous employer into an IRA account at your preferred mutual fund company. This would allow you to make ongoing contributions to your IRA and may provide you with a more investments options than your previous employer's plan provided.

In terms of moving your funds in your current employer's plan to your preferred mutual fund company, you should check with your employer about the options allowed under their plan. You may have the option to set up a Self-Direct Account that could allow you to use your preferred mutual fund company or offer you options similar to those offered by your preferred mutual fund company.

As a final note, from an administrative standpoint, it may make sense to consolidate your accounts with a single mutual fund company. However, the fund company that your current employer plans to use may offer you the same or better investment options than those offered by your preferred fund company. In my opinion, the investment options offered to you and the costs associated with those options by each mutual fund company should play a greater role in helping you to decide where to invest your retirement and investment savings.

Money market rates are at their lowest levels in over 20 years, and have been for a while. Are there any alternatives that can get you a higher interest rate while still giving you the security of cash?

There are a few options when it comes to parking cash. Money market accounts are probably the most popular because they give you the liquidity of cash – you can get your money back at any time – and an interest rate that is usually better than a checking or savings account. But the rates can really vary. I went on line and found rates ranging from 0.10 percent (one-tenth of one percent) to 1.5 percent. Shopping around can make a difference. If you're comfortable banking over the web, on line banks such as ING Direct or HSBC Bank offer competitive money market rates.

CDs are another option. Their rates, however, are very similar to money markets. Bankrate.com quotes average 6-month CDs at 0.98 percent and 12-month CDs at 1.44 percent. These are not terribly different from money market rates, and you have withdrawal penalties.

Short-term bond mutual funds are another option for cash. For instance the Vanguard Short-Term Bond Index Fund invests in good quality bonds with maturities of less than 3 years. It has averaged a 5.30 percent return over the past year. But bond mutual funds come with the risk of loss. The Vanguard fund has a low risk of loss and low expenses, but never the less more risk than cash or CDs.

Right now I have not found any alternative to cash that pays a decent rate without a risk of loss. After all, in these uncertain economic times it's the promise of safety that is driving down rates. But if you're willing to assume a little risk, a short-term bond fund might fit the bill.

Inheriting a Roth IRA is a great thing because all the distributions that you take will be tax free.  And, if you are lucky enough to inherit a Roth IRA when you are young, you could have decades and decades of tax free withdrawals ahead of you.  You may even find that the total of all the distributions you take over your lifetime exceed the initial value of the account many times over.  That is why it is important to try to take only the required minimum distributions (RMDs) from an inherited IRA if at all possible.

However, if you must take distributions faster than the schedule required for RMDs, you need to be aware of the 5 year rule.  Beneficiaries can withdraw the earnings portion of a Roth IRA tax free, but only if the account has been opened for at least 5 years.  So, if the person who left you the Roth IRA opened the Roth recently and died soon after, you may have to wait a few years to avoid taxation. 

Here is an example: if you inherit a Roth that was opened on May 1, 2007, the account was considered to be opened as of January 1, 2007.  To avoid paying taxes on the earnings portion of the Roth once you inherit it, you must not take out the earnings until after January 1, 2012.

This doesn't mean that you cant take any withdrawals before that date -- you are always free to withdraw the contributions to a Roth tax free.  It is only the earnings portion that has a waiting period and the other nice thing about Roths is that any withdrawal you do take is assumed to come from the contributions first.  Earnings are assumed to be withdrawn last.

If you inherit the Roth IRA from your spouse, you can elect to treat the account as if it were your own.  If you elect to treat it as your own, however, you may not be able to withdraw earnings free of tax until you reach age 59 and a half.

 

 

I've heard a lot about an investment called an Exchange Traded Fund (ETF). What is it and how does it work?

Exchange-traded funds (ETFs) were introduced in the 1990s and have continued to grow in popularity. Today, there are an estimated 2,000 ETFs available for investors. As with any investment, you should fully understand what they are, how they work, and the advantages and disadvantages before adding them to your investment portfolio.

ETFs are similar to index mutual funds. Index mutual funds and ETFs try to duplicate the holdings within a specific index in an attempt to replicate the performance of that index. The main difference between ETFs and mutual funds (including index mutual funds) is that ETFs are traded and priced throughout the trading day like stocks. Mutual funds are only priced once per day, at the end of the trading day when the market closes.

ETF's have been known to be relatively tax efficient and inexpensive when compared to active mutual funds. Since an ETF's holdings are designed to track an index, they only change when the holdings in the index change. Most indexes do not change their holdings very often. This generally results in lower trading costs and lower tax costs. In addition, ETFs usually have lower annual expenses because they do not have as much overhead associated with having a portfolio manager selecting securities for the portfolio.

As ETFs become more popular, new indexes are being developed for ETFs to track. As a result, some ETFs are beginning to look more like active mutual funds with higher costs, higher expenses, and lower tax efficiency. If you are considering ETFs for your portfolio, here are some main advantages and disadvantages to consider:

Advantages:

• ETFs trade like stocks. Therefore, they can be bought and sold throughout the trading day as the price fluctuates and can be bought on margin, sold short, or traded using stop orders and limit orders.
• Unlike mutual funds, ETFs do not have to hold cash or buy and sell securities to pay fund investors when a redemption is requested.
• An ETF's annual expenses and trading costs are usually lower than non-index mutual funds.
• ETFs typically have lower annual taxable distributions because they trade less frequently than mutual funds.
  
• ETFs may allow you to diversify your portfolio into additional sectors of the market such as commodities.

Disadvantages:

• ETFs may not be cost effective if you are Dollar Cost Averaging or making repeated purchases over time because of the commissions associated with purchasing ETFs. Commissions for ETFs are typically the same as those for purchasing stocks.
• From a timing perspective, selling an EFT when you want to or need to may be difficult if the ETF is a thinly traded issue or if the market is experiencing high volatility. This is also true when selling stocks.
• Some ETFs may not track a widely accepted index which may result in higher costs and higher risk.

I just completed my read of "The Snowball – Warren Buffett and the Business of Life" by Alice Schroeder. This biography covers some 800 pages and provides a perspective on a unique individual. I must admit, he is much different than what I expected. The following is my summary of the major factors that have contributed to Mr. Buffett's incredible success and wealth:

Singular focus – Since Warren Buffett was a young boy, he had almost a singular focus to accumulate wealth. He also believed his way to wealth would be through the stock market. At a very early age, he knew what he wanted and where he wanted to go. Successful people always have long-term visions of their life. This is a lesson especially for younger folks. You will only really succeed in life once you know what you want to accomplish. As Yogi Berra said, "If you don't know where you are going, you may end up some place else."

Dedication - Mr. Buffett spends about 18 hours every day dedicated to investing capital. This is the type of dedication needed to succeed at his level. I doubt he wastes anytime in front of the television or shopping at the mall. Almost all his time is spent thinking and working on Berkshire Hathaway. This type of dedication can have its drawbacks as well. The book does not portray his family life in a very positive manner. He was separated from his first wife (it appears they did not divorce for P.R. reasons) and did not spend much time with his children as they grew up. There is only so much time in a day, and he spent it mostly on business-related activities.

Independent thinking – Buffett has come up with his criteria for investing in companies. These criteria have been developed over years of studying and reading about his craft. He will only invest in companies that meet these criteria. He does not feel pressured when things do not go his way nor when outside sources suggest new rules for investing. The most telling story of this was back in 1999 during the "technology stock bubble". Many people were saying he was too old and out of touch. They said he did not understand the "new economy". Buffett continued to plot his course using the rules he knew and understood. He has been vindicated as the technology market crashed and Berkshire Hathaway has continued to thrive.

Alliances – Mr. Buffett has developed partners and allies to help him attain his goals. He uses these partners to manage his businesses, help find new investments, and to obtain access to capital. Mr. Buffett will be the first to tell you that his wealth would be a small fraction of what it is today without these business associates.

Integrity – Buffett has spent a lifetime being honest and fair with his partners, business associates, and investors. This has given him the title of the most trusted man in corporate America. Being the most trusted man in corporate America benefits him in many ways. Investors are confident they will be treated fairly. Deals are be made in short order without the need for an army of attorneys, bankers, and auditors. The list of benefits goes on and on.

Long-term strategy – Early in Buffett's career, there were times in which he pursued short term money making strategies. However, as the size of his investment portfolio grew, this was not a sustainable strategy. This long-term strategy has benefited him and his investors immensely. He does not get caught up with the whims of the market and short-term prices. He merely seeks investments that can sustain a competitive advantage over the long term. A company can not control its stock price, but it can control its profits and cash flows generated from operations. As long as it supplies a steady stream of cash flows, the long term stock price will take care of itself.

Creativity – Buffett is a creative thinker. This is not a gift, but is the result of his other traits described above. His ability to see things differently is a result of his experience and dedication to business. If something works in one industry, he tries to apply the same principles to other industries.

There is no doubt that God blessed Warren Buffett with significant talents. However, his gifts and talents do not seem to be out of the ordinary. The skills described above seem to be the ones that most play out to his success. I found this very uplifting as most of the above skill sets can be learned by anyone and can be applied in almost any aspect of our lives and careers.

Please note, I do not believe that success is only defined by the size of one's wallet. But I do believe Mr. Buffett success lies in his ability to pursue and achieve his goals.

Recently a New York couple sued their financial advisor and Fidelity for damages related to a loss of more than $2 million in their portfolio. FINRA, who arbitrated the case, denied the claim against Fidelity in part because the couple had stopped opening their account statements through the summer and fall of 2008. In fact during their 4-year relationship with their advisor they had opened statements only half of the time. The award statement noted that the losses were caused by the actions of the financial advisor, "coupled with the failure of the claimants to monitor their accounts."

Over the past couple of years I've had more than one investor tell me that they had stopped opening their account statements because they didn't want to see how much money they'd lost. I always tell them that that's a dangerous thing to do. If you don't look at your statements you lose track of what's going on with your account. If you are uncomfortable with the level of losses you see then it's time to call your broker or advisor and have a discussion. Ask your advisor why the losses are so large and talk about the strategy going forward.

Just as importantly, if you don't monitor the activity in your account you won't know if something goes on that you didn't approve. This is exactly how brokers/advisors are able to steal money from clients - by withdrawing money that they know the client isn't going to notice. And I'm not singling out any specific kind of advisor. I've seen theft happen with both brokers and independent financial advisors. I also had an elderly client who's credit card number, which was tied to her Merrill Lynch Account, was stolen (they didn't steal the card, the thief just got the number). The thief used it for a Las Vegas vacation and to sign up for Match.com. The client didn't see the unauthorized charges and it was a family member, reviewing the statements, who noticed her 80-year-old mother's Match.com charges!

So don't stick your head in the sand. Open those statements every month and read them thoroughly. It's the only way you will stay in control of your finances.

Do you buy or sell individual stocks?  If yes, you should know that Congress is considering imposing a tax of 0.25 percent on each and every one of your transactions.  Estimates of the revenue that would be generated from taxing these transactions exceeds $10B per year.

Proponents of the tax say that the average investor won't be impacted by the tax because the first $100,000 in transactions will be exempt and mutual fund trades won't be subject to the tax.  However, what do mutual fund managers buy?  Individual stocks of course, and the fund managers would be subject to the tax.  This would make mutual funds more expensive and those costs would very definitely be borne by the average investor. 

Lawmakers are quick to point out that the tax would not be imposed on an investor's trades within retirement plans and 529 plans, but if the underlying funds in these plans are taxed, the tax eventually "floats" back to the investor. 

The tax will also be imposed on options, futures contracts and swaps although the rate on these instruments would be 0.20 percent.  Interestingly, the tax does not apply to individual bonds.

This tax is a truly horrible idea and investors shouldn't be misled by the proponents of the tax who say that only day traders and Wall Street fat cats will be impacted.

The National Association of Personal Financial Advisors (NAPFA) started a series of monthly webinars for consumers on various financial planning topics in August. The next session is schedule for Dec 4 at 1pm ET and will cover the basics of investing including information about the differences between stocks, bonds and mutual funds, their characteristics, and how to determine which ones may be more appropriate for you. These webinars are free and designed to provide consumers with a better understanding of various aspects of financial planning. Each webinar goes for an hour and includes 20 minutes for questions and answers after the initial 40 minute presentation.

If you cannot participate in the live session on Dec 4, you can watch an archived version afterwards, however, you will need to sign up for the live session to be able to ask questions. Archived versions of all of the past sessions are available at http://www.napfa.org/consumer/ArchivedSessions.asp.

Visit NAPFA’s Consumer Webinar Series web site at http://www.napfa.org/consumer/UpcomingSessions.asp to register for an upcoming session.

Is your 401(k) back on track? Are you putting more of your money back into the stock market? Or are you investing less?

How has the last year changed your ideas about investing?

Globe reporter Megan Woolhouse wants to hear about where your long-term investment strategies stand. Contact her via e-mail by clicking here, or by phone at 617-929-3292.

What are Build America Bonds?

A Build America Bond (BAB) is a type of municipal bond created under the American Recovery and Reinvestment Act of 2009. Similar to other municipal bonds, BABs are issued by state, local, and county governments to finance capital improvements, governmental expenditures, and local projects. Unlike municipal bonds which are typically exempt from federal income taxes, BABs are taxable. For state and local income tax purposes, BABs are similar to other municipal bonds in that they are generally exempt from state and local taxes (especially if you live in the state where the bond was issued).

One of the key differences between BABs and other municipal bonds is that they are subsidized by the federal government. These federal subsidies are intended to help create jobs and make it easier for state and local municipalities to borrow money to fund local construction projects. From an investor’s standpoint, the federal subsidizes should translate into higher coupon rates offered by the issuers when compared to the rates offered on other municipal bonds.

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My husband is considering investing $10,000 dollars in a mutual fund which invests in GNMA securities. I am worried about the safety of the mutual fund. Do you know if it is FDIC insured?

Mutual funds that invest in GNMA securities are not FDIC insured. These bond mutual funds invest mainly in mortgage backed securities (which are bond investments backed by the Government National Mortgage Association (GNMA or “Ginnie Mae”). These mortgage backed securities (MBS) are formed by aggregating residential mortgages, mainly from the Federal Housing Authority (FHA) and the Department of Veterans Affairs (VA). While Ginnie Mae does not buy, sell, issue, or even aggregate these MBS, they do guarantee the timely payment of the interest and principal associated with the MBS if the underlying mortgages are in default.

Ginnie Mae is a government corporation that is a part of the Department of Housing and Urban Development (HUD). It deals in the residential housing and mortgage markets similar to government-sponsored enterprises, such as the Federal National Mortgage Association (FNMA or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHMLC or “Freddie Mac”). However, unlike Fannie Mae and Freddie Mac, Ginnie Mae is not a publicly traded company. Ginnie Mae securities are also the only ones that are federally guaranteed by the full faith and credit of the U.S. Government – like U.S. Treasuries (e.g., T-Bills, T-Bonds, T-Notes, TIPS). If the underlying owner (of a mortgage) in a Ginnie Mae MBS, defaults on the loan, the U.S. Government will continue to pay the investor of the MBS the interest and principal earned on the MBS investment.

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I purchased I-Savings Bonds in 2001 and 2002 at around 6.35 percent and 7 percent, I believe. Are the bonds still paying that or are they now at 0 percent?

I-Bonds are U.S. Savings bonds that incorporate inflation protection into the rate that is earned on the bond. The rate earned on an I-Bond is comprised of two separate components – a fixed interest rate component and an inflation rate component. This composite rate is updated in May and November of each year and applies to newly purchased I-Bonds during that period as well as to outstanding I-bonds at the time of the rate change.

For example, if you purchased an I-Bond on June 1, 2001, you would start to accrue interest on the bond at the rate of 5.92 percent – which was the composite rate in effect at that time. In November 2001, the composite rate was updated to 4.4 percent to reflect the new fixed rate and the then-current inflation rate. For the six months starting on November 1, 2001, you would accrue interest at the 4.4 percent rate. On May 1, 2002, the composite rate would be updated again and that would be the rate that you would earn for the next six month period. This continues until you redeem your bond.

As of May 1, 2009, the composite rate on the I-Bond was 0 percent. This rate dropped from 5.6 percent in November 2008 to 0 percent in May 2009 because the inflation rate component, as measured by Consumer Price Index for Urban Consumers (CPI-U) for March, was a negative 2.78 percent (-2.78 percent) and the fixed rate was 0.10 percent. While the combination of these two rates (from a mathematical standpoint) would result in a negative composite rate, the U.S. Treasury does not allow the composite rate on I-Bonds to be set below zero.

Despite the 0 percent return, current holders of I-Bonds should consider several additional factors before rushing off to redeem them. First, this rate will adjust again in November and depending on inflation, it may exceed the current 0 percent rate. Secondly, there are tax considerations associated with redeeming I- Bonds. Interest earned on I-Bonds are taxable at the federal level. And finally, there may be penalties incurred for early redemption, such as the loss of some accrued interest, if you redeem the I-Bond within 5 years of your purchase.

For more information about I-Bonds, visit the U.S. Treasury’s savings bond web site at:
http://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

I own GM stock. If the company goes bankrupt can I claim a loss on my income taxes or do I have to sell it now for pennies to claim that loss?

In order to take a tax deduction for a worthless security without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11, which is what GM is expected to do today, it means that the company continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

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I am considering taking an early retirement package which would have me retired by July. Can and should I contribute to my Roth? Can I contribute the maximum with only half a year of work? What type of mutual fund would be the best to fund in this climate?

Contributing as much as you can to your retirement plans always makes sense, and retiring mid-year won't necessarily affect that strategy. As long as you have earnings in 2009 you can contribute the lesser of $5,000 ($6,000 if you are age 50 or older) or an amount equal to your earnings. You can even make the contribution after you retire in July, as long as it is made before you file your 2009 income taxes next year.

Roth IRA contributions have a few other restrictions: the amount you can contribute begins to phase out if your income is above $166,000 for joint filer taxpayers or $105,000 for single taxpayers. Contributions are not allowed at all if your income exceeds $176,000 for joint filers and $120,000 for single filers.

Roth IRAs are a wonderful savings vehicle. As long as you are age 59 1/2 or older and your first withdrawal is at least 5 years after your first contribution, all of the interest, dividends and capital gains accrued in the account, in addition to your contributions, come out tax-free. In addition there is no required minimum distribution after age 70 as there is for traditional IRA owners.

If you are able to, you should consider also making the maximum contribution to your company retirement plan before you retire too.

As far as choosing a mutual fund, that is difficult to advise without knowing the rest of your portfolio. Your contributions should be invested in alignment with your other retirement savings, in a diversified portfolio of stocks, bonds and cash. Consult a financial advisor if your portfolio needs a check-up or rebalance before retirement.

My husband received 100 shares of stock from his grandmother back in the 90s. The stock split, and a company spun off, and that company was acquired by a private Japanese company in 2007. The Japanese company paid cash for the stock, and we received this cash payment in December 2008. Now we have to declare capital gains on this cash. How on earth do we figure out those capital gains? I understand we're supposed to figure the difference between the sale price and the purchase price all the way back when the stock was purchased by his grandmother, but we have no way to get the initial purchase price. Can you help us figure this out?

The capital gain or loss on the sale of a stock is computed by taking the difference between the proceeds received from the sale and the tax basis of the stock. The tax basis of the stock is the original purchase price plus any associated costs to purchase the stock such as brokerage fees or transaction fees. The difficulty in your situation (as you have alluded to) is determining the tax basis for stock that may have been purchased years or decades ago before your husband received it. The tax basis for your husband’s stock will be determined based on how he received it from his grandmother. In general, if his grandmother gifted the stock to him, the tax basis will be the tax basis that she had before she gifted it or the fair market value of the stock on the date of the gift. If your husband inherited the stock from his grandmother, the tax basis will generally be the fair market value of the stock on the date of her death.

Let’s take a look at each of these situations in more detail starting with the easier of the two. If your husband inherited the stock from his grandmother, you can look up the historical stock price on his grandmother’s date of death and use that as the starting point for your tax basis. In general, inherited securities receive a “step-up” or “step-down” in basis to the value on the date of death so you won’t need to go all the way back to his grandmother’s original purchase date(s) to determine the tax basis. Once you’ve determined the date of death value you can make adjustments to the tax basis from that date forward to account for any capital changes that may have occurred since you inherited the stock. If there were no capital changes, the date-of-death value becomes your tax basis.

For tax purposes, capital changes are changes that the company goes through that effect the value of their stock price and your tax basis in that stock. Examples of capital changes include stock splits, stock redemptions, mergers and acquisitions, etc. There are several ways to find out what capital changes have occurred for a company and how they affected your stock. Some publicly traded companies provide details on their corporate web site. If the company is no longer publicly traded or the information is not available through their web site, the task becomes more difficult and will require more work to find the information you need. There are reference materials that track the capital changes of companies. These materials can be expensive and difficult to find but some libraries may have them. If you use a tax preparer to do your return, see if they have access to this information. I believe many of the larger CPA firms and tax law firms have them. Another source may be your or your grandmother’s broker. Brokers may have access to this type of information through their research departments but I don’t know how easy it is for their clients to access this information.

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Note: the current I-Bond rate was incorrectly noted in the original entry and has been corrected.

I-Bonds are inflation-adjusted savings bonds issued by the government. Holders earn a combined interest rate with 2 components; a fixed rate and an inflation rate. The base rate is fixed for the life of the bond. The inflation rate, which is based on the current CPI-U, is good for 6 months. The Treasury issues a new fixed rate and a new inflation rate every six months, on May 1st and November 1st, which reflect current market rates for both components. Holders of existing bonds will keep their original fixed rate but have the inflation component adjusted to reflect the current CPI-U.

As an example, current I-Bonds issued between November 1, 2008 and April 30, 2009 earn a combined rate of 5.64 percent. That is an attractive rate in today’s environment, and is due to the high inflation we experienced last fall as oil and food prices soared.

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“I have stock that I bought in 2000 during the tech craze. It’s sitting in my brokerage account and has no value. I don’t think I can sell it, so can I write it off?”

It’s tough to make an investment in a company you think has great potential, only to watch the stock go to zero. Worse yet is being reminded of it every month on your brokerage statement. If you’re not willing to wait around for the company to turn around, you can get rid of your “near-worthless” stock.

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What is the difference between a money market mutual fund and a money market deposit account?
Good question! As investors continue to move money into more conservative holdings such as cash and cash equivalent investments, it is important to understand the difference between a money market mutual fund (sometimes known as a money market fund or a money fund) and a money market deposit account.

Money market funds and money market deposit accounts are similar in that they both usually invest in short-term, fixed income investments such as U.S. Treasuries. By definition, short-term, fixed income investments are those with maturities of less than one year. Both money market funds and money market deposit accounts usually offer higher rates of return than traditional savings accounts due to the fact that the short-term investments they use have the potential for higher returns. Both types of investments offer flexibility and liquidity as you can often write checks against these accounts and make ATM withdrawals from them.

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"Where should I put my money right now? I don't feel comfortable investing in stocks, and I've heard that Treasury bonds are paying next to nothing. Is there any place else that is safe to invest?"

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How come there are not a lot of people controlling risk with option strategies?

Stock, bonds and mutual funds are the investments that are more commonly held in the portfolios of most investors. However, there are many other investments out there including futures, options and other derivatives. While these investments can provide investors with additional ways to manage risk and generate profits within their portfolios, they are generally complex investments that are more expensive and risky than stocks, bonds and mutual funds.

Options are investments that an investor purchases to give them the right to buy or sell an underlying security (such as a stock or bond) at a specified price on or before a future date. The investor is not obligated to exercise the option, however, if the investor exercises the option he/she is agreeing to purchase or sell the underlying security based on the terms in the options contract. If the investor does not to exercise the option, the option will expire and the investor would have only lost the amount of money he/she used to pay for the option (i.e., the options premium).

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I have a small portfolio of mutual funds that have lost a good 33 percent during this crisis. If I have my broker sell $5,000 dollars of that portfolio and contribute it to my Roth IRA, would I be able to claim a loss for my 2008 taxes? Then, when the market gains, would those gains be taxable in the Roth?

Roth IRAs are great retirement vehicles but they can be confusing. Your question does not specifically mention if your portfolio of mutual funds is in a taxable account or in a retirement account so I am reading into your question a little and assuming that it is in a taxable account.

Generally, if you sell your mutual funds at a loss, you will be able to use that loss to reduce any taxable gains realized in that same year. If you do not have any gains during that year or if your losses exceed your gains, which may be more likely given the state of the financial markets this year, you can claim up to $3,000 dollars of net capital losses on your tax return. Any net losses above $3,000 dollars can be carried forward to your 2009 tax return.

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My husband has Alzheimer's Disease. He's been living in a Memory Care facility for three months. He is 82 while I am 64 and just retired. Between us, our portfolios have dropped in value over 25 percent. We do not have many years ahead of us to recoup our losses. I think we should contact our broker and sell everything and put our money in CD's. Should we close out our accounts?

A big market downturn is scary for everyone and it is especially scary for new retirees. I totally understand your wanting to move to the safety of cash but I urge you to not do anything in haste. As many advisers say: "panic is not an investment strategy."

Your husband is 82 but you are only 64. You can reasonably expect your retirement to last for 25 to 30 years. In order for your retirement assets to keep up with the effect of inflation, you will likely need some allocation to equities (stocks). I can't say what allocation is appropriate for you because I don't know enough about your particular situation. But the odds are good that you need at least a small allocation.

Selling everything now and moving to cash will simply lock in your losses and, once you are in cash,how much can you earn? Very little over the long term. And, to add insult to injury, you would likely be falling behind once you account for the effects of inflation.

Furthermore, once you are in cash, you need to be able to tell when to get back into the market. If you are scared of the market, there is a good chance that you will wait too long and miss most of the run-up in the market when it does eventually happen.

All this being said, if you find yourself unable to sleep at night and consumed with anxiety about what is going on in the market, you may be more risk averse than you thought and maybe it is appropriate to ratchet down your allocation to equities. If this is the case, I would consider lowering your stock allocation over time. Consider selling a certain percentage each month until you are at a level that you feel better about.

"Switching to Cash May Feel Safe but Risks Remain" is a great article. Check it out.

Good news! The limits on several retirement plans are due to increase in 2009. Be sure you visit your payroll/benefits office to sign up for the maximum contribution permitted.

In 2009, you can contribute $16,500 to your 401(k). That is $1,000 higher than in 2008. If you are age 50 or higher, you will be able to contribute $22,000 - an increase of $1,500. These increased limits also apply to 403(b) plans and 457 plans.

Unfortunately, there are no increases in the amounts you are able to contribute to traditional and Roth IRAs. Those limits remain at $5,000 and $6,000 if you are age 50 or older.

While these increased limits are good news, there is also some bad "tax news" to throw into the mix. That bad news comes in the form of a higher Social Security wage base in 2009. In 2009, wages up to $106,800 will be subject to 6.2 percent in FICA taxes and 1.45 percent in Medicare taxes. In 2008, the limit was $102,000 so this increased limit causes an extra $298 tax bill for employees.

People will frequently ask me about Securities Investor Protection Corporation (SIPC) coverage. Most people have the vague notion that it is like FDIC coverage for brokerage accounts. That description is not too far off, but there are big differences between the two.

First, SIPC is not a federal government agency. SIPC is funded by the member brokerage firms. Second, SIPC does not offer the same blanket protection that the FDIC offers.

It is extremely important to note that SIPC does not provide protection against market declines. Instead, SIPC replaces missing stocks and other securities. Basically, SIPC helps people whose money, stocks, or other securities are either stolen by a broker or put at risk when a brokerage house fails for other reasons. Investments that are not covered by SIPC insurance includes such things as commodity futures contracts, fixed annuity contracts and currency.

Like FDIC insurance, SIPC is also subject to coverage limits. Currently, SIPC coverage is available up to $500,000 per customer including $100,000 in cash. If your accounts exceed those limits, don't be too concerned -- most brokerage houses carry supplemental private insurance as well.

Visit the SIPC website for more details.

I don't know much about finance. My spouse and I only make $80,000. We have no debt but we also have only a small 401(k) and a small savings account. I am concerned that we are not well prepared for retirement but I'm not sure what we should be doing. Is it worth it for us to hire an adviser?

Great question. From your brief description, it seems like you probably don't need anyone to manage your money for you but you could definitely benefit from some professional advice. There are a good number of financial planners that work with people on an hourly or per-project basis. Good places to find these planners include:

The National Association of Personal Financial Advisors' website,
The Financial Planning Association's website, and
The Garrett Planning Network website.

When you call someone that you might like to hire, ask them if they do hourly or project-based work. Expect these individuals to charge approximately $100 to $200 per hour. Since you are paying by the hour, you should be as organized as possible. Have all of your statements and documents assembled before the meeting and prepare a list of questions or topics that you would like to cover. Sending your list of questions in advance of the meeting is also a good idea.

If you just want to get an idea of how well prepared you are for retirement, you can check out some of the many retirement calculators that are available on-line. You can also visit the investor centers of many of the national brokerage companies like Fidelity and Schwab.

I have a small cash windfall. I'd like to invest it in a mutual fund but I am concerned about immediately losing value. You've been saying "stay the course" to people already in the market. But what about someone just thinking of getting in?

My first question for you is "do you have an adequate emergency fund?" The definition of adequate varies from person to person but generally speaking a decent sized emergency fund would cover three to six months of your "must pay" expenses like the mortgage, your car payment, utilities, etc.

Assuming you are all set in the emergency fund department, I would then ask you when you will need the money that you are considering investing. If you will need it for a major purchase in the next 3 to 5 years, the stock market is not an appropriate place to be. CDs or high yield savings accounts would be better.

If this is long term money, or money you definitely won't need in the next 5 years, I think investing in an equity mutual fund would be totally appropriate. There is no way to "call the bottom" of the market so you have to be able to get past the possibility that you might lose a little bit of money in the very near term. We simply can never know in advance when the market has hit its bottom.

However, many professions think we are at or near the bottom which would signal a good buying opportunity. In an op-ed piece in Thursday's NY Times, Warren Buffet declared that he was investing his personal money in the market right now even though he had previously owned only government bonds. I'd say that if Warren Buffet is investing his own personal money in US equities right now, that is a signal worth paying attention to.

So, last week the markets dropped like a rock. The following losses were recorded for the Dow Jones Industrial Average:

Monday: Down 369 points
Tuesday: Down 508 points
Wednesday: Down 189 points
Thursday: Down 678 points
Friday: Down 128 points

For those of you keeping score, that's a total point drop of 1,874 or 18% in a single week. Pretty gut-wrenching wouldn't you say? If you are like a lot of people, you didn't get much sleep last week.

But what happened yesterday? Up 936 points. Almost 1,000 points in a single day! The percentage increase of 11.6 percent was the biggest since 1937 and it was the biggest one day point gain ever. The next closest was a 499 point gain in the year 2000.

What does this tell us about the markets? Have we reached a bottom? The honest answer is "who knows." No one has a crystal ball. And in fact, we will probably see our fair share of "down" days in the weeks to come even if we are firmly on our way to a recovery.

What it does tell us is that market timing is not a strategy. No one can call the slides or the rebounds with any degree of accuracy. The only reasonable strategy is to build a portfolio that meets your individual needs and stick with it. There will be good days and there will certainly be bad days, but on a long term basis you will be rewarded for hanging in there. Give yourself a pat on the back if you were worried last week but you stayed with your carefully designed portfolio. I'm sure it wasn't easy.

All you can do is try to remove as much emotion as possible from your decision making process. As many professionals were advising last week: "panic is not an investment strategy." Try not to make any significant financial decisions in the heat of the moment.

For example, if the events of the past few weeks have left you consumed with anxiety, maybe you should consider some changes to your portfolio, but you should make those changes gradually and with a cool head. If you really want to increase your cash or fixed income allocation, do so over a time period of several weeks or months to eliminate emotional decisions that you might regret later.

And, if you already have a well thought out plan, stick with it. Rebalance as needed, but stick with your plan. Don't run from stocks because they can be volatile. Volatility in the short term is the "price" you pay for the higher long term returns of stock. As Nick Murray, one of my favorite investment authors once said "the greatest long term risk of stocks is not owning them."

OK, there's no doubt about it, this has been one heck of a week. People are worried and very nervous. In today's blog entry I am listing some articles that I have read over the past week or so that I think are particularly helpful and insightful. These are really great articles and I won't even attempt to summarize them -- you should read them in their entirety. Hopefully they will make you feel less anxious about all the recent market turmoil.

"Switching to Cash May Feel Safe but Risks Remain" by Ron Lieber of the NY Times

"The Depression of 2008? Don't Count on It" by Jason Zweig of the Wall Street Journal

"As Dire as the Times May Seem, History Isn't About to Repeat Itself" by Karen Blumenthal of the Wall Street Journal

The American Association of Retired Persons (AARP) conducted a survey last month of over 1,600 baby boomers (defined to be those age 45 and older) and found that 34 percent of the participants are considering a delay in their retirement age and a full 20 percent have stopped contributing to their 401(k) plans over the past year.

That's unfortunate because with the market hitting new lows on what seems to be an everyday basis, now is very definitely the time to keep buying and, if at all possible, increase your contributions. I know that that is easy to say but sometimes hard to do as it does take some faith and a belief in the capital markets.

It also requires some confidence in your personal financial situation. The AARP study further revealed that 27 percent of those surveyed were having difficulty making their rent or mortgage payments and that 13 percent had taken a premature withdrawal from their IRA or 401(k). If your situation is that dire, it probably does make sense to turn off the 401(k) contributions for a while to get yourself back on more solid financial footing. The taxes and penalties associated with a premature withdrawal make it a last ditch option. However, if you are simply worried about the market because it keeps dropping and you have an adequate emergency fund and a well diversified portfolio, the thing to do is keep contributing. Two or three years from now, you will look back on all this market turmoil and wish you had bought more.

For more information about the AARP study, check out this article in the Wall Street Journal.

A recent Wall Street Journal article suggests that as the big banks get bigger, the best deals for savers might be found at the smaller banks. For example, the average yield for a six month CD is just 2.09 percent but if you are willing to shop around and consider out-of-state and internet banks, you can quite easily find rates that approach and possibly exceed 4 percent.

What many people are doing is keeping a small checking account at the large institutions so they can have easy access to a branch office and large ATM network but they also have accounts in far-flung locations to capture more favorable CD and money market rates.

Credit unions are also becoming more and more popular and they often offer the best rates on CDs and consumer loans. Like regular bank accounts, deposits at credit unions are insured for up to $100,000. Many people don't even consider credit unions because they think the membership criteria is very narrow and they incorrectly believe they won't qualify. Years and years ago, it might have been somewhat difficult to join credit unions, but these days, the membership base for most credit unions is very broad. You might be surprised to find that you are probably eligible to join at least one or two credit unions based simply on where you live or where you work.

I am 60 years old and only have a small amount in my 401k - approximately $90,000 (in a Fidelity Freedom 2015 account). I know I will never be able to retire on what I have but I don't want to lose the little bit I do have. I want to know, given how the market is going down, should I continue to contribute 15 percent of my salary to my 401k or contribute less and put some after tax money in a savings account?

I would urge you to consider continuing your 401(k) contributions. I know that it can be scary when the newspapers are splashed with headlines about one crisis after another, but you need to stick to your long term plan. If you continue to contribute to your 401(k), the shares you are buying on the days that the market is down 450 or 500 points are incredible bargains. Literally, everything you buy is on sale.

The only real way to "win" the investment game is develop a well diversified portfolio and make a promise to yourself that you will stick with the plan in good times and bad. You have to suffer through the bad in order to capture the good. You can't just have the benefit of equity market returns without also accepting the volatility that comes along with it.

The Fidelity Freedom 2015 is probably a good choice for you if you will be retiring in your mid to late 60s. It gradually becomes more and more conservative so you don't have to think or worry about changing your investment mix.

Monday was definitely a nail-biting kind of day. The Dow was down over 500 points and a lot of that loss came in the two hours the market was open. Panic was a word you heard on TV and saw on the Internet, and in all the newspapers. It was certainly hard not to feel anxious about the market, your retirement, your savings, and your future financial security. Many people wondered if it was time to move to all cash.

However, those who hung in there were rewarded in Tuesday's market which saw the Dow up 141 points or 1.3 percent and the S&P up 20.90 points or 1.75 percent. It just goes to show that you can't make important financial decisions based on emotions. You have to be able to tune out the fear-inducing headlines and stick with your long term plan. Remember, newspapers and magazines have to lead with the scare tactics or no one would buy the paper.

If you have a properly diversified portfolio, no action is required when the markets are falling -- except that you might want to buy more. If your portfolio has large and small company stocks, growth and value stocks, international exposure and alternative asset classes, you are all set. Sit back and watch what happens. There will be ups and there will be downs. You don't get the higher long term returns of stocks for free -- you have to be willing to soldier through the down days to capture the historically much higher performance of equities.

We don't know what the market will do today, tomorrow or the next day but we do know that in the long run, stocks are your best bet for beating inflation and earning a rate of return that will enable you to meet your long term financial goals.

I'm 26 years old, I bought a condo last year, I have a 6 month emergency fund saved and now I've been getting more and more interested in stocks. I've followed the market very closely for the last 6 months and in the last month or so I've been investing in a few stocks here and there with my extra money. I was curious if you had any books that you would recommend, not only for beginners but also for people that are starting to feel more comfortable researching and buying stocks.

For reading that is not too analytical, I like the "Little Book" Series. The best books in this series include:

The Little Book of Value Investing by Christopher Brown
The Little Book That Builds Wealth by Pat Dorsey
The Little Book of Common Sense Investing by John Bogle
The Little Book That Saves Your Assets by David Darst

To learn more about how to pick specific stocks, you should check out the series of books by Morningstar. Book 1 is "How to Get Started in Stocks" and it is pretty informative. Book 2 is "Diversifying Your Fund Portfolio" and is about Mutual Funds.

If you want to kick it up a notch in complexity, I truly love "The Four Pillars of Investing - Lessons for Building a Winning Portfolio" by William Bernstein. Other investing classics would include "The Intelligent Investor" by Benjamin Graham and "A Random Walk Down Wall Street" by Burton Malkiel.

The market has been very volatile lately and most long term investors are experiencing a "negative" 2008. The Standard & Poor's 500 Index is down approximately 15 percent year-to-date and the financial news seems pretty dismal at times. However, there is one bright spot -- tax loss harvesting opportunities are plentiful.

Basically, if you sell individual stocks or mutual funds for less than you paid for them, you will recognize a loss and you can subtract the loss from gains you might have somewhere else in your portfolio. If you don't have any other gains, the losses are still valuable because they can be used to offset up to $3,000 in ordinary income and the balance can be carried over to future years. (It might seem obvious, but we are talking about gains and losses in your taxable accounts, not your IRAs.)

As with most things in life, there is one "catch" and that catch is known as the wash sale rule. Under the wash sale rule, the IRS will deny your tax break if you have purchased the same (or a substantially identical) security in the 30 calendar days before or after the sale. The rules on what constitutes a substantially identical security are not always very clear, so if you want to make a "replacement" purchase within 30 days, it is probably best to consult your tax advisor or financial advisor. Also, it is important to note that if you do have a wash sale, the disallowed loss is not lost forever. Instead, your disallowed loss is added to the basis of the replacement security.

Tax loss harvesting really can be well worth your effort. If you are in the 33 percent tax bracket and you have a $3,000 loss that you can use to reduce your ordinary income, you will save almost $1,000 in taxes. However, there is a popular saying in our field: "don't let the tax tail wag the dog." In simple terms, this means that you shouldn't go crazy selling investments simply to capture a loss. A buy and hold strategy is still the best for most investors. You should simply be aware that if you find yourself holding an investment that no longer has a place in your portfolio, there may be some tax advantages to selling it.

From an investment standpoint is it better to put $3,000 in a flex account to cover my medical/child care or put the $3,000 in a tax deferred 401 plan? If I put it in the flex, I will save $900 in income taxes, but I don't know how to figure if that is really the way to go. Thank you.

I actually don't think this is an either/or question. You would only consider allocating $3,000 to a medical and/or dependent care flexible spending account (FSA) if you knew that you would have medical or childcare expenses that total at least $3,000. If it is a "given" that you have those costs, you will be paying $3,000 in expenses one way or the other. If you can use before tax dollars to cover the expenses by paying for them using an FSA, that is a pretty good deal because you will be getting a "discount".

Your question suggests that you might have $3,000 "extra" to invest. Contributing that amount to your traditional 401(k) would be great and doing so would reduce your taxable income by $3,000 -- just like contributing $3,000 to your FSAs. In addition, the $3,000 contributed to your 401(k) will grow tax deferred for many, many years

FSAs are a great employee benefit and nearly everyone who is eligible should consider participating. In a nutshell, FSAs are tax advantaged programs offered by employers that allow employees to pay eligible medical and childcare expenses using pre-tax dollars.

When you use an FSA to pay for these types of expenses, it is like getting a free discount on expenses you would be paying anyway. The discount is equal to the tax you would have otherwise paid on the money you contributed to the FSAs.

In this example, the person's taxable income is reduced by $3,000 and the "discount" they capture is equal to the tax they would have paid on that $3,000. The exact savings will vary from person to person depending on their marginal tax rate.

You can use a medical flexible spending account to get reimbursed for eligible medical expenses and you can use a dependent care flexible spending account to get reimbursed for qualified childcare expenses for children under the age of 13.

There are no statutory limits on contributions to medical flexible spending accounts, but employers often impose their own limits of $3,000 or $5,000. The limits for dependent care flexible spending accounts are $5,000.

These accounts really are worth the added headache of the associated paperwork. For example, have you ever considered laser eye surgery? This procedure can cost as much as $5,000 and it is not generally covered by insurance. If you can plan ahead and allocate $5,000 to your medical FSA, you can "save" $1,650 on this procedure if you are in the 33% marginal tax bracket. That's probably worth the cost of submitting the required reimbursement forms.

Should I take the money I have invested in mutual funds and start a 529 plan for my 18 month old daughter? What will the tax implications be?

529 accounts can only be funded with cash, so if you wanted to open a new 529 account using money that is currently invested in mutual funds, you would need to sell the mutual funds first.

If you have held the funds for more than one year and they are currently worth more than what you paid for them, you would have a long term capital gain. The highest rate that would apply to these gains would be 15 percent and it is possible that a 0 percent rate could apply (depending on your current tax bracket). If you have held the funds for less than a year, any gains would be taxed at ordinary income rates.

If the shares are worth less than what you paid for them, you would have a loss. This loss could be used to offset other gains and then up to $3,000 in ordinary income. Whatever losses you couldn't use this year could be carried over to future years.

It might be better (and easier) for you to simply open a new account and sign up for automatic monthly contributions. Many plans waive all fees if you commit to making monthly contributions of $25 or $50.

Remember, there is no guarantee that your daughter will attend college. The odds may be good, but if she never goes to college and there aren't any brothers or sisters to transfer the money to, taxes and a 10 percent penalty would be due on any earnings withdrawn from the 529 account that weren't used for qualified education expenses.

One of the advantages of saving for college using a 529 plan is that earnings will not be taxed until they are distributed and if the earnings are distributed to pay qualified education expenses, no federal taxes will ever be due.

For gift tax purposes, contributions to 529 plans are considered to be a gift so in 2008, you can contribute up to $12,000 to an account without the contributions being considered a taxable gift. If you want to make a larger gift, contributions of up to $60,000 are possible if you file a Federal Gift Tax return and elect to treat the deposit as if it were made over 5 years.

I have my retirement fund in a CD which comes due next month. With CD rates being low, I was looking into rolling it over into a mutual fund where you pick the date closest to your retirement date. What do you think of these funds?

You are talking about target date funds. Target date funds have names like:

Fidelity Freedom 2015
Vanguard Target Retirement 2035
T Rowe Price Retirement 2040

Target date funds consist of a diversified portfolio of stocks, bonds and cash. As the fund gets close to its target date, it decreases the allocation to stocks and adds more bonds and more cash. The end result is a portfolio that gets more conservative over time.

The idea is to invest in the fund that most closely matches your planned retirement date. So, for example, if you are 49 now, you will be 65 in 2024. You would probably invest in a fund that has 2025 in its name if you wanted to retire at age 65. Alternatively, if you consider yourself more aggressive than most, you could also invest in a 2030 fund because that fund would have a higher allocation to stocks for a longer period of time. Similarly, if you are exceedingly conservative, you can invest in a target date fund with an earlier "due date".

My opinion of these funds is mixed. If you know that you are the type of person to select funds once and then never re-visit the choice, target date funds might be a good option because it puts your retirement savings on "auto-pilot". In essence, all the future investment choices get made for you.

However, this auto-pilot feature is also what bothers me about target date funds. These funds basically treat all investors the same -- with the only differentiating factor being age. And all investors of the same age shouldn't be treated the same. For example, I am the same age as Melinda Gates. Melinda and I might share a similar investment philosophy and tolerance for risk, but that doesn't mean that our assets should be invested in exactly the same manner. I am stretching this popular analogy a little here, but you get the picture.

As is the case with all funds, beware of expenses because they can vary widely across fund families. You should also look at the composition of several funds with the same target date. You will find that even funds with the same target date can have noticeably different allocations to stocks, bonds and cash. Pick the fund that most closely matches your risk tolerance.

Finally, you need to know that target date funds are not guaranteed in any way like your CD. You could lose money.

I am a federal government retiree and 68 years old. I currently have $122,500 in my Thrift Savings Plan. I did not yet roll it into an IRA. What is a good company to roll the TSP into -- Vanguard? T Rowe Price? Fidelity? Which company might have the lowest fees?

All three of the companies you mentioned would be solid choices. However, I would probably put in a plug for keeping your money where it is. The government's Thrift Savings Plan (TSP) is as close to perfect a plan as you will likely find.

There are only five fund choices available but those five include a government securities fund, a fixed income fund, a common stock fund, a small cap fund and an International stock fund. All five are index funds and all of them have a rock-bottom expense ratio of .015 percent or 1.5 basis points. That means the fees are only 15 cents for every $1,000 invested! You would be hard pressed to find lower expenses in many other places.

The plan also now offers 5 lifecycle plans, so if you are retired and want to put your retirement savings on "autopilot", you could choose one of the 5 target retirement funds. If you have an average risk tolerance, you would choose the lifecycle fund that most closely matches your year of retirement. If you wanted to be more aggressive, you could choose a lifecycle fund with a date later than your retirement date. This is a wonderful plan and you probably shouldn't be in a rush to leave it.

TJ writes:

I am 28 years old. I started working 3 years ago and I am saving 2 percent of my pay in my 401(k). My employer does not match my contributions at all. What are my options for maximizing my retirement savings? Would I be better off with IRA accounts?

TJ, it is wonderful that you are looking at how you can maximize your retirement savings. Even though your employer does not offer a match, the 401(k) is probably your best opportunity to sock away the largest amount of money. At your age, you are able to contribute up to $15,500 to your 401(k). IRAs are also a great option, but the contribution limits on those accounts are $5,000. Keep in mind that you can contribute the max to both the 401(k) AND the IRA, so it is possible to be saving as much as $20,500. If you can save at least 10% of your salary now and throughout your working career, you will be in great shape for retirement when the time comes.