What is a Multi-Generational IRA plan?  A Multi-Generation IRA or “Stretch” IRA has administrative provisions allowing the non-spousal beneficiary or beneficiaries to continue tax-deferral of the account over the beneficiary’s life expectancy.

Recent IRA changes allow each beneficiary to establish a required minimum distribution plan based on his or her own life expectancy.  These distributions must begin by December 31 of the year following the participant’s death.  At any time, the beneficiary may elect to take a greater distribution than the minimum.  The technique of passing an IRA from one generation to another involves proper elections by the plan participant and proper identification of beneficiaries.  Beyond correctly identifying the beneficiaries, the trustee, custodian, or insurance company must have the systems for maintaining these accounts over long periods of time and the ability to administer this new opportunity in estate planning. 

The Multi-Generational IRA plan is designed to allow for a much greater time period of tax deferral and compounding of earnings.  Depending on the ages of the beneficiaries and/or rates of return, a stretch IRA can grow to many times the balance originally inherited.  With a Multi-Generational IRA plan you can truly create financial security for your children or grandchildren.  If you are interested in learning more about making your IRA a Multigenerational IRA, please call or email us.

How the Three-Act Drama Unfolding in Egypt

May Affect Your Money

After 30 years in power, it took only 18 days to topple Egyptian President Hosni Mubarak. He capitulated to the demands of the protesters and resigned as President. Now comes the hard part.

Since the glory days of ancient Greece, we’ve had the three-act play. You know how it goes. Act I sets the stage, introduces the characters and identifies the main problem. Act II is the most important act because the main problem becomes much more dangerous and difficult and the protagonist of the story looks like they will lose. Act II usually ends on an emotionally-charged cliffhanger so you’ll be compelled to come back from intermission. Act III pulls it all together and the story wraps up with the protagonist (usually) winning and everybody (usually) living happily ever after. Ah, if only real life was so neat and tidy!

What’s happening in Egypt could follow this script—or not.

We’ve just completed Act I as the protesters were able to chase Mubarak out of office. Act II is now starting as the country tries to move toward a democratic society. However, with parliament dissolved, the constitution suspended and elections for a civilian government still about six months in the future, it could be rocky. As one of the protesters said in a Wall Street Journal article on the day of Mubarak’s resignation, “It’s easy to throw stones at the aggressor but it’s not easy to chart a new course. Our hard work begins tomorrow.” As today’s youth would say, “True that.”

While it’s too early to know the outcome of Act II or Act III, it may make sense to look at two potential extreme outcomes. These bookends give us a sense for a possible worst case and best case.

Extreme Outcome One

If Egypt is not able to pull a democracy together and internal squabbling spills into neighboring countries, it could be a serious problem for the world. The Middle East can be a powder keg and with its strategic importance in the oil market, any disruption there could send the world economy into a tailspin. Neighboring countries are also experiencing unrest among their people so the call for reform in the region is strong and certainly not over yet.

Extreme Outcome Two

On the positive side, the changes occurring in the Middle East could usher in a new era of democratic reforms that lead to faster economic growth and rising stock prices. Remember the fall of Eastern Europe’s Soviet satellite states and the toppling of the Berlin Wall in 1989? The decade that followed was a strong one for worldwide economic growth and stock prices. If the fall of Eastern Europe is a blueprint, then there could be some rocky, but survivable times ahead followed by a long period of growth.

The Impact of Technology and Social Media

One of the big differences between the fall of Eastern Europe’s dictators back in the late 1980s and the situation in the Middle East is the rise of the Internet, and, in particular, social media. The educated, Internet-savvy young adults who helped fuel the protests in Egypt reportedly used Twitter and Facebook to mobilize their followers. While the fax machine was the technology of choice back in 1989, the tools of today are exponentially more powerful.

Victor Hugo said, “An invasion of armies can be resisted, but not an idea whose time has come.” For the Middle East, that idea is political and economic freedom. Our interconnected world enables the far reaches of the globe to see how the politically free and economically prosperous countries enjoy a relatively high standard of living. The people in these emerging countries see it on TV. They read about it on the Internet. They travel to our country and become educated in our universities. They like what they see and now they want it for their home countries.

A few months ago, nobody was predicting the imminent downfall of Hosni Mubarak. His swift decline is another example of how we live in a “speeded up” world of instantaneous communication and a desire for immediate gratification. That potentially dangerous combination means the ultimate denouement of this unfolding drama is anybody’s guess.

As your advisor, though, we’re not in the guessing game. Instead, we are actively monitoring the start of Act II and its potential implications for your investments. Regardless of how this drama unfolds, we will do our best to try and meet your goals and objectives.

In the meantime, please let us know if you have any questions or concerns.

The Financial Planning Association of San Diego is answering financial questions for the readers of the UT.  Nate was choosen to write an article about helping a family take control of their finances after the loss of a loved one.

If you missed this article published Sunday, November 21st, you can read it at the link below:

http://www.signonsandiego.com/news/2010/nov/21/how-help-surviving-spouse-regoup-financially/

2010, “The Year of the Roth IRA”

While the cap on who is permitted to convert a traditional IRA to a Roth IRA has been permanently repealed, a special provision that allows conversions to be split into each of the next two tax years will expire on December 31st.  Among other benefits, Roth IRA conversions can be an especially powerful retirement and tax planning tool for those that feel they may end up in a higher tax bracket in retirement and have extra liquid funds to “prepay” their taxes on retirement accounts.

Don’t Forget those RMDs

In 2009, those age 70 ½ or older who were subject to an RMD (Required Minimum Distribution) were given a year’s holiday from taking a distribution from their IRA and qualified retirement plans.  That holiday has come and gone and it’s important to resume those RMDs in 2010.

Reviewing Your Investment Plan

Each year your investments should be reviewed to ensure your holdings are appropriate for your risk tolerance and return expectations so that you have the highest likelihood of accomplishing your financial goals.  Within your overall investment plan, an end-of-year investment review should allow you to position your holdings so that you can benefit from the current economic cycle.

Allocating Income and Investments to Minimize Taxes

Many of the Bush Era tax cuts are set to expire or sunset at the end of 2010 and tax rates across most fronts will be changing.  It’s important to review which changes will most affect your financial situation and develop a tax strategy for your current and future income and investments before the year is over.

Avoiding Capital Gains Tax Increase

One area in particular that is changing for 2011 will be how capital gains are taxed.  In all tax brackets, except the lowest, capital gains taxes will be increasing for the first time in 17 years, rising from 15% to 20%.  This means that if you’re planning on selling property with a gain, it might make sense to do so this year instead of waiting.  If however, you have net losses this year (after netting your short-term and long-term gains and losses) you still have a deductable limit of $3,000 from your ordinary income.

Charitable Giving

There are no changes this year or next on types of charitable deductions or deduction limits, but it’s important to note that charitable deductions must be made before the end of the year in order to realize them in 2010.  However, with top tax rates increasing by almost 5% next year, the traditional tax strategy of accelerating deductions and deferring income into the next year may not apply to regular deductions, like charitable contributions, for top income tax filers this year.

Green Home Improvement Credit

Over the last few years, the government has encouraged the public to make investments and improvements in green energy efficiency by handing out tax credits of upwards of $1,500.  These credits are set to expire at year end.

Retirement Savings

Unlike IRAs where you have until April 15th of the following year to make contributions, qualified retirement plans like 401(k)s and 403(b)s require that you make your final contributions before the end of the year.  Once December 31st comes and goes, you won’t be able to bring your contribution up to the maximum of $16,500 for 2010.

We look forward to reviewing these points for each one of our clients as this year winds down and the New Year begins.  If you know of anyone that might benefit from having a year-end review, we’d be happy to meet with them before the end of the year.

Staying at Home

As the old saying goes, Home is Where the Heart Is.  One of the most preferred places for retirees to live is in their comfortable and familiar home, which is usually paid for.  However, factoring in the cost of vital services like health care and transportation, and more emotional factors like having a spouse or family member serve as a primary caregiver can make this one of the most challenging options.  In recent years products, such as reverse mortgages, have made living at home a little more affordable for retirees on a fixed income sources like pensions, social security and personal savings.

All in the Family

According to recent statistics, the typical caregiver is a 46 year old Baby Boomer woman with a college education who works and spends more than 20 hours per week caring for her aging mother.  The average length of caregiving last 4.3 years and typically lowers the caregiver’s life expectancy by 3 to 10 years.  There are many emotional and relational considerations when discussing this option, most likely resulting in compromises and coordination by both the elder and the caregiver.  Adult daycare and other community services can help ease these pressures.  One idea that can provide support to both the elder and the caregiver would be to rent out the elder’s home.  This strategy can provide tax benefits while preserving the value of the home for future needs or planned giving.

Retirement Communities

An increasingly popular option, retirement communities can provide independence, a sense of community with other seniors, and in some cases a total solution for future assisted and nursing care needs.  Costs for retirement communities can vary from a few hundred dollars to a few thousand per month depending on the type of community (non-profit, board and care, assisted-living, continuing-care, etc.), amenities, and experience of the staff.  In the case of continuing-care retirement communities (CCRCs), everything a senior could need is located under one roof, including a private room, various amenities and specialized health care.  CCRC’s operate more as a private senior club with entry fees ranging from $20,000 to $500,000 and caring monthly fees averaging $1,600 per month.

There are many different solutions to having the most fulfilling retirement imaginable.  The key, like any financial decision, is to have your goal clear in your mind and do the proper planning.  Let us help you develop your living plan that will endure throughout your retirement.

Key Findings from Caregiving in the U.S.  National Alliance for Caregiving and AARP, April 2004.

As the legal debate rages on in California about the right to marry, I wanted to address a common question in regards to titling of property, specifically the homes of married couples in California.  Ask an attorney, accountant or financial professional how to title your home, and you’ll likely get the dreaded, “It depends.”  While it truly does depend on your objectives and you should consult with an attorney prior to making any titling decisions, in California there are some potentially large tax differences between the two most common forms of ownership for married couples: community property with right of survivorship or joint tenants with right of survivorship.

While both forms of ownership transfer the decedent’s ownership share directly to the surviving spouse as an operation of the law thus avoiding costly probate, the similarities end at how they are treated for tax purposes.  The main difference lies in how the property’s tax basis is affect at the passing of a spouse.  When titling your home as community property with right of survivorship the surviving spouse receives a full step-up in basis on the property, while just the decedent’s share (50%) under joint with right of survivorship receives a step-up in basis.  This can be especially costly for couples owning highly appreciated property or older couples that have lived in their home for many years.

Please consult with your tax and legal advisor prior to making any titling decisions.  If you would like to review how your estate plan affects your overall financial plan, please call us and we’ll be happy to schedule a review.

Our Nathaniel Ritchison, Certified Financial Planner™, recently collaborated on an article in the San Diego UT!

Carol Kenney, a local San Diegan, volunteered for a “Money Makeover”, sponsored by the newspaper and the San Diego chapter of the Financial Planning Association.  Nate was then chosen by the FPA to analyze Kenney’s financial situation and make recommendations.

If you missed this article published Sunday, August 8th, you can read it at the link below:

http://www.signonsandiego.com/news/2010/aug/07/newly-divorced-woman-is-planning-retirement/

With the recession and subsequent recovery, investors are focused on how the markets have affected one of their largest financial goals—retirement.  Seemingly right on queue, many financial companies have tailored their advertisements to soon-to-be retirees.  A message that’s recently gained popularity is: do you know your retirement number?  You may have seen the commercials showing people carrying their retirement number around with them.  The numbers go through all sorts of daily abuse (very timely no doubt but it also makes for dramatic TV) – getting run over, burned and even bitten by a dog.  At the end of the day, everyone replaces their number in a case where in the morning the number is returned to its original condition.  Commercials like these illustrate two questions that we have been answering for years as financial planners and investment managers: Do I have enough saved to retire? How will the market changes affect me during retirement?

The advertisement tries to simplify the answer to those questions, suggesting that you achieve retirement by accumulating a certain account value.  Generally speaking, it’s hard to think of retirement as anything but the value in your portfolio.  As you work and save, monitoring your portfolio value can serve as a useful benchmark towards accomplishing a very abstract concept, like retirement.  But anyone who has had investments over the years recognizes it’s nearly impossible to time your retirement with the apex of your investment portfolio.  And in fact, very rarely are retirement decisions based chiefly on passing a certain account threshold.  Most of the time the decision to retire is based on a life event, like: turning a certain age, becoming eligible for benefits, changes at the workplace or a health event.  It’s at this time that most retirees find that they shift their focus from monitoring account values…to focusing on another number—their income.  Retirement isn’t a number or an account value for most retirees.  It’s a lifestyle filled with daily activities.

Our focus leading up to retirement is on identifying your income sources and developing a plan to maximize those sources, allowing you to enjoy retirement without worrying about changes in the economy.  In this month’s Planning Perspective, we talk about the three main sources of income in retirement and ways of maximizing them.  If you have any questions about your retirement plan or how those account values relate to your retirement income plan, give us a call and we’ll make sure that you understand “your number.”

One of the foundational tasks of building a sound financial future is preparing for retirement.   That means developing an income stream or streams that will cover all living expenses regardless of whether there is earned income.  In this letter, I would like to address some of the preconceived notions about retirement income that are prevalent in this country,  whether or not they are valid, and how they can be used to help prepare for retirement.   There are three main places from which people could receive a retirement income:  personal savings and investments, employer sponsored plans, and Social Security.  Every retiree should address each of these three areas and make sure they receive retirement income from each one at the age that is going to work best for their income needs.   We’ll start with the retirement income you have the least control over (Social Security) and finish with what you have the most control over (personal savings and investments).

PRECONCEIVED NOTIONS

The first preconceived notion some retirees have is that “Social Security will take care of my retirement needs.”   As most people know today, Social Security is meant only as a supplement and that is why workers have only 6.2% drawn out of their paychecks to provide for it.  At most, it should be planned to provide about a third of retirement income for a family.  There are two main pieces to Social Security that are under each person’s control.  One is the life-time income on which their Social Security income is based and second is the age at which Social Security is received.  The latter has to be planned very carefully as it will impact retirement income for a lifetime.  Taken too early, a retiree might end up sacrificing retirement income that could be retained.

The second preconceived notion is that “my employer will take care of my retirement.”  While that may have been the case fifty years ago, today’s retirement marketplace and shifting economy places the burden for saving for retirement firmly on the employee’s shoulders.  Most companies will offer a plan to employees but require the employees to make contributions from their own paychecks  in a 401k type plan and may or may not (depending on business conditions),  make a partial matching contribution.   At most, this should be about a third of retirement income as well.

THIRD, AND MOST IMPORTANT

The final piece is personal saving and investment and this is where pre-retirees have the most control but also can get the most confused.   The common preconceived notion is that “I’ll always have more time to save.”   From the very first day that someone starts working, a three part-plan needs to be in place that addresses Social Security, the employer-sponsored plan, and a personal savings plan that can be ramped up as income increases from year to year.  Because of its higher growth potential and tax efficiency, the personal savings and investment income should comprise 50% of your retirement income.  It is a daunting task to put a personal savings plan into place that is tax-efficient, has good long-term growth, and is manageable by the pre-retiree.  That is why having a qualified “coach” like a Certified Financial Planner™ can be invaluable in helping to structure the right retirement income plan and integrating all three retirement income sources.