Nurture Your 401k Portfolio Using Asset Allocation

Subscribe in a reader

ShareThis

eRollover.com

Nurture Your 401k Portfolio Using Asset Allocation

Here’s a quick quiz. Which strategy is more likely to help you reach your retirement goals: finding the next hot fund about to rally and investing everything in it, or splitting your money among carefully selected funds, some of which don’t even appear to be winners?

If you answered the latter, you probably have a good idea of what asset allocation is about. If you answered “finding the hot fund,” you need to pay especially close attention to this article.

Free Stock Trade. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Asset allocation is a strategy used by long-term savers to spread their money over several investment classes. Its goal is to maximize returns for a given risk level. It’s not an exciting strategy, but it has a good track record of helping savers reach their goals.

Allocation Compromises
In developing your allocation you will have to accept compromises. The first is giving up potential premium returns and high portfolio volatility in exchange for consistent better-than-average returns with lower volatility.

Asset allocation is one of the most important things to do to minimize risk. The idea is to spread your money across a broad spectrum of investments, such as cash, bonds and stocks, that don’t move in synch with each other. Indeed, the more your investments act independently of each other, the better. That way, if one asset goes through a rough time, the other assets support the portfolio.

But that doesn’t mean that if one investment is tanking, you should get out and put your money elsewhere. That’s called market timing and it’s a practice that financial planners discourage.

Bad Timing
Here’s why timing is bad idea. If you bailed out of stocks today, to catch the next rally you would need the market-reading skills to figure out when it was starting and then to quickly buy in. But, reading markets is difficult because they don’t move in a straight line.

Consider the following statistics. They are based on the following assumption — you invest $1,000 in January 1926 and leave it alone until December 2000.

• If you invested it all in Treasury bills, by December 2000 you would have $16,644.
• If you invested it all in stocks, by December 2000 you would have $2,562,976.
• If you invested it in stocks, yet missed being in the market the 40 best months over those 75 years, by December 2000 you would only have $15,050.

Asset allocation keeps your funds always invested in the market so you participate in rallies as they develop.

Building Your Allocation
This article won’t offer you a single, best allocation. What’s best depends on your situation. But we can offer guidance to help build your allocation.

Two issues to consider are your time horizon and investment-risk tolerance.
Time: The longer until you need your savings, the more money you will be able to save and the more investment risk you can tolerate. You can assume more risk because your portfolio will have time to recover from losses.
Risk: The investment risk we’re talking about refers to the fluctuation or volatility of returns on your investment. In assessing your risk tolerance keep in mind your time horizon, your retirement goals, whether you have the money to take risk and whether you feel comfortable taking risk.

Allocation Steps
The first step is to set up reserves equal to several months of living expenses. This money should be used for emergencies such as temporary job loss. The reserves should be invested in liquid, low-risk investments such as money market funds, financial planners recommend.

The next step is to create an investment allocation for your remaining savings — how much you put into equities, bonds or cash.
While most folks think of allocating their retirement portfolios , many planners recommend you apply this strategy to the investments used for all your long-term savings goals, such as a child’s college education or buying a second home.

Don’t rush creating an allocation because it’s one of the most important decisions you will make.

“For the long-term individual investor who maintains a consistent asset allocation and leans toward index funds , asset allocation determines about 100 percent of performance,” according to the January 2000 Ibbotson study The True Impact of Asset Allocation on Returns.

Many employers don’t offer index funds in their 401k plans, but the lesson remains valid: over the long term, your allocation will have a significant impact on your portfolio’s performance.

In creating your allocation, you will have to balance the risks inherent in each investment against their respective returns. From 1925 through today, cash investments generated average returns of 3 percent a year, bonds averaged a little over 5 percent and stocks averaged about 11 percent.

Cash: In a 401k plan, a cash investment would be a money market fund. These are considered extremely low risk and generally earn a small return. With this investment your original investment is not supposed to fluctuate.
Fixed income: In a 401k plan, this asset class is represented by bond funds. Many bond funds invest in a mix of government and corporate bonds . These funds typically offer a higher rate of return than cash-type investments and carry a modest amount of investment risk.
Equities: Within 401k plans this asset class is often represented by a myriad of funds. Equities have higher investment risk than cash or bond funds . In exchange for assuming this risk you gain the potential for higher returns. Indeed, equities are the one type of investment that, historically, has consistently beaten inflation over the long term. Retirement savers with a long time horizon should consider inflation the leading risk they face. That suggests equities should be a dominant asset in their portfolio.
Free Stock Trade. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Most 401k investors aren’t offered a single fund to serve as a proxy for the stock market. Typically, plans offer large-cap, small-cap, growth, value and international funds, and various permutations of these. You will need to create an allocation among these sub-classes of equities. It will be up to you to choose the funds to cover these different sub-classes. Carefully research their holdings by reading the fund prospectus to ensure that you are covering each category only once. If you invest in funds with overlapping assets you risk inadvertently putting too much money in a particular stock class.

You can make up for lost returns by saving more, or saving for a longer time.

When to Change Allocation
The recent market turmoil might tempt you to change your allocation. Don’t, say financial planners. That’s market-timing.
Your allocation is a long-term plan based on assumptions about your time horizon, your savings rates and your goals. Recent events have probably done little to change those assumptions.

The time to consider changing your allocation is when a major event occurs in your personal life (such as a major medical problem or accelerated retirement date) that changes your retirement outlook. If this occurs, you should run through the same decisionmaking process you used to develop your asset allocation, but now using your new set of assumptions.
Even as planners advise against changing your allocation, they do recommend regularly rebalancing your portfolio. To do this, compare your current allocation with your original allocation. If they’re not the same, sell assets that make up too large a percentage of your portfolio, and buy assets that make up too small a percentage, to return to your original allocation.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Congress mulls major 401(k) changes

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Congress mulls major 401(k) changes
eRollover.com

A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.

Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.

This was suggested by the chairman of the House Committee on Education and Labor.

“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.

When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.

“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.

That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.

“If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said.

Rep. Robert Andrews, D-N.J., raised the issue of which investment advisers are allowed to offer workers investment advice.

The Department of Labor is considering “loopholes” that would allow advisers to offer “conflicted investment advice if the advisers work for subsidiaries of financial services companies that sell the investments,” he said.

With American workers facing $2 trillion in losses from retirement plans over the past year and Democrats expected to gain seats in the House and the Senate, actions being contemplated by the committee are an important harbinger of what could come out of Congress next year.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Obama and McCain's Tax Proposals

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Obama and McCain Tax Proposals
by Mike Rowan, eRollover.com

I have watched over the past couple of months as Republicans and Democrats alike have argued about their economic and tax plans. This economy, and the behavior of the stock market , has every voter worried about their way of life moving forward. Although I believe that this recession will be behind us before we know it, every investor will be receiving their 401k, 403b, or other Retirement statements, and will be very concerned as they see substantial losses in their plans.

Taxes play an important role in the structure and health of our economy. I strongly believe that raising any sort of taxes during an economic downturn could be extremely harmful based on historic precedent. Just look at Herbert Hoover raising taxes in the late 20’s and early 30’s. What followed was the worst period of economic history.

I really do not want to present a biased view, however I would like to lay out Barack Obama and John McCain’s tax plans side by side for comparison purposes. In searching the web, and doing research on taxation, I found out the following:

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

Redistribution of Wealth?
According to a new analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, Democrat Barack Obama and Republican John McCain are both proposing tax plans that would result in cuts for most American families. Obama’s plan gives the biggest cuts to those who make the least, while McCain would give the largest cuts to the very wealthy. For the approximately 147,000 families that make up the top 0.1 percent of the income scale, the difference between the two plans is stark. While McCain offers a $269,364 tax cut, Obama would raise their taxes, on average, by $701,885 - a difference of nearly $1 million.

It is quite evident that Obama’s tax plan is much more punitive on the rich. However, upon more detailed analysis, Obama is actually going to give the 40% of American’s that do not pay income taxes a check from the government. Is that welfare in disguise or redistribution of wealth? That is up to you to decide. McCain claims that by not taxing the rich even more, this will lead to the creation of new jobs by way of trickle down economics. This seemed to work during the Kennedy, Reagan, and Bush administrations. However, I will leave that open for individual interpretation.

Thanks to the Washington Post for the Graphics and snippet! Make sure you get out there and vote!!!

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

Things to consider before you move your 401k into an IRA

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Things to consider before you move your 401k into an IRA
by Mike Rowan, eRollover.com

Typically when you leave a job, you should roll over your 401(k) to an IRA. Rollovers allow you to continue delaying taxes on your nest egg as it accumulates and avoid an early-withdrawal penalty. However, many people choose to leave their 401(k) with their old company, or roll it into their new company’s plan. There are several points to be aware of when making this choice with your 401k or 403b plan. Here’s how to decide if a 401(k) rollover to an IRA is right for you.

Think about fees and hidden charges
Americans transferred $195 billion from 401(k)-type plans to IRAs in 2006. But rollovers are a wise move for retirement savers only if the IRA charges lower fees than the 401(k) plan at the old or new job. Sometimes the IRA is a better deal, especially if the 401(k) is through a small business. But large companies often negotiate institutionally priced investments with lower costs than individuals can get on their own from retail IRAs. Low expenses make those 401(k)’s a much better place to keep your nest egg.
Rolling over a 401(k) to a high-priced IRA can cost you dearly, according to Hewitt Associates, a human resources consulting firm that processed more than 150,000 rollovers in 2006. A 35-year-old employee who changes jobs and leaves behind $33,000 in a 401(k) with typical institutionally priced investments can expect to have squirreled away $404,105 by age 70, according to Hewitt. If the same employee rolled the balance into a typical retail IRA (assuming in both cases an 8 percent annual return before fees are subtracted), he would have only $366,424 at 70. That’s a difference of $37,681.

Review the investment options in your 401k or retirement plan
IRAs almost always have more investment choices than 401(k)’s. The main reason for rolling it over into an IRA is diversification and more control over your retirement money. In an IRA, you can invest in individual stocks, bonds, and any mutual fund you want to. Savvy investors who already know they prefer low-cost index funds over exchange-traded funds, or vice versa, will enjoy the freedom of an IRA.

But retirement savers who aren’t likely to peruse their mutual fund prospectus might enjoy a smaller array of options already vetted by their employer or plan sponsor. Someone has limited the choices to a reasonable number and done a screen for you. You can do an asset allocation analysis with the funds that are offered and typically set yourself up just fine. If you are satisfied with the investments that you have, then you might want to leave your money there.”

Watch out for penalties.
If you are going to move your 401(k) to an IRA or your new 401(k) plan, you need to watch out for penalties. Job-hoppers can save themselves a lot of trouble-and money-by having the former employer send the cash directly to the new financial institution. You can do unlimited direct rollovers on an annual basis.

If you take the old 401(k) into your own hands, your employer will cut you a check for the balance, minus 20 percent withholding for income taxes in case you decide to keep the money. Then, you generally have 60 days to put the cash into a qualified tax-deferred account. If you don’t, Uncle Sam will keep the 20 percent (plus any additional amount you owe at tax time). This also means you have to come up with the absent 20 percent from another stash if you want to roll all of the distribution into an IRA. Only one rollover in this manner is allowed every 12 months.

Don’t Move Company Stock
Stock of the company you work for gets special tax treatment when held in an employer-sponsored 401(k). If there’s employer stock inside the 401(k), you may want to not roll that portion into an IRA.

Here’s an example: An employee buys $100,000 worth of company stock in his 401(k) plan, and it grows to be worth $1 million. If that stock is rolled over to an IRA, when it’s withdrawn, it will be taxed as ordinary income at a rate of up to 35 percent. Instead, Burkemper recommends that workers consider withdrawing the stock from the retirement plan. The original $100,000 investment would be taxable as ordinary income in the year of the distribution. But there is no tax on the $900,000 stock appreciation until it is sold. And then it would be taxed at the long-term, capital-gains rate of 15 percent. That would save the hypothetical borrower in this example $180,000 in taxes, assuming that income and capital-gains tax rates stay the same. If you roll it over to the IRA, that tax benefit is gone.

Think about Loan options for 401k and IRA Plans.
Loans on your 401k or your retirement stash to cover current expenses is never a good idea. But if your back is up against the wall financially, you can generally take loans only from a 401(k) and not from an IRA. If you roll it over to an IRA, the only way you can get access is to pay taxes and the penalty.

Estimate your retirement age.
With an IRA, there is a 10 percent penalty if you make a withdrawal before age 59½. But retirees can begin taking penalty-free 401(k) withdrawals at age 55. If you’re 56 and think you might need access to a 401(k), you may not want to move it. This can be circumvented by utilizing the substantially equal distribution provision, otherwise known as 72t, where you can access your money, but have to take the same amount for 5 years or age 59 1/2.
At age 70½, retirees must take required minimum distributions from their retirement accounts . There’s one exception: If you’re still working, you don’t have to take the distribution from a 401(k)-and pay the extra taxes that year-unless you own more than 5 percent of the company.

Consider your heirs with regards to Estate Planning
Most 401(k) plans will force your heirs to take the assets soon after you die, which can be a big tax burden on your loved ones. Some 401(k) plans allow only spouses to roll inherited 401(k) dollars into an IRA. If you’re going to stay in the plan, you better make sure it allows you to do a nonspousal rollover into an IRA. IRAs typically give retirees more freedom to allow heirs to take required minimum distributions instead of a lump sum and make it easier to set up multiple beneficiaries. If your employer’s 401(k) plan doesn’t make it easy for your heirs to space out the tax payments, you might want to roll over the money into an IRA.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Introduction To Forex Trading

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Introduction To Forex Trading
by Mike Rowan, eRollover.com

Investing in foreign currencies is a relatively new avenue of investing. There are considerably fewer people are aware of this market than there are people aware of several other avenues of investing. Trading foreign currency, also known as forex, is the most lucrative investment market that exists. There are several factors that make this true among which, successful forex traders earn realistic profits of one hundred plus percent each month. Compared to some of the better known investment markets such as corporate stocks, this is an unheard of return on investment . It's very necessary to mention here that a person who invests in forex must, without exception, make it a point to learn the detailed, but simple strategies and information surrounding the market. This very fact is what makes the difference between successful forex traders and other traders.

The foreign exchange market is the market in which currencies are bought and sold against one another. People may loosely refer to this market under different labels, including foreign exchange market, forex market, fx market or the currency market.

The foreign exchange market is the largest market in the world, with daily trading volumes in excess of $1.5 trillion US dollars. All transactions involving international trade and investment must go through this market because these transactions involve the exchange of currencies.

It is the most perfect market that exists because it has a large number of buyers and sellers all selling the same products. There is a free flow of information and there are little barriers to participate.

The currency exchange market is an over-the-counter (OTC) market which means that there is not one specific location where buyers and sellers can actually meet to exchange currencies. Instead, transactions are conducted by phone, fax, e-mail or through the websites of brokers who specialize in currency trading .

The major dealing centres at the time of writing are: London , with about 30% of the market, New York , with 20%, Tokyo , with 12%, Zurich , Frankfurt, Hong Kong and Singapore , with about 7% each, followed by Paris and Sydney with 3% each. Because of the fact that these centres are all over the world, foreign exchange traders can execute transactions 24 hours a day. The market only closes on the weekends.

THE MAIN "PLAYERS" IN THE FOREX MARKET
The five broad categories of participants are: consumers, businesses, investors, speculators, commercial banks, investment banks and central banks.

Consumers, including visitors of countries, tourists and immigrants, do need to exchange currencies when they travel so that they can buy local goods and services. These participants do not have the power to set prices. They just buy and sell according to the prevailing exchange rate. They make up a significant proportion of the volume being traded in the market.

Businesses that import and export goods and services need to exchange currencies to receive or make payments for goods they may have bought or services they may have rendered.

Investors and speculators require currencies to buy and sell investment instruments such as shares, bonds, bank deposits or real estate.

Large commercial and investment banks are the "price makers". They are the ones who buy and sell currencies at the bid-and-offer exchange rates that they declare through their foreign exchange dealers.

Commercial banks deal with customers on one hand, and with the Interbank or other banks, on the other hand. They profit by utilizing the bid-and-offer spread. The bid price is the exchange rate that the buyer is willing to buy and the offer price is the exchange rate at which the seller is willing to sell. The difference is called the bid-offer spread. They also make profits from speculating about whether the exchange rate will rise or fall.

Central banks participate in the foreign exchange market in their effective duty as banks for their particular government. They trade currencies not for the intention of making profits but rather to facilitate government monetary policies and to help smooth out the fluctuation of the value of their economy's currency.

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

Introducing the eRollover.com Education Center

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Introducing the eRollover.com Education Center
by Mike Rowan, eRollover.com

eRollover.com, the web’s leading portal for 401k, IRA , Retirement, and Personal Finance, has added a new feature on our site to help our members and visitors become more comfortable with all financial topics. With eRollover’s Education center, we have aggregated numerous topics about personal finance and retirement that are commonly sought out by our users and readers.

In addition, we would like to make this a place where our members can also submit their own content, so that this database of financial information is always up to date and displaying the type of financial data that our readers are striving for.

Please check out eRollover’s Education Center, and email any information you think should be included to info@erollover.com.

Introducing The eRollover Education Center!


eRollover is proud to introduce our education center, where you can find useful information on all types of 401k, 403b, Retirement, Investing, Insurance, and other Personal Finance topics!


401k, 403b, and 457 Rollover

Mutual Fund Education

Life Insurance

Long Term Care

Disability Insurance

Annuities

Asset Allocation

Investing Topics

IRA Information

Education and 529 Plans

Estate Taxes

Insurance Dictionary

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Asset Allocation Analysis for your 401k or IRA

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Asset Allocation Analysis for your 401k or IRA
by Mike Rowan, eRollover.com

As I sit here this morning watching the stock market futures tumble, I can’t help but think about investors out there who feel panic and despair about their retirement portfolios. I know that this stock market behavior over the last 2 months has been absolutely brutal and there is almost no place to hide. Even money market funds have been frozen and have required cash infusions to guarantee their liquidity.

Historically, the only thing that has been proven to prevent massive losses in your portfolio is to have an asset allocation strategy. I can’t stress how important this strategy is for your 401k, 403b, IRA, or other investment and retirement accounts. eRollover has invested in an asset allocation calculator, which can assist in setting up your plan according to your risk tolerance. This feature is free, and will actually generate a print out with its recommendations. Please feel free to utilize this feature of our site by filling out our asset allocation questionnaire.

Here is the definition of asset allocation, according to Investopedia.com.

An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

The three main asset classes - equities , fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

Investopedia Says… “There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds , and cash and equivalents, which will be the principal determinants of your investment results.”

As you can see, this strategy can help you to minimize risk and maximize returns over the long term. Please take advantage of our 401k and Retirement Asset Allocation Engine, and get your portfolio optimized for these turbulent market conditions.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

The Difference between Term and Permanent Life Insurance

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

The Difference between Term and Permanent Life Insurance
by Mike Rowan, eRollover.com

Many people ask me, “What is the difference in Term and Permanent Life Insurance?” So, I thought that I would write a quick excerpt explaining the basic differences between the 2 plans. Please keep in mind, each individual should review their own situation before committing to any life insurance plan. We encourage you to consult an advisor before deciding on a policy.

Term Life

Term life insurance is typically the least expensive type of coverage, at least initially, and the simplest. These policies do not build up a cash value. Coverage is in effect for a fixed term or period of time, usually one to 30 years, and typically may be renewed after the initial term. The policy pays your beneficiary a fixed death benefit if you die while the policy is in force. The premiums are lowest when you are young and increase upon renewal as you age. Be sure to check your policy for age or other renewal restrictions.

This type of insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.

Permanent life insurance includes whole life, universal life and variable life insurance.

• Whole life provides protection as well as a guaranteed cash value. The premiums remain at a fixed level for the duration of the policy. Over time, the policy generally builds up cash value on a tax-deferred basis. Some companies pay a dividend , which is a return of excess premiums.

• Universal life insurance is a flexible life insurance plan. These policies are interest-sensitive and give the owner the option to adjust the death benefit and/or premium payments, within limits, to fit the owner’s situation. The net premium payments are applied to the accumulation fund, which earns a guaranteed interest rate. As with whole life insurance, the cash value belongs to the policy owner, who may withdraw it or borrow against it as provided for in the policy.

• Variable life insurance is a life insurance policy that is based on the performance of the financial markets. The policy offers several professionally managed investment options and the policy owner decides how the net policy values are to be invested. The values may accumulate more rapidly than with other cash value policies, but the policy owner incurs additional risk. If market performance is poor, the death benefit may decrease, and/or the policy owner may have to pay higher premiums to keep the policy in effect. As with whole life and universal life policies, policy owners may borrow against or withdraw the cash value at anytime. Loans and withdrawals may reduce cash values and the death benefit.

Always read your policy carefully for any possible charges associated with these transactions. Variable life insurance policies are sold by prospectus, a valuable disclosure document, that should be read carefully.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

401k and 403b Rollover Mistakes

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

401k and 403b Rollover Mistakes
by Mike Rowan, eRollover.com

Have you thought about rolling your Traditional IRAs from one financial institution to another? Maybe you’re looking for higher returns, more investment selections or better service. If you roll over your Traditional IRA , there are some common mistakes you must avoid. If you don’t, you could face unnecessary taxes and penalties. In this article, we’ll give you an overview of IRA rollover rules and help you avoid breaking them.

60-Day Rule
After you receive the funds from your IRA, you have 60 days to complete the rollover to another IRA. If you do not complete the rollover within the time allowed or received a waiver or extension of the 60-day period from the IRS, the amount must be treated as ordinary income in the IRS’s eyes. That means you must include the amount as income on your tax return, where any taxable amounts will be taxed at your current ordinary income tax rate. Plus, if you did not reach age 59.5 when the distribution occurred, you’ll face a 10% penalty on the withdrawal. (For more on waivers of the 60-day period, see the article Exceptions To The 60-Day Rollover Rule.)

One-Year Waiting Rule
Within one year after you distribute assets from your IRA and rollover any part of that amount, you cannot make another rollover from the same IRA to another (or the same) IRA.

For example, imagine that you have two IRAs - IRA-1 and IRA-2 - and you make a tax-free rollover from IRA-1 into a new IRA (IRA-3).

Within one year of the distribution from IRA-1, you cannot make another tax-free rollover from IRA-1 or from IRA-3 into another IRA. However, you could roll funds out of IRA-2 into any other IRA because you did not roll money into or out of that account within the previous year.

The once-a-year limit on IRA-to-IRA rollovers does not apply to eligible rollover distributions from an employer plan. Therefore, you can roll over more than one distribution from the same qualified plan, 403(b) or 457(b) account within a year. (Note: This one year limit does not apply to rollovers from Traditional IRAs to Roth IRAs , i.e. Roth conversions.)

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

RMDs Not Eligible for Rollover
You are allowed to make tax-free rollovers from your IRAs at any age, but if you are 70.5 or older, you cannot rollover your annual required minimum distribution (RMD), as a rollover of an RMD would be considered an excess contribution. If you are required take RMD each year, be sure to remove the current year’s RMD amount from your IRA before implementing the rollover.

Same Property Rule
Your rollover from one IRA or to another IRA must consist of the same property. This means that you cannot take cash distributions from your IRA, purchase other assets with the cash, and then roll those assets over into a new (or the same) IRA. Should this occur, the IRS would consider the cash distribution from the IRA as ordinary income.

Caution: When Not to Use a Rollover
If you are simply moving your IRA from one financial institution to another and you do not need to use the funds, then you should consider using the transfer method, instead of a rollover. A transfer is non-reportable, and can be done for an unlimited number of times during any period. A rollover leaves room for errors, including missing the 60-day deadline, losing the check, and you are limited to the once per 12-month rule discussed earlier.

Additional points
You can roll over funds from any of your own Traditional IRAs, but you can also roll over funds to your Traditional IRA from the following retirement plans :
• A Traditional IRA you inherit from your deceased spouse
• A qualified plan
• A Tax-sheltered annuity plan (section 403(b) plan)
• A Government deferred-compensation plan (section 457 plan)

Note that if rollover eligible amounts from qualified plans , 403(b) plans or governmental 457 plans are paid to you instead of processed as a direct rollover to an eligible retirement plan, the payor must withhold 20% of the amount distributed to you. Of course, you will receive credit for the taxes that were withheld. However, if you decide to rollover the total distribution, you will need to make up the 20% out of pocket. If you want to avoid the withholding and the associated reporting requirements, a direct rollover is the method that should be used to effectuate your rollover from your qualified plan, 403(b) plan or governmental 457 plan account. A direct rollover is reportable, but not taxable. Plus, there is no 60-day window to worry about. Be sure to check with your plan administrator and IRA custodian regarding their documentation and operational requirements for processing a direct rollover on your behalf.

You might be able to move funds the other direction, too. That is, you may be able to take a distribution from your IRA, and then roll it into a qualified plan. Note, however, that your employer is not required to accept such rollovers, so check with your plan’s administrator before you distribute the assets from your IRA. Further, certain amounts , such as nontaxable amounts and Required Minimum Distributions cannot be rolled from an IRA to a qualified plan

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

Index Annuities-Protection in a Volatile Market

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

Index Annuities-Protection in a Volatile Market
by Mike Rowan, eRollover.com

What is an index annuity ?

There are two major types of annuities in the world, fixed and variable.
An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index. Your investment principal is usually protected against severe market downturns, in that you may have an annual return of 0% but not less than 0%. However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return.

Since interest is based on an index, isn't this like a variable annuity?
No. If a variable annuity account goes down, you could lose principal. Index annuity principal is protected from market risk - you can't lose principal if the index declines. Variable annuity gains are typically not locked in. Once index-linked interest is credited in an index annuity it cannot be lost, even if the index subsequently declines. And, variable annuities include reinvested dividends, neither the index nor index annuities reflect reinvested dividends.

So do I get all of the index gains and none of the losses?
No. It costs the insurance company to provide this protection against loss. This typically means that you won't fully participate in all of the gains when the market increases, but you also won't lose any principal in a falling market.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

What kind of interest will I earn?
Typically, we try to gain about 2% more on average than you could in a bond fund or fixed interest CD or similar vehicle. Remember though, an annuity provides you with tax deferred growth as well, so your taxable yield is much higher.

How could I earn zero?
The primary goal of the minimum guarantee is to protect the principal from market risk. So if the market drops, the worse thing an index annuity owner would say is "Zero is better than -20%". Many companies minimize the minimum guarantee so that if the market stayed down for years, the owner would only get back their money and a few dollars of interest. By minimizing the minimum, and only crediting the minimum guarantee at the end of the term, companies can let index annuities participate in more of the index performance.

Do index annuities have fees?
Not in the same way that a variable annuity or mutual fund does, but more like the way a bank does it. Index annuities have penalties for early withdrawal if you surrender the annuity early. You need to match the period with your goals, keeping in mind that all annuities are designed to be long term savings instruments.

What returns have index annuities actually credited?
The highest index annuity interest rate credited for one year was over 40%. In 2001 and 2002 the stock market was down and most index annuities credited 0%. Index annuities have been around since 1995. During this period we've seen the strongest bull market in ages, with five years of high double-digit stock market gains, and the worst bear market in a generation; hardly a normal period. Index annuities are designed to provide a return somewhere between stock market vehicles and savings instruments and they've been performing as intended.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Are index annuities safe?
Both principal and credited interest are protected from index declines, so the worst thing that could happen is the stock market drops for years and you still get back your principal plus a little interest. The index annuity is as safe as the insurance company issuing the annuity. No index annuity owner has ever lost money because the insurance company failed.

States and independent rating firms on a regular basis examine the financial books of insurance companies , and they look to make sure there's enough money to cover everything, which is why you very rarely hear of an insurance company going bust.

What if a company does go belly up?
An annuity contract is an asset of the insurer, and in the past another insurer has bought the annuity contracts of the troubled company and life goes on. And every state has a guarantee fund to dip into and protect annuity contract owners (up to a certain limit) if a company tanks. It is possible to lose money if an insurance company fails, but based on history it is not very likely.

Who buys an index annuity?
People purchase an index annuity because they want the potential to possibly earn more than they might make from another savings vehicle. If you have sufficient time to recover from potential losses (and the stomach for it) direct stock market investments should give you a higher return than index annuities. However, if your timeframe is too short to recover from a possible bad market, or you simply don't like the idea of possibly losing principal, index annuities are used as an alternative savings vehicle to bank instruments, fixed rate annuities, bonds and bond mutual funds

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

What is a 457 Retirement Plan?

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

What is a 457 Retirement Plan?
eRollover.com

A 457 plan is a retirement or pension plan that provides benefits to government employees as well as employees of tax-exempt organizations. Employees participating in 457 plans are allowed to defer their compensation on a before-tax basis via regular payroll deductions. Money placed in these accounts grows on a federally tax-free basis until withdrawn.

Today, we’re going to explain the basics of 457 retirement plans, touching on topics such as employee eligibility, contribution limits, as well as the differences between these plans and 401(k) or 403(b) plans.

Employer 457 Retirement Plans
The growing interest in 457 plans stems from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which made a number of changes as to how these 457 plans are treated. Employers eligible to participate in these plans include state and local government agencies that are exempt from federal income taxes , as well as other non-church organizations exempt from federal income taxes such as:

• Educational Organizations
• Charitable Organizations
• Hospitals
• Chartable Foundations
• Labor Unions
• Trade Associations
• Tax-exempt Non-Rural Electric Cooperatives

Governmental and Non-Governmental Plans
As just discussed, there are two types of 457 plans - those for governmental agencies and those for non-governmental / tax-exempt organizations. Some government plans were established under the provisions of Section 457(g) - but these types of plans can no longer be created. Most of the plans in existence today are Section 457(b) plans and that’s what we’re going to discuss first in this publication. We’ll cover the topic briefly here, but we’ve got an entire publication dedicated to 457(f) plans.

Non-Governmental 457b Plans
Non-profit organizations are now able to provide their employees with 457 plans in addition to their traditional 403b plans . Such companies can establish an eligible plan under Section 457(b) or what are called “ineligible” plans under Section 457(f).
Non-governmental 457(b) plans are limited to a predefined standard group of higher compensation employees - typically directors or officers of the company. Oftentimes this compensation limit is the same as that used for 401k participation testing purposes. And because these plans are usually limited to highly-compensated employees or a select group of executives, they are sometimes referred to as “top hat” plans.

The big advantage of these plans is that they allow employees that are in their peak earning years to defer the payment of federal and state income taxes on their contributions to the plan.

457b Plan Restrictions
Plans for these non-governmental entities are much more restrictive than governmental plans. For example, money deferred into these plans cannot be rolled over into any other type of tax-deferred retirement plan - only another non-governmental 457 plan. In addition, the money placed into these accounts is not held in a trust for the sole benefit of the employee that makes the deferral. Instead the money remains the property of the employer and therefore is available to creditors .

Deferral Limits 2008 / 2009
In 2007, the contribution limit on a 457b plan was $15,500 and that limit remained the same in 2008. Contributions moved up to $16,500 in 2009. In the years 2010 and beyond, the deferral limit on these plans will move up in $500 increments and will be indexed for inflation . This deferral limit applies to both governmental and non-governmental 457b plans.

Catch-Up Contributions
If you’re over 50 by the end of the calendar year, then you also qualify for an additional catch-up contribution of $5,000 in the years 2007 and 2008. In 2009, catch-up contributions moved up to $5,500. Catch-up contributions only apply to governmental plans. Non-governmental 457b plans are not eligible to make catch-up contributions.

457b Special Catch-Up Contributions
Finally, you may also qualify for a special catch-up contribution of $15,500 in 2007 and 2008, up from $15,000 in 2006. In 2009, this special catch-up contribution moved up to $16,500. This special catch-up contribution cannot be combined with the $5,000 / $5,500 catch-up contribution for those aged 50 and over. In order to qualify for this special catch-up deferral, you must have under-contributed in prior years. Speak with your plan’s administrator to verify your eligibility under this special provision.

Please visit our site for more Retirement, 401k, and Insurance information :
www.erollover.com

Obama, McCain, and the Estate Tax

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

The Estate Tax: McCain vs. Obama
By Mike Rowan, eRollover.com

For a tax that each year affects only a few hundred of the nation’s 27 million small companies, the estate tax manages to scare an outsize number of entrepreneurs: In a July Zogby poll of small-business owners, nearly half said they believe they will be affected by the fee critics call “the death tax.”

Prior to President Bush’s 2001 tax cuts, the estate tax levied a 55% maximum tax rate on all inherited assets above a $1 million exemption - including business assets passed on by a founder. Bush’s cuts set into motion a gradual phase-out of the estate tax; the exemption level has risen and the tax rate has been dropping since 2001, down to a planned 45% rate in 2009 with a $3.5 million exemption. Current law calls for the tax to be repealed for one year in 2010, but without congressional action to either reform the estate tax or make the tax cuts permanent, it will revert back to 2001 levels in 2011. When the next president takes office in January 2009, he will play an integral role in shaping the policy’s future.

The estate tax affects a tiny number of small or family-owned businesses. A 2005 report by the Urban-Brookings Tax Policy Center found that in 2004, when the exemption was at $1.5 million, just 440 small businesses and farms were hit with the tax. That same year, a Congressional Budget Office study determined that in 2000, 485 estates that included a family-owned business were hit with the tax. (Another 1,659 estates of farmers incurred estate taxes.)

But for those affected, the consequences can be devastating. Brad Eiffert, vice president of family-owned Boone County Lumber in Columbia, Mo., is in the rare category of having a business with enough assets to qualify for the tax, but not enough to pay for it without risking liquidation. Boone County Lumber, begun by Eiffert’s father in 1964, brings in $12 million to $15 million in revenues each year; most of the company’s assets are in land and equipment. The company carries a $2 million life-insurance policy on its patriarch (for an annual premium of $60,000), but whether that will be enough to cover the eventual tax is impossible to project.
Aside from the looming hit of the tax itself, the expenses of planning for it - hefty life insurance costs, accounting and legal fees - take their toll on small companies.

“There are those of us out there who are truly affected,” Eiffert said. “The very wealthy have the means to avoid this tax.”

Entrepreneur Caryn Hasslocher, owner of San Antonio catering company Fresh Horizons, is also hoping for clarification as she plans both her estate and that of her parents, the owners of a San Antonio restaurant franchise. They are now in their eighties.
“Knowing that the estate tax as it is now is due to expire in 2010 is of a great concern, because none of us know what it will be replaced with,” she said. “Overall, we need to get some closure on this one, badly,” said Sandy Abalos, a CPA in Phoenix who works with small-business clients. “What we’re doing is hanging onto a sunsetting provision, which makes planning really difficult for everybody.”

Both major-party presidential candidates, Republican John McCain and Democrat Barack Obama, agree on two things: that the estate tax should not revert back to its pre-2001 state, and that it should not be fully repealed. (A permanent repeal would cost $522 billion in lost tax revenue over the next decade, according to the Treasury Department’s evaluation of President Bush’s 2009 budget proposals.) The candidates also both support indexing the estate tax to accommodate inflation.

Obama proposes freezing the estate tax at 2009 levels: a 45% tax rate on estates valued at more than $3.5 million. Married couples can combine their exemptions for a total of $7 million.

“By exempting all estates under $7 million, Obama’s plan will shield all but about 100 estates with small business income from any estate taxation,” said Obama campaign spokesman Nick Shapiro, citing the Congressional Budget Office’s 2005 study on the estate tax and further analysis by the Center on Budget and Policy Priorities. “Senator Obama’s plan would completely exempt 99.7% of estates from taxation.”

McCain’s plan would be a more dramatic departure from current policy. The Arizona Senator favors a 15% tax rate, equal to the capital-gains tax rate, and an individual exemption of $5 million ($10 million for married couples).

“The goal is to allow small business to grow and expand,” said Doug Holtz-Eakin, a senior policy advisor for McCain’s campaign who also served as director of the CBO when its last comprehensive estate-tax study was done. To pay for it, “there’s ample room in the spending side to undo the explosion of spending seen in the past eight years,” he said.

The uncertainty surrounding the estate tax’s changing rates makes planning for it especially tricky. The steps that entrepreneurs can take to avoid the tax vary from situation to situation, and typically require consultation with an expert. A life insurance policy, like the one on Brad Eiffert’s father, can pay the tax through its proceeds as long as the policy is separated from the estate in a life-insurance trust. Succession plans, through which the owner’s stock is gradually gifted to the next generation, are another option.

Please contact an advisor for individual estate tax planning by clicking here

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

What to look for in a Disability Insurance Policy

Subscribe in a reader

ShareThis

Subscribe to erollover.com Blog by Email

What to look for in a Disability Insurance Policy

Buying disability insurance probably ranks low on your financial to-do list. After all, if you’re young and healthy and you work at a desk job, what are the odds you’re going to need it?

Well, you might not think of a broken bone, a problem pregnancy or an anxiety condition as disabling, but all of them could keep you out of work. About 30 percent of Americans age 35 to 65 will suffer a disability lasting at least 90 days sometime during their careers, according to the Health Insurance Association of America. Should you ever need the protection a disability policy can offer, you’ll be glad you took financial precautions. Without coverage, an unexpected disability can easily drive you into serious debt.

Do you need it?
Many people say, “I don’t need disability coverage — I’ve already got it through work.” But most company-issued disability insurance only provides you with 60 percent of your salary and sets a monthly maximum of $5,000 to $10,000, which can be even less than 60 percent of a highly compensated employee’s salary.

But here’s the problem: Those benefits are also fully taxable, which means you’re actually getting a lot less than 60 percent of what you’re used to.

You could easily find yourself trying to survive on about 40 percent of your salary — or less, if you’re a high wage earner — if you don’t buy a supplemental policy. And Social Security probably won’t cover you, either — Social Security disability benefits are one of the most difficult benefits to qualify for. You have to be completely disabled for at least a year, with no hope of recovery. Even when you meet those requirements, you’re unlikely to receive more than $2,000 a month.

Shopping for policies that make the grade
Look for company strength. The first question you need to ask is whether the insurance company you’re eyeing is financially sound.

There are maybe six major insurance companies left that still offer disability insurance. There are lots of smaller companies that offer disability insurance, but you should check their financial statements. Make sure they look like they’ll be able to pay out claims as time goes by. To check insurance company ratings, check moodys.com, standardandpoors.com, or ambest.com.

Aim for a non-cancelable contract.
Next on your checklist is renewability, or whether your policy’s terms are subject to change over time. There are three options: a non-cancelable and guaranteed renewable policy, a guaranteed renewable policy, and a conditionally renewable policy.

Experts say the non-cancelable contract, especially if price is not an issue, is by far the best of the three. That’s because it locks in your rates and benefits. The insurance company can’t make changes unless you request them.
Finally, avoid conditionally renewable policies. An insurer can put any condition on them or raise rates at any time.

Look for a broad definition of “total disability.
The most consumer-friendly definition of total disability is “own-occupation disability.” If you are disabled and cannot perform the principal duties of the job you currently have, you get paid your disability benefit even if you can do some other tasks.

Even if they become disabled, most people want to keep working. The neat thing about own-occupation coverage is that you’re not penalized for working at the flower shop down the street, even if you can’t yet go back to your full-time job.
The most conservative definition of total disability is “any-occupation disability.” Under this definition you do not get a benefit unless you are completely unemployed and unable to do any work.

Many companies, of course, will define “disability” in shades of gray between own-occupation and any-occupation disability. And some disability insurance products will give you own-occupation coverage for a specified period, then move you to a modified plan, increasingly contingent on whether you can produce any income.

Get the appropriate riders
If you have disability coverage, you may not use it for decades — if ever — and $3,000 a month in ten years will buy you considerably less than it does now. You might want to buy a rider that adjusts your policy for inflation, particularly if you’re in your 20s and 30s.

Another option to consider is a “future purchase option” – it allows you to buy more coverage as your salary rises or your business expands. This is especially good for people just starting their careers.

Putting a price tag on your policy
Disability insurance premiums will typically cost between 1 percent and 3 percent of annual income. Prices will vary according to several main factors, including your age, gender, health history and occupation.

Another factor affecting your premiums is the policy’s elimination period. That’s a specified length of time — people usually choose 90 days — from the onset date of disability. When that time is up, the company starts paying your benefits. You can choose an elimination period as short as 30 days or as long as 720 days. Generally, the longer your elimination period is, the cheaper your premium.

You’ll also have to choose a benefit period, or the length of time the insurer will pay you benefits. Most companies let you choose between benefits lasting two years, five years, all the way to age 65, to age 67, or for the rest of your life. Most people choose the age-65 option, as Social Security kicks in thereafter. The longer your benefit period, the more expensive your policy will be.
When they price your policy, each insurer categorizes you according to its own set of occupation classes, ranking systems that sort different jobs according to their likelihood of filing a claim. The more likely your occupation is to result in disability, the more expensive your coverage will be.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com