Charleston Wealth Advisors

Borrowing from Your 401k Plan

manuel — Thu, 03 May 2012 17:44:32 +0000

Employees are usually unaware but many 401k plans allow borrowing from your 401k account balance. Of course, the primary purpose of a 401k is to fund your retirement but on occasion it may make sense to borrow money from the plan.

Basics of Borrowing from a 401k Plan

Keep in mind, not all 401k plans allow borrowing as an option.
Plans may allow as much as 50% of your vested account balance, up to $50,000 dollars.
Just like any loan, you pay the loan back, with interest, from your paycheck.
Interest rate is usually set at prime rate plus 1 or 2 percentage points.
Usually, you have up to 5 years to repay your loan, or longer if funds used for principal residence.

Advantages of Borrowing from a 401k Plan

It is convenient. No credit check or credit application form.
Low interest rate compared to other types of loans or credit card interest rates.
No restrictions; you can borrow the money for any reason.
You paying interest to yourself, instead than a bank or credit card company.

Disadvantages of Borrowing to 401k Plan

Opportunity cost of earnings lost while borrowing the money.
Reduction in the amount you contribute to 401k plan as you pay back the loan.
If you quit working or change employers, the loan must be repaid back immediately. If you can repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal fee of 10% if you are not at least age 59 1/2.

Things to Consider

Borrow from your 401k plan as a last result because borrowing will set you back meeting your future retirement goals.
Never borrow if you are planning to leave your job within the next couple of years.
Never borrow if there is a chance you will lose your job.
Never borrow to time the market.
Never borrow to purchase some luxury item or pay for a vacation.

Contact us today to help you with your questions in regards to whether it makes sense to borrow from your 401k plan. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.

Choosing and Evaluating Financial Professionals

manuel — Wed, 18 Apr 2012 17:10:08 +0000

Although you may personally handle many of your financial affairs, sometimes you may need the services of a financial professional. Financial professionals include financial planners, attorneys, securities brokers, and other specialists. Selecting the right financial professional means evaluating the services they can offer and their credentials, and finding someone whom you can rely on to give you good advice and/or service when you don’t have the time or expertise to completely handle your financial affairs.

Explaining Financial Planning Credentials

When choosing a financial planner, you should be aware that some financial professionals who use this title are not truly qualified to give comprehensive financial planning advice. In general, a financial planner will have one or more of the following credentials:

CERTIFIED FINANCIAL PLANNER professional (CFP®)–This is the most rigorous and prestigious credential. CFP® professionals must have a minimum of three years of related experience and have completed a course of study registered with and approved by the Certified Financial Planner Board of Standards, Inc. (CFP Board). They must also pass a two-day 10-hour exam that covers all aspects of financial planning. In addition, they must adhere to a professional code of ethics and fulfill 30 hours of continuing education every two years. Many also belong to the Financial Planning Association, a professional organization. If a planner says that he or she is a CFP® licensee, ask to see the planner’s CFP Board license or call (888) CFP-MARK to check.

Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter® (CLU®)–Some financial planners are members of the Society of Financial Service Professionals, a professional association for life insurance agents. To receive either designation, planners must have at least three years of experience and complete a course of study through the American College in Bryn Mawr, Pennsylvania. Certification is rigorous and prestigious, and planners earning these designations must adhere to certain ethical standards.

Accredited Personal Financial Specialist (PFS)–The PFS designation is granted to CPAs who are members of the American Institute of Certified Public Accountants, and who earn a minimum of 80 hours of personal financial planning education, successfully pass a PFP-related exam, and have at least two years of full-time business or teaching experience.

Registered Financial Consultant (RFC®)–This designation is awarded by the International Association of Registered Financial Consultants (IARFC) to advisors who have a college or graduate degree in financial services, or who have earned an IARFC-approved designation or professional degree. The RFC® also must have a minimum of four years experience as a full-time practitioner or educator in the field of financial planning or financial services. He or she must also meet licensing requirements, and they must complete continuing education courses, and adhere to a code of ethics.

Financial Planning – Helping You See the Big Picture

manuel — Wed, 04 Apr 2012 15:26:07 +0000

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached. That’s where financial planning comes in. Financial planning is a process that can help you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?
A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
Establish and prioritize financial goals and time frames for achieving these goals
Implement strategies that address your current financial weaknesses and build on your financial strengths
Choose specific products and services that are tailored to meet your financial objectives
Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

Your goals or time horizons change
You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
Your income or expenses substantially increase or decrease
Your portfolio hasn’t performed as expected
You’re affected by changes to the economy or tax laws
Common questions about financial planning
What if I’m too busy?
Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?
Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

Contact us today to help you with your IRA contributions and investments. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.

There’s Still Time to Contribute to an IRA for 2011

manuel — Sat, 24 Mar 2012 10:53:27 +0000

There’s still time to make a regular IRA contribution for 2011! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2011 ($6,000 if you were age 50 by December 31, 2011). For most taxpayers, the contribution deadline for 2011 is April 17, 2012. Normally, your tax return must be filed by April 15. However, the IRS has extended the deadline to April 17 this year because April 15 is a Sunday, and April 16 is a holiday in Washington D.C.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2011, even if your spouse didn’t have any 2011 income.

Traditional IRA
You can contribute to a traditional IRA for 2011 if you had taxable compensation and you were not age 70½ by December 31, 2011. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2011, then your ability to deduct your contributions depends on your filing status and whether your modified adjusted gross income (MAGI) is within prescribed limits (see chart below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.

Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older). For 2011, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $107,000 or less. Your maximum contribution is phased out if your income is between $107,000 and $122,000, and you can’t contribute at all if your income is $122,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $169,000 or less. Your contribution is phased out if your income is between $169,000 and $179,000, and you can’t contribute at all if your income is $179,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. (Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own (other than IRAs you’ve inherited) when you calculate the taxable portion of your conversion.)

Finally, keep in mind that if you make a contribution to a Roth IRA for 2011–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2011.

New Tax Provisions for 2012 and 2013

manuel — Fri, 16 Mar 2012 15:21:29 +0000

A quick summary of how taxes for 2012 and 21013 stand as of March 2012. Please keep in mind new legislation may extend, change or cut any of these provisions.

New Taxes or Provisions Expiring at the end of 2012

Federal income tax rates– After December 31, 2012, we’re scheduled to go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%).

Long-term capital gains rate– Currently, long-term capital gain is generally taxed at a maximum rate of 15%. And, if you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. Starting in 2013, however, the maximum rate on long-term capital gains will generally increase to 20%, with a 10% rate applying to those in the lowest (15%) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years). And while the current lower long-term capital gain rates now apply to qualifying dividends, starting in 2013, dividends will be taxed at ordinary income tax rates.

2% payroll tax reduction– The recently extended 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax expires at the end of 2012.

Itemized deductions and personal exemptions– Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).

Tax credits and deductions– The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit revert to old, lower limits and (less generous) rules of application. Also gone in 2013 is the ability to deduct interest on student loans after the first 60 months of repayment.

Marriage penalty relief– Tax changes that were originally made to address a perceived “marriage penalty” expire at the end of 2012. If you’re married and file a joint return with your spouse, you’ll see the effect in the form of a reduced 2013 standard deduction amount, as well as in lower 2013 tax bracket thresholds in the tax rate tables (i.e., couples move into higher rate brackets at lower levels of income).

New taxes effective in 2013

Two new Medicare-related taxes created by the health-care reform legislation passed in 2010 take effect in 2013:

Additional Medicare payroll tax– The hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–increases by 0.9% (from 1.45% to 2.35%) for those with wages exceeding $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately). The rate for self-employed individuals increases from 2.9% to 3.8% on any self-employment income that exceeds the dollar thresholds above.

Medicare contribution tax on unearned income– A new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. The tax generally applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately).

Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant area. The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.

New 401(k) Plan Disclosure Rules

manuel — Fri, 10 Feb 2012 19:17:31 +0000

As 401(k) plans have become more popular, plan participants have become increasingly responsible for making their own retirement savings decisions. The Department of Labor (DOL) has become concerned that participants in self-directed 401(k) plans (those that allow participants to direct the investment of their own accounts) might not have access to, or might not be considering, information critical to making informed decisions about the management of their accounts–particularly information on investment choices, fees, and expenses.

As a result, in October 2010, the DOL issued new regulations that require self-directed 401(k) plans to provide detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed investment decisions. Some information must be provided on an annual basis, and some information must be provided quarterly. For most plans, the initial annual disclosure must be furnished no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September).

New 401k Changes

If you’re currently participating in a 401(k) plan, chances are you’re already receiving similar information as a result of an earlier set of DOL regulations. However, employer compliance with the older regulations was voluntary, whereas the new disclosure rules are mandatory for all self-directed 401(k) plans. Even participants in plans that previously complied with the earlier disclosure rules will see some changes when the new regulations take effect. For one, you’ll receive more detailed information about investment fees and expenses. Another change is that plan investment information must be provided in a chart, so that you’ll be better able to compare investment alternatives. And plans will no longer be required to automatically provide a prospectus, although one must be provided if you request it.

403(b) Plans, Contribution Limits and Rollover Options

manuel — Thu, 02 Feb 2012 20:36:10 +0000

A 403(b) plan is an employer-sponsored retirement plan for certain employees of public schools, tax-exempt (501(c)(3)) organizations, and churches.

The employer can purchase annuity contracts for eligible employees, or establish custodial accounts to be invested in mutual funds or other investments. In the case of annuity contracts, a 403(b) plan is sometimes referred to as a tax-sheltered annuity (TSA) plan. (Church plans are subject to several special rules not covered here.)

How Does the Plan Work

Depending on the specific type of 403(b) plan, contributions may be made by the employee, the employer, or both the employee and employer. Many 403(b) plans are similar to 401(k) plans: you elect either to receive cash payments (wages) from your employer immediately, or to defer receipt of all or part of that income to your 403(b) account. The amount you defer (called an “elective deferral”) can be either pretax or, if your plan permits, after-tax Roth contributions.

Employer contributions, if made, may be a fixed percentage of your compensation, or may match a specified percentage of your contribution, or may be discretionary on the part of the employer. One unique characteristic of 403(b) plans is that your employer is allowed to make contributions to your account for up to five years after you terminate employment.

What Are the Contribution Limits

You can defer up to $17,000 of your pay to a 403(b) plan in 2012. If your plan allows Roth contributions, you can split your contribution between pretax and Roth contributions any way you wish. Unlike 401(k) plans, employee elective deferrals to 403(b) plans aren’t subject to discrimination testing (which in 401(k) plans can often significantly limit the amount higher-paid employees can defer).

If your plan permits, you may also be able to make “catch-up” contributions to your account. You can contribute up to an additional $5,500 in 2012 if you’ll be age 50 or older by the end of the year. If you have 15 years of service with your employer (even if you haven’t attained age 50) a special Section 403(b) rule may also allow you to make annual catch-up contributions of $3,000, up to $15,000 lifetime. If you’re eligible for both rules, then any catch-up contributions you make count first against your 15-year $15,000 lifetime limit.

When Can I Access My Money

In general, you can’t withdraw your elective deferrals from your 403(b) until you reach age 59½, become disabled, or terminate employment (deferrals to annuity contracts prior to 1989 aren’t subject to these restrictions). Some plans allow you to make a withdrawal if you have an immediate and heavy financial need (“hardship”), but this should be a last resort–not only is a hardship distribution a taxable event, but you may be suspended from plan participation for six months or more. If your plan allows after-tax (non-Roth) contributions, your plan can let you withdraw these dollars at any time.

Employer contributions to 403(b) custodial accounts are subject to similar withdrawal restrictions. But employer contributions and pre-1989 deferrals to 403(b) annuity contracts are subject to somewhat more lenient distribution rules. Check with your plan administrator for your plan’s specific rules.

If your plan permits loans, you may be able to borrow up to one-half of your vested 403(b) account balance (to a maximum of $50,000) if you need the money.

What Happens When I Terminate Employment

Generally, you forfeit all employer contributions that haven’t vested. “Vesting” means that you own the contributions. Your plan may require up to six years of service before you’re fully vested in employer contributions, although some plans have much faster vesting schedules. (Your own contributions are always 100% vested.) You can generally leave your money in your 403(b) account, transfer it to a new 403(b) account, roll your dollars over to an IRA or to another employer’s retirement plan, or take a distribution.

Contact us today for a financial review. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston South Carolina area. The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.

A Good Time to Consult a Financial Planner

manuel — Tue, 31 Jan 2012 20:46:13 +0000

In many cases, a specific life event or a perceived need may prompt you to seek professional financial planning guidance. Such events or needs might include:

Getting married or divorced
Having a baby or adopting a child
Paying for your child’s college education
Buying or selling a family business
Changing jobs or careers
Planning for your retirement
Developing an estate plan
Coping with the death of your spouse
Receiving an inheritance or a financial windfall

In these situations, a financial professional can help you make objective, rather than emotional, decisions.

However, you don’t have to wait until an event occurs before you consult a financial advisor. A financial advisor can help you develop an overall strategy for approaching your financial goals that not only anticipates what you’ll need to do to reach them, but that remains flexible enough to accommodate your evolving financial needs.

Contact us today for a financial review. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston South Carolina area.

Some Misconceptions About Financial Advisors

manuel — Fri, 27 Jan 2012 03:37:41 +0000

Maybe you have reservations about consulting a financial advisor because you’re uncertain about what to expect. Here are some common misconceptions about financial advisors, and the truth behind them:

Most people don’t need financial advisors – While it’s true that you may have the knowledge and ability to manage your own finances, the financial world grows more intricate every day. A qualified financial advisor has the expertise to help you navigate a steady path towards your financial goals.
All financial advisors are the same – Financial advisors are not covered by uniform state or federal regulations, so there can be a considerable disparity in their qualifications and business practices. Some may specialize in one area such as investment planning, while others may sell a specific range of products, such as insurance. A qualified financial advisor generally looks at your finances as an interrelated whole, and can help you with many of your financial needs.
Financial advisors serve only the wealthy – Some advisors do only take on clients with a minimum amount of assets to invest. Many, however, only require that their clients have at least some discretionary income.
Financial advisors are only interested in comprehensive plans – Financial advisors generally prefer to offer advice within the context of a client’s current situation and overall financial goals. But financial advisors frequently help clients with specific matters such as rolling over a retirement account or developing a realistic budget.
Financial planners aren’t worth the expense – Like other professionals, financial advisors receive compensation for their services, and it’s important for you to understand how they’re paid. But a good financial advisor may help you save and earn more than you’ll pay in fees.

Working with a Financial Advisor

manuel — Fri, 20 Jan 2012 20:09:15 +0000

Even if you feel competent enough to develop a plan of your own, a financial advisor can act as a sounding board for your ideas and help you focus on your goals, using his or her broad knowledge of areas such as estate planning and investments.

Specifically, a financial advisor or planner may help you:

Set financial goals
Determine the state of your current financial affairs by reviewing your income, assets, and liabilities, evaluating your insurance coverage and your investment portfolio, assessing your tax obligations, and examining your estate plan
Develop a plan to help meet your financial goals which addresses your current financial weaknesses and builds on your financial strengths
Make recommendations about specific products and services
Monitor your plan and periodically evaluate its progress
Adjust your plan to help meet your changing financial goals and to accommodate changing investment markets or tax laws

Contact us today for a financial review. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston South Carolina area.