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Top Ten Financial Questions to Ask
1. Q. I'm thinking about refinancing my mortgage. Is this a good time or are the banks still skittish about lending?
A. It's a great time to refinance a mortgage as rates have tumbled down. If your credit is good you shouldn't have any trouble getting the lower rates; having less than stellar credit will likely get you higher interest rates. For those with good credit, a verifiable job and income the favorable rates should be available.
2. Q. I've just lost my job; what should I do with my 401(k) plan?
A. The answer depends on your company's plan document, but generally you can do one of four things:
- leave the money in your company plan;
- withdraw the amount in the plan and receive a full payout;
- roll the money into a new employers retirement plan; or
- roll the money to an IRA or ROTH IRA.
Leaving the money in the plan limits your investment choices to the plan offerings, and you won't be able to make additional contributions to the plan.
Withdrawing the amount in the plan will result in paying taxes, usually 20% right off the top, and there is a 10% penalty for early withdrawal if you are under age 59½. You may owe additional taxes in addition to the 20% withheld, depending on your tax bracket. Your tax deferral would also cease.
Rolling the money into a new employer's plan causes no penalties or taxes; however, be sure the new employer will allow the rollover. If there is a waiting period for participation in the new plan, then you need to make sure the money can sit in the old plan until you are eligible to contribute to the new plan.
Rolling the money to an IRA is usually the best option with little ramifications (you would lose ERISA creditor protection). An IRA offers the most investment flexibility, and depending on your income level, you may be able to roll the plan to a ROTH IRA (consult your financial advisor for which is best for you).
3. Q. I've just retired; should I leave my 401(k) plan with my former employer?
See the answer to the question 2 above.
4. Q. We think we're doing ok for long term retirement; how do we know for sure?
A. Thinking you're ok often leads to an uncertain retirement. A customized retirement plan designed around you and your goals lets you know whether you are on track. It can give you the financial peace of mind of knowing that you are not likely to outlive your assets. Accomplishing the goals of your retirement plan can lead to financial independence and enjoying a fulfilling retirement with a high degree of certainty.
5. Q. My broker has changed to another firm and I am tired of switching firms; if I move my accounts to Legacy will they remain with you?
A. Legacy uses three custodians to hold our accounts: Fidelity, Schwab and National Advisors Trust Company. Because we are fee-only and work for our clients, not a brokerage firm, we have no need to move accounts between brokerage firms unless there is a client specific reason to do so. Some of our clients have had their accounts with Schwab for nearly 20 years. You can be assured of stability with Legacy.
6. Q. I used to get dividends from stock; now I get nothing; is there anything I can do with my stock investments to produce income?
A. There are different investments vehicles that can be used to provide income for a portfolio. Many stocks that used to provide nice dividends have seen those dividends go away and, in many cases, have seen the value of the stock decline significantly. When choosing investments for a portfolio, it is important to consider the goals that the investor has for the portfolio as a whole, then to choose individual investments that compliment each other to achieve that goal.
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CD's can provide both a component of safety and some income, though rates are generally lower on CD's than on good, high quality bonds. CD's are generally not considered good long-term investments since they typically do not produce returns that beat inflation over the long term. -
High quality treasury or municipal bonds can provide both a component of safety for the portfolio as well as income. Bonds are available with different maturities, which in turn introduce different kinds of risks that need to be considered. -
Corporate bonds introduce some additional risk into a portfolio, but can also provide a higher income stream than the safer treasury and municipal bonds. -
High-yield (also known as "junk" bonds) offer yet more yield, but also more risk. The risk in high-yield bonds is not too far removed from the risk taken by investors in common stock and a potential loss of principal should be a consideration. -
Annuities can provide a stream of income for a certain period (10 years, for example) or for the rest of your life. It is critically important to understand what you give up in exchange for this certainty and how much you pay for it, so visiting with a trusted advisor is very important. Annuities can serve a purpose well, but there is plenty of fine print to understand before investing in one.
7. Q. I'm being pressured to buy an annuity; what is an annuity and should I buy one?
A. Fundamentally, an annuity is an insurance contract whereby an insurance company promises to pay you a certain level of income that is calculated based upon the terms of the contract in exchange for a lump sum payment of cash. All other details of your contract are a variation on this basic underlying concept. Depending upon the specific product offered by the insurance company, there will be numerous options available to you to guarantee specific terms of the contract (income, death benefits, access to principal, etc.). The most important factor to remember is that insurance company guarantees are not offered for free. Also, keep in mind that the vast majority of annuity contracts are sold through salespeople contracted with the insurance company, who are not legally required to place client interests first and stand to earn significant commissions as a result of your purchase which, as a result, may or may not be the best available option for achieving your particular personal objectives. It is imperative that you fully understand the terms of the contract and its underlying costs in order to evaluate whether or not it is the most appropriate vehicle for achieving your goals. An independent, fee only insurance expert can help you weigh the relative merits of an annuity contract as it relates to your unique personal circumstances.
8. Q. I just turned 70 ½; what is the rule for taking money out of my IRA accounts?
If you turned 70½ in 2009 you are not required to take any money out of your IRAs this year due to the Worker, Retiree and Employee Recovery Act of 2008, signed into law on December 23, 2008. Normal rules state that if you have turned 70½ you are required to take a minimum amount from your IRA accounts (except Roth IRAs) each calendar year. The amounts of the required minimum distributions are determined by dividing your previous year end balance by an IRS life expectancy factor and they usually increase each year. If you turn 70½ in one year, you may delay your first distribution until April 1 of next year, but you must also complete the distribution required for that next year by December 31 of the same year. Normally, we recommend that you do not delay the first distribution so that you may avoid paying income tax on two distributions in one year. However, the law is unclear about whether people who turn 70½ in 2009 will be required to take two distributions in 2010 (one by April 1, as if you chose to delay it, and the other by December 31). Legacy will watch for clarification of the law as the year progresses.
9. Q. I have bank accounts, an IRA and a 401(k). Are they insured?
A. Congress has temporarily increased Federal Deposit Insurance Corporation (FDIC) insurance limits from $100,000 to $250,000 per depositor through December 31, 2009. So if you have $250,000 or less in an IRA, checking or savings account, and your FDIC-insured bank fails, you'd be covered against any loss. Joint accounts held by a husband and wife would be covered up to $500,000 ($250,000 for each). 401(k) plans are not protected against market losses. Under the Employee Retirement Income Security Act (ERISA), the amount in your 401(k) account cannot be claimed by creditors should your employer go broke. View this link for full FDIC deposit insurance coverage Deposit Insurance Coverage Summary
10. Q. Could Black Monday happen again?
A. Black Monday refers to Oct. 19, 1987, the day that the Dow Jones Industrial Average plummeted 22.6 percent, a 111-year record loss that still stands. Many experts say that a repeat of this magnitude is highly unlikely because the stock market operates very differently than it did 20 years ago, with changes from more stringent curbs on trading to greater investor participation and awareness. By comparison, on Oct. 15, 2008, the Dow Jones sank 7.87 percent.
Frequently Asked Questions
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