A1A Wealth Management, Inc.
A1A Wealth Management, Inc. is an independent fee-based financial planning and business consulting firm located in Fernandina Beach, Florida.
Mark Dennis
Certified Financial Planner™
www.A1Awealthmanagement.com
904-491-1889
The firm is registerd in Florida as a Registered Investment Adviser.
Market Volatility Could Make Roth IRA Conversion Appealing
As a volatile stock market continues its ups and downs, many investors facing losses are searching for strategies to help them cope with the situation. Retirement investors may want to examine converting a traditional IRA to Roth IRA, with the understanding that the conversion can be reversed if needed.
Why Now
Thanks to legislation that took effect in 2010, investors at any level of income can convert a traditional IRA to a Roth IRA. A choppy market can be an excellent time for those considering a conversion to take the plunge. Here are a few reasons why it could make sense.
- Smaller balance = small tax bite: A conversion triggers a tax bill on the amount of money that is converted, so a smaller account balance results in a smaller tax bite.
- Hedge against future tax rate increases: Many observers believe that federal taxes are likely to increase in the years ahead as the federal government grapples with budget problems. Currently, qualified withdrawals from Roth IRAs after age 59½ are tax free, which presents an important benefit for retirement investors.1
Before deciding whether a conversion makes sense for you, make sure you understand the differences between a traditional IRA and a Roth IRA. The table below includes a summary of some of the key differences. You can learn more details by referencing IRS Publication 590.
| Traditional IRA | Roth IRA | |||
| Funded with after-tax dollars. | Funded with after-tax dollars. | |||
| Contributions may be tax deductible if certain income limits and other considerations are met. | Contributions are not tax deductible. | |||
| For 2012, the maximum contribution is $5,000 (those aged 50 and older can make an additional $1,000 contribution). | For 2012, the maximum contribution is $5,000 (those aged 50 and older can make an additional $1,000 contribution). | |||
| There is no income limit to open an account. | Income thresholds for contributions do apply and are typically indexed annually to inflation. | |||
| Distributions must be taken upon reaching age 70½. | No distributions are required upon reaching age 70½. | |||
| Distributions are subject to taxes. | Distributions are tax free. | |||
If you are considering a conversion, be sure to consult a tax professional to help you calculate the corresponding tax bill. Financial advisors usually recommend that taxes associated with a Roth IRA conversion be paid from assets outside of the Roth IRA account so as not to disrupt retirement savings.
You Can Change Your Mind
If you convert from a traditional IRA to a Roth IRA and you subsequently change your mind, there is a redo known as recharacterization. In effect, recharacterization is reversing the conversion and moving the assets back to a traditional IRA. Your financial institution can handle this transaction for you, and you are required to file an amended tax return. There are several reasons why investors may want to consider a recharacterization:
- The conversion from a traditional IRA to Roth IRA increases your marginal tax rate. (Consulting a tax advisor in advance could potentially help you avoid this situation.)
- You do not have enough cash on hand to pay the taxes.
- Note that these reasons are not specified by the IRS. According to current tax rules, you do not need to present a reason for recharacterizing.
Recharacterization needs to be complete by the last date when federal taxes, including extensions, are due. This date is usually in mid-October for the prior tax year. (For example, a Roth IRA conversion for the 2011 tax year needs to be recharacterized and an amended tax return filed by mid-October 2012.)
Best regards,
Mark Dennis, CFP® www.A1Awealthmanagement.com 904-491-1889
Source/Disclaimer:
1Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.
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This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc. and Mark Dennis, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Searching for Value in a Down Market
As volatility in the stock market continues, some investors may be tempted to buy on the dips. But this desire raises an important question: Is a low price by itself a true measure of a value stock? If an investor plans to hold a stock for the long term, how can an investor gauge its future potential compared with the broader market?
Value Investing Defined
Value stocks are those that have fallen out of favor in the marketplace and are considered bargain-priced compared with book value, replacement value, or liquidation value. Value fund managers typically invest only when they believe the underlying company has good fundamentals. Many value investors think that a majority of value stocks are created because investors overreact to negative events, which can include:
- Disappointing earnings.
- A negative outlook for the industry.
- A regulatory setback.
- Substantive litigation.
The idea behind value investing is that stocks of good companies will bounce back in time when a company overcomes a short-term obstacle and investors ultimately recognize fair value. But this recognition may take time or, in some instances, may never materialize.
Comparative Analysis
Investors looking to avoid a value mistake may want to compare a stock’s recent trend with a peer group or with a broad market index. Here are some other suggestions:
- Consider whether a stock has dropped more than the average stock in the S&P 500 during the past three months.
- Examine whether earnings estimates are being revised downward faster when compared with a peer group.
- Compare analyst estimates of future profit margins to historical margins. If expectations for future profits exceed past earnings, the company could end up disappointing investors.
Another technique for potentially avoiding a value mistake is to look for stocks paying dividends. Dividends historically have been seen as a sign of management’s confidence in healthy cash flow over the long term, as well as an indicator that management’s interests align with shareholders. Even if a stock price languishes for a period of time, a dividend provides an investor with something in the way of a return. Note that dividends are not guaranteed, and a company can reduce or eliminate a dividend at any time.
Perhaps the best strategy for avoiding a value mistake is to combine value stocks with growth stocks, international stocks, and other types of equities to pursue diversification. Although there are no guarantees, owning some of each could help to balance an equity portfolio over the long term.1
Best regards,
Mark Dennis Certified Financial Planner™ www.A1Awealthmanagement.com 904-491-1889
Source/Disclaimer:
1 Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, and may not be suitable for all investors. Investing in stocks involves risks, including loss of principal.
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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc., and Mark Dennis, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Roses are Red… and Pink and White and Yellow
Nearly 200 million roses are sold on Valentine’s Day, and the color and number of roses given are significant. What message do you wish to express to your loved one?
Numbers
- 1 rose – love at first sight
- 3 roses – in three words, “I love you”
- 24 roses – with 24 hours in the day, this number of roses says “You are always on my mind”
- 36 roses – means “My heart belongs to you”
Colors
- Red roses are the traditional symbol of love and romance.
- As a symbol of grace and elegance, the pink rose expresses admiration.
- Your true friends will love the warmth and sunny color that elicits happiness when you give yellow roses.
- For innocence, purity, and new beginnings, the white rose is associated with marriages and expressions of remembrance.
- In contrast to the white rose is the orange rose which embodies the emotions of passion, desire, and enthusiasm.
- Lavender roses symbolize enchantment and the whimsical nature of love at first sight.
Choosing just the right gift can be overwhelming, but giving from your heart to express your love this Valentine’s Day is always a sure thing.
Although we can’t guarantee a “sure thing” in the financial markets, we can help keep you from being overwhelmed by all the financial news. Let us know what we can do to help.
Happy Valentine’s Day!
Mark Dennis Certified Financial Planner™ www.A1Awealthmanagement.com 904-491-1889FAQs for Near-Retirees
After years of saving and investing, you can finally see your retirement on the horizon. But before kicking back, you still have some important planning to do. The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
1. When should I begin thinking about tapping my retirement assets, and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with a Certified Financial Planner™ professional may help you make important decisions such as how your portfolio should be invested, when you can afford to retire, and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.
2. How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year’s income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today’s retirees.
3. How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won’t remain static: Changes in inflation, investment returns, your desired lifestyle, and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial consultant and review your personal situation.
4. When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b), or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70 1/2. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don’t apply to Roth IRAs.
5. Are there other ways of getting income from investments besides liquidating assets?
One such strategy that uses fixed-income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while limiting your exposure to risk.1
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation.
Best regards,
Mark Dennis Certified Financial Planner™ www.A1Awealthmanagement.com 904-491-1889
Source/Disclaimer:
1 Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and changes in price.
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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc. and Mark Dennis, DVP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
How Much Will That Little Bundle of Joy Cost You? Try $163,000
…and we haven’t even sent him or her off to college, yet.
It certainly comes as no surprise to parents that raising a child can be expensive. But just how expensive? While many financial studies focus solely on college costs, research by the U.S. Department of Agriculture (USDA) provides parents and prospective parents with a general idea of the cumulative expenses for a child before college kicks in.
The results are sobering. The average total child-rearing costs for a child born in 2010 and living at home through age 17 range from $163,440 to $377,040, depending on the family’s income level. The USDA calculations include a wide variety of expenses, including housing, child care and education, health care, clothing, transportation, food, personal care, and entertainment.
Estimated Cumulative Child-Rearing Expenditures, 2010-2027
| Lowest Income Group (<$57,600) | $163,440 |
| Middle Income Group (between $57,600-$99,730) | $226,920 |
| Highest Income Group (>$99,730) | $377,040 |
Source: USDA, Expenditures on Children by Families, 2010; June 2011. All figures are in 2010 dollars.
Households in the lowest income group (those earning under $57,600 per year) are estimated to spend 25% of their before-tax income on a child, while those in the highest income group (earning more than $99,730 annually) are estimated to spend just 12%.
For a middle-income family with two children, the largest expenditures are:
- Housing, at an average of 31% of total expenses.
- Child care/education, 17%.
- Food, 16%.
- Transportation, 14%.
- Health care, 8%.
Total annual costs for that middle-income, two-child family range from $8,480 to $9,630 per child on average. For those couples with only one child, costs tend to be as much as 25% higher. Overall, costs for single parent households average about 7% less.
Not surprisingly, geography matters. Parents in the “Urban Northeast” had the highest average expenses, while those in “Rural” areas had the lowest. It also should come as no surprise to parents that it is generally more expensive to raise a child today than it was when they were children. Average child-rearing expenses for a middle-class family have climbed nearly 25% since 1960.
The USDA website has a free calculator that can help parents estimate their child care costs. The Cost of Raising a Child Calculator factors in geography, single or two-parent status, and the costs of additional children. The tool is available here: http://www.cnpp.usda.gov/calculator.htm.
Mark Dennis Certified Financial Planner™ www.A1Awealthmanagement.com (904) 491-1889###
December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc, and Mark Dennis, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
Getting Ready for (next) Tax Season: Changes for 2012
Although most Americans will not have to worry about 2012 taxes until early 2013 when 2012 tax returns are due, self-employed individuals or anyone who must pay quarterly tax payments will want to plan ahead.
And there’s good news for those that do. The IRS recently announced cost-of-living adjustments for the 2012 tax year that bump up brackets, deductions, and other thresholds for inflation.
The following is a summary of the key changes for 2012.
* Exemptions are up: The personal and dependent exemption increases to $3,800, up $100 from 2011.
* Standard deductions have increased: The 2012 standard deduction increases to $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separately, and $8,700 for heads of household.
* Tax-bracket adjustments: Tax-bracket thresholds have increased for each filing status (see table below).
* Estate tax exclusion has increased: The estate tax exclusion increases to $5,120,000, up from $5,000,000 for 2011. The annual exclusion for gifts will remain at $13,000.
* Earned income credits rise: The maximum earned income tax credit (EITC) rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC increases to $50,270, up from $49,078 in 2011.
* Transportation benefits adjusted: The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household.
Details on these and other inflation adjustments can be found in Revenue Procedure 2011-52.
2012 Tax Brackets
| Single | Joint Filers | Married Filing Separately | |
| 10% | $0 – $8,700 | $0 – $17,400 | $0 – $8,700 |
| 15% | $8,700 – $35,350 | $17,400 – $70,700 | $8,700 – $35,350 |
| 25% | $35,350 – $85,650 | $70,700 – $142,700 | $35,350 – $71,350 |
| 28% | $85,650 – $178,650 | $142,700 – $217,450 | $71,350 – $108,725 |
| 33% | $178,650 – $388,350 | $217,450 – $388,350 | $108,725 – $194,175 |
| 35% | Over $388,350 | Over $388,350 | Over $194,175 |
Mark Dennis Certified Financial Planner™ www.A1Awealthmanagement.com (904) 491-1889
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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc. and Mark Dennis, CFP®, a local member of FPA.
Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
“Full Nest” Finances: Considerations When Supporting Adult Children
As more and more adult children opt to stay at home longer or move back home, parents can face new challenges in making ends meet, while attempting to salvage their retirement finances.
Say so-long to the days of “empty nesters,” when parents would make life changes once their adult children had moved out and moved on. It is more likely that parents today are dealing with a “full nest.”
The “boomerang kids” situation goes by many names: “parasaito shinguru” (parasite singles) in Japan, “mammon” (mama’s boys) in Italy, and my personal favorite from the U.K., “KIPPERS” or Kids In Parents’ Pockets Eroding Retirement Savings.
It is estimated that 85% of this year’s college graduates are planning to head back to live with mom and dad.1 And a study in 2010 by researchers at Columbia University using the U.S. Current Population Survey found that 52.8% of 18- to 24-year-olds were living at home, up from 47.3% in 1970. The study also showed that one-in-seven young adults is emerging from their teenage years with no pathway to financial and economic independence.2
For parents it can be trying. While it’s important to respect the independence of full-grown children, it’s not that easy when they are exercising that independence under your roof. What’s more, it can also be a drain financially. Food, heating, gas, electricity, and many other daily expenses can be a lot higher when they include another mouth or two.
If you find yourself with a full nest, here are a few tips to help make ends meet:
- Make a budget. Tracking what you spend and comparing it with a monthly plan will help you to identify where the money is going, and where you can cut back. It can also show what costs are truly shared and what ones relate to specific family members.
- Share the common costs. Most live-at-home adult children are there for a reason, often due to lack of a job or inability to afford a place of their own. But that does not mean they should not shoulder a portion of household expenses. Work out a realistic rent or cost-sharing arrangement and stick with it.
- Separate the individual costs. Is your live-at-home son or daughter a finicky eater? Do they demand certain foods or sundries that you would not buy otherwise? Then let them pay for them. They’ll learn to appreciate what their tastes are actually costing, and avoid resentments on your part.
- Share the chores. Assigning chores and responsibilities may seem obvious, but often it’s overlooked, leaving mom and dad to do all the work. Garbage, lawn, housework — make it clear to all who is responsible for what task.
- Don’t make it too comfortable. If your goal is to eventually nudge your fledglings out of the nest, you need to provide incentive. That means not treating them as permanent guests, but as temporary live-at-home adult children, with obligations and responsibilities of their own. In the end, they will appreciate it as much as you.
1 Source: Harper’s Magazine, August 2011.
2 Source: Columbia University, National Center for Children in Poverty, “A Profile of Disconnected Young Adults in 2010,” December 2010.
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November 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by A1A Wealth Management, Inc. and Mark Dennis, CFP®, a local member of FPA.
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
