Tips for Conservative Investment Money

Mary called, frantic. "My savings account is paying under 3 percent but, if I lose a penny of this inheritance, I'll lose my mind. Is there something relatively safe that pays more?" This is a common question from more conservative investors.

Here are two options:
Option 1 - Certificates of deposit. Mary knew in general about the guarantees of bank CDs. She was surprised to learn that CDs come from a variety of places, and taking the highest rate for the longest term wasn't always the best strategy.

Tips for buying CDs now: Be sure to check rates at 2 places - local banks or credit unions and nationally offered CDs through a brokerage house. Sometimes a local bank may run a rate special in response to a large business loan. If they can pay CD buyers more and still profit after lending funds to the business, then it's worth dangling that extra incentive out there for CD buyers. At other times, national and/or brokered CDs give a more competitive rate. Also, it may be prudent to stick with a 1-3 year maturity, as rates are likely to rise, allowing quicker reinvestment at the higher rate.

Option 2 - Fixed Annuity. Mary had heard that annuities had higher fees and upon death, her heirs got little. What she didn't know is that she had half the story and many changes have occurred with annuities over the years. There are many types, all used for different purposes. The fixed deferred annuity is the easiest to understand. It is a contract between an individual and an insurance company. Interest earned during the term of the contract is nontaxable if reinvested. Principal is guaranteed by the insurance company. Withdrawals may be subject to income tax and, prior to age 591/2, a 10 percent federal penalty tax may apply. Withdrawals will affect both the account value and death benefit.

"What if the company goes belly up?" Mary recalled hearing about a failed insurance company a decade or two ago. Annuity money is only as safe as the company and the reserves it puts aside by state law. As an Alabama resident, there is an insurance fund set up in case the insurance company failure, but it's still a good idea to look for an A or A+ rated carrier.

Tips for buying annuities now: The rate can be locked in for a period of time or can adjust each year. Since we expect rates to increase, perhaps buying the adjustable one may be the best alternative. Be careful of higher "bonus" rates in the first year, as renewal rates may not be as high in later years. Look for annuities with a shorter surrender charge period (5-8 years) if you are concerned about flexibility. Most offer a 10 percent per year withdrawal. But if most of the money is stuck (not touchable) because of a high surrender penalty, the company can pay you whatever interest it wants when the annuity rate renews each year. And remember, the longer the surrender charge period, the more chance the agent got paid more of a commission....which sometimes means you get paid less in the end.

Removing Money From Retirement Accounts

Year end brings many questions about the nuiances of removing money from IRA?s ?those Required Minimum Distributions (RMD?s). This article is key for people over age 70 ½ or for children who care about their ultimate inheritance and can counsel parents with multiple accounts, which lend themselves to multiple mistakes!

For those readers not familiar with RMD?s, the government requires that once you turn 70 1/2, you must withdraw annually from most retirement type of plans ? and pay those taxes on the distribution. Calculations are done each year based on your balances and life expectancy (or joint expectancies with a spouse) ? but there are some creative ways to work these distributions and that?s where the questions come in!

Persons working over age 70 ½ with multiple IRA?s, ESOP?s (employer stock option plan), and 401K?s typically ask a few questions about their IRA and RMD?s. First, since they are still working, do they have to count his current company 401K as part of the money on which RMD?s must be figured? The good news is no - - unless the person is a 5%+ owner in the business, or unless he retires. One strategy we?ve used for people with 401K?s from previous employers is to roll them to the current 401K, which allows the worker to exempt these funds from the RMD calculation. We had a case this year of someone not implementing this strategy and it cost them $2,000 in taxes to keep the money in the old 401K. There are trade-off?s to the 401K transfer, but it is something to consider and shows the value of hiring someone to oversee the entire financial picture, instead of just manage an account or two?something we highly recommend you do.

Second, wouldn?t it be wise to delay taking distribution as long as possible and take this first distribution out in 2008, since the tax laws allow such a move? Normally, I would be in agreement to keep money compounding as long as possible. Although, your first RMD is figured in the year you reach 70 ½, you can wait until April 1st of the following year to actually pay it, allowing money to compound longer. It seems logical to wait to pay. However, you would have to take out TWO distributions in 2008 (2007?s and 2008?s). Since the distribution amounts might be of reasonable size, perhaps taking two distributions in one year might push you into a higher tax bracket - which might not outweigh any extra investment compounding. To muddy the water even more, if you are juggling the possibility of retiring in 2008, which would lower your tax bracket, it might be better to delay and take two distributions in the year of retirement. Needless to say, the decision of doubling up on RMD?s in 2008 isn?t quite so easy.

The third question has to do with the mechanics of withdrawing funds ? is there an easier way rather than taking little pieces out of so many areas? It is perfectly OK, even preferable at times, to take the distribution from one place, as long as you figure all accounts when performing the RMD calculation. Always consider removing money first from the lowest yielding investment, which leaves other investments to compound at higher rates.

So it goes, life and finances are rarely simple. This is just another reminder that most financial matters are inter-connected. When it comes to finances, it?s usually preferable to seek Financial Insight!

Christmas Open House - This Friday

We are diligently getting ready for our event on Friday! It's chocolate everything and lots of Holiday Spirits for all! We appreciate all our clients and want to share in this joyous season with those who mean the most to us! See you between 2-6 PM on December 7th!

Shari Makes Executive Council for 2007 with Raymond James Financial Services

It is a great honor to have been selected by our partner, Raymond James Financial Services, to be a member of the 2007 Executive Council. To qualify, you must have ethical standards, a clean 'compliance' record, outstanding client service, and a minimum of $500,000 of annual revenue. This is the third year we have received this honor.

How Property Transfers Upon Death

Many articles have been written on the benefits of a will in an effort to preach "be prepared," but how many people understand how a will works and how property is transferred? Probably fewer than we'd like to admit.

Most people want to transfer property upon their death in the most efficient way possible - without time, hassle, and expense. Many are surprised to learn that the quickest and least expensive way to transfer property is not through a will. You probably still need a will, but it's helpful to understand how to get property transferred without one.

Say Bob wants to leave one-third of his assets to each of his three daughters. He's an executive and has accumulated most of his money in a 401(k), where he listed his oldest daughter as beneficiary. His will designates the oldest daughter will settle his estate, so he lists her as beneficiary, assuming she will distribute equal portions to the other daughters. But at his death, the oldest daughter gets all of the 401(k) instead of one-third, and she may risk adverse tax consequences if she "shares" with the other sisters. If Bob understood more about how to transfer property, he likely would not have created this mess.

Jointly held property is one of the first types of property to be transferred upon death. If a name is added to your property deeds, bank accounts or other assets, you convert that property to a joint ownership position. Legally speaking, you have made a gift of a portion of your property to someone else. The advantage is that the others left on the account need only remove the deceased person's name by submitting a death certificate. No cost. Little delay. The big disadvantage is that joint owners have immediate access to your assets, so withdrawals can be made at any time without your permission. Also, if that person on your accounts were to be involved in any type of legal action (including divorce), your funds may be at risk. So, although easy and cheap, there are some drawbacks.

Another way to transfer property before a will takes effect is by using a beneficiary designation. These are available only on certain types of accounts: annuities, Transfer on Death (TOD) accounts, IRAs and other retirement accounts. The beneficiary tells the holder of the account whom to transfer the account to upon the holder's death.

Only after joint property and beneficiary property is settled does a will come into play. If you're not using a trust, most of the other property will likely be solely in your name. The will directs the court how to divide what's left in a process called probate. In Alabama, probate takes a minimum of 6 months; that gives time for creditors to "make claim" against your estate. Once that time passes and all debts are paid, the estate can be settled and property can be transferred according to the terms of the will.

When we can no longer bless our families with our lives, we can at least make the transition easier for them after we're gone. Understanding the basics is a good start.