April 24, 2008

Your Goal Helps Define Your Investment Options

Our family has just finished a whirlwind of college visits. With two sons graduating from high school in just 4 weeks (!), we have been thinking and talking about college choices. Of course, one of the big questions about college is how will we pay for it?

Actually, I think (I hope!) that we're relatively prepared to pay for these amazing college costs. One of our financial goals has been to save enough money to be able to pay for most of our sons' undergraduate college expenses. Over the past several years we have saved for future college expenses using a variety of tax-advantaged tools such as Coverdell Savings Accounts and 529 Plans. (For more information about these savings tools visit the University of Illinois Extension website, Tax Breaks for Higher Education.)

However, as the stock market went down recently and as I reviewed this last quarter's financial statements from our different accounts, I was VERY glad that I had remembered the basic rule: short-term goals require using different investment options than do long-term goals.

While saving for college started out as a long-term goal (over five years), it has recently changed for my family into a short-term goal. When you have a short-term financial goal you need to invest your money in investment options that not volatile and that are liquid -- so that when you need the money it is there and you can access it. I'm pleased that we have a stash of money in a money market fund (whose principle has not been effected by the stock market's downturn) to use to pay college tuition and housing deposits this week.

We will use the money we have in other investment options (such as 529 plans) eventually, but I'm happy to wait awhile until the market has a chance to correct itself and go back up.

So, do your investment options match your financial goals timeframe? The Plan Well, Retire Well website has an interactive lesson on this topic -- you can write your financial goals and match investment options choices on this secure, free website. Now is a good time to review your investments and see how they match your goals. Login to the Plan Well, Retire Well website and then go to the section "Choose Investments." From here click on the link "Invest Your Money." I think you'll find that it is time well-spent.

Comments? Just click on my name below to reply to this blog.

Posted by Kathy Sweedler at 3:39 PM | Permalink |

April 17, 2008

Money Smart Week Chicago, April 20 to 26, 2008

Got a financial question? I'm willing to bet that you can find a free workshop during Money Smart Week Chicago that will answer it. Money Smart Week runs from April 20 to 26, 2008, and you can find a workshop on almost every conceivable financial topic.

Several years ago, the Federal Reserve Bank of Chicago began assembling a group of partners to provide free financial education workshops for the public during Money Smart Week. This annual focus on financial education has grown by leaps and bounds. This year, the number of partner agencies and organizations has grown to more than 200, and more than 350 financial workshops will be offered. Under the Fed's leadership, other cities and regions have also adopted the Money Smart Week idea.

University of Illinois Extension has been partner in this annual financial education effort since almost the very beginning. This year, I will personally be teaching 10 workshops next week. One of them is a workshop via conference call--you can participate in the workshop from your home or desk at work. You can see a list of those workshops below, or download the list here. The Federal Reserve Bank provides an on-line calendar where you can search the entire list of 350+ workshops to find the ones that interest you. You'll find the calendar at www.moneysmartweek.org/chicago.

Money Smart Week – Chicago

Spring 2008 Workshops with Karen Chan

Who Gets the Money? Rules for Taking Distributions from Tax-Deferred Retirement Plans

Putting money into IRAs and other tax-deferred retirement savings plans was a smart thing to do. Understanding the rules about taking the money out is equally important. This workshop will explain

• the rules for taking distributions for those younger than 59½, those between 59½ and 70½, and those who have reached the important age of 70½ .
• how distributions are taxed and how to avoid additional penalties.
• rolling over money from one account to another, even if you're already taking annual distributions.
• what happens to the money when you're gone
• what rules apply if you inherit your spouse's IRA.

Location I: Monday, April 21 from 2:00 – 3:30 pm at Morton Grove Public Library, 6140 Lincoln Ave., Morton Grove, IL 60053. Register by April 21 by calling the Morton Grove Library at 847-965-4220

Location II: Wednesday, April 23 from 10:00 to 11:30 am via conference call from your home or office. Register at https://webs.extension.uiuc.edu/registration/?RegistrationID=1474. When you register, you will receive instructions for calling in to the workshop. Handouts will be emailed to you.

Planning for What If…?

Learn about tools individuals and families can use to plan financially – whether total assets are small or great – for emergencies such as disability, incapacity, or death, and life changes such as marriage, remarriage, and divorce. We'll cover powers of attorney, wills, trusts, insurance, and more. Learn whether you'll owe estate tax, how to title property to assure easy transfer at death, whether Medicaid will pay for your nursing home care, and more.

Thursday, April 24 from 9:00am– 10:30am at Mount Prospect Public Library, 10 S. Emerson St., Mount Prospect, IL 60056. Preregister by April 24 (or April 17 if special accommodations are needed) by calling the Mt. Prospect Library Registration Desk at 847-253-5675.

Choosing a Financial Professional

Learn how to how to find a financial planner you can trust. Learn the questions to ask, what the credentials and letters after the advisor's name mean, and red flags.

Location I: Monday, April 21 from 6:30 – 8:00 pm at Chicago Public Library - Austin-Irving Branch, 6100 W. Irving Park, Chicago, IL 60634

Location II: Tuesday, April 22 from 7:00pm – 8:00pm at Indian Trails Library, 355 S. Schoenbeck Rd., Wheeling, IL 60090. Register by April 15, 2008 by calling 847-459-4100 or email MShapiro@indiantrailslibrary.org

Making Your Money Last in Retirement

Learn strategies for managing your investments, retirement plans, and expenses in retirement to insure you don't outlive your money. How can you determine a sustainable amount to withdraw from your assets each year? Should you buy an annuity? Most financial workshops talk about ways to build your wealth while you're working; this workshop will talk about how to stretch what you've got.

Thursday, April 24 from 2:00pm– 3:00pm at Glenview Public Library, 1930 Glenview Rd., Glenview, IL 60025. Register by April 23, 2008 by calling the Glenview Public Library Information Desk at 847-729-7500.

Tax Breaks for Higher Education

Learn which of nine breaks you can claim if you or your child are taking college or other post-secondary school classes. Get all the details about qualifying for the Hope and Lifetime Learning Credits, Education Savings Accounts, and 529 plans.

Friday, April 25 from 12:00pm– 1:00pm at Chicago Public Library - Harold Washington Center, 400 S. State Chicago, IL 60605.

A Teen's Guide to Plastic: Myths and Truths

Participate in a teen talk show starring you! In 'Credit: Myth or Truth?,' you'll learn about credit problems, credit reports, credit cards, and the differences between debit and credit. Adults working with teen groups are encouraged to register and bring their group to any of these sessions.

Location I: Monday, April 21 from 11:00am – 12:00pm at Chicago Public Library, Garfield Ridge Branch, 6348 S. Archer Ave., Chicago, IL 60638. Register by April 18 by calling the Garfield Ridge Branch at 312-747-6094.

Location II: Wednesday, April 23 from 4:30pm – 5:30pm at Chicago Public Library, Sherman Park Branch, 5440 S. Racine Ave., Chicago, IL 60609. Register by April 18 by calling the Sherman Park Branch at 312-747-0477

Location III: Tuesday, April 22 from 4:30pm – 5:30pm at Chicago Public Library, Roden Branch, 6083 N. Northwest Hwy., Chicago IL 60631. Register by April 18 by calling the Roden Branch at 312-744-1478

For a searchable calendar of all Money Smart Week events, go to www.MoneySmartWeek.org/Chicago.

Posted by Karen Chan at 9:36 AM | Permalink |

April 10, 2008

Too Many People Losing Their Jobs!

When I write this blog, I usually choose to write about something that's on my mind due to my family or a workshop I've done or something in the news. And, what's on my mind today is people losing jobs. As you may have heard, many University of Illinois Extension offices are looking at a 50% reduction in their resources – which translates to many, many people losing their jobs.

It's not just Extension. It seems that everywhere I look there is another headline about a company cutting back, closing down, and laying off employees.

Job loss has lots of implications – for the individual, their families, and the communities they work in. There is no easy fix or solution in this situation. But I want answers and I want to help. So, being the person I am, I look to University of Illinois Extension for resources and help.

What we do know from research, is that when someone loses their job it's important to quickly cut back on spending. To quote from Getting Through Tough Times: Strategies for Spending Less:

Studies have found that many families do not adjust their lifestyle for about six months after their income is reduced. That six months of ignoring the situation can bring disaster. When you take charge of your financial situation immediately, you are making a positive contribution to your family's well-being now and in the future.

The Getting Through Tough Times series is a good resource for families to help manage the stress of a job loss. This series of 19 fact sheets includes topics such as Communicating Under Pressure, Making the Most of What You Have, and Talking with Creditors.

While I'm still optimistic (and hopeful) that the financial crisis for U of I Extension will be resolved so that Extension offices do not have to cut back on services and staff, it is clear to me that our economy is suffering and many people throughout the country will be losing jobs this year. I wish I could stop this trend, but since I can't what I can offer is tips on managing finances in difficult times. Stay tuned for more in the future.

If you have experience managing finances after a job loss that you'd like to share, just click on my name below to reply to this blog.

Posted by Kathy Sweedler at 4:25 PM | Permalink |

April 2, 2008

To Roth or Not: Deciding between Traditional and Roth Contributions to 403(b) and 401(k) Plans

My Human Resources Office just informed me that I now have the option of designating some or all of my 403(b) plan contributions as Roth contributions. Your employer may be offering you the same choice for your 401(k) or 403(b) plan. So how do we decide--To Roth or Not?

But before I go on, here's my bottom line: Most of us should be putting aside as much as we can for retirement. Just making some kind of contribution to your retirement plan or IRA is the important thing. Whether you can save only $50 month or you want to do the max ($15,500, or $20,500 if you're 50 or over), just sign up and do it. Now, on to the Roth decision.

Here's the choice:

1. Roth: Would I rather pay taxes now on my contribution, and never owe tax on any dividends or gains?
2. Tax deferred: Would I rather reduce my taxes now, deferring the tax on my contributions until I take the money out? But then I'll owe tax on all the money--contributions, dividends, and gains.

I also have the option of splitting my contribution - designating some as Roth, and the remainder as tax-deferred.

If my tax rate stays the same, the tax-deferred and Roth options are mathematically equivalent. That means that I would end up with the same amount of money whichever I choose. (This assumes that I keep my take-home pay the same, and reduce my contribution in by the amount of taxes I would pay on my contribution if I choose Roth.)

So what should I do? Here are the things I will consider in making my decision.

• Many working people expect that their income will be lower in retirement, putting them in a lower tax bracket than they are in now. That makes tax-deferred plans very attractive. But income taxes are at historically low rates right now. While I don't believe anyone can predict the future, my guess is that income tax rates will be higher by the time I retire. If I think those across-the-board increases in tax rates will be bigger than any reductions I get from having a lower income, it's Advantage: Roth.
• Other taxable income in retirement could cause up to 85% of Social Security benefits to be taxed. My Social Security benefits will be very small since I don't pay into Social Security as a University employee, but my husband will get a more typical Social Security benefit. Distributions from a tax-deferred plan could cause those Social Security benefits to be taxed, but Roth distributions will not. Advantage: Roth.
• Illinois does not tax distributions from tax-deferred retirement plans, so my tax-deferred contributions are completely free of Illinois income tax forever. But I will pay Illinois tax on my Roth contributions. Advantage: Tax deferred.
• What benefits could I get now by making tax-deferred contributions and having less taxable income ? A lower income could let me claim the Child Tax Credit, the Saver's Credit for contributions to retirement plans, education tax breaks like the Hope Credit or Student Loan Interest Deduction, or, if I'm a higher income household, prevent adjustments to my itemized deductions or exemptions. Since I have no kids or education expenses, and my income wouldn't be low enough to claim the Saver's Credit, I wouldn't get any additional benefits from reducing my income now. For me, it's a wash. But depending on your individual situation, it's very possible that it's Advantage: Tax-deferred.
• Will a tax-deferred contribution actually reduce my taxes? As a widow with dependents and education expenses, my sister doesn't end up owing any income tax. She would get no tax benefit from a tax-deferred contribution and it's clearly Advantage: Roth. But I do pay income tax each year, so for me, It's a draw.
• Maybe I can convince myself to contribute the same amount as a Roth contribution that I've been making as a tax-deferred contribution. I'd have to survive on less take-home pay. I'll end up with the same amount in my retirement account as I would with the tax-deferred contribution--but I'll owe no income tax on Roth distributions! This would be especially appealing if I'm already contributing the maximum to my plan. I can keep contributing the maximum, paying the taxes out of my take-home pay, and essentially sheltering even more of my income from taxes than if I were making tax-deferred contributions. If you will contribute the same amount as Roth as you have been with tax-deferred contributions, it's Advantage: Roth.
• To avoid the 10% early distribution penalty in tax-deferred plan, I must be age 59-1/2 before taking distributions unless I qualify for an exception. For a Roth 403(b) or 401(k), I must meet an additional requirement: I must have participated in the Roth option for 5 years. If not, I will owe taxes (and maybe penalties), but only on the part of the distribution that is coming from the growth in the account, not from my contributions. If I were planning to retire in less than 5 years and needed to start taking distributions then, I would lose some of the tax benefits. So if you're retiring soon, it might be Advantage: Tax-deferred.
• If there's still money in my account when I die, my heirs will have to pay tax when they take money out of my tax-deferred account, but the money in a Roth is tax-free. Advantage: Roth.

I want to point out two differences between Roth 401(k)/Roth403(b) plans and Roth IRAs. With Roth IRAs, you don't have to take distributions beginning at age 70-1/2, and distributions are deemed to come first from your contributions. But Roth 403(b) and Roth 401(k) plans will require you to take distributions beginning at age 70-1/2, and distributions are considered to be a pro-rata mix of your contributions and the earnings in the account. However, you may be able to roll over a Roth 401(k) or 403(b) to a Roth IRA and get those added benefits.

If the decision between tax-deferred and Roth is not clear-cut for you, maybe you'll do what I will probably choose. I will probably split my contributions between Roth and tax-deferred. Some financial planners describe that as "diversifying tax risk." I'll pay some tax now, some later. If my taxes end up being higher in retirement, I'll be glad I used the Roth option for some of my contributions. If I'm in a lower tax bracket, I'll be happy that I chose tax-deferred for the rest.

Posted by Karen Chan at 8:20 AM | Permalink |