To convert or not – traditional IRA to Roth IRA …

Converting a traditional IRA to a Roth IRA results in current income taxes. Also, certain taxpayers with high income cannot avail themselves of converting

If you have money outside your IRA that can cover the taxes, you are more likely to want to convert the IRA. The reason for doing so is that no taxes are due on withdrawals during retirement. Also, the asset passes to heirs with no income tax.

However, you are trading the taxes now, lessening your total investments, for future taxes. So you need to work through the decision to convert carefully

The calculation is complicated and, for example, if the traditional IRA were to be subject to taxes at a lower rate than now, converting might make sense.

A list of concerns appears below. If you are considering making this conversion and want help with the decision, let us know.



First, Bob Keebler is a CPA with a major accounting firm, Baker Tilly, in Appleton, Wis., and author of The Big IRA Book. Here’s his reaction to the article:
“The math of the conversion is more complex than this author addresses:
• When rates are going down the conversion likely makes no sense.
• When rates are going up the conversion is more likely to make sense.
• Conversions are likely better for the person who does not need the funds to live off.
• Conversions are generally better for the person that has outside funds to pay the taxes.
• Conversions for a couple before the first death can make sense.
• Conversions with the intention to monitor the market often make sense.
• Conversions for a person with an estate tax problem will make more sense than for a person without an estate tax issue.
• Conversions to leave a Roth to grandchildren often have merit.
• Conversions for a person with an NOL or other carryforward can make sense.
“This question is very complex and a calculator cannot replace the professional’s judgment.”

Planning for emergencies

A client asked for detail on the list for “in case of emergencies” documents

Here is an expanded version of what I have used in more recent financial plans, for the text on all the planning analysis:

You should consider compiling a reference book or adding to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

1. Location of original will, trust, etc.
2. Location of health care proxy and durable power of attorney
3. List of professionals: doctor, attorney, CPA, etc.
4. List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.
5. Location of insurance policies and valuables such as original titles, etc.
6. Location of safe deposit box for valuables and items in #5 of 7
7. List of all bank and investment accounts and location of any stock certificates or other documentation for investments
8. List of all mortgages, loans and credit card accounts
9. Any appraisals or other listing of items by value
10. All automatic debits that need to be addressed

If you have questions, additions or comments, let me know



Socially Responsible Investing and Going Green

More people ask about Socially Responsible Investing (“SRI”) and about “going green” these days.

My usual response is that you give up performance with SRI and suffer with higher fees and a limited universe of investments. It is therefore better to have a good investment plan and use money from that to support the causes important to you.

I have an article that I can send to you that gives both sides and some statistics. I have also read more in depth articles on SRI and specific funds.

The key observation is how broad or narrow the definitions of being socially responsible get in order to still have reasonable performance. Some funds even stray to get performance ……

On going green specifically, we have seen environmentally oriented mutual funds pop up since the oil scare of the 1970s. The conviction that alternative forms of energy will be necessary to meet global demand in coming decades has lead to responses by regulatory, corporate, consulting and other groups. Investors see that thinking green will be more than a passing fad.

As with SRI in general, the term “going green” has different meanings to different people and, unfortunately, to different managers and mutual funds. You need to be careful (1) that the fund invests in a way that you consider “green” and (2) that, in so doing, it has the potential to do well over time (i.e., its environmental goals do not frustrate its investment goals). The funds may be large cap, for global impact, or smaller cap, for more localized impact. The managers may not have experience with the new technologies. Furthermore, regulations are changing, which could have an impact on the companies in which the funds invest. Furthermore, large or small cap, the fund may not be well diversified because there are few companies that meet their investment criteria. So, you need to be careful in your selection.

As we said before, you may be better off to recycle, purchase conscientiously, invest well, and contribute to causes that will have a global impact rather than hoping for “making green from going green”.

If you want to discuss this, let me know please.

If some say “this is the new normal”, beware

A different Morningstar article is reprinted below – showing how to pick good funds, or good investment managers.

The reason I pass this along is to show, again, that the lessons of history still apply today in forming your portfolio. This counters to some extent the prior e-mail on “the new norm”…

As you know from prior e-mails, we still start with the allocation. However, after that, when you select funds or managers to fit the allocation, the criteria below form a good list.

Let me know if you have questions or comments about this (or any other subject)



The Keys to Picking Winning Funds
by Russel Kinnel | 07-21-09

It’s easy to overdose on data when choosing funds. Numbers can be interesting, but only a few really help you make good selections. Unfortunately, many investors have a hard time figuring out which stats to use and, all too often, make the mistake of leaning too heavily on a fund’s returns over the past year. Instead, here are some things that you should look a closer look at:

Expense ratio
This one’s simple: You improve your odds of success by investing in funds with low fees. Over a 10-year span, stock funds whose annual expense ratios are among the cheapest 20% in their categories are 1.4 times more likely to outperform and survive those in the second-cheapest quintile. And the least-expensive funds are 2.5 times as likely to outperform and survive those with expenses in the highest 20% of their categories.

Some funds watch out for shareholder interests, and others treat investors as if they were second-class citizens. For instance, some sponsors will keep a fund open to new clients even though existing shareholders would be better served if the fund closed. Over a lengthy holding period, a fund company will have many opportunities to choose between maximizing profits and protecting shareholders. I want the good guys on my side. Steer clear of funds with Morningstar Stewardship Grades of D or F.

Most investors are better off avoiding high-risk funds. That’s because it’s tough to stay put when a highly volatile fund gets whacked, even though holding steady might be the right course of action. The Morningstar Risk rating gives you a quick assessment of how dangerous a fund could be.

The bear market that ended (I hope) on March 9 also provides a very real measure of funds’ risks. Check how a fund fared in 2008, when the stock market tumbled 37%. In fact, before you buy a fund, look back over at least 10 years’ worth of returns to see how it fared in different climates. This should enable you to set realistic expectations and prepare you better for potential losses. But you should also ponder how you handled losses during the bear market. If you couldn’t stand the pain in certain funds and unloaded them, then look for more-conservative investments.

Manager Stake
In 2005, regulators started requiring managers to disclose how much of their own money they had invested in their funds. But that information is buried in the mountains of paperwork that funds must file, and few investors have the time, patience, and inclination to ferret it out. Fortunately, we’ve loaded the data into our computers at Morningstar.

It makes sense to follow the lead of insiders. After all, who knows a fund better? It turns out that fund managers are all over the place when it comes to putting their money where yours is. Most don’t have a dime in their funds, yet hundreds have more than $1 million invested. Consider a fund only if at least one of its managers has $500,000 or more invested in it.

Management Quality
The final step–identifying good managers who employ sound strategies–is the subjective part of the process. You can learn a lot from fund shareholder reports and from reports at

In Fund Spy, I identify the great fund companies and the also-rans. I also describe 20 great funds that pass my tests. Among them are Harbor Bond HABDX, T. Rowe Price Small-Cap Value PRSVX, and Dodge & Cox International Stock DODFX.

For more tips on identifying the most important information and picking the best funds, see my new book, Fund Spy: Morningstar’s Inside Secrets to Selecting Mutual Funds that Outperform.

From Kiplinger’s Personal Finance magazine, August 2009.
Russell Kinnel is director of mutual fund research with Morningstar.
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Comments on health insurance, tax changes and asset allocation (not even having all investments in cash is safe)

Starting with my reoccurring theme of asset allocation, I post below two comments on investing.

The first short comment from Morningstar reaffirms that you need to diversify by class, as well as in each class, of investment.

The second comment from Merrill Lynch provides a year to date summary of returns, showing that the people who tried to market time, by going to cash last year, missed out on substantial returns by being out of the stock markets in 2009.

Finally, as another example on diversifying, we had some clients invest in Euro bonds. They made over 20% in the last two years, which is much having gone to cash.

So, again, I urge anyone who has not reviewed their allocation to do so now …..

Tax impact of Health Care Reform
On the health care reform and its impact on your taxes, I reprint a section from the Kiplinger’s Tax Letter below.

As with many other sources, they believe a bill will pass and that it will have an impact on taxes.

The impact is likely to be predominately on people with income in excess of $250,000, but not beginning until 2011. When we know more on this, we will give you an update.

Estate Taxes
Kiplinger’s expects Congress to keep the estate tax much like it is today, rushing to avert the year of no estate tax and the year after or a $1 million credit (we now have a $3.5 million credit)…

Kiplinger’s also has comments on the “cash for clunkers” and changes likely in 401(k) plans…..

Let me know if any of this raises questions or comments please. Thanks,


From Morningstar:
Theoretical and empirical research, as well as long-term data from financial markets, confirms that risk is minimized significantly and performance can be enhanced when a portfolio holds, for long periods of time, different asset classes with dissimilar price movements. This approach, which fulfills the fundamental underlying objective of modern portfolio theory, is also in accord with the standards of modern prudent fiduciary investing.

From Merrill Lynch:
…. In the meantime the S&P 500 Index had its best quarterly return since 1998, rising almost 16%. Most US equities rose sharply in the second quarter as investors regained their appetite for risk; investors bid up stocks beginning in March after it appeared that the financial sector had stabilized and this momentum continued through the second quarter. Investors seized upon indicators such as retail sales, industrial production and ISM survey data that suggested economic growth, although weak, was showing improvement. Indeed, retail sales and durable goods orders were higher than expected and employment figures showed a moderation in worsening trends. After the strong end to the first quarter, analyst estimates for company earnings were on average revised higher as the depression scenario faded into memory. During the quarter, the riskiest assets were bid up the most, with the Russell 2000 Small Cap Index returning more than 20%.
Outside the US, the story was similar: markets improved sharply on the turn in economic data. The MSCI Emerging Markets Index had its best quarter in U.S. dollar terms since it was launched in 1988 – rising almost 35% in the second quarter…..

The Kiplinger Tax Letter (ISSN 0023-1762)
Health care reform may seem stalled for now, with both the House and Senate missing the deadline that Obama set for action on a bill…early August.
But work still goes on behind the scenes, so Democratic leaders can make a final push this fall.
Readers are asking what’s going to happen to the legislation and what it will mean for taxes.
We’ll share our answers to those questions.
What are the chances that no bill will pass?
Very unlikely, given all the political capital that the president has spent on this issue. He’s sure to insist Congress keep at it.
But if gridlock continues, Obama may have to accept a scaled down bill… a lesser expansion of the government’s role in providing coverage to the uninsured.
A smaller bill would lower the price tag, reducing the need for tax hikes. The odds of a big-ticket tax increase such as an income surtax would go way down. It wouldn’t be needed to offset higher federal spending from revamping health care.
Does a smaller bill mean no employer mandate? No, although the number of small businesses that would be covered by the mandate and the tax penalties for failing to provide coverage to employees would be smaller than originally thought. The tax would be somewhat less than the $750 per worker proposed in the Senate, and would be phased in for those businesses with payrolls that exceed $500,000. As first proposed, the tax would have covered firms with payrolls over $250,000.
Would a mandate apply beyond the private sector? Yes. The coverage rule and tax penalty are sure to cover nonprofit groups and state and local governments.
Could employers avoid the mandate by classifying workers as contractors?
Theoretically. However, it’s a risky move. Tax pros predict that a mandate would spur many firms to consider reclassifying employees to avoid covering them, forcing them to buy their own coverage. But you can expect that angry workers will squawk to the IRS, giving the agency lots of leads for employment tax exams.
Are middle incomers likely to see higher taxes to fund the overhaul?
Don’t rule it out. Lawmakers are considering, for example, a new tax on gold plated insurance plans. Those policies aren’t owned just by upper incomers. They are included in the contracts of many union members…police, firefighters, etc.
Would Congress consider making tax hikes start in 2010? Definitely not. Figure that 2011 would still be the earliest year that hikes would become effective.
Will continuing delays on health care push estate tax changes into 2010?
Not very likely. Lawmakers still intend to act before the end of the year to prevent the estate tax rate from dropping to zero in 2010. The exemption amount for 2010 will be kept at $3.5 million and the rate will stay at 45% for another year. The estate tax bill is sure to include extensions beyond 2009 of popular tax breaks, such as tax free IRA payouts to charity and the deductions for tuition and sales tax.

The “cash for clunkers” program has tax angles for people and businesses. Vouchers are tax free for individuals. Therefore, if you trade in a vehicle for a more fuel efficient one and get a $3,500 or $4,500 dealer credit on the trade-in, you owe no tax, even if the amount of the credit far exceeds the trade-in’s value. And if you purchase a qualifying hybrid or a lean diesel vehicle as a replacement, you still can claim the hybrid or diesel credit, even though the voucher isn’t taxed.
But car dealerships don’t benefit from the tax break, IRS officials say. The voucher amount is included in the gross receipts from the sale of the vehicle.

Many 401(k) plans will have a different look a couple of years from now. The economic downturn is prompting changes that firms will implement to reduce plan expenses and to prompt their employees to save more for retirement.
More employer payins will be discretionary. Although most plan sponsors that suspended matching contributions during the downturn will reinstate them, those payins won’t return before 2011, and they’ll probably be in a different form. Fewer firms will automatically match a set percentage of pay. More contributions will be tied to company performance. And many firms will stop obligating themselves to a contribution level at the start of the year but will wait until year-end to decide.
Companies will try to get more 401(k) accounts on autopilot to help workers boost savings. One idea: Having employee payins increase automatically each year until reaching a preset level…around 10% of pay…if the employee selects this option. The number of companies adopting automatic enrollment will continue to grow, though some will limit it to employees with at least two years of service. That way, firms can avoid incurring the administrative hassle and expense for short-timers.

Another subject:
Bad news from IRS for exchange-traded funds that invest in metals: Those funds do not qualify for the 15% rate on long–term capital gains. Instead, their top tax rate is 28%. It applies if the fund owned the metal for more than one year and the investor owned fund shares for over a year, IRS says privately.
The fund’s investors are deemed to own a share of the metal, such as gold, silver or platinum. The gain is treated as coming from the sale of a collectible.
The Service takes a different stance for IRAs investing in these funds. If the metal is held by an independent trustee, the Service will not treat the IRA as owning a share of the fund’s underlying metal. This favorable interpretation keeps the IRA from running afoul of the rule barring direct investments in bullion.