The Jacobs Financial Group

Why 2010 is the Year You Should Pay Closer Attention to Your Estate Plan

Estate planning is an essential part of anyone’s personal finances — no matter how wealthy you are. But even for those who have been diligent about planning for their spouses and heirs, this is a year when it may make particular sense to re-examine your strategy.

With the nonstop flurry of legislative activity in Washington, Congress has still not acted on the phase-out this year of the estate tax. If nothing is done this year, the heirs of any person who dies in 2010 won’t be liable for any federal estate taxes, no matter how big the estate. (The carryover basis rules for 2010, however, may give rise to additional planning considerations.)

Yet the potential bad news will come next year when the estate tax is scheduled to return with a vengeance on all estates over $1 million in size (the threshold was $3.5 million for individuals in 2009) with a potential return to a 55 percent top tax rate..

It’s worth a trip to your estate planner and your financial planner to help ensure your paperwork is in order and the previous plans you’ve made won’t cause problems.

Family trusts – also called bypass or credit shelter trusts – are of particular concern. These trusts work this way: Individuals add what’s known as a formula clause to their will or revocable trust that distributes up to the maximum amount of assets that can pass free of estate tax to the trust if the individual dies before their spouse. The creation of the trust helps ensure that once your spouse dies, neither these assets nor any appreciation on them will be subject to estate tax. But if you die this year, a failure to address the formula clause could potentially cause you to unintentionally disinherit your spouse.

The bottom line: It’s worth making a call to a financial planner and your estate attorney to make sure your plans are still in order.

And what if you’ve never made an estate plan? Even if you’re not particularly wealthy, you definitely need one. Here are some specific things you should do and make sure you have in place:

Make a financial plan: You can’t have a very effective estate plan without a full grip on your finances. First, sit down with a financial planner to gain an understanding of all the various aspects of your finances from your income and investments to your debt. Add various facts about your family situation to the mix, and that’s the starting point for an estate plan.

Make a will your first priority: Unless you have a very complicated estate, a standard will with wording common to your state may be satisfactory to properly dispose of your assets, but it’s generally a good idea to get feedback from an estate attorney to make sure your will fits you and your financial structure.

Create all necessary directives: It’s important to create a durable power of attorney to oversee financial issues and a healthcare proxy to appoint a trusted individual to oversee health-related decisions if you are unable to do so for yourself. Some states will allow you to appoint more than one individual in each role to allow for checks and balances, but it’s particularly important to work with an experienced estate attorney to make sure things are done right.

Establish guardianship and financial directives for your children: If you and your spouse were to die at the same time, who would take care of your kids? Based on your state’s requirements, your decision may need to be written up as part of or an addendum to your will. It’s also a good idea to name alternates in case the people you name have a change of heart for any reason, or if something happens to them. If your children are to inherit substantial assets or insurance proceeds, it is also wise to make sure that their guardians are qualified to handle that money. If not, someone else should be legally named to do so.

Review all beneficiary information: Make sure all your beneficiary designations on retirement accounts, insurance and other assets not distributed through your will or trust are current and clear.

Consider transferring IRA assets to a Roth: You’ll take a tax hit with the conversion, but converting traditional IRAs into Roth IRAs removes another headache for your heirs because no income tax will be assessed once the funds are withdrawn, assuming certain requirements are met.

September 2010 — This column is produced and is provided by The Jacobs Financial Group. (05-10)

Some Annuities Offer a Way to Pay for Long-Term Care

Current estimates from AARP put the annual cost of a private nursing home room at a national average of $78,000. As older Americans are still struggling to reassemble their retirement plans from the worst economic downturn in 70 years, relatively few are considering the potentially most devastating threat to their plans: the spiraling cost of long-term care.

On January 1, some important provisions of the Pension Protection Act of 2006 went into effect to help pay for those costs. Individuals no longer have to pay federal income tax on the proceeds from an annuity if those proceeds are used to pay for long-term care coverage. That means that chronically ill or disabled people will no longer have to rely on their own private long-term care policies or Medicaid to pay for costs related to long-term care.

The change is spurring the creation of hybrid deferred annuity policies that also carry long-term care coverage. These products allow policyholders to use the proceeds for LTC coverage, for income or for both. The proceeds that went to pay for long-term care costs for the policyholder would not be subject to federal tax.

These long-term care annuities can generate tax-deferred gains, which works particularly well for those in high tax brackets who believe they will be in a lower bracket by the time they would need to draw on that coverage.

This option isn’t for everyone and it’s important to consult a financial expert and more important, a tax expert to decide if this alternative is for you. It’s also important to compare the offerings of standard long-term care policies and these annuity/LTC hybrids since the hybrids are generally regarded to offer less LTC coverage in duration of benefits. Unless you have a significant amount to invest, these hybrid policies may not last beyond a year or two of benefits.

It’s important to talk to both financial and tax experts before wading into this arena and to see how much coverage you can buy based on the size of the annuity you can afford.

Before studying these products more closely, it’s important to look at the big picture of your finances and your expectations for care if you became temporarily or permanently disabled:

What resources do you have? This question goes beyond monetary issues. While caregiving puts a strain on family, it’s important to consider whether family and friends are truly willing and able to help with your care, which can provide a considerable financial and emotional benefit.

Check your health history: People in good health purchasing long-term care insurance at the age of 55 usually get the most affordable deal in LTC insurance. But an individual’s family health history and current health status are the real determinants of what your LTC insurance policy will cost – or if you’ll qualify for coverage at all. Also, it’s important to note that 40 percent of long-term care is provided to individuals between the ages of 19 and 65, so the need for care can strike at any time.

Are you a single female? Again, personal and family resources come into play here, but since women typically live longer than men – and they still earn less on average than men – women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.

What types of services are covered? Over the course of time, long-term care policies have evolved to place more emphasis on home-based care or assisted living, since most people would choose to recover or live out their last days in a familiar environment. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence, and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered and other services as listed in the policy.

What triggers the coverage? A qualified LTC policy won’t go into effect until the covered individual can’t perform two tasks of daily living for a specific period of time, typically 90 days, or when that person needs substantial supervision related to cognitive impairment. This is where you have to read the fine print since some policies are more restrictive than others. More affordable policies generally take longer to kick in. See if coverage for other physical ailments is available as part of the policy and what per-diem or monthly allowances are offered.

What if I never want to go to a nursing home? The idea is to cover every eventuality. The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home. Some policies do offer reduced percentages for home health care versus nursing home care, but it’s a better idea to keep full percentages on home health care benefits since most people would rather stay in their homes.

How good is the insurer? Do your homework on the financial health and track record of the insurer you choose, and that’s particularly important if you’re buying a hybrid policy.

September 2010 — This column is produced and is provided by The Jacobs Financial Group. (07-10)

Planning for a Child’s Private School Education

Sending your child to private school is an expensive proposition. For most people, it’s made a little tougher by the fact that it’s necessary to save for a child’s college education at the same time. Some have the income that makes this easier, but for the rest, it’s necessary to create a pay-as-you-go system that will somehow make it all work.

The parents who make it work tend to plan from the time the child is very young. They keep abreast of every possible resource for scholarships, discounts, loan programs and other forms of financial aid.

It makes sense to find a financial advisor who can link a child’s pre-college education planning to the financial planning necessary for college, grad school and beyond. Here are some things to know about the process:

Start with cost: The National Association of Independent Schools (NAIS), a national organization representing private pre-schools, elementary and secondary schools, estimates that the median annual tuition in 2009-10 for all grades of private day schools was $17,880. For boarding school, the average annual tuition was $34,900.

Is aid available? Definitely, and that’s why it’s important to keep your ear to the ground as part of your overall planning strategy. Just remember that grants and scholarships are the best form of financial aid because they don’t have to be paid back. Financial aid grants for private elementary and secondary schools are awarded on the basis of demonstrated need, just like college. According to NAIS, the average endowment per student during 2009-10 was $19,122. This is why it is important to check the size of the endowment fund at any school you consider – that’s money that the school keeps in reserve to invest so it can extend aid to families in need.

The application process: Most schools use the Parents’ Financial Statement (PFS) from the School and Student Service for Financial Aid (SSS). This is a service owned by NAIS that helps schools determine how much a family can afford to pay for school tuition and other educational expenses. If the school you are considering does not use SSS, be sure to ask what steps you need to follow in order to apply for assistance. The form considers how many children you’re paying tuition for in K-12 or college and how high the cost of living is in your area.

Don’t forget your retirement: Despite the huge challenge of paying for your child’s education, you have to pay yourself first. Talk to a financial planner to see how much you’ll need in retirement and how much you’ll need to save weekly to make that goal. Keep in mind that your greatest potential for a successful retirement comes from starting savings early and you can’t forfeit that in favor of your child’s education.

Consider a Coverdell Account: While the best solution will differ by family, one savings vehicle might be a Coverdell Education Savings Account. Coverdells are trusts created to save money for a child’s primary, secondary or college education. Contributions are relatively small — $2,000 per beneficiary from all sources during the year. Yet since Coverdells are considered the asset of the account owner, you may want to keep it in your name since an account in the student’s name could adversely affect financial aid eligibility.

Enlist the grandparents: If your grandparents can afford to help, they have several options to help you save for your child’s education without triggering their gift tax obligation. First, each grandparent can give up to $13,000 tax-free to each child. Also, they can give up to $2,000 annually to a Coverdell account you’ve set up for the child.

Don’t use debt as a Band-Aid: Avoid the trap of being forced to use debt while trying to “do it all.” Stay within your means. If you find yourself close to using your debt options, enlist the help of a financial planner to talk through ways to adjust your spending or find student aid.

September 2010 — This column is produced and is provided by The Jacobs Financial Group. (06-10)

Understanding Actively Managed Exchange Traded Funds

With so many investors and their advisors questioning traditional market thinking about index-based investing, exchange traded funds (ETFs) are starting to move beyond their traditional passive, index territory into more active management.

To some, it’s a fad. To others, it’s a serious threat to the territory traditionally held by mutual funds. Yet one thing so far is clear. Many of the biggest names in the mutual fund world are now seeking permission from the Securities and Exchange Commission to offer actively managed ETFs. For advice on this new generation of securities, investors should speak with a qualified financial advisor.

ETFs are baskets of securities that trade like stocks and until recently have almost always tracked market indexes like the Standard & Poor’s 500. ETFs have certain advantages over mutual funds – they generally have offered lower fees and tax advantages than mutual funds, and clearer tracking of their underlying investments because they are require to make that disclosure daily.

Here’s what’s changing. After the ETF industry won regulatory approval for actively managed funds after a 10-year effort, and so the first actively managed bond ETF surfaced spring 2009 with a few more based on stocks. What does active management mean? That managers have more leeway to choose the underlying investments within a fund, while indexed funds require holdings to mirror its chosen index.

What will make things interesting in the new ETF world is the continuing requirement that these active managers disclose every step they make. This is why active management is a challenge, because in the traditional mutual fund world, managers don’t have competitors looking over their shoulders when they try to build or exit positions. In the ETF world, disclosure is made on a daily basis, so managers have to worry about competitors mimicking their strategy and foiling their efforts to get the best price for their investments.

Some experts believe that as this category develops, the first baby steps for investing will go toward major stocks that are generally less volatile and therefore tougher for competitors to mimic. Others believe that actively managed ETFs will operate with a series of managers whose moves would be tougher to spot on any particular ETF’s disclosure list. However actively managed ETFs evolve, it makes sense to ask the following questions:

How will these investments fit into my overall portfolio? It makes sense to look at how ETFs fit into one’s overall portfolio mix given particular retirement and investment objectives as well as tax considerations.

How about fees? One of the chief advantages of index-based ETFs was low expense ratios. Actively managed funds generally do cost more. Try and get an idea of what the fee structure will be before you invest, and compare them to similar investments in the mutual fund arena.

What are the tax issues? Active ETFs have better tax advantages because the fund manager can sell the lowest-basis stocks via in-kind stock transfers through the creation and redemption process. This helps systematically reduce the tax exposure for investors.

What about the track record? This is a very good point, because as a relatively new investment category, it’s important to realize that these new categories of ETFs won’t have terribly long investment records to compare to other investments. Do your homework first.

July 2010 — This column is produced and is provided by The Jacobs Financial Group. (08-09)

How Much Term Life Insurance Should You Buy?

You may have read that term life insurance rates are at historic lows and that now is the time to buy. It’s worth a quick primer on why life insurance is necessary and who should buy it before getting to specific amounts that individuals should own.

First, a quick definition of what term life insurance is. A term policy is a policy with a set duration on the coverage period – anywhere from one to 30 years – and when it reaches the end of that term, the policyholder decides whether or not to renew it. Term policies provide no cash buildup like whole or universal life insurance – it only provides a death benefit at the time the insured dies. Because term doesn’t provide that investment component – the cash value that can be borrowed against – term is generally cheaper to buy than whole or universal life.

There is plenty of debate whether consumers should buy term or whole life. Some critics argue that whole life is a poor choice because you arguably could get a better return from other investments. Yet there are good purposes for these investment-feature policies – many use them as part of an estate-planning strategy.

But the first point is to decide whether you need insurance. People without dependents generally don’t, while people with spouses and families generally do. The primary point of life insurance is to replace income if a breadwinner dies.

As for the decision on what kind to buy, it helps to get some advice. A financial planner can help you determine the right insurance products to buy based on your needs and other assets. Better still, he or she can help shape your insurance purchases as part of an overall estate plan.

A planner can help a buyer decide how much life insurance to buy and over how long a period. Some critical questions that should be asked when purchasing insurance:
1. How much income would your spouse and your children need to replace your income over a period of years based on your current age?
2. Will your spouse or guardian need to provide childcare support?
3. Is there a mortgage to pay off?
4. Are there substantial short-term debts, like credit cards or auto loans, to pay off?
5. What are estimated college expenses for children and spouses, and when will those expenses start?
6. How much will burial expenses be?
7. Do you have any other life insurance?
8. Are there anticipated expenses for caregiving for elderly relatives or children or family members with special needs?
9. Do you anticipate substantial estate taxes when you die?
10. Do you have any other assets that can be liquidated sensibly or will bring in income?

Most online life insurance calculators found at most business news and personal finance websites can help you address questions 1-8. The last two questions require a bit more strategic thinking in terms of what you or your spouse have done with overall estate planning. Keep in mind that youth and health will also be factors in how much insurance you can afford to buy. And keep in mind that life insurers will investigate suspicious claims, so be honest about all facts you report.

Many term life policies are both “renewable” and “convertible.” Renewable means you can renew your coverage without a medical exam. The latter allows you to convert your term life policy into an equivalent cash value policy from the same carrier, should this make sense during the term of the policy. Again, the kind of coverage you choose should depend on your own personal needs and a financial planner can help you determine what those are.

Also, as you check various companies, it’s important to work with the most financially healthy carriers. Insure.com provides free ratings from Standard & Poor’s on various insurers, and many public libraries have subscriptions to ratings from A.M. Best.

One more thing. Don’t buy insurance and forget about it. Make sure that every few years you are reviewing your insurance purchases as part of your overall financial plan. Life circumstances change – incomes rise and fall and family size changes. Your insurance holdings always need to reflect current needs and conditions.

June 2010 — This column is produced and is provided by The Jacobs Financial Group. (05-10)

Blended Families Should Plan Early for Their Kids’ College Financial Aid

Finances for blended families – one of the fastest-growing demographics in the United States – can be complicated. The needs of stepchildren may fall into direct conflict with one’s own, and aside from the many financial entanglements that result from previous marriages or partnerships, college planning is a particular area where couples should seek help.

Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.

That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.

Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:

Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.

Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry — can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.

Get advice about the FAFSA: On January 1 each year, students become eligible to file their Free Application for Federal Student Aid (FAFSA) online for the coming school year. This process can get very confusing in blended families because parent-child relationships determine the level of financial responsibility and the potential for aid. In some cases, it might be wiser for a couple not to marry while children are still receiving financial aid in college, so it is critical for divorced spouses to get advice on this issue. Colleges will determine financial aid packages on the custodial and financial profile of parents based on any of the following parental scenarios:

• The parent who had provided the majority financial support to the child during the past 12 months.
• The parent who supplied more than half of the child’s support and pledges to continue to do so.
• The parent who has legal custody of the child.
• The parent who claimed the child as a dependent on their taxes.
• The parent who provided the most financial support to the child during the most recent calendar year.
• The parent with the greater documented income.

College financial aid is tough enough for traditional families to navigate. A financial planner with specific expertise in navigating financial aid issues as well as your overall financial picture can help you make the best choices in preparing your application for college aid.

Remember that if the parent who provided financial support was single, divorced or widowed but has since remarried, the student will have to submit the stepparent’s financial information. While this information will be evaluated, it doesn’t legally obligate the stepparent to provide financial assistance.

May 2010 — This column is produced and is provided by The Jacobs Financial Group. (09-08)

Should You Be a Borrower or Lender? The Return of the Personal Loan

As lending requirements stay relatively tight for most consumers, the chance of borrowing outside the banking system from family or friends can be attractive. After all, it’s rare to see a parent or sibling demand a credit check or other lengthy documentation.

On the other hand, it could be one of the most dangerous financial transactions you ever make simply because money can drive a wedge between relatives in even the closest of families.

There are good and bad aspects to private loans. The good news first:

• Terms can be significantly friendlier than a borrower would qualify for in the open market. For example, the rate charged on the loan can be higher than the lender would receive in a deposit account but lower than the borrower would pay a commercial lender.
• They can require little or no collateral.
• It’s a way to keep money in the family.
• It’s a way for a borrower to be able to buy a home, a car or other critical assets even if they have a poor credit rating.
• There’s no loss of tax benefits to the borrower or lender if an agreement in the case of a mortgage loan is structured and reported properly.

Now the bad news:

• Unclear agreements can lead to missed payments or default.
• If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed.
• Jealous relatives could say they weren’t treated fairly.
• Disagreements between borrower and lender could kill an important relationship.

The best arrangements are formal – written in proper legal language, notarized and recorded in the county where the property resides. A financial advisor can talk to both parties about what such loans – particularly large loans for real estate or tuition – can mean for their respective finances. It also makes sense for both parties to visit their respective tax professionals to make sure they know the correct ways to document the loan transaction over time for tax purposes.

A detailed document prepared with the help of an attorney or a certified public accountant can also lay out specific scenarios if either the borrower or the lender has to break or alter their agreement. Such trained experts can talk you through the benefits and pitfalls of a private loan arrangement as it affects your particular situation (either as lender or borrower) and specific laws and requirements in your state you have to follow if both borrower and lender are going to derive tax advantages from the agreement.

You should be aware that the IRS governs these interest rates and provides an annually updated table that you can get at http://www.irs.gov/app/picklist/list/federalRates.html – these rates are Applicable Federal Tax Rates (AFR). You can also forgive a portion of the loan each year up the annual gift exclusion which is $13,000 this year.

Generally, any private loan transaction should include a promissory note that establishes how the debt will be repaid. That’s true for business loans or loans for most types of property. In the case of a business loan, it makes sense for the potential borrower to get specific advice on how lenders in their business will be treated not only in terms of repayment, but default. These agreements are particularly important for tax purposes as well.

In the case of a loan made for real estate, a mortgage or “deed of trust” statement (depending on the state you live in) or an agreement specific to the type of loan that binds the property as collateral for the promissory note will be necessary. It basically says that if you don’t fulfill all the terms in the agreement the lender has the right to foreclose or repossess the property.

Even if a friend or relative makes an offer of help, it’s proper for the borrower to take the initiative to structure the arrangement in a way that’s responsible and beneficial to both. If a relative is drawing income from the loan, special provisions should be made for prepayment and other contingencies.

The most important thing to remember and plan for? When two people who are close to each other enter into such an arrangement, the most valuable thing really isn’t the money. It’s the relationship.

January 2010 — This column is produced and is provided by The Jacobs Financial Group. (02-10)

Be Careful When Rebalancing Your Kid’s 529 Plan Allocation

Market extremes tend to make uninformed people invest at extremes. As the market has suffered over the past two years, families putting their college savings into 529 college savings plans have watched their stock-based holdings shrink with the market and many have run for cover.

This has fueled a growing number of states with 529 college plans to offer accounts that are insured by the FDIC. According to InvestmentNews, Arizona, Ohio, Montana, Virginia and the latest state, Utah, have adopted FDIC-insured investment options such as savings accounts and certificates of deposit. Could your state’s plan be next?

If you’re a first-time investor in 529s or are still reeling from the impact to your current plan results, before you run for the safe cover of minimum returns, you may want to run for advice first. A financial professional can evaluate not only your 529 investments but your entire investment and savings situation to make sure you’re not only doing the best for your college student, but for your retirement – which actually should be your first priority. After one of the worst market downturns since the Great Depression, now is actually a great starting point for this kind of advice.

Here are a few things to consider about more conservative investments in a 529 portfolio:

Is 1 or 2 percent good enough?

Yes, keeping your investment safe is a critical goal during a downturn, but how long do you have until your child needs the money and how close are you to your savings target? Investing for such an expensive goal takes a mixture of risk and caution.. Just make sure you have the right information so you know when to get out. A mixture of equities and fixed-income investments are the best structure for these portfolios, but they bear watching in case of a downturn.

CD flexibility is limited:

The attraction of investing in CDs is not only safety, but the ability to “ladder” (buying at regular intervals) your investment as CDs mature into potentially higher-paying investments. Here’s the problem. Current rules for 529 savings plans allow investors only one investment change per calendar year though in 2009, the IRS made an exception and allowed two changes. So much for laddering – that means you can’t roll over funds from a matured CD into a new one more than twice, though some of the plans are devising ways to automatically roll over mature CDs into shorter-term investments as the funds meet their target date of use. Yet, it won’t be the same as making those decisions yourself.

Could rolling into more conservative investments now be a mistake?

Knowing when a market bottoms out would guarantee riches. So you have to have some exposure in the portfolio to the possibility of growth, even in these times. Rolling your investments into conservative waters may actually lock in losses of as much as 40 percent. It makes sense to get advice with such a move and keep your ear to the ground with respect to economic news.

Let the younger child’s 529 pay for the older child’s tuition:

If your oldest child is ready to or has started college and you have more than one child and one 529 plan for each, consider using the cash in the younger child’s plan to pay for the older child’s tuition. This way the equity investments in the older child’s plan have a chance to recoup their losses and pay for the younger child’s tuition in future years.

January 2010 — This column is produced and is provided by The Jacobs Financial Group. (05-09)

Why Every College Freshman Should Start A Roth IRA

At no time since the Great Depression have college students worried more about money. Tuition continues to rise, financing sources continue to contract. So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation. Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates. Assume that $20,000 grows at 7.5 percent a year until age 65 – that would mean more than a half million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA. First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible. Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible. Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: It’s good to start with describing the difference between a traditional IRA and a Roth IRA and why Roths might be a better choice for the average student. Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time. Also, some institutions offer cash bonuses for starting an account. Go with the best deal and start by putting that bonus right into the account.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor. A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges. While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships and grants and smart ideas for borrowing to stay in school. A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal. One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives. Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than blowing it at the mall, they might feel considerably better about the money they give away. At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.

January 2010 — This column is produced and is provided by The Jacobs Financial Group. (08-09)

Taking Steps to Safer Investment Decisions in 2010

It’s tough to tell how much one investor can do alone to preserve their assets in 2009, particularly with unprecedented government intervention in world markets. But there are some general ideas to employ as markets and economies hopefully stabilize in the New Year:

Start with a plan – or review an old one: If you’ve worked with a good financial advisor, you should be able to articulate your long-term investment goals by yourself. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

Check all your assets in banks: As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2013. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Review your risk tolerance: Having a plan doesn’t mean make the plan and leave it to sit for years. You and your financial advisor should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but when unusual circumstances in life or the markets take place, a phone call might be a good idea.

Prepare to stay invested: Stock downturns are always filled with panic selling – and buying. If your financial plan is sound, be prepared to stay the course, but work with your advisor to make sure you have your priorities covered. While times are tough, it’s wise to examine all your investment choices, but if they make sense, definitely put what you can afford in. You’ll reap rewards when the market returns.

Check your credit: No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.

Pay attention to your cash: You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can capitalize on legitimate opportunities.

Re-budget: It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market come back.

Check your retirement: How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.

December 2009 — This column is produced and is provided by The Jacobs Financial Group. (12-08)