The Jacobs Financial Group

Saving for College: Understanding 529 Plans

Expecting a bundle of joy and wondering if you will be able to afford sending him or her off to college? Fortunately, you have a number of tax-advantaged federal and state college savings vehicles at your disposal, including the 529 plan, which comes in two varieties: the prepaid tuition plan and the savings plan.

The Prepaid 529 Plan

A prepaid plan allows you to pay now at today’s rates for school tomorrow. In return, your account is guaranteed to pay for the tuition and fees at the state’s public universities and colleges by the time your child graduates from high school. Note that prepaid plans often do not cover the costs for room and board. Your child also may use the prepaid account to attend a private or out-of-state school, but you might risk forfeiting some of its value depending on how the plan values its contracts. Note, too, that most prepaid plans require that you or your child be a resident of the state in which the plan is offered.

The 529 Savings Plan

The 529 college savings plan is far more flexible than the prepaid tuition schemes. The money accumulated may be used at any school you choose and for all qualified higher education expenses, including room and board.

Each state determines what the lifetime contribution limit or account balance cap will be in its 529 plan, but typically such limits range between $100,000 and $270,000. Investment minimums are low (most plans let you sock away as little as $25 a month as long as a minimum of $500 is accumulated within two years of the initial purchase date), and there is no restriction on how much you may contribute every year unless the account is nearing the lifetime cap.

However, since 529 contributions are treated as gifts subject to gift-tax limitations, if you want to make a tax-free contribution, it shouldn’t exceed $13,000 annually ($26,000 if you’re contributing with your spouse). There’s one exception, however: You may contribute as much as $65,000 tax free in one year ($130,000 with your spouse), but that contribution will be treated as if it were being made in $13,000 installments over the next five years. That means you can’t make other tax-free gifts to the beneficiary during that time.

Most 529 savings plans offer a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. In the former case, your annual contributions get invested in a pre-selected portfolio of stocks and bonds. Early on, the portfolio is tilted toward stocks, and as the time for college nears, the weighting shifts toward bonds. You can switch investments up to twice a year.

The quality of 529 college savings plans varies by state, but in most instances you may open an account in any state you’d like. All 529 plans offer generous tax breaks, provided you use the money for qualified expenses. While your contribution is not deductible on your federal taxes, your investment will grow tax-deferred and withdrawals will not be subject to federal tax.

You should always compare the 529 plan of your choice with any 529 college savings plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other benefits that are only available for investments in the home state’s plan. You should always read the Plan Disclosure Document which includes investment objectives, risks, fees, charges and expenses, and other information. You should read the Plan Disclosure Document carefully before investing.

Investment Risks

Investing in college savings plans comes with some risk. Unlike prepaid tuition plans, they don’t lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money or your investment may not grow enough to pay for college.

January 2012 — This column is produced and is provided by The Jacobs Financial Group. (12-12)

Understanding Value Investing

As volatility in the stock market continues, some investors may be tempted to buy on the dips. But this practice 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.

January 2012 — This column is produced and is provided by The Jacobs Financial Group. (12-12)

Knowing When It’s Time to Sell an Investment

Most investors have a process for purchasing an investment. It usually involves performing research, comparing similar investments or investment types, and considering a number of more personal factors, including time horizon, risk tolerance, and goals.

Few investors, however, have a tried-and-true process for selling an investment. Yet knowing when to sell can be every bit as important as knowing what to buy. Here are some guidelines that can help you decide whether it is time to let an investment go.

• You’re concerned with performance. If you are thinking of selling a holding simply due to a recent drop in price, take a deep breath and reconsider. Ask yourself these questions: Is my investment truly performing badly, or is it a consequence of larger economic and market conditions? How has the investment performed relative to similar investments over the last 1-, 3-, and 5-year periods? Have there been changes in management or ownership that have directly impacted its performance? If your investment has been a perennial underperformer, it may be time to move on. But it’s never advisable to sell solely on impulse. Extreme market swings can make even the most seasoned investors nervous. Think of your long-term goals and remember that trying to time the market can often bring disastrous results.

• You experience changes in your overall risk tolerance, time horizon, or goals. An investment that made perfect sense for you while you were in your 30s and 40s may no longer be as suitable as you get older. If you are no longer comfortable with an investment’s degree of volatility — particularly as you near retirement age — it may be time to sell.

• You need to rebalance or diversify. Financial experts recommend rebalancing your portfolio at least annually. To do so means selling a portion of some of your winners to reallocate among investments that may not have performed as strongly. The goal here is to make sure that your portfolio is properly diversified. Being too heavily invested in one security or one type of asset class can expose you to a higher-than-intended level of risk.

• You made a bad decision. It can be tough to buck the “herd mentality.” If you bought an investment because it was the hot ticket at the time and now realize that it’s not suitable for you, it’s probably best to let it go.

• You find a better and/or cheaper alternative. Sometimes it may be practical to move from one investment to another. For example, you may be happy with your mutual fund’s performance, but not its fees. If you can find a similar investment with a similar track record that minimizes the costs to you, it may be wise to switch.

• You need the cash. Sometimes you have to part with an investment even though you’d rather not do so. But should you sell an investment that’s currently experiencing a run-up, or one that’s been battered? It may be worthwhile to consult with your tax professional. Selling an investment that has lost value can pay dividends at tax time by allowing you to use the deduction to offset other gains.

December 2012 — This column is produced and is provided by The Jacobs Financial Group. (11-12)

The Benefits of a Living Trust

When considering your estate planning needs, it can be beneficial to have the tools necessary to distribute your assets in the way you want. While a will is necessary for most people, there are also advantages to a living trust.

A living trust is a written legal document that partially substitutes for a will. The trust is administered for your benefit during your lifetime, and then transfers to your beneficiaries when you die. It can help ensure that your assets will be managed according to your wishes — even if you become unable to manage them yourself.

Almost any type of asset can be placed in a trust: savings accounts, stocks, bonds, real estate, life insurance, business interests, and personal property. To fund a trust, you simply change the name or title on your assets to the name of the trust.

When establishing a living trust, most people name themselves as the trustee in charge of managing the trust’s assets. You can also name a successor trustee — either a person or an institution — who will manage the trust’s assets if you ever become unable or unwilling to do so yourself. You can amend or revoke the trust at any time.

At your death, the trustee — similar to the executor of a will — would then gather your assets; pay any debts, claims and taxes; and distribute your assets according to your instructions. Unlike a will, however, this can all be done without court supervision or approval. And because the trust would not be under the direct management of the probate court, your assets and their value (as well as your beneficiaries’ identities) would not become a public record.

Since a living trust can hold both separate and community property, it may be a convenient estate planning vehicle for spouses and registered domestic partners to plan for the management and ultimate distribution of their assets in one document. A living trust does not exempt the assets from estate taxes or state inheritance taxes.

Living trusts are most appropriate for those with substantial assets or complex estates. In general, financial planners frequently recommend them for individuals or couples with an estate of $1 million or more. Estates of this size typically are subjected to probate in the deceased’s state of residence, which can cost anywhere between 2% and 4% of the estate’s value in court and legal fees and can take months to settle.

Do You Still Need a Will?

A will is an essential backup device for property that you don’t transfer to yourself as trustee. If you don’t have a will, any property that isn’t transferred by your living trust or other probate-avoidance device will go to your closest relatives in an order determined by state law. These laws may not distribute your property in the way you would have chosen. Also, if you have minor children, you need a will to establish guardianship.

December 2012 — This column is produced and is provided by The Jacobs Financial Group. (11-12)

Five Common Retirment Planning Mistakes

Only 14% of American workers say they are “very confident” they will have enough money to live comfortably throughout retirement. To help reduce such uncertainty from your life, consider these five common investment pitfalls — and how to avoid them.

Mistake #1: Waiting to Maximize Your Contributions
The sooner you start contributing the maximum amount allowed by your employer-sponsored retirement plan, the better your chances for building a significant savings cushion. By starting early, you allow more time for your contributions — and potential earnings — to compound, or build upon themselves, on a tax-deferred basis. For 2012, the maximum you can contribute to your 401(k), 403(b), or 457 plan is $17,000. In 2013, it rises to $17,500. If you are age 50 or older, you can sock away an additional $5,500. If you can’t contribute to the max, be sure to contribute enough to take full advantage of any company match contributions.

Mistake #2: Ignoring Specific Financial Goals
It is difficult to create an effective investment plan without first targeting a specific dollar amount and recognizing how much time you have to pursue that goal. To enjoy the same quality of life in retirement that you have become accustomed to during your prime earning years, you may need the equivalent of up to 80% of your final working year’s salary for each year of retirement.

Mistake #3: Fearing Stock Volatility
It is true that stock investments face a greater risk of short-term price swings than fixed-income investments. However, stocks have historically produced stronger earnings over the long term. In general, the longer your investment time horizon, the more you might want to rely on stock funds.

Mistake #4: Timing the Market
Some investors try to base investment decisions on daily price swings. But unless you have a crystal ball, “timing the market” could be very risky. A better idea might be to buy and hold investments for several years.

Mistake #5: Failing to Diversify
Investing in just one fund or asset class could subject your investment portfolio to unnecessary risk. Spreading your money over a well-chosen mix of investments may help reduce the potential for loss during periods of market volatility. Diversification may offset losses in any one investment or asset category by taking advantage of possible gains elsewhere. Now that you are aware of these five common investment errors, consider yourself lucky: You are ready to benefit from other people’s experiences — without making the same mistakes.

December 2012 — This column is produced and is provided by The Jacobs Financial Group. (11-12)

How to Contain Costs for Your College-Ready Child

College graduates in 2011 walked away with a diploma and an average of nearly $27,000 in student loans, according to a recent report. The report also estimated that two-thirds of the class of 2011 held student loans upon graduation, up 5% from the 2010 findings.

Student debt is widely understood to be a serious and growing problem in the United States. The federal student loan default rate is now the highest it has been in 14 years, at 9.1%. According to economists with the Federal Reserve Bank of New York, more than five million student loan borrowers have at least one loan past due.

And the news gets worse: While unemployment for college graduates was at 8.8% in 2011 — mostly in line with the national rate — an estimated 38% of recent graduates are working in jobs that do not require a college diploma.

What can you do to help contain costs for your college-ready child? Here are some tips.

• Start locally — Attending a community college for one or two years could substantially reduce costs when compared with a four-year public or private school.

• Tap into federal loans first – Find out more at the Federal Student Aid website, created by the Department of Education. Federal Student Aid provides more than $150 billion in federal grants, loans, and work-study funds each year.

• Investigate Income-Based Replacement (IBR) – Available for federal student loans since 2009, IBR caps monthly payments at a manageable share of income and forgives any debt remaining after up to 25 years of payments, or as few as 10 years of payments, for those working for public or nonprofit employers.

• Consider private loans as a last resort – These loans are tricky, as graduates find themselves locked into loan terms that can make repayment difficult as they navigate the job market and struggle to find steady work.

December 2012 — This column is produced and is provided by The Jacobs Financial Group. (11-12)

The Many Benefits of Rollover IRAs

Have you switched jobs recently and are wondering what to do with the retirement plan assets at your previous employer? You could roll them over into your new employer’s plan, but a rollover IRA may be a better choice. A rollover IRA can provide you with the broadest range of investment choices and the greatest flexibility for distribution planning, and can typically be operated with fewer restrictions. A rollover IRA gives you:

• More control: As the IRA account owner, you make the key decisions that affect management and administrative costs, overall level of service, investment direction, and asset allocation. You can develop the precise mixture of investments that best reflects your own personal risk tolerance, investment philosophy, and financial goals. You can create IRAs that access the investment expertise of any available fund complex, and can hire and fire your investment managers by buying or selling their funds. You also control account administration through your choice of IRA custodians.

• More flexibility: IRAs can be more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries in an estate plan. Each of those beneficiaries can make use of planning structures such as the Stretch IRA concept to maintain tax-advantaged investment management during their lifetimes. Beneficiary distributions from employer-sponsored plans, in contrast, are generally taken in lump sums as cash payments. Also, except in states with explicit community property laws, IRA account holders have sole control over their beneficiary designations.

Efficient Rollovers Require Careful Planning

One common goal of planning for a lump-sum distribution is averting unnecessary tax withholding. Under federal tax rules, any lump-sum distribution that is not transferred directly from one retirement account to another is subject to a special withholding of 20%. This withholding will apply as long as the employer’s check is made out to you — even if you plan to place equivalent cash in an IRA immediately. To avert the withholding, you must first create your rollover IRA, and then request that your employer transfer your assets directly to the custodian of that IRA.

Keep in mind that the 20% withholding is not your ultimate tax liability. If you spend the lump-sum distribution rather than reinvest it in another tax-qualified retirement account, you’ll have to declare the full value of the lump sum as income and pay the full tax at filing time. In addition, the IRS generally imposes a 10% penalty tax on withdrawals taken before age 59½.

Also, if you plan to roll over the entire sum, but have the check made out to you rather than your new IRA custodian, your employer will be required to withhold the 20%. In that event, you can get the 20% refunded if you complete the rollover within 60 days. You must deposit the full amount of your distribution in your new IRA, making up the withheld 20% out of other resources. When you file your tax return for the year, you can then include a request for refund of the lump-sum withholding.

If you have after-tax contributions in your employer plan, you may opt to withdraw them without penalty when you roll over your assets. However, if you wish to leave those funds in your retirement account in order to continue tax deferral, you can include them in your rollover. When you begin regular distributions from your IRA, a prorated portion will be deemed nontaxable to reimburse you for the after-tax contributions.
Potential Downsides of IRA Rollovers

While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances. Also, you must begin taking distributions from an IRA by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age.

Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Therefore, you should obtain qualified professional advice before taking any action.
November 2012 — This column is produced and is provided by The Jacobs Financial Group. (10-12)

Ten Investment Mistakes to Avoid

Who needs a pyramid scheme or a crooked money manager when you can lose money in the stock market all by yourself. If you want to help curb your loss potential, avoid these 10 strategies.

1. Go with the herd. If everyone else is buying it, it must be good, right? Wrong. Investors tend to do what everyone else is doing and are overly optimistic when the market goes up and overly pessimistic when the market goes down. For instance, in 2008, the largest monthly outflow of U.S. domestic equity funds occurred after the market had fallen over 25% from its peak. And in 2011, the only time net inflows were recorded was before the market slid over 10%.

2. Put all of your bets on one high-flying stock. If only you had invested all your money in Apple 10 years ago, you’d be a millionaire today. Perhaps, but what if, instead, you had invested in Enron, Conseco, CIT, WorldCom, Washington Mutual, or Lehman Brothers? All were high flyers at one point, yet all have since filed for bankruptcy, making them perfect candidates for the downwardly mobile investor.

3. Buy when the market is up. If the market is on a tear, how can you lose? Just ask the hordes of investors who flocked to stocks in 1999 and early 2000 — and then lost their shirts in the ensuing bear market.

4. Sell when the market is down. The temptation to sell is always highest when the market drops the furthest. And it’s what many inexperienced investors tend to do, locking in losses and precluding future recoveries.

5. Stay on the sidelines until markets calm down. Since markets almost never “calm down,” this is the perfect rationale to never get in. In today’s world, that means settling for a miniscule return that may not even keep pace with inflation.

6. Buy on tips from friends. Who needs professional advice when your new buddy from the gym can give you some great tips? If his stock suggestions are as good as his abs workout tips, you can’t go wrong.

7. Rely on the pundits for advice. With all the experts out there crowding the airwaves with their recommendations, why not take their advice? But which advice should you follow? Cramer may say buy, while Buffett says sell. And remember that what pundits sell best is themselves.

8. Go with your gut. Fundamental research may be OK for the pros, but it’s much easier to buy or sell based on what your gut tells you. Had problems with your laptop lately? Maybe you should sell that IBM stock. When it comes to hunches, irrationality rules.

9. React frequently to market volatility. Responding to the market’s daily ups and downs is a surefire way to lock in losses. Even professional traders have a poor track record of guessing the market’s bigger shifts, let alone daily fluctuations.

10. Set it and forget it. Ignoring your portfolio until you’re ready to cash it in gives it the perfect opportunity to go completely out of balance, with past winners dominating. It also makes for a major misalignment of original investing goals and shifting life-stage priorities.

November 2012 — This column is produced and is provided by The Jacobs Financial Group. (10-12)

Preventing Identity Theft

Millions of Americans fall victim to identity theft each year — and their financial losses are in the billions. In 2010 (the latest data available), an estimated 8.6 million Americans experienced identity theft, causing losses of $13.3 billion.

What can you do to help reduce your chances of having your identity stolen? The steps below can help you prevent significant losses.

• Check your credit reports every year. You have the right to obtain a free copy of your credit report every 12 months from each of the three credit reporting bureaus — Equifax, Experian, and TransUnion. Check thoroughly to ensure that there aren’t any unidentified accounts on your report.

• Place a freeze on your credit reports. This can help stop an identity thief from opening a credit card account under your name. You simply contact the three credit bureaus and request a credit freeze. This prevents lenders who don’t already have a relationship with you from viewing your credit report. If they can’t access your credit report, they won’t issue a new account. There is often a fee to request a freeze, depending on your state of residence and whether you’ve ever been the victim of identity theft in the past.

• Monitor your email. You want to be on the lookout for phishing scams, particularly those that appear to come from a credit card company, bank, retailer, or anyone else you do business with. Many of these emails will direct you to a phony website that will ask you to input sensitive data, such as your account numbers, passwords, and Social Security number.

• Be careful online. When banking or shopping online, be sure to use websites that protect your financial information with encryption, particularly if you are using a public wireless network via a smartphone. Sites that are encrypted start with “https.” The “s” stands for secure. Also be sure to use anti-virus and anti-spyware software.

What do you do if your identity is stolen? First, call one of the three credit bureaus and ask them to place a 90-day fraud alert on your credit report. They must contact the other two bureaus to place fraud alerts on your reports. You also want to get a copy of all three credit reports.

Second, file a complaint with the Federal Trade Commission (FTC). You’ll create an FTC Affidavit, which you should then take to your local police department and file a police report. Your copy of the FTC Affidavit and the police report make up an Identity Theft Report, which can help you:

• Get fraudulent information removed from your credit report.
• Stop companies from collecting debts caused by the theft.
• Get information about accounts that were illegally opened in your name.

November 2012 — This column is produced and is provided by The Jacobs Financial Group. (10-12)

Living Alone? Financial Tips to Keep You on Track

Living the single life no longer is an anomaly: According to the U.S. Census Bureau, 45% of households nationwide are maintained by a single person. Being single affects many areas of financial planning, including retirement, financing health care later in life, and other key issues.

If you are single, or expect to be as a result of a pending divorce, consider the following as you plan your finances.

Retirement
An increasing percentage of preretirees are planning for retirement on their own. What steps should solo planners take to shore up their finances for a comfortable retirement?

Set long-term retirement savings goals. If you have access to an employer-sponsored retirement plan, contribute as much as you can afford. For 2012, the maximum employee contribution is $17,000, and workers aged 50 and older can contribute an additional $5,000 catch-up contribution.
Consider funding an IRA. For 2012, the maximum contribution is $5,000, and investors aged 50 and older can contribute an additional $1,000.
Invest as much as you can. Investing as much as you can afford for retirement over the long term is beneficial because you will not have the luxury of falling back on a partner’s pension. In addition, your household will have one Social Security check to fund retirement expenses.

Parenting

Fund for your children, but don’t forget yourself. If you have children, your financial planning could be especially challenging because you may be required to fund tuition, child care, and other costs on one salary. As you raise your family, be sure not to shortchange your needs. Put away something for retirement, even if it is only a small amount each week. Over time, this amount may compound and serve as the basis of your retirement nest egg. Be sure to appoint a guardian for your children in the event that you are not able to care for them.

Insurance and Health Care

Review your options for disability insurance and long-term care insurance. It is critical to purchase these types of insurance while you are healthy and the premiums are affordable. These insurance purchases increase the chances that you will have adequate cash flow if you are not able to work because of a disability, or if you require assistance with activities of daily living later in life.
Prepare for health care expenses. You may need to direct a lawyer to draft a health care proxy in which you designate a loved one to make medical decisions on your behalf if you are not able to do so yourself.

Housing

Think carefully about the type of housing situation that suits your needs. Carrying a single-family home, especially in an expensive housing market, frequently is difficult on one income. Be sure that your home is affordable enough to permit you to invest for retirement and other financial goals.

Your situation may present additional considerations, but the suggestions mentioned here may help you manage your finances successfully.

November 2012 — This column is produced and is provided by The Jacobs Financial Group. (10-12)