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We have much to discuss this month! As many of our readers
know, John assumed ownership of
Brighton Financial Planning, Inc. at the beginning of February. While a few
changes have been made, much remains the same. Importantly, Jim, Nina,
Sree and Lorraine
remain and our commitment to prudent investment management and financial
planning and to client service will continue to remain our foundation.
Let's cover the changes we've made. First, as a result of
the transition, the name of the firm has changed, ever so slightly, from
Brighton Financial Planning, Inc. to Brighton Financial Planning. We have filed
a new Form ADV and have new agreements. Clients will receive the new ADV
shortly along with a new agreement to sign. Next, we've added this monthly
e-mail newsletter for existing clients. This has been written by John since September of 2008. The newsletter covers
market and economic performance for the prior month and highlights financial
topics of interest. For new readers, it is distributed using the Constant
Contact service which maintains anonymity of readers. Readers can always
opt-out of future emails by clicking on the appropriate link at the bottom. We
expect you'll find the Bulletin informative and will choose to continue
receiving it going forward. Finally, we will be changing our website and e-mail
hosting to a new service in late March. The email change should be seamless.
The new website will continue to serve as your connection to your investment
accounts and will add many new informative and useful pages.
A quick review of our services - discretionary investment
management, investment advisory, defined contribution advisory and estate and
financial planning. Our discretionary investment management involves developing
an investment policy statement and then constructing and managing an appropriate
asset allocated portfolio. We believe in prudent investment management consistent
with an endowment approach to portfolio management.
Our investment advisory services can be applied in two ways -
traditional advisory services on a project oriented basis and account
aggregation advisory services on a continual basis. For the traditional
approach, we'll advise clients on any financial related activities for which
they seek our advice. Fees are determined using an hourly fee schedule. For the
account aggregation advisory service we will coordinate analysis and reporting on
all client assets regardless of where the assets are held and will provide
asset allocation and investment selection advice across all portfolios.
Our defined contribution advisory service applies to small
businesses. We will help the business owner (plan sponsor) implement and/or
manage the defined contribution plan. We will advise on plan selection,
investment options and provide ongoing support for plan participants. This
service helps the plan sponsor meet his/her ongoing fiduciary responsibilities to
plan participants as well as helps participants take full advantage of plan
benefits.
Finally, we provide estate and financial planning services.
These services run the gamut from cash flow sufficiency analysis to planning
for and attaining life goals, such as funding college or achieving retirement
goals to estate planning to maximize wealth transference and minimize taxes.
We believe firmly in the value of communication. We send
this monthly e-mail newsletter and a quarterly print newsletter. We also hold
investment reviews at least semi-annually during which we review our client
portfolio and provide our perspective on global economic and market trends. We
maintain a blog to which John, Jim and Sree will post periodically on financial
topics as well as a Facebook page for shorter posts. We are also always
available via phone and e-mail to discuss any topics of concern or interest.
We welcome referrals and would welcome a discussion with
every reader regarding how we may be able to add value to your financial
well-being. We have a 25 year track record of success and have built many
lasting relationships. We're looking forward to another 25 years of success.
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"Unexpected"
Not Really
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 The media has written extensively in February about "unexpected" economic reports. In almost every instance the "unexpected" news has been bad news. However, most informed investors haven't been surprised by these weak reports. Much of the bad news has been about the continuing lack of job growth and the contrast to the improving economy. However, the lack of job growth is not surprising. Companies can't forecast top line revenue growth because of lack of clarity regarding the potential for increased regulatory costs and potentially higher taxes. Consequently, businesses are holding cash and managing their cost structure closely. Labor costs are typically the most significant cost to a business. Hence, managing this cost is critical in a weak and uncertain environment.
The financial markets have remained optimistic despite inconsistent economic reports and rather weak earnings reports. Stripping out financials, S&P earnings grew much less than analysts had forecast and are expecting for 2010. We remain concerned about this somewhat excessive optimism and remain hedged in our equity allocation. The "unexpected" news wasn't "unexpected" by us. We'll continue to remain skeptical until until we see signs of job growth and improved capital spending.
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| Roth IRA Conversions--New Opportunities for 2010
With the lure of  tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you're a high-income taxpayer, chances are you haven't been able to participate in the Roth revolution. Well, new rules apply in 2010 that may change all that.
There are three ways to fund a Roth IRA--you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later).
In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2010. If you're age 50 or older, you can contribute up to $6,000 in 2010. (Note, though, that your contributions can't exceed your earned income for the year.)
But your ability to contribute directly to a Roth IRA depends on your income level ("modified adjusted gross income," or MAGI), as shown in the chart below:
When you convert a traditional IRA to a Roth IRA, you're taxed as if you received a distribution with one important difference--the 10% early distribution tax doesn't apply, even if you're under age 59½. (The IRS may recapture this penalty tax, however, if you make a non-qualified withdrawal from your Roth IRA within 5 years of your conversion.)
If you've made only nondeductible (after-tax) contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth. But if you've made both deductible and nondeductible IRA contributions to your traditional IRA, and you don't plan on converting the entire amount, things can get complicated.
That's because under IRS rules, you can't just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist of a pro-rata portion of the taxable and nontaxable dollars in the IRA.
For example, assume that your traditional IRA contains $350,000 of taxable (deductible) contributions, $100,000 of taxable earnings, and $50,000 of nontaxable (nondeductible) contributions. You can't convert only the $50,000 nondeductible (nontaxable) contributions to a Roth, and have a tax-free conversion. Instead, you'll need to prorate the taxable and nontaxable portions of the account. So in the example above, 90% ($450,000/$500,000) of each distribution from the IRA in 2010 (including any conversion) will be taxable, and 10% will be nontaxable.
You can't escape this result by using separate IRAs. Under IRS rules, you must aggregate all of your traditional IRAs (including SEPs and SIMPLEs) when you calculate the taxable income resulting from a distribution from (or conversion of) any of the IRAs. But even if you have to pay tax at conversion, TIPRA contains more good news--if you make a conversion in 2010, you can take advantage of a special deferral rule that applies only to 2010 conversions. You can report half the income from the conversion on your 2011 tax return and the other half on your 2012 return. Or you can instead elect to report all of the income from the conversion on your 2010 tax return.
For example, if your only traditional IRA contains $250,000 of taxable dollars (your deductible contributions and earnings) and you convert the entire amount to a Roth IRA in 2010, you can report half of the resulting income ($125,000) on your 2011 federal tax return, and the other half ($125,000) on your 2012 return. Or you can instead report the entire $250,000 on your 2010 tax return.
Should you use the special 2010 deferral rule? The answer depends in part on your tax rate in 2010 versus what you think your tax rates will be in 2011 and 2012. Keep in mind that tax rates are scheduled to increase in 2011, if the Bush tax cuts are allowed to expire. The top tax rate will increase to 39.6% in 2011, up from 35% in 2010.
You can also roll over non-Roth funds from an employer plan (like a 401(k)) to a Roth IRA. Prior to 2010, the income limits and marital status restrictions also applied to employer plan rollovers to Roth IRAs (commonly referred to as conversions). As with traditional IRA conversions, these restrictions have been removed beginning in 2010, and now anyone can roll over funds from an employer plan to a Roth, regardless of income level or marital status.
Like traditional IRA conversions, the amount you convert will be subject to income tax in the year of conversion (except for any after-tax contributions you've made). But the good news is that the special deferral rule discussed earlier also applies to amounts you roll over from an employer plan to a Roth IRA in 2010. You can report half of the conversion income on your 2011 tax return, and the other half on your 2012 return, or you can instead elect to report all of the income on your 2010 tax return. And even non-spouse beneficiaries can roll over inherited employer plan funds to a Roth IRA, as long as it's done in a direct (not 60-day) rollover.
The answer to this question depends on many factors, including your current and projected future income tax rates, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state's tax laws, and how you'll pay the income taxes due at the time of the conversion.
And don't forget--if you make a Roth conversion and it turns out not to be advantageous (for example, the value of your investments declines substantially), IRS rules allow you to "undo" the conversion. You generally have until your tax return due date (including extensions) to undo, or "recharacterize," your conversion. For most taxpayers, this means you have until October 15, 2011, to undo a 2010 Roth conversion.
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This issue is longer than usual and we appreciate your willingness to read it throughout! As always, we hope you find it informative and useful and will consider forwarding it to anyone you believe will also find it beneficial.
Please let us know if there is anything we can do for you!
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Load vs No-Load
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Mutual funds are offered to investors via share classes. Most advisors use a share class which pays a commission, called a "load". The most common load share classes are "A", "B", and "C". When an investor invests via an "A" share, the investor pays his/her advisor a commission which is deducted from the amount invested in the fund. When an investor invests via a "B" share, the fund company pays the advisor the commission. If the investor sells the shares at some point over a specified period (typically 5 years), the fund company deducts a portion of the commission from the client's proceeds. If the investor invests via a "C" share, the advisor is paid a commission on an annual basis. This commission is paid on the value of the account, so the actual dollar value will rise and fall with the value of the account.
These share classes often include a "12b-1" fee, which is ostensibly a "marketing" fee but, in reality, serves as an additional source of income for an advisor.
Fee-only advisors, such as us, use only no-load share classes. These share classes do not pay commissions and do not pay 12b-1 fees to advisors. A fee-only advisor is compensated directly by the client for advice and/or management services.
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