INFORMATION on INVESTING & WEALTH MANAGEMENT
Investing and Wealth Management
Plans for accumulation and management of wealth require expert assistance in determining the road to success for your particular economic situation. Care must be exercised in all aspects so as to protect your assets as well as to align risk with reward in determining desired financial returns.
Individuals seeking to not only protect and preserve but to also maximize their returns must not be dealt with a cookie cutter approach but instead plans must be developed that personalize the effort with the goals, time frames and risk tolerance of the individual factored into the equation.
Highland Commercial Bank offers tools to assist you on your road to financial prosperity. This is done by a personalized, one on one, approach that is meant to grow over time.
Traditional IRA
This IRA is an excellent tool for you to plan for your retirement. Your growth accumulates tax deferred until withdrawal. You can utilize pre tax dollars to accumulate wealth for future earnings, pay less taxes now by benefiting from possible yearly tax deductions all the while increasing in value with the advantage of Federal Income Tax deferred earnings.
Eligibility requirements include:
*Individuals must be under the age of 70 ½ during the year they contribute and have earned income
*Individuals who are not active participants in any employer sponsored retirement plan may make fully deductible contributions regardless of their modified adjusted gross income
*Individuals that don’t qualify for a deductible IRA contribution may make annual non deductible contributions and still take advantage of the tax deferred earnings
*Individuals who have a modified adjusted gross income of up to $52,000.00 or joint filers with an adjusted gross income of up to $83,000.00 who are active participants in an employer sponsored retirement plan can make fully deductible contributions.
*Individuals contribution limits phase out between $52,000.00 and $62,000.00 modified adjusted gross income and between $83,000.00 and $103,000.00 for married couples filing jointly.
*If only one spouse is an active participant in a qualified retirement plan the other non active spouse may make a fully deductible contribution if the couples modified adjusted gross income is less than $156,000.00 or a partially deductible contribution between $156,000.00 and $166,000.00 of modified adjusted gross income.
Contributions Levels for 2007 tax year:
*$4,000.00 for single individual up to age 50
*$5,000.00 for single individuals age 50 and over
*$8000.00-$10,000.00 for married couples filing jointly ($4000.00 for each joint filer up to age 50 and $5000.00 for each over age 50)
Distributions:
Any distributions from a Traditional IRA may begin at age 59 ½ and are required to begin by April 1st of the year following the year you reach the age of 70 ½. Distributions taken prior to age 59 ½ may be subject to a 10% IRS early withdrawal penalty unless one of 6 qualifying exceptions occurs:
*Medical exceptions
*Death
*Disability
*Purchase of a first home (this has a 10,000.00 lifetime limit)
*Qualified higher education expenses
*Early retirement resulting in substantially equal period payments
The deductible contributions and earnings are always subject to federal income tax at the time of distribution.
Roth IRA
Roth IRA-Roth IRA is a retirement tool that allows the Roth IRA earnings to be tax free at distribution which is a significant change from the traditional IRA. While certain criteria must be met to qualify, the Roth IRA contributions are not tax deductible.
Eligibility Requirements:
*Individuals or married couples with earned income
*Single individuals must have modified adjusted gross income of less than $99,000.00
*Married couples with modified adjusted gross income less than $156,000.00 may make full contributions.
*Contribution limits phase out for modified adjusted gross income between $99,000.00 and $114,000.00 for single individuals and between $156,000.00 and $166,000.00 for married filing jointly.
*You may continue to contribute to a Roth IRA even if you participate in an employer sponsored plan. A non working spouse can also contribute even if the working spouse is covered by an employer sponsored plan.
Contribution Limits:
*$4,000.00 for single individuals up to age 50
*$5,000.00 for individuals age 50 and over
*$8,000.00-$10,000.00 for married couples filing jointly ($4,000.00 for each joint filer up to age 50 and $5,000.00 for each age 50 and over)
*While you can contribute to both a Traditional IRAS and a Roth IRA in the same year the total contribution is limited to the individual and joint filer limits listed above.
*Rollovers from a Traditional IRA to a Roth IRA to take advantage of tax free earnings may consider this conversion but it is only available to single individuals or married couples filing jointly with a modified adjusted gross income of $100,000.00 or less.
SEP IRA
SEP IRA-Simplified Employee Pension Plan IRAs, are other examples of ideal investment plans who want to create a tax deferred plan for small business owners or self employed individuals. These plans have specific advantages in that they:
*Provide a plan that is easy to establish and just as easy to maintain
*Provide for contributions that are tax deductible as a business expense
*Provide an effective and easy way for business owners and self employed individuals to establish and build their retirement assets
*SEPs allow owners to contribute up to 25% of each participant’s annual compensation or $45,000.00 whichever is less. You also have the flexibility to skip years and change the contribution level/percentage year to year.
Simple IRA
Simple IRA-If you as a company employ less than 100 people the Simple IRA is a cost effective way to establish a retirement plan. Features include the encouragement it provides to employees to contribute to their own retirement through a salary deferral option and there are some employer contributions, on a limited scale, allowed.
Contribution Levels:
*Employer contributions can be made up to the employer’s tax filing deadline including any extensions.
*The employer can choose from two options to make contributions. Either a dollar for dollar match on employee deferrals up to 3% of contributions(which can be lowered to as little as 1% for two out of any five years) or a non elective contribution of 2% of compensation(limited to $225,000.00) for each employee who has $5,000.00 in wages during the year regardless of participation in salary deferrals.
*Tax year 2007 employee salary deferrals can be made up to $10,500.00 under age 50 or $13,000.00 over age 50, or 100% of income which ever is less. They can be made throughout the calendar year with no minimum employee participants requirements.
INVESTMENTS
(Care should be maintained as these type investments are not insured by the FDIC or any agency of the United States Government and is subject to investment risks up to and including the loss of principal)
Mutual Funds
When a person invests in mutual funds you own shares of a group of stocks, bonds and other related securities in some combination determined by a professional manager or managers who select the investments and manage the entire portfolio.
You should look at a broad array of mutual funds to determine if the approaches to investment, the risk of the chosen portfolio, the objectives of the fund and its management best suit you and your style, goals and risk tolerance.
All mutual funds charge annual fees for management and these fees expressed as a percentage of the invested amount are deducted from gross fund revenue. Many carry sales charges, called loads, and these charges differ based on the class of shares as do the redemption rights. No load means no charges on the initial sale, back load incurs the charge when you sell the shares within a specific number of years and front load pays the sales charges on the initial investment.
There are typically four or more types of mutual funds. These include:
*Growth mutual funds- these funds typically hold common stock for capital gain and do not concentrate on current income. They typically might be considered on the higher end of the risk spectrum.
*Income mutual funds- these funds typically look for high yielding bonds and stocks to provide income for the investor. Typically less risky than growth funds as their share prices are more stable but have less possibility of significant share appreciation.
*Tax Advantage Mutual funds- These funds have low risk and are created to produce regular stable tax free income to the investor. This is available as municipal bonds are exempt from federal taxes and could be exempt from state and local taxes.
*Money Market Mutual funds-Designed to preserve principal and gain income at market (prevailing) rates of interest. Typical investments would include short term debt securities.
Annuities
An annuity is a contract for purposes of investment that is issued by an insurance company which allows your money to grow on a tax deferred basis very much like a qualified retirement plan. Limits on other retirement vehicles as to contribution limits and eligibility requirements may make it difficult to meet your retirement goals so this type of vehicle could assist.
While contributions are not tax deductible there are no limits you can put into a deferred annuity. Annuities can be fixed or variable and each have their own set of characteristics and features and benefits.
Fixed Annuities-
Fixed annuities provide for a fixed rate of return for a specific time and are positioned to assist in providing protection from market volatility. You should consider several items in determining whether or not a fixed annuity is good for your goals. You should consider such things as estate planning benefits-that is can your estate or named beneficiary receive the value of the remaining annuity without assistance of probate. You should also consider whether the benefits can be paid in lump sum or specific payments over time. Other items such as the availability of withdrawals without penalty, the tax advantages of allowing the growth to continue without the burden of taxation and how much flexibility you can have when determining how you wish to receive the income surely should be measured.
Variable Annuities-
Variable Annuities invest in a group of portfolios which could fluctuate with market conditions while adding risk on the downside they do allow for the potential of higher returns over time. You also have the added advantage typically of transferring monies invested within the annuity with no income tax consequences.
Typical features to review with any variable annuity product include the investment options available that closely meet your needs and profile, the availability of funds to withdraw on an as needed basis, the tax advantages of growth without the burden of taxation and the flexibility of how the income can be dispersed over time to you once you decide to receive it.
Bonds
Bonds represent an evidence of debt of some governmental or corporate entity and as such can provide for stable rates of return but can change due to changes in prevailing interest rates or the credit standing of the issuer. Typically these type investments include:
*Tax exempt municipal bonds
*Corporate bonds
*Mortgage backed securities
*U.S. Treasuries with varying maturities
*Governmental Agency bonds
Held to maturity bonds return full face value. Maturities vary from less than one year to as many as thirty years. Generally bond prices and values fall when interest rates rise and vice versa.
Equities
More commonly referred to as “stocks” this type of securities represent ownership as opposed to debt in a corporation which as such provides the owner of the stock with a beneficial interest in the company’s success through the payment of dividends and/or capital appreciation over time.
While stocks have over time provided one of the best performing types of investments they also can experience wide swings in value due to external and internal forces. You should of course measure your involvement in equities based on your knowledge of the industry and your tolerance for risk.
Tools for Wealth Management
There are many tools available for your use in managing the accumulation, growth and use of your assets up to and including the distribution of your wealth such as:
*Brokerage services
*Fee based asset management
*Strategies to manage and balance need with liquidity and market/product diversification
*Financial and estate planning including risk tolerances, financial goals and your time frame or time horizon for investing and receiving
*Insurance needs to include Life and Disability along with Long Term Care to ensure that you, your family, and your assets are protected.
Insurance
Insurance needs vary from household to household and from economic situation to situation. Many products are needed from day to day and include:
*Permanent Life insurance- Circumstances and needs change over time so a regular review of your life insurance needs is necessary to insure that you and your family are protected.
*Health Insurance-With the complexity of today health insurance you certainly want to gain the assistance of a qualified professional to determine your needs and how best to meet them in a cost efficient way.
*Term Life Insurance-As the name implies this provides coverage for only a limited time and unlike other life insurance policies term life does not maintain a cash value feature meaning that your entire premium goes for the cost of the coverage. There are certain benefits of term insurance including it is relatively cheap the younger you are, helpful in providing large amounts of temporary coverage, can be specifically targeted to an event such as guaranteeing a college education, funding a gift to charity or using as a source for debt retirement.
*Long Term Care insurance-With the expense of in home care and the ever increasing costs of assisted care and nursing home care it is important to successfully plan for this expense and this form allows you to do just that.
*Homeowner insurance-other than your personal life this represents most individuals and families most valuable assets and coverage limits and exclusions must be considered.
*Auto insurance-from your own car to other properties and liability for accidents and injuries as well as death it is important that this be properly planned for in your financial life.
*Specific valuable property coverage-many items unless specifically added are not covered under normal homeowners insurance and thus the specificity of the documentation of the items and their value is essential.
*Personal Umbrella coverage (Liability)- unfortunately in today’s very litigious society the issue of sufficient liability coverage must be reviewed by a qualified professional in order to determine sufficiency.
Educational Savings Products
529 College Savings Plans
Under the IRS Code Section 529 parents, grandparents, relatives and friends can save for a child’s education. Most states have plans that are personally and professionally managed. Advantages include:
*While funds are contributed on an after tax basis they grow tax deferred.
*Money can be withdrawn tax free to pay qualified education expenses at accredited schools
*Qualified expense include tuition, books, supplies, room and board and computer equipment etc
*Accounts can be transferred to a qualified member of the child’s family
Coverdell Education Savings Accounts
This account is a convenient way to plan for a child education. It is also tax exempt as long as the funds are used for educational purposes. There are specific eligibility requirements that must be met to qualify and include:
*Income restrictions individually of $95,000 and married filing jointly of $190,000.00
*Contribution Limits are $2,000.00 per year for children under age 18
*Contributions are not tax deductible but the interest in tax exempt and distributions are tax free if used for educational expenses
*Withdrawals can be used for tuition, room and board, fees, supplies and uniforms if any.
*Student must be enrolled full or part time and funds must be distributed by the students 30th birthday.
*Investment options vary from institution to institution
Health Savings Account
A health savings account is a convenient way to plan for medical expenses both seen and unseen and does so in a way that has tax advantages. If you are eligible you can make tax deductible contributions and funds can be withdrawn tax free when used for qualified medical expenses.
To qualify for our HSA you must be covered by what is called a high deductible health plan and there are maximum allowed annual contribution limits. The features and benefits are listed below:
*While no minimum balance is typically required investment options change as the balances increase. Typically fees are charged for initial set up, transactions, maintenance fee and debit card access.
*The funds remain in your HSA from year to year with no expiration at calendar year end and are not tied to your employer so are completely portable. If the balances are invested in a bank HSA then FDIC insurance is present and interest rates and investment options are typically tiered and available.
*Earnings are tax free when used to pay for a qualified expense and contributions are limited in their deductibility.
*To qualify you must be covered with the HDHP which is defined as:
*a deductible of at least $1,100.00 for an individual
*a deductible of at least $2,200.00 for family coverage
*a maximum annual out of pocket costs for single coverage not to exceed $5,500.00 and for family coverage of $11,000.00
*2007 maximum contribution limits are for single coverage of $2,850.00 and family coverage of $5,650.00
*New features for HSAs in 2007 include rollovers allowed from health flexible spending and health reimbursement arrangements into your HSA as well as one time rollovers from your IRA. Your advisor should consult with you as to limitations that apply.