TA K I N G C O N T RO L

2

We'll be with you ...
IT’S TIME TO GET CONTROL
o f Yo u r F i n a n c i a l F u t u r e
L et’s begin by stating the obvious: You can’t control the wind. Or the rain. Or what
happens in Washington. Or the driver in the car in front of you. And that can be scary
because all of these things that you can’t control – and countless others – could pro-
foundly affect you and your family.
Of course, the good news is there are plenty of aspects of your life you can control. This
publication addresses one of the most important – your investments.
When it comes to planning for your financial future, you don’t have to feel like a kite help-
lessly buffeted by the wind. You can take control and help ensure your investments have
you on track toward your goals. Your key to getting started is having a grasp of the basics.
And that’s just what this brochure is all about.
3

... helping define goals.
MAKING CHOICES
C l a r i f y i n g Yo u r O b j e c t i v e s
A common misconception is that you start investing by buying something. In fact,
purchasing investments is just one part of a much bigger picture. Think of it this way: You
wouldn’t set out on a trip without first having a destination in mind. In the same way, the
steps you take as an investor should be based on what you’re trying to accomplish. In
general, it’s only after you know your goals and your strategy for working toward them that
you should begin purchasing any investments.
4

Clarify Your Objectives out any short-term price volatility and have the
There are many reasons to invest: To purchase potential to enjoy the increased returns that a
a dream house or automobile; to vacation in riskier investment usually offers. (We’ll discuss
exotic places; to start a new business. the relationship between risk and return in the
next section.)
These are all valid reasons, but the three most
commonly cited reasons for investing are to: A shorter time horizon may require you to use
more conservative investments. If, for example,
• Help ensure a financially secure retirement you purchase an investment with plans to sell it
• Pay a child’s or grandchild’s higher in a year, it’s usually best to choose a low-risk
education expenses investment. If you hope to get a big return on a
short-term investment, you should understand
• Leave a financial legacy for heirs or, perhaps,
that you will need to make risky investments
a favorite charity
and face the very real likelihood that you may
The clearer your objectives, the easier it will be lose money.
for you to develop your strategy for working
toward them. Therefore, it’s essential that you Establish Your Starting Point
take time to prioritize your objectives. For
example, you may want to save for retirement. Once you’ve clarified your objectives and time
But how do you plan to spend your retirement? horizon, you need to determine where you are
Playing golf or tennis? Traveling? Shopping? today. In other words, is your financial house
Enjoying time with children or grandchildren? currently in order? For example, if you’re carry-
Pursuing a second career? Volunteering for ing a heavy debt burden, especially high-inter-
your favorite charities? These are all issues to est credit card debt, you’ll probably need to
consider when defining your objectives. reduce it before you start investing.
A good way to determine where you stand
Determine Your Time Horizon financially is to start with your personal net
worth statement, which your Wachovia
Having a clear idea of your goals is important
Securities Financial Advisor can prepare. This
because they will help determine your time
statement will give a snapshot of your assets
horizon. For example, if you want to save for
(what you own) and liabilities (what you owe).
a child’s education, your time horizon will
It will also show how your assets are currently
probably be shorter than if you are saving for
allocated between investments (stocks and
your retirement.
bonds), bank accounts (checking, savings and
Knowing your time horizon is important certificates of deposit) and real estate you own
because it will help dictate the types of invest- for investment purposes. Because it’s essential
ments you should make. Having a longer time to know where you’re starting from, having a
horizon usually means you can invest more net worth statement can be a valuable first step
aggressively because you should be able to ride in developing your strategy.
5

THE UPS
& DOWNS OF INVESTING
T h e R i s k s i n Yo u r P o r t f o l i o
Navigating through ebbs and flows ...
R isk is an inherent part of investing. And though it may seem simple enough on the
surface, risk can be one of the most difficult concepts for investors to understand. The
most obvious risk of any investment is that you’ll lose money – you purchase a stock at
$50 a share, for example, and a year later it’s worth only $25. Keep in mind at this point
you have what’s called a “paper loss.” In other words, you haven’t lost anything until you
sell the stock at less than $50. It could be that if you waited another year the stock might
be at $75, and you could sell it at a gain.
6

MEASURING AN INVESTMENT’S an investment that’s been relatively stable over The most important thing
UPS AND DOWNS a long time period can suddenly become vola- to understand about risk:
tile. So take standard deviation with a grain of It usually goes hand in
A stock that has wide price swings, such as the
salt, and be prepared to expect the unexpected
one just discussed, would probably be described hand with return potential.
with any investment.
as a volatile investment. Volatility is the most
common measurement of risk. It’s the range of
movement – both up and down – in an invest-
RISK’S ROLE IN YOUR PORTFOLIO
ment’s price over a period of time that deter- Here’s perhaps the most important thing to
mines how risky it is. understand about risk: It usually goes hand
An investment’s historical performance is used in hand with return potential. A low-risk
to determine its standard deviation, the statistic investment, for example, will often have a low
used to measure volatility. The more certainty return. As a result, investors include riskier
you can expect in predicting an investment’s investments in their portfolios because they’re
price performance based on what it’s done in looking for the greater return potential these
the past, the lower its standard deviation. investments offer.
Conversely, the more uncertainty you can antic-
ipate, the higher the standard deviation will be. FEELING AT EASE WITH
For example, if an investment has experienced YOUR INVESTMENT CHOICES
extreme volatility (large up and down price Your risk tolerance is simply the level of risk
movements) in the past, its standard deviation you can comfortably live with in your portfolio.
will be high – predicting that the volatility will The higher your risk tolerance, the better
continue in the future. returns you may be able to achieve.
Here’s how it works: If a stock has a 20% Although higher returns may be attractive, you
average annual standard deviation, an investor may be comfortable with a relatively low level
might expect it to end the year either 20% of risk – and that’s OK. You need to determine
higher or lower than its price at the beginning your risk tolerance and design your portfolio to
of the year. If this stock starts the year selling fit within it, which may require you to adjust
at $100 and ends the year between $80 and your objectives or time horizon.
$120, the price would be within its standard
For example, if you have a relatively low risk
deviation. Because standard deviation relies on
tolerance, want to start saving toward having
historical data to forecast what may happen
$1 million for retirement and have only a few
down the road, it is flawed. Anyone who knows
years to do so, you’re probably going to have
investments will tell you that past performance
to adjust your objective to an amount you may
is no guarantee of future results. For example,
realistically be able to achieve.
7

ADDITIONAL RISKS The Risk of the Road Not Taken
YOU NEED TO UNDERSTAND If you have all of your money in low-risk invest-
Price volatility is probably the biggest risk you ments, such as Treasury bills and bank certifi-
face as an investor. However, there are a couple cates of deposit, you’re guaranteed a certain rate
of others investors face each day. of return. However, you may be missing out on
the opportunity to enjoy greater returns by
The Risk of the Rising Cost of Everything diversifying into other investments. The possi-
bility that you’re missing out on the chance to
Another risk you need to understand is infla-
earn better returns with a different investment
tion risk, which threatens to reduce or even
is opportunity risk.
wipe out your investment gains. Every economy
experiences periods of inflation, and it’s been a Common stocks, for example, have historically
reality for the U.S. economy since the end of offered average compounded annual total
World War II. returns of approximately 10%,* which is better
than most other investments. However, along
The inflation rate fluctuates from year to year,
with this return comes increased risks, and
and although we are currently experiencing a
there are periods when stock investors lose
period of relatively low inflation, investors
money. In spite of this risk, stocks have proved
should factor inflation into their financial goals.
themselves through the years to be one of the
To overcome inflation, you need investments
best investments for helping individuals work
with returns greater than the inflation rate. Of
toward their long-term financial goals.
course, to get better returns, you will have to
choose investments with increased risk.
* Source: Russell Investment Company, Capital Market History and Asset
Allocation. Used with permission. All rights reserved. You cannot invest directly in
an index. Past performance is no guarantee of future results. Common stocks
are represented by the Standard & Poor’s 500 Stock Composite Index. Return
results assume annual reinvestment of dividend or interest income. The return
of principal value of an investment in stocks fluctuates with changes in market
conditions. Figure does not reflect the effects of taxes or transaction costs.
RISK AND RETURN
The shoreline represents fixed, decide that you fall somewhere
Go Hand-in-Hand
lower-risk investments. As you between the shoreline and
venture into deeper water, the the deep water. A Wachovia
Speculative investments become riskier — Securities Financial Advisor
Stocks from conservative to aggressive can help you select and manage
to speculative. As investments investments considered appro-
Growth Stocks
become riskier, they usually take priate for your objectives and
Bonds and on greater opportunity for higher risk tolerance.
Income Stocks Cash, Money returns. You will most likely
Markets and CDs
8

U P AT N I G H T
Wo r r y i n g A b o u t Yo u r N e s t E g g ?
Chances are, at least occasionally, you feel the So how do you know how much risk you should
temptation to push the envelope of your risk take on? There are many tools available to help
tolerance. And why not? If you can stretch the you assess your risk tolerance. Although these
limits of your risk tolerance, you should be able instruments can be helpful, a more accurate
to reap bigger returns. And who doesn’t want to indicator may be what your body tells you when
be the hero of a story about taking a huge risk your head hits the pillow. If you find yourself
and getting a big reward in return? tossing and turning or staring at the ceiling wor-
rying about your investments, it’s a pretty safe
Unfortunately, the world of investing is littered
bet that you’ve exceeded your risk tolerance.
with tales of people who made big leaps that
didn’t pay off. Those stories simply aren’t much What’s your body telling you? If your invest-
fun to tell. ments have you counting sheep, it’s time to
reassess and get them back in line with your
Rather than taking on excessive risk, you’ll
risk tolerance.
probably be better off choosing an investment
mix that balances your risk tolerance, objectives
and time horizon. (More on how to develop a
strategy for your portfolio is in the next section.)
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to power your nest egg ...
MAKE IT WORK FOR YOU
D e v e l o p i n g Yo u r P o r t f o l i o S t r a t e g y
O ne of the keys to successful investing is constructing a portfolio with the right
investment mix, or asset allocation, to help you work toward your objectives and suit your
risk tolerance. Your portfolio is nothing more than the collection of investments you own.
If you’ve been saving for your retirement through your company’s retirement plan, those
investments are part of your portfolio, as are any bank certificates of deposit you hold or
real estate you own for investment purposes.
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DETERMINING YOUR CASH PROVIDES FLEXIBILITY
INVESTMENT MIX Cash is the simplest asset class to understand,
When you’re in a traffic jam, did you ever but don’t let the name confuse you – it’s more
notice how the lane next to you always seems to than simply the money you have in your wallet.
be the one that’s moving while you’re sitting Cash also includes anything you have invested
still? Of course, if you change lanes, it will in what are known as cash equivalents. These
immediately stop and the one you just left will include bank accounts – such as checking, sav-
start moving. Wouldn’t it be great if you could ings and certificates of deposit – and money
be in every lane? Then it wouldn’t make any market funds.
difference which one was moving. You need cash to pay day-to-day expenses; how-
Having a proper asset allocation is a time-tested ever, the problem is its low return. Given infla-
strategy that lets you “be in every lane” when it tion, even low inflation, chances are you’re los-
comes to managing your portfolio. Because no ing money on any cash you hold – that’s why
one knows for sure which investment is going it’s important to keep only a small portion of
to do well tomorrow, you should spread your your assets in cash.
money over a number of different types of A good rule of thumb is to have an amount
investments. That way you can be prepared for equal to six to 12 months of your household
just about anything. expenses in cash in case of emergency, such as
A well-allocated portfolio typically consists of when a family breadwinner unexpectedly loses
some combination of the three primary asset his or her job. If you don’t have cash on hand in
classes: cash, stocks and bonds. Before you begin case of such an occurrence, you may find your-
working on your strategy for your portfolio, you self being forced to sell investments at unat-
need to understand the primary asset classes tractive prices to pay your expenses. You may
and the roles they can play in your portfolio. also choose to keep a cash reserve to take
Keep in mind there is no assurance that using advantage of investment opportunities that
asset allocation will protect you against market may arise. By having this reserve, you’ll be able
risk or guarantee against loss of principal. to invest in timely ideas that fit your invest-
ment objectives.
SAMPLE ASSET ALLOCATION Real Estate
Foreign Developed-Country Stocks
5%
Growth and Income 10%
Long-Term Investment-Grade Bonds Large-Cap U.S. Stocks
5%
30%
Speculative Bonds 10%
Short-/Intermediate-Term
Investment-Grade Bonds 15% Mid-Cap U.S. Stocks
15%
Cash Equivalents 5% 5%
Small-Cap U.S. Stocks
11

STOCKS ADD GROWTH POTENTIAL 1/2,000 of that company. You would have a say
in how the company was run, but your voice
Because stocks offer the best potential for
would be proportionate to your amount of own-
growth of the three major asset classes – which
ership. Another stockholder with 5,000 shares
is often crucial for working toward an investor’s
would have a bigger say because he or she
financial goals – they can play an important
would own more of the company.
role in almost any portfolio.
Let’s go back to that hypothetical business you
Being a stockholder means, quite simply, you
opened with your friend. You would naturally
are part owner of a company. Think of it this
expect to share in the company’s profits. The
way: If you and a friend went into business
same is true with stock. When a board of direc-
together and you both put up equal sums to get
tors, which represents the stockholders, decides
started, each of you would hold a 50% share in
to distribute a portion of the company’s profits,
the company. In return, you each would have
it does so in the form of a dividend.
an equal say in how the company was run, and
you would both expect to receive equal portions A stock that pays a cash dividend is called an
of any company profits. You would also see income stock. On the other hand, a board of
your investment’s value increase if the company directors could also decide to retain profits and
was successful and grew. reinvest them in the company to help finance
future growth. This type of stock is known as a
Common stock works the same way, only the
growth stock. An investor in a growth stock
numbers are much larger. If you owned, for
would expect to see his or her profits from own-
example, 1,000 shares in a company with 2 mil-
ing the stock come primarily from appreciation
lion shares outstanding, you would own only
in the stock’s price as the company grows.
Stock Investing
Advantages ... Disadvantages ...
› Over an extended period, investing in stocks has
proved to provide a better return than most other
› Stock investing involves greater risk than many other
investments.
investments.
› If you make a profit on the sale of stocks, you could
› The variety of choices available among stocks offers
plenty of investment diversity.
face capital gains taxes.
› The stock market is often driven by emotion, not
› Some stocks pay dividends, which can be
reinvested or used as income.
logic, making it hard to predict which stocks will do
well and which won’t.
12

(Growth stocks can pay dividends, but they are ing the supply and demand for a company’s Fluctuations in a company’s
minimal; otherwise, it could be considered an stock. If investors believe a company is going to stock price indicate how
income stock.) perform well, they will want to buy the stock, investors believe the company
One big difference between owning a business which will drive up its price. Fluctuations in a
will perform in the future.
with a friend and holding stock is that most company’s stock price indicate how investors
stocks are publicly traded, meaning you can sell believe the company will perform in the future.
your ownership to another investor quickly and If the price rises, investors think the company’s
easily – often within a matter of minutes. Stock prospects look good; a falling price, of course,
prices are influenced by many factors, includ- indicates the opposite.
WEALTH INDEXES OF INVESTMENTS IN THE U.S. CAPITAL MARKETS
(as of Year-End 2007)
$1,455.76
$1,000 Common Stocks
100 $79.90 Long-Term Bonds
$18.68 Treasury Bills
$12.31 Inflation
10
1
’30 ’34 ’39 ’44 ’49 ’54 ’59 ’64 ’69 ’74 ’79 ’84 ’89 ’94 ’99 ’04 ’07
Source: Russell Investment Company, Capital Market History and Asset Allocation. Used with permission. All rights reserved. You cannot invest directly in an index.
Past performance is no guarantee of future results. Large-cap stocks are represented by the Standard & Poor's 500 Stock Composite Index. Long-term bonds are
interest bearing or discounted government or corporate securities. Treasury bills are measured using an average of the 90-day T-bill. All return results assume annual
reinvestment of dividend or interest income. Inflation is measured by the Consumer Price Index for all urban consumers, not seasonally adjusted. Treasury bills and
government bonds are guaranteed by the U.S. Government and if held to maturity offer a fixed rate of return and fixed principal value. Yield and market value of
bonds will fluctuate if sold prior to maturity. The return of principal value of an investment in stocks fluctuates with changes in market conditions. Chart is for illus-
trative purposes only. Figures do not reflect the effects of taxes or transaction costs.
13

BONDS PROVIDE INCOME AND MORE Bonds in Your Portfolio
Bonds are the last of the three major asset Bonds usually serve two important functions
classes. Unlike stocks, bonds do not represent within a portfolio. First, because bond prices
an ownership position in the bond issuer. are generally less volatile than stocks, bonds
Instead, when you purchase a bond, you’re help give a portfolio stability. Second, because
making a loan to the bond issuer. It’s similar to they pay interest on a regular basis, bonds pro-
your home mortgage, only when you purchase a vide income. For these reasons, conservative
bond, you’re the lender rather than the borrower. investors who seek stability and retirees who
need income often have significant portions of
When you take out a mortgage, you agree to
their portfolios invested in bonds.
pay the lender interest, which is simply your
cost for taking out the loan. Likewise, when you Bonds are issued at par value; however, the
purchase a bond, the issuer (the borrower) agrees price can, and often does, fluctuate. Regardless of
to pay you (the lender) interest. Interest pay- the price paid for a bond, the amount of interest
ments on a bond are usually made twice a year. the owner earns is always based on the bond’s
par value. For example, a bond with a $1,000 par
A significant difference between a home mort-
value and 5% coupon will always pay $50 per
gage and a bond is in how the principal is
year in interest, even when the bond’s market
repaid. A typical monthly mortgage payment
price rises above or dips below par.
includes both interest and principal. Unlike
mortgage payments, the payments you receive
from a bond issuer consist of interest only.
Your principal is repaid only when the bond
matures (unless the issuer calls the bond and
repays the par value prior to maturity).
Bond Investing
Advantages ... Disadvantages ...
› Bonds provide income. › Although bonds are generally not as risky as stocks,
it’s still possible to lose part or all of your investment.
› U.S. government and municipal bonds offer income With all bonds except U.S. government bonds, you
tax advantages. ›
face the risk that the issuer of the bond may default on
› Bonds are considered less risky than stocks. its loan.
› Overoftime, bonds generally underperform stocks in
terms total investment return.
14

INVESTORS SEEK DIVERSIFICATION purchase additional shares when prices are low Mutual Fund
WITH MUTUAL FUNDS and fewer when prices increase, thus avoiding
Selecting the right stocks and bonds in which to
the potential pitfalls of trying to time the mar- Investing
ket – buying when prices are low and selling
invest and monitoring their performance can be Advantages ...
when they’re high. Although market timing
intimidating, especially for novice investors.
That’s why mutual funds are so popular. These
may sound appealing, it’s extremely difficult to › Investing in mutual funds is
a cost-effective way to invest in
do successfully, even for seasoned investors.
funds let you invest in the markets without a variety of investments.
having to decide exactly which stocks and Like any investment strategy, dollar cost
bonds to purchase. averaging doesn’t guarantee a profit or protect
against loss in a declining market. Because
› Because a mutual fund
owns a variety of investments,
Purchasing shares in a mutual fund can help an
dollar cost averaging requires continuous it’s less likely to be affected by
investor diversify. The mutual fund manager the poor performance of one or
investment regardless of fluctuating prices, you
uses money from many investors to purchase a two investments.
should consider your financial and emotional
variety of investments.
ability to continue the program through both
rising and declining markets.
› Mutual fund managers
are generally seasoned
Mutual Funds and Dollar Cost Averaging
Effective dollar cost averaging requires disci- professionals who study the
One of the advantages of mutual funds is that markets and adapt their funds’
pline. You must invest the same amount every
they let you purchase fractional shares, making portfolios to try to achieve
two weeks, month, quarter or other time period
it easy to dollar cost average, which is the prac- maximum performance.
you choose. If you skip a period or two because
tice of investing a set amount into a particular
you forget or are afraid you don’t have the
investment on a regular basis. For example, you Disadvantages ...
money at the time, you sacrifice the benefits of
could invest $100 each month in a mutual fund.
In a fluctuating market, this practice lets you
dollar cost averaging. › When you purchase mutual
fund shares, you invest in the
To help stay on track with your dollar cost aver-
fund itself and have no control
HOW DOLLAR COST AVERAGING WORKS aging strategy, you should consider taking
over investments within the fund.
advantage of a systematic investing program,
Using mutual fund investing to work
toward your goals. such as the Wachovia Securities Monthly
Accumulation Program (MAP). This program
› When you sell mutual fund
shares, calculating your cost
When price per share is $6, lets you choose an amount as little as $100 each basis for income tax purposes
its lowest, you buy 83 shares.
month to be invested into your choice of mutual can be difficult, especially if you
83 reinvested earnings to purchase
When price per share
funds from a broad array of alternatives. Once
is $10, its highest, you 71 71 you sign up for the program, the money is auto- additional shares.
buy only 50 shares.
62 62 matically invested each month without any fur-
55 55 ther action on your part.
50 50
To take advantage of MAP, you must have a
$10 $9
$8 $7 $7 $8 $9 $10 sufficient balance in your Wachovia Securities
$6
Shares purchased Price per share account’s cash investment alternative.
No capital gains taxes are due when fund
Chart assumes $500 periodic purchases. Example is for illustra- shares are held within a tax-advantaged
tive purposes only and does not reflect the performance of a account, such as a 401(k) or IRA. However,
specific investment. account withdrawals will be taxable. Roth IRA
and Roth 401(k) withdrawals may be tax-free.
15

S E L E C T I N G S U I TA B L E AC C O U N T S
... getting down to work.
W e’ve discussed many of the elements required to help you take control of your
financial future, such as understanding asset allocation and the roles different types of
investments can play in your portfolio. But when the rubber meets the road and you begin
to put what we’ve covered into practice, you’ll need to start with a brokerage account. In
fact, by the time you’re through, you’ll probably have a number of different accounts to
help you address your different objectives.
16

For example, you may have both a traditional In the unlikely event that you withdrew the
and a Roth IRA for your retirement savings. money all at once and paid the taxes at today’s
You could also have Coverdell Education top rate of 35%, you would still end up with
Savings Accounts (ESAs) and 529 plan accounts $241,999 more than you would have with a
to save for your children’s educations. taxable account.*
Before we look at the features of these different If you’re in a different tax bracket, your num-
account types, you need to understand the bers will vary, of course, but the principle is still
effects of taxes on your investments. Simply the same – you’ll end up with more if you don’t
stated, taxes can reduce your return. have to pay taxes on your earnings.
The chart below shows the potential long-term The previous statement may seem rather obvi-
effects of taxes. This hypothetical example illus- ous, but you need to understand that taxes work
trates an 8% rate of return on a $5,000 annual against your achieving your financial objectives,
investment for 40 years. If you were in the which leads to an important conclusion: You
28% tax bracket, you would see that tax deferral should consider taking advantage of accounts
would give you almost twice the $770,630 you that let you defer or completely avoid paying
would have if you had invested that same taxes on your earnings.
amount in a taxable account.
ENHANCE YOUR RETURNS WITH TAX-ADVANTAGED ACCOUNTS
The Value of Tax Deferral
$1,400,000
1,200,000 $909,288 value after taxes
assuming a 35% tax bracket
1,000,000 and lump sum distribution.
800,000
600,000
400,000
200,000
1 5 10 15 20 25 30 35 40 YEAR
Growth if taxed annual Growth without taxes
* Fees and charges are not reflected in the illustration and would reduce the performance shown if they were. Withdrawals are subject to income tax and, if taken before
age 59½, could be subject to a 10% IRS penalty.
Lower maximum tax rates on capital gains and dividends may make the investment return for the taxable investment more favorable, thereby reducing the difference in
performance between the accounts shown. Individuals should consider their personal investment horizons and income tax brackets, both current and anticipated, when
making an investment decision as these may further affect the results of the comparison.
17

EMPLOYER RETIREMENT PLANS the money has the potential to grow tax
OFFER TAX ADVANTAGES WITH EASE deferred until withdrawn.
An excellent place to start your retirement sav- One exception is the Roth 401(k). With this
ing is with an employer-sponsored retirement plan feature, you contribute after-tax dollars,
plan. These plans go under a number of differ- and withdrawals are tax-free when you make
ent names – in addition to 401(k) and 403(b) the withdrawals if:
plans, there are SIMPLE IRAs, 457 plans and • You’re aged 59 or older
Owner-Only 401(k) plans. Although they differ
• It’s been five years or more since you made
in the details, these plans share something
your first contribution
important in common: They each let you defer
a portion of your salary into an account. The To invest in a Roth 401(k), your employer must
money deferred into the account is deducted offer this alternative. To find out whether the
from your taxable income. Once in the account, Roth 401(k) feature is available to you, contact
your employer’s benefits department.
Employer-Sponsored
Retirement Plan Investing
Advantages ... Disadvantages ...
› Because money goes directly into the plan, there’s
no temptation to spend rather than invest it.
› Funds withdrawn before you are 59½ may be subject
to a 10% IRS penalty.
› Your employer may match your contributions. › 401(k), 403(b) and 457 plans limit your investments
to those chosen by the employer.
› With most plans, salary deferred into the account Withdrawals must begin at age 70½ for most
is deducted from your taxable income. ›
individuals, even if they don’t need the income. These
› Money invested in your account has the potential withdrawals are taxable with all plans except Roth
to grow tax deferred or tax free. 401(k) plans.
18

SAVE TAX DEFERRED IRA Investing
OR TAX FREE WITH IRAS
Advantages ... Disadvantages ...
As with an employer-sponsored retirement
plan, money deposited into a traditional IRA › Money invested in a traditional IRA has the ›
Taxable withdrawals from traditional IRAs
potential to grow tax deferred until withdrawn. must begin at the age of 70½, even if you
has the potential to grow tax deferred until
don’t need the income.
withdrawn. However, although anyone can
› Money invested in a Roth IRA has the
contribute to a traditional IRA, the tax-
deductibility of your contributions depends
potential to grow tax free and be passed tax
free to your heirs.
›
Funds withdrawn before age 59½ may be
subject to a 10% IRS penalty.
on whether you are covered by an employer-
sponsored retirement plan and your modified › There are can limitations on how money in
the account
few
be invested.
adjusted gross income (MAGI). If your MAGI
is above certain levels and you are covered by
an employer-sponsored plan, you may be able
to deduct only a portion or possibly none of
your traditional IRA contributions. If you’re
not covered by an employer-sponsored plan,
100% of your contribution, up to the govern-
TAX DEFERRED VS. TAX FREE
ment’s contribution limits, is tax-deductible,
regardless of your MAGI. Which is right for your nest egg?
It’s important to keep in mind, however, that
the real advantage of a traditional IRA is not TRADITIONAL IRA* ROTH IRA
the deductibility of your contributions but the QUESTIONS TO ASK YOURSELF Deductible Nondeductible Nondeductible
Contributions Contributions Contributions
opportunity to benefit from tax-deferred
growth. Investing in a Roth IRA, on the other Is current tax liability reduced? Yes No No
hand, gives you the chance to benefit from
Do income limits apply? Yes No Yes
tax-free growth and to pass assets tax free to
Are contributions limited by
your heirs. employer-plan participation? Yes No No
Your eligibility to contribute to a Roth IRA Is there a maximum age limit
for contributing? Yes Yes No
depends on your MAGI. If your MAGI is
above certain levels, you may not be able to Are earnings tax-deferred? Yes Yes Yes
contribute or the amount you can contribute Are withdrawals tax-free? No No Yes†
may be less than the maximum. Are minimum distributions required
beginning at age 70½? Yes Yes No
Roth IRA contributions are never tax-deduct-
ible; however, if you’re older than age 59½ * Your ability to deduct traditional IRA contributions is determined by your participation in an employer-sponsored
retirement plan, tax filing status and MAGI.
and have had the money in the account for † Tax-free status applies when the account is held for at least five years and the account owner is aged 59½ or older
upon withdrawal or meets special IRS exceptions. State taxes may apply. Contact your state department of revenue for
five years or longer, you can withdraw your information regarding regulations for Roth IRA distributions.
earnings tax-free whenever you desire.
19

ESA FIGURING HOW TO to pay the beneficiary’s qualified education
AFFORD HIGHER EDUCATION costs. If withdrawals aren’t used for qualified
Investin g Higher education costs have increased dramati-
expenses, income taxes will be owed on the
amount of earnings withdrawn, possibly along
cally in recent years – to the point where few
Advantages ... with a 10% IRS penalty.
families can afford to pay them out of their cur-
› Contributions have
the opportunity to grow
rent income while they have children in college. Whether you can contribute to an ESA depends
As a result, many families need a savings pro- on your MAGI. If you qualify, you can contrib-
tax free to pay qualified
gram to give their children the opportunity to ute up to $2,000 per year to help pay a child’s
education expenses.
enjoy quality educations. education expenses.
› There are few restrictions
on how contributions can
Today investors have two useful vehicles with Along with tax advantages, ESAs provide
which to save for education and avoid income flexibility. While a 529 plan (discussed next)
be invested. limits your investments to those chosen by the
taxes: ESAs and Section 529 plans.
sponsoring state, with an ESA you can select
› In addition to college
expenses, account balances Enjoy Flexibility With an ESA from a broad array of investment choices. In
can be used income-tax-free addition, with an ESA, qualified withdrawals
An ESA helps families save for education in
to pay qualified expenses for can be used to pay elementary and secondary
much the same way a Roth IRA helps individu-
elementary and secondary (high) school education expenses, including
als save for retirement. The after-tax dollars
school education, including tutoring, computer equipment, room and board,
deposited into an ESA have the opportunity to
tutoring, computer equipment, uniforms, and extended-day programs.
room and board, uniforms, grow tax free, as long as withdrawals are used
and extended-day programs.
Disdvantages ...
› Withdrawals not used for
qualified expenses may be
subject to a 10% IRS penalty.
› Ability to contribute is
based on MAGI.
E S T I M AT E D Y E A R LY
C O L L E G E - E D U C AT I O N C O S T S *
YEAR PUBLIC PRIVATE
2008 $17,336 $35,374
2013 23,199 47,338
2018 31,046 63,349
2023 41,547 84,776
* College costs projected by Wachovia Securities, LLC. in October 2007 based on “2007-2008 College Costs: Keep Rising Prices in Perspective.” © 2007 collegeboard.com, Inc.
Reprinted with permission. All rights reserved. www.collegeboard.com. College costs include in-state tuition and fees, books and supplies, transportation, and other expenses.
Costs for all future years assume a 6% increase per year.
20

Build Education Savings The federal government lets an individual
Quickly With a 529 Plan contribute up to $60,000 ($120,000 for a
Although income limits prohibit some individu- married couple) for a beneficiary in a single
als from contributing to an ESA, anyone at any year without incurring gift taxes. However, if
income level can contribute to a 529 plan. These you contribute this much, any additional gifts
plans are sponsored by states, and all states and given to the beneficiary within the following
Washington, D.C., currently have plans. five years will trigger gift tax consequences in
the years the gifts are made. A portion of the
Each state determines the investments available contribution to the plan may be returned to
in its plan. These plans are not all created equal, the donor’s estate if he or she dies before the
and it’s possible you won’t be happy with the five-year period has passed, which could have
investments available in your state’s plan. If so, estate tax implications.
keep in mind most states permit nonresidents
to participate in their plans; however, they may An investment in a 529 plan will fluctuate such
not offer all the benefits to nonresidents that that an investor’s shares when redeemed may
are available to residents. be worth more or less than the original invest-
ment. Investors should carefully consider the
You can make federal-tax-free withdrawals for investment objectives, risks, charges and
qualified education expenses. Withdrawals not expenses of 529 plans before investing. This
used for qualified education expenses may be and other important information can be found
subject to income tax and a 10% IRS penalty. in the 529 plan issuer’s official statement,
The annual amount you can contribute varies which should be read carefully before investing.
from state to state, but the contribution limits
are all significantly higher than the ESA’s
$2,000 limit.
529 Investing
Advantages ... Disdvantages ...
› Anyone can contribute. › Risk of loss of principal. Investment return
and principal value will fluctuate.
› Contributions have the opportunity to grow tax
free for education. › The sponsoring state dictates the
available investments.
› You can transfer the account to another beneficiary
if the original beneficiary doesn’t use it. › Withdrawals not used for qualified education
expenses may be subject to income tax.
21

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Getting Professional Assistance
I n addition to being complicated, investing is often emotional. When the markets are
doing well, investors tend to become overly enthusiastic and make unwise purchases
based on unrealistic expectations and greed. On the flip side, when markets are declin-
ing, there can be panic selling. An important advantage of having a financial advisor is
that he or she can help you avoid making investment decisions based on emotion
rather than sound investment principles.
Today’s financial advisors are well-versed in all aspects of helping you invest for your
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22

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Financial Advisor, you have someone who takes
the time to listen, to understand your needs
and to help you clarify your goals.
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That’s why your Financial Advisor will be there
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Our commitment to you will not change. This is
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