Financial Stewardship Newsletter May 2010


Published on

A Mid-Year Financial Review:
More Time to Plan
Understanding Mutual Fund
Expense Ratios
How Much Life Insurance is
I started a business that lost
money this year. Do I have

Published in: Economy & Finance, Business
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Financial Stewardship Newsletter May 2010

  1. 1. Financial Stewardship May 2010 Angela Giboney, CFP® Financial Advisor 22108 1st Pl W A Mid-Year Financial Review: More Time to Plan Bothell, WA 98021 425-415-6029 Mid-year is an ideal time can be as simple as dedicating a folder in your 800-499-2041 to take a look at your file cabinet to this year's tax return so that you finances, because the can keep track of important paperwork. demands on your time Retirement planning may be fewer, and the Give me a call and we'll set up a planning opportunities If you're working and you received a pay time for your mid year review. greater, than if you wait increase for this year, don't overlook the until the end of the year. opportunity to increase your retirement plan Angela Giboney CFP® Here are a few tips to get you started. contributions by asking your employer to apply Advisory services offered a higher percentage of your salary. This year, through Identifying your needs HBW Advisory Services LLC, you may be able to contribute up to $16,500 to 3355 Financial plans often need to be modified when your retirement plan at work ($22,000 if you're Cochran St, Suite 100, Simi personal circumstances change. Answering age 50 or older). If you have a traditional IRA, Valley, CA 93063, Angela Giboney is an these questions can help you identify the you may also want to weigh the benefits of Investment Advisor financial issues you want to address within the converting it to a Roth IRA this year, when you Representative. Securities offered next few months. may be able to take advantage of a special through HBW Securities LLC, deferral rule that applies only to 2010 Member FINRA/SIPC, 3355 • Are any life-changing events coming up soon, Cochran St, Suite 100 Simi conversions. This deferral rule gives you the such as marriage, the birth of a child, Valley, option of reporting half of any resulting taxable CA 93063 (800)473-3856. Angela retirement, or a career change? Giboney is a registered income that results on your 2011 tax return and Representative. HBW Insurance • Will your income or expenses substantially half of the income on your 2012 return. & increase or decrease this year? Financial Services, Inc. is a If you're already retired, take a new look at your separate entity from HBW • Are you concerned about the performance of retirement income needs and whether your Securities LLC and a separate entity form HBW Advisory your investment portfolio? current investments and distribution strategy Services LLC. HBW Securities LLC does • Do you have any needs or concerns that you will continue to provide enough income. not would like to address? Investment planning give legal or tax advice nor does HBW Advisory Services LLC. Tax planning Have you recently reviewed your portfolio to Completing a mid-year estimate of your income make sure that your asset allocation is still in tax liability can reveal tax-planning line with your financial goals, time horizon, and In this issue: opportunities. You can use last year's tax return tolerance for risk? Though it's common to as a basis, then make any anticipated rebalance a portfolio at the end of the year, if A Mid-Year Financial Review: the market is volatile, you may need to More Time to Plan adjustments to your income and deductions for this year. Check your withholding, especially if rebalance more frequently. Understanding Mutual Fund you owed taxes when you filed your most Expense Ratios Insurance planning recent income tax return or if you received a How Much Life Insurance is large refund. Doing that now, rather than Do you know exactly how much life and Enough? waiting until the end of the year, will help you disability insurance coverage you have? Are avoid a big tax bill or having too much of your you familiar with the terms of your I started a business that lost money tied up with Uncle Sam. If necessary, homeowners, renters, or auto insurance money this year. Do I have policies? If not, it's time to add your insurance NOL? adjust the amount of federal or state income tax withheld from your paycheck by filing a new policies to your summer reading list. Insurance Form W-4 with your employer. needs frequently change, and it's possible that your coverage hasn't kept pace with your One of the easiest things you can do right now income or family circumstances. to help avoid missed tax-saving opportunities for the year is to set up a system for saving receipts and other tax-related documents. This
  2. 2. Page 2 Understanding Mutual Fund Expense Ratios Every mutual fund must disclose certain costs handles any transactions. Management fees associated with running the fund. Those costs often represent the single largest portion of a represent a fund's expense ratio, which is typical fund's expense ratio. expressed as a percentage of a fund's assets. Marketing costs For example, a fund that has $100 million in assets and annual expenses of $1 million would These costs also are known as 12b-1 fees, report a 1% expense ratio (1% of $100 million = after the legal provision that permits them. They Running the numbers $1 million). were originally designed to let funds recoup costs associated with distribution and To get a true picture of a Why is a fund's expense ratio important? First, advertising, on the theory that attracting new fund's performance, you it can help you gauge how efficiently the fund investors and additional assets would help do not need to deduct a operates. A high expense ratio reduces the make a fund more cost-effective for each fund's expense ratio from amount that is paid to you as a shareholder. investor. In recent years, there has been the returns quoted in its Second, a fund's expenses affect your net discussion of whether 12b-1 fees should be prospectus. The figures returns, particularly over the long term. For eliminated--especially for funds that are closed that measure average example, let's look at a hypothetical illustration to new investors and therefore should have little annual and cumulative (which doesn't reflect the performance of any need to market themselves--but they are still return have already taken actual security). Assume you have $10,000 in very common. both operating and trading one stock fund that earns a 5.5% return and costs into account. $10,000 in another stock fund that earns Administrative fees exactly the same return but that costs you an This category of fees includes the cost of extra half-percent in expenses. The difference recordkeeping, custodianship, taxes, and legal, between 5.5% and 5% over 20 years means a accounting, and auditing services. $2,645 reduction in your bottom line. What's not included in an expense ratio That's not to say that you should automatically reject a fund just because it has a high expense Trading expenses represent the cost of buying ratio if the fund's performance is worth the or selling securities, and also can have a higher cost. However, you do need to take substantial impact on your net return over time. expenses into account, especially if you're Trading costs, which include commissions paid investing for the long term. by the fund when it buys or sells a security, aren't included in a fund's expense ratio. Some general categories of funds tend to have However, funds are required to report the higher expense ratios than others. For per-share cost of their annual commissions; this example, a stock fund that specializes in can be found in a fund's annual report or emerging markets may have to spend more on Statement of Additional Information. research than a fund that invests only in large-cap U.S. stocks for which a great deal of Also not included in the expense ratio is any information is readily available. A fund that is redemption fee a fund might charge if you sell actively managed may have higher expenses your shares before a specified time, or any than a fund that mirrors an index. sales charge the fund might impose at the time of purchase or sale. Each mutual fund's prospectus must include a table in the front that you can use to compare Before investing in a mutual fund, carefully the expenses of various funds. The table lists consider its investment objectives and risks as the fund's expense ratio as well as a well as its charges and expenses. This breakdown of the costs included in it, which fall information is available in the prospectus, which "Some general into three general areas: management fees, can be obtained from the fund. Read it carefully categories of funds marketing costs, and administrative fees. before investing. tend to have higher Management fees expense ratios than Comparison shopping others." Every fund has an investment management or The "Tools and Calculators" section of the advisor firm that manages the fund and makes Financial Industry Regulatory Authority investment decisions. Even an index fund, (FINRA) website includes an online Fund which does relatively little trading and whose Analyzer that lets you compare the impact investments basically duplicate those of an over time of the fees and expenses of as index, will have a firm or an individual who many as three funds.
  3. 3. Page 3 How Much Life Insurance Is Enough? Your life insurance needs often depend on a • Debts, including credit cards and mortgages: number of factors, including whether you're $317,000 married, the size of your family, the nature of • Emergency fund: $100,000 your financial obligations, your career stage, and your goals. Subtotal: $459,500 There are a number of approaches you can use Next, they estimate ongoing income needs, to figure out how much insurance you should such as: have. One method, called the "family needs • Providing for their dependent children's needs approach," focuses on the amount of life for a period of time: $500,000 insurance it would take to allow your family to meet its various financial obligations and • Wendy's income needs until her retirement: expenses in the event of your death. $450,000 Family needs approach • Wendy's retirement income needs: $380,000 Subtotal: $1,330,000 With the family needs approach, you divide your family's financial needs into three main Adding the sub totals together, John and categories: Wendy estimate that, should John die, their family would need $1,789,500. They then • Immediate needs at death, such as cash determine that assets available to offset their An insurance needed for estate taxes and settlement costs, needs include: coverage review is a credit card and other debts including mortgages (unless you choose to include • Bank savings: $40,000 periodic reassessment mortgage payments as part of ongoing family of your insurance • Investments: $220,000 needs. The main needs), an emergency fund for unexpected costs, and college education expenses. • Retirement assets: $250,000 objectives are to • Existing life insurance on John's life: $300,000 confirm that the level • Ongoing income needs for expenses related of insurance coverage to food, clothing, shelter, and transportation, Subtotal: $810,000 you have is still among other things. These income needs will adequate, to alert you vary in amount and duration, depending on a The difference between their family needs ($1,789,500) and their available assets to shortages in number of factors, such as your spouse's age, coverage that can your children's ages, your surviving spouse's ($810,000) equals their life insurance need ($979,500). occur due to changes capacity to earn income, your debt (including in your life, and to mortgages), and whether you'll provide funds Review your coverage ensure that any cash for your surviving spouse's retirement. value policies are Trying to figure out how much life insurance is • Special funding needs, such as college enough isn't always easy, and that amount will performing as funding, charitable bequests, funding a likely change with your changing expected. buy/sell agreement, or business succession circumstances. By examining your family's planning. anticipated expenses during various periods Once you determine the total amount of your after your death, you get a more realistic family's financial needs, you subtract from this estimate of your life insurance needs. total the available assets that your family could Unfortunately, many people underestimate their use to defray some or all of their expenses. The insurance needs and are underinsured. Often, difference, if any, represents an amount that life the purchase of life insurance is based on cost insurance proceeds, and the income from instead of what's needed. By the same token, future investment of those proceeds, can cover. it's possible to have more insurance than you Example: John and his wife, Wendy, are need. You may have purchased a large policy estimating the appropriate amount of life during a particular point in your life, and then insurance to buy on John's life. They first didn't adjust your coverage when your estimate their immediate needs as follows: insurance need was reduced. Both of these circumstances are reasons to review your • Final medical expenses: $5,000 insurance coverage periodically with your • Estate settlement costs including funeral and financial professional. Doing so can reveal burial expenses: $37,500 opportunities to change your levels of coverage to match your current and projected life insurance needs.
  4. 4. Ask the Experts I started a business that lost money this year. Do I have a net operating loss (NOL)? If you're a sole proprietor for--the 2 years preceding the year in which you and your business expenses have the net operating loss. Any remaining loss exceed your business is carried forward for up to 20 years after the income, you have a year in which you have the NOL. You can, reportable loss for income tax purposes. You're however, choose not to carry back the NOL to generally able to apply this loss against any the prior 2 years and simply carry forward the wage income or other business income that you entire NOL. Angela Giboney, CFP® Financial Advisor have (wages are considered business income) While NOLs are generally allowed to be carried 22108 1st Pl W and any nonbusiness income (e.g., interest) back 2 years, special rules apply to NOLs Bothell, WA 98021 that remains after taking your allowable incurred in 2008 and 2009 that allow NOLs to 425-415-6029 nonbusiness deductions. If you still have a be carried back for up to 5 years. There are 800-499-2041 business loss remaining after offsetting all your also exceptions to the general 2-year carryback income, you have a "net operating loss" for the rule, and alternative minimum tax (AMT) year. The net operating loss (NOL) calculation implications. Even in the most straightforward is very complicated, though. For example, Advisory services offered through HBW Advisory cases, NOLs are complicated. Services LLC, 3355 Cochran St., Suite 100, Simi certain items, like personal exemption Valley, CA 93063, Angela Giboney is an Investment Advisor Representative. deductions and other nonbusiness deductions, If you have an NOL, you'll want to read IRS aren't allowed in calculating an NOL. Publication 536, Net Operating Losses (NOLs) Securities offered through HBW Securities LLC, Member FINRA/SIPC, 3355 Cochran St., Suite for Individuals, Estates, and Trusts, and the 100 Simi Valley, CA 93063 (800)473-3856. The general rule is that you get to carry back an Angela Giboney is a registered Representative. instructions for IRS Form 1045, Application for NOL for 2 years. This means that you can apply HBW Insurance & Financial Services, Inc. is a Tentative Refund. You should also consider the NOL as a credit against income that was separate entity from HBW Securities LLC and a discussing your situation with a tax separate entity form HBW Advisory Services earned in--and reported on the tax returns LLC. HBW Securities LLC does not give legal or tax advice nor does HBW Advisory Services professional. LLC. This advertisement is not intended as legal or tax advice and may not be relied on for purposes of avoiding federal tax penalties. All individuals, including those involved in the estate planning process, are advised to meet with their tax and legal professionals. The individual sponsoring this newsletter will work with your tax and legal advisors to help Is it too late to take advantage of the special 2009 net select appropriate product solutions. We do not endorse or guarantee the content or services of operating loss (NOL) rules? any website mentioned in this newsletter. We encourage you to review the privacy policy of The Worker, Stabilization Act of 2008 (i.e., a "TARP" each website you visit. Limitations, restrictions and other rules and regulations apply to many of the financial and insurance products and Homeownership, and recipient) is not eligible. Special rules apply to concepts presented in this newsletter, and they Business Assistance Act of insurance companies. may differ according to individual situations. 2009 (WHBAA) included a If you're a calendar-year filer, you have to make provision that allows almost all taxpayers with the WHBAA election by the due date of your business losses to make an irrevocable election 2009 federal income tax return, including to carry back losses incurred in either 2008 or extensions. This deadline applies regardless of 2009 for up to 5 years (the election can only be whether you're making the election for a 2008 made for 1 year, however). Specifically, you're NOL or a 2009 NOL. If you filed your 2009 able to elect to extend the general 2-year NOL federal income tax return by April 15, 2010, carryback period to 3, 4, or 5 years; NOLs without making an election, you have until carried back 5 years can offset up to 50% of the October 15, 2010, to do so. taxable income from the fifth year, and 100% of the taxable income from the other carryback You can make the election in one of two ways. years. You can attach an election statement to the federal income tax return or amended return for Even if you took advantage of a similar the tax year in which the loss is incurred. Or, provision in earlier legislation to carry back a you can attach the election statement to the 2008 NOL, you're still able to elect to carry back carryback form itself (1040 filers would use a 2009 NOL under the provisions of the Form 1045 or Form 1040X). Your election WHBAA. Certain taxpayers are specifically statement must contain specific language. You excluded from making the election, however. can find more information by checking the IRS Prepared by Forefield Inc, For example, any business in which the federal website ( or by talking to a tax Copyright 2010 government acquired an equity interest professional. pursuant to the Emergency Economic