Good Things About August

Here we are in August. I won't mention the heat (other than that!). Since August is an oft-maligned month, I thought I'd share this list that I came across on the internet, to which I've added a few things:

Good Things About August
* Lighter clothing = less laundry to do!
* Grass doesn't grow as quickly = less lawn mowing
* Lots of sunlight (this can never be a bad thing)
* The refreshing (if brief) cooldown which follows an afternoon thunderstorm
* Melons are in season!
* School starts (likely only a good thing if you're a parent and NOT a school teacher)
* Baseball is getting to the really good part - the final run to the division races
* High School football gets started, and the promise of Fall is just around the corner
* You get a chance to really, REALLY appreciate air conditioning...

Let me know if you have other reasons to love the month of August, or if another month is your most favorite. I'll share any additional ideas that I get from you in future editions.

In this month's newsletter, I have an update on the BrightStart 529 plan, as well as an article on when it makes sense to leave a 401(k), 403(b), 457 or other retirement plan where it is instead of rolling it over when leaving a job. I think there are a few pearls of wisdom that you may not have considered there, and hopefully you're find this information helpful.

BrightStart - The Results Are In!

For those of us with kids nearing their college years (if they're in diapers, they're nearer than you think!), the goings-on at the Illinois State Treasurer's office has had more than just a passing interest for us.

If you haven't been following the story, just prior to leaving office, Judy Baar-Topinka negotiated a new management deal with Oppenheimer Funds, to manage the Bright Start 529 plan. As one of his first acts in office, Alexi Giannoulias (rightly so) asked for the negotiations to be reviewed, as due diligence. What resulted was a dramatic improvement in the terms of this plan, making BrightStart, in my opinion, superior to the other savings-type plan sponsored in Illinois - the Bright Directions 529 plan.

The primary reason that I consider the BrightStart plan superior to Bright Directions at this point, is that the cost structure of the BrightStart plan is now within the range of the most efficient investing vehicles that Americans have available to them. The new cost structure for the BrightStart plan ranges from 0.20% to 0.63% - you'd be hard-pressed to find ANY investment vehicle with expense ratios that low!

By contrast, the Bright Directions plan's expense ratios range between 0.12% and 1.24%, with a program management fee of 0.45% tacked on to each account. In addition, unless you've chosen to use a Fee-Only financial advisor (like, for example, Blankenship Financial Planning!) to assist you with acquisition of your Bright Directions account, you will have to pay a commission of anywhere from 3.5% up front to a 0.50% annual trailing commission. Effectively, you're paying around 4% up front (or more) for this plan, plus annual fees of an extra 0.50% for the underlying funds.

Now - if you happen to own the Bright Directions plan, there's probably a very good reason for it. Up until this recent announcement, the BrightStart plan had fees very comparable to the Bright Directions plan, with fewer choices for your investments, making it far inferior to Bright Directions. Just because at present the BrightStart plan has the edge over Bright Directions doesn't mean that you should switch plans or make dramatic changes to your strategy. I suspect that there may be improvements in the wings for the Bright Directions plan as well - and even if things don't change, the Bright Directions plan still offers a very good choice of investments. If you pay attention to how you manage the account, your costs can still be very low compared to the industry. If you'd like to discuss your options, give me a call.

The good news is that the BrightStart plan has "stepped up" and is now providing Illinois residents with a very cost effective 529 plan. If you're trying to decide what the best savings plan is for your Education Savings Strategy, the choice just got a little easier.

Everything But The Retirement Plan!

Conventional wisdom says that when you leave a job, whether you've been "downsized" or you've just decided to take the leap, you should always move your retirement plan to a self-directed IRA. (Note: when referring to "retirement plans" in this article, this could be a 401(k) plan, a 403(b), a 457, or any other qualified savings deferral-type plan).

But there are a few instances when it makes sense to leave the money in the former employer's plan.

You have several options of what to do with the money in your former employer's plan, such as leaving it, rolling it over into a new employer's plan, rolling it over to an IRA, or just taking the cash.

The last option is the worst. You'll automatically lose 10% via penalty from the IRS (unless you meet one of the exceptions, including first home purchase, healthcare costs, and a few others) if you're under age 59 1/2, plus you're taxed on the funds as if it were income. For the highest bracket, this can amount to losing as much as 45% of the account.

In addition, if you think about it, by cashing out you're derailing the retirement fund that you've put so much effort into setting aside. If you cash it out, you've got to start over, and you've got less time to build the account back up. A 2005 change in the tax law requires your old employer to automatically roll over your account into an IRA if it is between $1,000 and $5,000 (if you don't choose another option), to keep folks from cashing out. If your account balance is more than $5,000, the old employer is required to maintain your account in the old plan until you choose what you're going to do with it.

With recent tax law changes, another option has become available for your old account: you can now roll these funds over into a new employer's retirement plan, as long as the plan allows it. In many cases this may make good sense, especially if the new plan has good investment choices and is cost-effective.

If the new plan doesn't suit you, you can always roll the funds from your old employer's plan into an IRA. You'll then be able to decide just how you want to allocate the investmtents, choosing from the entire universe of available investment options, rather than the limited list that many plans have available. Caution is necessary when doing this type of rollover, as a misstep could cause the IRS to treat your attempted rollover as a complete distribution, having the same tax effect as cashing out. Seek the help of a professional if you are unsure about how to deal with this situation.

But when would you leave the funds at the old employer? If the old employer's plan is a well-managed, low-cost plan, and you're happy with how your investments have done, then you might just want to leave it where it is. In addition, if you happen to be over age 55, you may have options available to access the funds immediately, rather than waiting until age 59 1/2 - but only if you leave the funds in the original employer's plan. Plus, if your plan is a 457 plan (generally only available to governmental employees, such as the State), you may be able to tap the plan upon your ending employment without penalty as well.

Another good reason to leave the fund at the old employer is if you believe that there is a high probability that you may return to employment with this employer. Especially in the case of working for the State, it probably makes sense to leave those funds in the SERS plan when you think there is a better than average possibility that you may return to work with the State (even another agency), as there are benefits available in the plan that you would be giving up if you moved your account to an IRA, and you're not likely to be able to move those funds back when you return.

So - hopefully this quick conversation has helped to clear up some questions, and perhaps it has brought up some new questions for you. Don't hesitate to contact me if you're unclear about the choices that you have available. I'll be happy to discuss it with you.