April Greetings

Well, it seems that I was a little premature in my call for Spring in last month's letter. As I write these lines, we had a bit of snow earlier in the day, so I'm thinking that the groundhog's call was better than mine altogether, and he really pushed it this year! This makes more than 10 weeks of Winter after he saw his shadow back in February...

Enough about the weather though - it's April, so what should we be focusing on? I mean, besides the fact that the Cardinals and the Cubs are both playing very well... With the cold weather, we haven't had much thought of mushroom hunting or turkey hunting, so - I thought now was a good time to bring up some issues surrounding inter-family loans, which I've addressed in my second article. Many times this issue comes up and you may find some interesting tidbits in that article.

The first article this month covers the question "what can I do to prepare more for retirement goals beyond my 401(k) and IRA?" While most folks are, understandably, at their limits by making the maximum annual contributions to the "regular" kinds of accounts, some folks would like additional avenues to use. This article should help you to think through some of the possibilities, and as always, I'm available to talk it over if you'd like.

Beyond 401(k) and IRA

You're contributing as much as you're allowed to a 401(k) or other employer-sponsored retirement plan. You're also contributing the maximum annual amount to your Roth or traditional IRA. But you want to set aside still more money to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider...

Before moving beyond - are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you're really contributing all you can.

In 2008, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $5,000 to a traditional or Roth IRA. If you're age 50 or better, though, you can make up to an additional $5,000 in "catch-up" contributions to your 401(k) in 2008, and an additional $1,000 to your traditional or Roth IRA. What's more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (Call my office if you need help with the details on this one.)

Looking at deferred annuities

If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax-deferred; you don't pay tax until you take a distribution from the annuity, and then you only pay tax on the portion of each distribution that represents earnings. There is also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some tradeoffs that you'll need to weigh carefully:

• There are associated fees and costs, including annual fees, investment management fees, and insurance expenses
• A surrender charge may be imposed if you withdraw funds within a certain period of time (generally 7 years!)
• A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59 1/2
• Investment gains are taxed at ordinary income tax rates, not at the lower capital gains tax rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution) - this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable investment accounts

Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there's no federal penalty for withdrawing funds before age 59 1/2.

Investment options worth mentioning:

• Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
• Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
• Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

Inter-Family Loan Topics

Often, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal - but they don't want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic - the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they're in a "helping" position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?

Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there's no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there's always the chance that he or she won't be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

• Don't lend money you can't afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn't paid back, will the financial effect be negligible or substantial?
• Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it's convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
• Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn't paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don't feel guilty if you decide to turn down your family member's loan request. It's hard to say no, but it's still easier than repairing a damaged relationship if things don't work out.

Is it a good idea to cosign a loan?

At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it's noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won't affect their own finances, but unfortunately, that's not the case.

When you cosign a loan, you're guaranteeing the debt. Legally speaking, this means that you're equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you're not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.