Here is something we hear on occasion at CameronDowning: “I’m not sure an IRA is for me. I hear it may be too risky.” The problem with this statement is that an IRA, or Individual Retirement Account, is not an investment. So what is an IRA?

An IRA is technically a registration
It holds investments, but is not an investment itself. You can put all kinds of investments within an IRA. Consequently, stocks, bonds, mutual funds, CDs, and even gold bullion are investment options within an IRA. You can be 100% in cash in an IRA, which by definition has no risk. We’ve also commonly seen annuities put in IRAs which is typically not a good idea, and I discuss why elsewhere.

So what is an IRA?
Getting the terminology right is important. Picture a candy wrapper holding chocolate inside. An IRA is like the candy wrapper. Likewise, there are different kinds of candy wrappers just like there are various kinds of IRA registrations. Traditional, Roth, SEP, SIMPLE are the most...

In these days of market volatility and high emotions, I’d like to contribute a little financial wisdom to the discussion. To wit:

Buy low and sell high.
Amazing how many people do exactly the opposite. Say we’ve spent quite a bit of time ascertaining your risk tolerance. We go through the Riskalyze software exercise, and you score into an allocation that should, over the next 6 months, produce returns in the range of -8% to +16%. You agree that an 8% drop wouldn’t bother you. You could still sleep at night, knowing that markets are cyclical, and the long term trend is always up. We subsequently invest you appropriately. Yet, during a market correction, you call all worried about China and the price of oil and Puerto Rican bonds and the Brazilian recession, and instruct me to sell you out.

What happened here? Either you replied untruthfully to the questions the software program uses, or you let emotions cloud your judgment. Studies show that as much as 90% of...

An annuity in an IRA is typically a dead giveaway that a client worked with a salesperson, not a financial planner. Annuities, like any other tool, are not inherently bad. They work best when they do the job they were designed to do – and that job is income distribution. Annuities can be a useful accumulation vehicle for those with a more conservative investing outlook. They make sense for asset protection. An annuity is also a safe way to create a perpetual stream of income without market risk. Also, the use of a single premium immediate annuity, or SPIA, has particular application in estate planning. But an annuity in an IRA? Why???

Annuity salesmen & first responders
While annuities are appropriate in certain circumstances, most clients do not have the special planning needs that make an annuity in their best interests. Law enforcement, firefighters, and other first responders, are marketed heavily by annuity salesmen. Why? The often have DROP payments. Annuities pay a...

Can I time the markets?
When the stock market becomes volatile, people often wonder, Is this a good time to go in? What they are doing is trying to time the markets – they are making educated (or emotional) guesses as to market peaks and valleys, and investing accordingly. I’d put it to you that market timing doesn’t work, at least not consistently. If you look at a line graph in the first quadrant, there is nothing to say that the next data point will be above the last point, at the last point, or below the last point. Trends are real and visible, but they change.

We certainly understand the impetus behind market timing. You as an investor don’t want to put your money in on what turned out to be a high day for the year, and conversely you don’t want to have sold at what was the low day for the year.

The idea behind dollar cost averaging
The idea behind dollar cost averaging, or DCA, is a simple one: Instead of trying to time the market you invest a...

You’ve saved up your down payment, interest rates are good, and the time is right. So how much house can you afford to buy? There is a qualifying ratio lenders look at when approving you for a mortgage.

Debt to income qualifying ratio
The place to begin is your monthly gross income. That is, your income before any deductions for taxes, retirement plan contributions, or other payroll deductions. Bottom line: for those with excellent credit, the debt to income qualifying ratio lenders look for generally fall between 40-50%. In other words, lenders divide up all your monthly debt payments (including a proposed housing payment) by your gross monthly income. The result is a percentage. Debt payments include things like housing, credit card, student loans, and car payments.

Can you handle the debt payments?
Lenders want to see how you manage existing debt. They want to know if you are a responsible borrower before approving you for a mortgage. If your monthly debt payment is below the...

The stretch IRA is one in which the beneficiary chooses not to distribute the inherited account all at once, but to take required minimum distributions according to his (own) life expectancy. Please refer to my previous post about RMDs.

If you are a non-spouse IRA beneficiary, you have some choices. You can simply sell the assets and distribute them to yourself. This must be done by the end of the fifth year after the IRA owner died. The amount distributed is added to your taxable income for that year, and can run you right up the tax brackets. The taxation sort of makes sense, though, in that the traditional IRA owner was never taxed on the contributions to the account, nor on the growth within the account. So at distribution the IRS gets its own.

Even better, though, is the option of stretching the IRA. This simply means taking required minimum distributions over the beneficiary’s life (beginning the year after inheriting the account). Since the younger beneficiary has a...

Your emergency fund is foundational to any financial plan. Here I discuss what it is (and what it is not), why you need to have one, and how much should be in it. Also included in your financial foundation are wills, trusts, living wills, and guardianship arrangements, as well as basic insurances. Even if you are already retired this is just as, if not more, important.

The emergency fund – planning ahead
An economics professor once said that if you fall asleep in class and he calls on you just shout out, at the margin and you’ll likely have the right answer. The entire study of economics is about what happens at the margin: the next unit of production, the next unit of income. Think about it: bankruptcies happen when there’s just one dollar more due that you simply cannot pay. So in talking about an emergency fund, we’re talking about what happens at the margin of your financial life. You’re keeping cash set aside to make sure that you’ll never get...

One of the most popular ways to save for retirement is in a Roth Individual Retirement Account. The Roth IRA was first made available in 1997, after they were championed by former Senator William V. Roth of Delaware.

What is a Roth IRA?
Tax-wise, a Roth IRA is like a Traditional IRA in reverse. It may help to compare the two registrations.

In a Traditional IRA, as well as in a 401k, most people get tax deductions for contributing dollars up to certain limits every year. The account accumulates funds over time, perhaps generating some nice earnings, tax-deferred. When it’s time to retire, the full amount of the distribution is taxable at whatever your marginable tax bracket is at that time. Using simple math, if your tax bracket at retirement is 25% and you distribute $100 from your Traditional IRA you will get to keep $75. Remember, distributions from a Traditional IRA are fully taxable. Contributions are made before tax.

A Roth IRA is tax-favorable in the long term
By contrast...

Many of you have a 401k plan through your employer. We get a lot of 401k questions at CameronDowning. So here’s a post with some tips to make the most of this fantastic benefit.

401k plan basics
The technical name for the 401k plan is an employer-sponsored defined contribution plan with 401k provisions. Money goes into your account in different ways:

• You, the employee, defer (i.e. contribute) part of your salary on a pre-tax basis to invest for the future.
• Your employer makes profit-sharing contributions. These can vary year-by year. Employer contributions serve as an incentive for you, the employee, to work hard and make the company successful.
• Your employer may make matching contributions.
• You may receive forfeitures. Your plan has a vesting schedule, which tells you how much of the employer’s contribution you’ll be able to take with you should you go work elsewhere. If an account is not fully vested, typically the dollars that revert back are spread out to all...

Important ages
There are two important ages in retirement financial planning: 59 1/2 and 70 1/2. The former marks the age when you can distribute from your retirement account – IRA or 401k – without paying a 10% penalty on the distribution. The IRS, with this penalty, gives us all a reason to keep our long term savings in place for its intended purpose – retirement income. The second date is actually April 1st of the year after the year in which you turn 70 1/2. This is the date by which you must begin taking your required minimum distributions, or RMDs. As the name suggests, this distribution is required, whether you want to distribute or not. If you don’t, there is a 50% tax penalty assessed against the amount that should have been distributed.

How do I calculate required minimum distributions?
You use a factor from a table. Take the end of the year IRA balance, and divide it by the factor.

Age of retiree Divisor

70            ...