How to Get Out of Your 401k - from Forbes - The In Service Distribution

Retirement Guide
The Great 401(k) Escape
Ashlea Ebeling 02.25.08, 12:00 AM ET


If the offerings in your employer's plan aren't so great, put your money elsewhere.
Ritch S. Wright, now 60, doesn't plan to retire from his job as a Boeing finance director until 2014, when his youngest daughter should be finishing college. Yet earlier this year the Huntington Beach, Calif. resident rolled nearly $1 million, a big chunk of his Boeing 401(k), into an individual retirement account, using a little-known maneuver: an "in-service" distribution.

Employers and 401(k) plan administrators don't advertise this fact, but most workers 59 and a half and older, and even some younger ones, can roll over 401(k) funds while they're still working and contributing to the plan. This option isn't right for everyone. But in some cases it can provide more attractive investment choices, a better way to leave money to your kids or even a chance (new in 2008) to move 401(k) dollars directly into a Roth IRA.

The law allows workers to empty their 401(k) accounts once they hit 59 and a half. They can roll all the money into an IRA without paying tax now. Or they can take cash out, pay any ordinary income taxes due and spend what's left. The same goes for participants in government and not-for-profit savings plans similar to 401(k)s.

The law permits this, but employers don't have to permit it. Still, 70% of companies--and 89% of those with 5,000 or more employees--allow these in-service withdrawals, the Profit Sharing/401k Council of America found in a 2006 survey of 1,000 firms. So do some public sector employers; the federal government, for example, allows older workers to withdraw funds, but only once.

As for younger folks, the law permits them to get in-service distributions of money rolled over from previous 401(k)s; of employer (but not employee) pretax contributions; of employee aftertax contributions; and of account earnings. Here companies are less accommodating--only 16% allow this option, the 2006 survey found. Note that if a younger worker spends the cash, instead of rolling it over, he'll owe an extra 10% penalty on the taxable amount, just as he would if he got a "hardship" distribution from his 401(k) or took a loan from his 401(k) and switched jobs without repaying the loan.

One obvious reason to consider an in-service rollover is to escape a bum plan that has expensive or mediocre funds. Some small plans have annual fees on domestic equity mutual funds that top 2% a year. Outrageous. If you're stuck in one of those, you can chop your costs by rolling your 401(k) money into an IRA at a no-load fund company such as Vanguard, Fidelity or T. Rowe Price.

Even workers with reasonable 401(k) fund offerings, however, may want more choices. Only 14% of company 401(k)s offer a brokerage window that gives you access to a broad array of stocks, bonds and funds. A route around this blockade is to yank the money and send it into an IRA.

Another strategy: roll over part of your money. Jeffrey Bryant, a 56-year-old senior business analyst at PG&E in San Francisco, rolled part of his 401(k) into an IRA so he could invest in seven funds from Dimensional Fund Advisors, including small-capitalization and value funds; there were no comparable offerings in his company plan. He left the rest in his 401(k)'s bond and index funds, one with a rock-bottom expense of only 0.01%. a year--just one basis point. Bryant is buying the DFA funds through a fee-only financial planner at Merriman Berkman Next. So he's raising his total investment costs, even though the DFA funds are less expensive--at 0.29% to 0.74% a year--than the funds he sold off in his 401(k). Bryant is betting that with better funds and professional asset allocation and other advice, he'll come out ahead.

Not surprisingly, outside financial planners and brokers push rollovers, since it gives them more money to manage and collect fees for. Fifty-year-olds, as they near retirement and their 401(k) balances grow, want and are willing to pay for such help.

Wright will continue to invest the smaller amount he left in his Boeing 401(k) himself--he calls it his "play money." But he's handing management of his rolled-over funds to William Jordan, a financial planner at Sentinel Group in Laguna Hills, Calif. "I've reached that time in my life I need to become more conservative," says Wright, who has favored growth and international funds. His new objective: "Making sure I can eat all the way through retirement and making sure there is something left over for the kids."

Jordan plans to increase Wright's fixed-income allocation and construct a ladder of individual bonds with different maturity dates. In his 401(k), which doesn't let him buy individual securities, Wright's only choice would be a bond fund, whose maturity structure cannot be customized.

There are a few other reasons to consider an in-service rollover. One is a provision, new this year, that allows you to roll 401(k) money directly into a Roth IRA, where future earnings will be tax free. If your plan administrator is ready to cut a separate check with just your aftertax contributions, it appears (although the Internal Revenue Service hasn't issued rules on this) that you can roll that money directly into a Roth IRA and pay no taxes on the conversion. For now Roth rollovers are allowed only for those with family incomes of $100,000 or less. That income restriction is due to end in 2010.

Another reason to do an in-service rollover pops up if you're leaving retirement money to your kids or grandkids instead of to a spouse. A spouse who inherits either a 401(k) or an IRA can roll it into his or her own IRA with all the flexibility that an IRA offers its original owner. Kids, grandkids or other nonspousal heirs who inherit an IRA can't do that, but they can keep the money in an "inherited" IRA, potentially stretching out withdrawals and tax deferral for decades. Under a 2006 law change, kids and other nonspousal heirs can roll 401(k)s into inherited IRAs--but only if the employer permits it, which not all do. If yours is balky, get the money out now and put it into an IRA that won't have any employer getting in the way of your family's needs. (A nonspousal heir can't Rothify an inherited IRA.)

Before you rush to roll, consider some advantages to a 401(k). In a good plan the fees, particularly for index funds, may be extremely low. If you retire early, you can make penalty-free withdrawals from a 401(k) at age 55; with an IRA, you generally have to wait until you're 59 and a half. In a pinch you can take a loan (of up to $50,000) from your 401(k) but not your IRA.

Plus, if you hold your employer's stock in your 401(k), you may be eligible for a tax break at retirement. If you transfer that stock to a taxable account, you'll pay ordinary income tax (at rates of up to 35%) only on what the stock was worth at the time it was put into your 401(k). Any further appreciation won't be taxed until you sell the stock and then only at the long-term capital gains rate--which now tops out at 15%. There are some really crazy rules here that determine whether you're eligible for this break. So if you've got your employer's stock in your 401(k), check with your plan administrator and your tax adviser.

safety of your bank deposits - from the Sun Sentinel

sun-sentinel.com/news/local/southflorida/sfl-flzbankqa0720sbjul20,0,7034559.story

South Florida Sun-Sentinel.com
Federal insurance program protects most bank deposits
BY MARCIA HEROUX POUNDS

South Florida Sun-Sentinel

July 20, 2008

A bank failure in California. The federal government's planned bailout of the nation's largest mortgage holders, Fannie Mae and Freddie Mac. The strong possibility that more banks could collapse.

Is your cash safe in the bank? Banking experts say: Don't panic, because most deposits are protected by the full faith of the federal government.

Here are answers to key questions about bank safety:

Q: How do the big banks in South Florida, such as Bank of America and Wachovia, compare with the community banks in terms of risk?

A: The largest banks carry less risk for a depositor or investor because they're too big for the government to let them fail, said Florida banking analyst Ken Thomas.

But size doesn't really matter because your deposits are insured by the Federal Deposit Insurance Corp. If you keep $100,000 or less in your name in any bank, you don't have to worry because that money is insured by the FDIC.

Thomas recommends keeping no more than $95,000 in a bank to allow for interest on your deposits.

Q: How does FDIC protection work?

A: All your deposit accounts worth $100,000 and less in one banking institution are automatically insured by the FDIC. That includes savings, checking and money market accounts and certificates of deposit.

Many retirement accounts, such as IRAs and 401(k)s, are insured to $250,000 per person. There are ways to structure deposits to have more than $100,000 in a bank. In a joint account, for example, each depositor is insured up to $100,000. Your bank can help you with a strategy to ensure your protection. Or for help, go online to www.fdic.gov or call 877-ASK-FDIC (275-3342).

Q: In light of the recent failure of IndyMac Bank in California and the troubles of mortgage giants Fannie Mae and Freddie Mac, should I be wary of my bank?

A: IndyMac bank was "a real high flier," said Miller Couse, chairman of the Florida Banking Association, who says most banks are more diversified in their lending. "It was in all the markets tremendously affected by the housing industry."

IndyMac, like many of the nation's banks, was facing pressures of tighter credit, tumbling home prices and rising foreclosures. In recent weeks it had experienced a run, with depositors pulling out $100 million a day.

The FDIC had no choice but to take over the bank, but like the nation's other FDIC-protected banks, IndyMac's deposits are protected up to $100,000 for each account.

The government's potential buyout of Fannie Mae and Freddie Mac also has led to faltering confidence in the U.S. financial system. The Federal Reserve offered to let the mortgage giants draw emergency loans and the Bush administration asked Congress to temporarily increase the companies' lines of credit. Fed chief Ben Bernanke told Congress last week that Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages, are in "no danger of failing."

Q: How can I tell how strong my bank is?

A: One way is to check how banks measure up according to two firms that track them.

Banks with two or fewer stars out of a possible five are problematic or troubled, according to BauerFinancial's star ratings. You can check that at BauerFinancial.com. Local two-star banks are: Integrity Bank, Jupiter; Security Bank N.A., Fort Lauderdale; Ocean Bank, Miami; Republic Federal Bank, Miami; and Great Eastern Bank of Florida, Miami. No matter, your deposits in these five banks are protected by the FDIC.

Bankrate.com in North Palm Beach also monitors the financial health of banks.

You also could go to FDIC.gov and look up your bank's percentage of nonperforming loans — those for which customers are at least 90 days late making monthly payments.

"If you have a bank that has tremendous nonperforming loan percentage, spread those deposits around," said Couse, who is also CEO of First Bank in Clewiston.

For example, of total loans at BankAtlantic, one of the largest local banks in South Florida, 1.25 percent of them are non-performing, mostly commercial lending related to the housing industry, said Alan Levan, chairman of BankAtlantic Bancorp.

Levan said stock investment and deposits in a bank are separate issues. "Stock price is of interest to our shareholders, but totally unrelated to what's happening at the bank," he said. On a year-to-date basis, BankAtlantic's stock has declined 59 percent; Friday the stock closed on the New York Stock Exchange at $1.68 a share, up 18 cents.

Thomas said a financial institution with a low-priced stock isn't necessarily a poor place for a deposit. People don't have to worry about buying a CD there because the FDIC is insuring their deposits, he said.

Q: How much insurance does the federal government have nationwide for bank deposits?

A: The FDIC has nearly $53 billion. The estimated loss to the FDIC from IndyMac is between $4 billion and $8 billion.

Q: How often do banks fail?

A: John Bovenzi, the former chief operating officer of the FDIC who now is in charge of IndyMac, said last week that bank failures have been rare, and that if more banks do fail, the government has enough in reserve. There are 90 banks on the problem list, the FDIC has said. The agency doesn't reveal the banks on the list.

IndyMac is the fifth U.S. bank or thrift that has failed this year, according to the FDIC. In 2007, only three financial institutions failed, compared with the 2,808 institutions that failed between 1982 and 1992.

Still, Thomas said "dozens" of banks nationwide could fail or close this year – not hundreds as some fear. More bank failures can be expected this year, but "not any big ones," said Karen Dorway, president and director of research at Coral Gables-based BauerFinancial, which rates the financial health of banks.

This story was supplemented by Sun-Sentinel wire services.

Marcia Heroux Pounds can be reached at mpounds@sun-sentinel.com or 561-243-6650.



Is your money safe?
Have a question about the financial health of your bank? Send it to Sun-Sentinel.com/business and we'll answer it online or in the South Florida Sun-Sentinel.

From WSJ - Work at Home, Reputable Websites

WORK & FAMILY By SUE SHELLENBARGER
Nice Work If You Can Get It: Web Sites for At-Home Jobs
As gasoline prices soar and joblessness mounts, the nonstop stream of email I get from readers wanting to work from home is rising, too. Also multiplying are the online scam artists who seek to profit on that desire.
So like the ancient philosopher Diogenes searching for an honest man, I set out looking for a few honest Web sites that actually help people find real, paying home-based work. I selected only sites with a track record and users I could interview. Help in my search came from Tory Johnson, founder of WomenforHire.com1, an employment Web site, and co-author of a forthcoming book on working from home; and Peter Weddle of Weddles.com2, a researcher, consultant and author on recruiting and online employment.
YOUR QUESTIONS ANSWERED
3
Sue Shellenbarger answers readers' questions4 about work-at-home opportunities on the Web and U.S. states that plan to post child-care inspection complaints and reports online.
A word of caution: Although at-home opportunities are increasing, most are only for part-time, low-paid work without benefits; some people who use these Web sites make as little as $5,000 a year. Many work very hard at tasks most people would find difficult, such as telemarketing. Competition for at-home work is keen; prepare to wait months to get a client, project or assignment. That said, here are some options:
If you have professional skills and experience, and are prepared to slug it out for clients in the global marketplace, a free-lance site may be for you. Elance.com5 and oDesk.com6 each link clients with about 90,000 skilled free-lancers apiece, roughly half of whom are in the U.S. The sites post client feedback and publish results of optional professional-skills tests free-lancers can choose to take through the site. The sites also serve as secure intermediaries for clients' payments, in return for commissions of about 4% to 10% of free-lancers' fees. Information-technology workers, such as programmers and Web developers, are the sites' biggest market, but they're fast expanding into graphic design, writing, engineering, translation, marketing, accounting, administrative and legal services.
HOMEWORK

For information on finding trustworthy at-home work opportunities:
• bbbonline.org7 and click on "For Consumers."
• WomenForHire.com8, offers resources and ideas on working from home.
• FTC.gov9, type "work at home scam" in search box.
One exceptional success story comes from Arron Washington, 24 years old, a Hinesville, Ga., programmer who dropped out of college after realizing he could make as much as $60,000 a year on oDesk.com. "The offers just kept pouring in," he says.
If you like providing customer service, selling stuff by phone or in some cases making cold calls, companies that outsource call-center services for retailers, infomercial vendors and other clients are expanding use of at-home agents. Workers are typically paid by the hour, by the call or by the minute spent talking, plus incentives; most make a total of about $8 to $17 an hour.
West Corp. (west.com10), with 15,000 home agents, is undergoing "rapid expansion," says Dan Hicks, a senior vice president. LiveOps.com11, which claims to have 20,000 home agents working at least a few hours a week, plans to bring on several thousand more this year, says Jon Temple, president, world-wide operations. Arise.com12, with 8,000 home-business owners as agents, plans to add 4,000 more by year end, says Angie Selden, chief executive. AlpineAccess.com13, with 7,500 home agents, will hire 2,500 more people by December, says CEO Christopher Carrington. Executives at Convergys.com14, with 1,000 home agents, and VIPDesk.com15, with 300, also say they're expanding. WorkingSolutions.com16 claims 4,000 active agents and plans to hire as many as 600 more by December. In a new twist, a few of these companies, including West, are making home agents permanent employees with access to group benefits. Convergys and Alpine Access subsidize the benefits.
If you like the idea of being a "virtual assistant" -- a jack-of-all-trades who performs online many of the same services as an administrative aide in a brick-and-mortar office -- TeamDoubleClick.com17 offers links to clients. Pay is typically $10 to $20 an hour for taking calls, booking events or travel or other tasks. But entry barriers are high; some 80% of the site's 300 to 500 weekly applicants fail mandatory entry tests on typing, computer and phone skills. And only 10% of the site's 49,000 VAs are working, says co-founder Gayle Buske.
Other sites serve as job boards. Sologig.com18 says a sizable minority of the 8,000 screened free-lance opportunities it has posted can be done from anywhere. A smaller site, VirtualAssistants.com19, offers access to screened postings for $14.95 a month. And tJobs.com20 and teleworkrecruiting.com21 also charge a fee for access to screened work-at-home postings, which they collect from employers or elsewhere on the Web.
Write to Sue Shellenbarger at sue.shellenbarger@wsj.com22

URL for this article:http://online.wsj.com/article/SB121564902139141075.html

Hyperlinks in this Article:(1) http://WomenforHire.com (2) http://Weddles.com (3) http://online.wsj.com/article/SB121564872600341053.html (4) http://online.wsj.com/article/SB121564872600341053.html (5) http://Elance.com (6) http://oDesk.com (7) http://bbbonline.org (8) http://WomenForHire.com (9) http://FTC.gov (10) http://west.com (11) http://LiveOps.com (12) http://Arise.com (13) http://AlpineAccess.com (14) http://Convergys.com (15) http://VIPDesk.com (16) http://WorkingSolutions.com (17) http://TeamDoubleClick.com (18) http://Sologig.com (19) http://VirtualAssistants.com (20) http://tJobs.com (21) http://teleworkrecruiting.com (22) mailto:sue.shellenbarger@wsj.com

from Sun NYTimes Business Section - How to Survive Bear Market

July 6, 2008
Fundamentally
A Bear Market, Mauling Not Included
By PAUL J. LIM
WITH the Dow Jones industrial average and the Nasdaq composite index down about 20 percent from their recent highs, this sure looks like a bear market.

But does it feel like one yet? Before you answer, check how your overall portfolio has performed lately. You’re probably not happy with the returns — but if you have been a conservative, diversified investor, you may well be doing better than the overall stock market. “In most cases, the experience of your own portfolio is not what you’re reading in the headlines,” said Stuart L. Ritter, a financial planner at T. Rowe Price in Baltimore.

To be sure, this has been a particularly painful nine-month span, marked by a historic credit crisis, record-high oil prices, heightened inflation fears and perhaps even a recession. And considering that many foreign markets — like China, India and much of Europe — have declined sharply, there is a growing sense among investors that there is no place to hide.

But most individual investors don’t invest all their money in stocks. They put a portion of it into bonds, in part to stabilize their portfolios in a market storm.

This old-fashioned diversification has demonstrated its value. From the start of October 2007 — around the peak of the domestic stock market — to the end of June, a portfolio of 70 percent stocks and 30 percent bonds fell just 9 percent, according to the research firm Morningstar. The stock portion mirrored the Standard & Poor’s 500-stock index, while the domestic bond allocation was based on the Lehman Brothers Aggregate Bond index.

You would have fared even better if you had been gradually putting money into the stock market, a strategy known as dollar-cost averaging. In a falling market, this offers another form of ballast: it means that investors are buying new shares at ever-lower prices, thereby averaging out the returns they earn on each pot of new money.

“Times like these should remind people of the importance of the basics — like having a long-term asset-allocation strategy,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Investors might also want to remind themselves of the following three basic rules:

DON’T PANIC Downturns like this one may be painful, but “they’re a normal part of the market,” Mr. Ritter said.

Generally, the market has experienced a 20-percent-plus pullback every five years or so since 1900, according to James B. Stack, editor of the InvesTech Market Analyst newsletter. Some market strategists, including Ms. Sonders, say they think this downturn won’t be as severe as the bear market of March 2000 to October 2002, which cut the Standard & Poor’s 500 in half and erased nearly 80 percent of the value of the Nasdaq index. That bear was marked by sky-high stock valuations amid weak corporate fundamentals. This time around, corporate balance sheets — with the exception of financial companies — are in decent shape and price-to-earnings ratios are generally in line with historical standards, Ms. Sonders said.

“So I don’t think we’re necessarily going to suffer the same type of market pain as the last time,” she said.

STAY PROPERLY DIVERSIFIED This means not only owning different types of stocks, but also committing a permanent portion of your portfolio to fixed-income investments.

Why? Bonds can be a remarkably valuable part of a portfolio when stock prices decline.

Peng Chen, president and chief investment officer of the investment advisory firm Ibbotson Associates, recently studied the diversification benefits of various assets under different market conditions. He found that when domestic stocks went south, there was a tendency for many other investments to follow suit.

In a recent article in the journal of the CFA Society of the United Kingdom, “Re-evaluating Asset Allocation in a One-Basket World,” he found that correlations between the S.& P. 500 and foreign stocks increased in periods when the American index declined. By contrast, the correlation between American bonds and stocks fell to virtually zero in months when the stock market declined, according to Ibbotson. That makes bonds, as an asset class, an extremely effective buffer when the stock market is shaky.

STAY THE COURSE “Sticking to the original plan is the best course of action,” said Alison Borland, the defined-contribution consulting practice leader for Hewitt Associates.

History certainly bears this out. Say you were dollar-cost averaging $1,000 a month — with 70 percent going into S.& P. 500 stocks and 30 percent into a diversified basket of bonds — during the bear market from 2000 to 2002. While the market slide reduced the value of the stocks around 50 percent, the value of the new investments you made during that period would have fallen about 14 percent during this stretch, according to Morningstar.

Moreover, by continuing to invest through the bad times, investors set themselves up to bask in the long bull market that started in October 2002.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

from Marketwatch - Think Twice About Compromising Your Nest Egg

ROBERT POWELL
Better think twice
Don't make these critical mistakes with your nest egg, even if times are tough
By Robert Powell, MarketWatch
Last update: 7:31 p.m. EDT July 2, 2008BOSTON (MarketWatch) -- Recession or not, these are fast becoming hard times, and hard times can lead to bad decisions.
Recently, the Financial Industry Regulatory Authority warned investors to think twice before taking steps that might compromise their nest eggs, such as taking out a reverse mortgage, getting a 401(k) debit card, or cashing in life insurance policies to weather tough financial times.
"Each of these should be considered strategies of last resort," Mary Schapiro, chief executive of the Financial Industry Regulatory Authority said last week in a speech.
"They may raise cash quickly, but each also carries long-term consequences that can undermine financial security in retirement and pose the potential for losing a significant, and sometimes irreplaceable, asset," Schapiro said. FINRA is a nongovernmental organization that oversees U.S. security firms.


According to FINRA, Americans are faced with the perfect financial storm. Rising costs of fuel and food, declines and volatility in the housing and financial markets, and an ever-tightening credit crunch have gathered to form a storm that could lead some Americans to make poor financial decisions. "But tough financial times don't necessarily justify resorting to risky ways to make ends meet," Schapiro said.
Investors could be risking their most valuable assets when they use reverse mortgages, life settlements and 401(k) debit cards to tap much-needed cash.
Retirement accounts
Don't cut back on or stop contributing your 401(k) and, even more importantly, don't cash in all or part of your 401(k). To be sure, plan providers do allow hardship withdrawals in certain situations -- if you face eviction from or foreclosure on your primary residence, for instance, or some other financial calamity. But if you are under age 59-1/2 and there is no hardship, you'll have to pay ordinary income tax on the withdrawal plus a 10% penalty tax. What's more, many employers will withhold 20% of the amount being withdrawn, so it's possible that a $20,000 withdrawal works out to less than $14,000 when all is said and done.
FINRA also warns that such withdrawals come with another cost - opportunity cost. If you're 40 years old with $40,000 in your 401(k) and it's growing at 6% percent year, excluding additional contributions that money would be worth $107,710 in 17 years. But if that same person withdraws $20,000, that remaining $20,000 would be worth just $53,855 in 17 years. In other words, a withdrawal of $20,000 now costs about $54,000 in future growth.
Worse yet, FINRA warns, creditors have access to any money taken out of a 401(k), be it a loan or hardship withdrawal, in ways they wouldn't if you left the money in a retirement account. Under the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, creditors cannot touch your 401(k) balance or similar retirement savings account -- even if, as a last resort, you file for bankruptcy protection, FINRA said. Of note, balances in IRAs (Roth and traditional) are protected up to a limit of $1 million from creditors.
There are other benefits to maintaining contributions to your 401(k). Contributions reduce taxable income and lower your tax bill. Plus, 401(k) contributions often come with free money: Employers typically match a percentage of your contribution.
That said, if you really need the money from your 401(k), FINRA suggests taking out a loan rather than a withdrawal. You might be able to borrow money at a lower interest rate than a bank would offer. Plus, you won't have to pay taxes on the loan as you would with a withdrawal. Also, if your employer offers one, avoid using a 401(k) debit card, FINRA said.
Life settlements
Don't cash in your life insurance policy using something called a life settlement, FINRA warns. With a life settlement, a third party will buy your life insurance policy from you, typically for more than the cash value but less than the death benefit. According to FINRA, life settlements can be a valuable source of liquidity if you would otherwise surrender your life insurance policy or allow it to lapse, or if your life insurance needs have changed. But life settlements are not for everyone, FINRA said.
For instance, life settlements can have high transaction costs and unintended consequences. You might be unable to buy a new insurance policy, plus you could lose state or federal benefits, such as Medicaid. Also, you will have to pay taxes on the life settlement.
If you really need the money from your life insurance and you still need the coverage, FINRA suggests you borrow against your policy, or check whether you are eligible for accelerated death benefits. If you have a long-term, catastrophic, or terminal illness you might be able get a reduced benefit prior to dying.
Reverse mortgages
If you are over age 62 and have equity in your house, a reverse mortgage might sound intriguing. With a reverse mortgage, you get to convert the equity in your house to cash, plus you get to age in place, in your home. What's more, you don't have to make any interest or principal payments during the life of the loan.
But as with all things that sound too good to be true, especially something that sounds too good to be true for what could be your single largest asset and a future source of retirement income, there's a catch with reverse mortgages. For one thing, the loan costs can be steep. Also, interest is added to the principal, making reverse mortgages "rising debt" loans.
"The bottom line is that reverse mortgages are an expensive option that may prematurely deplete your home equity," FINRA said. "A reverse mortgage is a very serious decision."
Consider, for instance, some of the disadvantages FINRA outlined:
The income or lump sum you receive could impact you or your spouse's eligibility for various state and federal benefits, including Medicaid.
Depending on the laws of your state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply against creditors, or if you have a health emergency and your spouse must liquidate assets to pay for nursing home care.
A reverse mortgage is not the right choice if you want to leave your house to your heirs.
A reverse mortgage may be right for you. But you need to evaluate a number of factors, including your health, your spouse's health, other sources of income, the reason you're tapping your home equity, when to do it, and how wisely you use your loan proceeds - before deciding whether a reverse mortgage is right or not.
What are some alternatives to a reverse mortgage? According to FINRA, you could sell your house and then downsize or rent, or take out a home equity loan, or get help from your children or local government assistance program. Any of those tactics could unlock the equity in your home without the cost of a reverse mortgage.

Kids and Finances (Wall Street Journal)

July 2, 2008


Hello Muddah, Hello Fadduh,
My Portfolio Is in the Gutter
At Finance Camp, Kids Learn
About Stocks, Bonds and Risk;
Paying Bills With Cow Moola
By MARY PILON
July 2, 2008; Page D1

This summer, droves of school-age children will attend summer camp, where they will paddle canoes, play tennis and make crafts from paste and yarn. Others, will go to finance camp, where they will take excursions to a local bank or delve into budgeting and investing simulations. Rather than singing around the campfire, they will chant personal-finance mantras like these sung at Camp Millionaire in Santa Barbara, Calif.: "Financial freedom is your choice" and "Assets feed you, liabilities eat you."


Ed Koren
In the past, business and finance camps attracted high-achieving high-school students. Now, with the country's uncertain economy, financial education is expanding to an unlikely audience -- younger kids, even grade-school students. They are also reaching out to those from diverse economic backgrounds. And the lessons are surprisingly sophisticated, teaching campers how to rebalance portfolios, invest in real estate and use credit cards without getting dinged on fees.

At Camp Millionaire, campers in five days create a minieconomy based around "moola" -- mock currency that features a cow's portrait -- which kids use to spend, invest in stocks and compete with each other. They also use the fake currency to pay their "bills," running around and depositing moola in large envelopes with labels like "phone bill" and "credit card bill." Parents spend the real moola to send their kids to the weeklong session, which ranges from $279 to $300. Scholarships are available, based on financial need.

"Adults underestimate kids' abilities. Investing -- they'll get it and be interested in it," says counselor Pamela Capalad.


Andrew Adams, of Santa Barbara, attended the camp twice, once when he was 10 years old and again two years later. "He was coming home with words like 'adversely affect your credit score,' " says his mother, Denice Adams.

Andrew pointed out to his mother that her credit-card billing cycle had changed, and that she wasn't keeping up with payments. Her delays were racking up late fees, jacking up her interest rate and hurting her credit score. After considering her non-discretionary household expenses (his words), Andrew also pronounced that the mortgage on their Santa Barbara home was too high for her income. Now 15 years old, Andrew has launched his own small travel business and is a financial-news junkie.

Gauging Risk

At YoungBiz's Smart Start to Money Camp in Sarasota, Fla., campers ages 13 to 18 are asked to toss a ball into a bucket, earning more points the farther away they stand. It aims to teach kids about risk tolerance and lead them into a discussion about stocks and asset allocation. How far away from the bucket they're willing to stand might tell them something about their investing style.

BONDING OVER BANKING


1
Read about girls-only finance camps2 and join a discussion on WSJ.com's Front Lines3.Campers pay $100 to $300 for the three-day session, in which they form teams and compete to create the best portfolio. In 2001, during one of the first camps, one camper pleaded with his teammates to buy stock in a then-risky company, eBay. His peers lobbied for safer bets, like utility companies. After a fiery debate, the team passed on eBay but agreed on an alternative stock allocation. They won the competition because counselors were so impressed with their cooperation.

Camp Challenge, a joint effort between the North Carolina Bankers Association and 4-H, mixes financial education in the morning with traditional activities, such as horseback riding or swimming, in the afternoon. For $350, kids 10 to 14 years old learn the basics of everyday finance using the FDIC's Money Smart curriculum.


Robin Diamond
Federal Reserve Chairman Ben Bernanke with campers from Camp Challenge.
Camp Challenge is also part of the America's Promise Alliance, a business and nonprofit cooperative that works to reach students at risk of drug abuse or dropping out, for example. The weeklong overnight camp in Westfield, N.C., has drawn the attention of Federal Reserve Chairman Ben Bernanke and former Secretary of State Colin Powell, who have been known to mingle with campers when they're in the area.

In Denver, the Young Americans Center for Financial Education takes a macroeconomic approach to financial education.

Creating a Ghost Town

In weeklong sessions that cost $185, fourth- and fifth-graders take part in large-scale simulations of the economy of a small town. Campers apply for jobs. They create business plans for 17 different businesses, patronize others along Main Street and even buy health insurance. (It costs two AmeriDollars.) One year, the counselors had a camp of savers, and AmeriTowne turned into a ghost town when the kids refused to spend any money. The incident sparked a fruitful discussion about free enterprise. Counselors asked campers to imagine what would happen to AmeriTowne's Main Street if no one spent any money in the long term. The grim consequences of an inactive economy soon became apparent, especially when they realized that they, too, were business owners.

Global Economics

The fifth- and sixth-graders take the minitown approach and bump it up a notch to the International Towne. It is like a model United Nations with a robust focus on trade, currencies and deficits. They're thrown questions about environmental protection and sustainability. When counselors asked campers to write down how they would cope with limited water resources on the planet, they ran out of paper.

"They really run the world at the end of the week," former banker C.J. Juleff, vice president of programming for the camp, said.

Write to Mary Pilon at mary.pilon@wsj.com4

URL for this article:
http://online.wsj.com/article/SB121495019809220955.html


Hyperlinks in this Article:
(1) http://blogs.wsj.com/frontlines/2008/07/02/girls-bond-over-banking/
(2) http://blogs.wsj.com/frontlines/2008/07/02/girls-bond-over-banking/
(3) http://blogs.wsj.com/frontlines/2008/07/02/girls-bond-over-banking/
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Estate Tax Outlook (Wall Street Journal) - Stayin Alive

TAX REPORT
By TOM HERMAN






Stayin' Alive:
How to Cheat
The Estate Tax
July 2, 2008; Page D1
You still can't take it with you. But by timing your death, you can leave more of it to your heirs.

As ghoulish as it sounds, thousands of high-net-worth Americans who care about the financial well-being of their heirs have a powerful tax incentive to survive until at least Jan. 1, 2009. On that day, the federal estate-tax exclusion is scheduled to jump to $3.5 million from $2 million this year.

"No respirator plugs will be pulled in December," predicts Michael Graetz, a Yale Law School professor and co-author of a 2005 book on the estate tax, "Death by a Thousand Cuts."

The top estate-tax rate, now 45%, won't change. But raising the exclusion by $1.5 million could translate into tax savings of hundreds of thousands of dollars for heirs fortunate enough to have a wealthy benefactor who continues breathing until New Year's Day.

Some affluent Americans already are keenly aware of the increased importance of staying healthy. "It's less important to have a lawyer for sophisticated estate planning than to have a good cardiologist," says Douglas E. Schoen, a New York political consultant and author who expects to leave a large estate.

The imperative to stay alive is likely to take on growing importance in the final weeks of 2008, especially for wealthy people in poor health. But based on current law, there's an even bigger incentive to survive until 2010. In that year, the federal estate tax is scheduled to disappear entirely, only to reappear again in 2011 with a $1 million exclusion for 2011.

Don't bet on total repeal of the estate tax, though, even for one year. Financial planners, accountants and lawyers expect Congress and the next president -- whether it be Sen. Barack Obama (D., Ill.) or Sen. John McCain (R., Ariz.) -- to reach a compromise that will retain the estate tax in some form.

"The one thing we all know cannot happen is what current law says will happen," says Mr. Graetz, referring to the current law killing the estate tax in 2010 and reviving it in 2011 with only a $1 million exclusion. "That means Congress must act next year, no matter who's president."

So what will Congress do? Although nobody knows, it's significant that, under both candidates' plans, only a tiny fraction of all estates would get hit by the federal estate tax. "Our calculations from IRS and other data sources indicate that Obama would tax less than one-half of one percent of all estates of people dying in the U.S. -- and McCain would tax less than one-quarter" of one percent, says Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington.

So what should well-to-do families do until the dust settles? For a look at what could lie ahead, we've provided, below, the proposals of Sens. Obama and McCain, based on interviews with their advisers, and calculations done by Deloitte for The Wall Street Journal on how families would be affected by them -- as well as advice from tax planners.

The Obama Plan. Sen. Obama proposes a $3.5 million exclusion in 2009 and thereafter, with a top rate at 45%. His plan will "fully repeal the estate tax for 99.7% of households," says Jason Furman, Sen. Obama's economic policy director.

"He would add certainty and stability to the tax code by making the 2009 estate tax parameters permanent, exempting estates of up to $7 million for a married couple," Mr. Furman says. The Obama plan "retains the estate tax for the top 0.3% of estates in order to restore fairness to the tax system, helping to pay for a tax cut for 95% of workers and their families."

The McCain Plan. Sen. McCain proposes raising the exclusion to $5 million per person and cutting the top federal estate-tax rate to 15%, says Douglas Holtz-Eakin, the senator's senior policy adviser and a former director of the Congressional Budget Office. This plan "should go into place ASAP after he is elected," Mr. Holtz-Eakin says.

"If the political climate makes it next to impossible to achieve full repeal, then Congress should look towards a compromise," says Mr. Holtz-Eakin, referring to President Bush's unsuccessful efforts to kill the estate tax permanently. He calls Sen. McCain's plan "a compromise that holds the potential for breaking the logjam and providing some much-needed certainty."

Cutting the tax rate to 15% "would link the death tax with the current capital-gains tax rate," Mr. Holtz-Eakin says. "By doing so, Americans will not be forced to pay more in death than they would if they had sold property prior to their death." He also says that a $5 million exclusion "is generally thought by many to be the appropriate size to help small-business owners avoid cash-flow difficulties" upon the death of a family member.

Stepping Up. Despite their differences, both senators support retaining the current system for valuing stocks, mutual-fund shares and other inherited property whose value has increased over the years. This is important to many heirs because it can affect how much they eventually owe in capital-gains tax, if anything at all, when they sell inherited property.

Suppose your aunt dies and leaves you an assortment of stocks and fund shares that have risen sharply in value over the years. Under the current system, your cost "basis" for purposes of calculating future taxes would typically be their value on the date of her death (or, in certain circumstances, six months later). This system often is referred to as "stepped-up basis" or "step-up in basis," since the value of the appreciated asset typically gets stepped up to fair market value. The current step-up system is scheduled to continue through 2009, and then undergo major changes in 2010.

What You Could Pay. Under both candidates' plans, very few estates would have to pay federal estate tax. How much heirs ultimately pay could vary widely depending on such factors as state tax laws. But the McCain plan, if enacted, generally would mean much-larger savings for heirs of substantial estates than the Obama plan.

Heirs to the biggest fortunes should care far more about what happens to the tax rate than the exclusion amount. "The wealthiest Americans would benefit more from McCain's tax-rate decrease than from his exemption increase," says John Olivieri, a partner at the law firm White & Case in New York.

Analysts at Deloitte Tax estimate the federal estate tax for a hypothetical $5 million estate under the McCain plan would be $675,000 less for 2009 than under the Obama plan. For a $10 million estate, the savings under the McCain plan would be nearly $2.2 million. For a $50 million estate, the difference would be more than $14 million. For a $100 million estate, the difference would be more than $29 million. (These numbers reflect federal tax only; many states levy their own taxes.)

Getting Ready. Besides staying in good health, consider a few other ideas. For starters, make sure you have all your key documents in place and up to date, such as your will, durable power of attorney, health-care proxy and living will, says Mr. Olivieri. "An up-to-date will should contain a plan flexible enough to deal with the changing tax landscape," he says. Also make sure those you trust know where all these documents are located.

One of the easiest techniques is to take advantage of the annual gift-tax exclusion. That allows you to give away as much as $12,000 a year to anyone you wish -- and to as many people as you want -- without having to worry about taxes or even file a return. In addition, you can pay someone else's tuition or medical expenses without having those payments count toward the annual limit -- as long as you make your payments directly to the educational or medical institutions. Many wealthy people use the gift-tax exclusion to reduce the size of their taxable estates.

There are many other techniques worth considering, including setting up various types of trusts, such as a "grantor-retained annuity trust," or GRAT, says Don Weigandt, a managing director of J.P. Morgan Private Bank in Los Angeles. This type of trust is popular among those with assets expected to increase in value. Another idea: Consider moving from a high-tax state, such as New York or New Jersey, to one such as Florida or Nevada.