A Financial Adviser’s Top 5 Tips for 2010

Every few months my employer’s financial advisor, Michelle Bless of the Retirement Strategies Group,  comes by the office to update us on changes to our benefits package or give advice. Last time she was here, I asked for her top five financial tips for 2010. She provided a great list of things to consider for 2010:

1. Roth Conversion Income Limits Lifted!

For most people, their retirement savings and/or income streams in retirement are 100% taxable. From an advisor’s standpoint, it is very helpful to have some tax free money to work with in retirement. I would recommend looking at a Roth Conversion which allows you to convert your IRAs to Roth IRAs and pay the income tax today and allowing the account to grow on a tax free basis (vs. tax deferred). Before 2010, you weren’t allowed to convert if your Adjusted Gross Income was $100,000 per year or more but now that rule has expired which is big news. A few things to keep in mind: 1) If you convert in 2010 and ONLY in 2010, the IRS will allow you to spread out your tax liability over two years, 2011 and 2012. 2) If you can’t pay the taxes out of savings I would recommend not doing it. There are many things to consider and strategies to implement to make sure that the conversion is right for you so seek professional advice first.

2. Beef up your Emergency Savings accounts to 3 months living expenses if you’re married and 6 months living expenses if you’re single.

If anything, this recession has really driven home the fact that most people are unprepared to continue paying their bills for longer than a few weeks if they lost their job. This recession has affected people from all walks of life and has cost millions of people their jobs. You must have emergency savings in the bank to ensure that you can continue to pay your bills should you find yourself out of work. I know saving for retirement is important, but if your retirement account also becomes your emergency savings account (which for many it is) then that’s not good financial planning. Retirement accounts are for retirement, not to buy a first home, not to send your kids to college, and not to dip into if you are in a financial bind

3. Buy real estate.

Real estate has to exist somewhere in your financial life either a primary residence, rental properties, or with Real Estate Investment Trusts (REITS) – public or private. The IRS has extended the Home Buyer Tax Credits for first time home buyers as well as for current home owners. The rules are as follows:

  • Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30, 2010.
  • Expands the credit to grant up to $6,500 credit to current home owners purchasing a new or existing home between November 7, 2009 and April 30, 2010.

If you’re not in a position to purchase physical real estate, a public or private REIT can fulfill that asset class. If you don’t know what I’m talking about, send me an email or give me a call. For the tax credits consult your tax advisor.

4. Give yourself an annual financial review and calculate your Net Worth.

One goal I have for my clients is to increase their net worth each year. If it hasn’t gone up, then we look at why – Was it market performance? Savings? Big expenses? It is a very empowering exercise. Add up all your accounts (bank, brokerage, retirement, cash value in life insurance, etc) and subtract your liabilities (mortgage, car loans, student loans, credit cards, etc).

5. Teach your kids about money now.

If you have kids and they get an allowance or money for their chores, a good exercise is to have them divide that money into three groups: Save, Spend, Donate/Share. This will help them develop good money management skills at an early age and will also teach them the value of the money they earn/are given. You can buy these piggy banks with three compartments on Amazon.

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