Articles for September 2015

Is this the year you stop procrastinating about your Financial Plan?

Some things to think about as you get started.

Look at your expenses and your debt. Take a look at your core living expenses (such as a mortgage payment, car payment, etc.). Can any core expenses be reduced? Investing aside, you position yourself to gain ground financially when income rises, debt diminishes and expenses decrease or stay (relatively) the same.

Maybe you should pay your debt first, maybe not. Some debt is “good” debt. A debt is “good” if it brings you income. Credit cards are generally considered “bad” debts.

If you’ll be carrying a debt for a while, put it to a test. Weigh the interest rate on that specific debt against your potential income growth rate and your potential investment returns over the term of the debt.

Of course, paying off debts, paying down balances and restricting new debt all works toward improving your FICO score, another tool you can use in pursuit of financial freedom (we’re talking “good” debts).

Implement or refine an investment strategy. You’re not going to retire solely on the elective deferrals from your paycheck; you’re to going retire (potentially) on the interest that those accumulated assets earn over time, plus the power of compounding.

Manage the money you make. If you simply accumulate unmanaged assets, you have money just sitting there that may be exposed to risk – inflation risk, market risk, even legal risks. Don’t forget taxes. The greater your wealth, the more long-range potential you have to accomplish some profound things – provided your wealth is directed.

If you want to build more wealth this year or in the near future, don’t neglect the risk management strategy that could be instrumental in helping you retain it. Your after-tax return matters. Risk management should be part of your overall financial picture.

Request professional guidance for the wealth you are (or could be) growing. A good financial professional should help to educate you about the principles of wealth building. You can draw on that professional knowledge and guidance this year – and for years to come.

Mike Moffitt may be reached at ph# 641-782-5577 or email mikem@cfgiowa.com

Website: www.cfgiowa.com
Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Can an IRA Be a College Savings Vehicle?

You might be surprised at its potential.

An IRA is a retirement savings account, right? Indeed it is. IRA stands for Individual Retirement Arrangement. Even with that definition, however, there is no prohibition on using an IRA to save for other purposes, such as funding a college education.

Why would anyone choose an IRA as a college savings vehicle? At first glance it may seem strange, since there are a couple of types of investment accounts dedicated to that goal in the first place. On closer inspection, IRAs – especially Roth IRAs – present some features that may be quite attractive to the parent or grandparent seeking ways to build education savings.

Flexibility. Parents are urged to save for their children’s college educations as soon as possible … but what if their children end up spending little or no time in college? Some young adults do start careers or businesses without any college education. Some simply have no interest in going to school any longer. Another, more pleasant circumstance worth mentioning: what if a child ends up getting a significant college scholarship, even a full ride?

In the event that these things happen, parents or grandparents who long ago opened a conventional college savings account may face a financial dilemma. Withdrawals from these conventional college savings plans are tax-free as long as they are used for qualified educational expenses, but if the funds are withdrawn other purposes, the distribution is regarded as fully taxable income (and the account gains are subject to a 10% penalty). Sometimes you can transfer assets in one of these conventional college plans to another family member, but some families do not have that choice.1

As an IRA can be used to build retirement savings as well as a college fund, it offers a family flexibility in the face of such uncertainty. If the assets saved and invested for college end up being nice but not really necessary, those invested assets can serve as retirement funds.

Tax-deferred growth & the possibility of a tax-free withdrawal. You probably know the basic distinction between a traditional IRA and a Roth IRA: the former permits tax-deductible contributions as a tradeoff for eventual taxable withdrawals, while the latter offers no tax deduction on contributions in exchange for tax-free withdrawals later (provided an investor follows IRS rules). Either IRA gives you tax-deferred growth of the invested assets.2

Now, can you open a Roth IRA, own it for five years or more and withdraw its assets tax-free even if you use the money for something other than your retirement? If that something is your child’s college education, the answer is (a qualified) yes.3

Withdrawals from Roth (and for that matter, traditional) IRAs face no withdrawal penalties if the money withdrawn is used for qualified educational expenses. Does this mean you can take $100K out of a Roth IRA today and use it to pay for your child’s college education? Probably not that large an amount, as some restrictions apply.3

Roth IRA withdrawals are regarded by the IRS as a return of contribution first, with account earnings coming out next. If you own a Roth IRA and are younger than 59½, or are older than 59½ but have owned your Roth IRA for less than five years, your Roth IRA’s earnings are ordinary, taxable income if withdrawn. Roth IRA contributions may be withdrawn tax-free at any age. So if you have contributed, say, $45,000 to a Roth IRA, as much as $45,000 from that Roth could be taken out tax-free and used for qualified educational expenses.3

One other note about taxes that pertains to all this: eight states offer no tax deduction on funds contributed to a conventional college savings plan. If you live in one of those eight states (Massachusetts, New Jersey, and California among them), then idea of withdrawing Roth IRA contributions tax-free at some point for education purposes may seem more attractive.3

Not considered an asset on the FAFSA. When students apply for college aid, they routinely fill out the Free Application for Federal Student Aid (FAFSA), which helps the federal government figure out the Expected Family Contribution (EFC), or the degree of college costs the family finances can handle. Conventional college savings accounts are counted as assets on the FAFSA in determining the EFC, but IRAs and other retirement accounts are not.1

What are the shortcomings of building college savings with an IRA? First, this idea may not work for retirees, as you must have “taxable compensation” to make Roth IRA contributions and you cannot make traditional IRA contributions past age 70½. Phase-outs on for high earners may reduce or even prohibit annual Roth IRA contributions for some. Lastly, some of the conventional college savings vehicles have no annual contribution limits, while the annual contribution limit for Roth and traditional IRAs is currently set at $5,500 ($6,500 if catch-up contributions are included). Even so, families who seek more flexibility in their college savings options may see an IRA, particularly a Roth IRA, as an intriguing potential college savings vehicle.2,3

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. 

Citations.

1 – marketwatch.com/story/3-reasons-to-use-a-roth-ira-to-save-for-college-2015-03-25 [3/25/15]

2 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]

3 – cnbc.com/2014/02/03/roth-iras-can-be-a-better-way-to-save-pay-for-higher-education-costs.html [2/3/14]

The Long Ascent of the S&P 500

The index has overcome obstacle after obstacle through the years.

No one knows what will happen tomorrow on Wall Street. Even the most esteemed analysts can only make educated guesses. As the old saying goes: past performance is not indicative of future results.

All that said, the market has had many more positive years than negative years. The history of the S&P 500 is worth considering in light of recent market volatility. The S&P is the broad benchmark that economists, journalists, and investors regard as shorthand for the “market.” As the S&P 500 includes about 500 companies, it represents overall market performance better than the 30-component Dow Jones Industrial Average.

If you look at the annual returns of the S&P since 1928, you will see a long ascent with periodic interruptions, and a historical affirmation of equity investment. Looking at the total returns of the S&P (with dividends reinvested), the numbers are even more impressive.

The S&P advanced in 63 of the 87 years from 1928-2014. The average total return during those 63 profitable years was 21.5%. The average total return during the 24 down years was not as bad: -13.6%.1

The index has endured only four multi-year slumps in this 87-year period: 1930-31, 1940-41, 1973-74 and 2000-02. As for extremes, the total return for 1954 was 52.56%; the total return for 1931 was -43.84%.2

Narrowing the time frame a bit to reflect the investing experience of baby boomers, the S&P advanced in 31 of the 40 years from 1975-2014.3

Have market gains typically outpaced inflation? Looking at data since 1950, the answer is yes. Only in the 1970s and 2000s did U.S. equities climb less than consumer prices. The nadir came in the 1970s, when yearly inflation averaged 7.4% while the S&P’s average price return was 1.6% and its average total return was 5.8%. Contrast that with the 1990s. In that decade, the annual price return for the index averaged 15.3%, the average total return 18.1%; mean yearly inflation was just 2.9%.4

When it seemed like the market was coming apart, the S&P recovered. As the oil crisis and inflation threatened to unglue venerable economies in the 1970s, the S&P posted total returns of -14.31% in 1973 and -25.90% in 1974. Then it roared back, gaining 37.00% in 1975 and 23.83% in 1976. When the dot-com bubble burst, the total return was -11.85% in 2001, -21.97% in 2002; after that, the S&P’s next two annual total returns were +28.36% and +10.74%. When the credit crunch and the Great Recession occurred, the index delivered an abysmal -36.55% total return in 2008; the next year, the total return improved to +25.94% and stayed positive through 2014.2

The S&P’s compound returns are especially encouraging. In studying the index’s compound annual returns, we get a solid understanding of how staying in the market has benefited the U.S. equity investor. Average returns are interesting, yet they do not factor in cumulative gains or losses over a given period.

Examining 40-year performance periods for the S&P from 1928-2014, the poorest such period had a compound return of 8.9%. The best 40-year “window” had a 12.5% compound return. Using an even narrower “window,” we find that the best 15-year stretch was from 1985-99, producing a compound return of 18.3%. The poorest 15-year stretch occurred before many of today’s investors were born: the interval from 1929-43 had a compound annual growth rate of just 0.6%.1

The compound return across 1928-2014 is 9.8%, in simplest terms meaning that a $100 investment in shares of S&P 500 firms in that year would have grown to $346,261 in 2014.1,*

The correction we have just witnessed looks momentary indeed in the light cast by these “windows” of time.

The lesson? Stay patient & keep the big picture in mind. Before this latest correction, the market had been comparatively calm for so long (the previous 10% drop happened nearly four years ago), investors had almost forgotten what a correction felt like. Moreover, that 2011 correction was the culmination of a three-month market descent; it was not so abrupt.5

We cannot predict tomorrow, but we can take comfort (and encouragement) from the history of the market and how well the S&P 500 has performed over time.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

 * This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

 The S&P 500 is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is not guarantee of future results.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – marketwatch.com/story/understanding-performance-the-sp-500-in-2015-02-18 [2/18/15]

2 – pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html [1/5/15]

3 – 1stock1.com/1stock1_141.htm [8/27/15]

4 – simplestockinvesting.com/SP500-historical-real-total-returns.htm [8/27/15]

5 – cnbc.com/2015/08/21/the-associated-press-qa-what-a-stock-market-correction-means-to-you.html [8/21/15]

Happy Labor Day

labor_day-600x448

Please enjoy the long weekend.

You may also enjoy this recipe from Judy Moffitt for Key Lime – White Chocolate Cookies!

Preheat oven to 350 degrees
½ cup (1 stick) margarine or butter, softened

¾ cup packed brown sugar

2 tablespoons granulated sugar

1 egg

1 ½ teaspoons vanilla extract

2 ½ cups Bisquick original baking mix

6 drops green food color (optional)

1 six ounce package white chocolate baking bars cut into chunks

1 tablespoon grated lime zest

½ cup chopped pecans

Beat the margarine, sugars, egg and vanilla in a large bowl until well mixed. Stir in the baking mix. Stir in food color (if desired), white chocolate chunks and lime zest.

Drop the dough by rounded teaspoonfuls onto an ungreased baking sheet. Bake 8 to 10 minutes or until set but not brown. Let cool 1 minute before removing from the baking sheet. Cool on a wire rack. Makes about 3 ½ dozen cookies.