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The Advisory Firm Newsletter:  March 2012

THIS MONTH IN PERSONAL FINANCE: Saving for children/grandkids, Donor Advised Funds for charitable contributions, Bonds, To Refi or Not & Mortgage myths.


This month we cover a variety of topics that should appeal to readers of every age group. As always, if you have a question on any of these topics feel free to email me.

Before we get started may I direct your attention to the left hand column. There you will find a 2012 Financial / Tax Quick Reference Guide available for download. I also have a limited quantity of glossy printed copies that I can mail. Just follow the instructions on the page that pops up to request yours......


How can I save for my kids / grandkids?

This question seems to come up fairly routinely, so I wanted to list the most popular options along with the pros and cons of each:

UTMA / UGMA Custodial Account

This is a very common way for a minor to have an investment account or savings account. If you have ever setup a savings account for your kids at the local bank it is this type of account. The benefits are that it is fairly straight forward: you are the adult in charge of the account even though your child's name is on it. The things that you may need to think about: this account will generate a 1099 each year at tax time and when your child / grandchild reaches "age of majority", which is 18 in the State of Georgia, the account is officially theirs. You have no control of the money at that point.

529 College Savings Plan

A very popular option for putting away savings for kids / grandkids are the 529 College Savings Plans. Unlike the Custodial accounts above, this one is for one specific purpose, higher education. These plans are fairly widespread as all States have partnered with an Investment firm to offer these. You can invest in any plan in any state and the funds can ultimately be used at any college your kids go to. Yes, you can have multiple 529 plans. So a parent could setup a plan for a child and the grandparent could set one up as well. These plans operate as follows: You put in contributions (monthly, lump sum) with after-tax money (no tax break going in). The benefit is when your child gets to be college age you can then withdraw the money to cover tuition, room/board, etc from the plan to offset that expense - tax free. (repeat the growth in the account is tax free). These account also grow tax deferred so there are no 1099's to hassle with each year.

So what are the things to watch out for? Well, the first is like all investments there are no guarantees on performance. Most likely you will set one up with an "age based" option that starts aggressive while your child is young and gradually gets more conservative as they get closer to 18. However, that doesn't guarantee any return. The second is to get this "tax free" growth feature you have to use the money for higher education, or pay a penalty + taxes on the growth to get it back out for other uses.

The biggest benefit though is that you control this account indefinitely. It never converts to the childs ownership. One more thing..... all of these 529's are managed plans by the institutional firms that partner with the states. You can set these up yourself and you do not need to pay a broker a commission to do it. They don't really add value other than shuffling the money into the plan.

Roth IRA for a minor:

This one pops up occasionally and for the longest period has been a gray area for many custodians, some of which will not open a Roth IRA for a minor. The biggest thing is: they must have earned income!!!!

This can be a very neat tool as it works similar to the 529 above: after tax money is contributed and it grows tax deferred. However, with this one you can of course build tax free retirement savings, but also take out money for first time home purchase ($10k) and also remove principal (contributions) for college and let the earnings grow for retirement. There are more rules and regs for this account that you will need to educate yourself on, but it is an option.

Want to learn more?:

Saving for college.com


Feeling Charitable? Want a tax break?

Open a Donor Advised Fund! In a sense this is like having a cost effective family foundation. Some folks like the idea of having the status that comes with a family foundation, however there are administrative and expense issues that make it cost prohibitive to many. If you have $5000 to give away or even $500,000 maybe a Donor Advised Fund makes more sense.

A Donor Advised Fund allows a person to contribute any amount you wish, take advantage of the tax deduction allowed and then name a charity at some point at a later time. So if your unsure how you want to spread your money around this has the benefit of immediate tax help but time to choose your charities.

With a Donor Advised Fund you can gift highly appreciated securities, so that you don't have to take the tax hit by selling first.

Here are a couple of resources to learn more:





I typically use the terms bonds and fixed income as descriptors for the same thing: bonds. The reason I bring this up is that I've seen other advisors have a broader definition of "fixed income", as in pensions, rental real estate, etc. Basically anything that has a steady income.

For the benefits of this discussion, let's just say both terms mean the same thing.

Most clients understand stocks (ie. you own a share of ownership in a company) or stock mutual funds (ie. you own a share of a mutual fund that owns many shares of many companies). By far the biggest question I get when talking about our investment strategy is to explain a bond or bond fund (fixed income).

High level definition: a bond is debt. It is a loan made to the Federal Government in the form of treasury bonds (quit laughing!), to a state / county or city in the form of municipal bonds or to a company in the form of a corporate bond / high yield bonds. (this can be repeated outside our borders in the form of international/emerging market debt as well)

Let's take a Business as an example: Say Corporation A needs to raise funds for a large facility expansion. They could go to the bank, but the amount in question is to large for a bank loan. They could issue more stock in the market, but that would depress the stock price by diluting the shares (and earnings per share), so they opt for the debt markets and issue a 30 year bond in which they offer to pay a certain interest over those years based on par value of the bond and then in 30 years they will redeem the bond at par value. So essentially you the bond buyer just loaned them money for a state rate of return.

Why invest in bonds? I describe it more as the anchor of your portfolio. Bonds provide a steady income for your portfolio while stocks provide the growth engine.

Is it guaranteed? Should I cash out my CD's and dive in? NO....... A bond is an investment. The prices fluctuate based on market demand, financials of the company, etc. Although the debt markets are many times larger than the stock market, sometimes they can be illiquid to. This means that you may not be able to readily sell your bond until a bidder is found. (not a problem with bond mutual funds)

Can I lose money? Yes..... Read paragraph above. I typically use bond "funds" to minimize the default risk, but if using individual bonds you do have to worry about a company (or government) not being able to pay their interest payment and effectively defaulting. As a bond holder you are higher on the liquidation list so if a company goes bankrupt all the stockholders lose everything. Once the company pieces are sold off after the IRS is paid then bond holders get the rest. Or in the case of restructuring the bond holders are given a large stock ownership in the newly reorganized entity. (think GM , Delta, etc)


Housing & Mortgage:

Two things to cover here:

Can I write off a loss on my primary home if I sell below what I owe? NO. A residence is considered personal property not a capital investment.

If I shortsale and the mortgage company agrees to forgive the difference between what I owed and what the house sold for, do I owe taxes on forgiven amount? NOT if it is your primary residence. YES if it is an investment property, unless you fall under one of the IRS exemptions. (based on current regs)

More Info: http://www.irs.gov/individuals/article/0,,id=179414,00.html


Lastly, A question came up recently regarding refinancing. I answered in a blog I write for over at FiGuide.com. If you want to solve the same question go over to BankRate.com and click on Calculators and then look for the mortgage calculators with amortization tables.


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.