Financial Planning — Helping You See the Big Picture

Do you vision home ownership, starting a business, or a comfortable retirement? These are just a few of the financial goals that may be important to you, and each comes with a specific price tag attached. This is where financial planning comes in.

Financial planning is a process that can help you reach your goals by evaluating the big financial picture, and then outlining strategies tailored to fit your individual needs and available resources.

Why is Financial Planning Important?
A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is how it helps you arrange financial priorities. A financial plan will clearly show you how each of your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement.

You can then use the information to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll have the peace of mind that comes from knowing your financial life is on track.

The Financial Planning Process
Creating and implementing a comprehensive financial plan generally involves:

• Developing a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, investment portfolio, tax exposure, and estate plan
• Establishing and prioritizing financial goals and time frames for achieving these goals
• Implementing strategies that address your current financial weaknesses and build upon your financial strengths
• Choosing specific products and services that are tailored to meet your financial objectives
• Monitoring your plan, making adjustments as your goals, time frames, or circumstances change

Key Members of Your Team
The financial planning process can involve any number of professionals.

• Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.
• Accountants or tax attorneys provide advice on specific federal and state tax issues.
• Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.
• Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.
• Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions rest in your hands.

Why Can’t You do it by Yourself?
You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on Track
The financial planning process doesn’t end once your initial plan has been created. Your plan should genera

lly be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

• Your goals or time horizons change
• You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
• You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
• Your income or expenses substantially increase or decrease
• Your portfolio hasn’t performed as expected
• You’re affected by changes to the economy or tax laws

Understanding Risk

Risk is all around us. Some people consider driving a car risky. Others don’t seem to mind driving but are terrified of flying in an airplane–even though statistics show you’re far more likely to die in a car than in an airplane. Some people, like race car drivers, cliff divers, and bungee jumpers, actually thrive on risk; others go to great lengths to reduce or avoid it.

Risk is multidimensional with many factors interacting. For example, an athlete in top physical condition may suffer a fatal heart attack while exercising because he or she has a family history of heart disease. Some risks are more apparent than others. For instance, walking a high wire is quite obviously a risk. On the other hand, the danger of being struck by lightning is not so obvious.

Nobody can fully escape risk. The best you can do is to reduce (or “hedge”) as much as possible. Stay clear of people with colds, maintain a healthy diet; wear a life jacket when boating. Most importantly, purchase adequate health, property, and liability insurance.

Risk in the Investment World
Some people view risk as a negative, others as a positive. Ask any group of people what risk means to them, and you are likely to get some of these answers:

• Danger
• Possible loss
• Uncertainty
• Challenge
• Opportunity
• Thrill

In the investment world, however, risk equals uncertainty. It refers to the possibility of losing an investment or that an investment will yield less than its anticipated return. Quite simply, investment risk refers to the probability that an investment will make or lose money. Every investment carries some degree of risk because its returns are unpredictable. The degree of risk associated with a particular investment is known as its volatility.

The Relationship Between Risk and Return
When you invest, you plan to make money on that investment or, more accurately, earn a return. Risk and return are directly related. The higher the risk, the higher the return potential. If you want a higher rate of return, you will have to accept a higher risk. Conversely, you may accept a lower risk, but the return potential is lower.

Technical Note: The term “risk-return trade-off” refers to the universal principle that investors should plan to be compensated for taking higher levels of risk of loss by earning higher rates of return.

The Relationship Between Risk and Time
The length of time that you plan to remain in a particular investment vehicle is known as your time horizon. Generally speaking, the longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you’ll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will not lose money.
Risk-taking propensity

Each of us is able to accept a certain amount of investment risk. This is known as our risk-taking propensity. Those of us who can accept a relatively great amount of risk are referred to as risk tolerant. On the other end of the spectrum, those who can accept very little risk are known as risk averse. Those who hold the middle ground are risk neutral or risk indifferent.

There are ways to measure your risk tolerance, using tests to assess how you react to different types of risk, such as monetary, physical, social, and ethical. These tests aren’t foolproof, since we are essentially talking about psychological behaviors that may vary under different conditions. However, the results from these tests are generally considered reliable and valid.

Your risk-taking propensity is as important in determining which investments match your risk-return expectations as the risk of the investment itself.

Diversify Your Portfolio to Reduce Risk
One of the best ways to reduce risk is to develop a portfolio of investments that is balanced in terms of the types of assets in which you invest. In other words, don’t put all your eggs in one basket. This is known as diversification or asset allocation. A portfolio that mixes a variety of asset classes (e.g., cash, bonds, domestic and foreign stocks, and real estate) has a lower risk for a given level of return than does a portfolio that consists of only one. Diversification works because it broadens your investment base. It can be achieved by company, industry, type of security, markets, or by investment objective.

How an investor diversifies depends upon his or her own situation. An investor can be aggressive (investing mostly in high-risk vehicles), conservative (investing mostly in low-risk vehicles), or somewhere in between.

Diversify with the Passage of Time
Historically, time has had a dampening effect on the riskiness of investments. Basically, the longer an investor remains invested–or the longer the investor’s time horizon–the less risky the investment becomes. Of course, there is no guarantee this will continue in the future.

Do Your Homework
You may be able to reduce some risk simply by being diligent. For example, have real estate inspected and appraised before you buy it, or investigate a company’s financial condition before you purchase stock in it.

Gauge the economy by identifying trends in overall business conditions. These trends are indicated regularly (weekly or monthly) by figures on inventories, prices, employment, and the GDP. Is the economy on an upswing or downswing? Knowing this will help you choose an investment more likely to appreciate under the given conditions.

Choose investments that make sense to you. For example, buy stock in a company with relatively stable earnings, or one whose sales are likely to keep up with inflation, or one whose products are in great demand, or one who sells a product for which the demand is constant, such as food

How to Handle Stock Market Volatility

Keeping your cool can be hard to do when the markets go on their roller-coaster rides of late. But it is vital to have strategies in place that prepare you both financially and psychologically to handle this inevitable market volatility.

Have a Game Plan Against Panic
Having predetermined guidelines that anticipate turbulent times can help prevent emotion from dictating your decisions. If you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage. Or you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You can use diversification to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance.

Consider Playing Defense
Many investors try to prepare for volatile periods by reexamining their allocation to such defensive sectors as consumer staples or utilities (though, like all stocks, those sectors involve their own risks). Dividends also can help cushion the impact of price swings.

Use Cash to Help Manage Your Mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you’ve established an appropriate asset allocation, you should have enough resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call.

A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns. Knowing that you’re positioned to take advantage of a market swoon by picking up bargains may increase your willingness to be patient.

Know What You Own and Why You Own It
When the market sneezes, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing. If you don’t understand why a security is in your portfolio, find out. A stock may still be a good long-term opportunity even when its price has dropped.

Remember That Tomorrow is Another Day
The market is nothing if not cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market is probably the worst time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

Learn From Your (and Others’) Mistakes
Everyone looks good during bull markets, but smart investors emerge during the inevitable rough patches. Even the best aren’t right all of the time. If an earlier choice now seems rash, sometimes the best strategy is to take a loss, learn from the experience, and apply the lesson to future decisions.

A qualified financial professional can help prepare you and your portfolio to both weather and take advantage of the market’s ups and downs.

Understanding the Alternative Minimum Tax (AMT)

If you aren’t already familiar with the alternative minimum tax (AMT), there’s a good chance that your family soon will be. This is because its key figures aren’t indexed for inflation. As a result, the AMT continues to snare more middle-income Americans every year. Additionally, because temporary legislative band-aids expired at the end of 2006, our nation’s economic stage is set for a dramatic rise in the number of individuals who are affected.

What is the AMT?
The AMT is essentially a separate federal income tax system with its own tax rates and set of rules which governs the recognition and timing of income and expenses. If you’re subject to the AMT, you have to calculate your taxes twice–once under the regular tax system and again under the AMT system. If your income tax liability under the AMT is greater than your liability under the regular tax system, the difference is reported as an additional tax on your federal income tax return.

Are You Subject to the AMT?
Part of the problem with the AMT is that, without doing some calculations, there’s no easy way to determine whether you’re subject to the tax. Key AMT “triggers” include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there’s a good possibility you might have to contend with the AMT. IRS Form 1040 instructions include a worksheet that may help you determine whether you’re subject to the AMT (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know for sure.

AMT Adjustments
Differences between the regular and AMT calculations include:

• The standard deduction and deductions for personal exemptions are not allowed for purposes of calculating the AMT.
• Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions.
• Under the AMT calculation, any deduction for medical expenses may also be reduced, and qualifying residence interest (e.g., mortgage or home equity loan interest) can only be deducted to the extent the loan proceeds are used to purchase, construct, or improve a principal residence.
• Special AMT treatment applies to the exercise of incentive stock options (ISOs) and to the treatment of certain depreciation deductions.

AMT Exemption Amounts
While the AMT takes away personal exemptions and a number of deductions, it substitutes a specific AMT exemption amount. The AMT exemption amount that you’re entitled to depends on your filing status and income (AMT exemption amounts are phased out for individuals with higher incomes). A patchwork of legislation since 2001 has, along with other AMT provisions, pumped up AMT exemption amounts to stave off a spike in the number of taxpayers caught in the AMT “net.” The bad news, though, is that the last legislative patch expired at the end of 2006. Unless Congress passes new legislation, 2007 AMT exemption amounts return to pre-2001 levels, and the number of taxpayers subject to AMT is expected to skyrocket.

Legislative Outlook
Several bills have been introduced in the current Congress relating to the AMT. Proposals range from another one-year patch to full repeal. The problem with repealing the AMT is that it would leave a significant revenue gap (the Joint Committee on Taxation projects that the AMT will account for almost $25 billion in revenue for the 2006 tax year). That means we’re more likely to see another short-term fix than we are to see substantive reform.

Help is Available
Owing AMT can be an unpleasant surprise. It also turns a number of traditional tax planning strategies (e.g., accelerating deductions) on their heads , so it’s a good idea to factor in the AMT before the end of the year, while there’s still time to plan. If you think you might be subject to the AMT, it’s worth sitting down to discuss your situation with a qualified tax professional. Until our federal government decides to substantially reform the current system, more American families will continue to carry this additional tax burden.

Gathering Data and Maintaining Proper Records

A record-keeping system is a planned, methodical approach to collecting, filing, and storing documents that are important to you and to other members of your family and household. While everyone saves at least some important documents and records, you may be uncertain of how to go about organizing your financial history, which records you should save, and how long to save each item.

Why Bother?
Creating a systematic approach to record keeping addresses these questions. It also offers several distinct advantages, while minimizing the risk of being unable to locate a critical document when it is urgently needed. Added emotional turmoil is never welcome at such times. The focus here is on records you must keep for financial planning and budgeting. However, a good record-keeping system requires retention of other important documents as well. Among these are items that may not be financial records per se, such as marriage and birth certificates, wills, deeds, trust documents, insurance policies, and medical proxy statements.

Save Valuable Time
Having an established record-keeping system means that when you sort and open the daily mail, you automatically know which items to save and where to put them. Without such a system, important bills and documents can be misplaced easily. Even a few items gone astray can be a source of major headaches later. Avoids lost records that can be costly

Documents of many types may be required for reference or verification long after you receive them. Tax auditors invariably demand documented support for tax return claims. Guarantees and warranties contain vital details usually soon forgotten. Proof of citizenship is required for employment and international travel. Other needs arise less frequently, but missing records usually bring plans to an abrupt halt while a desperate search is undertaken.

Example(s): Rob, an avid mountaineer, has a terrible accident that lands him in a hospital for surgery. He’s pretty sure the name of his insurance company has a color in it, but his short-term memory is a little hazy from the fall. And unfortunately, his wife can’t find the insurance policy or card. If only Rob had kept better records!

Avoid Added Emotional Turmoil in Stressful Times
Occasional periods of high stress are a given in our fast-paced world. Coping with the search for misplaced records is bearable, if unpleasant, in times of normal stress, but in crises and other urgent situations, you might ask, “Who needs this?”

Example(s): After 30 years, Ron’s job is terminated by the ABC Company. Ron is fortunate in landing a comparable job with ABC’s competitor, XYZ, Inc., but Human Resources at XYZ, Inc. requests proof of his citizenship before employing him. Ron recalls having his birth certificate years ago but has no idea where to look for it.

Others Can Better Manage Your Affairs If It Suddenly Becomes Necessary
Hopefully, you will never become incapacitated, but there is always a possibility. If it happens today, can someone easily take over your financial affairs? Or, as is too often the case, will they have no idea about your financial situation and the location of important records?

Example(s): You are on a business trip when your flight home on ABC Airlines crashes. Fortunately, you survive, but you spend several weeks in intensive care. Your significant other enters your hospital room to say, “Honey, the tax man called again requesting the paperwork for tax preparation. He said the extension you requested will run out soon.” Will locating those records be a Herculean task?

Gathering the Data
A vital records log can be used to keep track of your records. The log is a worksheet that identifies where each of your important documents are located. It should be readily accessible so that in times of crisis, your important records can be easily found.

Budgeting 101: The Income and Expense Statement

One of the most important steps in budgeting is reviewing income and expenses. Everyone knows that money tends to trickle out faster than it comes in, but often we lose track of how much goes where. An income and expense statement provides a snapshot that quickly shows your household’s spending pattern in relation to its total income. With it, you can make informed budget-adjustment decisions more easily. The income and expense statement may be done weekly, monthly, quarterly, or yearly

What Is It For?
The income and expense statement reports income earned and spent during a specified period. That period can be whatever best meets your budgeting needs. A period of several months to a year is often used to obtain a broad overview.

Comparing two or more income and expense statements is more meaningful when each reflects an equal time period (e.g., comparing one month to another or one year to another).

Example(s): Last year Zora left her old employer to join ABC, Inc. Her former employer paid Zora weekly, but ABC pays her monthly. If Zora’s income and expense statements were done weekly last year, they would need to be done weekly this year as well to do an apples-to-apples comparison.

Use the Income and Expense Statement to Estimate Future Income and Expenses
An income and expense statement can be used to forecast what you expect your income and expenses to be during some future period. It is a useful budgeting and financial planning tool. Although it is based on projected income and expenses, its accuracy is usually an adequate base for budgeting and planning purposes. Income and expense statements help identify problems and opportunities in budgeting.

As with cash flow analysis, you can compare income and expense statements for successive periods to learn several things. For example, you can learn which categories are increasing and decreasing, whether net income is shrinking or growing, and at what rate these changes are occurring. Net income–the amount of income you have left when all the bills are paid–increases your net worth.

Interpreting the Results: Are You Living Within Your Means?
If your expenses exceed your income, you have a negative bottom line or a “net loss.” That is, you are depleting your net worth, a situation that sometimes requires prompt and serious attention. Hopefully, you have a substantial net gain, meaning that your net worth is indeed growing. You can divide total expenses by total income to learn what percent of income you are spending. Compare this to previous periods to learn if your ability to grow your net worth is improving. The percent of income you spend or save is meaningful only to you and your own budget objectives. Certainly, a higher net worth will enable you to do more and live more comfortably in coming years.

A retirement plan contribution is not truly an expense item. It is income being saved for future use. However, such contributions are often viewed as expenses in a cash flow analysis and budget because that cash is temporarily unavailable for other needs.

Should You Buy Rental Car Insurance?

When you rent a car, you absolutely need insurance…but that doesn’t necessarily mean you should purchase it from the rental car agency. You most likely already have adequate coverage through your regular auto insurance policy or even through your credit card company.

Purchasing insurance from the rental car agency may significantly increase the overall cost of renting a vehicle, so do your homework before you walk up to counter. Start by visiting the rental agency’s website, where you can usually preview the types of coverage you’ll be offered and read up on the terms and conditions.

Various Options
One popular type of coverage generally offered is the Collision Damage Waiver (CDW), sometimes called a Loss Damage Waiver (LDW). If you purchase this waiver, you may not be held responsible if your rental car is stolen or damaged. But you may want to decline the CDW if you own a vehicle and have comprehensive or collision coverage, because the coverages and deductibles that apply to your own vehicle generally extend to your rental vehicle. If you have any questions, call your insurance company to learn what is (and is not) covered. Also, different rules apply for business and international travel.

Next, call your credit card company. Coverage varies, but many cards offer protection (the coverage will be secondary to any insurance coverage you have). To receive protection, you generally have to decline the CDW and charge the entire rental car transaction to the credit card supplying the coverage. Make sure you understand all conditions that apply.

Evaluate Your Own Risk Tolerance and Comfort Level
The bottom line is that if you don’t have coverage through your auto insurance policy or your credit card, or you simply want the highest possible guaranteed protection, you’ll likely need to purchase it from the rental car agency. But never wait until you’re standing at the counter in front of the rental agent to decide, because if you do, it’s easy to waste a lot of money buying insurance you don’t really need.

Protecting the Personal Items in Your Car

Loose items in your car are easy targets for thieves unless you take security more seriously. Items most likely to be stolen are small, expensive electronics such as: portable navigation devices, cell phones, portable DVD & music players, and valuable sports equipment (i.e. golf clubs, baseball glove, tennis racquet).

Although it may seem obvious, the best way to protect your possessions is to lock your car doors. And don’t leave any windows (or the sunroof) open…not even during the dog days of summer!

To prevent crimes of opportunity, never leave valuable items in plain sight. Today’s thieves don’t usually bother tearing CD players out of the dashboard anymore (although some still try) because it’s so much easier to grab a detachable GPS navigation device off the dashboard or to swipe an mp3 player or cell phone that was left on the seat. Even though it may be a hassle, lock your valuables in the trunk or (better yet) take them with you.

You may be surprised to learn that personal property in your car is generally not covered by your auto insurance policy unless it’s permanently installed (e.g., a factory radio). However, personal items are generally covered by your homeowners or renters insurance, subject to a deductible, and up to certain limits.

If you routinely carry expensive items in your car and need additional coverage, look into purchasing a rider or endorsement to your homeowners or renters policy. And keep in mind that some policies will provide coverage only when signs of forced entry are present–another reason to lock your vehicle!

Six Benefits of Working with a Financial Advisor

If you’re like most people, you take your car to a professional mechanic for routine maintenance. You see a doctor when you have health exams. When the need for legal counsel arises, you consult an attorney. We all regularly rely on the expertise of others, and it’s no different with matters of personal finances. In fact, we believe most people could benefit from working with a qualified financial professional. Here are six good reasons why:

1. You Don’t Know What You Don’t Know
No one is an expert on every subject. Managing finances on a day-to-day basis is one thing; implementing a comprehensive investment plan to fund your retirement while setting aside funds for your child’s education is something else. That doesn’t mean that you’re not capable of doing it, only that you should not underestimate the expertise needed to put together an effective plan. If you’re going to go at it alone, you need to take considerable time to educate yourself, and that brings us to the next point…

2. You Have Good Intentions, But Never Set Aside the Time
There’s an entire industry built around providing individuals with the tools they need to do their own financial planning. Books, magazines, websites, blogs, calculators, worksheets, and videos all empower individuals to take a more active role in their financial future, whether they’re working alone or with a financial professional. Not one of these resources, however, will help unless you set aside the time to research and apply it to your own situation. Working with a financial professional enables you to take active steps and to and offload the time commitment to a professional.

3. Doing Everything Yourself Isn’t Efficient
There’s a long list of things that we could do by ourselves but instead choose to pay someone else to do for us. For example, you could paint your house, but you may be happy to pay someone else to do it. Why? It’s more efficient. You can spend the time working on other things and, if you choose the right professional, it will probably be done faster and better than if you did it yourself. The same goes for working with a financial advisor.

4. You Are Not Objective
It’s hard to look at your own situation without any bias. Having someone else with experience analyze your financial condition can be extremely helpful. And, in cases where you and another person (i.e. spouse, sibling, or parent) aren’t on the same page, an advisor can listen to both parties’ concerns, identify underlying issues, and help you find common ground.

5. Keeping Up With Change is a Full-Time Job
Last year alone, there were four major tax legislations signed into law. Even seasoned financial professionals have had a difficult time keeping up with the changes. Not understanding how these changes might affect your financial plan could be dangerous, but understanding the changes takes time and effort (see reason number 2).

6. You Can See the Trees, But Not the Forest
A good financial professional can help you see the big picture. He or she can show you how your financial goals are related–for example, how saving for your child’s college education might affect your ability to invest for retirement. He or she can work with you to prioritize your goals, implement specific strategies, and choose suitable products or services. A financial professional can also stay on top of your plan to make sure it remains on track, recommending changes when conditions, or your circumstances, dictate.

Beyond 401(k)s and IRAs: Enjoy Your Life Today

You’re contributing the maximum to a 401(k) and also maxing out your Roth or traditional IRA. But, as a master spendthrift, you still have additional dollars you could save to ensure your retirement is everything you hope for. What options do you have?

Make Sure You Have a Life Today
Aggressive saving is a habit that all financially responsible people share. But don’t get carried away. Even though you’ll want a fulfilling retirement in 2050, don’t neglect your quality of life today. While you’re young, remember to also spend money on current experiences with others: fulfilling hobbies, international travels, and group outdoor adventures should be at the top of your list.

Besides, if you’re responsible enough to max out a 401k and a Roth IRA, then you probably also have a pile of cash sitting quietly in a savings account. You’ve setup an emergency fund already and are now looking for additional ways to put your dollars to work. If this is your situation, then trust us, you can afford to indulge yourself in a hot-air-balloon ride, a week in Spain, or a few days at the spa.

And after all of that, if you’ve still got some cash left over (lucky you!), then here are some other ways to set aside long-term dollars for retirement.

Are You Really Maxing Out Your 401(k) and IRA?
IRAs and 401(k)s have real advantages when it comes to saving for retirement. So, before you go any further, make sure you’re really contributing all you can.

In 2007, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $4,000 to a traditional or Roth IRA. What’s more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation.

Look at Deferred Annuities
If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax deferred, which means you don’t pay tax until you take a distribution from the annuity. There’s also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some trade offs that you’ll need to weigh carefully:

• There are usually costly fees such as annual expenses, investment management fees, and insurance expenses
• A surrender charge may be imposed if you withdraw funds within a certain period of time
• A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59½
• Investment gains are taxed at ordinary income tax rates, not at lower capital gains rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution)–this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable Investment Accounts
Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there’s no federal penalty for withdrawing funds before age 59½.

Investment options worth mentioning:

• Index mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
• Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Remember the Big Picture
Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.

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