Archive for February, 2010

What is special about Financial Planning – Explains Carolynn Tomin, CFP

Many of you know, I am working on my CFP certification and doing courses thru Boston University. I was fortune to read online materials prepared by experienced professionals and one among them is Carolynn Tomin. She is a Certified Financial Planner™ professional who specializes in financial education. Carolynn is a consultant to Boston University’s Program for Financial Planning, where she edits, writes and oversees curriculum for their online Financial Planning Program.

As we are discussing more about 401K, retirement and financial planning in the past few posts. I decided to get in touch with her personally and was able to get some answers for questions everybody has these days.

Vijai: Can you explain to an ordinary person who doesn’t have any money management experience about financial planning? Is it a essential to any person for their financial wellness?

Carolynn: The purpose of financial planning is to make sure you have a plan in place to reach your financial goals. Money is only a means to an end- what do you need to spend it on (your fixed expenses) and what do you want to spend it on (your short-term and long-term goals) Once you have identified your goals you will know how much money you will need at a future date. Then you devise a plan to make sure that money will be available when you need it. If you don’t have enough income, assets, investments etc. to reach your goal, you may have to delay achieving your goal or create strategies to obtain more income, invest more wisely, save more money each month, cut back on your discretionary expenses etc. But if you don’t have a financial plan in place, you may be planning to fail.

Vijai: What do you see as the major distinction between financial planning and estate planning? 

Carolynn: Estate planning is an important part of financial planning. Estate planning protects you, your family and your entire estate, which is the wealth and assets you have accumulated during your life, and plans for how those assets will be protected and distributed during your life and at death. Estate planning also ensures that you have proper legal documents in place such as wills, trusts and powers of attorney, and estate planning may even lower your gift and estate taxes.
Vijai: What is the importance of Will and Trust?

Carolynn: There are many different types of trusts and they are used for specific purposes. For example, if you wanted to protect your property if you became incapacitated, you could set up a revocable trust now that would manage your money and property if you became incapacitated in the future. All trusts have a trustee who manages the money and property in the trust for the trust beneficiaries. 

Vijai: I mentor people to be their own financial planners. I recommend them to start planning their finances for their better future. I tell to make money rightly, save more, spend less and give graciously.  At the same time, no one can be an expert of everything. It is a tough task so I suggest them to seek CFP and CFA’s help when thing go beyond your control. What do you think about that?

Carolynn: I like your approach to helping people who are in need of financial planning advice. Many people are overwelmed by the complexity and sheer volume of financial planning information that’s available when they are trying to sort out what information may pertain to them. Once they get beyond learning the basics of financial planning there are topics such as insurance, investments, retirement planning, taxes and estate planning to learn about.
People who need financial planning advice should consult a Certified Financial Planner because that person has completed their education, has passed a rigorous 10 hour exam, has at least 3 years of work experience, and they are bound by a Code of Ethics for Certified Financial Planners. These 4 E’s- education, examination, experience and ethics are what separates Certified Financial PLanners from those who just call themselves financial planners or financial advisors. People in need of planning will receive competent advice by Certified Financial Planners who will put their clients interest before their own. That’s because CFP practitioners have a fiduciary duty to put their client’s interests first.
I hope to get some more questions answered and will publish them as Final part.

Interview with Dan, Sharebuilder President about 401K and IRA Rollover’s

Being an ING DIRECT customer for almost 5 years, I am currently taking advantage of quite a few of their offerings like Orange Savings, Electric Orange Checking, Orange Business and Sharebuilder accounts. I am amazed by their different way of approaching customers which can’t be compared to any other banks. You can read more about their Orange Code of Ethics and more from a recent interview by ING Direct CEO to Costco Connections.

ING Direct,  an online banking legend is going to celebrate it’s 10th year anniversary with 10 million customers weathered the past economic storm by taking a unique approach, persuading customers to save instead of spending more. Through social media like twitter, facebook and their own blogspace,, they encourage customers to share their thoughts and ideas about saving, spending less and being frugal.

With their new subsidary ShareBuilder, an online brokerage designed for automatic, long-term investing. They also started offering investment and retirement solution. As we been talking about 401k and IRA in the last few posts, I wanted to bring something from ING Direct. So I got in touch with my PR contact at ING Direct and able to get a short email interview with M. Dan Greenshields, President of ShareBuilder.

Vijai: Thank you for taking time to answer few questions about IRA Rollovers.

Dan:  It’s my pleasure.

Vijai: Dan, as we all know there are millions of people out their looking for job and not finding them. So many are planning to dip into their retirement savings. How is ING DIRECT helping their members who lost their job and have 401K? Do you help educate them with options?

Dan: Because of the potential for taxes and penalties, we feel that qualified retirement savings should be some of the last assets that people tap into. As an organization, we encourage customers through our website, service team, and advocacy efforts to build an emergency fund and educate them on the value of regularly investing in their retirement, even if that means just a few dollars a month. An emergency fund could be used for exactly this purpose, which we hope they’d tap first.  

Vijai: How different is ING DIRECT’s IRA Rollover options from other brokerage and mutual fund companies?

Dan: We feel we have a distinct advantage on two fronts: our low-cost investment options and our people. Between ING DIRECT and our brokerage subsidiary ShareBuilder, we are able to offer both investment (stocks, ETF’s and mutual funds) and FDIC-insured options (high-interest savings and CD’s), providing more choices than a standalone bank or brokerage can offer.

At ShareBuilder, there is no minimum investment required to open an account and no inactivity fees. Customers are able to invest in stock, as well as a range of exchange traded funds and mutual funds, and are able to buy fractional shares of stocks.  We also created, a consumer-friendly retirement savings and investment channel.  The Retire MyWay planning tool allows users to create a personalized retirement action plan specific to how they want to live during their golden years. Customers can create and commit to retirement goals using interactive calculators and tools, and they can learn about places to invest and review model portfolios designed to match their investing style and needs.

On the service front, we have a dedicated team of Retirement Specialists who understand both bank and brokerage products, and can talk customers through these alternatives while helping them navigate the rollover process. 

Vijai: Does Dollar cost averaging methodology really works and how, show me with proof?

Dan: The longer your time horizon, the better the results.  That’s what history shows.  Dollar based investing allows you to purchase partial shares of your favorite companies for a fraction of a share’s total cost.  In a sense, it democratizes investing, lowering the entry barrier and giving everyone a chance to own a piece of the market.
Take the simple, hypothetical but fairly typical example of a market that starts at 10,000, drops to 8,000, increases to 10,000, and then increases further to 12,000. In this case, an investor would be better off with dollar cost averaging.  Here’s why: If you are the person that knows to buy at 8,000, then congratulations – you’re probably a professional investor. For the rest of us, however, you might have been better off investing $1,000 at each of those four points in time (resulting in holdings of $4,900), than investing $4,000 up front (resulting in holdings of $4,800). In addition to the fact that it’s mathematically advantageous, it also just makes sense as a discipline. Because most of us make monthly payments in other facets of our lives (utilities, car, mortgage, etc.), it’s relatively easy to adopt and stick with an investing plan that is monthly as well. 
Vijai: I saw advertisements for free Transaction Fee on IRA Rollovers with some fine prints. I always thought ING DIRECT don’t like gimmicks to attract customer. Any comments?

Dan: Last year, 40 percent of Americans believed the economy would cause them to retire later than expected, but as we begin the New Year, we want to make saving for retirement easier. Currently, we’re allowing customers who open an Individual Retirement Account (IRA) by April, 15, 2010 to make an unlimited number of free automatic investments in 2010. These credits apply to any stock or exchange traded fund, plus any mutual funds so long as the mutual fund’s minimum has already been met. Go here for more information: We feel this offer will lend a helping hand to those people who are having a hard time getting started investing in their retirement or need help getting their retirement goals back on track.
Vijai: Is IRA Rollover easier to do without much paper work through ING DIRECT? Explain the process.

Dan: There are a few different ways to initiate and complete a rollover, depending upon the type of plan the participant’s assets are in and in what form the participant wants to roll them over, but the process almost always involves a little paper at some point.  We try to reduce the paperwork and fine print, and make that process as seamless as possible. Our goal is to understand each participant’s particular situation, and use that information to help them complete the process as quickly and as easily as we can. 
Vijai: If a person has ING DIRECT mutual funds thru employer and lost his/her job, can they keep their plan and maintain low fees after becoming non-participant?

Dan: Generally, if a participant has less than $5,000 in a plan, the employer may have the right to cash out the participant, or automatically roll their assets into an IRA. However, as long as a plan participant has over $5,000 in a 401(k) plan, they always have the option of keeping their assets in that plan. If the plan has no annual administration fees, and a broad mix of funds that perform well and have low expense ratios, this can be a good option. If the plan has limited options, poorly-performing funds, or expensive funds, than it usually makes sense to complete a rollover into an IRA. 

Vijai: Final comments or any other thing you want to add about ING DIRECT’s goal towards 401K and IRA Rollover?

Dan: Awareness of your financial situation is a critical component to getting on the retirement saving track. Try to fully fund your 401K (or encourage your employer to set up one if it doesn’t exist), diversify your assets within the account and regularly rebalance them.  Also, an IRA Rollover can help you consolidate and better manage your retirement funds. 

Vijai: Thank you for your time Dan. 

Glad to answer and explain our position to our customers. Thank you for this opportunity.

Websites discussed above are, and

Know your options and Save your 401k funds

Lost your job and wondering what happens to your 401k or employee sponsored savings?

Getting bombarded by calls/ads/emails from financial firms to rollover your 401K fund?

Many Americans are facing the same situation and asking similar questions as more than 4 million lost their job last year. After losing a job, you don’t think about 401k for a while because you are busy hunting for the new job. With job market still in limbo land, many people are having tough time finding any job and struggling to feed their families. In this situation, they are looking for options to earn and even willing to break their nest egg to get through the current situation and worry about retirement later.

In my last post, I stressed the importance of timely action on your 401K  before it’s too late whether you decide to save or take out distributions. How you handle your 401-K account can result in anywhere from zero to hefty taxes and penalties. This blog post, I plan to share few important questions and answers with my research, study and experience in rolling over 401K during the job change 2 years ago. 

First question, What are my options?

There are several options when it comes to saving your 401-K and your former employer or 401k administrator from investment company should have already provided you with information. If not, here are some important options:

1. Stay In

You can stay put with the former employer plan unless there is no restrictions and limitations.

Pros: No Paper work, Low fees, Better investment options, money grows tax deferred.

Cons: Higher fees, no contribution from employer, no flexibility, less attracive plans and importantly minimuim balance requirement. ($5000 most cases)

2. IRA Rollover

Next comes the IRA Rollover which is highly recommended and advertised in the past year by lot of brokerage and mutual fund companies. It is easy and has lot of advantages.

Pros: No penalty or Income tax when rolled over directly, tax deffered growth, more investment options, Direct control over money, great flexibility to change funds any time.

Cons: 401K security value might be down because of stock market and lose money by rollover since they need to cash the security before rolling over. Also usual IRA withdrawal rules apply.

In general all the contribution by you and vested employee portion in the 401K plan is eligible for rollover. A rollover can be paid directly to you or it can be implemented as a direct rollover.

Direct Rollover: The funds in your 401-K account are paid directly into the IRA. With a direct rollover, the 401-K administrator is not required to withhold any income tax and you do not owe a penalty. It has become easy with Internet and many companies allow internet application submisions.

Check Payment: Many 401K administrators send check directly to you if they havn’t heard with 60 days. When you receive your 401-K distribution, your former employer has withheld 20% as taxes. This withholding is a requirement. It does not mean you will owe the tax. In order to avoid taxes and tax penalty you must: 1. Deposit full amount including the 20% withheld by employer with your funds into your IRA account within 60 days of receiving the funds. When you file your taxes for the year you will not owe taxes on your rollover, but will be able to include the 20% withheld as income tax paid.

If you do not pay full amount, you will owe Income taxes at your current tax rate on the amount of 401-K funds you did not rollover plus additional 10% tax penalty is due because you received retirement funds before you reached 59-1/2. 

Because of above complications direct rollover is less risky, faster, less time consuming and not as complicated as a payment made to you.

3. Rollover to New Employer 401K Plan

You can also choose to wait and roll over to your new employer 401 plan depending upon your situation. That helps to keep all your 401k money in one place. But you have to find the job on time and also you have to satisfy balance requirement to keep funds in the former 401k plan. You might endup paying higher fees during the interim period. Be aware of it and make decision.

4. Rollover Annunity

You can rollover to Insurance companies annunity option. A Rollover Annuity is a contract between you and a life insurance company that allows you to specify how you want to receive future income, and even elect a death benefit for your beneficiaries. Your money transfers to the annuity and earnings, if any, will continue to grow tax deferred until withdrawn.

Pros: No penalty or Income tax when rolled over directly, tax deffered growth, more investment options, Direct control over money, great flexibility to change funds any time and decide how your income will be paid.

Cons: If elected to get immediate withdrawal and below 59 1/2, penaly applies

5. Lumpsum Cash Out/Distribution

It is not recommended option but if you are above 59 1/2 age limit you can take out the money without any penalty and taxes implications. But when you don’t find job and need to take care of the family, this has become only option for many people. SO if you cashing out 100,000 and you are in 25% tax rate, you would end up paying 25,000 + 10% penalty would be $35,000 loss. 

Pros:  Instant money from nest egg 
Cons: Need to pay Income Tax if you are younger than 59 1/2 upto your tax rate + 10% penalities.

6. Safe Harbor Hardship Withdrawals

If you don’t wish to take out full amount, you can always withdraw certain portion using the hardship withdrawal requirements. In this bad economy, uncle sam allows certain withdrawals (listed below)but still might need pay income tax and 10% penalty. Also funds are limited to the elective portion of the deferral, and not any income or interest on the deferred amounts. It might help to overcome the situation and not a bad option in worse situations.

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