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This forum currently lists answers to Frequently Asked Questions about the securities industry, investing, estate planning, dispute resolution and portfolio performance. If you have a question or comment please email PPA at financialservices@ppatc.com. The FAQ's listed here are from email, client inquiries and the "Ask The Expert" TV program seen on TV 7&4 in Traverse City, MI. PPA Director Patrice Stewart is a regular guest on the program aired every Monday morning.
Q: What is the easiest way to save for retirement?
One of the most efficient ways to save for retirement is a tax-advantaged Individual Retirement Account or IRA. In a regular investment or taxable savings account you pay taxes each year on investment earnings. In an IRA, taxes on earnings and capital gains are deferred until you begin to make withdrawals. These withdrawals are treated as income and taxed at your federal income tax bracket. An IRA can be opened by anyone under the age of 70 1/2 who has compensation from employment. Contributions to an IRA are tax deductible, maximum contribution is $2,000. You can pay into an IRA as late as April 15th and still get a deduction on your previous years income taxes. Withdrawals prior to age 59 1/2 usually involve penalties, and you must begin withdrawals at age 70 1/2. Any mutual fund, brokerage firm or bank can set up an IRA. Interview several investment advisors before making a decision on whom to use. Ask what their investment philosophy is and what kinds of investments they recommend. Be sure to ask about the risks involved with each investment discussed.
Q: What are the types of joint ownership of investment accounts?
There are several types of joint ownership. The advantages and disadvantages vary by the size of an individuals assets and other factors such as: age, how assets are titled, are assets between a husband and wife, etc. Types of joint ownership include JTWROS- Joint Tenancy With Right Of Survivorship is ownership between two parties and when one dies the property will pass automatically to the other. TENANCY BY ENTIRETY- limited to husband and wife, the entire property goes to the surviving spouse. TENANCY IN COMMON- provides that each of the owners has an undivided interest in the property. When one dies their half goes to their estate. If the assets in question are over $600,000 a trust should be established for tax advantages. If you are considering severing joint ownership use extreme caution to be certain that taxable gifts do not result from this action.
Q: Are children obligated to pay the debts of their deceased parents?
No. If they did not co-sign the documents that created the debt. An example is when an elderly parent goes into a nursing home. The management of the home will want you to guarantee payment. You are under no obligation to do so.
Q: What is the best way to save for a child's college education?
Start at birth. New tax laws allow a couple earning less than $150,000 per year to contribute up to $500 to an Educational IRA for each child under 18. Funds in this type of IRA can be withdrawn tax free. Couples earning over $150,000 can set up an UGMA - Uniform Gift to Minors Account. Once funds are entered into this account they belong to the child and cannot be taken back. It is an irrevocable gift.
Q: What is a mutual fund?
A mutual fund company pools investment funds of many individuals. Professional managers invest the money in an effort to achieve a stated investment goal. Mutual funds can be common stock funds, preferred stock funds, bond funds, a mix of these or special situation funds. Is the mutual fund suitable for your financial situation? This is the first question you should ask yourself and your investment advisor.
Q: What is the difference between arbitration and mediation as ways to settle disputes?
Mediation is as different from a judicial settlement conference as arbitration is from a court trial. A mediator's purpose is to facilitate an agreement between the parties. Unlike an arbitrator, the mediator has no authority to impose a settlement. His/Her function is to act as the "person in the middle" between the contendng forces and to serve, if possible, as a vehicle for bringing about a resolution of the dispute. To perform this role, the mediator must have cedibility with the parties and some measure of their trust. A mediator cannot perform any role in a dispute unless he/she can gain the confidence of the parties.
Q: How often should I expect my broker to be suggesting changes in the kinds of investments I have in my IRA?
This depends on a number of factors. In your initial meeting with your broker to set up the IRA she should have asked you a lot of questions about your investing history, income, age, risk tolerance, expected return, anticipated retirement age, etc. After considering your responses an asset allocation strategy should have been agreed upon. Asset allocation determines what types of investments your money will go into. In an IRA the allocation or investment mix remains fairly constant. The allocation may need to be changed if significant events occur in your life or the investment markets. A detailed review of your account should take place at least every six months to be sure your investment objectives are being diligently pursued.
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