Maintaining High Standards

The Department of Labor has proposed that high fiduciary standards be applied to all retirement accounts, such as IRAs. This is an expansion of applying the standard to employer sponsored plans such as a pension or 401(k). As many people have their IRA managed by an investment advisor or broker, this will hold many more managers to the high standard.

Registered Investment Advisors such as New Perspectives already have a fiduciary duty to clients. That means that the advisor must always act in the best interest of the client, a higher standard than is applied to other managers such as a broker-dealer. The different business model of the broker-dealer manager may not be well suited to the fiduciary standard and they may not be able to manage IRA accounts as they have before.

In all, this is very good for investors. The higher standard, already in place for Registered Investment Advisors, will apply to more managed assets. Ask your advisor if they are held to a fiduciary standard and what that means to them.

For more information on this rule change, see this Financial Advisor article.

Three considerations before paying down on your mortgage.

It's the start of a new year and people are looking at their financial resolutions. A common question that I see is "Should i save this money or pay down my mortgage?" In general, I am a fan of saving the money, but there are a few important points to consider.

1. Money is cheap right now, so paying extra on your mortgage is unlikely to actually save you much in interest payments. The notable exception here is if you can pay just enough to re-finance at an excellent rate and better terms.
2. Savings are very important, having three months of mortgage payments socked away in a cash savings account will be a godsend when you have a couple of months of tight budgeting or transition between jobs.
3. Retirement savings are opportunistic, you can pay off your mortgage pretty much any time you like, but putting extra money in your retirement account can only be done in the year you earned the money, or like a Roth IRA, until the tax deadline (so, for 2012 earnings/savings, April 15 2013). If you can afford to save for retirement, you MUST do it before the deadline.

Again, the main point is that money is cheap right now. Yes, you will pay less in interest if you pay an extra lump sum now, but you will lose the flexibility of keeping that cash on hand. In most cases, having that cash on hand may be more valuable than paying down the low cost debt. Everybody has a different situation and only make these decisions in the context of your whole financial picture.

Start Thinking About Your Tax Shelters

While not everyone can easily open up an account in the Caymans (or Switzerland, or Bermuda amongst other popular tax havens) everyone can have their own little tax shelter in the form of an IRA. Most IRAs take income before you pay taxes, saving you on your bill to the IRS. Because of the pre-tax nature of these contributions, $1 contributed to the account reduces your income by less than $1 - that's like a sale on savings!

For the self-employed, look into opening a SEP IRA. Your accountant should be able to tell you how much you can contribute in a given year and that may immediately reduce your tax bill.

If your employer does not offer a retirement plan, contributions to your personal Traditional IRA are fully deductible. For 2012, you can contribute $5,000, for 2013 you can contribute $5,500. If your income is less than these limits, the maximum you can contribute is your income.

A Roth IRA is one of the best tax shelters available. Contributions go in after you pay taxes, but come out tax free in retirement. If your income is less than $173,000 (married filing jointly) or less than $110,000 (single) you can contribute up to $5,000 for 2012 or $5,500 for 2013. If your income is less than these limits, the maximum you can contribute is your income.

You have until tax time this year to make a contribution for 2012. You can go ahead and save for 2013 anytime this year until tax time 2014!