The Alan Haft Blog

What You Don’t Know Can Hurt You You’ve probably heard the saying, "what you don’t know can’t hurt you," but when it comes to your finances, ignorance is not necessarily bliss. It’s easy to make bad financial decisions when you lack sufficient information or you are misinformed. By the time you realize your mistake, it’s usually too late to correct it. Here are several common mistakes that can be avoided with just a little bit of forethought.

Naming the wrong insurance beneficiary

Life insurance has many benefits. Among them is the fact that death benefits are generally paid directly to the beneficiary you name in the policy without passing through probate. But what happens if the beneficiary you name is unable to accept the death benefit, because he or she is a minor, deceased, or incompetent? In these circumstances, unless you’ve named an alternate beneficiary, the life insurance proceeds will be subject to all of the expenses and delays associated with settling an estate through probate.

What can you do before it’s too late? Review your life insurance beneficiary designations at least annually to be sure the proceeds will pass to the proper beneficiary without the involvement of probate. Also, consider adding at least one contingent or alternate beneficiary in case the primary beneficiary is unable to receive the proceeds.

Selecting the wrong pension option

If you’re lucky enough to have an employersponsored pension for your retirement, the distribution choices you make usually can’t be changed, regardless of whether your circumstances change. Before making your choice, get all of your plan’s options from the plan administrator and review them with a financial professional who can help you crunch the numbers. Estimate your retirement income needs, then determine what the best strategy is for you and your family.

What can you do before it’s too late? If you’re married you’re required to take a joint and survivor option, unless your spouse waives his or her rights to your pension. If you elect the single life option, your payments will be larger, but at the expense of a future spousal benefit. If you choose the single life option, make sure you have plenty of other income or life insurance to replace the pension for your surviving spouse.

Owning assets jointly

Owning assets jointly often can be a good strategy to avoid probate or minimize estate taxes. However, this form of asset ownership also has disadvantages. The joint owner has equal rights to the jointly owned asset, meaning he or she can withdraw from a joint bank or brokerage account or sell his or her interest in the asset without your consent. In addition, adding someone’s name to an asset may be considered a gift, subject to possible gift taxes. And, owning assets jointly exposes those assets to the creditors of your joint owner. Finally, with respect to long-term care planning and Medicaid qualification, adding a joint owner can negatively affect your Medicaid eligibility.

What can you do before it’s too late? Consider the ramifications of joint ownership carefully before implementing this strategy. If your intent is to leave the asset to the joint owner, alternatives such as payable on death accounts, trust designations, or life estates may accomplish your goal and protect your interest in the asset at the same time.

Underinsured homes

Imagine this scenario: you just suffered through a terrible fire that destroyed your home and most of its contents. You get an estimate on the cost to rebuild your home and file a claim with your homeowners insurance carrier. To your shock, you find that they are not going to cover the entire cost to rebuild. You thought your policy covered the full replacement cost of your home. However, the policy actually provides extended replacement cost, which offers up to 120% of the policy’s face amount–not enough to cover all of the costs to rebuild your home.

What can you do before it’s too late? Review your policy at least annually and make sure the face amount is enough to cover the cost to rebuild your home should the unthinkable occur. That means you need to know the approximate cost to rebuild, including any additions and improvements you made to the home. Also, take into consideration increasing costs of materials and labor.

Other common mistakes

• Failing to provide for financial loss due to a non-work related disability

If your retirement savings have taken a beating, you may be wondering how you will make up a monthly retirement shortfall. One option might be to delay receiving Social Security benefits. Although you can receive retirement benefits as early as age 62, the longer you put off retirement, the larger your monthly benefit check will be.

When can you retire?

How much you’ll receive from Social Security every month depends mainly on how old you are when you begin receiving benefits and on your lifetime earnings. Your full retirement age is 65 to 67, depending on the year you were born. The Social Security Administration calculates your base benefit–the amount you’ll receive at full retirement age–using a formula that takes into account your 35 highest earnings years.

How much you’ll receive from Social Security every month depends mainly on how old you are when you begin receiving benefits and on your lifetime earnings. Your full retirement age is 65 to 67, depending on the year you were born. The Social Security Administration calculates your base benefit–the amount you’ll receive at full retirement age–using a formula that takes into account your 35 highest earnings years.

If you begin receiving benefits earlier, you’ll receive less than you would at full retirement age. If you begin receiving Social Security benefits at age 62, each monthly check you receive will be 25% to 30% less than it would be if you waited until full retirement age.

If you begin receiving benefits later than full retirement age, you’ll receive more than you would receive at full retirement age, because you’ll earn delayed retirement credits for each month you postpone retirement up until age 70. Delayed retirement credits will increase the amount you receive by 7% annually if you were born in 1939 or 1940, 7.5% if you were born in 1941 or 1942, or 8% if you were born in 1943 or later.

Retirement benefit illustration

The following chart illustrates how the age you
begin receiving benefits can greatly affect the
amount of income you receive from Social
Security every month. The chart assumes a full retirement age of 66, and a base benefit at full retirement age of $2,000 (which is nearly the maximum Social Security benefit an individual can receive).

Social Security Retirement Benefit

In this hypothetical example (your individual situation will be different), the Social Security benefit available at age 62 is $1,500, which is 25% less than the $2,000 monthly benefit available at full retirement age. But at age 70, the benefit available is $2,640, which is 32% more than the monthly benefit available at full retirement age, due to delayed retirement credits. Keep in mind, too, that other factors, including post-retirement earnings and cost-of-living increases, can also affect your monthly benefit check.

You can explore various retirement benefit scenarios by using the Retirement Estimator, or one of the other benefit calculators available at the Social Security Administration’s website, www.ssa.gov.

There’s no right or wrong time to begin receiving Social Security retirement benefits, and you should determine how retiring at a certain age affects your overall lifetime income, as well as your monthly income. How long retirement is likely to last, the effect on your spouse’s income, and your tax situation are also considerations when deciding when to retire.

To encourage energy savings, the American Recovery and Reinvestment Act of 2009 expanded the tax credits related to energy-efficient home improvements.

For 2009 and 2010, you may be able to claim a tax credit equal to 30% of the cost of energy-efficient property that you install in your principal residence. Qualified products can include new windows, doors (exterior and storm), insulation, roofing, HVAC systems, nonsolar water heaters, and biomass stoves (e.g., those that use plant-derived fuels, including wood and wood pellets) for your existing principal residence. (Note that installation costs are covered for HVAC, biomass stoves, and nonsolar water heaters, but not for the other products listed here.) A total combined credit cap of $1,500 applies to all 2009 and 2010 improvements.

For property placed in service in 2009 through 2016, you may be able to claim a separate tax credit for 30% of the cost of buying and installing qualified geothermal heat pumps, solar panels, solar water heaters (pool or hot tub heaters do not qualify), small wind energy systems, and fuel cell power systems (limited to $500 per 0.5kW of power capacity); generally, no cap applies to these improvements. This tax credit is available for products installed in both new and existing homes. With the exception of fuel cell systems (which, to qualify, must be used in a home that is or will be your principal residence), these products may be used in a second or vacation home as well.

Only products that meet very high energyefficiency standards qualify, so you’ll need to carefully check the manufacturer’s certification. It will tell you whether or not the product qualifies for a tax credit. Keep a copy of the statement, and receipts, for your tax records. A tax professional can give you more information about these tax credits. You can also visit the Energy Star website, www.energystar.gov, to find out more about energy-efficiency standards and products.

I’m buying my first home, but I already own an investment property. Will I qualify for the first-time homebuyer’s tax credit?

Even though you already own an investment property, you may be able to qualify for the first-time homebuyer’s credit that was included in the American Recovery and Reinvestment Act of 2009. For the purposes of qualifying for the credit, a first-time homebuyer is defined as someone who has not owned a principal residence during the three-year period prior to the home’s purchase. Your investment property is not considered to be your principal residence, so you may still be eligible for the first-time homebuyer’s credit, assuming you meet other requirements.

One requirement is that you must purchase a home on or after January 1 and before December 1, 2009. You must also meet certain income limits. To qualify for the full credit, which is equal to 10% of the home’s purchase price (up to a maximum credit of $8,000), your modified adjusted gross income must be no greater than $75,000 if you’re single, or $150,000 if you’re married. The credit is reduced if your income exceeds these amounts, and is eliminated if your modified adjusted gross income exceeds $95,000 ($170,000 if you’re married filing jointly).

If you’re married, and your spouse has owned a principal residence within the past three years even if you have not, neither of you will qualify for the credit. But if you’re single, and are buying a home with someone else who has owned a principal residence within the last three years, you may still qualify, even though the other buyer will not.

Note that if the home you’re buying ceases to be the principal residence of you and your spouse within 36 months of the purchase date, you’ll have to pay back the credit. For more details, visit the IRS website, www.irs.gov.

No, not if you intend to name your future grandchild as beneficiary. A valid 529 beneficiary has to have a Social Security number, so it’s not possible to name a child who hasn’t been born. But there is a way to open a 529 account that eventually can be turned over to a future grandchild.

Your first step is to open a 529 account and name a beneficiary who is a "family member" of your future grandchild. Then, when your grandchild is born, you, as account owner, can change the beneficiary to your grandchild. All 529 plans have mechanisms in place for changing the beneficiary.

According to IRS Publication 970, Tax Benefits for Education, there are no income tax consequences if the beneficiary of a 529 plan account is changed to a "family member" of the original beneficiary. This includes the beneficiary’s (1) spouse, (2) son, daughter stepchild, foster child, adopted child or descendant of any of them, (3) sibling or stepsibling, (4) parent or ancestor of either, (5) step-parent, (6) niece or nephew, (7) aunt or uncle, (8) daughter-in-law, son-in-law, motherin- law, father-in-law, sister-in-law, or brotherin- law, (9) the spouse of any person listed, and (10) first cousin. Changing the beneficiary could have gift tax consequences, though.

However, carefully check the details of any 529 plan you’re considering before you name the initial beneficiary. Some plans impose age restrictions on the beneficiary, such as requiring that the beneficiary be under age 21. Such a restriction could pose a problem if you intend to name your adult son or daughter as the initial beneficiary.

Other plans may have rules that indirectly impact who you can choose as your initial beneficiary, such as a requirement that the funds in the account be spent within 10 years of when the initial beneficiary would be expected to enter college. You don’t want to be surprised by a technicality.

Can more than one 529 plan account be opened for the same beneficiary?

Yes. You (or anyone else) can open multiple 529 accounts for the same beneficiary, provided you do so under different 529 plans. For example, you could open three 529 college savings plan accounts for your daughter: one in State A, one in State B, and one in State C. Similarly, you could open accounts in States A and B for your daughter, and another relative could open an account for her in State C. Or, you could open a 529 college savings plan account and a 529 prepaid tuition plan account for your daughter in State A. But you can’t open two college savings plan accounts (or two prepaid tuition plan accounts) in State A for the same beneficiary.

If you do open multiple 529 accounts for the same beneficiary, keep in mind that each plan has its own contribution limit, and contributions can’t be made after the limit is reached.

However, some states consider the accounts in other states to determine whether the limit has been reached. For these states, the total balance of all plans (in all states) can’t exceed the current year’s maximum contribution amount.

Also, keep in mind that each 529 plan will have its own investment options and flexibility, contribution rules, ownership and beneficiary designation rules, costs and fees, and ability to perform account management tasks online.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

No matter how good a company you work for, you should think carefully about how much you should have invested in it. Yes, there are companies whose employees have become wealthy from company stock that was part of their compensation. But there also are stories about employees of companies such as Enron, Bear Stearns, and Lehman Bros.–people who believed in their employers but learned the hard way that allowing one company– especially a current employer–to dominate their investment or retirement portfolio can have devastating consequences.

According to the most recent Employee Benefit Research Institute statistics (Issue Brief No. 308, August 2007), company stock represents According to the most recent Employee Benefit Research Institute statistics (Issue Brief No. 308, August 2007), company stock represents an average of 11% of 401(k) plan participants’ assets (though that percentage is less than in previous years). However, few mutual fund managers would allow a single stock–any stock–to represent that much of a fund’s portfolio. And a corporate pension plan is actually prohibited from investing more than 10% of its holdings in the company’s own stock.

Ironically, the better your company’s stock has performed, the greater the chance that it may have grown to dominate your portfolio. However, even if your company is a good one, working at a company means you’ve invested your “human capital”–your earning ability–in that firm. If you also have a large portion of your investment capital there, your financial well-being is even more dependent on a single company. If a company’s stock is suffering, it might react by cutting jobs companywide. If yours were one of them, both your human and investment capital would be hit.

And don’t forget to consider whether an equity mutual fund you hold also may have invested in your company’s stock. You can find out a fund’s holdings by checking its annual and semiannual reports. You can use the information to estimate your total exposure to your employer’s stock.

If stock options are part of your compensation package, a significant market downturn can mean special financial pain.

In many cases, people who receive options to buy their company’s stock find that during a downturn, the stock’s market price is lower than the option’s exercise price. Since few would choose to exercise an option that requires paying more than the market price, the option is said to be “underwater”–a situation that was widespread last year. If your options are underwater, it’s worth checking to see if your company has considered asking its shareholders to approve repricing the options, or exchanging them for a smaller number of options with a lower exercise price. Some companies are taking such steps to try to retain valued employees.

If you exercised options to purchase your company’s stock in 2008, you may face a more complex problem. The type of option and when you exercised it can raise a number of issues at tax time. If you own nonqualified stock options, you’ll generally owe ordinary income tax on the difference between the exercise price and the stock’s market value as of the date you exercised it. That amount is considered compensation and, if you’re an employee, should be listed on your W-2 form.

If you exercised incentive stock options (ISOs), tax is ordinarily deferred until you sell the stock that you acquired. However, unless you sold the stock in the same year that you acquired it, you have to factor in the alternative minimum tax (AMT). For AMT purposes, when you exercise an ISO, income is generally recognized to the extent that the fair market value of the shares when acquired exceeds the option’s exercise price. This means that a significant ISO exercise in one year can trigger AMT liability, even though no income is actually received. This application of AMT could be a real problem if you exercised the options in early 2008 and later saw the value of the stock you received dramatically decline in value. If you are subject to AMT as the result of an ISO exercise, you’ll be entitled to a resulting AMT credit that can be used in future years.

The Emergency Economic Stabilization Act of 2008 included some relief for taxpayers who exercised ISOs prior to 2008, and makes it easier to claim unused AMT credit. However, it will be of little help if you exercised ISOs in 2008. For more information, talk to a tax professional.

With recent market declines, many investors are taking a new look at converting their traditional IRA to a Roth IRA. For many, the tax cost of converting has dropped significantly, making this a more attractive option.

You can convert your traditional IRA to a Roth IRA in 2009 if your modified adjusted gross income (MAGI) is $100,000 or less. If you file a joint federal tax return with your spouse, the $100,000 limit applies to your combined income. If you’re married filing separately, you’re not allowed to convert at all in 2009.

You generally have to include the amount you convert in your gross income for the year of conversion, but any nondeductible contributions you’ve made to your traditional IRA won’t be taxed.

If you’re not eligible to convert in 2009, there’s always next year–literally, in this case. Starting in 2010 anyone can convert, regardless of income level or marital status. Plus, if you convert in 2010, you’re allowed to spread the income tax hit over two years: you report half the taxable income from the conversion in 2011, and half in 2012. So, even if you’re eligible to convert in 2009, you should discuss with your financial professional whether it makes sense in your particular case to wait until 2010 to convert in order to take advantage of this special tax rule.

If you’re eligible, converting is easy. Simply notify your IRA provider that you want to convert your existing IRA to a Roth IRA, and they’ll provide you with the necessary paperwork to complete. You can also transfer or roll your assets over to a new IRA provider.

Remember that you can also convert SEP IRAs (and SIMPLE IRAs that are at least two years old) to Roth IRAs. And, if you’re eligible for a distribution from your employer retirement plan (for example, a 401(k) or 403(b) plan), you may also be eligible to transfer or roll over those distributions to a Roth IRA, subject to these same conversion rules.

I converted my traditional IRA to a Roth in 2008–can I undo this?

In most cases, yes. If you converted your traditional IRA to a Roth IRA in 2008, before the recent market downturn, you may find that you now owe taxes on a conversion amount that’s significantly higher than what your investments are now worth. If that’s the case, you may find it advantageous to undo your conversion. The IRS refers to this process as a "recharacterization."

You may also want to recharacterize if you converted in 2008, and now find that you weren’t eligible because your 2008 income is higher than you expected.

A recharacterization is essentially a do-over. You’re treated as if you never converted your traditional IRA to the Roth IRA. You accomplish this by transferring the Roth IRA assets, and any earnings, back to a traditional IRA (in a trustee-to-trustee transfer if you’re using a new traditional IRA provider).

To undo your 2008 conversion, you need to carefully follow these steps:

• Inform your IRA providers (the one holding the Roth IRA and the one providing the traditional IRA, if different) that you intend to recharacterize your Roth IRA to a traditional IRA. You must provide this notice on or before the date the assets are transferred back to the traditional IRA.

• Make sure the transfer is completed by the due date for filing your federal income tax return for 2008, including extensions. For most taxpayers, that can be as late as October 15, 2009. (If you’ve already filed a timely 2008 tax return, you can still recharacterize by making the transfer and filing an amended return by October 15, 2009. Be sure to write: "Filed pursuant to Section 301.9100-2" on your Form 1040-X.)

• Report the recharacterization to the IRS (see Form 8606 for more information).

If you undo your 2008 conversion in 2009, you generally won’t be able to convert back to a Roth IRA until 31 days after the recharacterization.

Don’t stop at yield

If you’re tempted to seek a higher return, don’t forget that yiel alone shouldn’t be your only criterion. In reaching for additional yield, you may be taking on additional risk. Also, if and when interest rates rise, the change may affect a bond’s market value unless held to maturity. Don’t hesitate to get expert help to assess whether you can increase your return without taking on more risk than you can afford.

Low interest rates create a dilemma. Do you accept a low return because you feel you must protect your principal? Or do you take on greater investment risk in order to try for a higher return? In balancing those two concerns, here are some factors to think about.

Consider laddering your CDs

When yields on Treasury bonds began dropping last year, many investors were attracted to certificates of deposit (CDs) offered by banks that needed to attract capital. However,interest rates won’t stay low forever, and at some point you may want access to your money before a CD matures. One way to achieve higher rates while retaining flexibility to adjust your strategy over time is to ladder CDs. Laddering involves investing in CDs with varying maturity dates. As the shorter-term CDs mature, you can reinvest in one with a longer term and higher rate. Over time, laddering can give you both the higher rates typically offered by longer-term CDs and the ability to adjust as interest rates change.

Example: Susan wants to invest $60,000 in CDs. She puts $20,000 in a six-month CD that pays 2.6%, another $20,000 in a three-year CD that pays 3%, and the final $20,000 in a five-year CD that pays 3.5%. When the sixmonth CD matures, she reinvests that money in another five-year CD. When her two-year CD matures, she reinvests it in still another five-year CD. At that point, funds from a maturing CD will be available roughly every other year, but will earn the higher five-year rate. If rates are lower when a CD matures, she has the option of investing elsewhere. (This is a hypothetical example and doesn’t represent the results of any specific investment.)

Pay attention to expenses

Low returns magnify the impact of high investing expenses. Let’s say a mutual fund has an expense ratio of 1.00, meaning that 1% of its net asset value each year is used to pay operating expenses such as management and marketing fees. That 1% represents a bigger relative bite out of your return when the fund is earning 3% than it does if it’s earning 10%. At the higher number, you’re losing only about 10% of your return; at 3%, almost a third of your return goes to expenses. Before investing in a mutual fund, carefully consider its fees and expenses as well as its investment objective and risks, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing. If you prefer individual stocks, keep an eye on trading costs.

Think about your real return

Low interest rates may not be quite as problematic as they seem. Even if you’re earning a low interest rate, your real return might not suffer too much if inflation is also low. Real return represents what your money earns once the impact of inflation is taken into account. With an annual inflation rate of 0.1%– the December 2008 Consumer Price Index (CPI) figure–a bond that pays 3% would produce the same real return as a bond that pays 5% when annual inflation is running at 2.1%.

Compare interest rate and yield spreads

When market instability drove many investors to the safety of Treasury bonds, their prices rose and yields fell. As a result, the spreads between Treasury yields and those of corporates and municipals have been relatively high over the last year because non-Treasury bonds have to offer higher yields to compensate for investors’ anxiety about the safety of their principal and possibility of default.

Consider small changes

You may not need to remake your portfolio completely to seek a higher return. For example, if you’re in Treasuries, you could move part of that money to municipal bonds, which may involve greater risk of default but whose net returns are boosted by their exemption from federal income tax. Or you could shift a portion of your stock allocation to dividendoriented stocks and ETFs, or preferred stock.

Look for buying or selling opportunities

Interest rates also can be used to help evaluate equities. Some analysts like to determine the relative value of the stock market using the so-called Fed market valuation model. (Though not officially endorsed by the Federal Reserve Board, the method evolved based on a 1997 Fed report.) The model compares the earnings yield on the S&P 500 to the 10-year Treasury bond’s yield. If the S&P’s yield is higher than the T-bond’s, the model considers the market undervalued relative to bonds. If the Treasury yield is higher, the market is overvalued. However, this is only one of many valuation models and shouldn’t be the sole factor in your decision.

Roth conversions

Individuals who would like to contribute or convert to a Roth IRA in
2009 but don’t qualify because of income limitations might benefit from making nondeductible contributions to a traditional IRA today, and converting the funds to a Roth IRA in 2010, when the income limits no longer apply. Additionally, for Roth conversions in 2010 only, any resulting taxable income will be deferred until 2011 and 2012 (with 50% taxed in each year).

No doubt, 2008 was one of the worst years in the history of the stock market, and one of the worst for retirement savings. Here are four things you can do now to help make the best of a bad situation.

1.Review your retirement plan Review your overall retirement plan with your financial professional. What, if any, adjustments can you make to help you reach your retirement goals? If you were planning to retire in a certain year, determine if that’s still realistic, and calculate how much longer your assets might last if you work a few years longer. Can you reach your goals by using a smaller withdrawal rate assumption, or by increasing your IRA or 401(k) savings? Does your asset allocation still make sense? And if you don’t have a plan for your retirement, now is a good time to think about establishing one.

2.Convert your traditional IRA, or transfer 401(k) plan securities, to a Roth IRA

Due to declining values, the tax cost of converting to a Roth IRA has dropped dramatically for many investors. Consider whether converting to a Roth IRA makes good financial sense for you. The taxable portion of your traditional IRA will be subject to ordinary income tax in the year of conversion, but qualified distributions from your Roth IRA will be entirely free from federal taxes.
For 2009, you’re able to convert only if your modified adjusted gross income is $100,000 or less (this dollar limit applies whether your tax filing status is single or married filing jointly). If you’re married filing separately, you can’t convert at all in 2009. But if these rules preclude you from converting, there’s always next year–literally. These limitations are repealed in 2010, so anyone will be able to convert a traditional IRA to a Roth, regardless of income level or marital status.
Similarly, if you’ve decided a Roth IRA makes sense for you, and you’re entitled to a distribution from your 401(k) plan, keep in mind that you can roll over (that is, essentially convert) your non-Roth assets to a Roth IRA (hardship withdrawals, certain periodic payments, and required minimum distributions (RMDs) can’t be rolled over). This may be especially attractive if you’re entitled to an in-kind distribution of employer stock whose values are seriously depressed–you’ll pay tax on this reduced value and any additional appreciation may be
tax free.(The same income and marital status limitations that apply to traditional IRA conversions also apply to rollovers from 401(k) plans to Roth IRAs in 2009.)

3.Undo a 2008 conversion in 2009

What if you already converted your traditional IRA to a Roth in 2008,and your IRA balance has taken a significant hit since then? The tax cost of converting was probably much greater than if you had waited until 2009 to convert. Well, don’t fret–you can undo a 2008 conversion up until the due date for filing your 2008 tax return, including extensions. Technically called a “recharacterization,” this procedure allows you to treat the conversion as if it never occurred.

To undo your 2008 conversion, you need to carefully follow these steps:

•Inform your IRA providers (the one holding the Roth IRA and the one providing the traditional IRA, if different) that you intend to recharacterize your Roth IRA to a traditional IRA. You must provide this notice on or before the date the assets are transferred back to the traditional IRA

Make sure the transfer is completed by the due date for filing your federal income tax return for 2008, including extensions. For most taxpayers, that can be as late as October 15, 2009. (If you’ve already filed a timely 2008 tax return, you can still recharacterize by making the transfer and filing an amended return by October 15, 2009.Be sure to write:”Filed pursuant to Section 301.9100-2″on your Form 1040-X.)

•Report the recharacterization to the IRS (see Form 8606 for more information).

You can even reconvert your traditional IRA back to a Roth in 2009 (if you meet the eligibility requirements) beginning on the 31st day following the recharacterization.

4.Continue to contribute

Despite the recent downturn, for many people IRAs and employer retirement plans remain important vehicles for retirement savings. Make sure you’re taking full advantage of any company matching contributions you’re entitled to. And if you’re age 50 or older, keep in mind that you may also be able to make catch-up contributions (up to $1,000 for IRAs and $5,500 for 401(k) plans in 2009).

Where do you go for investment advice?

A financial advisor? CPA? Jim Cramer? Suze Orman? Maybe the retired guy down at the pool?

What about Yoda? Ever consider him?

As surprising it may sound, when it comes to getting good advice on investing, for a moment, forget The Wall Street Journal and everything else. That two-foot, nine-hundred year old creature surprisingly offers some decent advice on investing. In fact, as crazy as it sounds, the entire Star Wars series itself offers some truly fantastic suggestions to get us on the right path towards success. Only problem is, few people have taken the time to do something as ridiculous as I have: ponder how the classic tale can teach us a few things about making money.

Mind you, this wasn’t exactly done on purpose. A short while ago, in the deep, dark hours of a California night, I found myself out on the couch flicking through channels for something to lull me to sleep. After watching the Knicks highlights on ESPN, a re-run of Mad Money, then surfing past Happy Days and Charles In Charge, I landed on Star Wars only to soon realize the classic movie and all those that followed really can teach us a few important things about prudent investing.

Here’s a few examples:

LESSON 1: START BY WIPING THE SLATE CLEAN

Investing: I recently took a moment to do something most normal people would never do: search through a stack of magazines to analyze the financial ads. Between Fortune, Money Magazine, Smart Money, BusinessWeek and a handful of others, the results were undeniably clear: in my brief study, when it came to ads for financial products, by a long-shot, it was the costly, managed mutual funds that advertised far more than anyone else.

What relevance does this have? … Let’s continue …

Star Wars: Imagine being Luke. You just crashed in a deep, dark, musty swamp where a two-foot tall creature named Yoda revealed himself to be the Jedi master. If that wasn’t odd enough, a little while later the thing tells you to start lifting rocks with your mind. Having little choice but to go with it, you heroically manage to satisfy master, but when he tells you to lift an x-wing fighter with your head, that’s a different story:

LUKE

Master, moving stones around is one thing. This is totally

different.

YODA

No! No different! Only different in your mind. You must unlearn

what you have learned.

Lesson Learned: I totally agree with Yoda. After all, who wouldn’t? The creature not only managed to live nine-hundred years, but he beat the pants off an Evil Emperor at least four times his size. Impressive stuff, right?

When it comes to learning a few things about successful investing, the first place many folks should start is not by learning complicated investment formulas that ultimately few wind up remembering, but with a willingness to do what Luke was basically forced to do: unlearn some of the things you perhaps already know.

What baggage are you reading this article with? Does it come from scores of ads from some costly mutual funds trying to get your hard earned dollars into their pockets? You know, the ads showing happy people who all seem to be putting Bill Gates to shame? Based on the vast number of ads out there from some of the costly fund companies, chances are your sub-conscience is carrying a few of those fancy advertisements inside you and you may not even know it.

So, to begin with, start by listening to Yoda. Being a successful investor often means willing to unlearn some of what you know. While your mind may not wind up lifting an x-wing fighter from a dark, musty swamp, you just might be able to open a window to a few new interesting concepts about successful investing.

Here’s the first example that comes to mind…

LESSON 2: AN OPEN MIND CAN LEAD TO GREAT SUCCESS

Investing: Some of the more interesting investment concepts can either be traditional in nature or somewhat unique. Although they’ve been around for ten years or so, a generally low-cost investment product such as an Exchange Traded Fund are somewhat new and recently started to explode with popularity. On the more unique side of the spectrum, who would ever think something as bland, boring and unappealing as Life Insurance would provide some retirees with tax efficient income? In today’s marketplace, some investors selling life insurance policies are experiencing some attractive profits. Who’s doing these things? It’s not sophisticated actuaries nor is it Noble Laureates that have figured out how to beat the system; it’s main street retirees that opened their minds to one of today’s newest concepts, that of something called “Life Settlements.”

Star Wars: In real time it took a few months but in movie-time it took just under two hours for Luke to truly open his mind to new concepts. By fully opening his mind and entrusting The Force, he turned a targeting computer off and wound up landing one right into the Death Star’s exhaust port. … End result? Death to the Star and birth to inter-galactic celebrations across the universe that changed our movie-going lives forever.

Lesson Learned: Whether it’s the willingness to turn off a computer tracking system or consider innovative concepts such as Life Settlements, it’s those with open, educated minds that often find the success they seek. (Please note: Life Settlements are in no way appropriate for all individuals. Before entering in any life settlement, be absolutely sure to evaluate the all the advantages, disadvantages and risks of engaging in such a settlement with a qualified individual).

LESSON 3: STAY AWAY FROM THE HYPE

Investing: I’ll stay away from the windfall of Bernard Madoff clichés and go back a little in time on this one …. Who would you rather be? A sock puppet on national TV promising its stockholders boatloads of money or a cup of coffee that costs $3 bucks? While at first being a puppet seemed like the way to go, it was just a matter of time before Starbucks double-Frapps put the now infamous Pets.com mascot to shame. As most people that experienced the .com bust would now attest to, investing into hype often leads to nothing but regret.

Star Wars: Who would you rather be? A seven foot master with a deep voice, impressive ship and a mind that melts men or a skinny blue eyed farmhouse kid chugging around the galaxy in a worn out jalopy? While at first glance sporting a cool black helmet and long cape would seem like the way to go, Star Wars proved to us that end of the day, staying away from the hype can wind up saving you from the dark side.

Lesson Learned: Save the sock puppets for your kid’s next birthday. Flashy ads, slick brochures and fast-talking salesmen isn’t what counts, it’s what’s behind the window-dressing that does. Next time you’re confronted with a hyped-up investment that seems a bit “too good to be true,” keep in mind Han Solo’s classic line, “I got a bad feeling about this.” Think smart, double-check the hype and remember: this is your hard-earned money we’re talking about.

LESSON 4: SUCCESS DOESN’T HAPPEN OVERNIGHT

Investing: Some of the most successful investors I’ve ever met started out with nothing. Thinking back to these people, those with the most often started with the least. Somehow, some way, fearless persistence, dedication and that occasionally annoying thing called “time” steadily built them their success. While diversifying your investments, reducing fees, minimizing taxes and budgeting yourself to save a few dollars every month may sound painful, dreadfully boring and slow paced, remember: when it comes to trying to get rich quick, the longer you play the game, the less chance you typically win. On the flip side, when investing smart, the longer you play the game, the greater the odds you’ll come up a winner.

Star Wars: Have a good idea for a movie? George Lucas did. To follow in his footsteps, first lock yourself in a room with a legal pad and for the next year or so, do nothing but write an outline to a science fiction story. Then, over the next year or so, expand the outline into a screenplay, and once that’s done, spend the next year re-writing it. With the script finally complete, spend another year raising money to produce it. With financing in place, spend another year filming it, the year after that editing it and once that’s all finally done, take a deep breath, sit back and make a few billion dollars.

Lesson Learned: Don’t think success could happen to you? That could be your first problem. Whether it’s building wealth or creating the second most successful movie ever made, remember: the journey to riches rarely happens overnight. Take, for example, Henry the Electrician, a friend of mine who once made $4 dollars an hour fixing fuse boxes. Tired, worn out and envisioning a better life, he one day had the guts to scrape together a few dollars, purchase an apartment on the dark side of town and rent it out. Half a lifetime later, with hundreds of apartments to his name, his personal Star Wars is now a reality, and with a little time and dedication, I’d bet anything one day yours will one day be as well.

LESSON 5: STAY AWAY FROM THINGS YOU CAN’T UNDERSTAND

Investing: There’s nano-tech, bio-tech and gen-tech. Derivatives, floaters, collars, straddles, those infamous CDOs and a long list of many other complex investments. While some of these might be all well and good, it’s probably best you listened to Warren Buffet who once wisely told us mere mortals to stay away from things we can’t understand.

Star Wars: There’s tall creatures, short creatures and monsters buried beneath the trash. Blubber-filled giants, underground slugs, women with thin heads and a long list of other bizarre things. While some of these might be all well and good, it’s probably best you listened to Yoda who once wisely told Anakin to stay away from things he can’t understand.

Lesson Learned: Who knew Warren Buffet and Yoda would be so incredibly alike? Until this fleeting moment, I for one never did. Whether your journey is about destroying an evil empire or building wealth, staying away from things you can’t understand is often a first rule of success.

LESSON 6: KEEP IT SIMPLE

Investing: Want to outperform most mutual fund money managers? I do. That’s why when it comes to investing my own money, I often stick with index investing and diversify my money into things including the mindless and boring S&P 500. Somewhat sad but irrefutably true, over time, you’ll most likely make more money investing into the simple and mindless S&P than most mutual funds. And if returns aren’t enough to inspire you, what about fees and taxes? Fees in most indexes are typically much less than many managed funds, and investing in the indices rarely causes capital gain taxes until you decide to pay them, not someone else. How good is that?

Star Wars: Legendary effects, wild robots, fantastic chases and places that few people could ever imagine made my popcorn dance, but when stripping away all that cool stuff, what do you really have? A simple and familiar storyline that follows Joseph Campell’s classic thesis that proved all timeless stories can be boiled down to the same, simple storyline that’s been re-hashed a thousand times through heroes wearing a thousand different faces.

Lesson Learned: Forget phone books of investments many accounts contain. Who has the time to keep track of those things anyway? Whether it’s creating a movie few will ever forget or making money, remember: it rarely has to be complicated for it to be effective. (Please be advised: index investing is not appropriate for all investors. Before investing in any index or any investment, please be sure to first evaluate your own unique and personal situation with a qualified advisor).

CONCLUSION

I had fun pondering how Star Wars can teach us a few things about our money, and in fact, there were a handful of other “lessons” I wound up editing out. But who knows? Given the examples above, next time you see Star Wars, perhaps you too will realize some of the valuable lessons the classic tale teaches us not only about money, but about life itself.

May The Force be with you.

Especially during these volatile market days, saving for retirement is not always easy. There are bills to pay, clothes to buy, movies to see and a long list of many other things that can easily get in the way.

With this in mind, I wanted to point out a few ideas on how to save $100 per month. If it doesn’t sound like saving this amount would equate to much, over time it can really mean much more than you most likely think.

Let’s suppose you invest $100 every month, and let’s also assume you invest it into a stock index fund that earns an average return of 8% per year (which, judging by the latest financial headlines is a bit unbelievable, but let’s just be a bit optimistic here for historical purposes). Before revealing the results, note the emphasis on “index fund.” This is important to highlight because when investing in an index such as the S&P 500, not only do you get some degree of diversification, but you’ll also keep the fees you pay and the taxes you owe to a minimum as well.

Let’s also suppose the amount you save increases by 3% per year to keep in line with a hopeful increase in wages. So, invest $100 per month in an index fund such as the S&P 500 and at an 8% average rate of return, a 3% savings increase per year and at a 25% assumed tax bracket, the following would result:

Looks good to me. Here’s a few creative ways to help you get there:

1. Invest your tax refund: April 15^th will be here in a blink of an eye. With that in mind, are you one of the unlucky people to get a tax-refund this year? Remember, your tax refund is merely an overpayment of estimated taxes or withholdings that earned Uncle Sam interest, not you. If you were one of the unlucky people to receive a refund, evaluate your estimated taxes or withholdings and don’t give it to Uncle Sam as a tax-free loan. Instead, invest it. Doing so could very well get you that $100 monthly savings you’ve been looking for.

2. Brown bag it: Working? Let’s suppose you eat lunch out every day and the average meal costs $12. That’s $240 per month in food costs. To save money, would you eliminate dining out every day? Not unless you wanted to miss out on the latest business news or how Bob’s date went with Jane. So, let’s assume you cut down on the dining and ate out once a week. Doing so would bring the total monthly food costs to right around $50. You still have to feed yourself, right? So let’s assume you spent about $100 for some groceries. Do the math, and there you have it – you’re left with a $100 dollar monthly savings.

3. Rideshare to Work: Let’s suppose you travel 15 miles each way to work, your SUV holds 20 gallons and gets 15 miles per gallon. Two more variables needed: Let’s suppose gas costs the historical average of $2.75 per gallon and there’s 22 working days in the month. How much would you save if you carpooled with two friends? Sounds like one of those SAT brain twisters, right? And you thought you were out of high school — Do the math and that’ll save you roughly $80 per month and get you a nice ride in that lower traffic carpool lane as well. How great is that?

4. Energy Checkup: Are there ways you can save a few dollars on your monthly energy costs? For me there was. A couple of small touch-ups around the house and I am now helping keep Al Gore happy. With a few mouse-clicks on the “Home Energy Checkup” at www.ase.org, I quickly learned a few interesting ways to save a couple of dollars every month on my energy bill and maybe you will too.

5. Skip the Root Beer: It’s a rare day when I don’t have a craving for an ice-cold Root Beer. Suppose I didn’t listen to my own advice above and ate out five times a week. If a Root Beer costs $1.50, I just spent $30 per month. For savings and nutritional reasons, I should have been drinking water. While the $30 savings won’t get me my $100, it’ll definitely help get me there and make my mom happy along the way as well.

6. Clip Coupons: If you’re like me, that means you eat a few boxes of Cinnamon Toast Crunch every month along with a few dozen South Beach Protein Bars and bags of Turkey Jerky. Interested in saving a few dollars on these monthly purchases? Websites such as www.coupons.com claim you can print a few of their coupons and save over $100 every week. Who says Double Stuff Oreos are bad for you? When I’m busy saving money when eating them, I would completely disagree.

7. In-Home Beauty Regime: Thanks to a thinning hairline and my Flowbee, it’s been at least a decade since I paid someone to cut my hair. Suppose each cut costs an average of $50 and I need to cut my hair once every two months. By doing it myself, I’ve basically saved $25 per month. Care to come by for a Flowbee? Would you do it yourself? Doubtful on the former, possible on the latter. There are also a few possible things you can do to reduce your monthly beauty costs such as a do-it-yourself manicure or mudpack.

Better nutrition? Energy efficiency? Getting yourself rich instead of Uncle Sam and having more money for retirement? As far as I’m concerned, that $100 per month savings can really go a long way, and hopefully after this brief posting you’ll agree.