Beacon Financial Tips & Tools

What to Do with Your Tax Refund or Other "Found Money"

Garrett Planning Network Provides Thirteen Smart Ideas

(Lee's Summit, MO)  February 24, 2008 - After concluding their tax preparation activities, many people will see that they are entitled to a refund from Uncle Sam. "Whether you refund is large or small, you are wise to determine now what you will do when that check arrives," says Sheryl Garrett, CFP®, author of Personal Finance Workbook For Dummies® (Wiley, November 2007) and founder of the Garrett Planning Network (www.GarrettPlanningNetwork.com). "Don't fritter it away or spend it on a whim." 

On a recent teleconference, network members brainstormed thirteen ways taxpayers can put this "found money" to work:

1.    Put the entire amount, up to the maximum allowed by law ($4000 for an individual in 2007 unless you are age 50+, then the maximum contribution is $5000; $5000 for an individual in 2008 unless you are age 50+, then the maximum is $6000), into a Roth IRA assuming your income falls below the government thresholds (the phase out for singles in 2007 is $99-$114,000 and in 2008 it's $101-116,000; for married couples in 2007, the phase out is $156-166,000 and in 2008, it's $159-$169,000). If you are saving for higher education funding needs, withdrawals of regular contributions to a Roth IRA are not subject to tax or penalty and can be made at any time, and you can take a "qualified distribution" (one that is made after a 5 year holding period, beginning on the first day of the first year for which the contributions were made), if one of the following applies: (1) you are a first-time home buyer, (2) you are age 59 1/2 or older (3) the distribution is due to death or disability. If your earned income for 2007 is higher than the phase-out thresholds, put your "found money" into another qualified retirement plan such as a 401(k), 403(b) or 457 plan if your employer offers one. Consider contributing to a traditional IRA if you have maxed out contributions to your employer-sponsored plan or if a Roth IRA is not an option.

2.    Give the money to charity and you can claim that amount as a tax deduction on your 2008 tax return, if you itemize using Schedule A of Form 1040

3.    Sign up with www.kiva.org and provide micro-loans to budding entrepreneurs in third-world countries. If you're feeling especially patriotic, you might consider investing in small business start-ups in the US, for instance: helping a relative by providing seed money for a local venture.

4.    Start a tax-sheltered 529 college savings plan to fund your own or children's/grandchildren's educations. Consider funding an Education Savings Account (ESA), formerly called a Coverdell account, if you plan on paying private school tuitions through secondary school. (Coverdell phase outs in 2007 and 2008: Single- $95-$110,000; Married Filing Jointly - $190-$220,000)

5.    Check that you have adequate insurance coverage on the following types of policies:  property and casualty, life insurance, health insurance, long-term care and disability insurance. Use the tax refund money to pay the premiums.

6.    Use the refund money to engage the services of an attorney. If you don't have a will then have one drawn up.  Without a will issues such as child guardianship and disbursements of assets will not be decided by you, but rather the laws at the time. For high net worth families, make sure your estate plan is up to date.

7.    Use the money to purchase stock mutual funds at lower prices. Some funds offer lower initial purchase amounts, especially for IRA's, or even lower if automatic transfers are made from your bank account or paycheck. While the market has been gyrating wildly, there's never been a better time to invest. If you have cash sitting on the sidelines, you may miss the next market upswing. Time in the market matters more than trying to time when to get into the market. If you are investing for the long-term, you can't afford not to be invested in stocks. Remember the old adage, "buy low and sell high." Stock prices are low right now. Consider international as well as domestic opportunities.

8.    If you have credit card debt, pay off as much as possible. For free credit reports go to www.annualcreditreport.com (the only authorized source for free credit reports). Use part of the money to obtain your FICO score from this site(the rating that shows how credit worthy you are). Correct any misreported items and work to keep your credit reports clean. Make your payments on time and don't take on more debt than you should. Try to live within your means. Get help at the Consumer Credit Counseling center.

9.    Mortgage interest rates are the lowest we've seen in years. If you have a good credit score, now is a good time to refinance your first mortgage and/or to wrap our Home Equity Line of Credit (HELOC) or second mortgage into a more attractive home loan. Consider a 15-year loan to accelerate the payout. Get out of variable loans now. Use your "found money" to pay points and loan costs.

10.    During economic slowdowns, including a recession, job losses and/or business declines are inevitable. Take a course, add to your credentials and consider how you can improve your skill set to make yourself as attractive as possible in the marketplace.

11.    Schedule your annual check ups with your doctor and your dentist. Use the tax refund money to pay the deductible and co-payments. Join the YMCA or the local health club, consult with a nutritionist, or buy a piece of exercise equipment (and be sure to use it!). Without your health, wealth is not important.

12.    Schedule a financial check up for yourself. Annual trips to the dentist, the doctor - and your financial planner - are wise investments. A professional financial adviser can help you see tax loss harvesting opportunities, assess investment options, analyze insurance coverages, and plan for a secure retirement.

13.    Purchase a gift certificate, for a set amount of professional financial advice, for a loved one. If you can't afford or don't want to pay for a complete financial plan, find a financial planner who works by the hour and will render as much help and advice in the time allotted by visiting www.GarrettPlanningNetwork.com.

About The Garrett Planning Network, Inc.

What: An international network of independent professionals who offer financial planning and advice on an hourly-as-needed, per-project and/or retainer basis. No commissions or third-party compensation is allowed. Now anyone regardless of income or net worth can hire an independent financial planning professional to help them make better financial decisions.

Network Founder: Sheryl Garrett, CFP® -- author of several financial planning and investment books including her latest, Personal Finance Workbook For Dummies® (Wiley, November 2007). Recipient of numerous industry awards. Profiled in hundreds of national publications including Wall Street Journal, New York Times, Kiplinger Personal Finance, MONEY magazine and multiple times on the TODAY show, Bloomberg TV and Fox News affiliated stations. Named four times to Investment Advisor magazine's annual list of the "Top 25 Most Influential People in Financial Planning."

Headquarters: Shawnee Mission, Kansas (Kansas City metropolitan area)

Year Founded: 2000

Contact: (866) 260-8400 or info@garrettplanning.com

Web: www.GarrettPlanningNetwork.com

Membership Guidelines: Members pay an annual licensing fee in exchange for network training, support and participation. Members also must be CERTIFIED FINANCIAL PLANNER™ certificants or actively working toward that status, independently registered in the state in which they practice or with the U.S. Securities and Exchange Commission, and adhere to a strict code of conduct, ethics and compensation.

Number of Members: Approximately 300 across the United States and overseas, including Lee's Summit, MO based Kristine McKinley.

Located in Lee's Summit, Missouri, Kristine McKinley,CPA, CFP®, is a member of the Garrett Planning Network. Her firm is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association. Ms. McKinley offers a complimentary, no-obligation Get Acquainted meeting to discuss her services and help potential clients determine if there is a good fit. More information can be obtained at www.beacon-advisor.com, by phone at 816-739-4853 or by email at kristine@beacon-advisor.com.

Does the market have you feeling squeamish?

As you read the headlines and hear the news, it's almost impossible to avoid feeling a bit squeamish in today's volatile market.  You're probably wondering what's in store for 2008 after such a bumpy first few weeks. Unfortunately, it's impossible for even the most brilliant economists to accurately predict the future.

The most important thing you can do during volatile market times is to have a plan, and to NOT make rash decisions based on emotion.  During volatile markets, planning is essential to minimize your stress level.  That doesn't mean that you won't feel nervous if your investments decline, but focus and confidence will help you fight the natural human tendency when it comes to your own nest egg to sell when the market is down. Remember the old adage "Buy low, sell high"?  Now is the perfect time to "buy low".

A well diversified portfolio is one of your best allies when markets are volatile. Remember, you are investing for the long term; even if you are retired your investment horizon could still be 20+ years. Market downturns can be great buying opportunities for the long-term investor. For example, your regular 401K contributions this month are purchasing more shares than 6 months ago. When you actually need these funds in 5, 10, or 20 years, chances are very good they will have significantly increased in value.  So by buying when the market is low, you are actually leveraging your money to work harder for you in the future.

On the other hand, if you are reaching the end of your accumulation years and/or entering the distribution phase of your life, you will not want to make any rash decisions based on the market's short-term volatility. The worst thing you can do is to fall prey and "sell low" because you are panicked.  So, give yourself a 10 day breather after any big market event - whether up or down - and give me a call before you make any buy or sell decisions.  There may be some tweaking we can do to your portfolio to help you get through the volatility, without selling out when the market is down.    

No matter which stage of investing you are in, the message I am trying to communicate to you is this: if your financial plan and investment strategy was sound a week ago, it is still sound today. Unless something has changed in your life, it is unlikely that you should take radical action. If you feel like your portfolio does not reflect your goals or risk tolerance, then now may be a great time to schedule a financial checkup to review your portfolio.  Otherwise, remember that you are investing for the long-term, and this short term volatility will eventually pass.

Expect the market to be volatile this year.  In addition to the recent recession fears (the media is not our friend in this case), we are in an election year, so expect more volatility in 2008.  However, this too shall pass!  Keep focused on your goals, post them in plain sight and review them often.

Probably the best advice I can give you is something I heard a CNBC analyst say this morning (while we waited for a low opening on Wall Street): "If you're investing for more than 12 months, you should turn the news off, it doesn't affect you today".

Tax Organizers for 2007 Tax Year

Just a quick post to let you know that I will be mailing out tax organizers this week.  If you are a new client and would like to receive a blank organizer, please email me at kristine@beacon-advisor.com, or Download Tax_Organizer_2007.pdf .

Credit Resolutions for the New Year

One way to cut the sting of the post-holiday credit card bills is to set a new agenda when it comes to credit.  So consider the following ideas when setting your credit resolutions for 2007:

Set dates for getting your credit reports: Each year, you should check each of your credit reports from annualcreditreport.com directly.  You should spread out your requests, making requests quarterly so you can catch errors that might come up at different parts of the year and spot identity theft.

Get your credit score once a year: A credit score is a three-digit number that reflects the credit history detailed by a person's credit report.  Go to www.myfico.com to retrieve your credit score once a year from one or all of the three credit bureaus.

Lock up cards; don't cancel them: Do whatever it takes to limit the use of credit cards in your life, but don't cancel credit card accounts once they're paid off.  Why?  Because your credit score relies on the number of credit lines you have open and in good standing and the length of time they're open.  Lenders want to see a long record of credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.  Remember to use them once a year and pay the full amount off immediately, to keep credit cards active.

Pay on time: Nothing damages your credit standing faster than late payments, particularly on big loans like mortgages and car payments.  Get current and then resolve to pay in advance of the due date.  A suggestion: once you get a bill, immediately look for the due date.  Then make a note to yourself on a calendar 5-7 days before the due date to put a check in the mail so you're on time.  You can also secure electronic payment options so you can pay closer to the due date or automatically.

Monitor credit problems: If you've filed bankruptcy or had a debt put in collection, it takes years to remove those events from your credit record.  Determine the month that data should leave your report and make sure you follow up to make sure that removal happens.

Choreograph your payments: If you have multiple balances you need to eliminate, schedule a payment order right now starting with the highest-rate balances first.

Keep your balances low: If you carry balances over 50 percent of your credit limit on any account, it might lower your credit score. To remedy this, use several cards to spread out the balance - and pay them off - or ask the creditor to raise the limit on the card.

Limit your credit inquiries: The next time you go to a department store, you might be offered a chance to save 10-15 percent on a purchase if you agree to apply for their store card.  At the same time, you'll probably continue to get plenty of credit offers in the mail.  Shred all direct mail credit solicitations the moment you get them, and as for in-person credit offers, just say no.

Research big loans in advance: Always ask a potential lender which credit bureau they use to make their decisions. Auto, mortgage and other lenders may prefer one credit bureau over another, and if you plan well ahead of your purchase, you should aim to correct errors in your credit report and try to get your credit score as high as you can.

Track your spending: If you've never made a concerted attempt to track your spending - all your spending, not just what you've put on credit cards - do so this year.  If you have a computer, buy a financial management program that makes it easy for you to download your banking and investment accounts, any remaining credit accounts and record all your cash expenditures down to the last pack of gum.

Go debit: Banks increasingly offer debit cards that double as ATM cards and carry a credit card brand that allow them to be used in many business establishments.  The key is to put a spending limit on the debit card equal to the cash you have in the account linked to it.  Responsible use of today's debit cards can wean you off of credit cards entirely.

[This column is produced by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.]

How to Get Your Free Credit Report

Unfortunately the holiday season usually brings an increase in credit card fraud and identity theft, so right after the holidays is a great time to check your credit report.  Following is why, when and how to check your credit report...

Why you should check your credit report

• to check for errors
• to check for fraud and identity theft
• to get the best interest rates
• more and more people are relying on credit scores - car insurance, employers, etc.

When to check your credit report:

• Once a year if you have good credit and don't anticipate any large purchases in the near future
• Before a major purchase, such as a new home, new car, etc. - should request your credit report 6 months ahead of a big purchase so you have time to correct any errors
• If you've been denied a credit card, loan or other product or service because of your credit (you are entitled to a free credit report if you have been denied credit based on information found in your report)
• If you suspect that your identity has been stolen
• If you are starting a plan to get out of debt or repair your credit.

How to check your credit:

There are three credit reporting agencies (Equifax, Experian and TransUnion), and they are required to provide you with one free credit report each year.  The three agencies do not always share the same information, so it's important to check all three. 

You can order all three credit reports at one time, but it may be a better idea to check one company one month, wait a few months, then check another company, then the third company a few months later.  This way you are getting three free credit reports a year, and you are checking several times a year, so you are more likely to catch errors and/or fraud.

Go to www.annualcreditreport.com to request your free credit report online.  This is the only authorized source for consumers to check their credit report online for free.  There are commercials and websites for other companies who claim to offer your credit report online for free, but they are generally selling a service or they are a scam.

In addition, you can call 1-877-322-8228, or you can write for your free credit report at: Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

Finally, you can purchase a 3-in-1 report, which is basically getting all three reports from each of the credit bureaus.  This is a good idea if you have never requested your credit report before, or if you suspect fraud.  You can purchase your 3-in-1 credit report at www.myfico.com.