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Did you know…State taxes vary for Roth conversions?

Check out this article from Kiplinger and contact me if you have any questions on how this may affect you.

Save Money in August!

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FAQs On the New Credit Card Rules

Is it Time to Rebalance Your 401(k) Investments?

Do you “practice a form of benign neglect”? Check out this SmartMoney article to find out.

When it comes to 401(k) plans, savvy investors know that asset allocation –
based on your time horizon, risk tolerance and savings goal – is crucial.
But without regular checkups, over time your investments can drift away
from that initial allocation. That’s where rebalancing comes in. Say you
set up your 401(k) plan to have a 60%-40% stock-to-bond allocation – 60% of
your portfolio is in stock mutual funds and 40% is in bond funds. You
forget about it for a year. In the meantime, the value of stocks has fallen
considerably and your allocation shifts to 35% (stocks) and 65% (bonds).

Most experts recommend plan participants rebalance their 401(k)s
periodically – generally, at least once a year. Rebalancing means adjusting
the allocations to the funds in your account back to their original targets
with your ideal mix of stocks, bonds and cash. But the majority of plan
participants practice a form of benign neglect: They do nothing. About 85%
of participants make no asset allocation changes during the year, says
David Wray, president of the Profit Sharing/401(k) Council of America.
Inaction is the second biggest mistake participants make, while the biggest
is not contributing enough to get the full employer match, says Wray.
Investors should note that taxes are an important advantage when
rebalancing. In a regular brokerage account, buying and selling often
generates increased taxes each time you rebalance. But there are no tax
consequences in a 401(k).

What types of events should act as a potential trigger to rebalance your
401(k) plan? Here are a few:
Big market movements
Big market swings tend to shift your intended asset allocation, so plan
participants should make sure they’re not too heavily invested in one asset
class that has recently outperformed or done poorly, says Dean Kohmann,
vice president of 401(k) plan services at Charles Schwab. For example, say
an investor puts 60% of his account in stock mutual funds and 40% in bond
funds in the year 2000. If left unattended, by the end of 2002 – after the
big tech bust – the account would have held 41% in stocks and 59% in bonds.
Those investors would have lost out on double-digit equity returns from
2003 through 2007 and earned lower returns in bonds, he says. By
rebalancing periodically, you increase your rates of return and reduce
risk, says Kohmann. However, using big market movements as a signal to
rebalance comes with some risk. There is a tendency to try to time the
market – selling out of equities when things get too scary and moving into
them as market upswings reach their peak, says John Scherer, a certified
financial planner with Trinity Financial Planning in Middleton, Wis.
Too much company stock Generally, company stock should not comprise more than
20% of your overall 401(k) portfolio. If your company is getting negative
attention in the news, it might be a good time to ensure your original
allocation to company stock hasn’t changed because of stock price
fluctuations. “I’m always advising my clients to make sure they’re not too
concentrated in their company stock. They have a lot at stake with their
company, one, with their job, and with benefits and stock options. To add
it into the 401(k) – it’s a lot,” says Timothy Parker, president of Hudson
Capital Management, an investment advisory firm in Ridgewood, N.J. Some
companies provide a match not in cash but in company stock. In such a case,
your 401(k) could end up with too much in company stock. If your employer
matches half of your contribution with stock, your portfolio could be
one-third of company stock, says Parker. (For example, if you contribute
$1,000 to your 401(k) and your employer matches $500, you have $1,500 –
$500 of which is in company stock.)
Life event
Consider rebalancing if you’re married and your spouse gets another job and
another 401(k). Say the husband has some good equity fund choices in his
401(k) plan while the wife has good bond fund choices. Parker says he likes
to look at the couple’s plans together as one investment unit. “Why not use
best choices in each asset class,” he says. “Look at both plans as one unit
and choose the best options from each.” Similarly, divorce would also be a
good time to re-evaluate your 401(k), but be aware of the possibility that
the plan’s assets may get divided in the divorce settlement, Parker says. If
plan choices change It’s not unusual for a company to change the funds offered
in a 401(k) plan. In most cases, if one fund is taken out, another fund,
Published July 23, 2010 with a similar investment objective, will replace
it. But that’s not always the case. For example, if your plan gets rid of
its high-yield bond fund option – which you hold – and isn’t replacing it
with a similar fund, your provider might move you into another default fund
if you don’t make decision, says Kohmann. Sometimes an employer will switch
plan providers altogether, which would require new investment decisions.
You might have to rebalance based on better or more limited choices, or
even do some of the rebalancing outside of the 401(k). For instance, “if
the new provider doesn’t have good selections for the bond side of the
portfolio, we may allocate more to stocks there and more to the bond side
in IRAs,” says Erin Baehr, a certified financial planner and owner of Baehr
Family Financial.
Proximity to retirement
Rebalancing becomes more critical as you approach retirement. When
you’re about three to five years away from retirement you want to
assume a little less risk, says Lynn Mayabb, a certified financial planner
at BKD Wealth Advisors in Kansas City, Mo. But investors also need to
remember that if they want to retire at 65, they might have 25 years
of retirement. “You don’t want to go too cautious,” Mayabb says.
An investor within five years of retiring should be careful not to let his
or her 401(k) plan get too heavily weighted toward equities. If the market
fell, they would incur greater losses, and they don’t have time to make up
the losses and might have to work longer, says Kohmann.

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