How Long Should You Keep Your Statements?

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A year? Seven years? It depends.

You have probably heard that you should retain copies of your federal tax returns for 7 years. Is that true, or a just myth? How long should you keep those quarterly and annual statements you get about your investment accounts? And how long should you keep bank statements before throwing them away?

Tax returns?
The Internal Revenue Service urges you to keep federal tax returns until the period of limitations runs out – that is, the time frame you have to claim a credit or refund, or the time frame in which the IRS can levy additional taxes on you. (This is a good guideline for state returns as well.)

If you file a claim for a credit or refund after you file your tax return, the IRS would like you to keep the relevant tax records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. If you claim a loss from worthless securities or bad debt deduction, you are advised to hang onto those records for 7 years. If you … uh … filed a fraudulent return or no return, you should keep related/relevant documents for 7 years. The IRS also advise you to retain employment tax records for at least 4 years after the date that the tax becomes due or is paid – again, whichever is later.1

Some tax and financial consultants advise people to keep their tax returns forever, but concede that canceled checks, receipts and other documents supplemental to returns can usually be safely discarded after 3 years. (The standard IRS audit goes back three years.)

Tax records relating to real property or “real assets” should be kept for as long as you hold the asset (and for at least 7 years after you sell, exchange or liquidate the asset). These records can help you figure appreciation, depreciation, amortization, or depletion of assets with regard to the property.1 You also might want to keep receipts and tax records related to major home improvements – if you sell your home, you can show tomorrow’s buyer how much you put into the house.

Mutual fund statements?
The annual statement is the one that counts. When you get your yearly statement, you can toss quarterly or monthly statements (unless you really want to keep them). You might want to quickly glance and make sure your annual statement truly reflects changes of the past four quarters.

You want to keep any records showing your original investment in a fund or a stock, for capital gain or loss purposes. Your annual statement will tell you the dividend or capital gains distribution from your fund or stock; as you may be reinvesting that money, you have a good reason to keep that statement.

IRA and 401(k) statements?
You get a new one each month or quarter; how many do you really need? The annual statement is the most relevant. Additionally, you want to hang onto your Form 8606, your Form 5498, and your Form 1099-R.

Form 8606 is the one you use to report nondeductible contributions to traditional IRAs. Form 5498 is the one your IRA custodian sends to you – it is sometimes called the “IRA Contribution Information” or “Fair Market Value Information” form, and it usually arrives in May. It details a) contributions to your traditional or Roth IRA and b) the fair-market value of that IRA at the end of the previous year. Form 1099-R, of course, is the one you get from your IRA custodian showing your withdrawals (income distributions).2

If you are 59½ or older and have owned a Roth IRA for 5 years or more, the assets in your account become tax-free, lessening your need to save these forms. However, you will want to keep a paper trail before then – if you somehow need to make early or tax-free withdrawals or write off a loss, you need the documentation.2

Bank statements?
The rule of thumb is 3 years, just in case you are audited. But some people shred them after a year, or immediately, fearing that such information could be stolen. In certain cases, it may be wise to hang onto them longer – in case of a divorce, for example. If someone tries to take you to court in the future, or if a creditor comes knocking, you may want to refer to them. Your bank may provide you with archived statements online or on paper (but there is sometimes a fee for supplying you with hard copies).

Payroll documents?
Most financial and tax consultants advise you to retain these for 7 years or longer if you are a small owner or sole proprietor. The IRS would like you to keep them around at least that long. Again, should there be a lawsuit or a divorce or any kind of potential legal dispute involving your company or one of its employees, a detailed financial history can prove very useful.

Credit card statements?
You don’t need each and every monthly statement, but you may want to keep credit card statements that contain tax-related purchases for up to 7 years.

Mortgage statements?
The really crucial records are most likely on file at the County Recorder’s office, but it is recommended that you retain your statements for up to 7 years after you sell or pay off the mortgaged property.

Life insurance?
Keep policy information for the life of the policy plus 3 years.

Medical records and medical insurance?
The consensus is 5 years from the time treatment ends (or from the time medical services are rendered, with regards to insurance). If you think you can claim medical expenses on your tax return, then follow the IRS suggestion and retain records for 7 years following the end of the year in which they are claimed.

Kristen Chirhart is an Investment Advisor Representative. Securities offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. Investment advisory services may be offered through AIC or 20/20 Capital Management, Inc. AIC is not affiliated with Boom Planning, 20/20 Financial Advisers, LLC or 20/20 Capital Management, Inc. Additional products and services may be available through Boom Planning, 20/20 Financial Advisers or 20/20 Capital Management, Inc. that are not offered through AIC.

Kristen Chirhart may be reached at (415) 677-9500 or kristen@canvasfinancial.com. CA Insurance License #0G16691.

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.
1  irs.gov/businesses/small/article/0,,id=98513,00.html [4/8/08]
2 kiplinger.com/columns/ask/archive/2004/q0206.htm [2/6/04]

An Estate Planning Checklist

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Things to check and double-check before you leave this world

Estate planning is a task that people tend to put off, as any discussion of “the end” tends to be off-putting. However, those who leave this world without their financial affairs in good order risk leaving their heirs some significant problems along with their legacies.

No matter what your age, here are some things you may want to accomplish this year with regard to estate planning.

Create a will if you don’t have one. Who doesn’t have a will? You might be surprised. Some tremendously wealthy people have passed away without leaving a valid will. For example, Pablo Picasso and even Howard Hughes!

It is startling how many people never get around to this, even to the point of buying a will-in-a-box at a stationery store or setting one up online. A recent Lawyers.com survey of 1,022 Americans found that just 35% had wills. (For that matter, only 18% had some kind of trust.)1

A solid will drafted with the guidance of an estate planning attorney may cost you more than the will-in-a-box, but may prove to be some of the best money you ever spend. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity.

Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.

You should know that a living will is not the same thing as a durable medical power of attorney. A living will makes your wishes known when it comes to life-prolonging medical treatments, and it takes the form of a directive. A durable medical power of attorney authorizes another party to make medical decisions for you (including end-of-life decisions) if you become incapacitated or otherwise unable to make these decisions.

Review your beneficiary designations. Who is the beneficiary of your IRA? How about your 401(k)? How about your annuity or life insurance policy? If your answer is along the lines of “Mm … you know … I’m pretty sure it’s…” or “It’s been a while since …”, then be sure to check the documents and verify who the designated beneficiary is.

When it comes to retirement accounts and life insurance, many people don’t know that beneficiary designations take priority over bequests made in wills and living trusts. If you long ago named a child now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die – regardless of what your will states.2

Time has a way of altering our beneficiary decisions. This is why some estate planners recommend that you review your beneficiaries every two years.

In some states, you can authorize transfer-on-death designations. This is a tactic against probate: TOD designations may permit the ownership transfer of securities (and in a few states, forms of real property, vehicles and other assets) immediately at your death to the person designated. TOD designations are sometimes referred to as “will substitutes” but they usually pertain only to securities.3

Create asset and debt lists. Does this sound like a lot of work? It may not be. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.

  • One list should detail your real property and personal property assets. It should list any real estate you own, and its worth; it should also list personal property items in your home, garage, backyard, warehouse, storage unit or small business that have notable monetary worth.
  • Another list should detail your bank and brokerage accounts, your retirement accounts, and any other forms of investment plus any insurance policies.
  • A third list should detail your credit card debts, your mortgage and/or HELOC, and any other outstanding consumer loans.

Think about consolidating your “stray” IRAs and bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear. Let your heirs know the causes and charities that mean the most to you. Have you ever seen the phrase, “In lieu of flowers, donations may be made to …” Well, perhaps you would like to suggest donations to this or that charity when you pass. Write down the associations you belong to and the organizations you support. Some non-profits do offer accidental life insurance benefits to heirs of members.

Select a reliable executor. Who have you chosen to administer your estate when the time comes? The choice may seem obvious, but consider a few factors. Is there a stark possibility that your named executor might die before you do? How well does he or she comprehend financial matters or the basic principles of estate law? What if you change your mind about the way you want your assets distributed – can you easily communicate those wishes to that person?

Your executor should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them. Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and emotional issues among your heirs upon your passing.

Many people have the idea that they don’t need an estate plan because their net worth is less than X dollars. Keep in mind, money isn’t the only reason for an estate plan. You may not be a multimillionaire yet, but if you own a business, have a blended family, have kids with special needs, worry about dementia, or can’t stand the thought of probate delays plus probate fees whittling away at assets you have amassed … well, these are all good reasons to create and maintain an estate planning strategy.

Kristen Chirhart is an Investment Advisor Representative. Securities and Investment Advisory services sold through Ameritas Investment Corp. (AIC) Member FINRA/SIPC. AIC and Boom Planning are not affiliated. Kristen Chirhart may be reached at (415) 364-0226 or kchirhart@canvasfinancial.com. CA Insurance License #0G16691.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 financial-planning.com/news/Schenkman-lawyers-estate-2665998-1.html [3/1/10]
2 sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/11/02/investopedia6151.DTL [11/2/10]
3 raymondjames.com/branches/c2c/35C/oxleygrouprja/articles/distribution/tod_will_substitutes.pdf [2006]
4 www.montoyaregistry.com/Financial-Market.aspx?financial-market=reasons-not-to-write-your-own-will&category=30 [1/23/11]

Impact Investing (Socially Responsible Investing)

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Allocating your assets with the goal of helping the world … and your portfolio

“Do well by doing good.” You’ve probably heard that phrase. In the financial arena, it is often written or spoken in reference to impact investing – also known as socially responsible investing.

A chance to be an activist. Maybe you don’t think of yourself as an activist – you don’t take to the streets, you don’t have the time or energy to get involved on the ground in social or political causes. Well, many investors around the world are choosing to be economic activists through socially responsible investing.

The fact is, sometimes a corporation or a big business can generate large-scale environmental or social returns for a community or a region – an impact that many non-profit organizations would be hard-pressed to match. Socially responsible investing means allocating some of your investment assets across private sector change agents working for sustainability.

The demand is there and financial firms are noticing it. Many investors want to affirm sustainability through their portfolio choices. The fund companies must meet an interesting challenge as they seek to serve this expanding investor niche.

On one hand, it would seem appealing to allocate X percent of one’s assets to an emerging market fund dedicated to impact investing. You could help the emerging economy of a nation or a region with a growing middle class, and essentially cast your vote in a certain economic direction. On the other hand, many emerging market economies have lax environmental and labor regulations and poor track records when it comes to human rights – and mutual fund companies are hardly lobbyists.
Still, as of January 2011 there were 166 impact investing funds available – more than twice the selection found in 2001.1

Social returns aside … what about investment returns? A few years ago, impact investing was getting a bad rap. The word on the street (Wall Street) was that your fund choices were limited and performance was nothing to write home about. Well, is that true today?

It doesn’t appear to be. SRI funds appear to be holding their own in the market The KLD 400 Social Index – pretty much regarded as the benchmark index for socially responsible investing – posted a 1.1% price return across the past five years compared to 1.0% for the S&P 500. Some individual fund returns have been very impressive. For example, the 75-stock Huntington EcoLogical Portfolio gained 33.5% during 2009.1,2

Who sets the screens? Who determines whether or not companies meet a socially responsible fund’s criteria? Sometimes that is left up to private third-party research firms consulting the fund. This may mean that some companies you might think twice about make the cut, as their criteria could differ from yours. So you want to keep checking what you own.

You also want to see that the funds are really walking the walk. The Social Investment Forum (a Washington, D.C.-based membership organization for financial services industry firms and professionals committed to impact investing) says that just 27% of socially responsible mutual funds file shareholder resolutions or actively call for change at the companies they own. SmartMoney looked at 20 big socially responsible mutual funds and discovered that 10 had invested in oil companies.1

Consider green investing in pursuit of a triple return. Look into some of these funds and you will likely find one (or two, or more) that may meet your personal environmental, social and governance standards. Over time, they may create financial, social and environmental returns.

Kristen Chirhart is an Investment Advisor Representative. Securities and Investment Advisory services sold through Ameritas Investment Corp. (AIC) Member FINRA/SIPC. AIC and Boom Planning are not affiliated. Kristen Chirhart may be reached at (415) 364-0226 or kchirhart@canvasfinancial.com. CA Insurance License #0G16691.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations
1 –smartmoney.com/investing/mutual-funds/what-you-need-to-know-about-socially-responsible-mutual-funds-1294427152167/ [1/11/11]
2 – post-gazette.com/pg/10075/1043010-334.stm [3/16/10]
3 – montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [1/29/11]

How to Build Good Credit (and Improve Your Credit Score)

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Some little things that may make a difference in the number

740 is the new 720. If you want to refinance or buy a home or pass muster with a lender, a landlord, an insurer or even a possible employer, it will help to have a credit score of 740 or better. While the median FICO score in America is still 720, many lenders have now set the bar 20 points higher.1

Fannie Mae has also raised its requirements: FNMA used to request that you had a credit score of at least 580, and now you need a 620 or higher.1

Fair Isaac, the credit rating agency behind the FICO score, says that 13% of Americans have credit scores of 800 or better. You may not, and if your score is nowhere near that lofty mark, here are the steps toward possibly improving it.1

First, look at your credit reports. Go to annualcreditreport.com – a free, centralized online service created by Equifax, Experian and TransUnion – and request a free credit report from each of the big three consumer credit reporting firms. (You can do this once a year.) You need credit reports from each of them, because a creditor doesn’t have to report to all three credit bureaus. In fact, some community banks and credit unions may not even report your credit history to them.2

Look for any errors. Errors on credit reports are more prevalent than you may think. Sometimes information about you is years out of date or just plain wrong. Account histories can be inaccurate, and sometimes people make typing mistakes. The report will include a dispute form; you can use the dispute form to report mistakes or write a letter detailing them. Who knows – you may find something within the report that can help you boost your score.

Does it sound involved? This is actually the easy part. Some work lies ahead of you.

Stabilize your credit profile. It is true – a personal bankruptcy will stay on your credit report for 10 years, and late payments on credit cards will stay on your credit history for 7 years. Yet over time, credit bureaus generally give more to the consistency of credit payments than to disruptive events. So consistency is a key. Moderation and caution are also helpful when it comes to rebuilding your credit history. So pay attention to these instructions…2

  • Plan to solve any immediate crises in your financial life. If you can’t pay your bills, for example, you won’t be improving your credit score anytime soon. As for debts, pay off the smallest first, then the next smallest, and so forth as your finances allow in the coming months and years. Negotiate with any collection agencies and demand a statement in writing showing that you have paid in full.
  • Cutting up a credit card won’t help. While cutting up a card may feel like a clean break, it does not close your account with that credit card issuer. If you want to close an account, do it by paying down your balance, calling the issuer, confirming that zero balance, and verbally canceling the card. Then check your credit report later to see that the account has been “closed at customer’s request”.
  • Stay on the radar of credit card companies. Stopping card use may actually do you a disservice, as the FICO scoring formula favors at least occasional activity. So keep your account active, and maintain between two and four credit cards.
  • Keep balances low or wipe them out. Make every effort to pay off 100% of the balance each month.
  • Set moderate credit limits. If a credit card company offers you a card with a really generous limit or offers to raise your limit, refrain from accepting the offer.
  • Start a new savings account or build up the one you have. Creditors look for signs that you have cash reserves and that those reserves are being boosted or replenished.

Incidentally, if a lender says “no” to you, you can now learn why. At the start of 2011, a new federal law went into effect -essentially an update of the Fair Credit Reporting Act. If you apply for a loan or a line of credit and are offered clearly less favorable terms than someone with a high FICO score would get, the lender has to tell you why this happened in writing. It has to say which credit report it based the decision on and how you can obtain a free copy of it within 60 days of the notice. (Things will be spelled out even more clearly soon: as of July 21, 2011, the lender must provide you with a free credit score in the letter.)3

Credit scores can be improved. If your score is way down there, it may seem as though you are facing a mountain that will take years to climb. It may; credit scores improve gradually, and the biggest positive influence on a credit history is a pattern of consistently paying off debts and bills. There is no magic wand that will instantly and dramatically improve your score, but it is better to start the process of rebuilding your credit history today rather than tomorrow.

Kristen Chirhart is an Investment Advisor Representative. Securities offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. Investment advisory services may be offered through AIC or 20/20 Capital Management, Inc. AIC is not affiliated with Boom Planning, 20/20 Financial Advisers, LLC or 20/20 Capital Management, Inc. Additional products and services may be available through Boom Planning, 20/20 Financial Advisers or 20/20 Capital Management, Inc. that are not offered through AIC. Kristen Chirhart may be reached at (415) 677-9500 or kristen@canvasfinancial.com. CA Insurance License #0G16691.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 – money.msn.com/credit-rating/raise-your-credit-score-to-740-weston.aspx [9/21/10]
2 – bankrate.com/brm/news/cc/20011008b.asp [7/2/08]
3 – bucks.blogs.nytimes.com/2011/04/14/get-bad-loan-terms-now-youll-get-some-clues-why/ [4/14/11]
4 – montoyaregistry.com/Financial-Market.aspx?financial-market=what-is-tax-efficiency-and-why-does-it-matter&category=31 [4/17/11]

Should You Apply for Social Security Now or Later?

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When should you apply for benefits? Consider a few factors first

Now or later? When it comes to the question of Social Security income, the choice looms large. Should you apply now to get earlier payments? Or wait for a few years to get larger checks?

Consider what you know (and don’t know). You know how much retirement money you have; you may have a clear projection of retirement income from other potential sources. Other factors aren’t as foreseeable. You don’t know exactly how long you will live, so you can’t predict your lifetime Social Security payout. You may even end up returning to work again.

When are you eligible to receive full benefits? The answer may be found online at ssa.gov/planners/retire/index.html.

How much smaller will your check be if you apply at 62? The answer varies. As an example, let’s take someone born in 1949. For this baby boomer, the full retirement age is 66. If that 61-year-old baby boomer decides to retire in 2011 at 62, his/her monthly Social Security benefit will be reduced 25%. That boomer’s spouse would see a 30% reduction in monthly benefits.1

Should that boomer elect to work past full retirement age, his/her benefit checks will increase by 8.0% for every additional full year spent in the workforce. (To be precise, benefits increase by .67% for every month worked past full retirement age.)2

So it really may pay to work longer.

Remember the earnings limit. Let’s put our hypothetical 61-year-old baby boomer through another example. Our boomer decides to apply for Social Security at age 62 in 2011, yet stays in the workforce. If he/she earns more than $14,160 in 2011, the Social Security Administration will withhold $1 of every $2 earned over that amount. $14,160 is the 2011 earnings limit, unchanged from 2010.3

The earnings cap disappears at full retirement age (66 in this case). If our boomer keeps working past 66, he or she may keep 100% of Social Security benefits regardless of earned income level.3

How does the SSA define “income”? If you work for yourself, the SSA considers your net earnings from self-employment to be your income. If you work for an employer, your wages equal your earned income. (Different rules apply for those who get Social Security disability benefits or Supplemental Security Income checks.)4

Please note that the SSA does not count investment earnings, interest, pensions, annuities and capital gains toward the current $14,160 earnings limit.4

Some fine print worth noticing. If you reach full retirement age in 2011, then the SSA will deduct $1 from your benefits for each $3 you earn above $37,680 in the months preceding the month you reach full retirement age.4 So if you hit full retirement age early in 2011, you are less likely to be hit with this withholding.

Did you know that the SSA may define you as retired even if you aren’t? This actually amounts to the SSA giving you a break. In 2011 – assuming you are eligible for Social Security benefits – the SSA will consider you “retired” if a) you are under full retirement age for the entire year and b) your monthly earnings are $1,180 or less. If you are self-employed, eligible to receive benefits and under full retirement age for the entire year, the SSA generally considers you “retired” if you work less than 15 hours a week at your business.2,4

Here’s the upside of all that: if you meet the tests mentioned in the preceding paragraph, you are eligible to receive a full Social Security check for any whole month of 2011 in which you are “retired” under these definitions. You can receive that check no matter what your earnings come to for all of 2011.4

Learn more at socialsecurity.gov. The SSA website is packed with information and user-friendly. One last little reminder: if you don’t sign up for Social Security at full retirement age, make sure that you at least sign up for Medicare at age 65.

Kristen Chirhart is an Investment Advisor Representative. Securities and Investment Advisory services sold through Ameritas Investment Corp. (AIC) Member FINRA/SIPC. AIC and Boom Planning are not affiliated. Kristen Chirhart may be reached at (415) 364-0226 or kchirhart@canvasfinancial.com. CA Insurance License #0G16691.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations
1 – socialsecurity.gov/retire2/agereduction.htm [7/11/10]
2 – socialsecurity.gov/retire2/delayret.htm [8/16/10]
3 – ssa.gov/pressoffice/colafacts.htm [10/21/10]
4 – ssa.gov/pubs/10069.html [1/10]

Should You Pay Off Your Home Before Retiring?

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Before you make any extra mortgage payments, consider some factors

Should you own your home free and clear before you retire? At first glance, the answer would seem to be “absolutely, if at all possible.” Retiring with less debt … isn’t that a good thing? Why not make a few extra mortgage payments to get the job done?

In reality, things are not so cut and dried. There is a fundamental opportunity cost to consider. If you decide to put more money toward your mortgage, what could that money potentially do for you if you were to direct it elsewhere?

In a nutshell, the question is: should you pay down low-interest debt, or should you invest the money into a tax-advantaged account that could potentially bring you a strong return?

Relatively speaking, home loans are cheap debt. Compare the interest rate on your mortgage to the one on your credit card. Should you focus your attention on a debt with 6% interest or a debt with 15% interest?

You can usually deduct mortgage interest, so if your home loan carries a 6% interest rate, your after-tax borrowing rate could end up being 5% or lower.

If history is any barometer, your home’s value may increase over time and inflation will effectively reduce the real amount of your mortgage over time.

A Chicago Fed study called mortgage prepayments “the wrong choice”. In 2006, the Federal Reserve Bank of Chicago presented a white paper from three of its economists titled “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings”. The study observed that 16% of American households with conventional 30-year home loans were making “discretionary prepayments” on their mortgages each year – that is, payments beyond their regular mortgage obligations. The authors concluded that almost 40% of these borrowers were “making the wrong choice.” The white paper argued that the same households could get a mean benefit of 11-17¢ more per dollar by reallocating the money used for those extra mortgage payments into a tax-deferred retirement account.1

Other possibilities for the money. Let’s talk taxes. You save taxes on each dollar you direct into IRAs, 401(k)s and other tax-deferred investment vehicles. Those invested dollars have the chance for tax-free growth. If you are like a lot of people, you may enter a lower tax bracket in retirement, so your taxable income and federal tax rate could be lower when you withdraw the money out of that account.

Another potential benefit of directing more funds toward your 401(k): If the company you work for provides an employer match, then you may be able to collect more of what is often dubbed “free money”.

Let’s turn from tax-deferred retirement investing altogether and consider insurance and college planning. Many families are underinsured and the money for extra mortgage payments could optionally be directed toward long term care insurance or disability coverage. If you’ve only recently started to build a college fund, putting the assets into that fund may be preferable.

Let’s also remember that money you keep outside the mortgage is money that is easier to access.

What if you owe more than your house is worth? Prepaying an underwater mortgage may seem like folly to you – or maybe you really love the house and are in it for the long run. Even so, you could reallocate money that could be used for the home loan toward an emergency fund, or insurance, or some account with the potential for tax-deferred growth – when all the factors are weighed, it might look like the better move.

Think it over. It really comes down to what you believe. If you are bearish, then you may lean toward paying off your mortgage before you retire. There is no doubt about it – when you pay off debt you owe, you effectively get an instant return on your money for every dollar. If you are tantalizingly close to paying off your house, then you may just want to go ahead and do it because you love being free and clear.

On the other hand, model scenarios may tell you another story. After the numbers are run, you may want to direct the money to other financial priorities and opportunities, especially if you tend to be bullish and think the market will perform along the lines of its long-term historical averages.

No one path is right for everyone. If you’re unsure which direction may be most beneficial to you, speak with a qualified Financial Professional.

Kristen Chirhart is an Investment Advisor Representative. Securities and Investment Advisory services sold through Ameritas Investment Corp. (AIC) Member FINRA/SIPC. AIC and Boom Planning are not affiliated. Kristen Chirhart may be reached at (415) 364-0226 or kchirhart@canvasfinancial.com. CA Insurance License #0G16691.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_05.pdf [8/06]
2 montoyaregistry.com/Financial-Market.aspx?financial-market=will-you-have-an-adequate-retirement-cash-flow&category=3 [2/27/11]