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Another Twist on Roth Conversions


A Roth conversion is relatively simple. In essence, you agree to withdraw funds from your IRA today, pay the associated taxes, deposit those assets into your Roth IRA, and enjoy tax free growth and withdrawals going forward. There are, of course, numerous rules that complicate things a bit, but most people conceptually understand the process.

Before we can get to the execution phase of converting the assets, we have to be sure the strategy makes sense given our individual circumstances. Much has been written to suggest that a Roth Conversion is most palatable when you assume (or know) that your tax rates in the future (at the time of distribution) will be higher than they are today. There are a number of cases where this may be true, but here are a couple of less traditional scenarios:

With the unemployment hovering at about 9%, many Americans find themselves with far less income today than they’ve had in previous years or than they would expect to have in future years. If you find yourself laid off, or out of work for any extended period of time, you may fall within a lower than typical tax bracket. A rough outline of your 2011 tax return could yield opportunities to convert assets that would “fill” the 10% or 15% tax bracket in 2011 with Roth conversions. Essentially, if your taxable income (adjusted gross income, or AGI, less deductions and exemptions) is on pace to fall below $34,500 for an individual, or $69,000 for a married couple, there could be an opportunity to convert at lower tax rates than you will have later in life.

We often engage retired clients in the Roth conversion discussion. There are a number of reasons why retired clients’ tax rates could rise- the introduction of social security, required IRA distributions at age 70.5, the onset of pension plan benefits down the road, or a change in fiscal policy to name a few. But the more subtle justification is one that I have read little about, which deals with the survivorship issues for married clients. 

When a married couple enjoys retired life together they are typically subject to tax rules based on both spouses sharing a return. When the first spouse dies those rules change, and the amount of income allowed in each tax bracket is cut in half! The problem lies in the reality that income often doesn’t dramatically change. While the surviving spouse loses the smaller of the two Social Security checks, they retain the larger. Pension income will likely change, but many clients will choose survivor options for their pensions that leave up to 50% of the deceased spouse’s benefit on the living spouse’s return. If the couple had dual pensions, the surviving spouse may actually see an increase in their own pension, given they no longer have to pay for their own survivor benefit. And, finally, IRA income may not change much at all, especially if the couple is already subjected to required minimum distributions (RMDs). The surviving spouse will simply inherit the IRA balance of the deceased spouse, roll it into their own IRA, and have their personal RMD calculation applied to the combined balance.

We try to identify this planning opportunity long before it exists. We do tax planning each year for all of our retired couples to see if we have room in the lower tax brackets to complete Roth conversions. We have found that the optimum time to execute this strategy is early in retirement, leading up to the point when RMDs begin. For example, we may be able to convert a fair amount of assets in the years before Social Security begins, and complete smaller conversions in a couples’ late 60’s leading up to RMDs.

You could extend this same logic for couples that are willing to pay taxes at their rates today in order to provide Roth IRAs for their heirs, who presumably will have higher tax rates in the future. But we will leave that conversation for another day!

The truth is there are few rules of thumb in financial planning. If you think Roth conversions might fit within your tax planning, be sure to understand all of the nuances, both for Roth conversions themselves and for the general tax rules of various income types (specifically Social Security). Or better yet, seek advice from a financial planner or tax professional. Taking advantage of these opportunities when they exist can make a big difference in your life, your spouse’s life, or the life of your heirs in the future.

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN


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Does ‘I DO’ Have to Break the Bank?


I am, admittedly, curmudgeonly when it comes to weddings. I have the personal opinion that young couples go incredibly overboard when it comes to their “big day”. I wasn’t any happier, or more in love with my wife, because hundreds of people were able to witness an incredibly personal moment. But, as is often the case, my bride to be 12 years ago had a vision in her head of what “getting married” looked like, and it involved quite a few people I had never met!

It isn’t that I don’t enjoy seeing people being happy, or even that I don’t enjoy a good reception following the big event. For me it is simply too much grandeur, too much cost.  Brides Magazine 2011 American Wedding Study reports that the AVERAGE wedding now costs $26,501! And that is down $1,500 from 2009! Staggering!

I know I have no chance of convincing the brides of the world to drop the pomp and circumstance and tone down the fairy tale wedding they have been planning since they were teens. But I am going to share with you how I would have handled things differently if I had it to do over, though I really hope I don’t get that proverbial second chance!

  • Consider the alternatives- I know you have the vision in your head of the big ceremony followed by the raucous party at the ballroom or country club. But at least examine what a more subdued wedding might look like. What if you did it on an off-day? What if you had a less formal, less costly reception? How would you really feel in a private ceremony where you and your spouse-to-be could focus on each other, rather than worry about all of the chaos that comes with a larger affair? Do both the bride and the groom want to get married in front of 350 people (and pay for the reception to follow)?
  • Focus on the rest of your life, not one single day- Imagine if a bride and groom spent as much time planning their lives together as they do planning a one-day party. Imagine if they didn’t start their new lives together $10,000, or $15,000, or $25,000 in debt just so they could invite everyone they know to share in their “big day”. It is my opinion that more couples need to focus on how to integrate two financial lives into one; on how the monthly budget will work; how much they can save monthly, to where that money should be saved, and what their new goals and objectives, hopes and dreams are now that they have more than themselves to consider. We have all heard the divorce rate statistics in the US, and know anecdotally that finances play a major role in many of those divorces. How could those statistics change if we spent a bit less time picking out dresses, tuxedos, cakes, and a menu for 300?
  • Be realistic about your budget- If you have to have a big, traditional wedding, spend some time developing the budget. And then stick to it. Can’t afford to invite 475 people? Don’t! Choosing between a $1500 cake and a $450 cake? Take another bite! Do you really need a $15,000 party after you say “I Do”? Really?  Over-exaggeration, you say? The same Brides Magazine study referenced above reports the AVERAGE reception cost in 2011 will be a whopping $13,367! I have never had $13,000 worth of fun at wedding!I had a conversation with a client a few years back as she began helping her daughter plan a wedding. She had a sense that the budget was bloated, and that there must be a less expensive way to proceed. In conversations with her neighbors (she lived in a posh suburb of Minneapolis), she was told you could hardly do anything for less than $25,000, but that you could easily spend twice that much. I quietly chuckled. My wedding day didn’t cost anywhere near $25,000……by design! Another client is currently working through planning a wedding with their daughter. They are being very deliberate in using this as an opportunity to teach budgeting and financial skills, with an eye towards the long-term future of the new couple-to-be. 
  • Don’t discount the impact a wedding can have on family- Many young couples rely on parents to fund some (or all) of the cost. As a father whose daughter has him firmly wrapped around her finger, I would find it hard not to go above and beyond in helping with wedding costs. But what would the impact be on my personal finances? We have talked to many a client where such financial support is barely noticeable. But we have dealt with equally as many for whom it has a big impact on their liquid cash or long-term planning. Especially when you consider that many parents are just starting to recover from the educational funding they provided for their children. Parents might not say no, but it can be an awkward position in which to sit.

I recognize that I am a member of the largely ignored male demographic on this particular topic, but I have a sincere hope that the trend on wedding costs will continue to decline. I am not sure I will ever see the need for all that a wedding entails. I also recognize that happiness is best achieved through experience, and that weddings can offer one of the best. That is until the credit card bill comes due the following month!

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN


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Summer Learning Opportunities


Most School Districts in Minnesota begin their school year after Labor Day. This is traditional in a state that has limited warm weather months and depends on tourism for a portion of its annual economic output. A later start to the school year also means that most Districts don’t release the kids for summer vacation until early June. Such is the case last week for my three kids.

We all have visions of, and memories about, the “last day of school” from our youth. The excitement, freedom, and potential of a summer are emotions many miss as they enter the “real world” and work for a living. But as I look back at my own summers past, it becomes apparent that our children’s education does not need to end once those school doors close. Here are a few possible learning opportunities to assist your child with this summer:

  • Work Ethic- Summer is a time to relax, recharge and enjoy the simple things in life. But it can also be a time to get outside, roll up your sleeves, and begin to develop the work ethic you take with you into adulthood. Give your kids some responsibilities, and teach them to take pride in their work. From things as small as walking the dog or mowing the lawn, to actual summer employment for the teen crowd, balancing work responsibilities with a social life is a valuable skill to learn. And there is no better time than when you are free of homework and school projects.
  • Value of Saving- If your child is earning money in the summer- be it from an at-home allowance, neighborhood mowing gig, or actual employment- talk to them about how the income should be handled. Much of this bounty can be spent on all there is to do in the summer, but some should be put away for future use. Have your child start their own savings account. You could possibly put a matching formula in place to represent how things may work when they are in their full-time jobs. But the saving habits they build today will serve them well in the future.
  • Experiences vs. Material Goods- Numerous studies show that happiness, as hard as it is to define, is best achieved through experiences and less attainable with material goods. Family vacations, time at the lake, a day at the waterpark, or a picnic in nature can all leave lasting impressions that the latest gadget can’t compete with. Plan experiences with your family and friends, and encourage your kids to forgo the impulse buys at the department store to give themselves opportunities for experience at a later date.
  • Balance in Life- a culmination of all of the above, finding the right balance between work and play, saving and spending, the material and non-material is a lifelong pursuit. Talk to your kids about the financial decisions you are making, and how they might model their own behavior accordingly. How did you prepare for your family vacation? Why is your family lake place so important? How do you balance your time between work and play? Your kids will listen, and learn, along the way. Get out and spend time with your family this summer, for soon the kids will be grown and those opportunities will fade.

We all know the main goal of summer vacation is to relax, hang with friends, and be “free.” But if you can sneak some of these lessons in on your children it may help prepare them for the life they will live all too soon!

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN


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The End of a Life


It is incredibly difficult to make those phone calls. The call to someone’s sibling, child, parent, or friend to pass along the sad news that a person they have known and loved for years is gone. Whether the death is sudden in nature or follows a prolonged battle with a devastating disease, nobody is really prepared for the finality of death. 

At the beginning of April, my wife lost her father after an almost 2 year battle with pancreatic cancer. By many accounts it is a story of success that a 70 year old man was able to hold off the “inevitable” for so long. We have a great support system made up of family and friends, and that made the weeks that followed much easier to handle. 

Unfortunately, this wasn’t our first experience with planning a funeral, or handling an estate. But it was our first time witnessing the end as it arrived – of seeing first hand how devastating it is to watch somebody fight valiantly through the final years, months, days or hours of their life. Of being forced to cope with the various emotions experienced by all during the fight for life.

Certainly we would rather not have to watch anybody else we know go through a similar battle, but the odds are against it. Hopefully some of our observations will be of help the next time, and to others in their own lives.

Preparation can be useful for all involved, but doesn’t fully prepare a family for the emotional toll. As a financial planner, I talk to my clients about the proper documents for these very situations. A Durable Power of Attorney will name the person you would prefer act on your behalf financially. More important in this case, a Health Care Directive, or Living Will, will spell out your desires for the medical care you would like to receive, or not, if you can’t effectively communicate with your doctors, and will also name someone to ensure those wishes are followed. But when staring death square in the face, how likely is it that your loved one will second guess their initial feelings? Will they suddenly change these documents to protect the life they are fighting for? How, as part of their support system, will you guide and support these internal questions? These aren’t questions of judgment. They don’t have a right or wrong answer. But they are questions that will define how everyone involved experiences an already difficult situation. Open and honest communication is critical because……..

By definition, we have never died before! A shockingly obvious statement until you live through it. There were days of frustration, anger and fear in that two year fight. Frustration, anger and fear on the part of my father in law as he came to grips with the reality he was facing. Frustration, anger and fear on the part of my wife and her family as they tried to offer support. There were days when my wife would come home after a long day in hospitals, or in chemo sessions, or after surgeries and admit that amidst the concern for her father was a sense of frustration at how he was communicating with her, how he was treating those around him, and at a perceived lack of acknowledgement on his part that things weren’t well. But our reality was that we had never faced our own death before. How could we really know the emotions he must have felt? How scared he must have been? It was our job to be at his side, to communicate with him frankly and honestly, and to support the decisions he would make for his own well being. Each of us will deal with our own mortality in a unique way. I suspect we all hope those around us will be there regardless of our choices!

Familial strength can be measured in tough times. We have all heard horror stories about families split apart during an estate resolution, or as they fight about what care should be received by their loved one. Our experience was ultimately positive. It would be a lie to say that my wife and her siblings agreed on every aspect of care. But the communication lines were open and the discussions were honest. When it came time to advocate for hospice care, they came together, with doctors in agreement, and discussed this with their father. It was 3 days from hospice admittance to his last breath. While you never feel good about the decision to say “it’s time”, having those you love around you to share in the decision making is incredibly important. Having the courage and ability to communicate effectively is essential in ensuring that the future of those relationships remains strong.

There is no way to truly prepare for the death of a loved one. We all know about the oft discussed estate planning preparations that can be made. But life and death can’t truly be defined in documents. Human beings aren’t that simple. The complex range of emotions and personalities of patients and families make each scenario unique and challenging. Real preparation comes in the form of open communication well in advance of, and during, the tough times.

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN


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It’s Time for Spring Cleaning!


It’s that time of year in the Great White North. The days are getting longer, the sun stronger, and temperatures are slowly starting to climb above those found in your home freezer. As the spring thaw begins, those of us who choose to subject ourselves to winter every year feel that “itch”. The itch to get outside without a white blanket on the ground;  the itch to trade parkas, hats and mittens for shorts and t-shirts; the itch to open the windows in the house, even if it is ‘only’ 45 degrees, and get some fresh air into our abodes. 

But there is one caveat to the joys of spring- spring cleaning! After being stuck indoors for the better part of 4 months, who wants to spend a whole weekend, or series of weekends, freshening up the house? Sadly there is work to be done. Winter clothes to be put away and spring clothes to bring out. Windows to wash, floors to scrub, screens to spray out, and a winter’s worth of dust bunnies to corral. 

Truth be told spring cleaning isn’t that bad (just don’t tell my wife I wrote that). After all, spring brings rain showers and sloppy yards. Outdoor activities remain somewhat limited when this occurs, and one might as well stay busy. Once the more traditional cleaning is done, why not turn your focus to a financial spring cleaning of sorts?

There may be no better time of year to spend a day reviewing your financial life. You are caught between the festivities of the Holiday season and the activities and travel of late spring through summer. You likely have much of the financial information put together for your tax preparer, and you still have enough time left in the year to make any necessary adjustments worthwhile.

So what might a spring financial cleaning session entail?  Consider:

  • Taxes- Most Americans are a month away from filing their 2010 tax return. Once the return is finalized you will have the opportunity to review your progress on the current year. Are your withholdings appropriate? If you received a refund for 2010, or if you had a larger than expected tax bill, you may wish to reduce or increase your 2011 withholdings accordingly. If your CPA made estimated payment recommendations, you can look at your budget to see how they will fit in. Beyond your income taxes, this is also a good time to review your annual property taxes. If you don’t escrow your tax payment each year, have you secured the necessary funds to make your May payment? October payment? Have you reviewed your tax assessment to ensure the valuation is fair? If not, what is your recourse?
  • Income- You have the opportunity to review your W2s to see what your overall income was in 2010, and project if you think 2011 will be similar. This will help in the tax planning noted above, but can also help you review budgetary and savings goals. Many of our clients who receive annual bonuses receive it about this time of year. A review of the year’s expectations can help you plan the various uses of that income.
  • Expenses- Now is the right time to review the annual budget. The arrival of spring brings lower energy use in the home, and less of the monthly budget will be dedicated to the heat and electricity bills. Where should that money be diverted to? Are there expenses poised to take their place or can you save slightly more for the next 7-8 months? This is also a good time to think ahead to summer. When people ask me how many kids I have, I simply answer, “I have two hockey players and a daughter”. It isn’t that my daughter couldn’t be a hockey player, she just isn’t. I am now starting to write checks for the summer clinics, camps, and sports teams my two sons will play on. This takes some forethought and planning, and should be put into context with the rest of our annual budget. Plus, paying attention to these expenses now can better prepare me for the same expenses next year. Summer will also bring travel for my family. It will be useful to take stock of what we currently have saved, and what is left to be done before we hit the road. Sometimes I wish vacations weren’t so much work!
  • Investments- If you are managing your own portfolio this might be a good time to ensure you have the proper risk level for your needs. Rebalancing once per year is often enough, and now is the time to review your allocation, especially after another good market year in 2010. You might find the world, and your investment outlook, has changed. You have an opportunity to re-tool your savings to better reflect what you expect going forward.
  • Insurance and Estate planning- As long as I am spending time looking at my complete financial picture, why not review my insurance policies and estate plan to be sure they are in order. Do I have the appropriate property and casualty coverage? Life insurance coverage? Should I shop for more cost effective policies? Does my will still meet my needs and desires? Is my Durable Power of Attorney and Health Care Declaration still as I would like it?

Whether you are a do-it-yourselfer, or you work with a planner, take advantage of the blossoming season to cultivate and refresh your financial life.

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN


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Financial Planning is Not a Wanderer’s Game!


I have always been a bit of a wanderer. From the day I received my driver’s license, I have enjoyed simply strapping into the driver’s seat and finding new territory. I started out by learning some of the back roads within the area where I live, driving through the countryside for hours. Since then I find myself cruising back roads in the more remote areas of Northern Minnesota looking for things I haven’t seen before. As task driven as I can get in my day-to-day work life, something about the exploration involved in the journey outshines the thought of where the final destination might be.

This type of wandering is not without its pitfalls. I have been lost, stuck, and high centered on logging trails miles from home. As a teenager, a friend and I slid into a ditch in the middle of winter on a forest road and thought we might have to spend the night, finally getting pulled out as the sun went down. On a solo trip on another remote road the weight of the vehicle was too much for some ice on a large puddle to handle, and I ended up knee deep in 33 degree water pulling “icebergs” out from under the car before a call for help yielded rescue. Obviously none of these mishaps resulted in disaster, and none have dampened my explorer mentality.

But there are some instances in life where “wandering” is less appealing, and your financial planning is one such example. You don’t have to have a map that details every financial decision, or destination, in your financial future. In fact, flexibility and adaptability is essential to any plan, as life has a way of throwing in some key inflection points that will test your original plan of action. But it does help to have a general sense of why you are planning in the first place, or more succinctly, what you consider your life’s goals to be.

Goal setting is the first stage of any good financial plan. Whether you are working with a planner, or decide to do-it-yourself, developing your key strategies and tactics will rely on some consideration for what your short-, mid-, and long-term goals will be. They might be as specific as “I want to send my kid to an elite college in 12 years”, or as general as “I want to be financially independent in my early fifties”. 

Goals vary widely based on personality and lifestyle. For those who are married or have a partner, deep conversations with your significant other can be messy and enlightening at the same time. It isn’t rare to find a husband and wife, while discussing goals in their initial meetings, to have different visions of their joint future. In fact, often one spouse will hear another express a goal that surprises them. But this exercise is essential in moving forward to really figure out what is important in life. Whatever your situation, don’t calculate your savings needs, life insurance assessment, or education needs without due respect to goal setting.

Shockingly, most clients we meet with haven’t given much thought to what they truly want from their futures. Too often we find people give “expected” answers while not really fleshing out what “retirement” or “financial independence” means. It is amazing to me the lack of imagination shown when talking about what really makes one happy, and how willing they are to “settle” or sell themselves short in these discussions. Don’t be afraid to dream in your goal setting exercise, and at times to dream boldly!

As cliché as it might sound, money is a means, not an end! It is up to you to dream and define what that end might be and shape your financial plan, and your financial resources, to achieve your life’s goals. If you wander through the financial landscape, you might accidentally reach your Valhalla, but that isn’t a journey that offers the greatest chance of success. Take the time to find and set your goals and you increase your probability of success.

Oh, and keep that cell phone handy! I may need you to pull me out of a tough spot on my next adventure.

Mike BranhamMike Branham, CFP®
Financial Planner
Cornerstone Wealth Advisors, Inc
Edina, MN

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