Sizing Up Stocks: All About Market Caps

38970096 - planning, risk and strategy in business, businessman gambling placing wooden block on a tower
For investment purposes, companies generally can be categorized in one of three broad groups based on their size — large-cap, midcap and small-cap. “Cap” is short for market capitalization, which is the value of a company on the open market.
To calculate a company’s market capitalization, you’d multiply its stock’s current price by the total number of outstanding shares. For example, if a company issues one million shares of stock trading for $50 each, its market capitalization would be $50 million ($50 times 1,000,000 shares).
Although there isn’t one set framework for defining the different market caps, one widely used source – Standard & Poor’s – currently describes each segment as follows:

  • Large-cap generally represents top companies in leading industries of the U.S. economy.
  • Midcap generally represents a phase in the typical business life cycle in which firms have
    successfully navigated the challenges specific to small companies. At the same time, midcaps tend to be quite dynamic and not so large that continued growth is unattainable. Thus, the midcap segment may offer aspects of the markets not covered by the large-cap and small-cap worlds.
  • Small-cap generally represents a segment of the market that is characterized by less liquidity and potentially less financial stability than that of large caps.
    The Risk/Return Factor
    Given these parameters, it generally follows that a stock’s market cap may have a direct bearing on its risk/reward potential. Recognizing this relationship is important when making decisions about which investments to choose for your long-term portfolio.
    For instance, investments in large-cap stocks may generally be considered more conservative than investments in small-cap or midcap stocks, potentially posing less risk in exchange for less aggressive growth potential. In turn, midcap stocks generally fall between large caps and small caps on the risk/return spectrum.
    Small-cap companies may be vulnerable to the intense competition and uncertainties of untried markets. On the other hand, small-cap stocks may offer growth potential to long-term investors who can tolerate volatile stock price swings in the short term.
    A standard method of gauging the performance of an investment is to measure its returns against those of an index representing similar investments. As with stocks, indexes come in all sizes and shapes. As their names suggest, the S&P 500®, S&P MidCap 400® and S&P SmallCap 600® indexes are commonly referenced representatives of large-cap, midcap and small-cap stocks.
    Selecting the Right Combination
    So what does a company’s size have to do with your investment strategy? Quite a bit. That’s why some investors choose to diversify, maintaining a mix of market caps in their portfolios. When large caps are declining in value, small caps and midcaps may be on the way up and could potentially help compensate for any losses.
    To build a portfolio with a proper mix of small-cap, midcap and large-cap stocks, you’ll need to evaluate your financial goals, risk tolerance and time horizon. A diversified portfolio that contains a variety of market caps may help reduce investment risk in any one area and support the pursuit of your long-term financial goals. However, there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

    And Baby Makes Three

    photo of newborn baby feet
    Starting a family can be one of life’s most fulfilling experiences. It can also be among the most expensive.
    According to statistics compiled by the U.S. Department of Agriculture, families in the United States could spend well above $200,000 for food, shelter and other necessities to raise a child through age 17–and that doesn’t include college!
    As you consider your growing family’s financial needs, take a look at some key areas to address before and after your new child comes home. This handy checklist can help you get a head start on planning.
    Begin Budgeting

  • To be baby ready, you’ll need some basics: a crib, changing table, car seat, carriage, infant clothes and more. Also, factor in the costs for any home renovations you may want, like a nursery room or bathroom upgrade.

  • Paying for medical care can increase your monthly spending; prepare to cover any copays for visits to the pediatrician, for example. Also consider the need for baby food; new clothing as the baby grows; diaper services or supplies; and, eventually, potential expenses for child care, babysitting and preschool.

  • Think about how your income might change if you, your spouse or both of you choose to reduce your work hours. Compare the benefits and costs of stay-at-home parenting with paying for child care.
    Review Your Health Insurance Coverage

  • The medical costs of bringing a new life into the world can add up and insurance coverage varies widely. Check with your healthcare provider or human resources office about any copayments, coinsurance and/or deductibles you can expect, and be sure that you’ve met all the terms of the insurance contract.

  • Determine whether your preferred obstetrician and pediatrician will be considered in-network or out-of-network for insurance reimbursement and referral purposes. A provider’s status in your insurance plan may affect not only your out-of-pocket costs but also your access to hospitals, imaging centers and laboratories.

  • Many policies have specific procedures for adding coverage for dependents. To be sure that you have uninterrupted coverage for your new addition, check with the company beforehand.
    Explore Employer-Sponsored Benefits
    As a starting point, determine whether the birth of a child is considered a qualifying life event (QLE) by your employer. If so, normal open enrollment restrictions may not apply. Then, if available to you, consider the following benefits:

  • A health savings account (HSA). A HSA may allow you to accumulate health care reserves on a pretax basis to pay for future medical expenses.

  • A dependent care flexible spending account (FSA). This benefit, if offered, lets you set aside money each pay period on a pretax basis to pay for qualified child care expenses. Take care to contribute only what you are sure you can use each year because any money remaining in the account after the benefit period ends generally would be forfeited.

  • Maternity/paternity leave. Companies must generally offer their employees some time off around the birth of a child. Your human resources or personnel office can explain your benefits and how to qualify for them.

  • Job sharing and telecommuting opportunities. Caring for a newborn is a lot of work. If you are considering adjusting your time on the job, look into these potential options.

  • Adoption benefits. If you are adopting a child, you may be eligible for an adoption credit, and/or your employer may provide qualified adoption assistance that is potentially excludable from your gross income.
    Review Existing Estate Plans

  • Be sure your new child is accounted for in your will and in your spouse’s will. If you assigned shares of anything by percentage, make sure those percentages are updated to reflect your intentions.

  • If you have existing guardianship arrangements, be sure to explicitly include your new child. Consider designating a guardian if you have not done so.

  • Be sure that any retirement account beneficiary designations accommodate your new child’s interests

  • A new family member means a potential new life insurance beneficiary. Are your beneficiary designations up to date? Do you and your spouse both have enough insurance coverage to accommodate your growing family?
    Begin Saving for College
    Given the high cost of a college education, it’s probably not an overstatement to say you can never start saving too soon. Here are a few tools that can help:

  • A 529 college saving plan offers you generous contribution limits, flexible withdrawal rules and potential tax savings.

  • A custodial account may offer potential estate tax and gift tax planning benefits.

  • A Coverdell education savings account can be used to fund certain elementary school, high school or college expenses.
    Doing advance planning on a number of financial fronts can help ensure that your new addition to the family has a smooth and secure start in life.
    1Asset allocation does not assure a profit or protect against a loss. Rebalancing a portfolio may create a taxable event if done outside a retirement account. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.
    To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity

    Your Financial Life: A Month-by-Month Guide

    Your Financial LIfe - A Month By Month Guide
    Every year, millions of Americans resolve to get their financial house in order. Then, as the year slips away, so do their good intentions. Sound familiar? If so, don’t give up. Maybe you just need a different approach.
    This month-by-month financial checklist focuses on specific financial tasks. If you manage to accomplish just a few of them, you should be in better shape financially and have more control a year from now.
    The Winter Months

    • January–Reviewing and updating your budget at the beginning of the New Year can get you off to a good start. Evaluate last year’s income and expenses and adjust your plan accordingly. Try to revisit your budget throughout the year to see how much progress you’re making or to identify areas where you need to improve.
    • February–By February you should have your Form W-2 from your employer(s). Gather the rest of your tax documents–property tax receipts, mortgage interest, donation receipts, etc.–so you’re ready to meet with your tax advisor as soon as you have all your information. If you’re getting money back, filing in advance of the April deadline can mean an earlier refund.
    • March–This might be a good time to check your retirement and other investment portfolios and compare their performance with a benchmark index. And if your asset allocation has changed, rebalancing can bring it back to its original mix.

    Spring Ahead

    • April–Federal income tax returns are due on or around April 15. If you are expecting a tax refund, consider directing the extra money toward your retirement. Every little bit can add up. Remember, you have until the tax filing deadline to contribute to an individual retirement account (IRA) for the prior year.
    • May–Consider designating May as “check your credit report” month. You’re entitled to one free credit report annually from each of the three major credit reporting agencies: TransUnion, Experian, and Equifax. Check all three reports at the same time or at different times throughout the year. Log on to AnnualCreditReport.com to stay on top of changes or suspicious activity.
    • June–In June, review your estate plan, beneficiary designations, and the individuals you’ve named as executor and as guardian for your minor children. Changes in your family situation might require adjustments to your plan.

    The Good Old Summertime

    • July–July is a good time to schedule an appointment with your financial professional to check that you’re on track with pursuing your goals. Summer is also a good time to start teaching your children valuable lessons about money. Help them establish a savings account at your local bank and encourage them to set aside money each month for wish-list purchases.
    • August–Make sure your summer fun didn’t upend your budget with a review of your credit card accounts and personal loans. If you’re not making progress with reducing your debt, come up with a plan to pay down your balances faster.
    • September–September is Life Insurance Awareness Month, so review your coverage to make sure it’s adequate for your family’s needs. Check your disability coverage as well, and consider the need to supplement any employer-provided coverage you may have.

    Fall Into Good Year-End Habits

    • October–October is generally the time for reviewing employee benefits and making choices for the coming year. Contributing to a health savings account (HSA) or flexible spending account for health and/or dependent care can potentially lower your tax bill.
    • November–Begin year-end tax planning by November to take advantage of strategies that may help minimize your income tax obligation. Waiting too long can deprive you of opportunities. As part of your assessment, consider your investments. Holding on to investments in a taxable account for more than one year will typically qualify you for a lower tax rate when assets are sold.
    • December–Consider donating to charitable organizations before year-end. Contributions charged to a credit card or paid by check by December 31 may be deductible on this year’s tax return.

    Skin in the Game: Getting Kids Involved in College

    Getting kids involved in college planning may be an excellent way to teach responsibility to young people — a lesson that could reap benefits well beyond their college years. Children can earn money, learn about sources of financial aid, research potential colleges and take other steps that may relieve their parents of some of the responsibility of college planning.
    Starting Early
    According to the U.S. Department of Education, the best time to introduce children to college planning is when they are in middle school, typically grades six through eight.
    You may want to initiate discussions about college, explaining the importance of developing good study habits and instilling the idea that your family supports higher education.
    You may also want to encourage your children to begin thinking about the career they would like to pursue, which is likely to influence their choice of college, as well as to establish a savings account that could be earmarked for education expenses. In addition, you can teach basic lessons about compounding, investing and other money management issues.
    When students are in the latter part of middle school, they can also start planning to make the most of high school experiences with an eye toward college. Remind your budding scholar that success in high school depends on skills and attitudes that are developed in middle school or earlier. You can help your child plan for college by assisting him or her with developing a realistic budget.
    The chart below gives a general idea of the average current annual cost of attending a four-year public versus four-year private college.
    Kids in College
    Match Involvement to Age, Grade Level
    Young people can assume varying levels of responsibility for college planning depending on their age and interests.
    Consider the following if you are looking to get a middle or high school student involved.
    6th to 8th Grades
    • Continue good study habits
    • Enhance computer and Internet skills
    • Participate in arts activities or sports
    • Start saving money
    9th to 10th Grades
    • Enroll in college-preparatory classes
    • Establish high academic standards
    • Research careers that match personal aptitudes
    • Learn about college costs
    • Identify prospective colleges
    • Research financial aid and scholarships
    • Set aside money from babysitting, yard work, or other odd jobs for college expenses
    11th to 12th Grades
    • Get a part-time job and continue saving for college
    • Visit colleges of potential interest
    • Take the Scholastic Aptitude Test and/or the ACT® assessment
    • Enroll in advanced placement classes, if available
    • Apply to colleges and for financial aid
    This article was prepared by Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

    Company stock in your 401(k)? What Retirement Investors Need to Know

    Owning company stock in your employer-sponsored retirement plan is not necessarily a bad thing. Company stock can potentially help employees profit from a company’s success and even provide tax benefits. But holding company stock can present unique risks, particularly if the stock allocation represents a large percentage of your total retirement plan assets.
    Let’s consider the case of Enron which, although occurring long ago, still raises some valid points. Enron filed for bankruptcy late in 2001 after struggling for months with mounting losses and debts–as well as questions about its accounting practices. At the time, it was the largest corporate bankruptcy in U.S. history. Because more than half of the assets in Enron’s retirement plan were invested in the firm’s stock, the result was devastating. As the share price sank, so did the balance in many employees’ retirement plan accounts. An estimated $1 billion was lost among about 15,000 accounts.
    Additionally, the collapse of companies like Lehman Brothers in 2008 caught the attention of millions of American workers who have company stock in their retirement plan accounts. With their own futures in mind, they have started asking some important questions.
    What Can I Do?
    Following are some steps each of us can take to evaluate our own situation.
    Know your plan–Brush up on the rules that govern your employer-sponsored retirement plan. Is company stock an investment option? Does your employer make matching contributions in the form of company stock? Are there rules governing management of the stock within your account? You can request a Summary Plan Description, which details the rules. Ask your employer to clarify any rules you don’t understand.
    Consider your share of company stock–If you do own company stock through your employer-sponsored retirement plan, what percentage of your total assets does it represent? The ideal allocation for you will depend on your goals, time horizon and risk tolerance, factors you may want to review with a financial professional.
    Review your overall investment strategy–Take a look at your strategy for investing through your company plan. How much do you contribute and what investment options are you using? If your employer already matches your contributions with company stock, you may not want to invest additional money in it.
    You also might want to consider investments with holdings that differ from your company’s stock–a strategy called diversification.1 If your company stock is a growth stock, for example, you might want to think about a fund that invests in value stocks. Or if your company is a retail company, you might want to look for funds that invest in other industries and sectors that may perform differently. The benefit of diversifying is that if one investment declines in value, others can potentially increase in value and help offset potential losses.
    Consider your other investments. Do you invest in an individual retirement account (IRA) or other retirement savings account? Does your spouse have a retirement plan of his or her own? It’s important to look at the investments in those vehicles and determine whether they complement your plan investments. If you can’t control the level of diversification in your own plan as much as you’d like, you may be able to enhance your level of diversification elsewhere.
    Evaluate your options
    While Enron and other company collapses have raised valid questions about owning company stock, you may still want to consider taking advantage of your plan. A matching contribution of company stock may be better than no matching contribution at all. Conduct a comprehensive review of your plan assets, your investment strategy and your investments outside of your plan. And given the important role these assets are likely to play in your financial future, be sure to consult a professional before taking action.
    There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Amounts in mutual funds are subject to fluctuations in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.
    The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
    Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

    Your Piece of the American Dream: Buying a First Home

    buying a homeFor many people, buying their first home represents the biggest financial commitment they’ll ever make. Before making such an important decision, you should consider a variety of factors starting with whether home ownership is right for you.
    When considering this question, it may help to view the ownership decision as a lifestyle choice first, and a financial decision second. While over time, buying a home can potentially be a good way to build equity, history has shown that, like many other investments, real estate prices can fluctuate considerably. If you aren’t ready to settle down in one spot for a few years, you may want to defer buying a home until you are. But if you are ready to take the plunge, you’ll need to determine how much you can afford to spend.
    How Much House Can You Afford?
    Most people, especially first-time buyers, must take out a mortgage to buy a home. To qualify for a mortgage, the borrower generally needs to meet two industry-standard ratio requirements: the housing expense ratio and the total debt ratio.

    • The housing expense ratio compares basic monthly housing costs to the buyer’s gross monthly income (before taxes and other deductions). Basic costs include mortgage payments, insurance and property taxes. Income includes any steady cash flow, including salary, child support or alimony payments. For a conventional loan, your monthly housing cost generally should not exceed 28% of your monthly gross income.
    • The total debt ratio is the percentage of income required to service all of your monthly debt payments. Monthly payments on student loans, installment loans and credit card balances, for instance, are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, generally should not exceed 36%.

    In addition to qualifying for a mortgage, you will likely need a down payment. Down payment requirements generally vary from a minimum of 3% to 20% or more depending on individual factors. Down payments greater than 20% generally exempt you from buying private mortgage insurance and may help you secure a lower interest rate. Mortgages available to some military veterans and active duty military personnel through the Veterans Administration (VA) may require no down payment.
    Closing Costs
    Closing costs vary considerably, but typically add between 2% and 7% to your purchase price. Such costs can include–but are not limited to–a home inspection, loan origination fees, up-front “points” (prepaid interest), application fees, an appraisal fee, title search and title insurance, homeowner’s insurance, recording fees and attorney’s fees.
    Operating Costs
    In addition to mortgage payments, there are other costs associated with home ownership. Home association fees, utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping and replacement of appliances are some of the more common costs incurred. Check the actual expenses of the previous owners and make sure you know how much you are willing and able to spend on such items.
    Once you’ve determined a price range and location, you’re ready to look at individual homes. Remember that much of a home’s value is derived from the values of those surrounding it. In addition to “comparables,” consider the neighborhood, schools and other qualities that may be attractive to future buyers as well as those attractive to you. The more research you do today, the better your decision will look in the years to come.

    Comparing Apples to Apples: Understanding Common Market Benchmarks

    Stock-Market-watchThe dictionary defines the word benchmark as “a point of reference from which measurements may be made.” In investing, benchmarks–or market indexes–are used by investors, portfolio managers and market watchers to track how a particular asset class or sector performs and to compare relevant investments to that measurement.

    Each market index tracks a representative sampling of stocks, bonds or other securities that may be similar to the holdings in a given investment portfolio. In order to use benchmarks accurately, you should always compare apples to apples. It helps to be familiar with a variety of benchmarks and the sectors and asset classes they track.

    A Variety of Measures

    Following are some of the more popular and widely used indexes:

    • The Bloomberg Barclays U.S. Aggregate Bond Index tracks the investment grade, U.S. dollar- denominated, fixed-rate taxable bond market.
    • The 10-Year U.S. Treasury bond is issued by the Treasury Department with a 10-year maturity. It is the most popular type of U.S. Treasury debt and is often used as a barometer for the overall U.S. economy.
    • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities.
    • The Dow Jones Industrial Average® is a price-weighted measure of 30 U.S. blue-chip companies.
    • The NASDAQ Composite Index measures all domestic and international common stocks listed on the NASDAQ Stock Market. Launched in 1971, the index today includes over 3,000 securities.
    • Morgan Stanley Capital International’s Europe, Australasia, Far East (EAFE) Index represents the performance of large- and midcap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada


    Many benchmarks, including those listed above, are reported regularly on major financial websites and in the business section of local newspapers; national publications such as The Wall Street Journal and Investor’s Business Daily; and, internationally, in the Financial Times.

    Using Benchmarks to Target Expected Return

    Benchmarks can be used to assess the types of investments that may be most suitable to an individual’s goals and investment time frame. By looking at the past performance of a market index, you can gauge the relative return potential of a particular asset class, as well as its risk characteristics. Keep in mind, however, that past performance is not a guarantee of future results and these unmanaged indexes cannot be invested into directly.

    Also, be careful to use the right benchmark. For example, you wouldn’t want to invest in corporate bonds maturing in five years based on the benchmark performance of 10-year U.S. Treasury bonds. Your financial advisor can help you assess which benchmarks to use in evaluating the performance and risk of a given market.

    Finally, when using market indexes, keep in mind that even though an investment vehicle performs well in relation to its market benchmark that does not necessarily mean it’s an appropriate vehicle for your money. Investments should be made based upon a number of criteria, including your objectives, time horizon and risk tolerance.

    Your financial advisor can help you determine which benchmarks to use when evaluating investment vehicles.

    IRA or 401(k)?

    inflationKnow the key differences between these two popular retirement plans to ensure your clients are saving in the right account.

    IRAs and 401(k)s share a lot of similarities. They are both retirement plans. They both can help you lower your tax bill today, provide tax-deferred growth, and help provide an income source in retirement. That said, there are also many differences between IRAs and 401(k)s. Some are relatively benign and probably won’t impact you very much, but other differences can make one type of account far superior to the other in particular situations. With that in mind, today we explore five things you can do with an IRA that you can’t with a 401(k).

    1. Make a qualified charitable distribution


    Qualified charitable distributions (QCDs) allow IRA owners and IRA beneficiaries age 70½ or older to send up to $100,000 from their IRA account directly to a charity without including any of that amount in their income. If you make a QCD, you won’t get a charitable deduction, but by never adding the income to your tax return in the first place, it often still results in a lower tax bill than if you had taken a “normal” IRA distribution and made a “regular” charitable contribution. In no case would your tax bill be higher. As an added bonus, your QCD can be used to offset all or a portion of your required minimum distribution.

    1. Take a penalty-free distribution for higher education expenses


    In general, distributions taken from a retirement account prior to age 59½ are subject to income tax and an additional 10% early distribution penalty. The law does, however, provide for a number of exceptions to this rule. One such exception is available if you use your IRA to pay for higher education expenses (i.e. college tuition, books, required supplies, a computer for school) for yourself or for certain other family members, such as your children. Note that this exception is only available if you take money out of an IRA prior to age 59½.

    If you try to do the same thing from a 401(k), you’re going to wind up with a tax bill bigger than you had bargained for. Some very smart and well educated people, including lawyers and CPAs, have gone to tax court to argue this point, and none of them has walked away the victor. Don’t make the same mistake.

    1. Take a distribution whenever you want


    They call it a retirement account for a reason. It’s supposed to be for your retirement! That said, life happens and sometimes people need to access their funds sooner than had been planned. If you are still working for the company sponsoring your 401(k) and you need some additional funds, you’re at the mercy of your plan’s rules and, to an extent, the Tax Code, when it comes to being able to access your money. Typically, access to funds is extremely limited, especially if you’re still under age 59½. In such cases, you may be able to take a loan from your 401(k) and you may be able to take a hardship distribution, but neither of those options is guaranteed to you under the law.

    In contrast, if you have an IRA, you can typically take a distribution from your account whenever you want. There are no restrictions under the law whatsoever. Of course, as noted above, if you take a distribution from your plan or your IRA prior to age 59½, you will generally owe income tax and a penalty, but if you really need those funds and there is nowhere else to turn, what choice do you really have?

    1. Aggregate RMDs between multiple accounts


    Today, it’s not uncommon for people to have several 401(k)s or similar plans accumulated over time through work with different employers. Similarly, many retirees have more than one IRA account. Some even have 10 or more! If you happen to have more than one 401(k) and you’re age 70½ or older, you must calculate the RMD for each of those 401(k) plans separately and you must take those RMDs separately from each plan.

    In contrast, if you have more than one IRA and you’re 70½ or older, an RMD must be calculated for each IRA, but if you want to, you can combine (or aggregate) the RMDs and take them from any one IRA or combination of IRAs you choose without a penalty.

    If you accidentally took the same approach with your 401(k) plans, you’d find yourself subject to a 50% penalty—yes, you read that right—for each plan from which you did not take the appropriate distribution.

    1. Avoid withholding


    Paying your taxes is not optional. It’s a requirement. You may, however, have a very low, or even non-existent tax bill after applying all of your available deductions, exemptions, and credits, etc. Alternatively, you may have withholding from other sources, such as a pension, or make estimated tax payments, that are sufficient to cover your tax bill. In such cases, there’s no reason to have any further amounts withheld from your retirement account distributions. Doing so would just be giving the government a tax-free loan until you filed your taxes and received your refund.

    If you have an IRA, you’d be able to avoid this because, when you take a distribution from your IRA, you can opt-out entirely of withholding. This, however, would not be the case if you had a 401(k). In general, distributions from 401(k)s that are eligible for rollover are subject to mandatory withholding of 20%. There is no opt-out provision. After all, it isn’t called “strongly suggested withholding.”

    So there you have it: five things you can do with an IRA that you can’t do with a 401(k)! Does that mean IRAs are better than 401(k)s? No, of course not. They’re different. For some people, IRAs are better, while others will benefit more from a 401(k). Could we, for instance, find five things you can do with a 401(k) that you can’t do with an IRA? Absolutely. Who knows, you might even see something like that here in the near future!

    Everything You Need to Know About a Will, but Haven’t Thought to Ask

    Questions and answersEveryone knows the importance of preparing and maintaining a will, yet many people have never written one. To those who haven’t, take note: If you die intestate (without a will), the intestacy laws of the state where you reside will determine how your assets will be distributed. And if minor children are involved, a judge may decide with whom they will live.

    On the other hand, if you take the time to prepare a will, you’ll be the one who determines how your property is distributed and who will care for your minor children when you’re gone. Simply put, a will is one way that provides peace of mind and the immense satisfaction of knowing that you have taken the necessary steps to pass on the fruits of your life’s labor to your loved ones.

    What Is a Will?

    A will is a legal declaration that enables you to direct the disposition of your assets upon your death. You can divide your assets any way you want, as long as guidelines are presented clearly in writing. While wills generally address the bulk of your assets, there are a variety of items that are not covered by the instructions in a will. These items include community property, proceeds from life insurance policy payouts, retirement assets, assets owned as joint tenants with rights of survivorship, and investment accounts that are designated as “transfer on death.”

    Types of Wills

    Following are some of the more common types of wills and their intended uses.

    • A simple will provides for the outright distribution of assets to beneficiaries. This type of will is best for individuals with small, uncomplicated estates.
    • A pour-over will passes assets into an existing trust or trusts.
    • A living will expresses an individual’s last wishes regarding whether and how the person wishes his or her life to be sustained under specific circumstances.


    Drafting a Will

    Ideally your will should be drawn up by a lawyer, and you (and your heirs, if possible) should be familiar with its general form and contents. Although it’s your legal right to do so, it’s usually not a good idea to draft your own will. You may not be aware of the statutory requirements that exist in your particular state for establishing a valid will. State requirements vary and some states may have different standards for witnessing a will, or require specific language that must be included for the will to be considered valid. Having your will at least reviewed by a lawyer can safeguard against potential problems down the road.

    When meeting with a lawyer to draft your will, bring the proper information. Such a list typically includes proof of your real property, such as your home, along with documentation that shows how much you paid for it. Also bring a list of intangible property such as your bank and investment accounts along with your latest statements for each; a copy of any life insurance policies; and a list of your debts.

    One item that individuals often overlook when drafting their will is a list of professionals they want contacted, such as a financial advisor, insurance agent, banker, or lawyer. Also bring the names of any executor or guardian named for your children.

    Key Decision Points

    Husbands and wives can write their wills jointly or separately, although most legal professionals recommend the latter. One reason is that joint wills generally bind the surviving spouse to dispose of property per the will’s terms despite future changes in circumstances (including tax law changes).

    Also, if you have young children, an important provision is the selection of a guardian who would raise your children in the event of your death and the death of your spouse. If you die without a will and have minor children, a judge may appoint a guardian for them, and there is no guarantee that the court’s appointment will coincide with your own wishes.

    The Post-Will Process

    Once your will is completed, keep an original copy on hand, although it’s perfectly fine to make photocopies for family members and friends. Keep the original in a secure place, such as a home or business fireproof safe. If that can’t be arranged, keep it in your lawyer’s office or with the clerk at your local probate court, who will hold it for safekeeping in a sealed envelope. Wherever you decide to keep your will, make sure that its location is known by family members or close friends.

    It’s also a good idea to review your will every five years. Your family circumstances or financial fortunes may change, as may federal and state laws. When things do change, periodically reviewing your will with your lawyer (and revising it if necessary) will help to ensure that its contents conform to current laws and regulations and that it reflects your current status and desires.

    A Post Election Letter to Our Valued Clients

    will and estate planningDonald Trump has completed his landmark quest and will become the nation’s 45th President after a contentious and often divisive campaign. In addition, the Republican Party has retained control of both houses of Congress. This outcome marks a significant reversal from just a few weeks ago when a Hillary Clinton presidency was highly probable and even a Democratic party sweep of Congress was possible.

    While this outcome is certainly a shock to many, it is important to remember that the result isn’t a surprise to the plurality of American voters that spoke their collective will at the ballot boxes yesterday. The strength of a democracy is not in whether we like the outcome, but rather in how we accept the result as the voice and will of our republic.

    While many things are promised on the campaign trail, all newly elected Presidents enter with a constrained ability to enact their agenda unilaterally. As a result, immediate and sweeping political changes are a process, which give markets and the American public time to digest and react. Although often derided by partisans, the inability of a President to swiftly change policies is a strength of our political system, not a weakness of it.

    Moreover, the current market volatility is not because Trump was elected President, as markets do not have political affiliations. Rather, it reflects the market’s adjustment to a surprise presidential winner and the market’s tentativeness regarding the vast uncertainty over which of President-elect Trump’s stated policies he will be able to enact. The first major step towards clarity will come with Trump’s choices for key administration officials; his selections will give a better sense of the priorities for the Trump administration. This should provide some path to further understanding and calm markets.


    For the first time in 10 years, one party has control of the Presidency and both houses of Congress. As in all things, this may solve some problems, and perhaps exacerbate others. For example, potentially divisive upcoming issues, such as the necessary expansion of the debt ceiling and reforms to the corporate tax code, could be easier to navigate. There is a common perception that the markets like divided government. While that may often be correct, it is not necessarily true at every point in time.


    Most importantly, however, over time we have witnessed corporations and financial markets adapting smoothly to new political environments. The uncertainty surrounding the Trump presidency could be greater than a typical transition; therefore, the markets may take additional time to process any changes. However, the uncertainty itself is not unusual.


    Separating political views and emotions from investment decisions is difficult. Whether this election result was your favored outcome or not, what we have learned over the years is that although Presidents can set an overall tone for the markets, over the long term, it is the underlying fundamentals of the economy and the strength of corporate profits that matter more. Overall, we continue to be encouraged by the underlying fundamentals in the economy and the related resilience of the stock market. Recently, encouraging economic data, including a record 73 consecutive months of private sector jobs growth, high consumer confidence, and an increase in manufacturing activity, all suggest a recession in the next year is unlikely. And, although the stock market has been essentially flat over the past three months, the S&P 500 has returned 5.2% year to date (through market close on November 8, 2016).


    As this historic election cycle comes to a close, we suggest casting a “vote of confidence” for the U.S. economy and markets. While uncertainty will certainly be prevalent over the short-run, our political and economic systems are resilient and can, after a period of adjustment, adapt to new realities. As investors, we all need to try and put this election into perspective, as our investment horizons extend far beyond yesterday’s votes or any political cycle. And, the keys to your investment success of relying on independent investment advice and sticking to your long-term investment strategies should not change, regardless of who is in office.


    As always, if you have questions, I encourage you to contact our office.


    Sincerely, John Stevens, Wealth Advisor


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