Alliance Investment Planning Group

An underreported story. In 2010, we have a wave of IRA owners converting traditional IRAs to Roths. There are all kinds of compelling reasons to make that move. Yet for some IRA owners, the conversion may have an unintended consequence: it may reduce their son or daughter's chances for college financial aid.

A Roth conversion will increase your taxable income. As some scholarships, grants and loans are awarded based on income levels, a big jump in adjusted gross income (AGI) could potentially jeopardize them. This can be a problem if you're a "millionaire next door" who wants your kids to exploit financial aid as much as possible.

That income must be recorded on the FAFSA. Universities commonly use the Free Application for Federal Student Aid (FAFSA) as a test to determine whether a student is eligible for grants, loans and some scholarships. The FAFSA is all about family income - factors like net worth and invested assets don't come into play. Mom and Dad's higher AGI could mean lower levels of financial aid, because the income boost from the Roth conversion will make it look like Mom and Dad can now shoulder a greater percentage of education costs.^1,2

A New York Times article offered an example. Take a hypothetical family of four with total 2010 income of $75,000 and one college student. For every $10,000 of taxable income stemming from a Roth conversion, the parents' expected annual contribution to that student's education would go up by $3,200 in a FAFSA estimate.¹

In April, Mark Kantrowitz (publisher of FastWeb.com, an online scholarship directory) told Financial Advisor Magazine that the Department of Education had requested universities to recognize the effect of 2010 Roth conversions on family incomes. No evidence suggests colleges are doing this en masse.²

Financial aid decisions are often based on multiple years of income. Keep this in mind. IRA owners who go Roth this year are well aware that they may divide taxes on the conversion across the 2011 and 2012 tax years. Well, that decision may affect family incomes for those years, and possibly chances at student loans, grants and scholarships through 2013.¹

If your kids are young, time is on your side. If your children are a few years or more away from college, you can make a Roth conversion without having to worry about its impact on FAFSA applications.

Any potential Roth IRA conversion should be analyzed for its impact on other aspects of your family's financial life. The impact on college financial aid is but one factor to consider. The potential long-term benefits of a Roth IRA conversion are considerable. Confer with a financial consultant to see if the decision is appropriate before you elect to make the move.

Citations.

¹ bucks.blogs.nytimes.com/2010/04/16/how-a-roth-i-r-a-conversion-can-hurt-financial-aid/ [4/16/10]

² fa-mag.com/fa-news/5452-roth-ira-rollovers-could-affect-college-financial-aid.html [4/21/10]

This material was prepared by Peter Montoya Inc. and should not be construed as investment 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. www.montoyaregistry.com www.petermontoya.com

Create a pool of healthcare dollars that will grow in any market.

How will you pay for long term care? The sad fact is that most people don't know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. The 2010 report found that

• In 2010, the median annual cost of a private room in a nursing home is $75,190 or $206 per day - $14,965 more than it was in 2005.
• A private one-bedroom unit in an assisted living facility has a median cost of $3,185 a month - which is 12% higher than it was in 2009.
• The median payment to a non-Medicare certified, state-licensed home health aide is $19 in 2010, up 2.7% from 2009.¹

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.²

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. That's inaccurate. It can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.³

Choosing a DBA. That stands for Daily Benefit Amount - the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you "inflation protection" at enrollment, meaning that every few years, you will have the chance to buy additional coverage and get compounding - so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That's all.²

Now, Medicaid can actually pay for long term care - if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you'd spend on a used car from the late 1990s) are nothing compared to real-world LTC costs.⁴ Ask your insurance advisor or financial advisor about some of the LTC choices you can explore - while many Americans have life, health and disability insurance, that's not the same thing as long term care coverage.www.marketinglibrary.net

Citations.

1 genworth.com/content/etc/medialib/genworth_v2/pdf/ltc_cost_of_care.Par.85518.File.dat/Executive%20Summary_gnw.pdf [4/10]

2 - aarp.org/families/caregiving/caring_help/what_does_long_term_care_cost.html [11/11/08]

3 - pbs.org/nbr/site/features/special/article/long-term-care-insurance_SP/ [11/11/08]

4 - longtermcare.gov/LTC/Main_Site/Paying_LTC/Private_Programs/LTC_Insurance/index.aspx [6/25/09]

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. www.petermontoya.com, www.montoyaregistry.com,

 Main Street's anger over Wall Street reaches the Senate floor.

Another reform bill is now making its way through the Senate - a bill that would reregulate the financial services industry with a few goals in mind:

• 1) Preventing failures of large banks and financial services firms, or at least insulating taxpayers and the economy in such an emergency
• 2) Creating a new financial watchdog agency to protect consumers
• 3) Tightening regulations on derivatives
• 4) Banning banks from proprietary trading (with the "Volcker Rule")
• 5) Increasing transparency^1,2,3

Anger on Main Street, while palpable, won't pass these reforms. In the Senate, Democrats are largely driving them; Republicans want to see them altered. Let's look at them briefly.

The bailout issue. The bill introduced by Senate Banking Committee Chairman Chris Dodd (D-CT) would set up an "orderly liquidation fund" - $50 billion deep - to help the federal government wind down any big banks that threaten to go belly up.³ Senate Republicans argue that this would amount to a permanent "bailout fund" that would implicitly encourage federal bank rescues. Some Republicans think it perpetuates the "too big to fail" mentality.

A group of Congressional Democrats have introduced the S.A.F.E. Banking Act, which would cap bank size: no U.S. bank or bank holding company could hold more than 10% of the country's insured deposits. The S.A.F.E. Act would also hold the amount of non-deposit liabilities at financial institutions at 2% of GDP for banks, and set a 6% leverage limit for bank holding companies.⁴

The proposed new Bureau. The reform bill proposes creating a Bureau of Consumer Financial Protection, possibly as an offshoot of the Federal Reserve. It would watch over banks and credit unions with $10 billion or more in assets, as well as major investment firms and mortgage lenders apart from the banking industry. In addition to trying to protect people from predatory or discriminatory practices, the BCFP would also seek to better inform consumers via an Office of Financial Literacy.² Skeptics see this as another multibillion-dollar layer of bureaucracy, a "fifth wheel" whose mission could just as well be handled by an augmented Fed.

Crackdowns on derivatives & proprietary trading. Ah yes, derivatives - those investments no one really understood. Or watched closely. The reform bill would require banks to build a wall between their derivatives trading and their commercial banking operations - in other words, the "Volcker Rule" would be the law. Well, banks do make a lot of money through proprietary trading in their own accounts. In late April, JP Morgan analysts concluded that if the Volcker Rule went into effect, the six biggest global investment banks would need $85 billion more to capitalize the new investment banking divisions they would need to create. According to the JPMorgan scenario, Deutsche Bank would have to grab $26 billion alone and BNP Paribas would have to come up with $21.1 billion.⁵

A better understanding for all? If the reforms become law, regulators would work to make the "fine print" that comes with a credit card, a mutual fund or a mortgage product clearer, so that fees and other quietly assessed charges would become easier to understand. Hedge funds would have to register with the federal government. Certain Democrat-driven amendments would even demand more transparency at the Federal Reserve. As Sen. Bernard Sanders [I-VT] remarked in late April, "During the bailout, the Fed lent trillions of dollars at zero or near-zero interest rates to large financial institutions. During the Budget Committee hearing, I asked Chairman Bernanke who received that money, [and] he refused to tell us."

A new chapter, or a whole new book? You could argue - convincingly - that a loosely regulated Wall Street caused or least exacerbated the "Great Recession". In the aftermath of that downturn, we may see the biggest rewrite of financial rules and regulations since the Great Depression coming before 2010 ends.

Citations

1 - msnbc.msn.com/id/36770907/ns/business-us_business/ [4/27/10]

2 - csmonitor.com/USA/Politics/2010/0429/Financial-reform-bill-101-what-it-means-for-consumers [4/29/10]

3 - csmonitor.com/USA/Politics/2010/0428/Financial-reform-four-sticking-points [4/28/10]

4 - memphisdailynews.com/editorial/Article.aspx?id=49660 [4/29/10]

5- reuters.com/article/idUSN2924718120100429 [4/29/10]

6 - csmonitor.com/USA/Politics/2010/0428/Republicans-relent-clear-financial-reform-bill-for-debate/%28page%29/2 [4/28/10]

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..

Run the numbers, because the answer could be "yes."

An underreported story. In 2010, we have a wave of IRA owners converting traditional IRAs to Roths. There are all kinds of compelling reasons to make that move. Yet for some IRA owners, the conversion may have an unintended consequence: it may reduce their son or daughter's chances for college financial aid.

A Roth conversion will increase your taxable income. As some scholarships, grants and loans are awarded based on income levels, a big jump in adjusted gross income (AGI) could potentially jeopardize them. This can be a problem if you're a "millionaire next door" who wants your kids to exploit financial aid as much as possible.

That income must be recorded on the FAFSA. Universities commonly use the Free Application for Federal Student Aid (FAFSA) as a test to determine whether a student is eligible for grants, loans and some scholarships. The FAFSA is all about family income - factors like net worth and invested assets don't come into play. Mom and Dad's higher AGI could mean lower levels of financial aid, because the income boost from the Roth conversion will make it look like Mom and Dad can now shoulder a greater percentage of education costs.^1,2

A New York Times article offered an example. Take a hypothetical family of four with total 2010 income of $75,000 and one college student. For every $10,000 of taxable income stemming from a Roth conversion, the parents' expected annual contribution to that student's education would go up by $3,200 in a FAFSA estimate.¹

In April, Mark Kantrowitz (publisher of FastWeb.com, an online scholarship directory) told Financial Advisor Magazine that the Department of Education had requested universities to recognize the effect of 2010 Roth conversions on family incomes. No evidence suggests colleges are doing this en masse.²

Financial aid decisions are often based on multiple years of income. Keep this in mind. IRA owners who go Roth this year are well aware that they may divide taxes on the conversion across the 2011 and 2012 tax years. Well, that decision may affect family incomes for those years, and possibly chances at student loans, grants and scholarships through 2013.¹

If your kids are young, time is on your side. If your children are a few years or more away from college, you can make a Roth conversion without having to worry about its impact on FAFSA applications.

Any potential Roth IRA conversion should be analyzed for its impact on other aspects of your family's financial life. The impact on college financial aid is but one factor to consider. The potential long-term benefits of a Roth IRA conversion are considerable. Confer with a financial consultant to see if the decision is appropriate before you elect to make the move.

Citations.

¹ bucks.blogs.nytimes.com/2010/04/16/how-a-roth-i-r-a-conversion-can-hurt-financial-aid/ [4/16/10]

² fa-mag.com/fa-news/5452-roth-ira-rollovers-could-affect-college-financial-aid.html [4/21/10]

Half of Americans aren't paying federal income taxes. Is that right?

A provocative statistic. Last July, the nonpartisan Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution) estimated that 47% of Americans would not owe a penny to the IRS for tax year 2009.1

The White House has projected the federal deficit at $1.6 trillion for 2010 - that's about 10.6% of our GDP, a percentage unseen since the 1940s. So is it fair to the nation that so many Americans are legally avoiding federal income taxes?²

A major reason? Refundable tax credits. The Making Work Pay credit and other tax cuts accompanying the federal stimulus gave millions more of us a refund this time around. If these credits hadn't appeared, the TPC says 38% of us still wouldn't have owed federal income tax for 2009, thanks to assorted variables - astute tax planning, low taxable income, and other factors.¹

People who assume the rich are dodging taxes are misinformed. The TPC found that only about 1.5% of those with taxable incomes of $1 million or more owed no federal income tax for 2009. For those with taxable incomes from $500,000-$1,000,000, the estimate rises to just 2%.³

If you made between $75,000-100,000 in taxable income in 2009, you may have been in the lucky 9.2% who the TPC says didn't owe anything to the IRS. In contrast, it figured that 61.8% of taxpayers who earned $20,000-30,000 last year and 47.5% of those with taxable incomes from $30,000-40,000 had no federal tax liability.³

Can you bring the deficit down without new or excessive taxes? Good question. At first glance, it may seem impossible. The Treasury, however, has a plan to do it, and it looks like this: cut war spending by $250 billion, save another $252 billion by letting tax cuts sunset for couples making more than $250,000 yearly, collect $331 billion in bank fees, and save $105 billion from a selective federal spending freeze. This could shrink the deficit to around 3% of GDP, which the Treasury feels is bearable.⁴

Of course, bipartisan politics might get in the way. Higher federal income taxes (and new kinds of taxes) seem to be looming in the future; as for legislators figuring out a way to spare us from them, that would seem a longshot.

Citations.

¹ taxpolicycenter.org/publications/url.cfm?ID=1001289 [7/2/09]

² reuters.com/article/idUSTRE63C09I20100413 [4/12/10]

² usatoday.com/news/opinion/editorials/2010-04-16-editorial16_ST_N.htm [4/16/10]

⁴ cnbc.com/id/36432254 [4/13/10]

Increased costs or savings in years to come? What do the federal health care reforms mean for your company? Will they lead to thousands of dollars in extra costs and more paperwork? Or will federal subsidies make this a "game changer" for small companies that have struggled to provide insurance plans?

If you employ 50 or more, you will face a major choice. Businesses with 50 or more employees will have a choice beginning in 2014: they can sponsor a health plan for 100% of their workers (even those signed up for government-subsidized health insurance) or pay $750 per worker in penalties to the federal government.¹

A business might opt to take the penalty and do away with health insurance. Paying the annual penalty might be cheaper. So that would leave the employees uninsured, and they would have to go to state health plan exchanges to buy health coverage that could be more expensive.

Some analysts warn that another macroeconomic effect might result - years of high unemployment. They think that increased insurance costs will discourage business hiring in the next decade.

The new reforms don't put any caps on health insurance premiums. Insurers have every reason to hike rates before the new insurance markets come around in 2014 with added competition.²

If you employ 25-49 people, you won't face this choice. The government won't require companies with fewer than 50 employees to offer health insurance starting in 2014, and therefore these companies won't have to contend with possible fines like their big brothers. But while firms with 50 or fewer workers would be exempt from coverage provisions, they will still have to contend with rising premiums.^1,3

A major tax credit for smaller firms and solopreneurs. If you employ less than 25 or are self-employed, you may find that the healthcare reforms bring you tax relief.

Beginning in 2010, companies with less than 25 employees that pay the majority of health care premiums for their workers qualify for a tax credit up to 35% of their premiums. (In 2014, that credit could be as great as 50% of premiums if you arrange insurance via one of the Small Business Health Options Programs, or SHOP Exchanges). The tax break you get will depend on a couple of variables: the number of employees you have and their average salary.²

However, this tax break won't be offered to sole proprietorships. That factor may encourage you to incorporate or become an LLC.²

If you own a smaller company, insurance might become cheaper. The idea is that small businesses can pool together in the SHOP Exchanges and negotiate insurance coverage as a group. Greater buying power implies lower premium costs (in theory).

Businesses with 100 or fewer workers can jump into a state SHOP Exchange pool starting in 2014; states may choose to limit the pools to firms with 50 or fewer employees through 2016.⁴

The non-partisan Congressional Budget Office estimates that the SHOP Exchanges would lower annual premiums for these businesses by 1-4% with a 3% increase in the amount of coverage. That could mean a savings of more than $10 billion nationally.^1,4

If you work for yourself, you will likely be able to take advantage of government health care subsidies in 2014. If you are self-employed in 2014 and earn less than four times the poverty level, you can qualify for these subsidies. (To give you some idea, in 2010 400% of the poverty level comes to $88,200 for a family of four.)²

Some notes for 2011. In 2011 as a result of the new law, a business will have to report the value of an employee's health care coverage on W-2 forms. Many companies provide coverage for employee dependents not enrolled in other employer-based health plans up to age 22 or 23; next year, that age limit will rise to 26. All lifetime caps on insurance policies offered through employer-sponsored plans will be eliminated in 2011. Penalties will increase for the misuse of HSA funds, and workers with FSAs and HSAs will not be reimbursed for money used for over-the-counter drug purchases.⁵

Citations.

¹ cbsnews.com/stories/2010/03/23/eveningnews/main6326955.shtml [3/23/10]

² usatoday.com/money/smallbusiness/columnist/abrams/2010-03-26-what-health-care-reform-means_N.htm [3/26/10]

⁴ usatoday.com/news/washington/2010-03-25-healthqa_N.htm [3/25/10]

⁴ money.cnn.com/2010/03/22/smallbusiness/small_business_health_reform/ [3/22/10]

⁵ money.cnn.com/2010/03/26/news/economy/health_care_changes_to_employer_benefits/index.htm [3/26/10]

       You're suddenly rich. Now what?

What's the plan when you have a windfall? Through luck, inheritance, talent, or legal decisions, some people receive "sudden wealth" - a lump sum of money that is at least several times their annual income. Sometimes people think that the money will solve all of their problems. But if they aren't careful, it can create entirely new ones.

Sudden wealth often comes with emotional baggage attached to it. If you're suddenly wealthy, you may experience degrees of fear, guilt, anxiety and even paranoia in the months following your good fortune. As Dennis Pearne, Ed.D., author of The Challenges of Wealth notes, sudden wealth "changes what you can do, what you no longer have to do, where you can live" and other aspects of your life that seem set in stone. "So much changes so fast that it can be terribly overwhelming, and some people go into money shock."¹

We've all heard stories about people who won the lottery and ended up broke. In fact, you may have seen stories on TV or in magazines or newspapers about people who lost sudden fortunes in a matter of years, or let wealth wreck their families. It seems incredible, but it happens.

So, how does it happen? And how can you avoid it?

Rule #1: get financial guidance from a qualified source. You would think that anyone who receives a six-figure or seven-figure check would immediately talk to a financial professional. But that is not always the case.

Some people put it on their "to-do list" ... and then go out and do other things with the money. Some never bother to seek qualified advice at all. Instead, they listen to relatives or neighbors.

The problem is, sometimes these relatives or neighbors

• Have never had great amounts of money and do not understand the responsibilities that come with it
• Only see wealth in terms of material things and purchases
• Would like to vicariously live out their fantasies as a byproduct of your good fortune
• Urge you to take chances (risks) with your money
• Assume that you are "set for life"
• Want you to look at wealth from their mentality, or want you to associate with their shady lifestyle

While your relatives and neighbors may mean well, they are likely not financial advisors. In fact, some advisors aren't well equipped to consult people with sudden wealth either.

Rule #2: find a financial advisor familiar with the issues surrounding sudden wealth. Ideally, you want someone who has consulted people in a similar situation. This is because sudden wealth is truly a special circumstance. It's not just a matter of putting more money in bank accounts or investment accounts. Sudden wealth can mean a whole lifestyle shift - a new address, a new reason to get up in the morning, or maybe new questions about what to do with your life. Your loved ones may not look at the money the same way you do, and there needs to be harmony.

If you come into sudden wealth, do yourself a favor and pause. Find an advisor who has consulted people who have come into money. Ask him or her to help you put together a team - because you may need one. Many millionaires and quasi-millionaires have financial professional, CPAs, and estate planning attorneys working for them - working in a unified effort to help them manage their money, reduce their taxes, make charitable gifts and arrange inheritances for their heirs.

Any new millionaire, or near-millionaire, should strive to make newfound wealth grow and last. To do that, you need an investment plan that makes sense in the long run and makes you feel comfortable. You also need to plan to defer or reduce taxes and risks to your wealth - and when you are a new millionaire, you're looking at a level of taxation and potential risk most people will never experience.

So if you find yourself with sudden wealth, plan. Instead of acting on impulse, act with intent and purpose. Meet with a qualified advisor to learn about your options and to establish financial priorities.

Citations.

¹articles.moneycentral.msn.com/RetirementandWills/EscapeTheRatRace/YoureSuddenlyRichBummer.aspx    [8/1/08]

This was prepared by  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.

Washington, D.C. - 02/18/2010 - There was a $1 trillion gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises, according to a new report released by the Pew Center on the States.  The shortfall, which will have to be paid over the next 30 years by state and local governments, amounts to more than $8,800 for every household in the United States.

The figures detailed in Pew's report, "The Trillion Dollar Gap," include pension, health care and other non-pension benefits promised to both current and future retirees in states' and participating localities' public sector retirement systems. 

Pew's numbers likely underestimate the bill coming due because the most recent available data do not account for the second half of 2008, when states' pension fund investments were particularly affected by the financial crisis.  Additionally, most states' accounting methods spread the investment declines over a period of time-meaning states will be dealing with their losses for several years.

"While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states' inability to save for the future and manage the costs of their public sector retirement benefits," said Susan Urahn, managing director, Pew Center on the States.  "The growing bill coming due to states could have significant consequences for taxpayers-higher taxes, less money for public services and lower state bond ratings.  States need to start exploring reforms."

To help policy makers and the public understand these challenges, Pew assessed all 50 states on how well they are managing their public sector retirement benefit obligations.

In fiscal year 2008, states' pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion reserved to cover those costs.  Overall, states' pension systems were 84 percent funded-above the 80 percent funding level recommended by experts.  Still, the unfunded portion-$452 billion-is substantial, and states' performance is down slightly from an 85 percent combined funding level in fiscal year 2006.  Pension liabilities have grown by $323 billion since 2006, outpacing asset growth by almost $87 billion.

Retiree health care and other non-pension benefits, such as life insurance, create another huge bill coming due: a $587 billion total liability to pay for current and future benefits, with only $32 billion-or just over 5 percent of the cost-funded as of fiscal year 2008.  Half of the states account for 95 percent of the liability.  Because of a 2004 Governmental Accounting Standards Board rule, the full range of non-pension liabilities was officially reported in fiscal year 2008 for the first time across all 50 states.

In spite of the large and growing shortfall and the variation among states, momentum for policy reform is building nationwide.  Fifteen states passed legislation to reform their state-run retirement systems in 2009 compared to 12 in 2008 and 11 in 2007.  Reforms largely fell into five categories: (1) keeping up with funding requirements; (2) reducing benefits or increasing the retirement age; (3) sharing the risk with employees; (4) increasing employee contributions; and (5) improving governance and investment oversight.

With legal restrictions in most states on reducing pensions for current employees, the majority of changes in the past two years affect new employees.  Ten states increased the contributions that current and future employees make to their own benefit systems, while ten states lowered benefits for new employees or set in place higher retirement ages or longer service requirements. 

"A growing number of policy makers recognize that their states' fiscal health depends on how well they manage the bill coming due for public sector retirement benefits," said Urahn.  "We are seeing more and more states explore policy reforms aimed at putting their systems on stronger fiscal footing."

"The Trillion Dollar Gap" identified significant variations in how states are managing their employee retiree benefits:

Pension benefits

• Sixteen states were deemed solid performers, 15 were in need of improvement and 19 states were flagged for serious concerns.
      
• States like Florida, Idaho, New York, North Carolina and Wisconsin all entered the current recession with fully funded pensions, and were rated top performers by Pew.
      
• In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states.  By 2008, only four-Florida, New York, Washington and Wisconsin- could make that claim. 
      
• In eight states-Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia-more than one-third of the total pension liability was unfunded.  Two states-Illinois and Kansas-had less than 60 percent of the necessary assets on hand.
  
  
  Health care and other non-pension benefits
  
• Nine states were deemed solid performers, having enough assets to cover at least 7.1 percent-the 50-state average-of their non-pension liabilities.  Only two states-Alaska and Arizona- had 50 percent or more of the assets needed.
      
• Forty states were classified as needing improvement, having set aside less than 7.1 percent of the funds required.  Twenty of these have no assets on hand to cover their obligations. (Nebraska does not provide estimates of its retiree health care or other benefit obligations and did not receive a grade.) 
      
• Only four states contributed their entire actuarially required contribution for non-pension benefits in 2008: Alaska, Arizona, Maine and North Dakota.

About the Methodology

Pew's analysis is based on data from states' own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations.  Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localities' and teacher plans.  States have flexibility in how they compute their obligations and present their data, so three main challenges arise in comparing their numbers: whether and how they smooth investment gains or losses; when they conduct actuarial valuations; and what assumptions they use for investment returns, retirement ages and other factors. 

The Pew Center on the States is a division of The Pew Charitable Trusts that identifies and advances effective solutions to critical issues facing states.  Pew is a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life. 

  Explaining some of the intricacies of withdrawals.

Sometimes people want to access Roth IRA funds for early retirement or other purposes. Maybe you're one of them. If you have ever thought about taking money out of a Roth IRA, be sure to consult your financial advisor first before you make a move ... and keep the factors mentioned below in mind. 

You can withdraw regular contributions tax-free, but not your earnings. This is a critical distinction, and many Roth IRA owners don't seem to know about it.

When you withdraw assets from a Roth, there is a set order in which contributions and earnings must be distributed - the IRS ordering rules for distributions.¹

• The IRS regards the first layer of withdrawals from a Roth as regular contributions instead of earnings. So this layer is treated as coming from your annual after-tax contributions. Therefore, if you just withdraw this layer of money, there are no taxes or penalties involved. (You can do this at any time, whether you have held your Roth for 5 years or not.) Basically, the IRS is permitting you to remove a percentage of your account before the alarm sounds on the five-year clock (see below).^2,3

• The next assets to be removed from the account, according to IRS rules, are the conversion and rollover contributions to your Roth. These are removed on a so-called "first in, first out" basis. For example, the amount of a contribution to your Roth resulting from a conversion made in 2002 would come out before the amount of a contribution to your Roth resulting from a conversion made in 2008. The taxable portion of the conversion/rollover contribution comes out first (the amount claimed as income), and then the non-taxable portion.(By the way, the IRS disregards Roth-to-Roth rollover contributions in these rules.¹)

• Finally, earnings accrued by the Roth IRA are distributed.

So in other words, merely withdrawing your regular contribution will not trigger tax. But if your Roth has realized earnings from contributions, the earnings will be subject to income tax if they are withdrawn.

Is your withdrawal a qualified distribution? Here's another important consideration. If you have owned your Roth IRA for less than 5 years and/or are younger than age 59½, you risk taking a nonqualified distribution if you withdraw money from it. You know what that means - a 10% penalty for early withdrawal in addition to taxes. (There are some exceptions to this outlined in IRS Publication 590, which is certainly worth reading.)¹

If you have owned your Roth IRA for more than 5 years ...

• You can make a qualified withdrawal of earnings.
• You can make a qualified withdrawal of taxable conversions (conversions made in separate tax years will have to meet separate 5-year tests).

You can withdraw nontaxable conversions to your Roth IRA at any time.³

Watch the 5-year clock. Yes, how is the 5-year period preceding a qualified distribution measured? The clock starts on January 1st of the tax year of your initial contribution, conversion or rollover to a Roth IRA. For example, let's say you opened up a Roth IRA account on January 1, 2007. On January 1, 2012, your Roth IRA will meet the five-year test.¹

What if you have multiple Roths? Well, when it comes to distributions, the IRS has some aggregation rules for you. You will have to figure out the taxable amounts withdrawn, distributions and contributions using a little addition. You must ...

• Add up all distributions made from all your Roth IRAs during the tax year.
• Add up all regular Roth IRA contributions made during the relevant tax year (including ones made after the close of the tax year, but before April 15 of the following year). Now add that total amount to the total undistributed regular contributions made in previous years.
• Add all conversion and rollover contributions made during the year together. To quote Publication 590: "For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2008 and the conversion or rollover contribution is made in 2009, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2009."¹

There are additional rules for recharacterized contributions that end up in a Roth IRA.

If all this makes you want to talk to a financial advisor or accountant, before you take money out of your Roth IRA ... well, that is a wise step to take. Confer with the financial or tax advisor you know and trust.

Citations.

¹ irs.gov/publications/p590/ch02.html#en_US_publink10006523 [12/4/09]

² investopedia.com/ask/answers/179.asp?viewed=1 [12/4/09]

³ smartmoney.com/personal-finance/retirement/nine-frequently-asked-questions-about-iras-7950/ [1/21/09]

The past few years have hammered home the importance of corporate integrity, as investors watched former Wall Street darlings collapse in the aftermath of corporate scandal. In fact, a majority of investors now believe that companies that operate with higher levels of social responsibility carry less risk (55%) and deliver better returns (52%).¹ And 71% of investors contend that knowing that companies are rated higher in terms of their social performance would make them more likely to invest in such companies.²

But how do you go about investing in companies with higher levels of integrity? An investment strategy called socially responsible investing (SRI) provides an option. SRI is based on the principle of investing in well-managed companies that act responsibly towards shareholders, communities, employees, consumers, and the environment.

Socially Responsible Investing

So, what exactly is SRI? SRI is an investment strategy that integrates social or environmental criteria into financial analysis. Although the term has a contemporary ring to it, socially responsible investing is hardly new. SRI was first formally practiced by religious investors who, nearly 100 years ago, avoided companies involved in tobacco, alcohol, and gambling. During the 1980s, there was a resurgence of interest in SRI as investors shunned companies operating in apartheid South Africa. Now many investors are concerned about a broader range of issues, including environmental protection, workers' rights, product safety, and business ethics. In fact, SRI represents nearly one out of every 10 dollars under professional management (or $2.29 trillion), up 258% from 1995 ($639 billion).³

How SRI Works

Of course, most investment managers look for companies with strong balance sheets, sound management, and viable products. But socially responsible investments add another layer of analysis on top of traditional financial analysis that seeks to identify companies that meet specific social and environmental criteria. Many social investors believe that this social research process can identify companies with lower risk and better quality management, thus helping to contribute to better long-term financial performance.

In addition, many socially responsible investors also actively use their position as owners to push companies to improve. For example, Calvert, one of the nation's largest families of SRI funds, often works with companies to encourage them to address issues of social and environmental concern. In 2007, Calvert filed or co-filed 36 shareholder resolutions on a variety of issues. Shareholder resolutions are formal requests that can come to a vote in front of all shareholders asking companies to take specific actions, such as working to diversify their boards, enhancing their corporate governance practices, and improving their environmental policies. Everyday shareholders can have an impact by simply voting in support of such social resolutions, much like you might cast a political vote.

Lastly, many social investors direct some of their assets to promote community investment projects in the U.S. and around the world. In addition to earning competitive returns, these assets contribute to ending poverty by increasing affordable housing, community development, access to capital, and more.

Millions of Americans are looking to integrate their financial goals with their concerns about the environment, safe products, fair labor practices, and other quality-of-life issues. SRI offers investors the opportunity to build sound portfolios for their financial futures, while helping to build a better future for the world.

1. "Attitudes Toward Socially Responsible Investing," Yankelovich Study conducted for Calvert, January 2006.

2. Ibid.

3. 2005 Report on Socially Responsible Investing Trends in the U.S. The Social Investment Forum, 2005, p. iv.