Did you know that many financial advisors are not required to act in the role of a fiduciary?  Many financial advisors are instead subject to a business standard that only requires that the recommended investments be “suitable” for their clients.  Other financial advisors are subject to a more strict fiduciary standard which means the advisor has “a duty to act in the best interests of their client.”

To understand the difference, we must look at the current regulatory environment.  Commissioned based brokers or a broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA).  Brokers are often called “registered representatives” and work for such firms as Merrill Lynch, Smith Barney, Edward Jones, Wachovia, UBS or Wells Fargo.  Insurance agents, who offer investment products, are also almost always brokers.

FINRA only requires registered representatives and broker-dealers to provide a “suitable” investment to their clients, based on the client’s financial situation and their other holdings.  FINRA does not require for registered representatives and brokers to act in the client’s best interests.  Since FINRA only requires the “suitable” business standard, the registered representative or broker-dealer does not need to disclose any potential conflicts of interests that their investment advice might include.  This often leads to a broker recommending a product with a commission fee (load) when the same product is available as a “no-load” product.

Investment advisors, often called registered investment advisors or RIAs, are a different type of financial advisor.  RIAs are regulated by either the SEC or their state securities regulator.  RIAs are subject to the Investment Advisory Act of 1940, which requires that they have a “fiduciary duty to act in the best interests of their client”.  Investment advisors are paid through a fee structure, either on an hourly basis or as a percentage of assets under management (AUM).  RIAs are typically “fee only” advisors that do not receive any commissions and are always held to a fiduciary standard.

Some financial advisors present themselves as “fee based” advisors.  These advisors will be acting in the fiduciary capacity of an RIA when providing financial planning advice and typically charge a fee for this advice.  However, when these same advisors implement the proposed plan, they sell commissioned-based products.  When they sell commission-based products, they are operating as a registered representative/broker and are regulated by FINRA.  When these products are sold, the advisors are no longer acting as a fiduciary and need only to meet the “suitable” standard for the product that they sell..

If this seems confusing, you are not alone.  New government regulatory proposals are intended to undo this morass.  However, it is unclear how a broker can maintain a fiduciary relationship with their client while selling a commissioned based product, when a similar (or even the same) non-commissioned product is available.  

Since major banks, brokerages and insurance companies are dependent upon the revenues from their commissioned based products, it is doubtful that registered representatives who sell these products will ever be required to have a fiduciary duty when selling products to their clients.   Hopefully the new regulations will require the up-front disclosure of the commissions being paid to the sales person for each product sold, before it is sold, as well as any other potential conflicts of interest.  With this disclosure, the consumer will know how much of the total cost of the products is being used for compensating the broker-dealer and the sales person.

I believe that every financial advisor should have a fiduciary duty to put their client’s interest before their own.  However, until government regulations require this, consumers should be aware of the difference between commissioned based sales people with only a “suitability” standard and fee only planners who have a fiduciary duty to their clients.

There is a simple, easy to use tax reduction tool, currently available to 90% of all US taxpayers.  In 2010, this tool will be available to everyone.  Unfortunately, only 19% of all taxpayers currently take advantage of it.  Do you know what it is?

If you guessed the Roth IRA, you’re correct.  Like a traditional IRA, a Roth IRA is a personal savings account in which funds grow tax free.  Unlike a traditional IRA, when Roth IRA funds are withdrawn, in a qualified withdrawal, no taxes are due on either the funds or their investment growth. 

With the growing federal deficit, it is probably safe to assume that your tax bracket in retirement will be close to your present tax bracket.  If so, the Roth IRA will always yield a higher after tax return than a traditional IRA.  This holds true even when if you invest the tax savings from your traditional IRA contribution.    

Another advantage of a Roth IRA is that there are no mandatory distribution requirements.  With a traditional IRA or a 401(k) plan, you must begin taking withdrawals and paying taxes on the withdrawn funds at age 70 ½, even if you do not need these funds.

Because there are no mandatory withdrawal requirements with a Roth IRA, they can be an excellent estate planning tool.  If you do not need your Roth IRA funds during retirement, the Roth IRA funds can be passed to your heirs.  The inherited Roth IRA funds remain income tax free when withdrawn by your heirs.  An inherited Roth can have a mandatory distribution schedule that is based on the expected lifetime of the heir.  This allows most of the Roth IRA funds to continue to grow tax free throughout a second lifetime. 

If you earn less than $105,000 as an individual tax filer or less than $166,000 as a joint filer, you can annually contribute up to $5,000 ($6,000 if age 50 or over) to a Roth IRA, even if you are covered by a qualified company retirement plan. 

Many financial advisors recommend that you put the maximum amount possible into a tax deferred retirement account, such as a 401(k) or 403(b).  However, it is often wiser to put the maximum amount that your company will match in the tax deferred retirement account and put the next $5,000 ($6,000 if age 50 or over) of retirement savings into a Roth IRA. This approach will maximize your after tax retirement funds and maximize your withdrawal options during retirement.

Converting tax deferred funds from a traditional IRA or 401(k) to a Roth IRA is often wise, especially if you may not need all of your tax deferred funds during retirement.  Currently, if your annual income (AGI) exceeds $100,000, this type of conversion is not permitted.  However, this income limitation for a Roth IRA conversion will soon disappear.  

Starting in 2010, everyone will be able to do a Roth IRA conversion, regardless of income level.  With a Roth IRA conversion, you must pay current taxes on the amount converted.  Once these funds are converted, you never pay income taxes on these funds and their investment gains again. 

There is an additional incentive to convert funds to a Roth IRA in 2010.  Taxes owed on funds converted in 2010 can be spread over two tax years.  In 2011 and beyond, 100% of the conversion taxes must be paid in the year of the conversion.

A Roth IRA conversion should only be considered if you have adequate additional savings to pay the taxes due without using the converted funds.   If you will need any of the converted funds within five years, do not convert these funds.  Funds withdrawn within five years will likely be considered a non-qualified distribution, requiring the payment of a 10% penalty on any funds withdrawn.

With the enormous expansion of government debt, it seems likely that income and capital gain tax rates will soon rise.  Whether you are eligible now, or must wait until 2010, the benefits of having a Roth IRA should be considered as part of your personal financial plan.  

As an asset manager, I must continually consider whether I should be increasing, decreasing or maintaining my clients’ equity (stock market) allocations. My decision has been to use the market rally to lower my clients’ equity positions. While my crystal ball is no better than yours, here are a few of the factors that that I believe could negatively impact the market.

1) Valuation – Most economist are predicting that the S&P 500 will end 2009 with operating earning per share (before write-offs) of between $45 and $55. With the S&P 500 index at approximately 900, these earnings provide (pre-write off) P/E (price earnings) ratios of between 16 and 20. In a healthy, growing economy, those P/E values would signify a fully valued market. Can these P/Es be justified in our current environment?

2) Federal Debt – Many ‘bulls” argue that low interest rates justify paying a higher P/E on equities. In normal times, they would be correct. However, with the $700 billion stimulus package, a $1.8 trillion 2010 federal deficit and over $1 trillion dollars committed to federal bail outs, our federal debt will likely increase by well over $2 trillion in the next 18 months. (Remember, a trillion is 1,000 billions)

At some point, China, Japan and other “saving” countries will only buy our federal debt if it is offered at much higher interest rates. When interest rates increase, debt oriented investments become more attractive and equity investments less so. Higher interest rates will also make corporate borrowing more costly, which could easily damage our economic recovery.

3) Commercial Real Estate – The recent financial crisis, requiring $700 billion in TARP funds (not to mention TALF and PPIP), was mainly created by consumer debt. Defaults on mortgages, home equity lines and credit card debt created most of the current “toxic assets.” However, the next “shoe to fall” is commercial real estate. Large commercial real estate bankruptcies are beginning to proliferate. As these failures continue, expect to see more toxic assets appear on our bank’s balance sheets.

4) Toxic Assets – Many banks have balance sheets filled with toxic assets, with more likely to come. The Treasury has proposed the PPIP program to help banks remove these toxic assets to a “private/public partnership.” It seems unlikely that these assets are worth the value at which they are carried on the banks’ balance sheets. Assuming these toxic assets are purchased, much of any losses suffered, as reflected in the difference between their final value and the price paid under the PPIP program, will be assumed by the tax payers (you and me). These losses will increase our federal debt, putting even more pressure on interest rates.

5) International Event – Shortly after the election, our new Vice President predicted that the administration would be tested with an international crisis within its first six months. Most recent administrations have been tested during their early phases. Needless to say, there are many candidates to test our will and resolve. If such an incident occurs, the market will react negatively until the situation is resolved.

While “green shoots” may be appearing, along with signs that the recession may be slowing, our economy still faces many daunting problems. Until there are workable solutions to these problems, it will be difficult for the economy to have a significant recovery.

Considering the problems facing our economic recovery, it is hard to see significant stock market upside at current market prices. While it never pays to time the market, practicing “market intelligence” is always wise. If you are a long term investor, it may be prudent to stay at the low end of your investment policy’s equity allocation. In turbulent markets, investors should focus on asset preservation. The goal of asset preservation is to have the maximum assets available to invest when the economy truly begins to recover and grow.

Since the deferred annuity sales person will be paid a commission as high as 10% on your deferred annuity purchase, let’s take a closer look at what he/she is trying to sell you. Here are some areas that are not always well explained by the deferred annuity sales person.

1) Mortality and Expenses (M&E) Charges – All deferred annuities have M&E charges to pay for the life insurance guarantee, the sales person’s commissions and the administrative expenses of the contract. M&E charges are usually between 1% and 2% of the contract value, paid every year. If your deferred annuity has a value of $100,000, up to $2,000 annually will be used for M&E expenses. Even though you will likely never see these charges, they are being taken from your investment each year.

2) Surrender Charges – Virtually all deferred annuities that are sold through commissioned sales people will carry a surrender charge. Typically, these charges begin at 7% for the first year of the contract and decrease by 1% per year. Seven years after you purchase the contract, you may still have to pay 1% of its total value if you want to cash it in. Sometimes, you are allowed to withdraw up to10% of contract value yearly. However, the surrender charges assure that the insurance company will have your money long enough to pay for the high sales commissions required.

3) Management Fees – If you buy a variable annuity, the subaccounts are very similar to mutual funds. A typical subaccount will have a 1% or higher management fee. This expense is over and above the M&E fees that were previously discussed. While these fees are somewhat consistent with the fees charged for actively managed mutual funds, they are up to 5 times as high as the fees charged for indexed mutual funds and Exchange Traded Funds (ETFs). The subaccount returns will be net of the management fees, but they will not show the M&E fees that are assessed each year.

While it is true that a deferred annuity will be tax deferred until you cash it in or annuitize it, all gains of the deferred annuity will be taxed at your ordinary income rate when you receive your returns. Since the deferred annuity is typically held for 10+ years, this tax advantage may completely disappear when you cash it out.

If you believe that a deferred annuity is right for you, before you buy the product that your sales person is offering, contact Schwab, Fidelity, Vanguard or another discount brokerage house. They will likely have a similar deferred annuity product. Compare M&E expenses, surrender charges and management fees of the non-commissioned product with the one you are being sold. You will likely find that the non-commissioned product provides a better total return than the one that you are being sold.

Over the past several years, you and your spouse have successfully built a portfolio of investments. As your house has grown in value and the mortgage principal has declined, you also have a significant amount of equity in your home. To avoid the complications of probate, you have been advised to title your house, your brokerage accounts and your savings accounts in Joint Tenancy with Rights of Survivorship (JTROS). JTROS serves as a “Will substitute” and allows property to pass to the surviving spouse outside of probate.

You and your spouse want your children to inherit the fruits of your labor. Your wills make this decision very clear. Since your total estate is below $3.5 million, you are convinced that your estate planning is complete.

Unfortunately, your children may receive none of these JTROS assets when the second spouse dies. With JTROS, when the first spouse dies, the surviving spouse receives complete ownership and control of the property. The surviving spouse may remarry and put the property into JTROS with a new spouse. If your surviving spouse predeceases their new spouse, the new spouse receives total ownership and control of the house and all of the remaining assets, regardless of what is stated in the deceased’s Will.

To avoid an outcome that neither you nor your spouse wish, pay close attention to how your property is titled. To assure that your children will receive at least a portion of any remaining assets at the second spouse’s death, you can own your investments accounts individually or put them in individual living trusts. It may also be wise to own your house as Tenants in Common (TIC).

With TIC, each spouse typically owns an equal share of the house and has an undivided right to use the property. However, when one spouse dies, the deceased spouse can designate in their will who inherits their interest in the property. You could have your TIC property go into a trust. The trust can allow the trustee to provide income and even principal from any assets to be used to support your surviving spouse. When the house is sold, your 50% of the sale proceeds would go into the trust. When the surviving spouse dies, the remainder of the trust could pass on to your children.

If all of your property is currently titled as Joint Tenancy with Rights of Survivorship, you and your spouse should have a discussion about the pros and cons of this approach. If you decide that this does not accomplish your objectives, meet with an estate planning attorney and discuss the options available that will meet your estate planning goals.

Estate laws are complex. However, changing how property is titled is a simple and low cost procedure. Be sure that you address how your property is titled when you do your estate planning. If you don’t, your estate may never reach your desired beneficiaries.

Business Owners

As a business owner, you feel a responsibility to provide the best possible benefits for your employees. However, with current economic conditions, many small businesses can no longer afford to provide employer matching funds for their company sponsored retirement plans. Even without employer matching, you may still feel that it is your duty to provide your employees with a 401(k) plan.

As a small business owner, the types of 401(k) plans that are available are often limited. To keep the plan affordable, your plan may only provide a small number of mutual funds from a single family of funds. Typically, these mutual funds will have a front end load (sales charge).

There are three problems with this type of 401(k) plan:

1. A front end load provides for an immediate reduction in the investment returns for you and your employees.
2. If the number of mutual funds is limited, you may not be able to provide adequate diversification for you and your employees
3. The plan sales person may not have the training, knowledge and investment skills that are required to provide comprehensive investment advice on how to safeguard and grow your 401(k) investments.

If your plan has some or all of these drawbacks, examine your employee’s 401(k) contributions. You may find that most employees are contributing less than $5,000 per year to the plan. If that is the case, your employees will get the same tax deferred benefits and much greater investment flexibility with a traditional IRA.

If your 401(k) contributions are more than $5,000 per year, you must weigh your reduced amount of tax deferral against the cost and limitations of your plan. If the 401(k) is mainly for your employees, you may be doing them a favor by eliminating the company plan.

Employees

If your company offers a 401(k) plan, and you are under age 50,you may contribute up to $16,500 per year to the 401(k) plan plus an additional $5,000 per year to a Roth IRA. Full Roth IRA contributions can only be made if your AGI (Adjusted Gross Income) is under $105,000 as a single tax payer or under $166,000 as a joint tax filer. Let’s assume that you qualify for both a 401(k) and a fully funded Roth IRA.

If your company offers a 401(k) with an employer match, try to contribute the full amount that the employer matches. This “free money” from your employer provides an immediate 100% return on your 401(k) investment.

Now, let’s explore your options once you reach the employer match or if your company offers no employer matching funds. If your 401(k) plan comes with a wide range of no load investment options and skilled investment advice, it is likely wise to fund your 401(k) plan to the maximum amount possible. However, if your company provides a limited number of mutual funds with sales charges (loads) and offers limited (or poor) investment advice, you may want to fund a Roth IRA up to the $5,000 ($6,000 if you are over age 50) maximum, before funding your 401(k).

A Roth IRA can be established with a discount brokerage firm such as Schwab, Fidelity or Vanguard. You may then use no load, low cost mutual funds or exchange traded funds (ETFs) for your investment vehicles. You or your investment adviser can establish a diversified portfolio that meets your investment goals and matches your risk tolerance levels. Even though a Roth IRA contribution is not tax deductible, the contributions and investment returns can be withdrawn tax free during retirement.

Many larger companies have excellent 401(k) plans, offering low cost, no load funds, extensive diversification and skilled investment advice. However, if you own or work for a company where this type of plan is not available, consider your options. They are not as limited as you might think.

Will Social Security be around when you retire? In is my opinion that Social Security will survive and be available, even for employees that are just entering the workplace. Social Security is a “sacred cow” for all politicians that wish to be re-elected. Because of this, it will survive, regardless of the future costs and its associated debt. However, at some point, the cost of maintaining the present Social Security benefits will be overwhelming.

To offset the increasing costs of Social Security, the “Full Retirement Age” for younger workers will likely be extended beyond the current maximum of age 67. The maximum level of earning taxed will continue to increase beyond the current $106,800 and the combined Social Security tax rate of 12.4% will likely increase. There may also be “privatization” of a portion of Social Security taxes. “Privatization” would allow for government transference of some of the Social Security investment risk, as well as allow for inflation adjustments to be discontinued on the “privatized” benefits.

With Social Security changes likely, what should you do to maximize your retirement income? If you are under age 50, plan for your retirement as if Social Security benefits will not be available. While this scenario is highly unlikely, increasing your retirement saving will provide for a more abundant retirement, regardless of what happens to Social Security.

If you are over age 50, your Social Security benefits will likely be unaffected by any future changes. However, since the Social Security rules are so complex, be sure you understand all of the variables before you begin taking benefits. As an example, many people believe that, if they are fully retired, they should automatically begin taking Social Security benefits at age 62. However, this decision could cost them thousands of dollars in reduced benefits.

Let’s look at a few strategies on when to take Social Security benefits.

Strategy 1 - If you will have any meaningful employment between age 62 and your Full Retirement Age (FRA), wait until your FRA to begin your Social Security benefits. Any income above $14,160 annually will reduce your Social Security benefits by one dollar for every two dollars that you earn above that limit.

The next two Strategies assume that you are in good health and that you do not require early Social Security benefits for your financial survival.

Strategy 2 – Even if you are fully retired, start taking your Social Security benefits at your FRA instead of age 62. By doing this: 1) You receive annual Inflation adjustments based on benefits that are 33% higher; 2) You receive more total benefits if you live beyond age 77; 3) If your benefits are greater than your spouse’s and you predecease your spouse, your spouse can receive a 33+% larger payment.

Strategy 3 – If your spouse is younger and will receive a significantly lower benefit, consider waiting until age 70 to collect your benefits. This will provide you with a benefit that is 32% greater than your FRA benefit and at least 76% higher than your age 62 benefit. More importantly, if you predecease your spouse, he/she will receive this increased benefit for the remainder of their lifetime, if they wait until their FRA to begin taking Social Security benefits.

These three simple strategies demonstrate the importance of making an informed decision concerning Social Security benefits. The approach that is best for you will depend upon your health as well as any spousal age and income differences. As part of your abundant retirement planning, get professional advice on the vagaries of Social Security before making your decision on when to begin taking benefits. Doing this may provide thousands of extra retirement dollars for you and your spouse.

When you develop an investment policy, you define the asset classes you will consider for investments as well as the minimum and maximum portfolio percentages which may be allocated to each asset class. The asset classes you chose and their allocation ranges depend upon your age, risk tolerance and your total financial resources.

In the previous article, we considered two of the most common investment classes, equities (stocks) and fixed income (bond) investments. This month we will consider three additional asset classes.

Real Estate – The most common methods of investing in real estate are rental properties or Real Estate Investment Trusts (REITs). Owning rental real estate requires active management of the investment properties. Rental real estate is also illiquid, often requiring several months to sell at an acceptable price. If these two drawbacks are acceptable, the next step is to accurately evaluate the rental property’s total investment return.

With the current high foreclosure rate, you may find well priced rental properties. However, before you purchase, do a thorough financial analysis of your expected investment return. A simple way of doing this is to compare rental real estate “yields” to the yields of fixed income investments.

For rental property, annual “yield” is net income divided by your net property value. Net income is the expected annual rental income less all expenses, including mortgage payments, property taxes, insurance, property management fees and a reasonable property repair allowance. Net property value is the appraised property value less mortgage balances and all costs required to sell the property, such as realtor fees, closing costs, etc. Because of the previously described drawbacks, annual rental property “yield” should always exceed the yields available from fairly safe fixed income investments.

REITs can be excellent investments during economic prosperity. From 2003 – 2006, REITs provided high yields and excellent total returns. Currently, REIT funds, such as the Ishares Cohen and Steer ETF (ICF) are at historic lows. While they yield approximately 10%, REIT prices will likely remain depressed until a sustained economic recovery begins.

When considering real estate, always examine your investment policy. Rental properties can require significant capital investments which could exceed your investment policy guidelines for real estate investments.

Commodities – Commodities are typically too risky to be included in a moderately conservative investment portfolio. However, there are times when a small investment in a specific commodity is prudent. Gold is considered a safe haven investment as well as a hedge against inflation. A small gold investment may prove worthwhile, especially if gold prices retreat. Many experts also believe that oil prices will continue to rise when the worldwide economy stabilizes.

If you wish to invest in commodities, I recommend using Exchange Trades Funds. Gold can be purchased with GLD (SPDR Gold Shares) and oil with USO (United States Oil). Commodity investments are extremely speculative and should not exceed 5%-10% of your investment portfolio.

Cash Investments - Cash investments include saving accounts, money market mutual funds and CDs that mature in one year or less. The principal is safe, but the yield is usually low or even negative, when offset by inflation.

Currently, most money market funds are yielding under 0.5% and 1 year CDs are yielding approximately 1%. With these low yields, only funds that may be required in the next 12-24 months should be kept in cash investments.

The key to investment success is a well-balanced portfolio, reflecting current economic and financial conditions. Until economic conditions improve, a conservative investment approach will likely serve you well.

As a “leading edge” Baby Boomer, I am often asked: “When should I begin taking Social Security benefits?” The answer to this question is dependent upon many variables. However, the key is to understand how the complex Social Security benefit rules can be used to maximize your family’s retirement income. In the following scenario, we see how understanding the complex Social Security rules can increase a couple’s Social Security benefits by over $60,000.

George has just turned 66, his full retirement age (FRA), and has not yet filed for his Social Security benefits. He plans on waiting until he is age 70 to file for Social Security. By doing this, he will receive “delayed retirement credits” that will provide him with 132% of his full Social Security retirement benefit. This will allow him to collect $2,640 per month instead of the $2,000 per month he would get at age 66.

George’s wife, Barbara, has recently turned 62 and would like to start collecting her Social Security benefits. At age 66, her benefit would also be $2,000 per month. However, at age 62, Barbara will only receive 75% of her full retirement benefit or $1,500 per month.

When George and Barbara meet with their financial planner, they discovered a little known way for George to get a benefit now and still receive the full delayed benefit of $2,640 when he reaches age 70. George can immediately file for a spousal Social Security benefit and receive $1,000 per month. This amount is 1/2 of Barbara’s FRA Social Security benefit, since George is already at his FRA. Together, George and Barbara will receive $2,500 per month, until George turns 70.

When George turns 70, he will apply for Social Security benefits based on his earnings. He will then receive his delayed retirement benefit of $2,640 per month. When George turns 70, their combined Social Security benefit will increase from $2,500 per month to $4,140 per month.

There is another important advantage to this approach. If George dies before Barbara, a likely scenario since he is four years older and a male, Barbara may apply for “survivor benefits.” This will allow Barbara to receive George’s benefit of $2,640 per month instead of her $1,500 per month, for the rest of her life.

Assuming both George and Barbara live until they are age 80, this approach will provide George and Barbara $59,520 more in Social security benefits than if George had merely filed for his full benefit at age 66. In this scenario, I assume that there is no inflation. When inflationary increases are included, the increased amount of additional Social Security benefits collected are even greater.

This approach may not suit your needs. However, it demonstrates that Social Security is a very complex system. The decisions that you make on when and how to receive your Social Security benefits can have a significant impact on the retirement income that you will receive.

Before you file for Social Security, meet with a fee only financial planner who understands the vagaries of the Social Security system. By analyzing your financial situation this expert can help you choose when and how to take your Social Security benefits.

For someone who is self-employed, a SEP IRA is often the best way to reduce your taxable income and save for retirement. If your company is an S or C Corporation, you can contribute up to 25% of your W-2 income to a SEP IRA. With a sole proprietorship or an LLC your maximum contribution is 20% of your income. In either case, the maximum annual contribution is $46,000 for 2008.

If you have any employees, you must contribute the same percentage of income for any employee that is over 21, has worked for you for at least 3 years and receives at least $550 in annual compensation.

If you have no self employment income, you may be able to contribute to a traditional, deductible IRA or to a Roth IRA. To determine if you qualify for an IRA contribution, let’s look at the rules for each type of IRA.

To contribute to a traditional IRA, you must be under 70½ years old and you(or your spouse) must have earned income. In 2008, your maximum IRA contribution is $5,000 ($6,000 if you are over age 50).

If you are covered by a company retirement plan, you can deduct the maximum amount when your Adjusted Gross Income (AGI) is no more than $53,000 as a single tax payer or $85,000 as a joint filer. If your spouse has no earned income, they can contribute the maximum amounts to their own IRA, even when you are covered by a company retirement plan, as long as your AGI is under $159,000.

To contribute to a Roth IRA, your Adjusted Gross Income (AGI) must be less than $101,000 as a single filer or $159,000 as a joint tax filer. Your maximum Roth IRA contribution is $5,000 ($6,000 if you are over age 50). However, if you make any traditional IRA contributions, the maximum Roth contribution amount is reduced by the amount that you contributed to the traditional IRA.

Based on IRS rules, the decision on which IRA to fund is often obvious:

1. If you are not covered by a company retirement plan and, as a single filer have an AGI over $101,000 or as a joint filer have an AGI over $159,000, you can only fund a traditional IRA.

2. If you are covered by a company retirement plan and your AGI is over $85,000 but less than $159,000 as a joint filer or over $53,000 but less than $101,000 as a single filer, you can only fully fund a Roth IRA.

3. If you are over 70½ and have earned income, you can only fund a Roth IRA.

Funding a Roth IRA has the following advantages over a traditional IRA:

1. When buying your first home, a Roth IRA allows the withdrawal $10,000 of growth and income plus all of your contributions, with no taxes or penalties on the withdrawal.

2. For people under age 40, the tax free growth and withdrawal of funds during retirement often make Roth IRA contributions a better, after-tax choice.

3. When funds are required before age 59½, a Roth IRA typically allows the withdrawal of Roth contributions with no taxes or penalties on the withdrawal.

4. A Roth IRA in your estate is an excellent method of passing tax free funds to younger generations.

If there are no compelling reasons to chose a Roth over a traditional IRA, decide on whether you wish to reduce your current taxes with a traditional IRA or reduce your taxes during retirement with a Roth IRA.