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Business and Estate
ADVISER
A Publication of Business & Estate Advisers, Inc.

VOL. 20, NO. 2 WAYZATA, MINNESOTA Fall 2005

Remember the Six Pack ...
By Sarah Kaelberer

For years our firm has used the “six pack” of Coca-Cola bottles as a method to explain the six ways to place funds into a 401(k).  Since 2003 we have been anxious for our “Bottle #6” to come back into play! Just to give you a brief starting point:

Bottle #1:           Deferral (employee savings)
Bottle #2:           Employer Match
Bottle #3:           Profit Sharing (employer discretionary)
Bottle #4:           Profit Sharing Plus (additional contribution to higher paid individuals)
Bottle #5:           Rollover (from other employer plans or IRAs)
Bottle #6:           Roth Account

So what is this Roth 401(k) and why is it such a big deal? Well, there are tremendous opportunities for Roth 401(k)s for many individuals that are not eligible for Roth IRAs. Let me again back up and cover some basics.

Eligibility:  To be eligible for any contribution to a Roth IRA, income of the contributor must fall within a certain income limit.  For married individuals filing jointly, once the income is above $160,000, neither individual is eligible for a Roth IRA. For single filers, the upper income limit is $110,000. In a Roth 401(k), eligibility for the plan will mean eligibility for the Roth 401(k) regardless of income!

Taxes on money in:  Regular 401(k) savings are pre-tax (federal and state income). Regular IRA deposits are, depending on income and eligibility, tax deductible. Savings to Roth 401(k) are after tax. Saving limits are still subject to plan maximums ($15,000 for 2006 plus a $5,000 catch-up for those over age 50). A Roth 401(k) will still be eligible for company matching, if applicable.

Taxes on money out:  Since there are no taxes on contributions to regular 401(k), all withdrawals are taxed as ordinary income. Since there was no deduction on the Roth 401(k) contributions, as long as withdrawals meet some tests (individual is over age 59½ and the account has been open for 5 years) the withdrawal will be entirely free from income taxes. Now this is certainly an advantage for those anticipating equal or higher tax rates in retirement.

Required Minimum Distributions (RMDs): Personally, I find this to be the most beneficial aspect! On regular IRAs and 401(k)s, accounts for those over age 70½ are required to take annual distributions. There is an exception for those over age 70½ and still employed. As long as they are not an owner they can delay distribution from their current employer plan. Roth 401(k)s will be subject to RMDs. Roth IRAs, however are not and have never been subject to RMDs. So, under current regulations it appears that the Roth 401(k) can indeed be rolled into a Roth IRA and then required distributions are not required!

Whenever we are dealing with the IRS, the Department of Labor and ERISA, nothing is ever that simple! First, any 401(k) wishing to add this provision will have to be amended to do so. Second, is this here to stay? The Roth 401(k) springs from The Economic Growth and Tax Relief Reconciliation Act (EGTRRA 2001), which, as you may know, is subject to “sunset” in 2010 and the provisions of the Act will revert to 2001 status. There is continuous lobbying and debate of making many parts of this Act permanent. President Bush has indicated a willingness to make this permanent, but as we all know, nothing is permanent until signed into law.

Okay, my final note (and my compliance department would be proud!): the above information is generic and for informational purposes only. It is representative to the tax laws in effect as of this writing. It is not intended to serve as tax advice. Should you wish to discuss further details of the Roth 401(k), please feel free to call us at either of our locations.

“Is the Bear Market coming or going?” A black bear paid a visit to our Rice Lake office on a hot summer day this past July.

WHAT'S HAPPENING?

Never build a log cabin from scratch unless you have time on your hands!  Many of you know I started this ¾ scale venture about four years ago as a “playhouse” for my grandchildren. Sue has urged me to get it done so I now have it in high gear. I may even have the outside complete this fall!  But believe me when I say, it is cheaper to buy one of those ready made ones you see along the road now and then.  I’ve got over 200 trees in this deal and each tree takes at least 2-hours to fall, limb and make into a useable log!  But, I will say one thing, the finished product looks great and it will be a “lifetime” accomplishment when I finally get it done.


Our goals for 2005 were (in order) to 1) Provide World Class Service to our customers,  2) Be a World Class Place to work, and 3) Increase our business by 15% over our five year rolling average.  Our year ends on September 30 and we’ve met goal #3 but could have done better with #1 and #2.  In August, we held an all company meeting and have promoted Jill Johnson to be our “team quarterback”.  To provide World Class Service (better than anything you’ve seen), we need someone that can coordinate all efforts of the company to do so.  In the past I could promise the client service, Sarah could promise the client service, Steve could promise the client service but sometimes our internal communications didn’t get the message.  We strongly believe that to have Jill coordinate this service should see a noticeable improvement to our customer base.  Let us know what you think as the months unfold.
My dog is now a year older and the rookie season is over. This October I’m headed for the Delta Marsh (Manitoba) for a ten day duck hunt with clients and friends.  We’ll see if Lena has advanced or not!  I’ll give the full report in the next issue.

It was a thrill to be invited by Minnesota Life Actuary Bob Reynolds to a Canadian Fishing Trip in late July.  He took me to his “special lake” near Kenora.  This is a trophy walleye lake and one that Bob has been going to for 20 plus years, and I might add usually three times a year.  And, he was right, one morning in less than an hour, we boated two 26” fish, two 28” fish and one 29” lunker.  These are certainly the biggest Walleyes I’ve ever seen and I’m happy to report they’re all back in the water and hopefully will bite again on Bob’s line some day.  Thank you Bob for inviting me on a “memory trip”.


Four couples from Rice Lake, including Sue and I, decided on a little excursion to Northern Italy in September.  We began our adventure on Sept.15 and returned on the 25. We made it to Venice, Florence, Milan and the Mediterranean Coast.  Again, a “memory trip”.  Thank you Don and Pauli Storm, Dave and Sue Hildebrand and Dave and Sonja Wilson for including us in the fun.
Sue and I have even found time this past summer to discover the North Shore of Lake Superior.  This is one of those “best kept secrets” of the USA.  To have the largest fresh water lake in front of you and the Sawtooth Mountains in the back of you is a beautiful site.  If any of you have an interest we’d love to have you experience the North Shore with us during the fall, winter, spring or summer.  We’re also looking for some adventure types that would like to “take the drive” around the entire lake.
Don’t forget to mark your calendar that Skip-A-Day XXII is June 5, the first Monday in June of 2006 instead of the Monday before Memorial Day as it has been in the past.


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BULLETIN BOARD OF CURRENT EVENTS

September 2005

Three “Financial Fitness Seminars” were held in the Rice Lake Area. First annual North Shore Golf Outing.  Steve and a group of clients tested their skills at Superior National. Sarah spoke at a NAIFA symposium designed to help younger agents build their practice.

October 2005

Sarah, Steve, Dennis and Doug will attend the annual ValMark School of Life in Orlando, Florida.  Dennis and Steve will be making a presentation on “Comprehensive Financial Planning A-Z” to the entire ValMark organization. Dennis will be in the Delta Marsh for a 10 day duck hunt. There will be an employee benefit seminar in Rice Lake in late October.  Healthcare plan changes and 401(k) plan opportunities will be discussed. Sarah has an article on 401(k) Plans coming out in the October edition of Insurance Selling.

November 2005

Dennis will return to the Delta Marsh for a 3-day hunt and then to South Dakota for a 3-day Pheasant Hunt. No deer hunting this year for Dennis as the bi-annual family trip is scheduled for Thanksgiving Week.  This year’s trip is to Mexico as planned and orchestrated by oldest daughter Stephanie. November brings the semi-annual Deadwood R & R for Sarah and Darvin.

December 2005

Sue and Dennis go to Boston for a weekend with Tom & Galynn Brady Sr., Dan & Anne Rigby, Jim & Sue Chapman and Richard & Linda Sullenger.   The highlight will be attending a Patriot’s Game where Tom and Galynn’s son Tommy is the star quarterback.  

Sarah will complete a December enrollment meeting in South Florida (love it when our clients have their conferences somewhere warm in December and January!).

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Meet our Advisory Board Members

Todd D. AndrewsTodd D. Andrews
Wayzata Advisory Board

Q.  How did you first become acquainted with Business & Estate Advisers?   I met Dennis through my brother John who attended college with him and was one of his TKE frat brothers.
Q.  What, in your opinion, makes Business & Estate Advisers different from other financial services firms?  The personal service and interest which the employees at   B & E give to clients.  They give service to solve a problem or an issue not to sell products.

Don Cuskey, Jr.Don Cuskey, Jr.
Rice Lake Advisory Board

Q.  How did you first become acquainted with Business & Estate Advisers?   I served on the church board with Sue     (Dennis' wife) therefore I met Dennis and attended a seminar that RJF & Dennis put on.
Q.  What, in your opinion, makes Business & Estate Advisers different from other financial services firms?  B&E staff get to personally know their clients which helps with total goal achievement.

Ralph

Hammer Residences, the Wayzata-based not-for-profit organization that provides housing, daily living support training for adults and children with disabilities, has launched an art benefit event called   “The Art of Reaching Out…A SculpTOUR,” which features artist-decorated sculptures of Hammer’s figure logo, fondly named Ralph.  Pictured here is Business & Estate Advisers’ Ralph statue designed and painted by Twin Cities artist Danielle Ferrin.  Our Ralph is proudly displayed on the lawn of our Wayzata office.

Business & Estate Adviser's
"Tips for Teens"

Volume 11 Issue 1

Edited and Revised by Business & Estate Advisers, Inc. as an insert to our newsletter

By:  Steve Bowman, MBA, CFP

Any golfers out there?  If you have ever played golf you would know that shooting par on a hole is a good thing.  Par is determined by how many shots it is supposed to take an excellent golfer to complete a hole.  Who determines this?  I do not know, perhaps a group of excellent golfers go out there and they take the average of what they got.  In any case, if you shoot a par, generally you are a happy person.  Now, a birdie is even better.  If you get a birdie, you shoot one stroke under par which means you are better than an excellent golfer who shot par.  A really good day has you shooting a lot of pars, and a birdie or two.  But in reality, most of us have a job or go to school and we don’t get paid to play golf.  When we go out to the golf course we shoot a handful of bogies (1 stroke over par), a few pars, and maybe if we are lucky a birdie. 

What does this have to do with investing?  If I told you, you have the opportunity to shoot par on your investments a good majority of the time, would that be interesting? Shooting par over time can add up to a good score.

How to shoot par on your investments:
Mutual funds are a good way to access a large pool of investments with a relatively small amount of outlay.  With mutual funds, you can deposit say $50.00 and own a small piece of over 200 companies.  Why do you want to own a small piece of 200 companies?  In general the more you own, the less impact it will have if one of the companies goes broke.  One of the mutual fund mangers goals is to go out and select some companies that they believe will do well in the future.  Their selection process is always secret as they are competing for the investment dollars of the public.  Their goal is to try and pick companies that are going to do better than the average, better than par. Their goal is to shoot birdies for you.

What’s the problem with that?  Nothing.  But once we start trying to shoot birdies, we may end up shooting a bogie, or
worse a double bogie!  For example, one group of money managers thought they could shoot birdies by owning a well known company with operations in Minnesota.  In August they said this company stock will “outperform” its peers.  One month later the company is in bankruptcy and the share price nearly worthless, triple bogie. Who knows what the future holds? Nobody knows for sure. 

So, how can a person shoot par?  Instead of trying to shoot a birdie by picking companies that may perform well, we can pick the whole group of companies and shoot a par. 

We have found that if par is the goal then it is best shot using an Exchange Traded Fund.  These are like mutual funds in that you can own a small piece of a lot of companies within a single share.  For example, the Russell 1000 is an index made up of 1000 companies stocks.  One share of the Exchange Traded that represented this index was trading for around $70.00.  So, much like a mutual fund, you can access a good number of companies with limited outlay.

Are Exchange Traded Funds (ETF’s) for everyone?  Shooting par is good, but you have to look at the green fees it costs to even play.  Although ETF’s have significantly lower operational costs, acquiring a single share may be cost ineffective.  Thus it may still make sense to go with mutual funds in some cases, but it is important to see how well they have done in relation to par. 

The bottom line: in investing most people want to go for birdies, but in reality, over time, a solid game of par might end up in a better average score.  Indexes establish the par score and owning the index is a simple way of attempting a par score. 


Today's Quiz:

  1. Par is a good score in golf. T F
  2. You can own a piece of many different companies with a relatively small initial investment. T F
  3. Active money managers can predict the future.  T F
  4. Exchange Traded Funds invest typically in indexes. T F
  5. I need a golf lesson.T F

ALL CORRECT ANSWERS WILL RECEIVE A PRIZE! PLEASE MAIL OR FAX RESPONSES TO P.0. Box 679, WAYZATA, MN 55391 OR FAX (952) 475-0816

 

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Business and Estate
ADVISER
Business & Estate Adviser, published periodically, is composed on a personal computer utilizing Microsoft Word 2000 and Times New Roman typeface. Camera-ready copy is generated on a Hewlett-Packard LaserJet 4050 printer. Gray-shades and printing by Wallace Carlson Company, Minnetonka, Minnesota. For additional copies or information, please contact Jule Kingren at (952) 475-0440. Copyright © 1990-2004 Business & Estate Advisers, Inc. All rights reserved.

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