Financial Frontlines®

Some of you retired or separated from the Service soon after implementation of the Post 9-11 GI Bill in August 2009.  You probably didn’t realize at the time (who did?) that you had to transfer the educational benefit to dependents BEFORE you actually separated from the Service.

Maybe others of you didn’t find out about the “…before you separate policy…” until after separation.  Of course, the longer the time period after the P911GIB implementation, the less likely it is that you couldn’t have known about the policy.

If you didn’t transfer benefits but intended to, you have an option to try and fight for your transfer benefit.  The Services control the transfer benefit, not the VA.  If you were still in the Service after the Aug 2009 Post 9-11 GI Bill start date, you were eligible to transfer the benefit up until your retirement or separation date.

Your option is the Board for Correction of Military Records (BCMR) program.  Each Service has a BCMR program.  This is not an automatic approval process.  You can be turned down under this program.  If, and this is a big IF, the Board decides in your favor, your transfer benefit can be reinstated.

You have to apply to the BCMR for consideration.  The burden is on you to prove the Service neglected to provide proper management or counsel that denied you benefits you intended to exercise or tried to exercise.  Saying something was “unfair” won’t cut it.  You have to show evidence that you were wronged by the Service per laws, regs, policies, directives, deficient base-level program, etc.  Why didn’t you apply prior to you leaving the Service?  How is this the Service’s problem and not a personal problem?

Think you have a case?  Put together your BCMR package and see what happens.  See the appropriate web site for information on the process:

Army:  http://arba.army.pentagon.mil/

Navy/Marines:  http://www.donhq.navy.mil/bcnr/bcnr.htm

Air Force:  http://www.afpc.af.mil/afveteraninformation/afbcmr.asp

Post 9-11 GI Bill law: http://www.law.cornell.edu/uscode/html/uscode38/usc_sup_01_38_10_III_20_33.html

I hear it all the time.  We assume when we have several VA disabilities with their associated ratings, to come up with the combined rating, we should add the ratings together.  That’s obviously not how it works because you’ve tried this.

The VA figures your combined disability rating by calculating your non-disability rating first.  Actually, the VA calls it your “efficiency” rating.  It goes like this.  A person with a disability rating of 30% is considered 70% efficient, able to function normally so to speak.

To combine your ratings, rack and stack your disability ratings from the most severe rating to the least severe.  Let’s say you have disability ratings of 70% and a 40% rating.  That means you have efficiency ratings of 30% and 60%.

Multiply the efficiency ratings together to get an 18% efficiency rating.  Subtract this from 100% to get 82%.  Round up or down to the nearest number divisible by 10.  80% in this case.

Have more than two ratings?  Factor each additional rating by multiplying the combined ratings before it.  Example, multiply the first two efficiency ratings.  Use the result from the first two ratings to multiply by the third efficiency rating.  Use the result of the three ratings to multiply by the fourth rating and so on.

For more information and the chart used to combine ratings, click here and do your own math.

This content is provided courtesy of USAA.

By Scott E. Halliwell, USAA Certified Financial Planner® Practitioner, ChFC®, CLU®, CWS®

It’s hard to believe that we are now into the second year of no income restrictions on Roth IRA conversions, but it’s true. Beginning in 2010, the rules were changed to allow anybody, regardless of income, to convert a traditional IRA to a Roth IRA — and wow, has that change ever cranked up the interest in this strategy!

Unfortunately, with more interest often comes more confusion and the Roth IRA is no exception. One of the biggest areas of confusion I’ve seen with this retirement savings plan is around the tax treatment of withdrawals. To bring some clarity to this, I thought it might be helpful to discuss this issue in layman’s terms (or as close to those as this topic will allow me to get).

Three Possible Pieces
To understand the tax implications of Roth IRA withdrawals, it helps to first understand the IRS generally recognizes Roth IRA balances as having three possible components. These are:

• Regular contributions to the Roth.
• Conversions contributions (Traditional IRAs or Qualified Retirement plans converted to a Roth).
• Earnings and growth on these contributions.

Unfortunately each of these has a potentially different income tax treatment (imagine that — complication as it relates to taxes!) and you don’t get to decide what comes out first (more on that later). Let’s examine how a withdrawal of each of these possible Roth IRA components is typically treated for tax purposes.

Regular Contributions
By comparison, withdrawals of Roth IRA dollars originating as direct contributions are probably the easiest to understand. Contributions can be withdrawn at any time, for any reason, without taxes or penalties. It just doesn’t get much easier than that.

Conversion Contributions
The rule change last year that gave everybody the ability to convert Traditional IRAs to Roth IRAs has increased the popularity of Roth IRA conversions. However, the big hang-up with conversion contributions (as compared to regular contributions) is that withdrawing them can lead to penalties if you don’t follow the rules. In general those rules are:

• Conversion dollars (but not their earnings) withdrawn prior to age 59 1/2 and within five years¹ of the conversion will be penalized.
• Conversion dollars (but not their earnings) withdrawn after age 59 1/2 or after five years¹ from the conversion will not be penalized.

Starts on the first day of the tax year in which the conversion was made. Each conversion carries a separate five-year-window.

Earnings
Finally, we get to withdrawals of Roth IRA dollars representing earnings or growth.
We have already examined how regular contributions can come out any time without taxes or penalties. We have also seen that withdrawals of conversion contributions may be subject to penalties if rules are not followed. Now we’ll look at earnings — which can be both taxed and penalized if not taken correctly. Generally speaking:

• Earnings withdrawn prior to age 59 1/2 will be taxed and will incur a 10% penalty.
• Earnings withdrawn after 59 1/2 and within 5 years² will be taxed, but not penalized.
• Earnings withdrawn after age 59 1/2 and after 5 years² are tax free (Finally — we get to the reason most people go with Roth IRAs in the first place!).

The five-year-window to determine if withdrawn earnings are taxable begins on the first day of the tax year for which the first contribution to the account was made, or the first day of the tax year in which a conversion is made — whichever came first. It’s worth noting that this is only relevant for withdrawals after age 59 1/2 since any withdrawal of earnings prior to that will result in taxes and penalties (unless an exception applies).

What Comes Out First?
So now that you know how each possible component of a Roth IRA withdrawal is treated for income tax purposes, the only remaining question is this: In what order do these possible components come out upon withdrawal?
Unfortunately, you don’t get to decide — the IRS has rules for that as well!

The order in which Roth dollars come out is exactly how I have reviewed them in this post:

1. Regular contributions.
2. Conversion contributions, on a first-in first-out basis.
3. Earnings on contributions.

Exceptions, Exceptions
Finally, as with just about every income tax rule, there are of course exceptions to the basic treatments I have outlined in this post. As a matter of fact, there are around 10 exceptions to the 10% early withdrawal penalty rule as well as a handful of exceptions to the 5 year holding requirement. Consequently, it’s always best to speak with a qualified tax advisor about your specific situation before taking any action related to Roth IRA withdrawals.

I also recommend taking a look at IRS Publication 590, the source of information I used for this post.

If you have a Roth IRA, hopefully you won’t need to tap into it until long after you reach age 59 1/2. However if you do, hopefully you now have a little better understanding of how withdrawals are treated and what to watch out for.

USAA’s investment experts talk about where the team is finding value in this uncertain financial market-

This content is provided courtesy of USAA.

By Wasif Latif, Vice President Equity Investments &
Matt Freund, Senior Vice President, Investment Portfolio Management

Okay, we admit it. We do occasionally find ourselves talking about what it must have been like to have been asset allocators in the 1980s and 1990s, those golden decades when the Federal Reserve Board broke the back of inflation, leading to a multi-year drop in interest rates.

The Cold War came to an end, bringing a peace dividend to the U.S. budget that, with the cooperation of both political parties and big stock market capital gains, led to government budget surpluses. Government was getting out of the way of the markets — some say too far out of the way — and tax rates were coming down.

Globalization was taking hold in a way that made investors optimistic, the world was generally at peace and the average annual returns from the S&P 500 Index in the 1990s was 17.8%. The maestro himself, Alan Greenspan, seemed to have the magic touch, taming the economic cycle and leading the way to a future domestic and global prosperity.

Just one decade later, we live with current and projected U.S. federal budget deficits that strain weary eyes, if not credulity.

The country is fighting two wars and dealing with the aftershocks of a real estate boom turned bust, leaving an estimated 20% of the nation’s homeowners with houses worth less than their mortgages.

Developed market stocks lost money in the last decade which, along with declining home values, has left many Americans feeling less prosperous, more nervous and less willing to spend. Unemployment has doubled, and it’s even worse if you consider discouraged workers.

Faith in all institutions, from financial to governmental, has collapsed in the wake of a credit crisis, a financial crisis that almost led to a meltdown of the U.S. banking system and the greatest recession since the Great Depression.

No Wobbling

We clearly face a year in 2010 that will require a steely backbone. As British Prime Minister Margaret Thatcher told the first President Bush shortly after Iraq’s invasion of Kuwait, “This is no time to go wobbly.” Here’s a short-list of “known unknowns” that we face this year:

• At the one-year anniversary of its bottom on March 9, 2009, the S&P 500 Index has gained 72.29% through March 9, 2010. That’s an awfully big move in one year, and one that will need to be sustained by continued gains in revenues and earnings.
• The credit markets have largely recovered from the credit crisis, but much of the healing has been courtesy of massive government intervention. This was partly through the effort known as quantitative easing, a multi-trillion dollar program through which the Fed purchased U.S. Treasury and government-backed mortgage securities for its own balance sheet. This program, which needs to be carefully unwound, was extended three months in late 2009 and is currently scheduled to conclude at the end of March. Will the Fed extend the program in some way in order to keep interest rates low, especially on mortgages?
• U.S. unemployment remains stubbornly high, and the latest unemployment numbers, including discouraged workers and those working part-time jobs not by choice, has reached 15%, seasonally adjusted. With consumer spending making up two-thirds of the U.S. economy, the unemployment situation is not heartening.
• While growth in the emerging markets continues to impress, we’ve recently seen the biggest engine, China, take steps to avoid a credit/housing bubble that could slightly depress economic activity. There are also sovereign debt issues, especially in Europe, at a time when many countries around the world — especially ours — need to continually issue new debt and roll over old debt to get the economy back on a sustainable growth path.

Our View of these Intractable Issues

In terms of S&P 500 valuations, it’s important to remember that the recent huge gain came off the very depressed levels of last March. At its current level of around 1,140, the S&P 500 appears fairly valued, trading at 14.6 times the 2010 earnings estimate. This is still a full 27% below its 2007 high. U.S. Gross Domestic Product fourth-quarter growth was just revised upward to a healthy 4.9%, the best since the third quarter of 2003.

Corporate profits are improving at a time when balance sheets are strong and costs have been cut. There is room for stocks to move higher, especially U.S. large caps with reasonable valuations, cash on hand, access to global markets and the ability to access the debt markets.

Further, there is tremendous liquidity sitting on the sidelines in almost zero-yielding money market accounts and 1% to 2% savings accounts. U.S. money market funds hold more than $3 trillion and there is another $1 trillion in excess reserves on bank balance sheets, with an additional $1 trillion held by U.S. companies.

When it comes to quantitative easing, we look at Fed Chairman Ben Bernanke’s history. As a student of the Great Depression, he remembers when Franklin Roosevelt pulled back in 1937, raised taxes and effectively extended that terrible period until the U.S.’ entry into World War II.

Despite the Fed’s transparency, we don’t see the government allowing us to re-enter crisis conditions, especially after spending trillions of dollars and backing tens of trillions of dollars of debt securities. This bodes well for the corporate bond market, the housing market and the economy.

As for unemployment, it appears that the government is finally getting serious, with both parties facing mid-term elections in November. It won’t be easy, but this much is clear — even a slow increase in employment can have a positive impact on consumer behavior, which may lead investors to seek less-conservative options.

Finally, we are concerned that emerging markets stocks may have gotten ahead of themselves at the same time developed markets, especially in Europe, may be facing issues. We have therefore slightly reduced our overweight to emerging markets, remain underweight in non-U.S. developed markets, and have increased our overweight to the USAA Precious Metals and Minerals Fund.

So there is value, and we’re working to find it. There are portions of the bond market, particularly among banks and insurers, commercial mortgage-backed securities and select corporate bonds that our fixed income managers find attractive, and they are monitoring and adjusting portfolios accordingly.

Our goal at this point is to give ourselves maximum flexibility to deal with volatile markets, providing protection to our managed account-holders while giving them the opportunity to take advantage of selloffs if we perceive that they are overdone, as was the case with the stock market swoon in January. We will look to gradually de-risk as the year goes on and expectations for the economy decline later in the year.

Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Contact us at 1-800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.

This content is provided courtesy of USAA.

A surging stock market late last year may have helped you regain some of the ground your 401(k) lost during the global financial crisis.

Now, the markets are jittery as everyone wonders if the recovery is for real. Once again, you may be feeling unsteady about your employer’s retirement savings plan.

“Let this decade’s rocky start be a not-so-gentle reminder to all of us to make strategic moves with our 401(k) plans,” urges USAA CERTIFIED FINANCIAL PLANNER^TM practitioner J.J. Montanaro.

Here, Montanaro looks at some of the lessons learned from the recent economic downturn and recommends six tools for managing your retirement plan.

1. Stop trying to outsmart the market. When people try to guess what the market’s going to do next, they often become their own worst enemies. Want proof? In the first quarter of 2009, Americans pulled more than $1 billion from investment options that held stocks, according to a survey by global human resources firm Hewitt Associates. Stocks bottomed March 9, 2009, which means many of those people locked in their losses and then missed out on one of the biggest rallies of the past century.
2. Make sure you have the right mix. Some investors may have fled stocks because they didn’t realize just how much risk they were taking — until it was too late.
   While stocks historically have offered attractive long-term returns, they also expose you to the risk of big declines. That’s why it’s important to allocate your money across different types of investments.
   Building a diversified portfolio is much easier than you think, especially if your retirement plan offers target retirement funds. They’re customized based on your planned retirement date. You simply pick the fund that’s closest to your planned retirement, and the fund manager creates a diversified portfolio that becomes more conservative as your target gets closer.
   If your employer’s plan doesn’t offer target funds, USAA’s Portfolio Planner can recommend an investment mix in a matter of minutes.
3. Don’t lose your balance. Over time, your portfolio may start to drift away from its original mix. It’s inevitable as the investments that make up your portfolio grow and shrink at different paces.
   Let’s say you put 50% of your portfolio in stocks and 50% in bonds. Next, let’s assume that, over the next year, your stock funds grow by 15% while your bond funds lose 5%. You’d now have a portfolio that’s 55% stocks and 45% bonds.
   To keep your portfolio aligned with your appetite for risk, it’s important to review and possibly reset your investment mix at least once a year. It’s called rebalancing, and about half of all 401(k) plans can do it for you automatically, according to Hewitt Associates.
4. Pump up the volume. When it comes to saving for retirement, Americans often think their success depends entirely on the economy and the markets. They forget that they control the most important variable of all: how much they’re saving.
   The great thing about employer savings plans is that the money gets put to work before we ever get our hands on it. Be bold. Increase your contribution rate to the highest level you think you can possibly manage, and you’ll be surprised how little you miss the money. At a minimum, contribute enough to get your employer’s full match. It’s money in your pocket.
5. Bring it all together. If you’ve changed jobs a few times in your career, chances are you’ve got some unfinished business. You need to decide what to do with the money sitting in your former employers’ 401(k) plans.
   You can tie up those loose ends by moving your money to an IRA in a tax-free move called a rollover. Consolidating your money with rollovers can simplify your life and give you access to more investment options.
6. Turn it into income. If you’re close to retirement, you face an intimidating challenge: figuring out how to make that money last the rest of your lifetime. As part of a comprehensive retirement plan, consider an immediate annuity.
   “An annuity lets you exchange some of your savings for an income that’s guaranteed to last your entire lifetime,” says Montanaro. “At a time when employer pension plans are becoming rare, annuities give retirees a do-it-yourself option.”