April ACap ReCap – Your Personal Finance Questions Answered
1. Can I open a Roth IRA for my kid(s)?
I received this question recently while speaking to a group of cardiologist. One of the doctors wanted to give his young child the gift of tax-free growth with a Roth IRA – a fantastic idea for parents who want to teach their children early about saving. To contribute to a Roth IRA, one must have earned income so your child cannot be unemployed. Also, while the maximum you can contribute to a Roth IRA in 2013 is $5,500, your child must have at least that much in earned income. The IRS defines earned income as “all taxable income and wages you get from working.” So if your child has a summer job earning $2,000, the maximum he/she can contribute to a Roth IRA is $2,000. If you have the extra cash and you want to help your working kids start saving for their retirement as early as possible, then contributing to their Roth IRA would be an excellent idea.
2. What is a target-date fund?
A target-date fund (aka: life cycle or aged-based fund) is a mutual fund that invests according to your target retirement date – the fund starts off invested mostly in stocks when you are young and becomes conservative over time as you get closer to retirement. Target-date funds usually have a date associated with them such as 2040 so that you can select a fund that closely matches your retirement date. The idea behind target-date funds is simple enough and appealing to many because the funds are assumed to be set-it and forget-it type investments. Unfortunately, such funds have several limitations worth noting. Target-date funds assume that everyone in the fund has the same goals and risk tolerance. Let’s assume you have two individual who are the same age, earn an equal annual salary, and have the same size portfolio. These two individuals can have completely different financial goals and most importantly, risk tolerances. Yet if they invest in the same target-date fund based on their age, their needs will not be met. There are other problems with target-date funds such as the lack of an appropriate benchmark or that they tend to invest in the same family of funds. Nonetheless, target-date funds have recently become the default investments in 401k plans, meaning if you do not select your own investments, you will automatically be placed in a target-date fund based on your age. Stay tuned for a more in-depth article on the pros and cons of target-date funds.
3. How can I tell if I’m paying hidden fees on my investments?
This was a great question I received while speaking to a group of residents and fellows when I stressed the importance of working with a Fee-Only advisor. Large financial organizations are notorious for assessing fees; while some fees are disclosed, most are hidden. One of the most commonly used methods of hiding fees is by marking up the price of the investment. For example, suppose you deposit $100 into your retirement account every month to buy a mutual fund that costs $10 per share, in theory, you should get 10 shares of that mutual fund ($100 / $10 = 10 shares); however, the investment firm actually charges you $10.575 for each share so you really only get 9.46 shares ($100 / $10.575). Your monthly statement shows your $100 investment so you assume you are not paying any fees, but you just paid 5.75 percent to make an investment and a portion of that went to your advisor. You would never know this unless you took the time to reconcile the price you paid for each share versus the actual price found online. When you work with a Fee-Only advisor, you can rest assured that absolutely no one pays the advisor except you the client – there are no kickbacks or incentives for recommending one investment over another.
4. Do I need an estate plan?
If you own anything, you need an estate plan. Granted, the complexity of your estate plan is dependent on the type of asset(s) you have – it could be as simple as deciding who will get your dog when you pass or which of your heirs will inherit the family business. An estate plan can also let you choose a person to act on your behalf should you become incapacitated. In addition, a well-constructed estate plan can ensure your assets are distributed according to your wishes and not those someone else. The best thing to do is schedule an initial meeting with an estate planner to see whether or not you need a plan. Most estate planners will give you a free initial consultation. Think you need an estate plan? Contact us if you want a referral to a great estate planner in your area.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com