Each year, the IRS releases inflation-adjusted figures for key retirement contribution limits.  Some limits remain the same, while others may experience a slight increase.  Below are the contribution limits for 2012.  The “catch-up” limits apply to those 50 years or older.

2012 Contribution Limits

*indicates a change from 2011 tax year limits.

I am considering buying bond funds and would welcome your recommendations. I recently read in Time magazine that you could get hurt if you’re invested in a bond fund. How can I get hurt holding bonds?

Many people think bonds are risk free, but that is not actually true. There are multiple risks associated with bonds, but they can be an extremely important component of a portfolio despite those risks. And, if properly allocated, they can provide a level of security above and beyond the equity markets. Of course there is no free lunch, and the added stability of bonds requires a tradeoff. Namely, you are foregoing the equity premium associated with stocks.

We recommend using a mix of high quality short- and intermediate-term government and Treasury issues. For tax-deferred accounts we include Treasury Inflation Protected Securities (TIPS). This allocation is purposefully designed to be very conservative. Nonetheless, it is still subject to certain risks. Interest rate and inflation risk make the top of the list. You can alleviate the risk of inflation through the use of TIPS. Interest rate risk is somewhat of a different story.

There is an inverse relationship between bond prices and interest rates. As rates rise, bond prices fall and as rates fall, bond prices rise. Longer-term bonds are hit hardest in a rising rate environment; short-term issues are hurt the least. Of course shorter-term issues generally pay less interest. If you want an appreciable return – especially in today’s low rate environment – you need to extend beyond extremely short-term debt. Our solution is to limit risk exposure and also gain some additional yield by using high quality short- and intermediate-term US government and Treasury debt.

Every year, we update two of the core articles in our Best of Merriman library – Fine tuning your asset allocation and The ultimate buy-and-hold strategy.

The 2012 updates of these articles, which now include performance information through 2011 are now available in our Best of Merriman library.

The new cost basis legislation means some changes to the 1099 Composites you will receive from your custodians in late January. The most notable change is the revised 1099-B, which now displays cost basis information, including: the date of acquisition, the adjusted cost basis, disallowed wash sale losses, covered and uncovered securities status, as well as the specific holding period indicating your total short and long term gains and losses.

Also included in the Form 1099 Composite this year is a newly revised Year-End Summary Report (for Charles Schwab accounts) or a Supplemental Information Report (for Fidelity accounts). These additional summary reports provide a consolidated view of the realized gains and losses, the cost basis summary and the wash sale data for the tax year 2011. A summary of fees and expenses has also been added to help you identify the total management fees debited from your account(s).

This new format now consolidates all of your tax information into one easy and convenient report, making the headache of tax preparation much easier for yourself and your tax preparer. For tax year 2011, the cost basis information is being provided to you for informational purposes only and will not be reported to the IRS. However, cost basis information on mutual funds and ETFs purchased on or after January 1, 2012 will be reported directly to the IRS on an annual basis beginning with the tax year 2012.

If you have questions, please consult with your tax preparer or refer to these guides from Charles Schwab and Fidelity. Additionally, some custodians provide tax information electronically, so you don’t have to wait for the hard copy to arrive in the mail. If you have not already selected that option for your account(s), you may do so by accessing your account online or, if you’re a Merriman client, by calling your Merriman Client Service team at 1-800-423-4893.

In case you missed one, or are just tuning in, here are the top 5 most-listened-to Sound Investing podcasts of 2011:

#5 – Les Masonson helps us debunk the myths about market timing

#4 – What returns should we expect from the stock market in the future?

#3 – 10 year report card, DFA vs Vanguard

#2 – What should I do with my Required Minimum Distribution if I don’t need it for income?

#1 – Quarterly report, DFA vs Vanguard

As we enter a new year, we thought it would be fun to look back at the ten most-read blog posts of 2011:

#10 – Fixed index annuities: Perfect product or a ripoff? By Jeremy Burger

#9 – Performance: Time Weighted Return vs. Internal Rate of Return by Dave Spratt

#8 – Social Security as fixed income by Paul Merriman

#7 -  Tracking error: What is it, and why does it matter? by Jeremy Burger

#6 – We’ll say it again: The choice of assets can make a big difference by Larry Katz

#5 – Is rampant inflation an upcoming problem for the US? by Mark Metcalf

#4 – Strategies for recovering from market downturns in retirement by Mark Metcalf

#3 – Evaluating new investment products by Dennis Tilley

#2 – How to invest so your money lasts in retirement by Larry Katz

#1 – Are dividend-paying stocks good bond substitutes? by Larry Katz

Our friends at Thomson Reuters have provided another wonderful checklist of year-end tax planning opportunities. As we enter the final week of the year, it’s worth considering if any of these options can save you money. Read More…

I have 5 nieces ranging in age from 2 to 14. We want to give them money instead of toys for birthdays and Christmas. We are talking about $25 each for birthdays and Christmas for now. That’s only $50 per year until we can increase it. Where is the best place to put that money?

The ability to delay gratification goes hand in hand with long term success.  Not only will your gift help provide financial security but it will set an important example.  Sure, every kid would love to have the latest and greatest toy.  But – at least to us boring adults – the prospect of an extra several thousand dollars for college, retirement, or a down payment on a home is much more appealing.  Granted this is not as tangible and doesn’t present as well to a 7 yr. old as a box of Legos, for example.

The option you choose depends upon the circumstances of each child.  If the goal is to fund college my first recommendation would be to use the West Virginia Smart 529 Select plan.  This plan has a low minimum initial investment and offers age-based portfolios that allocate amongst stocks and bonds based upon the beneficiary’s age.  As the child approaches the distribution phase (college) the portfolio automatically adjusts to a more conservative allocation.

However, the West Virginia does assess a $25 annual maintenance fee for smaller accounts.  The details of which can be found in the aforementioned link.  In your case it may be best to explore the 529 plan associated with your state of residence.  When the account meets one of the exceptions for the $25 West Virginia plan fee you can roll the assets into it.

Another option would be contributing to a custodial account such as a UTMA or UGMA.  The downside to a custodial account is that there are no real tax advantages.  However, if the child is not going to go to college it may be a sensible option.  Unlike 529 plans the only restriction for a custodial account is that the money must be used for the presumed benefit of the minor.  As mentioned above this would be an appropriate vehicle to save for something such as a down payment on a home.

Finally, once the kids begin to earn income you have the option of helping them set up an IRA.  What I love about this option is the time horizon and the shared responsibility.  Not only could you contribute $50/year, but you could encourage them to do the same.  Again, this is setting an example that will help shape their perspective and increases their chances, in this case for retirement success.

At the end of the day the foregone toy will be a distant memory.  More importantly, you will have made a lasting contribution to the financial security and education of your nieces.

During several recent discussions with clients, I’ve heard a common question, “Why isn’t my portfolio doing as well as the market?”  This inquiry, of course, leads to another question: “What is the market?” To most investors, the market is either the S&P 500 or the Dow Jones Industrial Index. While these two indices are often cited by news outlets, they only cover portions of the larger global market.

At Merriman, we have long advocated that the allocation of the equity portion of your portfolio include large company stocks, small company stocks, international stocks, emerging market stocks and real estate investment trusts. Each of these asset classes perform differently over time, sometimes dramatically so. Tracking error, the way we refer to it here, is the amount by which the performance of a portfolio differs from that of the major market indices. In some years, this difference will be positive, meaning your portfolio outperformed a major index like the S&P 500. However, there will be years like 2011 when these additional asset classes will lead your portfolio to underperform the S&P 500.

Read More…

If you are like most of us, you likely visit your doctor’s office at least a couple of times a year. But when was the last time you had a check-up for your 401(k)?

It would not surprise me if you said, “not in quite a while”. But getting a financial check-up for your 401(k) account is extremely important, especially given the heightened economic issues and market turbulence over these last few years.

One of the many benefits of being a Merriman client is that we have the tools to help you align your 401(k) investments once a year. All you have to do is provide us with the mutual fund choices within your 401(k).

Read More…