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Corporate or Business Finance Note

Stocks and Your Portfolio The first thing you should know about stocks before adding them to your portfolio is that they carry a certain amount of risk. This is because the returns on stock are not guaranteed; not by the government, not by the company issuing the stock, and certainly not by your broker. That means that there is a chance that your actual return will be different than what you had expected. For instance, you might purchase stock under the expectation that its price will rise steadily over time and that it will pay you annual dividends. However, if the company experiences financial problems, you may not receive the price appreciation or the dividends that you expected. In fact, the company could even go out of business, in which case you could lose your entire investment. On the flip side, however, there is always the chance that the stock will outperform your expectations. It could double in price and start paying out hefty dividends, in which case you would enjoy a gain greater than what you had expected. Because there is uncertainty regarding which of the various possible outcomes will occur, you bear a certain amount of risk when purchasing the equity. How do the risks associated with stocks affect your overall portfolio? That depends upon what other investments are in your portfolio. In general, the risks associated with investing in stocks are greater than the risks associated with investing in bonds or money markets . At the same time, however, the risks associated with investing in stocks are less than the risks associated with investing in options or futures . Of course, not all stocks pose the same level of risk: some (such as internet stocks) are much higher risk than others (such as utilities), so it's important to understand the amount of risk you would be taking on with any given investment. In order to manage the risks associated with investing in stocks,most investors turn to a practice called diversification when building their stock portfolios. Diversification is a method of risk reduction in which investors buy multiple securities instead of just one. As a shareholder in several companies, the diversified investor knows that if one of his or her stocks happens to fail then there is always the chance that another one could gain enough to offset the loss. It's basically just a way for you to not put all your eggs in one basket, which is also the concept underlying mutual funds . There are two ways to increase your diversification (and reduce your risk): increase the number of stocks you own or own stocks that are fundamentally different from one another. Of course, you can't totally eliminate all the risks involved in stock investing because there is still market risk, the risk that the entire market will fall. In that case, no matter how well diversified you are, your portfolio will suffer. The other variable that will influence the amount of risk in your stock portfolio is your time horizon. Over the long, long term (several decades), history has shown time and again that stock prices outperform almost all other investments. However, in the short run stock prices often go down (about half the time, if the time period is sufficiently short). That means that if you are at a point in your life when you may need to sell your stocks in the short run (such as if you're close to retirement), then you may want to think twice about investing in stocks. There is a definite possibility that

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Corporate or Business Finance Note
the stocks that you buy now may be worth significantly less one or two years in the future. Most likely, however, they will be worth significantly more ten or twenty years in the future. So before you invest in stocks, you should sit down and examine both your own time horizons and those of the market in order to see whether or not you can bear the risks associated with short term stock investing. Once you've thought about the risks associated with stock investing and figured out your plans for diversification, the next issue to consider when adding stocks to your portfolio is which stocks to add. You'll first want to take a look at your particular investing objectives. If you're looking for steady income with low risk, you may want to consider investing in income stocks . On the other hand, if you're looking for opportunities that may result in a big payoff and you're not too concerned about the risks involved, you might want to try investing in growth stocks . There are a number of different stock strategies that you can use to try to meet your goals . Once you've decided on a strategy, the last step is to determine whether or not you should buy the stocks you want given the prices at which they are selling. In order to do this, you value the stocks you are interested in according to what you believe they are worth and then compare them to their market prices. If you think your stocks are worth more than what they are selling for, then they are good candidates for purchase. If you think they are worth less than their price, then you might want to wait before purchasing them. The method of determining a stock's worth is called valuation, and there are many different approaches to it. Some investors look at a company's fundamentals while others look at quantitative data regarding the stock's price and its trading patterns . You'll probably want to look at both of these techniques in detail before settling upon which one you think is the best method for you to value stocks for your portfolio. You should also check out our "Choosing a Stock" section for more advice on how to select individual stocks to invest in . Introduction to Stocks Stocks are among the most talked about and most popular investment opportunities available. But although virtually everyone has heard about stocks, many people don't understand the basic concepts underlying them. Indeed, the starting point for any investor interested in investing in stocks should be to understand what shares of stock actually represent and why there is a market for them. Simply put, shares of stock represent partial ownership in a company. That is to say, when you own a share of stock, you actually own a part of the company, not just a fancy sheet of paper. This means that you have a say in how the company is run and that you have a claim on the company's profits if and when they are paid out in the form of dividends . The more shares of the company that you own, the more say you have in how the company is run and the greater your claim on the company's dividends. Ownership in the company is determined by the number of shares you own divided by the total number of shares outstanding. So, for example, if a company has 100 shares of stock outstanding and you own 50 of them,

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Corporate or Business Finance Note
then you own 50% of the company (of course, most companies have millions of shares outstanding.) That, in essence, is what it means to own stock. In reality, of course, there is much more to it, starting with the reasons why companies have stock in the first place. In fact, not all companies have stock. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. What distinguishes a corporation from these other businesses is the structure of its ownership. A corporation is in itself its own entity and is owned by shareholders, whereas in a sole proprietorship or limited partnership the company is directly owned by the sole proprietor or partners, respectively. The owners of the corporation own it through the ownership of shares of stock. There are many reasons why a company might choose to become a corporation. First of all, incorporation gives the company separate legal standing from the owners and protects the owners of the company from being personally sued in the event that the company does injury or harm to another person or corporation. This concept is known as "limited liability" and it protects the owners of a corporation from being held personally liable in the event that the company is the subject of a lawsuit. Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations (although these can be both advantageous and disadvantageous). So how does one obtain stock ownership in a corporation? For many companies, shares of stock are limited to the founders of the company and/or their employees. These companies are called "private" companies because their stock is owned privately; that is to say, it is not possible for the public to buy shares in the company. All corporations start out private; after all, the founders of the company usually want to maintain control over the company and its profits. However, after a company has grown for a while, the private owners will sometimes decide to sell shares of stock in the company to the public. This is what is called "going public" or performing an "initial public offering" . Companies choose to sell shares of their stock to the public in order to raise money for the company. They might need this money in order to expand their operations, pay off existing debt, develop a new product, or for any number of other reasons. So for a certain price the corporation decides to sell its rights of ownership to the public. Once a company has sold shares of its stock to the public, those shares can then be resold by the initial buyers to other investors. This buying and reselling of stock is done on what is called an exchange, which is essentially just a marketplace for stock . As the demand for a stock rises and falls on the exchange (which can be due to a number of different reasons), the price for the stock will also fluctuate. Price fluctuations, in turn, create another opportunity for investors to make money through stock, namely through capital gains. Capital gains are those profits that an investor makes when he or she buys a stock for one price and then later sells that stock for a higher price. Capital losses, the opposite of capital

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Corporate or Business Finance Note
gains, occur when the investor sells the stock for a lower price than he or she originally paid. So, companies sell stock in order to raise money and investors buy stock in order to make money. But, as economists are forever reminding us, there's no such thing as a free lunch. Each side must give something up in order to have the opportunity to make money. As mentioned, corporations, when selling their stock, give up some control as to how the company is run and what is done with the profits. In return, they get an influx of capital for the business. On the flip side of the equation, individuals give up their money in order to buy the stock (and become "shareholders"); in return, they gain control over the corporation and the right to future profits. There is, however, the chance that there won't be any future profits, that the profits will be much lower than what the investor anticipated, or that the company will go out of business entirely. That means that the investor takes on a certain amount of risk when investing in a company's stock, If any of these things happen, the investor could lose most or all of the money that he or she paid for the stock in the first place. That means that there is a certain amount of risk associated with investing in stocks. Of course, most of the above is a vast simplification of what is actually involved in investing in stocks. Deciding how much a stock is worth, evaluating the risks associated in investing in them, and trading them are all very complicated processes that are discussed in detail elsewhere in this section .

Common and Preferred Stock Stocks can be classified into many different categories. The two most fundamental categories of stock are common stock and preferred stock, which differ in the rights that they confer upon their owners. Common Stock Most shares of stock are called "common shares". If you own a share of common stock, then you are a partial owner of the company. You are also entitled to certain voting rights regarding company matters. Typically, common stock shareholders receive one vote per share to elect the company's board of directors (although the number of votes is not always directly proportional to the number of shares owned, ). The board of directors is the group of individuals that represents the owners of the corporation and oversees major decisions for the company. Common stock shareholders also receive voting rights regarding other company matters such as stock splits and company objectives. In addition to voting rights, common shareholders sometimes enjoy what are called "preemptive rights." Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of stock. This means

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Corporate or Business Finance Note
that common shareholders with preemptive rights have the right but not the obligation to purchase as many new shares of the stock as it would take to maintain their proportional ownership in the company. But although common stock entitles its holders to a number of different rights and privileges, it does have one major drawback: common stock shareholders are the last in line to receive the company's assets. This means that common stock shareholders receive dividend payments only after all preferred shareholders have received their dividend payments . It also means that if the company goes bankrupt, the common stock shareholders receive whatever assets are left over only after all creditors, bondholders, and preferred shareholders have been paid in full. Preferred Stock The other fundamental category of stock is preferred stock. Like common stock, preferred stock represents partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that you have a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: Cumulative: These shares give their owners the right to "accumulate" dividend payments that were skipped due to financial problems; if the company later resumes paying dividends, cumulative shareholders receive their missed payments first. Non-Cumulative: These shares do not give their owners back payments for skipped dividends. Participating: These shares may receive higher than normal dividend payments if the company turns a larger than expected profit. Convertible: These shares may be converted into a specified number of shares of common stock. Since preferred shares carry fixed dividend payments, they tend to fluctuate in price far less than common shares. This means that the opportunity for both large capital gains and large capital losses is limited. Because preferred stock, like bonds, has fixed payments and small price fluctuations, it is sometimes referred to as a "hybrid security." Stock Classes Although common stock usually entitles you to one vote for every share that you own, this is not always the case. Some companies have different "classes" of common stock that vary based on how many votes are attached to them. So, for example, one share of Class A stock in a certain company might give you 10 votes per share, while one share of Class B stock in the same company might only give you one vote per share. And sometimes it is the case that a certain class of common stock will have no voting rights attached to it at all.

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Corporate or Business Finance Note
So why would some companies choose to do this? Because it's an easy way for the primary owners of the company (e.g. the founders) to retain a great deal of control over the business. The company will typically issue the class of shares with the fewest number of votes attached to it to the public, while reserving the class with the largest number of votes for the owners. Of course, this isn't always the best arrangement for the common shareholder, so if voting rights are important to you, you should probably think carefully before buying stock that is split into different classes. What are Dividends? Dividends A dividend is a portion of a company's earnings that is returned to shareholders. Dividends provide an added incentive (in the form of a return on your investment) to own stock in stable companies even if they are not experiencing much growth. Many companies -- mature and young, large and small -- pay a regular dividend to their stockholders. Companies use dividends to pass on their profits directly to their shareholders. Most often, the dividend comes in the form of cash: a company will pay a small percentage of its profits to the owner of each share of stock. However, it is not unheard of for companies to pay dividends in the form of stock. Dividends can be determined by a fixed rate known as preferred dividends, or a variable rate based on the company's latest profits known as common dividends . Companies are in no way obligated to pay dividends, although they will almost always pay them to preferred shareholders unless the company is experiencing financial troubles. There are basically three dates to keep in mind when considering dividends. The first is the declaration date, on which the company sets the dividend payment date, the amount of the dividend, and the ex-dividend date. The second is the record date, on which the company compiles a list of all current shareholders, all of whom will receive a dividend check. For practical purposes, however, this is an obsolete date -- the more important date is the ex-dividend date (literally, without dividend), which generally occurs 2 days before the record date. The ex-dividend date was created to allow all pending transactions to be completed before the record date. If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend payout. Further, for all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend payout automatically reduces the value of the company (it comes from the company's cash reserves), and the investor would have to absorb that reduction in value (because neither the buyer nor the seller are eligible for the dividend). Why do some companies offer dividends while others don't? For that matter, why do any companies offer dividends? The answer, naturally, is to keep investors happy. The companies that offer dividends are most often companies that have progressed beyond the growth phase; that is, they can no longer sustain the rate of growth commonly desired by Wall

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Corporate or Business Finance Note
Street. When companies no longer benefit sufficiently by reinvesting their profits, they usually choose to pay them out to their shareholders. Thus regular dividends are paid out to make holding the stock more appealing to investors, a move the company hopes will increase demand for the stock and therefore increase the stock's price. So what is the appeal of dividends? They offer a consistent return on a low-risk investment. An investor can buy in to a company that has a stable business and stable (albeit low) earnings growth, rest easy in the knowledge that the value of his or her initial investment is unlikely to drop substantially, and profit from the company's dividend payments. Further, as the company continues to grow, the dividends themselves may grow, providing even more value to the investor. This is one way to treat dividends; however, there are other strategies for profiting from dividends. Some investors try to "capture dividends": they will purchase the stock right after the dividend is announced, and try to sell it for the same price after they've collected the dividend. If successful, the investor has received the dividend at no cost. This usually doesn't work, because the stock price usually adjusts immediately to reflect the dividend payout, as interested buyers know the stock no longer includes the current dividend payment and they adjust the amount they're willing to pay accordingly.

Introduction to Trading and Types of Orders Introduction and Types of Orders Before you start trading stocks, it's a good idea to understand the process of trading. Most buyers in this country are accustomed to retail shopping, where the prices are set beforehand by the seller. The stock market operates more like an auction, in which both buyers and sellers are actively setting the prices at the same time. This section will show you how trading works, the different types of trading orders you can execute, and the different systems that you can use to place your orders. Both buyers and sellers actively set prices in the stock market. Not surprisingly, then, there are two prices associated with every stock: the bid price and the ask price. The bid price is the price at which buyers say they will purchase the security; the ask price is the price at which sellers say they will sell the security. The bid and the ask prices are rarely, if ever, the same: generally, the bid is slightly below the ask. The difference between the two is what is known as the spread-this is the amount that is taken by your broker as profit. Specialists, who are in charge of the coordination of the buying and selling of a certain stock, pair bids and asks together to streamline the process and keep the spread small but positive . Since the bid and ask prices of a stock are in constant fluctuation, you need to be careful about your sales and purchases. The price that you see quoted may or may not be the price at which you actually buy/sell the stock. For instance, you may look on the internet and see that your stock is selling for a certain price and decide that it's time for you to sell.

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Corporate or Business Finance Note
However, you might also get distracted by something immediately afterwards, so a little bit of time elapses before you can contact your broker to tell him/her to sell your stock. Then your broker has to relay the order down to his/her representatives on the trading floor assuming the stock trades on the NYSE or Amex . By the time your trade is actually executed, the price of the stock might have slipped from what you thought it was, and you're left with less cash than you had anticipated. Sound scary? Fortunately, trading does not have to work that way. The good news for you is that you have many options regarding the method of execution for your trades. In the above example, you would have been using what is known as a market order. Market orders definitely have their uses, but you should be aware of all of the following types of trades: Market Orders: As mentioned above, you tell your broker to purchase or sell a specified quantity of stock at the prevailing market price. These are often the lowest-commission trades because they involve very little work on the broker's part. Limit Order: You tell your broker to buy a security at or below a specified price, or to sell a security at or above a specified price. This ensures that you will never pay more for the stock than whatever price you set as your "limit." Stop Order: You tell your broker to buy a security at the market price once it reaches a level higher than the current market price. The opposite would be true if you were selling: you would tell your broker to sell your security once it reaches a level below the current market price. Fill or Kill: You tell your broker to execute the trade immediately; if the trade is not filled right away then your broker does not execute the order. Day Order: You tell your broker to execute the trade by the end of the day; otherwise, he or she does not fill the order.

Taxation of IRA Contributions The tax implications of IRAs can be broken down into the following categories: Taxing of deductible and non-deductible contributions Withdrawals are taxed if the original contribution was deductible in the first place. If the contributions were not deductible, then the withdrawals will not be taxed. 1. Taxes on Excess Contributions

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Corporate or Business Finance Note
There are limits on annual contributions but a participant may elect to make additional contributions. Those will be taxed at 6% if the money is not removed from the account before the tax filing deadline. To avoid the penalty, the excess money and earnings can be removed from the account prior to the filing date, although the earnings are taxable for that year. 2. Rollovers It is possible to move the funds from another IRA or a qualified retirement plan such as a 401(k) within 60 days. This will allow for the funds to keep their tax-deferred status while the funds are moved into another 401(k) plan. 3. Premature withdrawals Withdrawals usually start at the age of 59 1/2; otherwise, there is a 10% penalty. However, there are some exceptions to this rule. Penalty-free withdrawals can be made before the retirement age if the participant qualifies. The qualifications include:  Withdrawal by the beneficiary in case of owner's death or disability.  Withdrawals taken in equal periods determined by the participant's life expectancy or the joint life expectancy of the participant and the beneficiary.  Withdrawals used to pay for medical expenses that excel 7 1/2% of your AGI.  Withdrawals used to pay for medical insurance if the owner has received unemployment for more than 12 weeks.  Withdrawals used to pay for the first home, subject to a $10,000 limit.  Withdrawals used to pay for higher education expenses. All of these withdrawals are subject to ordinary income taxes but there is no additional penalty for this premature distribution.

There are three methods for premature withdrawals: 1. Life Expectancy Method

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Corporate or Business Finance Note
There are IRS tables that determine life expectancy of the owner or the joint life expectancies of the owner and a beneficiary. The withdrawal amount is calculated by dividing the balance at the beginning of the year by the factor found in the IRS life expectancy tables. For each year that passes by, the life expectancy factor is reduced by one. 2. Amortization Method The life expectancy is determined using the IRS tables mentioned above. The annual withdrawal amount is determined by applying an assumed earnings rate over the life expectancy. Generally, the rate must be within 120% of the applicable federal long-term rate. Once the rate is determined, the withdrawal remains fixed each year. 3. Annuity Factor Method

Similar to the second method, but the withdrawal amounts are calculated using a different set of life expectancy tables than those used by the life insurance agency, which is the UP-1984 Mortality Table. Regardless of which method is used, the process must continue for a minimum of five years or until age 591/2. Introduction to IRAs and Distribution Options Individual Retirement Accounts are tax-deferred plans that a participant establishes with a bank, mutual fund, or brokerage; periodic contributions can be invested in different types of securities such as stocks, bonds, etc. The preferential tax treatment applies to all dividends, interest, and capital gains until the age of retirement, which is 59 1/2. Annual contributions are tax-deductible if certain IRS requirements are met. A participant can only contribute to an IRA if there is no 401(k) plan or other employer-sponsored retirement plan. Contributions are dependent on a participant's annual gross income (AGI), but in general, there is a limit of $3,000 a year for single participants and $6,000 for married couples. Single participants will be eligible for the deduction if they earned less than $50,000 and married participants will be eligible if their joint income was less than $70,000. Contributions can be made for a particular year until April 15 of the following year. If the money is taken out before the retirement age of 59 1/2, there is a penalty of 10% in addition to the applicable ordinary income taxes. There are some exceptions to this rule; purchase of a first home up to $10,000, certain higher education expenses, medical expenses above 7.5% of the participant's AGI, health insurance premiums during unemployment, or permanent disability. A participant is able to roll over a distribution to another IRA or withdraw funds using a special schedule of early payments made over the participant's life expectancy. Distributions are required to start once the participant reaches age 70 1/2. In the case of married couples, a surviving spouse can take over the deceased spouse's IRA and continue the tax deferral. All other

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Corporate or Business Finance Note
beneficiaries have to take the distributions from an Inherited IRA, distributions which are subject to taxation. There are a couple of options on the distributions: 1. Lump Sum Following the five-year rule, a beneficiary may take the amount in the IRA without penalty no later than December 31 of the fifth year after the IRA owner died. The beneficiary can keep what is left of the money after paying ordinary income taxes. 2. Little-by-little IRA distributions paid over the beneficiary's life expectancy; the annual distributions are subject to taxation. This option must be selected no later than December 31 of the year following the IRA owner's death. If the money is not withdrawn then the five-year rule will apply. Different Types of IRAs There are several types of IRAs: 1. Traditional IRA The term used to define the regular IRA to participants under age 70 1/2. Annual contributions have a limit of $3,000 minus the participant's deductible IRA contributions. Earnings on the account are tax deferred until withdrawal, which must begin at age 70 1/2. Distributions are taxed at that time; if the distributions are not taken at that age, there is a 50% penalty on the amount not taken. After the age of 70 1/2, contributions can be made to the IRA; the limit of $2,000 is phased out if the participant's AGI falls below a specified level. 2. Roth IRA Roth IRAs are similar to traditional IRAs, except that contributions come from after-tax earnings and are not taxed when withdrawn. After holding the Roth IRA account for a minimum of five years and reaching the age of 59 1/2, all withdrawals are tax-free, with the exception of gains. In order to qualify, participants filing jointly must have an adjusted gross income below $160,000 and single participants below $110,000 (note: these numbers change from year to year). Roth IRA's are described in detail in the next section.

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Corporate or Business Finance Note
3. Individual Retirement Annuity A traditional or a Roth IRA established with a life insurance company through the purchase of a special annuity contract.

4. Group IRA or Employer and Employee Association Trust Account A traditional IRA established by an employer for employees. 5. Simplified Employee Pension (SEP-IRA) A traditional IRA established by an employer for employees. Employer contributions can be up to $40,000 or 25% of an employee's annual compensation. 6. Savings Incentive Matching Plan for Employers IRA (SIMPLE -IRA) A traditional IRA established by small companies for employees. Participants can contribute up to $8,000 a year ($9,000 if age 50 or older); employers will match a portion of the employee's contribution. 7. Spousal IRA A traditional or a Roth IRA set up by a married person in the name of his/her spouse who has an annual income of less than $3,000. There is a $3,000 limit on Spousal IRA contributions, but the working spouse can contribute an additional $2,000 to an individual IRA. Couples must file jointly in that year. 8. Rollover or Conduit IRA A traditional IRA established by an individual to receive a distribution from a qualified retirement plan, such as a 401(k). There is no limit on the contributions transferred to a rollover IRA. The

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Corporate or Business Finance Note
amount in the new account is eligible for a consecutive transfer into a new employer's qualified retirement plan. 9. Inherited IRA A traditional or Roth IRA given to a non-spousal beneficiary of a deceased IRA owner. The beneficiary receives the distribution by December 31 of the fifth year after the death of the owner. In addition, this type of IRA does not allow for tax deduction contributions and rollovers to and from other IRAs. The IRA can also be paid as an annuity or in periodic installments not extending beyond the beneficiary's life expectancy. If the IRA owner dies before naming a beneficiary and has not started taking the minimum required distributions (MRD) at age 70 1/2, then the IRA is paid to the estate by December 31 of the fifth year after the death of the owner. If the owner had already started taking the MRD, then the IRA is paid to the estate over time based on the owner's life expectancy. 10. Education IRA (EIRA) An IRA set up on or after January 1, 1998, that allows a beneficiary to pay for higher education . The name is confusing, since it's not really a retirement account at all. Contributions are not tax deductible but all deposits and earnings can be withdrawn without additional penalties or taxes. The old law that limits annual contributions to $500, now only applies to higher education costs. An individual may contribute a maximum of $2000 a year to the Coverdell Savings account for eligible expenses associated with attending elementary or secondary school. The beneficiary must be 18 or younger but there are no limits on a beneficiary's income. IRA Conversions A traditional IRA can be converted into a Roth IRA without penalties if the adjusted gross income for the participant is less than $100,000 excluding the amount of the conversion. These contributions and any earnings are subject to taxation. Any future qualified distributions from the Roth IRA will be tax-free. The conversion may not always be the best available option. First, the income from the conversion could result in being placed in a higher tax bracket. Second, if the participant is close to retirement, expecting to drop to a lower tax bracket, the conversion will trigger an income tax payment at the current, pre-retirement bracket. On the other hand, if the IRA owner wants to leave the account as part of his or her inheritance, transferring the funds to a Roth IRA can have great

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Corporate or Business Finance Note
benefits for the heirs. First of all, there are no minimum distributions during the life of the owner. Second, the conversion will reduce the participant's taxable estate by the amount of the taxes, therefore reducing the inheritance. Finally, if after April 1 and after turning 70 1/2 the participant has not yet named a beneficiary, it is possible to convert the account to a Roth and name a new beneficiary at that time, allowing this person to keep the IRA during his or her expected life as calculated by the IRS. IRA Rollovers This is the process in which the assets from one qualified retirement plan or IRA is reinvested in another similar plan within a specific time frame, usually 60 days. These transfers can happen when leaving a job at an employer who offered a retirement plan such as a 401(k). The company can issue a check for the amount minus 20% in withheld taxes. To avoid this penalty, the rollover must be done trustee to trustee, meaning that the check is made out to the new trustee or custodian of the Rollover IRA. The company will provide the check and the participant must deposit the check into the new account within 60 days. Deductible IRAs A tax-deductible IRA is a traditional IRA that has annual tax-deductible contributions. The maximum amount per year is $3,000 and withdrawals are taxed as income. You can withdraw the money free of penalties before age 59 1/2 if you are buying your first home (up to $10,000), to pay for higher education expenses, or in the event of a disability or even death. Eligibility depends on the modified adjusted gross income; if you participate in an employee-sponsored retirement plan there are no limits on your modified AGI. Eligibility phases out for single tax payers with a modified AGI less than $44,000 and for married couples less than $64,000

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