TSP now offers Roth TSP option

Good morning.  The federal government's popular defined contribution retirement plan, the Thrift Savings Plan (TSP), recently began to offer a "Roth TSP" option.  Federal employees should figure out whether or not to use it.

Current TSP participants should contact their tax advisor about whether or not the Roth TSP is a good choice (and I'll join the call with you, if you want).

I do not provide formal tax advice—taxes are not my area of professional expertise.  That said, I have some thoughts and info to share:

1. Roth TSP contributions are from already-taxed money, instead of being tax-deductible like normal TSP contributions.
2. Roth TSP withdrawals in retirement, however, are tax-free (with some exceptions), while normal TSP withdrawals in retirement are taxable.
3. Tax rates are now pretty low by historical standards.  They might increase in the coming decades.  If they do, it is likely that "the better deal" is to give up the tax-deduction now in favor of the tax-free withdrawals later.
4. Many tax professionals I have read or heard from favor Roth anyway, even if income tax rates do not change.
5. This article provides a good overview, as well as some helpful details:  http://www.fedsmith.com/article/3408/unraveling-mysteries-roth-tsp.html

I generally favor Roth TSP over TSP, but each federal employee should consult their own tax advisor on this matter.

FYI, and please contact me with any questions or if you want my list of recommended tax professionals.

--Gary


Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
(855) 347-9483 fax
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Yacktman Reorganization--Probably Good for Yacktman Focused Fund

Good afternoon.  You may have received a phone call and/or letter from The Yacktman Funds.  That company runs one of the key mutual funds in my Flex portfolios.  They are reorganizing the company and want fund shareholders to vote on it.  Hence the calls and/or letters to individuals like you, instead of to investment advisors like me.

This is legitimate, just unusual.  Normally I handle "everything" for my clients, but in this case you retain the right to vote and I am not able to do it for you.

So, here is my brief explanation of what is going on at Yacktman:

1. Yacktman Asset Management (YAM) is the investment advisor to the Yacktman Funds (the Yacktman Focused Fund is in my Flex portfolios, so many of my clients own shares thereof); this means the Yacktmans and their employees work for YAM, and their one job is to provide the advisory/management services to the Yacktman mutual funds and "separately managed accounts".
2. YAM was founded by Don Yacktman about 20 years ago, and he is 70 now.  His son, Steven (about age 40) and a fellow named Jason Subotky are the two other key people.  They have a handful of assistants and junior management types, totaling about 10 people.  Don, Steven, and Jason, and I believe one other fellow, are the "portfolio managers", the ones who decide what to buy and sell in the mutual funds.
3. Don seems to want to cash-out a little (a lot?) and also make it easier to transfer ownership and/or control to Steven and others (like Jason) whenever Don's time is up.
4. YAM also wants to hand-off the administrative and back-office workload and focus solely on investment selection and portfolio management for the Yacktman Funds.
5. So, the YAM folks have decided to sell 55% of YAM to a firm called Affiliated Managers Group, Inc. (http://www.amg.com/Home/); this gives the Yacktmans cash in lieu of some equity in the company, and it also, according to the Yacktman employee I spoke with today, provides the right structure by which the firm can transfer ownership/control to the next generations if/when Don retires or dies.
6.  But now YAM only owns 45%, so how do we know they are still calling the shots?  Well, we don't for sure, but there are good indicators.

A.      For one thing, each of the key Yacktman people have agreed to 10-yr contracts--Don plans to be working at this until at least age 80, and I was told he only half-jokingly said he wanted a 25-yr contract.

B.      Another thing is AMG's reputation; they have done this sort of "acquisition" more than 25 times with other boutique investment advisors and the Yacktman team thinks AMG's reputation is for leaving alone the companies they buy or invest in and just let them continue the good work that attracted AMG to invest in the first place.

Bottom line:  I am in favor of this reorganization/sell-out, as the expectation is that there will be no adverse changes to the Yacktman Focused Fund and there is potential for positive changes (more resources, more time for portfolio managers to focus on investing instead of business management).  If you want to have your say, you are welcome to call them at 877-536-1557 (tell them you are calling to vote on the Yacktman reorganization) and vote Yes, No or Abstain.

Meanwhile, I will be monitoring the performance, people and strategies of the Yacktman Focused Fund.  If they make changes that appear to be inconsistent with the reason I "hired" them for the Flex portfolios (they are our best way to have exposure to large, US-based companies with "value" characteristics), I will take appropriate action and keep my clients posted.

Please contact me with any questions.  Thank you!

--Gary

Garo Linck Partoyan

Financial Advisor & Owner

Potomac Wealth Strategies, LLC

1800 Diagonal Rd., Suite 600

PMB 12

Alexandria, Virginia  22314

(703) 746-8195

(855) 347-9483 fax

Garo.Partoyan@PotomacWealthStrategies.com

www.PotomacWealthStrategies.com

FINANCIAL BLOG:  http://potomacwealthstrategies.blogspot.com

Flex Portfolio Performance Through May 2012

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50/40/10)	-8.7%	-8.8%	1.0%	-11.0%	6.8%	9.3%	-3.4%	4.9%
S&P 500	-6.0%	-3.5%	5.1%	-0.4%	12.0%	14.9%	-0.9%	4.1%
MSCI EAFE	-11.5%	-13.6%	-3.8%	-20.5%	1.9%	3.4%	-7.3%	4.0%
Barclays Aggregate Bond--US	0.9%	1.5%	2.3%	7.1%	6.5%	7.1%	6.7%	5.7%
Barclays Aggregate Bond--Global	-1.0%	-0.6%	1.0%	2.3%	7.1%	6.0%	6.5%	6.8%
Moderately Aggressive Benchmark	-6.9%	-6.8%	0.9%	-7.5%	7.3%	8.8%	-1.7%	4.9%
80 Flex III	-5.1%	-4.5%	1.7%	-6.1%	6.6%	9.4%
80 Flex II	-5.3%	-5.5%	1.8%	-4.6%	7.5%	9.8%	6.0%	9.9%
80 Fidelity	-6.8%	-6.6%	1.2%	-8.1%	6.9%	8.8%	-1.8%	4.8%
Moderate Benchmark	-5.1%	-4.9%	1.2%	-4.1%	7.4%	8.3%	0.7%	5.4%
60 Flex III	-4.4%	-3.9%	2.1%	-4.6%	6.3%	9.0%
60 Flex II	-4.6%	-4.6%	2.1%	-3.5%	6.9%	9.2%	6.6%	9.6%
60 Fidelity	-5.0%	-4.7%	1.4%	-4.7%	6.6%	8.1%	0.1%	5.0%
Moderately Conservative Benchmark	-3.3%	-3.0%	1.3%	-0.8%	7.4%	7.7%	2.8%	5.8%
40 Flex III	-3.7%	-3.3%	2.4%	-3.1%	5.9%	8.5%
40 Flex II	-3.8%	-3.8%	2.4%	-2.3%	6.3%	8.6%	7.2%	9.2%
40 Fidelity	-3.0%	-2.7%	1.7%	-1.0%	6.5%	7.6%	2.1%	5.2%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	23%	52%	14%	11%
60 Flex II	28%	39%	24%	9%
40 Flex II	34%	26%	34%	6%

Flex Portfolio Performance Through March 2012

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
S&P 500	3.3%	12.6%	12.6%	8.5%	12.0%	23.4%	2.0%	4.1%
MSCI EAFE	-0.5%	10.9%	10.9%	-5.8%	2.0%	17.1%	-3.5%	5.7%
Barclays Aggregate Bond--US	-0.6%	0.3%	0.3%	7.7%	6.4%	6.8%	6.3%	5.8%
Barclays Aggregate Bond--Global	-0.7%	0.9%	0.9%	5.3%	6.2%	7.5%	6.4%	7.3%
Moderately Aggressive Benchmark	1.0%	9.3%	9.3%	2.6%	7.2%	17.6%	1.0%	5.6%
80 Flex III	0.7%	7.3%	7.3%	1.6%	7.4%
80 Flex II	0.1%	7.8%	7.8%	3.8%	8.7%	16.9%	8.1%	11.0%
80 Fidelity	1.2%	9.7%	9.7%	2.1%	7.1%	17.8%	0.9%	5.5%
Moderate Benchmark	0.5%	6.9%	6.9%	3.9%	7.2%	14.7%	2.6%	6.0%
60 Flex III	0.4%	6.6%	6.6%	2.2%	6.9%
60 Flex II	-0.1%	7.0%	7.0%	3.9%	7.9%	15.2%	8.3%	10.6%
60 Fidelity	0.8%	7.3%	7.3%	3.2%	6.7%	14.8%	2.1%	5.5%
Moderately Conservative Benchmark	0.1%	4.5%	4.5%	5.0%	7.1%	11.8%	4.0%	6.3%
40 Flex III	0.1%	6.0%	6.0%	2.8%	6.5%
40 Flex II	-0.2%	6.2%	6.2%	3.9%	7.1%	13.5%	8.5%	10.0%
40 Fidelity	0.4%	4.9%	4.9%	4.6%	6.5%	11.9%	3.3%	5.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	23%	53%	13%	11%
60 Flex II	28%	40%	24%	8%
40 Flex II	34%	27%	33%	6%

Small Business is the Heart of the American Economy

The Small Business Administration (SBA) cites 10 reasons why small businesses are "the heart of the
American economy."

1. Small businesses make up more than 99.7% of all employers.
2. Small businesses create more than 50% of the nonfarm private gross domestic
product (GDP).
3. Small patenting firms produce 13 to 14 times more patents per employee than
large patenting firms.
4. The 22.9 million small businesses in the United States are located in virtually
every neighborhood.
5. Small businesses employ about 50% of all private sector workers.
6. Home-based businesses account for 53% of all small businesses.
7. Small businesses make up 97% of exporters and produce 29% of all export value.
8. Small businesses with employees start-up at a rate of over 500,000 per year.
9. Four years after start-up, half of all small businesses with employees remain open.
10. Small businesses create 75% of the net new jobs in our economy.

Financial Priorities Checklist

Here is a list of items to consider when organizing your personal financial matters, in order of priority that applies to most people.  If you want to know more, please contact me.

--Gary Partoyan

• Life Insurance
• Term—create necessary nest egg for your survivors if you die too soon
• Permanent (optional)—to ensure additional buy-up despite health; to maintain coverage throughout lifetime

• Disability Insurance
• Long-term
• Short-term
• Pay for it yourself and have the income benefit tax-free (this is the better choice), or have employer pay for it and have income benefit taxed

• Cash-flow Positive Monthly Budget

• Debt
• Mortgage, car, and student loans are usually okay
• Revolving credit card debt, personal loans, home equity lines of credit, etc., are usually not okay—get rid of them

• Emergency Reserves Fund
• 3 to 12 months of necessary living expenses, in case of income interruption, etc.
• Keep liquid in money markets or the bank, or low-risk investments with easy liquidity

• Retirement Investments (order of funding priority)

1)     Employer-sponsored Retirement Plan—contribute the minimum necessary to get the maximum matching contribution from employer

2)     Roth IRA, if eligible

3)     Employer-sponsored Retirement Plan—top-off up to the IRS maximum allowable contribution

4)     Traditional IRA

5)     (If you still have more to invest for retirement after 401k and IRA contributions) Variable Universal Life Ins and Variable and/or Fixed Annuities for tax-advantaged savings

• Secondary Investment and Savings Priorities
• Education
• Early-retirement
• Private schools
• Charity
• Luxury items
• Investment speculation

• Other Considerations
• Use a professional to file your taxes!
• Use a patient and flexible but expert lawyer to prepare your estate planning documents, which should probably include:
• Pour-over Will
• Revocable Living Trust
• Irrevocable and Marital A-B trusts, if estate taxes are part of your picture
• Durable (financial) Power-of-Attorney
• Advance Medical Directive (in VA, this combines Healthcare Power of Atty and Living Will)
• Childcare provisions

Flex Portfolio Performance Through February 2012

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
S&P 500	4.3%	10.0%	8.9%	5.0%	13.3%	25.3%	1.5%	4.1%
MSCI EAFE	5.7%	10.2%	11.3%	-7.5%	5.3%	19.6%	-3.0%	6.2%
Barclays Aggregate Bond--US	0.0%	2.0%	0.9%	8.4%	6.6%	7.5%	6.4%	5.7%
Barclays Aggregate Bond--Global	-0.1%	2.3%	1.6%	6.5%	6.2%	8.6%	6.6%	7.4%
Moderately Aggressive Benchmark	4.0%	8.5%	8.3%	0.8%	9.2%	19.7%	1.1%	5.8%
80 Flex III	2.2%	5.1%	6.5%	1.9%	9.2%
80 Flex II	2.6%	6.0%	7.7%	4.5%	10.5%	19.0%	8.3%	11.3%
80 Fidelity	3.8%	8.0%	8.3%	0.0%	9.0%	20.0%	1.0%	5.8%
Moderate Benchmark	2.9%	6.7%	6.3%	2.8%	8.7%	16.6%	2.7%	6.2%
60 Flex III	2.0%	5.3%	6.2%	2.8%	8.7%
60 Flex II	2.3%	6.0%	7.1%	4.7%	9.6%	17.1%	8.6%	10.7%
60 Fidelity	2.8%	6.3%	6.4%	1.7%	8.2%	16.5%	2.2%	5.7%
Moderately Conservative Benchmark	1.8%	5.0%	4.4%	4.7%	8.1%	13.4%	4.2%	6.4%
40 Flex III	1.8%	5.6%	5.8%	3.6%	8.1%
40 Flex II	2.0%	6.0%	6.4%	4.9%	8.7%	15.2%	8.8%	10.1%
40 Fidelity	1.9%	4.8%	4.5%	3.7%	7.6%	13.3%	3.4%	5.6%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	23%	54%	12%	11%
60 Flex II	30%	41%	21%	9%
40 Flex II	37%	27%	29%	7%