Converting Your After-Tax 401(k) Dollars to a Roth IRA

Here’s the dilemma: You have a traditional 401(k) that contains both after-tax and pre-tax dollars. You’d like to receive a distribution from the plan and convert only the after-tax dollars to a Roth IRA. By rolling over/converting only the after-tax dollars to a Roth IRA, you hope to avoid paying any income tax on the conversion.

piggy-bank-661969_1280For example, let’s say your 401(k) plan distribution is $10,000, consisting of $8,000 of pre-tax dollars and $2,000 of after-tax dollars. Can you simply instruct the trustee to directly roll the $8,000 of pre-tax dollars to a traditional IRA and the remaining $2,000 of after-tax dollars to a Roth IRA?

In the past, many trustees allowed you to do just that. But in recent years the IRS had suggested that this result could not be achieved with multiple direct rollovers. Instead, according to the IRS, each rollover would have to carry with it a pro-rata amount of pre-tax and after-tax dollars. The legal basis for this position, however, was not entirely clear.

And while some experts suggested that it might be possible to achieve a tax-free Roth conversion of after-tax dollars using 60-day rollovers, the process was fairly complicated, and it required taxpayers to have sufficient funds outside the plan to make up the 20% mandatory withholding that would apply to the taxable portion of the distribution.

IMG_0920IRS Notice 2014-54
Thankfully, in Notice 2014-54 (and related proposed regulations), the IRS has backed away from its prior position. The Notice makes it clear that you can split a distribution from your 401(k) plan and directly roll over only the pre-tax dollars to a traditional IRA (with no current tax liability) and only the after-tax dollars to a Roth IRA (with no conversion tax). The IRS guidance, which took effect January 1, 2015, also applies to 403(b) and 457(b) plans.

When applying Notice 2014-54, it’s important to understand some basic rules (also outlined in the Notice). First, you have to understand how to calculate the taxable portion of your distribution. This is easy if you receive a total distribution–the nontaxable portion is your after-tax contributions, and the taxable portion is the balance of your account. But if you’re receiving less than a total distribution, you have to perform a pro-rata calculation.

This is best understood using an example. Assume your 401(k) account is $100,000, consisting of $60,000 (six tenths) of pre-tax dollars and $40,000 (four tenths) of after-tax dollars. You request a $40,000 distribution. Of this $40,000, six tenths, or $24,000, will be taxable pre-tax dollars, and four tenths, or $16,000, will be nontaxable after-tax dollars.

What this means is that you can’t, for example, simply request a distribution of $40,000 consisting only of your after-tax dollars. The Notice requires that you treat all distributions you receive at the same time as a single distribution when you perform this pro-rata calculation (even if you subsequently roll those distributions into separate IRAs).

Taking this example a step further, could you now direct the trustee to directly transfer the $16,000 of after-tax dollars to a Roth IRA (with no conversion tax) and send the remaining $24,000 to you in a taxable distribution? The answer is no, and this leads to a second basic rule described in the Notice:

Any rollovers you make from a 401(k) plan distribution are deemed to come first from your pre-tax dollars, and then, only after these dollars are fully used up, from your after-tax dollars. If you’re rolling your distribution over into several different accounts, you get to decide which retirement vehicle receives your pre-tax dollars first.

It’s these new rules that allow you to accomplish your goal of rolling over only the after-tax portion of your 401(k) plan distribution into a Roth IRA. Going back to our example, these rules make it clear that you can instruct the 401(k) plan trustee to transfer only your pre-tax dollars–$24,000–to your traditional IRA, leaving the remaining $16,000–all after-tax dollars–to be rolled over to your Roth IRA in a tax-free conversion.

Review Your Finances Mid Year

You made it through tax season and now you’re looking forward to your summer vacation. But before you go, take some time to review your finances. Mid-year is an ideal time to do so, because the demands on your time may be fewer, and the planning opportunities greater, than if you wait until the end of the year.

2015road496240933Think about your priorities
What are your priorities? Here are some questions that may help you identify the financial issues you want to address within the next few months.
1) Are any life-changing events coming up soon, such as marriage, the birth of a child, retirement, or a career change?
2) Will your income or expenses substantially increase or decrease this year?
3) Have you managed to save as much as you expected this year?
4) Are you comfortable with the amount of debt that you have?
5) Are you concerned about the performance of your investment portfolio?
6) Do you have any other specific needs or concerns that you would like to address?

Take another look at your taxes
Completing a mid-year estimate of your tax liability may reveal tax planning opportunities. You can use last year’s tax return as a basis, then make any anticipated adjustments to your income and deductions for this year.

You’ll want to check your withholding, especially if you owed taxes when you filed your most recent income tax return or you received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid a big tax bill or having too much of your money tied up with Uncle Sam. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.

To help avoid missed tax-saving opportunities for the year, one basic thing you can do right now is to set up a system for saving receipts and other tax-related documents. This can be as simple as dedicating a folder in your file cabinet to this year’s tax return so that you can keep track of important paperwork.

IMG_5787Reconsider your retirement plan
If you’re working and you received a pay increase this year, don’t overlook the opportunity to increase your retirement plan contributions by asking your employer to set aside a higher percentage of your salary. In 2015, you may be able to contribute up to $18,000 to your workplace retirement plan ($24,000 if you’re age 50 or older).

If you’re already retired, take another look at your retirement income needs and whether your current investments and distribution strategy will continue to provide enough income.

Review your investments
Have you recently reviewed your portfolio to make sure that your asset allocation is still in line with your financial goals, time horizon, and tolerance for risk? Though it’s common to rebalance a portfolio at the end of the year, you may need to rebalance more frequently if the market is volatile.

Note: Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Identify your insurance needs
Do you know exactly how much life and disability insurance coverage you have? Are you familiar with the terms of your homeowners, renters, and auto insurance policies? If not, it’s time to add your insurance policies to your summer reading list. Insurance needs frequently change, and it’s possible that your coverage hasn’t kept pace with your income or family circumstances.

Will Entrepreneurship Be Your Next Mid Life Career Move?

An exciting aspect of mid-life career change is the opportunity to seek new ways to tap one’s skills and experience developed over a lifetime. Having counseled scores of people in the midst of transition, I find it so inspiring to meet professionals who have creatively applied a lifetime of work skills to their new endeavors!

dreamstime_xs_39003948Increasingly, it appears that a larger number of baby boomers are choosing various forms of entrepreneurship as their preferred avenue to apply their knowledge and professional talent. According to the 2015 State of Entrepreneurship Report recently issued by the Kaufmann Foundation, entrepreneurship remains alive and well in the US and the birth cohort known as the “baby boomers” are actually the primary group driving this trend.

Their report cited data showing that Americans in their fifties and sixties have started businesses at a faster pace over the last decade, while that pace has continuously slowed among other age groups. The trend makes sense since entrepreneurship seems to be enjoying a renaissance for a variety of reasons, according to the Kaufmann Foundation.

Venture and angel investment levels in recent years mirror those of the late 1990s and very early 2000s. City and state governments increasingly build economic development strategies around entrepreneurship. And Baby Boomers appear well positioned to lead this trend. Professionals in their 50s and 60s have historically exhibited high levels of entrepreneurial activity, according to the Kaufmann Index of Entrepreneurial Activity cited in the report.

Who knows? With the US economy now appearing to be on more solid ground, this might be a good time for you to consider an alternative career path or entrepreneurial pursuit if you are attracted to the freedom and opportunity that comes with a non-traditional work model.

dreamstime_xs_18998686This could lead you to start a business, but it could also involve considering any number of professional paths that may entail less career or financial risk than starting your own venture. For example, you could think about consulting in your current field, or consider other types of engagements that reflect your professional passions and expertise.

Anecdotally, I meet many professionals who are seeking non-traditional work options that appeal to their professional interests and where they can think they might have greater freedom to make work choices based on their personal values. If these ideas resonate with you, then this might be an opportune moment to consider your career goals before you one day stop working!

It goes without saying that you would need to consider your personal finances, among other factors, before making a decision about a new path. Please feel to free to access our firm’s free Career Transition Workbook, which may help evaluate the financial and life planning aspects of moving in a new professional direction.

In addition to offering the Workbook, we will continue striving toward offering financial educational resources to help you make confident and informed financial decisions. Here is a sample of recent content added to our blog page, and which might help along your very own career and financial planning journeys:

Happy Belated Birthday Bull Market: After recently witnessing a sixth consecutive year of attractive stock market gains, many investors are wondering how much steam is left in the equity markets. But the possibility of continued modest stock market gains during 2015 is not as unlikely as it may seem. Read more…

Evaluating a Franchise for a Second Career: Buying a franchise might be an excellent way to break into starting a business. But how do you evaluate whether a franchise is right for you? Read more…

dreamstime_xs_15566306A Do It Yourself Approach to Retirement Planning: Worried about whether you will save enough money to one day be able to stop working? You can follow a step by step process to make your goal less overwhelming. Read more…

Starting a Business — Make Sure You Have a Plan: If the idea of starting your own venture holds some appeal, starting your own business or endeavor might be an appealing career alternative, especially if you enjoy the freedom and challenge of trying to fill an unmet market need. Here are some thoughts about preparing to make venture your fly. Read more…

I hope these thoughts and ideas help you move toward feeling more confident and settled about your financial and career goals! As always, if you have any questions, please email me at bill.pollak@lpl.com or call me at (925) 464-7057!

Happy Belated Birthday Bull Market!

The financial crisis of 2008 seems like such a long time ago. During the crisis, we saw the collapse of Lehman Brothers, bank bailouts and forced mergers, massive federal stimulus, and extraordinary Federal Reserve (Fed) policy.

file0001539596844We experienced near unprecedented stock market volatility when daily stock market moves of 5% or more were not uncommon. Despite these extreme conditions, one of the greatest six-year bull markets emerged from this crisis.

Three months ago, we celebrated another (belated) birthday of the bull market that began on March 9, 2009. (A bull market is defined as a prolonged period of stock market gains without a 20% or more decline.) Not only has this bull market for stocks lasted a long time from a historical perspective (it is the third-longest since World War II), it has also been the strongest six-year-old bull.

As the bull market enters its seventh year, many are wondering whether this bull has another year left to run. As should not be surprising given its age and the strong returns it has produced, this bull market may be due for a modest correction. But, that does not necessarily mean that a downturn is imminent.

Risks always loom somewhere and, right now, they are in the form of terrorism, the Russia-Ukraine conflict, the possibility of a nuclear Iran, the energy downturn, and the Eurozone’s struggles.

However, there seem to be enough factors supporting this bull that it could continue its charge:

• Bull markets do not die of old age, they die of excesses, and there does not seem to be any evidence today that economic excesses are emerging in the U.S. economy.

• The Fed typically reacts to built-up excesses with multiple rate hikes, contributing to the start of recessions. The slow economic recovery we have experienced has delayed the formation of excesses and the start of the Fed’s rate hike campaign.

• Though valuations are slightly expensive by historical standards, prior bull markets have shown that corporate earnings gains can lift stocks for quite a while even after valuations exceed long-term averages and stop expanding. Valuations have proven to be good indicators of long-term stock performance; they have not been reliable shorter-term indicators.

• Low inflation persists, which helps increase the value of future earnings and dividends.

• Economic and market indicators that have been found to be effective in signaling recessions and stock market downturns suggest the economic expansion and bull market have the potential to continue through 2015.

Given this backdrop, I believe remaining fully invested in a diversified portfolio is prudent. The outlook continues to be positive for modest gains in stocks based on the underlying strength of the U.S. economy, a rapidly improving employment backdrop, and accommodating global central bank policies. Thus, we can be optimistic that we may be blowing out seven candles on this bull market’s birthday cake next year.

As always, if you have any questions, I encourage you to contact me at bill.pollak@lpl.com or at (925) 464-7057.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.

Economic forecasts set forth may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial.

A Do It Yourself Guide to Retirement Planning

Each year in its annual Retirement Confidence Survey, the Employee Benefit Research Institute reiterates that goal setting is a key factor influencing overall retirement confidence. But for many, a retirement savings goal that could reach $1 million or more may seem like a daunting, even impossible mountain to climb.

DSC00566What if you’re investing as much as you can, but still feel that you’ll never reach the summit? As with many of life’s toughest challenges, it may help to focus less on the big picture and more on the details.* Start by reviewing the following points:

Retirement goals are based on assumptions
Whether you use a simple online calculator or run a detailed analysis, your retirement savings goal is based on certain assumptions that will, in all likelihood, change. Inflation, rates of return, life expectancies, salary adjustments, retirement expenses, Social Security benefits–all of these factors are estimates.

That’s why it’s so important to review your retirement savings goal and its underlying assumptions regularly–at least once per year and when life events occur. This will help ensure that your goal continues to reflect your changing life circumstances as well as market and economic conditions.

Break it down
Instead of viewing your goal as ONE BIG NUMBER, try to break it down into an anticipated monthly income need. That way you can view this monthly need alongside your estimated monthly Social Security benefit, income from your retirement savings, and any pension or other income you expect. This can help the planning process seem less daunting, more realistic, and most important, more manageable. It can be far less overwhelming to brainstorm ways to close a gap of, say, a few hundred dollars a month than a few hundred thousand dollars over the duration of your retirement.

Make your future self a priority, whenever possible
While every stage of life brings financial challenges, each stage also brings opportunities. Whenever possible–for example, when you pay off a credit card or school loan, receive a tax refund, get a raise or promotion, celebrate your child’s college graduation (and the end of tuition payments), or receive an unexpected windfall–put some of that extra money toward retirement.

Retirement may be different than you imagine
When people dream about retirement, they often picture images like exotic travel, endless rounds of golf, and fancy restaurants. Yet a recent study found that the older people get, the more they derive happiness from ordinary, everyday experiences such as socializing with friends, reading a good book, taking a scenic drive, or playing board games with grandchildren. (Source: “Happiness from Ordinary and Extraordinary Experiences,” Journal of Consumer Research, June 2014)

While your dream may include days filled with extravagant leisure activities, your retirement reality may turn out much different–and that actually may be a matter of choice.

The bottom line
Setting a goal is a very important first step in putting together your retirement savings strategy, but don’t let the number scare you. As long as you have an estimate in mind, break it down to a monthly need, review it regularly, and increase your investments whenever possible, you can take heart knowing that you’re doing your best to prepare for whatever the future may bring.

*All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

No Matter Your Age, Your Social Security Statement Matters

Fifteen years ago, the Social Security Administration (SSA) launched the Social Security Statement, a tool to help Americans understand the features and benefits that Social Security offers. Since then, millions of Americans have reviewed their personalized statements to see a detailed record of their earnings, as well as estimates of retirement, survivor, and disability benefits based on those earnings.

NPT-HEALTHSSI0114_02How do you get your statement?
Here’s how to get a copy of your statement, and why it deserves more than just a quick glance, even if you’re years away from retirement! In September 2014, the SSA began mailing Social Security Statements to most workers every five years. Workers attaining ages 25, 30, 35, 40, 45, 50, 55, and 60 who are not receiving Social Security benefits and are not registered for an online account will receive a statement in the mail about three months before their next birthday. Workers older than age 60 will receive a statement every year.

But why wait? A more convenient way to view your Social Security Statement is online. First, visit socialsecurity.gov to sign up for a personal my Social Security account (you must be 18 or older to sign up online). Once you have an account, you can view your Social Security Statement anytime you want, as often as you want.

Check your estimated benefits
Your Social Security Statement gives you information about retirement, disability, and survivor benefits. It tells you whether you’ve earned enough credits to qualify for these benefits and, if you qualify, how much you can expect to receive. As each Social Security Statement notes, the amounts listed are only estimates based on your average earnings in the past and a projection of future earnings. Actual benefits you receive may be different if your earnings increase or decrease in the future.

Amounts may also be affected by cost-of-living increases (estimates are in today’s dollars) and other income you receive. Estimated benefits are also based on current law, which could change in the future.

Retirement benefits
Social-security-statementAlthough Social Security was never intended to be the sole source of retirement income, retirement benefits are still very important to many retirees. Your statement shows estimates of how much you can expect to receive if you begin receiving benefits at three different ages: your full retirement age (66 to 67, depending on your birth year), age 62 (your benefit will be lower), or age 70 (your benefit will be higher).

When to start claiming Social Security is a big decision that will affect your overall retirement income, so if you’re approaching retirement, this information can be especially useful. But even if you’re years away from retirement, it’s important to know how much you might receive, so that you can take this information into account as you set retirement savings goals.

Disability benefits
Disability is unpredictable and can happen suddenly to anyone at any age. Disability benefits from Social Security can be an important source of financial support in the event that you’re unable to work and earn a living. Check your Social Security Statement to find out what you might receive each month if you become disabled.

Survivor benefits
Survivor protection is a valuable Social Security benefit you may not even realize you have. Upon your death, your survivors such as your spouse, ex-spouse, and children may be eligible to receive benefits based on your earnings record. Review your Social Security Statement to find out whether your survivors can count on this valuable source of income.

Review your earnings record
In addition to benefit information, your Social Security Statement contains a year-by-year record of your earnings. This record is updated whenever your employer reports your earnings (or if you’re self-employed, when you report your own earnings). Earnings are generally reported annually, so keep in mind that your earnings from last year may not yet be on your statement.

It’s a good idea to make sure that your earnings have been reported correctly, because mistakes do happen. You can do this by comparing your earnings record against past tax returns or W-2s you’ve received. This is an important step to take because your Social Security benefits are based on your average lifetime earnings. If your earnings have been reported incorrectly, you may not receive the benefits to which you’re entitled.

What if you find errors? The SSA advises you to call right away if any earnings are reported incorrectly. The SSA phone number is 1-800-772-1213 (TTY 1-800-325-0778).

Use this Primer to Evaluate a 2015 IRA Contribution

The combined amount you can contribute to your traditional and Roth IRAs remains at $5,500 for 2015, or $6,500 if you’ll be 50 or older by the end of the year. You can contribute to an IRA in addition to an employer-sponsored retirement plan like a 401(k).

NRT-SEPPQ113_02But if you (or your spouse) participate in an employer-sponsored plan, the amount of traditional IRA contributions you can deduct may be reduced or eliminated (phased out), depending on your modified adjusted gross income (MAGI). Your ability to make annual Roth contributions may also be phased out, depending on your MAGI.

These income limits (phaseout ranges) have increased for 2015:

Income phaseout range for deductibility of traditional IRA contributions in 2015

1. Covered by an employer-sponsored plan and filing as:
Single/Head of household $61,000 – $71,000
Married filing jointly $98,000 – $118,000
Married filing separately $0 – $10,000

2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan: $183,000 – $193,000

Income phaseout range for ability to contribute to a Roth IRA in 2015

Single/Head of household $116,000 – $131,000
Married filing jointly $183,000 – $193,000
Married filing separately $0 – $10,000

How Much Money Should You Withdraw for Retirement?

During your working years, you’ve probably set aside funds in retirement accounts such as IRAs, 401(k)s, and other workplace savings plans, as well as in taxable accounts. Your challenge during retirement is to convert those savings into an ongoing income stream that will provide adequate income throughout your retirement years.

file7681341282971Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

Why is your withdrawal rate important?
Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement, as it will have a lasting impact on how long your savings will last.

Conventional wisdom
So, what withdrawal rate should you expect from your retirement savings? One widely used rule of thumb states that your portfolio should last for your lifetime if you initially withdraw 4% of your balance (based on an asset mix of 50% stocks and 50% intermediate-term Treasury notes), and then continue drawing the same dollar amount each year, adjusted for inflation. However, this rule of thumb has been under increasing scrutiny.

Some experts contend that a higher withdrawal rate (closer to 5%) may be possible in the early, active retirement years if later withdrawals grow more slowly than inflation. Others contend that portfolios can last longer by adding asset classes and freezing the withdrawal amount during years of poor performance. By doing so, they argue, “safe” initial withdrawal rates above 5% might be possible. (Sources: William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994; Jonathan Guyton, “Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?” Journal of Financial Planning, October 2004)

1_1837966Still other experts suggest that our current environment of lower government bond yields may warrant a lower withdrawal rate, around 3%. (Source: Blanchett, Finke, and Pfau, “Low Bond Yields and Safe Portfolio Withdrawal Rates,” Journal of Wealth Management, Fall 2013). Don’t forget that these hypotheses were based on historical data about various types of investments, and past results don’t guarantee future performance.

Inflation is a major consideration
An initial withdrawal rate of, say, 4% may seem relatively low, particularly if you have a large portfolio. However, if your initial withdrawal rate is too high, it can increase the chance that your portfolio will be exhausted too quickly, because you’ll need to withdraw a greater amount of money each year from your portfolio just to keep up with inflation and preserve the same purchasing power over time.

In addition, inflation may have a greater impact on retirees. That’s because costs for some services, such as health care and food, have risen more dramatically than the Consumer Price Index (the basic inflation measure) for several years. As these costs may represent a disproportionate share of their budgets, retirees may experience higher inflation costs than younger people, and therefore might need to keep initial withdrawal rates relatively modest.

Your withdrawal rate
There is no standard rule of thumb. Every individual has unique retirement goals and means, and your withdrawal rate needs to be tailored to your particular circumstances. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

All investing involves risk, including the possible loss of principal; there can be no assurance that any investment strategy will be successful.

Evaluating a Franchise Purchase for a Second Career

Owning a franchise can be a great way to break into the world of entrepreneurship. However, franchising isn’t for everyone. It’s best to review the possible pros and cons of franchising before making any commitments.

OLYMPUS DIGITAL CAMERAPotential Advantages

    Mentorship: Most franchisors offer some managerial coaching to new franchisees.

    Trusted brand and/or product or service: Many franchises offer a brand and/or product or service that is typically recognized by your target market.

    Time-tested operating system: With the purchase of a franchise comes an operating system that ideally has been tried and proven through the years.

    Group purchasing power: Most franchisors have contracts with suppliers, providing the cost benefits of buying in bulk.

    Advertising and marketing: After paying a small percentage of gross profits, franchisees can usually take advantage of professionally created campaigns launched by the franchisor.
    Financial Help: Some franchisors will provide assistance to new franchisees in securing financing.

    Potential Disadvantages
    Fees: In addition to the upfront franchise fee, there may be ongoing royalties and, as mentioned above, advertising fees, which are typically required even if you don’t like or want to utilize the campaigns.

    Control: You will generally have to abide by the many restrictions set by the franchisor. These can affect operations, types of goods sold, vendor relationships, marketing strategies, geographic location, and even website content/presence, among other key management decisions.

    Renewal policies: Franchises are generally governed under a contract with an end date, and franchisors may choose not to renew at the time of expiration or may decide to raise fees or impose new restrictions upon renewal.

    For more information, visit the Bureau of Consumer Protection website and review “Buying a Franchise: A Consumer Guide.”

Should You Worry about a Federal Reserve Interest Rate Hike?

After years of record-low interest rates, at some point this year the Federal Reserve is expected to begin raising its target federal funds interest rate (the rate at which banks lend to one another funds they’ve deposited at the Fed). Because bond prices typically fall when interest rates rise, any rate hike is likely to affect the value of bond investments.

bond-investingHowever, higher rates aren’t all bad news. For those who have been diligent about saving and/or have kept a substantial portion of their portfolios in cash alternatives, higher rates could be a boon. For example, higher rates could mean that savings accounts and CDs are likely to do better at providing income than they have in recent years.

Also, bonds don’t respond uniformly to interest rate changes. The differences, or spreads, between the yields of various types of debt can mean that some bonds may be under- or overvalued compared to others. Depending on your risk tolerance and time horizon, there are many ways to adjust a bond portfolio to help cope with rising interest rates. However, don’t forget that a bond’s total return is a combination of its yield and any changes in its price; bonds seeking to achieve higher yields typically involve a higher degree of risk.

Finally, some troubled economies overseas have been forced to lower interest rates on their sovereign bonds in an attempt to provide economic stimulus. Lower rates abroad have the potential to make U.S. debt, particularly Treasury securities (whose timely payment of interest and principal is backed by the full faith and credit of the U.S. Treasury), even more attractive to foreign investors. Though past performance is no guarantee of future results, that’s what happened during much of 2014. Increased demand abroad might help provide some support for bonds denominated in U.S. dollars.

Remember that bonds are subject not only to interest rate risk but also to inflation risk, market risk, and credit risk; a bond sold prior to maturity may be worth more or less than its original value. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.