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January 2009- 2009 changes to Required Minimum Distributions
We would like to inform you of recent legislative changes that were passed by both houses of Congress and signed by the President this past year. This legislation, entitled TheWorker, Retiree and Employer Recovery Act of 2008(The Act), is designed to help alleviate the financial burden facing investors who have seen their retirement savings shrink dramatically due to this year's economic downturn.
The Act will provide relief during 2009 to two types of investors:
- Over age 70 ½ who hold retirement assets in 401(k)s, 403(b)s, 457(b)s and traditional IRA accounts.
- Holders of inherited assets still registered in the name of the decedent in 401(k)s, 403(b)s, 457(b)s and traditional IRA accounts.
It does so by suspending required minimum distributions (RMD), the mandatory withdrawals previously required of all defined contribution plan participants over age 70 ½.
The suspension of RMDs in 2009 allows you to forego or reduce asset liquidations that otherwise would have been required to generate your cash distributions. As a result of the RMD suspension, you need not liquidate assets at current price levels, and may continue to keep your holdings invested on a tax-deferred basis with no penalty. If you choose to do so, you retain the opportunity to await stronger market conditions for future liquidations. You are also free to continue to receive distributions according to your current schedule if you do not wish to make any adjustments in 2009 based on The Act.
Please note, however, that the new tax law applies only to 2009. It does not provide a waiver of your 2008 RMDs or any 2008 distribution that has been delayed until April 1, 2009. We look forward to sharing ongoing updates regarding this important legislation with you as they become available.
You will continue to receive systematic distributions from your retirement account according to your current election.
2010 will be an extraordinary year for tax law, a tax year so potentially advantageous that we may never see its like again. One probable 2010 phenomenon: a wave of high-income and high net worth individuals converting traditional IRAs to Roth IRAs. Here’s why 2010 represents a great year to make that move.
Income limits: gone. Today, you have to pass an income test before you can convert a traditional IRA to a ROTH. If your modified adjusted gross income (MAGI) is more than $100,000, you can’t do it. This limit has long frustrated high-income taxpayers.
In 2010, it’s a whole different story – there is NO income test. Anyone with any MAGI can make the conversion.
While you still can’t contribute to a ROTH IRA if your 2007 MAGI exceeds $166,000 (joint filers) or $114000 (most single filers), it is the conversion that is important.
Potential Advantages: considerable. Many high-salaried people have rolled old 401(k) assets from old jobs into traditional IRAs. In 2010, they can convert them to Roths, which will mean:
-Tax-free growth of these assets
-Tax-free withdrawals of these assets someday (assuming they are 59½ or older and the Roth IRA is more than 5 years old)
-No minimum distribution requirements once you turn 70½
-An eventual reduction in their taxable estate
Taxes: deffered. Of course, you will pay taxes on a Roth IRA conversion. But if you do this in 2010 you don’t have to pay them right away. Unless you elect otherwise, the taxes on the conversion will be spread out over the 2011 and 2012 years. In effect, this gives taxpayers the ability to delay full payment of any tax due in 2013.
The non-deductible IRA option. Some high-income earners have opened non-deductible traditional IRAs with the intent of converting them to Roths in 2010.
While a traditional IRA has no contribution phase-outs due to income, high-income taxpayers can’t deduct their IRA contributions like the middle class can. For tax year 2007, for example, the deduction phase-outs (this is MAGI) start at $83,000 for joint filers and $52,000 for single filers and head of households.
If you don’t qualify to make a deductible IRA contribution or a Roth contribution, the non-deductible IRA lets you make a permissible “end run” to build some assets that can “go Roth” in the near future. If the tax law changes taking effect in 2010 stay in place for years to come, you will be able to open a non-deductible IRA annually (as long as you keep earning income) and convert it to a Roth each year.
Why would Congress give IRA holders a break like this? The simple answer: quick revenue for the federal government. In 2010, a LOT of cash will be pumped into the Roth IRA program, and that will result in a LOT of taxes as a result of the conversions (a short-term revenue boost).
Ready for 2010? Whether you do or don’t convert a traditional IRA into a Roth in 2010, you will want to know about the changes in tax law affecting IRAs and other retirement savings vehicles, and your estate and your investments. We will remind you about options again towards the end of 2009 and early 2010.
March 2009- American Recovery and Reinvestment Tax Act of 2009
Individual tax incentives abound in American Recovery and Reinvestment Tax Act of 2009
The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.
Making Work Pay Credit. The Making Work Pay credit is a new but temporary refundable credit. Qualified taxpayers will either take the credit through a reduction in the amount of income tax withheld from their paycheck (by allowing a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual's earned income or $400 ($800 for married couples filing jointly)), or in a lump sum when filing their income tax return for the tax year.
Note.Individuals who are self-employed may qualify for the credit as well, to the extent earnings from self-employment are taken into account in computing taxable income.
The credit applies retroactively to the start of 2009 and extends through 2010. Up to the maximum $400/$800 credit amount is allowed for each year. The credit begins to phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 in the case of married couples filing jointly). The credit will be phased out at a rate of 2 percent above the MAGI limits.
$250 Economic Recovery Payment. The ARRTA also provides a one-time payment of $250 to individuals on a fixed income, including railroad retirement beneficiaries, Social Security recipients, disabled veterans, as well as retired government workers who are not eligible for Social Security benefits. The $250 payment will reduce the individual's otherwise allowable Making Work Pay credit to which they may be entitled. This payment will only be made in 2009, likely around mid-year.
New Car Deduction. Both itemizers and non-itemizers can take advantage of a new but temporary above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase of a new (qualifying) motor vehicle. Both domestic and foreign vehicles qualify, as well as motor homes, including SUVs, light trucks or motorcycles, weighing no more than 8,500 gross pounds.
The deduction is allowed in computing AMT, but is not available to taxpayers who elect to deduct state and local sales and uses in lieu of income taxes as an itemized deduction. The deduction begins to phase-out for taxpayers with AGI exceeding $125,000 ($250,000 for joint filers). Additionally, deductible sales/excise taxes can not exceed the portion of tax attributable to the first $49,500 of the purchase price.
Enhanced First-Time Homebuyer Tax Credit. The ARRTA raises the maximum amount of the first-time homebuyer tax credit to $8,000 (up from $7,500) and extends the credit through December 1, 2009. The ARRTA also completely eliminates any repayment requirement for purchases made after January 1, 2009 if the taxpayer does not sell or otherwise dispose of the property within 36 months from the date of purchase. However, if the taxpayer does dispose of the residence within this time, pre-ARRTA rules for recapture apply, requiring the homebuyer to repay any credit amount received to the government over 15 years in equal installments. Purchases on or after April 9, 2008 and before January 1, 2009 are still governed by the original first-time homebuyer tax credit rules enacted last year in the Housing and Economic Recovery Act of 2008.
Education Credit. The ARRTA temporarily enhances and expands the Hope college education tax credit (renaming it the American Opportunity education tax credit) for 2009 and 2010. The credit is increased in amount, to a maximum of $2,500 per year and extended to all four years of college education. Additionally, the credit is subject to more generous phase-out levels of $80,000 of AGI for individuals and $160,000 for joint filers. For 2009 and 2010, up to 40 percent of the American Opportunity credit is refundable.
Qualified Tuition Programs ("529 plans"). Distributions from qualified tuition programs (also known as "529 plans") used to pay a beneficiary's qualified higher education expenses are tax-free. For 2009 and 2010, ARRTA allows beneficiaries to use distributions from QTPs to pay for computers, laptops and computer technology, including internet access.
Child Tax Credit. The ARRTA increases the refundable portion of the child tax credit for both 2009 and 2010. For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer's earned income in excess of $3,000.
Enhanced Earned Income Tax Credit. For 2009 and 2010, the ARRTA temporarily increases the Earned Income Tax Credit (EITC) for working families with 3 or more children. The new law: (1) increases the credit to 45 percent of a family's first $12,570 of earned income for families with 3 or more children and (2) adjusts the start of the EITC phase-out range upwards by $1,880 for joint filers, regardless of the number of children.
AMT Patch. The ARRTA boosts alternative minimum tax (AMT) exemption amounts for 2009. The new amounts are slightly higher than last year's exemptions but much higher than the amounts they had been set to revert to had this remedial provision not been passed.
The 2009 exemption amounts are:
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$46,700 for individuals and heads of household; and -
$70,950 for joint filers and surviving spouses.
The new law also provides that for 2009 nonrefundable personal credits may offset both regular tax and the AMT.
Partial Exclusion of Unemployment Benefits. The ARRTA temporarily excludes up to $2,400 of unemployment compensation from a recipient's gross income for 2009. Unemployment benefits are otherwise includible in a recipient's gross income for tax purposes. As such, any unemployment benefits over $2,400 in 2009 will be subject to federal income tax.
Increased Transit Benefits For Workers. Beginning in March 2009, and effective for 2009 and 2010, the ARRTA increases to $230 per month the income exclusion for transit passes and van pooling.
Energy Incentives. Code Sec. 25C provides a tax credit for energy efficient improvements made to a taxpayer's home. The ARRTA increases the Code Sec. 25C residential energy property credit to 30 percent (up from 10 percent), raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the pre-2008 $500 lifetime cap, and makes other modifications to the credit. Taxpayers can use the credit for insulation materials, exterior windows and doors, skylights, central air conditioning, and hot water boilers, among many other energy efficient improvements.
The ARRTA also removes the individual dollar caps under the Code Sec. 25D residential energy efficient property credit for solar hot water property, wind energy property and geothermal heat pumps. Moreover, if you are interested in an environmentally-friendly car, the ARRTA modifies the credit for plug-in electric vehicles, although they are not yet on the market.
April 2009 - It's Spring - Do You Know Where All of Your Documents Are?
Sorting out and organizing your financial papers is an annual ritual.
It's time to weed out your financial papers. As the weather warms and you gear up for a big spring cleaning, it's also an excellent time to organize your financial papers. This is an important step toward getting your finances in shape.
Creating a filing system that works best for you is essential, but many people proceed directly to creating a paper-shuffling system of loose papers and folders and forget other details that doom their organizing system.
So while you are cleaning and organizing the rest of the house, here's how to rethink how you store your financial papers and create a better system:
Determine a central location
Most people keep their important papers in the wrong place. They choose an out-of-the-way spot such as the basement, the back of a closet, or a spare storage room instead of an area that is centrally located and easy to access.
If you fail to pick a place that makes it easy to immediately file away the papers, the papers will end up on desks, in drawers, and spread among various boxes all over the house.
There is an easy way to determine if your current filing system is adequate. If you know exactly where all your tax information, credit-card statements, household bills, banking statements, appliance warranties and manuals, passports, investment papers, wills, and insurance papers are without searching and they are easily accessible, then you have a good system.
If you are like most people and don't know instantly where all these documents are, it's time to determine an easily accessible place for all of them.
Disorganization will not only cost you valuable time when you need to locate your important papers, it can also cost you money.
While individuals who are young and single can probably get away with a large folder to keep track of their financial papers, if you are married or have any type of investments, you really need to purchase or create a filing cabinet dedicated to them.
Where you place it depends on where you open your mail and take care of the bills. Placing it in a home office or next to a family room desk where you open mail makes it easy to access and file everything immediately so it doesn't get lost or misplaced. Some people even use a kitchen cabinet. The most important thing is that it be in a place that you use regularly and that you have easy access to.
Create a master document
Once you have established a place to store all these financial documents, create a master document.
While you won't be able to create this master document until you have gathered all your other financial information and determined a filing system, it's important to mention it here because most people never create one.
Once all their financial papers are gathered together, they feel that is enough and they are finished-which can be a huge mistake.
You may know what all the papers mean, where they are located, and how they are filed, but nobody else does. The importance of a master document is to explain what all of your financial papers are as a guide to an executor of your estate or anyone else that may need access to them someday.
In addition to explaining the filing system you have created, the master document should also contain all the important financial information not filed away, such as online account information,
where your safety deposit box key is located, and important contact numbers.
Develop a financial routine
Much more important than your filing system is getting into a routine of regularly filing your financial papers. Whether that is opening mail for a few minutes on a daily basis or placing all financial mail on your desk to open and file once a week, creating a set routine makes it much easier to keep all your financial papers in order and properly filed.
When creating the routine, take the time to coordinate your filing system with other ways you track your finances. If you track your budget using computer software, make sure to input the needed information at the same time that you file the papers.
At the same time, make sure to note due dates for bills and other events on your calendar, personal organizer, or electronic assistant. By creating a routine to do all these things at a specific time each day or week, you can organize most of your finances in one step instead of several.
Make the filing system flexible and simple
How you organize your financial papers once you have determined a central location really isn't of importance as long as it makes sense to you. Everyone is different, and what works best for one person won't necessarily be the best for another. The main point is that it's a system that you understand and will want to use.
You need to be consistent and choose a filing system that you are most comfortable with. There are a number of ways that you can create the system depending on what most appeals to your sense of organization.
While the most common method of filing is by subject or category (dividing financial papers by topic), you can also file papers month by month (placing all the financial papers that you receive each month into separate folders), using a color-coded system (each color represents a category or subject), or by priority (placing papers in the order that they need to be taken care of first). Any of these methods will work.
When you actually make your filing system, ensure that it is flexible and simple. If you aren't sure how specific to be when beginning, opt for broad categories. Many people try to make a huge number of specific categories at the beginning, and there are so many that it makes it difficult to keep track. The entire filing process then becomes overwhelming.
If you find over time that a certain category is too broad, you can easily create subcategories or entirely new ones as you see which papers you deal with most each month.
Take part of a day during your spring cleaning routine to focus exclusively on your financial papers, and you'll be surprised at the rewards you reap.
May 2009 - 10 Commandments for Frugal Living
Frugality often gets a bad rap. Many people misunderstand frugality and assume that it's nothing more than being "cheap" when, in reality, frugality is making sure that you get the most from the money and resources you have, even if they are limited. For those who are just beginning to embrace frugality as a part of their lifestyle, here are 10 frugal commandments to live by.
1. Thou shalt not buy things you don't need
To get the most from the money that you have, it's essential to have a basic understanding of the difference between wants and needs. Chances are that a lot of things that you assume are needs are only wants, which you have disguised as needs in order to justify purchasing them. Basic needs are food (including water), shelter, and clothing plus the essentials needed to work so that you can provide those basics. That means that the TV (and virtually every other gadget in your house) is a want and not a need. Having the willpower to buy only those things that you really need is essential to getting the most out of frugality. (Being frugal doesn't mean being stingy, but it does mean that any wants you have are specifically saved and budgeted for as opposed to purchased on impulse.) Simply put, if you don't need it, don't buy it, no matter how good the price.
2. Thou shalt buy only when you have the money
One of the basic premises of frugality is having the money to pay for the things that you buy. By budgeting and saving for those things that you want and paying for them with cash rather than using credit, you ensure you aren't paying far more than you should be for the products and services that you buy.
3. Thou shalt purchase by value, not price
One of the biggest misconceptions about being frugal is that those who are frugal only purchase things that are cheap or the very lowest price. The truth is that those who are frugal always try to buy the best value, taking into account other factors such as life expectancy and additional upkeep costs that come into play beyond retail price. This often means looking at the long-term cost of an item rather than just the initial purchase price.
4. Thou shalt be patient
Those who embrace frugality rarely have the latest and greatest gadgets on the market. Instead, those who are frugal wait for the early adopters to embrace the technology until the point at which the price falls to a reasonable level. Those who are frugal are usually a generation or two behind on the latest gadgets, but they get them for a fraction of the price, and the gadgets still perform the functions that need to be done.
5. Thou shalt buy used
A basic tenet of frugality is getting the best value from what you purchase, and this often means purchasing products used. Those who are frugal are more than happy to let someone else pay full retail price and absorb the premium pricing for products that are depreciating assets (think of the difference in price between a brand-new car and a two-year-old vehicle, for example). Used products are often a fraction of the price of the new models and in many instances perform the needed task just as well.
6. Thou shalt look for alternatives before buying
If you need something, automatically going out and buying it is not an approach that a true frugal person would take. Instead, before spending any hard-earned money on something that may be used only a few times, consider alternatives. Is it possible to borrow it from a friend, a neighbor, or a place such as the library? Would renting it be less expensive in the long run? Do you have something else already on hand that could be used to perform the same task? Buying is only one of many options.
7. Thou shalt ignore the Joneses
Part of living a frugal life is understanding that life isn't a competition over who has the most stuff. It's important to concentrate on your and your family's needs, not on what others are spending their money on. Just because your neighbors bought it doesn't mean that you need to go out and buy something on par or better.
8. Thou shalt not pay full retail price
When you are going to make a purchase, you should never pay full retail price. There are a number of ways to avoid paying full retail, such as using coupons, finding discounts, waiting for sales, and negotiating a lower price. With a bit of preparation and forethought, there is never a reason to pay full retail price for anything.
9. Thou shalt not waste
One thing that those who are frugal hate is waste. While this obviously includes the waste of money, it also goes beyond money to such areas as wasted resources and wasted time. Efficiency is a frugal person's friend, and those who are frugal tend to follow the green mantra of reduce, repurpose, reuse, and recycle.
10. Thou shalt do things yourself
When something needs to be done, the first choice of who should perform the task should be you, not someone you hire. Frugal people tend to be do-it-yourself experts and do not pay others to do things that they can easily do by themselves. When they don't know how to do something, they research it to see if they could do it with the proper instructions, or if it would be best to let an expert handle it.
While it may take some practice at first, getting these 10 frugal commandments down will make your savings account look a lot healthier come 2010.
June 2009 - Your Money or Your Life Insurance
Not everyone needs life insurance. Here's how to determine whether it makes sense for you.
Purchasing life insurance is probably one of the easiest activities to procrastinate. Unfortunately, many people go through a life-altering event before they even think about it.
For example, you may have recently gotten married, had children, or had a health scare, which made you think about how your loved ones would fare without you around. Whatever the reasons may be, it's important to distinguish when life insurance makes sense and when it does not.
Not everyone needs life insurance. In its purest form, life insurance is merely a form of financial protectionin the event of your death. You sign a contract to pay premiums to an insurance company, and in return, the company agrees to provide a specified amount of money to your beneficiaries upon your passing.
This financial protection can be particularly comforting when it comes to providing:
-Protection for your family against financial hardship or to maintain their current standard ofliving
-Cash to pay off mortgages, taxes, or other debts so your heirs are not left with them
-Funds to pay funeral expenses
-A continuing income stream for your surviving family members
-An inheritance for your heirs
-A nest egg for future expenses, such as your children or grandchildren's education
Life insurance is most applicable when you have dependents or heirs who count on you to provide for them. On the other hand, there are plenty of situations where life insurance does not make sense, such as if you are single and don't have any dependents.
You may hear that premiums are lower if you purchase a policy when you are young, or that by purchasing a long-term policy now, you won't have to provide evidence of insurability later. While both statements are true, odds are that you'll be paying premiums needlessly if you follow this line of reasoning. If you truly don't need life insurance now, then why pay for it?
What are the chances that your health will take a significant turn for the worse before you reach the point when you need life insurance? If you want to hang on to as much of your money as possible, don't buy insurance before you can demonstrate a real need for it. The following are some circumstances in which you would most likely not need life insurance:
You are retired and have no dependents. At this time in your life, you most likely don't have large debts (such as a big mortgage) or dependents relying on your income. If no one who will be financially harmed when you pass away, you probably don't need life insurance. Plus, premiums for people over age 65 are very high and may even be unaffordable. An exception to this logic may apply if you are using life insurance as an estate-planning tool for tax purposes.
You are retired and have no dependents, and your spouse has a high enough income. Life insurance should be purchased to replace the income or services you're currently providing for your family. However, if your family has other means of resources besides you, then it doesn't make sense to spend money on life insurance (unless for estate-planning reasons).
You are considering a policy for a minor child. The child probably does not need life insurance unless you would need the money to cover basic funeral expenses. Undoubtedly the loss of a child would be terribly tragic. Financially speaking, however, you would not experience a loss of income provided by the child. Therefore, life insurance does not make sense for minor children except as insurance against the cost of funeral expenses.
At the other end of the spectrum, if you have young children, a spouse, or other family members who are relying on your contribution to the household income in order to pay the bills, then you probably do need life insurance. Whether it's to pay off your mortgage or provide your family with a specified income stream, life insurance is an important financial tool that can help you plan for the uncertainty of the future.
July 2009 - 7 Things You Should Spend Money On Today
7 Things You Should Spend Money on Today
Opening your wallet can be beneficial during tough times—if you know where to spend.
It's important to save where you can, but it's just as critical to spend where you should. When times are tough, most people think they should spend less and save as much as possible. That's good advice in many situations, but there are exceptions. Here are seven of them:
Home improvements. A recession is a great time to do work on your home. Materials will be discounted, since demand will be low. Labor is plentiful and cheap. And if the work increases the value of the house, spending extra money to get improvements done when times are tough makes financial sense.
Your health. Your health is always important, but it is even more crucial during dour economic times. You can't afford to miss work for an extended period without placing your job at risk. Preventive measures, even if they cost extra, are important. In addition, you need to quickly address ailments so they don't turn into something major later on.
Quality food. Food tends to be one of the few budget items that can be juggled to save money here and there. The problem is that people often choose to buy poorer-quality food, which isn't as healthy. The food you eat will determine your energy level and resistance to colds and illnesses. Also, learn the tricks of the coupon trade so you can get quality food and save money at the same time.
Retirement. If you have the money, now's the time to buy stocks and other investments, especially if your timeline for needing the money is decades away. While people feel more secure when the stock market is rising, that's when equities are more expensive. Stocks today are less than half of what they were at their peak—a bargain. Stock investing involves risk including loss of principal.
Products that save you money. More than ever, it makes sense to spend money on appliances and gadgets that will save you money in the long run. Price tags and labor are cheaper, and the extra efficiency will pay off in the long run.
Costs to relax. When the economy turns sour, it brings on stress. Stress is not only bad for your health, it can ruin relationships, cause a decline in job performance, and affect decision-making when it comes to finances. The key is to know what reduces stress and figure out a way to keep or increase that activity in your budget. For example, a gym membership may seem like a luxury when there isn't enough money to go around, but exercise is a known stress reliever. Perhaps painting is your stress relief. Whatever the activity may be, don't scrimp.
Repairs and maintenance. Lengthen the life of what you have and avoid spending money on brand-new equipment. The amount you spend may be a fraction of the replacement cost.
August 2009 - Annual Submission Required - Proposition 8 Decline in Value Reassessment
If you haven't heard of this proposition before this might be something that you want to take a look at.
If you purchased your property during a time when the real estate market fell dramatically, such as during the years 2005 through 2008, or if your property is substantially damaged due to a storm or fire that causes a reduction in your property's value, it is likely that your property will benefit from a Proposition 8 reassessment. The decline in value is typically temporary and may be the result of changes in the real estate market, the neighborhood, or the property itself.
Information about prop 8 can be found at http://www.test.boe.ca.gov/proptaxes/faqs/prop8.htm.
This is the prop 8 frequently asked questions page from the State of California Board of Equalization.
The link to the assessors office website for Los Angeles County and Orange County is www.assessor.lacounty.gov. This is a useful resource for practical information about property values and the assessment process. Comparable sales data and maps are also easily accessible.
September/October 2009 - Dollar Cost Averaging and Municipal Bonds
Benefits of Dollar Cost Averaging
- Using this strategy, more shares are purchased when prices are low, and fewer shares are bought when prices are high.
- The benefit of dollar cost averaging is highest when there is uncertainty in the market.
- Dollar cost averaging is easy to understand, eliminates timing difficulties, and removes emotions from decision-making.
- Dollar cost averaging does not protect investors against losses. It does result in the average cost per share being lower than the average price of the shares over time.
Dollar cost averaging is a well-known investment strategy designed to help reduce volatility by purchasing securities in fixed dollar amounts at regular intervals, regardless of what direction the market is moving and regardless of the share price. Using this strategy, more shares are purchased when prices are low, and fewer shares are bought when prices are high. For example, an investor might choose to purchase $100 in shares of stock every month. When each share of stock has a higher price, the $100 will purchase fewer shares. However, when the price falls, the same dollar amount will purchase more shares. The investor pays a mix of higher and lower prices for the investment, rather than trying to pick the optimum day to make their investment. By investing a set amount over time, investors take advantage of the rise and fall of prices in the market to smooth returns. An investor should consider their ability to continue purchasing though periods of low price levels. Such a plan does not ensure a profit and does not protect against loss in declining markets.
The benefit of dollar cost averaging is highest when there is uncertainty in the market. Poorly performing markets provide great entry points for investments. However, since a market bottom is a process, not a day, dollar cost averaging ensures that investors are purchasing at regular intervals and are thus able to take advantage of market slumps by automatically buying more of an investment for the same amount of money. Dollar cost averaging takes some of the guesswork out of investing and helps lessen the risk of investing a large amount in a single investment at the wrong time.
Implementing a Dollar Cost Averaging Strategy
Dollar cost averaging is a relatively mechanical investment strategy that has much to offer the typical investor. It's easy to understand, eliminates timing difficulties, and removes emotions from decision-making. Best yet, it is the most effective means to put money to work under uncertain times for the market.
This simple investment technique is defined by two directives: (1) invest the same amount of money (2) at regularly scheduled intervals. The amount of money and frequency are up to you, the investor. A key factor to the success of this approach is to select an amount you can stick with faithfully over time. This approach automatically results in buying more shares when prices fall and buying fewer shares when prices rise. In effect, investors are buying more shares at lower, perhaps bargain prices and fewer shares at what might be considered high prices. Keep in mind that it is imperative to stay with the plan and ignore market fluctuations when employing this strategy.
Dollar Cost Averaging in Uncertain Times
While some investors will choose to look for shelter, others view a down market as an opportunity. Many investors are victims of their own emotions. In fact, it's often after stock prices have risen markedly that many investors get optimistic and buy shares. And those same investors often sell when they become fearful after prices have already dropped. The consequence is that investors buy at high prices and sell at low prices, the very opposite of what they should do to best work toward their goal.
Investors must not let their emotions get the best of them, and must exercise the discipline of maintaining a systematic investment program. If investors want to avoid the "buy high, sell low" trap, then dollar cost averaging can be a valuable strategy in a down or uncertain market.Keep in mind that dollar cost averaging does not protect investors against losses. While it does result in the average cost per share being lower than the average price of the shares over time, in a bear market an investor can have losses. Dollar cost averaging may also lower your potential profits, if done in a steadily rising market. If a stock's share price rises all year long, then an investor would have greater gains if they make a single large investment early in the year.
Conclusion
Dollar cost averaging is a great strategy for an investor who is uncertain about the future of the market to use. However, if you are confident of a bull market, the best strategy is likely to make a lump sum investment rather than dollar cost averaging in. If the latter description doesn't fit you or the current market conditions, the least risky way to take advantage of great entry points during a down market is to consider and implement a dollar cost averaging plan.
Earn Tax-Free Income with Municipal Bonds
Municipal bonds, frequently issued by state or local municipalities, are a popular way to earn tax-free income and, if income is reinvested, to achieve tax-free compounding of returns. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well. However, it is important to note that gains and losses realized in conjunction with municipal bonds investments are subject to tax. Also known as "munis," these fixed-income investments can provide higher after-tax returns than similar taxable corporate or government issues.
Types of Municipal Bonds
The most common type of municipal is called the general obligation (GO) bond. These bonds are not tied to a particular community project and the issuer is obligated to make interest and principal payments on time, which makes them one of the least risky municipal investments. Consequently, they also have relatively low yields.
Another type of bond is the revenue bond, which is backed only by the revenue expected to be generated by the facility being built. Other types include special tax bonds and industrial revenue bonds, as well as variations on the general obligation bond.
Municipal Bonds in Your Portfolio
Municipal bonds usually have a yield several percentage points below the yield of corporate bonds of comparable maturity. This means that a municipal bond can provide the same after-tax yield as a taxable bond paying a higher interest rate. If you are in a high tax bracket, the benefits of using municipal bonds within your bond allocation are impressive. For example, if your income tax rate is 28%, a municipal bond paying 6% interest is actually a better investment than a taxable bond paying interest at 8.3%.
Factors Affecting Municipal Bonds
As with any investment, municipal bonds present certain risks. Municipal bonds react to changes in interest rates, which is why many analysts recommend holding short- to intermediate-term bonds, because they are less vulnerable to changing interest rates. Municipal bonds also pose credit risks, as became apparent when Orange County, California filed for bankruptcy in 1994. Another consideration is the potential for future changes in tax laws. Some of these risks are lessened by purchasing shares of a municipal bond fund, which is inherently diversified.
Additionally, you should be aware that municipal bonds involve risk and are not suitable for all investors. Fixed-income investments are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, political events, tax ramifications, and other factors. This is not an offer or solicitation for brokerage services or other products or services. Municipal bonds are not an obligation of the U.S. government.
Municipal bonds continue to offer many investors higher after-tax yields than could be earned on comparable taxable investments. Because of this important benefit, you may want to consider whether an allocation within your portfolio is suitable given your situation.
December 2009 - Charitable Giving - Tax Saving Ideas for the Home Stretch
Here's a quick review of three important charitable giving vehicles to consider:
1. Donor-advised funds. These funds are public charities that allow you to make a large current gift to charity and then "advise"—without the legal right to actually direct—the fund on how and when to make specific gifts to other public charities. Several donor-advised funds (DAFs) have been very successful in raising money on a commercial basis. In addition, some community foundations offer donor advised funds. When you give money to a donor-advised fund, you are giving away money irrevocably. The charity that receives his gift—the donor-advised fund—owns the money. "Once a contribution is accepted, it's an irrevocable charitable contribution to the gift fund, to be owned and held by our trustees," says one of the nation's largest DAFs. The fund will generally take the donor's advice but is not required to do so. In fact, the IRStakes a negative view of any pledge by a DAF to follow donor advice. Think about DAFs when control isn't critical and the amount of the gift is small. Key features to consider are:
- Ease of use
- Donation size ($500,000 or less)
- Willingness to relinquish legal control
- Availability from both mutual fund companies and community foundations
2. Private foundation. Private foundations are the gold standard against which other charitable instruments are measured. No other vehicle can match the unique combination of flexibility, control, and tax advantages that private foundations provide. A private foundation offers its founders the ability to make a difference in the world, build a permanent legacy, gain personal satisfaction and recognition, and keep control in the founder's family forever. Of particular importance is the fact that you can obtain large income tax deductions for gifts to their foundations without having to give the money away to charities this year. All they'll ever need to give away is 5% per year, meaning that the fund can grow over time. Another benefit, this time from the advisor's perspective: You can manage the investments.
3. Supporting organization. A third alternative is like a cross between a private foundation and a public charity, called a supporting organization. Consider this when you would like to set up a private foundation but want to donate real estate or a closely held asset. A supporting organization can make a lot of sense if you have a large portion of your wealth in:
- Partnerships
- Real estate
- S corporations
- Operating businesses
- Related-party assets, such as notes from a business or partnership
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