Archive for the ‘Financial Planning’ Category

Mutual funds are priced once per day after the markets have closed. You can purchase and redeem shares through the funds directly.

ETFs are indexed vehicles that trade like stocks, are traded through a brokerage account throughout the day, and their prices fluctuate all day. Expense ratios are usually slightly lower. You will incur commissions for each transaction. If you invest regularly, this can be expensive.

In general, when choosing between the two, your preference for trading flexibility should take priority because expense ratios are marginally different.

ETFs are tax efficient compared to mutual funds. However, comparison for ETFs should be with tax-managed funds, which seek to maximize after tax returns.

The volatile markets have created tax-planning opportunities that you should consider as the year winds down.

Capital Gains/Losses

Your capital losses from the sale of investments will offset your capital gains. If your losses exceed your gains, the IRS allows you to deduct an additional $3,000 against other income and any unused losses may be carried forward to use in future years. For example, if you have losses from the sale of investments, consider selling (if selling makes sense within the context of your goals) investments with gains prior to year-end. The gains will be offset to the extent of your losses.

If you want to recognize both gains and losses in two different stocks, or mutual funds, the sale of each will allow you to offset the gains with the losses. If you really like the stock, or mutual fund, that you sold at a loss, you can repurchase a similar stock, or fund. To avoid the “wash sale” rules you must purchase a similar investment but not an identical one or the loss will be disallowed. When implementing such a strategy, you should also consider any associated transaction costs.

Mutual Funds

With regard to mutual funds, here are a few items that you should keep in mind. Funds usually distribute capital gains every year. The deemed distributions are taxable to the shareholders even though no cash has been received. Call your funds and ask about capital gain distributions for 2002. With this information, you can plan to implement some strategies prior to year-end. Also, if you are planning on selling or buying shares of funds, you need to know the dividend dates. If you are buying, you should purchase shares subsequent to the date. And if you are selling, you should sell prior to the date. With regard to a sale of shares, you also need to consider the different methods available in determining your basis. There are several methods and the method you elect can have a significant impact on the amount of gain or loss you need to report to the IRS.

Charitable Donations

Consider donating appreciated stock or mutual fund shares to a qualified charitable organization instead of cash. If done properly, you do not report any gain on the donation and you receive a charitable deduction equal to the fair market value of the investment. If you are considering donating an investment that has declined in value, sell it first, and donate the net proceeds, that way you will be able to deduct all or part of the loss in the year of the sale and receive a charitable deduction for the cash contributed.

Probably not! A majority of people have either outdated or inappropriate designations.

Have you had a life-changing event such as a marriage, divorce, or the birth of a child? Or, have you just not thought about it, or just not gotten around to it?

The financial implications that designation errors can have on an estate could be devastating. Mistakes in naming beneficiaries may result in the disinheritance of children and grandchildren and delays in providing for the financial needs of loved ones. They may also result in unnecessary expenses and taxes.

Take some time now to determine if your beneficiary designations are accurate and then review your designations on a periodic basis.

Corporate MMAs are very similar to traditional MMAs in operation, but offer a higher yield. They are also less secure than traditional MMAs that are insured by the FDIC, because your investment is only backed by the corporation’s promise of repayment, and in the case of bankruptcy, you become essentially an unsecured creditor.

In a traditional MMA, the institution invests your money in low risk (US Govt. & Agencies, CDs, Commercial Paper) investments. Corporate MMAs invest in higher yielding investments, such as equipment leases and consumer loans.

Currently, GM is offering a yield of 2.75% for an investment of $50,000 or more. The average current yield for traditional MMAs is around 0.60%. Ford, GE, and Caterpillar are also offering corporate MMAs.

If you think that these accounts may fit into your overall investment strategy, approach it as if you were investing in bonds of the corporation, and base your decision not only on the current yield of the account but also the credit worthiness of the corporation.

This vehicle protects against the devastating impact of inflation on fixed income investments.

I Savings Bonds are accrual securities, which means interest income payments are not received until the bonds are redeemed or mature (up to 30 years). Federal income tax on the interest can be deferred until redemption or maturity. Also, the interest is exempt from state income tax.

The interest rate is a combination of two separate rates: a fixed rate of return, and a variable semi-annual inflation rate based on the CPI-U. In the unlikely event of deflation, the value of the bond remains at its pre-deflation level. Moreover, because they do not trade in the secondary market, their value never decreases.

As a result of being structured as long-term investments, there is a three-month interest penalty if redeemed within five years of purchase.

I Savings Bonds are very attractive for retirement savings outside tax-deferred accounts, and, as an added bonus, they qualify for the education tax exclusion.

Money held in accounts set up under Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) must be spent on purchases that clearly are for the benefit of your minor child. The custodian cannot spend the money on anyone but the child.

The income earned in the account is taxed at the child’s lower marginal rate, if under state law the account legally belongs to the child and the parent is not permitted to use it to discharge support obligations. However, in the case of children under the age of 18, the unearned income (interest, dividends, etc.) taxable to the child will be taxed at the parents’ higher marginal rate. To the extent that income from the account is used for the minor child’s support, it may be taxed to the parent who is legally obligated for the support. State laws differ as to a parent’s obligation to support. The income will be taxable to the parent only to the extent that it is actually used to discharge the obligation.

Also, transfers under UTMA or UGMA generally qualify for the annual gift tax exclusion ($12,000). Finally, the value of the property transferred under UTMA or UGMA is includable in the estate of the donor (parent-custodian) if he or she dies while serving in that capacity.