Making Cents

THE DCA Way

Posted by Curtis A. Smith, CFP® on 30 December 2009 | 0 Comments

Tags: Dollar Cost Averaging, Core Series, Spending Plan, Cash Management, Financial Planning, Investing, Retirement Plan Contributions

Are you investing inconsistently … or not at all? Inconsistent investment can sabotage your retirement savings efforts. There’s a way to avoid that problem: a strategy called Dollar Cost Averaging (DCA).

By investing equal dollar amounts on a regular monthly basis, you can plan to build wealth in a way you can afford today.

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Tax Alert: Plan to Take Advantage of 2010

Posted by Curtis A. Smith, CFP® on 28 December 2009 | 0 Comments

Tags: Itemized Deductions, Standard Deduction, Alternative Minimum Tax, Marginal Tax Rates, Income Tax, Financial Planning, Core Series, Estate Tax

Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to exploit.

No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.(source)

As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.(source)

Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.(source)

The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.(source)

The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.(source)

The AMT (Alternative Minumum Tax). You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.(source)

How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).(source)

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Year-End Financial Moves to Think About

Posted by Curtis A. Smith, CFP® on 15 December 2009 | 0 Comments

Tags: Harvesting Losses, Tax Credits, Energy Credits, Flexible Spending Account, 401k, IRA, Roth IRA

Now is the time to consider some year-end financial moves – there are only two weeks left - little and not-so-little things you might do to plan to improve your financial position. Taking time to make some strategic decisions before December 31 can help keep your portfolio on track and potentially minimize your April income tax bill.

You could put more in your 401(k) before they play “Auld Lang Syne”. As you only get one chance to save for retirement and an annual deadline to make retirement plan contributions, you could increase your final retirement plan deferrals of 2009 to the maximum allowed by your plan, assuming your finances permit you to do so. Contributions to traditional IRAs and 401(k)s are usually made with pre-tax dollars and thereby could help you reduce your tax bill.(source)

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The 401k Plan Needs to be Replaced

Posted by Curtis A. Smith, CFP® on 10 December 2009 | 2 Comments

Tags: 401k, Financial Planning, Investing, Retirement Plans

In fall 2009, TIME Magazine raised eyebrows with a cover article called “Why It’s Time to Retire the 401(k)”. Author Stephen Gandel, the magazine’s senior economic writer, argued that 401(k)s, 403(b)s and IRAs had proven themselves “a lousy idea, a financial flop.”

Citing data from the Society of Professional Asset-Managers and Record Keepers, Gandel noted that in 2009, the average 401(k) had a balance of $45,519. Moreover, 46% of all 401(k) accounts had balances of under $10,000. However, he failed to mention that the average 401(k) account has been held for less than a decade.(source)(source)

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November 2009 Monthly Economic Update

Posted by Curtis A. Smith, CFP® on 8 December 2009 | 0 Comments

Tags: Economic, Core Series, Financial Planning, Investing, Commodities, Foreign Markets

The month in brief. The Dow climbed 6.51% in November, and the S&P 500 and NASDAQ were nearly as hot.(source) Gold prices reached new highs, and home sales numbers were impressive. A recovery appeared certifiably underway, albeit the kind that featured an occasional step back. A debt crisis in Dubai only rattled stocks momentarily. Data showed consumer spending increasing, and Black Friday wasn’t bleak. 

Domestic economic health. Has unemployment peaked? The jobless rate came down to 10.0% in November from October’s 10.2% mark. As for next year, Federal Reserve policymakers predicted unemployment of 9.3-9.7% by 4Q 2010 – better, but hardly a forecast to celebrate. However, the great news in the November jobless stats; payrolls only contracted by 11,000 positions – the economy seemed on the verge of creating jobs again.(source)(source) Time will tell on employment gains.

The recovery was progressing, in fits and starts. We learned that consumer spending increased by 0.7% and wages increased by 0.2% in October.(source) The Black Friday weekend was solid, if not spectacular; National Retail Federation research gauged online and brick-and-mortar retail traffic at 195 million versus 2008’s 172 million. However, the average shopper spent $343.31 this Thanksgiving weekend compared to $372.57 a year ago.(source)

Turning to services and manufacturing, factory orders increased in October for the sixth month out of seven (+0.6%) while October durable goods orders fell (-0.6%).(source) The Institute for Supply Management’s November service sector index showed contraction (48.7 as opposed to a 50.6 reading in October) and its manufacturing index slipped from October’s 55.7 mark to 53.6 last month – still showing growth.(source)

After October declines, the two notable consumer confidence indexes presented a mixed bag: the Conference Board index went to 49.5 in November from 48.7 in October, but the Reuters/University of Michigan survey finalized at 67.4 for the month, down from 70.6 in October.(source)(source) We learned consumer prices had risen 0.3% in October, with core CPI +0.2%; the last figure put core CPI at +1.7% for the past 12 months of data, squarely within the Federal Reserve’s inflation target zone.(source)

Global economic health. All kinds of 3Q data were now available. Perhaps the cheeriest news was the Eurozone economy grew by 0.4% in the third quarter – the first positive quarter in the last six. German’s economy grew by 0.7%. Out of the major European economies, only the United Kingdom and Spain remained in recession.(source)(source) The Bundesbank, Germany’s central bank, forecast GDP of +1.6% for 2010 and +1.2% for 2011 after a -4.9% showing for 2009.(source)

Aided by a government stimulus and $1.3 trillion in loans, China’s economy expanded by a record 8.9% in the third quarter.(source) While data arrived showing Japan’s economy posting its second straight quarter of growth, the International Monetary Fund estimated the nation’s GDP would shrink by 5.4% for 2009.(source) Turning to the third and fourth largest economies in Asia, India’s economy grew by 7.9% for the third quarter, while South Korea’s economy grew by 3.2%.(source)(source)

World financial markets. The DAX led the way among major European indices with a 5.0% November gain. England’s FTSE 100 climbed 4.0% and France’s CAC 40 rose 3.2%. Among European indices of note, only the ISEQ (Ireland) posted a November loss. Turning to the Pacific, the Shanghai Composite went +3.4% while Hong Kong’s Hang Seng was -2.8% last month. The Singapore STRAITS Times was up 4.2%. The Australian All-Ordinaries took a 1.1% November loss. It was not a good month for the Nikkei 225, which dropped 9.5%. Eyeing emerging markets, Brazil’s Bovespa had the hottest month of any notable index (+9.0%). India’s Sensex was +4.6% as the month drew to a close, and Russia’s RTS was up 8.3% (and more than 130% YTD).(source) The MSCI World Index gained 2.88% last month, earning a +18.57% YTD mark. The MSCI Emerging Markets Index gained 3.24%, leaving it up +52.48% YTD.(source)

Commodities markets. When November ended, gold had settled at $1,181.10 per ounce (on its way to $1,200 in early December). The precious metal gained a jaw-dropping 13.60% ($141.40 per ounce) in November, its biggest monthly dollar gain since 1980. On November 30, gold was +33.67% YTD with a 24.10% cumulative gain across September, October and November. Copper gained 6.82% last month, bringing it to +125.70% YTD. Silver ended November +62.99% YTD, platinum +55.47% YTD and palladium +98.37% YTD. Oil prices rose $0.28 in November to $77.28 per barrel, which left oil +73.27% for 2009 YTD. At November’s end, oil prices had risen 11.27% across the last four months.(source) These returns may be the result of domestic political uncertainity. Do you think so?

Looking at farm commodities, wheat prices rose nearly 25% during the month and orange juice prices rose nearly 29%. Among notable ag futures, only cattle and sugar finished negative for the month.(source)

Housing & interest rates. With buyers rushing to qualify for potentially expiring tax credits and mortgage rates at or near record lows, the residential real estate market heated up. A rush of buyers in the South put new home sales at +6.2% for October, while existing home sales leapt north by 10.1%.(source) On the downside, housing starts dropped 10.6% in October to the lowest level since April.23 On the upside, pending home sales rose again: +3.7% in October, 32% above levels a year before.(source)

Interest rates on 30-year FRMs moved even lower. On November 25, Freddie Mac’s weekly survey had the national average at 4.78%, matching the record low set in April. Interest rates on 15-year FRMs were averaging 4.29%, 5/1-year ARMs 4.18%, and 1-year ARMs 4.35% at that date.(source)

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Safety Tips for Online Shopping

Posted by ICMC Staff on 4 December 2009 | 0 Comments

Tags: Identity Theft, Debit Card, Credit Card,

Whether you shop online routinely or infrequently, it will help to follow some precautions this holiday season as you hunt for bargains. The risk of identity theft rises as you offer more and more information about yourself online, so the holiday season is a time to be careful as well as resourceful. Here are some dos and donts.

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Thinking Ahead about Inflation?

Posted by ICMC Staff on 4 December 2009 | 0 Comments

Tags: Economic, Financial Planning, inflation, Interest rates, Refinance, Laddering, TIPS, I-Bonds

 

While the struggling economy has put a vice on inflation, many experts don’t expect things to stay that way for much longer. Why? Many economic experts fear the current level of federal spending will inevitably lead to printing more money, and that’s regarded as an inflationary solution.  The solution is to "reflate" occurred in the last seventies-early eighties during the Carter administration (recall the economic mailaise speech?). Printing money resulted in money market fund yields above 10%, mortgages above 10%, and business loans with similar double digit rates. Now is the The time to plan for inflation. 

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Prepare Now for Estate Tax Law Changes

Posted by Curtis A. Smith, CFP® on 2 December 2009 | 0 Comments

Tags: Estate Planning, Estate Tax, Life Insurance Trust, GRAT, Gifting, Wills, Power of Attorney, Directive to Physicians, Guardianship

The nonstop discussion of health care reform and the economy this year crowded out discussion surrounding estate tax law sunset, due to expire December 31, 2009. However, it appears likely the estate tax will be continued at 2009 levels through 2010. What does this mean? More than likely, as of this writing, the 2010 estate tax top rate will be 45 percent and the exemption will be $3.5 million per person.

For now, conservative Congressional lawmakers dream of killing the estate tax seems to be dead, at least through 2012. The ever expanding federal spending continues, fueling the need for every tax Congress can dream of and maintain. That means it’s a good time to talk to tax and financial experts about the best ways to pass your holdings to the next generation no matter what happens with the future of the “death tax.”

If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to board-certified estate planning attorneys, as well as fiduciary, fee-only CFP® professionals for solutions to estate tax issues. This is one area where solutions are readily available, procrastination being the largest tax due to your inaction.

Here are some things to keep in mind as you prepare for those conversations:

Give during your lifetime: You can now give $13,000 per calendar year per recipient without paying gift tax or affecting your 1 million dollar lifetime exemption. You can also pay someone's tuition or medical bills directly, or give to a charity, without paying gift tax on the amount, thereby reducing the size of your estate and your eventual estate tax bill after you die.

Check whether your state charges an estate tax: Roughly half of all states charge estate tax, and that’s a recent thing. States previously received a slice of the federal estate tax, which no longer happens, so it’s important to consider the state’s impact when making an estate plan.

Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.

Know if your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust popular among families with assets expected to appreciate in value. Such appreciation can be passed on to heirs with minimal tax consequences with proper estate planning. 

The bottom line remains it is always better to have an estate plan, than not to have one! Today, make an appointment to have your wills, power of attorney, directive to physicians, guardianship, and power of attorney for health care drafted by a competent estate attorney in your state. It also pays dividends to consult with your fiduciary fee-only advisor in advance, as this individual can aid in sorting through the many decisions to be made in your estate planning. Begin 2010 on a good note by taking care of this for your family!

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