Archives for October 2009

3 Year-End Tax Planning Ideas

November and December are key months for individuals to focus on minimizing their income and capital gain tax liabilities. While we don’t hold ourselves out as tax advisors, one of our goals is to maximize the after-tax investment returns for our clients, so we thought it would be helpful to share some tax planning techniques to consider. Since each person’s tax situation is different, we recommend that you consult with your tax advisor before taking any action.

Charitable Donor-Advised Funds

Consider maximizing the tax benefit of your charitable gifts through the use of a Charitable Donor-Advised Fund. Donor-advised funds allow you to donate cash, or more ideally appreciated securities that you have held for a year or more, to a charitable account that you control. You receive a tax deduction in the year of transfer for the fair market value of the cash or securities transferred to the fund (and no capital gain is then realized by you, the donor). Assets transferred to a donor-advised fund are liquidated by the sponsoring organization and placed into an account, for which most donor-advised funds offer 5-10 investment options. At the instruction of the donor, assets can be transferred from this fund to qualified charities within the current year, or over several years.

Section 529 Plan for College Savings

Many people are now considering shifting assets they have reserved for college education expenses to accounts for your children or grandchildren through a College Savings Plan (a.k.a. Section 529 Plan). The benefit of these plans is that the investment earnings and the assets placed in these plans accounts are generally exempt from federal and state income taxes, provided that the withdrawals are used for qualified college expenses. This tax-free withdrawal feature can make 529 Plan accounts more attractive than other types of college savings strategies.

Roth IRA Conversion

If you have an IRA, it may be worthwhile to determine if you would experience long-term tax benefits from a Roth-IRA conversion.

With a Roth-IRA, withdrawals of your contributions or earnings are typically never taxed. Therefore, the long-term tax benefit of a Roth-IRA conversion (for people who find themselves in a low tax bracket) is that a small upfront tax payment, on the amount converted, can be a small price to pay for income tax savings on thousands and possibly hundreds of thousands of dollars of future earnings.

For 2009, to be eligible for a conversion your current year’s adjusted gross income (AGI) will need to be less than $100,000, but starting next tax year, 2010, that income limitation will be eliminated. You may not fall into this “under $100,000 of adjusted gross income” category this year, but a one-time event (e.g., business losses, rental losses or capital losses) may reduce income to unusually low levels and make it a prime year for a Roth-IRA conversion. And, starting next tax year, 2010, with the income limitation lifted, people at any level of AGI will be eligible to make a Roth IRA conversion.

Operationally, some or all of an individual’s traditional IRA is transferred to a Roth-IRA in a conversion. Taxes are due at ordinary income tax rates on the amount that is transferred, or converted. Ideally, conversions are done where the tax payer’s federal tax rate remains low, between 0% and 15%, so the upfront income tax cost are minimal. A relatively small (percentage-wise) upfront tax payment can be a small price to pay for the benefit of future tax-free withdrawals of both contributions and earnings that could extend for decades.


Ingredients of Deflation

The ongoing debate still rages…inflation or deflation?  We’ve blogged a lot on these topics and it’s our stance that in the near term, deflation is the bigger risk.  Longer term then, inflation will be a concern.  Here’s a list of ingredients of deflation that we see as being currently present, and hence, why we believe that deflation is the greater near term risk.

  • Rising Unemployment – There has never been a sustained inflationary period without wage inflation.  Currently, wages are basically flat and falling.  A few years ago 1 in 16 Americans were unemployed, today it is 1 in 5.
  • Wealth Destruction – Two bear markets and a housing market collapse have put the American consumer on the ropes.
  • Decreased Demand / Increased Savings – Savings rates have increased to 6% and is expected to rise over the next 3-5 years back up to the 9% level where it was 20 years ago.
  • Low Capacity Utilization – This occurs when factories aren’t utilizing their full capacity.  While this metric is rebounding, it is still lower than at any time since the data has been collected.

Not an exhaustive list, but certainly enough to help formulate our opinion.  So, the question becomes, how do you invest in periods of near term deflation?  Stay tuned til next time…



Reminiscing Dow 10,000

REBLOG: This post was originally published by Barry Ritholtz on his blog, The Big Picture.

DJIA 10,000, let’s reminisce: “

With the DJIA approaching 10,000 again, let’s reminisce about 1999, the year it first passed that magic level on March 29th. Millennium by the Backstreet Boys was the best selling album, American Beauty won the Academy Award, the Euro was established, SpongeBob SquarePants aired for the first time, Hugo Chavez was elected President of Venezuela, Karl Malone, Pudge, Chipper Jones, Jagr and Kurt Warner won MVP awards and the average price of a gallon of gasoline at the pump was about $1.20. US nominal GDP ended at $9.6b vs $14.1 as of Q2 ‘09. Also, on March 29th 1999, the DXY was at 100.36 (now 75.60), the CRB was at 192.40 (now 269.15), gold was at $280 (now $1,060), oil was $16.44 (now $74.80), corn was $2.32 (now $3.85), copper was $.62 (now $2.83), the 10 yr yield was 5.19% (now 3.38%), and the fed funds rate was at 4.75% (now 0-.25%). Oh, how time flies.

2010 Roth Conversion

2010 may be a great time for boomers to create a tax-free income stream for retirement. This is thanks to the opportunity to complete a Roth conversion without income limits (current limit is $100,000). This elimination of income limits was part of the Tax Increase Prevention and Reconciliation Act of 2005.

However, in a recent survey, 73% of boomers who own a traditional IRA are not planning to convert to a Roth IRA next year. A lack of knowledge about Roth conversions could be to blame. 57% of high income boomers are not aware that income limitations on conversions will be eliminated in 2010.

To learn more, or see if a conversion is right for you, feel free to contact us or post a reply to this blog.

For further reading:


Source: Journal of Financial Planning

TARP Losses: $100-200B (And Counting…)

REBLOG: This post was originally published by Barry Ritholtz on his blog, The Big Picture.

Over the weekend, we celebrated (if that is the right word) the one year anniversary of TARP


CNN/Money has a pair of nice graphics dissecting how taxpayer monies were spent, along with likely losses:



TARP: Taxpayers on the hook for $200 billion

David Goldman

CNN/Money, October 3, 2009

Q3-2009: the Best Quarter For Stocks Since 1998

Stocks just finished another strong quarter. That makes two in a row! The Dow & the S&P both had their best quarter since 1998! Here are the details:

Dow Industrials

  • Up 1265 points this quarter, or 15%, to close at 9712.
  • Biggest quarterly percentage gain since Q4-1998.
  • Best 3rd quarter performance since 1939.
  • July was the best month for the Dow since 2002.
  • Up 28% over the last six months. This is the best two-quarter performance since the two-quarters ending March 1987.
  • Up 11% for the year-to-date.

Nasdaq Composite

  • Up 287 points this quarter, or 16% to close at 2122.
  • Up 39% over the last six months. This is the largest two-quarter gain since the two-quarters ending March 2000.
  • Up 35% for the year-to-date.

S&P 500

  • Up 138 points this quarter, or 15% to close at 1057.
  • Up 56% from its March low.
  • 32% off its October 2007 high.
  • Biggest quarterly percentage gain since Q4-1998.
  • Up 32% over the last six months. This is the best two-quarter performance since the two-quarters ending June 1975.
  • Up 17% for the year-to-date.