First the Good news�..
am very pleased to announce the addition of another financial planner
to our team at Asset Planning, Inc. Diane, Carol and I welcome Beverly
Cox to the staff. I have known Bev for several years as we have played
golf together. We have also worked on several projects together over
the last year. Our philosophies about financial planning and
investments are similar and I am sure she will be a great addition. Bev
brings fifteen years of experience to the firm. Her bio is posted on
our web site.
In local events, I should be featured in the LA
Times on Tuesday, October 15 in a new �money makeover� column. I just
finished another �One on One� for the OC Register (copy enclosed) and
was quoted on the front page of the OC Register following the latest
fed rate cut. I remain on a panel of experts for their mutual fund
quarterly review, published on 9/30/01. This keeps me on my toes!
And then the Bad news�.
has been a quarter like no other ever experienced by the American
people. We are at war due to an attack on our own land. It still seems
unbelievable and incomprehensible.
Where is our economy now?
When people and businesses stopped buying new items, companies stop
ordering parts and supplies for products and let their supply or
surplus inventory be sold without replacing it. When companies are not
producing at the same level as before, due to lower projected sales,
layoffs of workers and cut back on expenses occur. This is the scenario
that we have all seen since the beginning of the year.
stock market values the price of stocks by looking to future earnings
and sales of a company and tries to determine what it will be worth.
When the market saw the earnings potential of companies being reduced,
it lowered the prices of the stocks through sales until the current
estimates equaled the value of the stock. In short, the market declined
and was staying that way since there was no good news on the horizon.
For the first time in several months, I was seeing positive signs
coming from the manufacturing sector. In the days surrounding the
attack, numbers were released that showed manufacturing orders were
increasing as companies began placing new orders. This meant that
things were picking up. This could have been just what was needed for
the market to look forward to increased sales, thus rising stock
Then the attacks came and America virtually stood
still for several days trying to comprehend what had happened. In this
aftermath of human and business destruction, we find damage to the
economy. The travel, insurance and leisure industries were hard hit.
The layoffs from these industries will continue until Americans go back
to flying and traveling as we did before. This will only come when we
feel safe to do so. I know we will never feel as safe as we did before
the attacks, but we will return to our way of life as we knew it. In
time, we will resume taking vacations and going to conferences and
doing business as we did.
I met with clients in the weeks
following the attacks and one theme stood out in each meeting. They
felt guilty for worrying about their portfolios when human lives had
been lost. Some clients emailed me to see how I was doing, giving me
support. Some brought in checks to deposit to their accounts, wanting
to support the market by purchasing, instead of selling, stocks in
uncertain times. We displayed our flags, lit candles and cried together
to get through these past weeks. I miss my dad more and wish he were
here to tell me more stories about how he fought twice as a Marine for
our American freedom, many years ago. I watch our Armed Forces ready to
fight a new war, knowing action must be taken.
How the market
will react is still an unknown. I am encouraged by the markets behavior
in the last week, with most stocks and funds rising. Historically, the
stock market recovers well following major events such as this. Some
portfolios saw their values rise 5 to 7% in the week following the
quarter end. I continue to monitor the funds very closely and stay in
contact with the fund managers. We do have the strongest economy in the
world and America is the greatest Nation. We will recover and prosper
Please call if you have questions or wish to schedule a meeting.
Sandra C. Field, CSA, MBA, CFP
You�ve probably heard or read of them - state ponsored 529 college
savings programs. There are others available as well; the newly
enhanced Education IRA and the old favorite, UGMA and UTMA accounts.
Determining which type of savings plan is right for you depends on
several factors. Among them: your income, the child�s age and how much
you�ll be relying on financial aid. In some cases, your best option may
be to take advantage of more than one account. I�m going to focus on
the 529 today.
Let me begin by sharing a great website with you.
It is www.savingforcollege.com and is authored by Joe Hurley, It is
full of timely, pertinent information and articles that will expand on
what I�m writing here.
The recently passed Tax Cut made
tremendous improvements to higher education finance. The new law
substantially raises the amount that can be contributed to education
accounts. It�s increased the number of people eligible to save and
makes 529 plans even more appealing. Currently, earnings accumulate on
a tax-deferred basis and withdrawals from these accounts are taxed at
the child�s rate. Starting in 2002, they will be free of federal taxes!
Yes, you read that correctly, tax-free withdrawals (if it�s for
qualified educational expenses).
529 plans are named for the
section of the tax code that created them in 1996. The vast majority of
the plans allow nonresidents to participate, which means you can choose
virtually any state�s plan regardless of where you live or where your
child is likely to attend school.
Unlike Education IRAs, 529s
have NO income limits or age restrictions, so anyone can participate.
You could even set one up for yourself. Some plans will let you invest
more than $200,000 per beneficiary, and there are no annual limits.
And, if your child doesn�t end up using the money � maybe she�s
received a full scholarship � the assets can be transferred to a
sibling or first cousin.
You, as a parent, could open a 529 for
your children, and grandparents could have one for the same children.
You, the donor, are the owner of the account. Your child is the
beneficiary. You remain in control of the monies over the account�s
lifetime. You decide when withdrawals are taken and for what purpose.
If your child uses some of the funds for higher education and is
through, with money to spare, you can name another beneficiary and
start the routine all over again. As long as the beneficiaries are some
form of blood family member you can change beneficiary as needed.
changes to 529 plans that begin next year could literally buy you an
extra year of college. Let�s say you invest $60,000 in a 529 plan for
your son. Assume the account doubles in value by the time he heads off
for school, representing a $60,000 gain. Under the previous rules that
profit would have been taxed at the child�s 15% tax rate, reducing the
account by around $9,000. That�s nearly a year�s worth of tuition and
expenses at a public college. Now, that $9,000 stays available for
tax-free withdrawal for those same expenses.
So what if your
only beneficiary decides not to go to school? There�s no time limit on
this account, you could change the beneficiary to your spouse, who
always wanted to return for his/her Masters. You could let it sit and
grow while the child works for a few years and then decides to go to
school, or if not that, decides to get married and has a child of their
You could then change the beneficiary on that account to
your newest grandchild and it lives still in its tax-deferred state.
And if you are feeling generous, you could change ownership of the
account to your child (who is now fully grown and very responsible). Of
course, there may be gift tax consequences to that last part, so don�t
do anything without checking with us. The point is that it is flexible.
case, what happens if your child doesn�t go to college, or if there�s
more in the account than is ultimately needed? Federal law requires
that the 529 plans charge you a penalty if a withdrawal isn�t used to
pay qualified higher education expenses. Based on IRS guidelines, most
states will collect a penalty of 10% of the earnings portion of the
�nonqualified� withdrawal. This means you�ll get back 100% of your
principal and 90% of your earnings.
That penalty, however,
will be charged at your income tax rate not the student. The penalty is
usually not charged if you terminate the account because the
beneficiary has died or become disabled or if you withdraw funds not
needed for college because the beneficiary has received a scholarship.
gift and estate tax treatment of an investment in a 529 plan is, to
quote Joe Hurley, �a good news, bad news situation�. The bad news is
your contribution is treated as a gift to the named beneficiary for
gift tax and generation skipping transfer tax purposes and so you need
to be aware of this exposure especially if you are making other gifts
to the beneficiary during the same year.
The good news is that
your contribution qualifies for the $10,000 annual gift tax exclusion
and so most people can make fairly large contributions without
incurring the gift tax. If you make a contribution of between $10,000
and $50,000 for a beneficiary, you can elect to treat the contribution
as made over a five calendar-year period. This allows you to utilize as
much as $50,000 in annual exclusions to shelter a larger contribution.
The money (and the growth of your account) gets out of your estate
faster than if you made the contributions every year. There are more
details to be discussed if this applies to you, but I�m sure you get
There�s more to know especially about the potential
impact on financial aid qualifications and the sunset provisions
inherent in this new tax law. If you are interested in discovering if a
529 plan makes sense for you or your family, please email or give the
office a call.
Beverly Cox, IAR
Taking stock in a downturn
Stay calm, learn to adapt and don't do anything drastic, local investing experts say.
March 13, 2001
By DIANA McCABE
The Orange County Register
What do I do now?
what some individual investors might be asking today after Monday's
dramatic sell-off on Wall Street, which left the Dow off 4.1 percent
and the Nasdaq down 6.3 percent.
Local financial experts are
quick to say "don't panic,'' which is probably easier said than done.
So here are their answers to some questions jittery consumers might
have about their investments.
Q: Monday's market drops really make me nervous. What's one thing I can do now to settle my nerves?
For starters, make sure you have a contingency plan in place, says Don
Wilkinson of United Planners' Financial Services of America in Newport
Beach. For example, right now a conservative investor might want to
increase his or her cash position.
"When the market drops 5 percent to 10 percent, increase your cash position by 5 percent to 10 percent,'' Wilkinson says.
if you're losing sleep at night, it might be time to look at how much
you've got hanging out there in stocks and in what sectors, experts
If you're properly diversified - and that doesn't mean merely owning 20 different Nasdaq stocks - you shouldn't be worrying.
Q: What about my 401-k?
What about it? "I really wouldn't base a decision on just Monday,''
says Sandra C. Field, a certified financial planner at Asset Planning
Inc. in Los Alamitos.
Since we really don't know where the
bottom of the market is, consumers who are thinking about changing the
mix of their assets should be making small adjustments, she says. Also,
check the holdings in your retirement funds now. You might be surprised
to learn you don't have as much exposure to some declining sectors as
you thought. "Many managers have sold off technology and are moving
into defensive positions such as health care and utilities,'' she says.
But the big point? Continue to make your contributions, Wilkinson says. "The stock market is on sale.''
Q: Why do I have to do anything at all?
A: You might not have any adjustments to make, but you need to check your attitude and expectations.
"People have to be willing to adapt,'' says Ryan Kelly, chief executive of Spectrum Asset Management in Newport Beach.
used to be able to simply buy an index fund or stock and it would
usually go up, in what Kelly calls an investing market. "Now, we're in
a trading market and the rules have changed,'' he says.
might have bought a stock at $18, but instead of holding it and hoping
it hits $50, they might have to let go at $30, Kelly explains. He
encourages investors to use "stop loss'' orders, which tell brokers
when to sell a slumping stock.
Q: I've saved money for a down
payment on a house. I hope to buy in less than two years, but I'm
worried about putting my money into the stock market.
You're right to be worried. "You have no business risking that money in
the market right now,'' Field says. She suggests tucking away the
savings in a Roth IRA, where you should choose some stable investments,
such as bonds or cash (CDs or a money-market fund) or perhaps value
stocks. You'll also be able to take out your contribution for your
first home and not worry about taxes or early-withdrawal penalties.
Q: Is there a way to take advantage of the Nasdaq's slide?
Aside from looking at the slide as a buying opportunity, you could look
at mutual funds that "short'' the Nasdaq, Wilkinson says. This strategy
is for the aggressive investor, he points out, but the idea is simple.
You invest in a fund that gains when the Nasdaq loses. He recommends
Rydex Dynamic Venture 100. When the Nasdaq drops 5 percent, this fund
goes up twice the loss, or 10 percent. Of course, if Nasdaq goes up 5
percent, the fund drops 10 percent. But for aggressive investors
looking to recoup some losses, shorting the Nasdaq is working right
now, he says.
Q: I'm retired and know I need to be in the market, but I'm afraid now.
If you're newly retired, you're right that you can't afford not to be
invested. "A lot of people in their 60s think they just need to move
all of their retirement money to bonds,'' Field says. "But they might
live another 40 years. If you think you'll stay in bonds, your money is
not going to last 40 years,'' she says. She suggests keeping two years'
worth of cash in short-term corporate bonds, money-market accounts or
certificates of deposit. The rest goes into the market but in a mix
that the investor is comfortable with, she says.
Q: OK, so if I get out of tech stocks, what sectors should I be looking at?
Kelly and others like energy. "It's been on a nice run for the past 12
months,'' he says. He also suggests health care -- and keeping a
portion in cash.
A good bond is also something to consider.
For example, a California municipal bond with a AAA or AA credit rating
might yield around 5 percent now. But if the economy continues to slow,
its total return might rise to 8 percent to 10 percent, Kelly says.
Q: How long is this turmoil going to last?
Well, that's the big question. The interest-rate cuts of the past few
months won't really have any impact on the economy for several more
months. Wilkinson thinks the ride on Nasdaq will be bumpy all the way
"There are no clear directions and that's what's confusing.''
But the Dow has basically been flat, so don't expect any major drops there, Wilkinson says.
"Overall, people are concerned with weak earnings and there's just this kind of fear that spilled over.''
There are new capital gains rates available for assets held for
more than five years. The rules are different depending on what tax
bracket the taxpayer is in.
For those in the 15% tax bracket,
the long term capital gain rate is 8% on assets held more than five
years and sold after December 31,2000. The 8% rate applies regardless
of when the five-year holding period began and it applies to the extent
that the taxpayer is in the 15% bracket.
For those in the 28%
tax bracket or higher, the long term capital gains rate drops to 18 %
for assets purchased after December 31,2000 if the asset is held for
more than five years. Capital gains of assets held 1 to 4 years or
purchased before January 1,2001 will still be taxed at 20%.
Because the asset must be held five years and must be acquired after
December 31, 2000, the 18% tax rate will not apply before 2006.
determining if the holding period begins after December 31,2000 for
this special 18% rate, taxpayers must include the option holding
period. So if an employer grants an employee incentive stock option in
the year 2000, stock acquired by exercising the option will not be
eligible for the 18% rate, even if the stock is acquired in 2001.
Special Election to use the 18% Rate instead of the 20% Rate
other than corporations can elect to treat capital assets, business
assets, and stock held on January 1, 2001, as if they are sold for
their fair market value in order to reset the acquisition date so the
future appreciation can qualify for the 18% rate. The gain from the
deemed sale is taxable, however any loss resulting from this election
is not allowed. This election is irrevocable.
Note : This election can not be used on a personal residence.
to use this election: A taxpayer should use this election when a stock
has a small gain and the taxpayer expects appreciation in the future
and he plans on holding the stock for more than five years after
Carol J. Patrick, CPA
To reduce the amount of tax you owe when you file your 2000 return next
year, you may have some tax decisions to make between now and December
secret to successful year-end tax planning is to consider your tax
situation two years at a time. The idea is to reduce the tax you will
pay over both years (’00 & ’01), not just one. You need to look at
the income and deductions which apply to ’00, which fall into ’01 and
which are available in either year.
It is usually better to
defer income and accelerate deductions. This way you will delay, for
the longest period of time, the tax you pay. This will be especially
true if there is an across the board tax decrease in ’01. (Possible,
but don’t hold your breath!). If you expect to be in a higher tax
bracket in ’01 the opposite strategy, delaying deductions and
accelerating income, would probably be more beneficial.
investments offer a way to shift income at year-end. You can decide
when to take the gain or loss, this year or next. You shouldn’t let
taxes be the sole driving reason for making changes in your
investments. Whatever decisions you make should make overall economic
Retirees can juggle payouts from IRAs for the best tax result.
Tax planning using deductions may be the most successful. Three types of itemized deductions are easiest to shift:
Contributions – Deducted in the year your check is mailed. Also
consider donating appreciated securities. You get to deduct the full
value of the asset (if held for more than one year) and avoid paying
income tax on the appreciation.
State and local taxes - This
works especially well with estimated state income taxes. You can pay
the estimate that is due in January ’01 in whichever year it produces
the best result. The second half of property taxes due in April can
also be considered for prepayment in December if needed. Care should be
taken to make sue that the alternative minimum tax does not come into
Interest Expense – You may consider paying the January
mortgage payment in December. It is important to make sure the Mortgage
Company receives the payment before the end of the year. This way it
will be reflected on Form 1098 that shows the interest paid by you for
Other itemized deductions can also reduce you income tax bill:
– The deduction is limited to 7-½% of AGI. Shifting payments from one
year into the next may allow you to exceed this limitation and get a
deduction in at least one of the years.
Miscellaneous – The
deduction is limited to 2% of AGI. This deduction includes investment
and tax advice, job-hunting expenses, unreimbursed employee business
expenses, IRA fees and safety deposit box charges. Shifting these
expenses into one year or the other may enable you to exceed the limits.
Some individuals, by careful planning, are able to itemized in one year and use the standard deduction in the second year.
alternative minimum tax should always be carefully considered. If it
applies to your tax situation many of these strategies will just not
Careful tax planning can make a difference in your income
tax liabilities. Please contact your tax advisor for more specific tax
saving ideas that may be used in your specific tax situation.
Diane K. Burch, CPA