TheLecoursReport's Xanga

Monday, November 13, 2006

Mon, 13 Nov 2006 17:45:05 GMT

The effect of a capital gain distribution on a fund’s price

If your fund is down when the market is up, the fund might have just paid a capital gain.

· What is a capital gain? When you sell a capital asset — such as a stock or a bond — for more than you paid for it, you make a profit, or experience a capital gain. So if you buy a stock for $100 and later sell it for $120, your capital gain is $20.

· Why do mutual funds pay capital gains? When a mutual fund sells a holding, it receives any profit, or capital gain, that results from the sale. Mutual funds are required by law to pay virtually all gains to their shareholders in capital gain distributions. These distributions, which typically occur once or twice a year, are made primarily for tax reasons.

· Why does the fund price drop when capital gains are paid? Fund managers buy and sell securities throughout the year, sometimes at a profit, sometimes at a loss. When profits outweigh losses, they accumulate and contribute to the rise of the Net Asset Value (NAV) of the fund’s shares. When that profit is paid out to shareholders — as the capital gain distribution — its NAV, or share price, will be reduced by the amount of the distribution.

However, if you reinvest the distribution, as most shareholders do, the number of shares in your account will increase proportionally, so that the total value of your account will not be affected by the distribution.

· For example… Say a fund share sells at an NAV of $10. If sales of the fund’s securities have realized a profit of $2 a share during the year, a capital gain distribution of $2 will be deducted from the NAV on a specified date, so on that date the fund share price will decline to $8.

· Don’t worry — you haven’t lost any money. You still have $10 in value — $8 in the fund’s Net Asset Value, and $2 in your pocket or reinvested in the fund. And if you do automatically reinvest your capital gain distribution, it buys you additional fund shares at the new, lower price of $8. These additional shares compensate for the drop in the NAV, so the total value of your account doesn’t change. (Of course, if there is a decline in the market at the same time, you may still see a drop in the total value of your account.)

· For example… If you have 100 shares in your account when the NAV is $10 a share, your account value is $1,000. If the fund pays a capital gain distribution of $2 a share (or $200, since you have 100 shares), the NAV drops to $8 a share and your original 100 shares are now worth $800. However, if you automatically reinvest your capital gains, the $200 distribution buys you $200 worth of shares — at $8 per share. The distribution therefore adds 25 shares ($200 divided by $8) to your account, so you now own 125 shares worth $8 each, for a total of $1,000, which was your original account value before the capital gain was paid.

I've gotten a few phone calls from people who are watching their investment accounts and they have asked me about why the value drops on what seemed to be a "good" day. This is one of the most common reason: capital gain distributions, dividend distributions, special dividends, etc. By the time they get their statements at the end of the month, the whole issue is made clear. Call me if you have questions on your own account.

Charitable Contributions from Your IRA

Mon, 23 Oct 2006 16:55:20 GMT

New tax rules for IRAs have recently been enacted. Up until the end of 2007, if you are charitably inclined and wish to give some of your IRA funds to a church or a charity, you can withdraw up to $100,000 from your IRA tax free and give it to the charity directly. You receive no tax deduction but also do not have to report the income. This new provision allowing Qualified Charitable Distributions only applies to IRA owners over the age of 70 ½, and only applies to outright IRA gifts to charities, not gifts made to grant-making foundations, donor advised funds or charitable gift annuities.

The big incentive here is that the charitable donation from your IRA will satisfy your minimum distribution requirements. While all taxpayers over age 70 ½ are required to take minimum distributions from their IRA, they won't have to pay tax on the amount of the required distribution that they give to charity. This can lower your income and maybe even cut down the tax you pay on Social Security income, not to mention the loss of tax deductions, exemptions and tax credits that are lost when your income is increased. So, if you normally make donations anyway, you should now make those donations (through 2007) from your IRA and reduce your taxable income.

This provision is especially good for those who do not itemize their deductions (they take a standard deduction) and would not normally be able to deduct gifts to charity (unless the donations were large enough to qualify for itemizing deductions). By not having to report the income from the IRA distribution, you effectively receive a deduction that would not otherwise have been available to you.

However, there’s a technicality here that financial institutions will have to address so that your contribution qualifies. Under this provision, the donation must be made DIRECTLY from your IRA to a charity without you or anyone else touching the money in between.

If you think that this tax-saving technique is appropriate for your contributions to your favorite charity, you should discuss this with me as soon as possibleat 860-521-4751.

August 17th: President Bush Signs the Pension Protection Act of 2006 ("the PPA").

Wed, 23 Aug 2006 18:47:34 GMT

While the new law of over 900 pages mainly deals with relatively arcane retirement-plan provisions, it also includes important tax changes that will directly affect many individuals, small businesses and charities. Here is one of the key points, that I know will affect my clients:

Beginning in 2007: More Beneficiaries Can Roll Over Money from a Deceased Person's Retirement Plan: Under the current rules, only an individual who is a deceased person's surviving spouse can rollover, into his or her own IRA, distributions received as a beneficiary of the deceased person's qualified retirement plan (like a 401-k plan).

Other beneficiaries (such as children, grandchildren, and other relatives or unmarried partners) can't take advantage of the tax-smart rollover strategy. But things now change.

Beginning next year, a nonspousal beneficiary will be allowed by the IRS to receive a tax-free rollover (actually, a direct transfer) of a qualified distribution from a deceased person's plan, even if that person died several years ago. The plan too must allow for this to happen.

For this taxpayer-friendly treatment to apply, however, the money must go directly into the receiving IRA via a trustee-to-trustee transfer. And it must go to a separate account created for this purpose, called a "Beneficial IRA". The Beneficial IRA is also known as an "Inherited IRA" and it is maintained in the name of the deceased plan participant (e.g.: "Uncle Ralph's IRA, deceased February 15, 2007, FBO Neice").

The beneficiary may not co-mingle this distribution into an already-existing IRA that he or she may have had; doing so will cause the transfer to become enirely taxable. But this Beneficial IRA preserves the "Stretch" IRA concept for the beneficiary.

So don't let your dear departed Uncle Ralph's plan make out the check to you personally. If that happens, you can't roll the money over, and you'll owe taxes on what you receive.

Ralph's Funeral

Tue, 08 Aug 2006 18:32:17 GMT

When he died, Ralph's will provided $ 30,000 for an elaborate funeral.

As the last guests departed the affair, his wife, Helen, turned to her oldest friend.

"Well, I'm sure Ralph would be pleased," she said

"I'm sure you're right," replied Joanne, who lowered her voice and leaned in close.

"How much did this really cost?"

"All of it," said Helen. "Thirty thousand."

"No!" Joanne exclaimed. "I mean, it was very nice, but $30,000?"

Helen answered. "The funeral was $ 6,500. I donated $ 500 to the church.

The wake, food and drinks were another $ 500

The rest went for the memorial stone."

Joanne computed quickly. "$22,500 for a memorial stone? My God, how big is it?!"

"Two and a half carats."

Roth Conversions Are Making A Big Comeback!

Mon, 07 Aug 2006 14:08:33 GMT

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law. This tax bill included a provision dealing with conversions of traditional IRAs to Roth IRAs. Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.

Remember that a Roth IRA is worth more than a conventional IRA because withdrawals from it are forever tax-free. Roth IRAs have been described as the greatest retirement plan ever.

Under current law, distributions from a Roth IRA are tax-free if distributed after age 591/2 and after the account has been open five years. What's more, there are no required minimum distributions during the lifetime of the Roth IRA owner.

The new tax law makes Roth IRAs even better, especially for those with modified adjusted gross income (MAGI) above $100,000. (Yes, MAGI. That would be adjusted gross income modified by IRA deductions, student loan interest deduction, exclusion of qualified bond interest and the like. Ask you accountant if in doubt.)

The new law eliminates the restriction that prevents Americans with MAGI above $100,000 from converting a traditional IRA to a Roth IRA. This change is not effective, however, until 2010. But that delay opens up a huge loophole, which I'll discuss later.

In addition, the law now provides that taxpayers who convert a traditional IRA to a Roth IRA in 2010 can spread the resulting "reportable income" over the following two years, including the income "ratably" in 2011 and 2012. Americans can, however, if they choose report 100% of the resulting income in 2010.

For financial experts, this part of the new law causes the most confusion and debate.

The elimination of the $100,000 adjusted gross income ceiling for converting a traditional IRA to a Roth IRA starting in 2010 can reap big savings. That's especially so if you are able to pay the tax with outside funds, not those in the IRA being converted.

You'll be hearing more about Roth conversions soon.

It Happens Every Month Around Here

Fri, 04 Aug 2006 17:23:02 GMT

This firm has got to have well over 1000 clients and so with a group that large, all kinds of things can happen, and do.

Just with my own group of 250+ clients from the NU family, there is a death closely related to my clients, or one my clients themselves pass away, just about every month. My clients lose their spouses, their parents, or other relatives. They are widows, or widowers, or children, or grandchildren, or executors, or beneficiaries of the decedent.

So read the article that is linked below. It oversimplifies the process but it gives you an idea what has to be done to get someone organized after a death in the family.

Financial Steps to Take When Someone Dies

Happy Birthday Mom!

Tue, 25 Jul 2006 17:31:55 GMT

My mother-in-law turned 99 today. Happy Birthday, Mom! You're amazing us in many ways. And by the way, thank you for letting me marry your daughter! Love you.

So much for my personal life; here is the professional comment:

The life expectancy tables I just looked at say that a 99 year old woman has a life-expectancy of 2.3 years. This is the way actuaries talk to each other at insurance companies.

But the life expectancy number applies only to groups of 99-year-olds. The statement above means that a 99 year old woman has a 50/50 chance of living another 2.3 years. Or, said another way, half of all 99 year old women will die within the next 2.3 years, half will live longer than 2.3 years.

Life expectancies for a group, even a small one, can get much longer. For instance, the life expectancy of a (married) couple, both age 65, is 26 years! That means that there is a 50/50 chance that one member of the couple will live to be 91. Or said another way, half of age 65 couples will both be gone before age 91.

And half of all couples age 65 will have one member live longer than age 91.

Quote of the day: I hope I die like grandpa did: quietly, in his sleep; not yelling and screaming like all of those passengers who were in the car with him!

Markets Shake but My Clients Hold Firm

Tue, 13 Jun 2006 19:12:30 GMT

It was the second week in May that the news was reporting that we were within a few percentage points of an all time high in the Dow Jones Industrials, and when that conversation lasted about a week, the air started to come out of the balloon.

Now the stock market is around 10,700, maybe 8% off of its peak, and that doesn't even qualify as a "correction" in market-speak, but enough to give back most of the profits made so far this year. Still, most of my clients are in much better shape with their portfolios than they might think.

But during the past month, I have only received only ONE PHONE CALL from clients looking to bail out. And even this lone client who said he wanted to "get out of the market" had several other things on his mind besides money.

John Bogel, the retired head of Vanguard funds, once said "activity is the enemy of the investor." I think he is right, and I believe you are right to hold on to your positions now and through the summer.

Believe me: I will be happy to hear from you and we can walk through your investment accounts together to make sure that the mix of assets is right for you, and we'll make changes if need be. Don't be shy. Through the summer months, I am best reached at the office on Tuesdays, Wednesdays, and Thursdays.

Advanced IRA Training from Ed Slott in Atlanta

Sun, 14 May 2006 12:20:39 GMT

Last week I attended the first of two training sessions on advanced IRA strategies from one of the most publicized experts around, Ed Slott. He is both knowledgeable and humorous: he gets a real kick out of having transformed a sleepy CPA tax practice in the suburbs of New York City into a nationally recognized powerhouse of IRA tools and techniques. He is in high demand, always on the road, speaking to whatever group will pay for him to visit. He must have 100 dates booked up for the rest of 2006, speaking to advisors like me, brokers at wirehouses, insurance agents, mutual fund companies. He has written two books and he is quoted in the press just about every week.

There were maybe 100 of us, financial advisors of all kinds, who flew into the Atlanta area for this meeting for some of his best thinking on the management of IRAs, especially on how to advise our clients about avoiding the many pitfalls in the ownership of IRAs. The horror stories of bad advice are amazing: there simply seems to be so many lousy practitioners out there. The bad news has even received the attention of many people in the popular press, and especially The Wall Street Journal who sent one of their staff reporters, Kelly Greene, to both attend and present her observations to the group. She specializes in retirement issues for the WSJ and is inviting all of us who heard her speak to contact her when we have a "case study" that might prove to be of interest to WSJ readers. If you hear of some interesting case, please let me know. In the future I will bring any helpful WSJ stories from Kelly to this newsletter/blog for your reading enjoyment.

This education has me reviewing my own IRA accounts with many of you (almost all of my clients have an IRA with our firm). The process involves going back to the original documents that were signed at the time that the account was opened. The specific document we look at is the Beneficiary Designations list, where you name the people who would receive the IRA in the event of your death. For most of you, you would name your spouse; some of you will name a family trust; still others, name children. But what if your beneficiary is no longer with us at the time of your death? Then you may have named "contingent beneficiaries" who may then receive the account, in whole or in part. Adding to the opportunity, some beneficiaries will make a strategic decision to keep the IRA in the family for many years by "disclaiming" their ownership of the account (again, in whole or in part) so that the money flows down to the next generation (the grandchildren?). When we spread the IRA distributions across two or more generations, we have the "Stretch IRA", the popular term for this wealth preservation technique. Getting to analyze these IRA accounts and communicating these concepts to my clients is a big undertaking, but the opportunity for them is huge.

Don't think that you have to wait for me to be calling you on this subject. If you think you are a candidate for the "Stretch IRA" please get in touch and we will put your name toward the top of the list. Motivated clients are lot easier to work with, so we would love to hear from you.

Wealthier Taxpayers May Gain If Bill Allows Move to Roth IRAs

Thu, 04 May 2006 14:46:42 GMT

From the Wall Street Journal, 5/3/2006

Congress is planning to allow high-income taxpayers to convert their traditional individual retirement accounts into Roth IRAs, which allow tax-free withdrawals. The move would provide these taxpayers with considerable tax savings in later years after they make a much smaller upfront tax payment when they convert.

The plan, which would be part of a larger tax bill, could be finalized as early as this week. It would suspend the current $100,000 income limit on such conversions for one or two years, according to congressional aides familiar with the bill.

"It would be a huge deal," says James M. Spindler, a senior financial adviser and vice president at Univest Corp.'s Wealth Management and Trust Group in Souderton, Pa. "I would think that anyone who can possibly have the means to do it would have to sit down to talk to their financial adviser" about converting their IRA.

The Roth IRA conversion proposal is expected to be part of a $70 billion tax bill to extend reduced capital-gains and dividend tax rates, which were enacted in 2003 and are due to expire in 2009. The plan would raise tax revenues to help offset the cost of the tax cuts over the first four years, but would cost an estimated $9.4 billion from 2011 to 2015 as taxpayers tap their retirement accounts, according to Congress's Joint Committee on Taxation. House and Senate negotiators were close to finalizing the bill last week, and the White House is pushing for a deal this week, according to a top Senate Finance Committee aide.

It is unknown how many taxpayers would take advantage of the conversions. One preliminary estimate by the Joint Committee on Taxation figures $4.8 billion in tax revenue will flow to the Treasury through 2010 if the Roth IRA conversion income limits were lifted for two years.

The Roth IRA -- created in the 1997 tax bill and named for former Senate Finance Committee Chairman William Roth (R., Del.) -- doesn't permit a tax deduction for funds contributed to the accounts. But funds grow tax-free and can be withdrawn, tax-free, with few restrictions. In addition to withdrawals made by people age 59½ and older, amounts categorized as "qualified distributions" aren't taxed or subject to the 10% tax on early withdrawals, such as first-time homebuyers' expenses of up to $10,000. And Roth investors can withdraw regular annual contributions at any time, as well as sums converted from a traditional IRA after five tax years.

By contrast, traditional IRAs offer upfront tax deductions, as long as taxpayers meet specific income limits. Withdrawals generally are taxed at a taxpayer's ordinary income rate. When an individual converts a traditional IRA into a Roth IRA, he or she pays taxes on the fair-market value of the amount being converted.

Accountants and tax planners report considerable interest in Roth IRA conversions by small-business owners and other wealthy clients with IRAs.

If the bill passes, "I think you would see a substantial number of people doing the conversion," says Mark Birge, a CPA at Aldrich Kilbride & Tatone in Portland, Ore.

A conversion works best for someone with a higher income who can pay the resulting tax bill with outside funds, says Univest's Mr. Spindler. Advisers generally frown on using funds from the IRA to cover the tax bill, since that lowers the ultimate investment return.

Now that I am back from a great vacation, I am working through the inevitable pile-up of email, snail mail, and phone call. Still, if you think you are a candidate for a Roth conversion, even under the current rules with the $100,000 income ceiling, get in touch with me to discuss this.

I will be out of the office on Monday and Tuesday, off to Atlanta for Ed Slott's Advanced IRA training workshop. ---RGL