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A Monthly Newsletter Source of Financial Sources END-OF-YEAR FINANCIAL STRATEGIES • Plan Your Tax Loss Harvesting Strategy Now – ETFs Make it Easier. • Roth IRA Conversions Ideal if Your 2005 Modified Adjusted Gross Income is below $100,000 • Retirement Accounts Must be Opened in 2005 if You Plan to Fund Them in April 2006. • Max Out Your Retirement Plan Contributions and Fund Your Catch Up Contribution By the Time of Your Last Paycheck in 2005. • Complete Any Donations of Cash or Highly Appreciated Stock (Katrina provision) by December 31. INVESTMENT MANAGEMENT & RETIREMENT • GE, McDonalds & Wal-Mart look to Green Initiatives for Increased Profitability: Winslow Green Growth Fund (WGGFX) drives performance by investing in small-cap companies with sound environmental, governance and financial records. • Lines of Credit on Appreciated Real Estate Will be Key to Boomer Lifetime Income Planning. • Should Self-Employed Consultants Who Don’t Intend to Retire Take Their Social Security Benefits When Eligible --- or Wait? The answer depends on risk tolerance, taxes, and personal and family history of health • How to Keep Grandparent Generosity From Spoiling Your Kids at Christmas. NEW BOOK: The Ultimate Parenting Map for Money Smart Kids. Media Copies Available. END-OF-YEAR FINANCIAL STRATEGIES The following five end-of-year financial strategy stories are attributed to: Jennifer Ellison, CFA, is a portfolio manager with the Menlo Park office of Bingham, Osborn & Scarborough LLC (BOS) 650-462-8666. BOS is a San Francisco, California-based registered investment advisor with $1.4 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. BOS has eight principals and a total staff of 26 working on behalf of their clients, plus an administration, finance and systems staff with direct client contact and responsibilities related to client accounts. Plan Your Tax Loss Harvesting Strategy Now – ETFs Make it Easier. Unrealized losses in taxable accounts require attention at this time of year. You can sell those assets at losses to offset any gains you may have taken earlier in the year if you do it before December 31st.. If you have not realized any gains, it is still a good idea to harvest your losses because they can be carried forward and used in future years. In fact, there is no time limit in which you must use your losses. If you do have losses in excess of gains, you can write off $3,000 against your income. Any remaining losses will be carried forwards on your tax return and can be used in the future. When harvesting tax losses, avoid leaving the proceeds of your sales in cash for an extended period of time. It is best to sell an asset and then repurchase a similar but different asset. Remember, if you sell an asset and repurchase the same asset within 30 days you will not be able to use the loss as a write off against gains. This is called the Wash Sale Rule. Exchange traded funds (ETF’s) and index mutual funds make it easy to harvest tax losses without disrupting your investment allocation. For example, if you had an unrealized loss in the iShare S&P 500 (ETF) you could sell that investment and immediately purchase the Vanguard 500 index mutual fund. You would realize the loss in the ETF but you would still own the S&P 500, just in a different format. You can’t do this with individual stocks however. If you have a loss in General Motors the closest you could get would be to sell GM and perhaps buy Ford. You would still own an auto company, but with completely different financial characteristics and the performance between the two could be vastly different. Roth IRA Conversions Ideal if Your 2005 Modified Adjusted Gross Income is below $100,000. If your Modified Adjusted Gross Income (MAGI) is below $100,000, you have the opportunity to convert any assets in a Traditional IRA or IRA Rollover into a Roth Conversion IRA. The Roth IRA differs from a Traditional IRA in that dollars go into the account after being taxed and they grow tax free, meaning they are not taxed upon withdrawal. There are some other distinctions between these two types of IRA’s. Noteworthy is the fact that Roth IRA’s do not have minimum required distributions beginning when you turn 70 ½ like a Traditional IRA. In any year when you may have been laid off or are in a transition between jobs and your MAGI is below $100,000, you should absolutely explore the Roth conversion opportunity. You must make any conversion by December 31st of the tax year in which your income is below the $100,000 threshold. Retirement Accounts Must be Opened in 2005 if You Plan to Fund Them in April 2006. Self-employed individuals have the opportunity to open different kinds of retirement plans such as the Defined Benefit Plan, Solo 401k and Simplified Employee Pension account. These accounts do not need to be funded until you file your tax return, but the accounts must be open by December 31st. If you are a self-employed person and you have not yet set up a retirement plan, discuss which type of plan makes the most sense for your situation with your Investment or Tax Advisors. A Defined Benefit Plan will require that a pension administrator draft a specific document for your plan. This can take several days to several weeks, so begin your discussions now. Many custodians such as Schwab or Fidelity have prototype plan documents for SEP and Solo 401k accounts, which require less time to open. But it is always better to reduce your year-end stress and complete the paperwork well before the last day of the year. Max Out Your Retirement Plan Contributions and Fund Your Catch Up Contribution By the Time of Your Last Paycheck in 2005. Check your latest pay stub or call your payroll department to ensure that you will have contributed the maximum amount to your company 401(k) or retirement plan by your last paycheck of the year. If you have under contributed, most companies will allow you to change your withholding amount in your last paycheck to make up the difference. In 2005, anyone can contribute $14,000 to a 401(k) or 403(b) plan (assuming they earned at least that amount during the year) and anyone over age 50 can add another $4,000 as a catch-up provision, for a total contribution of $18,000. In 2006, the maximum contribution limits will rise to $15,000 for those under age 50 and an additional $5,000 for those over age 50. Make sure you adjust your withholdings for 2006 to ensure you contribute the maximum next year. Complete any donations of cash or highly appreciated stock (Katrina provision) by December 31. Charitable contributions must be made by December 31st in order to be taken as a tax deduction for 2005. We recommend donating highly appreciated stock rather than cash to charities. Most custodians require that stock donations be completed two weeks to ten days before the end of the year so they have time to process the transfers. This year, because of Hurricane Katrina, Congress has eliminated the limit on charitable contributions. Normally you can only deduct charitable donations up to 50% of your Adjusted Gross Income. In order to increase charitable contributions, Congress is allowing charitable contributions in excess of 50% of your AGI to also be deducted against your income. The contributions do not have to be made to Katrina victims. If you are looking for an opportunity to make a large contribution and benefit from the entire deduction, this is the year to do it. The limits will be imposed again in 2006. Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com , 508-479-1033. INVESTMENT MANAGEMENT & RETIREMENT GE, McDonalds & Wal-Mart look to Green Initiatives for Increased Profitability: Winslow Green Growth Fund (WGGFX) drives performance by investing in small-cap companies with sound environmental, governance and financial records. Recently behemoths GE, McDonald's and Wal-Mart announced their corporate-wide initiatives regarding renewable energy and environmental standards for themselves and their supply chain. Jack Robinson, portfolio manager, Winslow Green Growth Fund (WGGFX) knows why. Green investing pays off. "We have irrefutable proof that when management greatly minimizes the impact of their companies on the environment and pays attention to the health and welfare of their workers, they are more profitable”, says Robinson. For instance: Robinson's 5-star-rated mutual fund, the Winslow Green Growth Fund (WGGFX) is up over 10% year-to-date, and over 30% for the last year (as of 9/30/05), a direct result, they believe, of their focus on small cap companies that meet their standards of strong fundamentals, green commitments, and thoughtful governance. "We search for small growth companies that are on the leading edge of their fields “, says Robinson, “because we have found that companies with sound business practices pay off for shareholders.” Sectors of interest include: healthy living, software and services, pharmaceuticals and biotechnology, consumer staples, healthcare equipment and services, and energy. Jackson W. Robinson is founder and portfolio manager for the Winslow Green Growth Fund (WGGFX), Winslow Management Company LLC, Boston, MA. Winslow focuses on small growth companies with big, new ideas. The media can reach Jack Robinson by calling Nicolé Keane, director of marketing, at 617-788-1608 Lines of Credit on Appreciated Real Estate Will be Key to Highly-appreciated real estate will be the crucial distinction between retirement financial comfort and lack of financial comfort for the bulk of the Boomer cadre who are living longer lives, facing increased health care costs, and soaring inflation. Boomers will need to pay careful attention to lifetime income planning. Unfortunately, many financial advisors focus on portfolio management and do not pay attention to clients' real estate assets. Strategies for Boomers to access the equity in highly-appreciated first and second home properties is seldom discussed. There are many ways to access the equity in a first or second home whether you sell and downsize, sell and go to assisted living or nursing home, or stay in the house and access the equity through home equity loans. Accessing real estate equity for lifetime income planning is a trend bursting on the horizon. Here are some options: Accessing equity and not selling Banks are becoming more creative in offering equity lines of credit to their customers with highly appreciated real estate. Assume an equity line of $1 million that can be used as needed for expenses, maintenance and also to pay the interest on the line of credit. This strategy allows the homeowners to access the income they need, and keep the house. Families choosing to downsize properties can use the 1031 exchange option to get into a different property, deferring the capital gains tax and using the spousal exclusion of up to $500,000 in gain on the house. Strategies for Smart Selling Reverse Mortgages Work for Some One or multiple options that fit a family's scenario, all related to the real estate, can help solve numerous lifetime income planning issues, empowering real estate owners as they age. There are numerous creative uses of line of credit bank loans all of which seem to be less costly than reverse mortgages if the home owner qualifies. The competitive marketplace is beginning to reflect the unique needs that Boomers present to their financial advisors and bankers. Stay tuned. Banking institutions want to meet the fast growing need for equity line of credit products. Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, their families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925 Should Self-Employed Consultants Who Don’t Intend to Retire Take Their Social Security Benefits When Eligible or Wait? Retirement just doesn’t seem necessary for some self-employed, particularly for those who have already created a balanced lifestyle that includes grandchildren, travel and a self-determined pace of days. So the question becomes should you take your social security benefits as soon as you are eligible, or succumb to the IRS’s annual mailing that shows you how much larger your monthly benefit check will become if you wait until age 70. Joan is eligible for full retirement at 65 years and 10 months on January 1, 2006. In this scenario the numbers were run on the benefits calculator on the Social Security Administration's website, www.ssa.gov with an estimated COLA percentage taken from ssa.gov. The numbers show that were Joan to forego her benefits until age 70, she would give up almost $100,000 in four years from 65 and 10 months to Age 70. That’s a lot of money. However, ignoring taxation issues, she will more then catch up with her larger benefits from age 70 until age 82, if she lives that long. The difference is that Joan, by delaying, will receive $40,000 more in benefits by age 82 than if she had begun taking benefits at age 65 and 10 months. The IRS taxes up to 85% of social security benefits. Given Joan’s assumed tax bracket, she would pay approximately $23,600 in federal taxes on the social security benefits she receives before age 70. Assuming that she invested her social security benefits net of taxes from ages 66 through 69 in a security that gave her a 5% return each year, she would have just over $153,000 by the time she turned 83 effectively doubling her investment over that time period. She would, of course, owe taxes on the gain from that investment. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com. How to Keep Grandparent Generosity from Spoiling Some Grandparents feel that it is their God-given right to spoil their grandkids. Others feel that their grandkids are already spoiled rotten. And there are many other varieties of grandparents between these extremes. • Make yourself available to your parents for input on financial gifts and rewards they may want to give. Linda Leitz, CFP, Pinnacle Financial Concepts, Inc., Colorado Springs, Colorado, is author of “The Ultimate Parenting Map to Money Smart Kids,” as a book or as a CD. She specializes in helping families and individuals meet their long- term financial goals. She also helps those in the midst of divorce resolve financial issues through her company Divorce Solutions, Inc. She can be reached at 719-260-9800 or Linda@brightleitz.com.
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