Money & Your Life

Here are articles and the publications that have recently printed my column:

Albany, N.Y., Times Union
Use losses to your benefit
November 10, 2008

No one likes to see his investment portfolio tumble as many did in October, but the downfall is not all bad news for taxpayers. The lower stock prices provide an opportunity for saving on income taxes come April 15 and beyond.Usually we think of strategies to prevent us from paying taxes on higher incomes when the markets are doing well or our job is paying well. It actually works both ways. So if you’re depressed over losing money, cheer up. Here are ways you can use those losses to your benefit.

Convert to a Roth IRA: With portfolio values lower, traditional Individual Retirement Accounts can be converted to Roth IRAs. Why now? When you convert, tax is due on the amount converted. If your IRA is down to $100,000, for example, from $125,000, you’ll pay tax on $100,000 instead of $125,000.

And when the value recovers over the years and it comes time to take it out in retirement, withdrawals will be tax-free. Since conversion values are considered ordinary income, watch that it doesn’t push you into a higher tax bracket. You may want to convert only a portion up to the limit of your current tax bracket.

Reverse a Roth conversion: If you converted earlier this year (when it was $125,000 in our example above), you could reverse it now and take your chance the value will still be lower next year and do another conversion after Jan. 1 — unless it’s in December, in which case the next conversion has to be at least 30 days later. Conversions can be done only once a year.

Write off losses: Selling stocks at a loss gives you a tax deduction for the amount you lost in the sale. If your $10,000 stock, ETF, bond or mutual investment is now worth $8,000, you’ll get a $2,000 deduction, called a capital loss. You can deduct up to $3,000 in losses a year, with anything more carried over to the following year’s taxes. If you still believe in the investment, you can buy it back after 30 days. The IRS does not allow a sale and buyback within 30 days in order to claim a tax loss.

So cheer up, you may have lost money in investments but you can get a lower tax bill.

Have you ever tried to plan something months in advance and find yourself doing everything at the last minute? Apparently, that long-term type of thinking fails with money too.

We are more successful in meeting our financial goals when we make them short-term instead of long-term, according to research by Rice University and Old Dominion University. Participants in a study who planned to save a certain amount each month were more successful than those who planned to save a set amount for a year later. In fact, the month-to-month savers ended up saving more over the long-term.

“Our study shows that Americans are better at saving money when they are thinking about it month-to-month, on an ongoing basis rather than a long- term goal,” said Paul Dholakia, associate professor at Rice’s Jones Graduate School of Management.

This research points to the need to think of long-term goals as an end rather than a means. Tiny steps need to be taken along the way, such as figuring out the goal and making monthly, or weekly, steps to meeting it.

For example, saving for a $2,000 vacation in a year or planning to pay off a $2,000 debt in a year is more successful if $166 is saved every month for 12 months, or $42 a week for a year. To be more disciplined, put the money in a separate savings account.

When you see what you need to save every week you become more aware of your expenses to make sure you have that amount left over to put into that savings account.

“It will be painful, but like that mortgage or car-loan payment, we need to start thinking about a savings transfer every pay period,” Dholakia said.

Like everything else in life, controlling our minds is more important than responding to emotions and letting our emotions trick us into believing we will eventually reach our goal. Implant in your mind now a systematic way of meeting your goals to extinguish irrational thinking.

Myrtle Beach Sun News
Keep insurance between jobs
Tax benefits, wise choices may put policy in reach
July 25, 2008

Individuals who find themselves a victim of a layoff or find a new job that doesn’t offer health insurance face a difficult task in deciding how to replace health insurance. While the options may be more expensive than a subsidized corporate plan, some do offer tax benefits an employer cannot.

The first option is to continue your previous employer’s insurance through COBRA. While this maintains your coverage, it’s expensive, as you now must pay the full premium and employers usually tack on an extra 2 percent to cover administrative fees.

Instead of this option, explore an individual policy with the same insurer or another provider that includes your doctors in its network. If you are healthy, you could also lower the benefits provided to get a lower rate. For example, if you’ve only been going to the doctor for routine visits or emergencies, you might opt for a higher deductible. Just don’t wait too long to get new insurance, as pre-existing medical conditions may not be covered if you have been without insurance for more than two months.

Another option is to use a Health Savings Account. These let you make tax-deductible contributions to a savings account in which withdrawals are tax-free if used to pay medical costs. Any other withdrawal purpose is subject to a 10 percent penalty. The balance when you turn 65 can be withdrawn for any reason without tax penalties. You must pair the HSA with a high-deductible medical policy and not be eligible for coverage from your or your spouse’s employer.

For entrepreneurial individuals, starting a business brings the most benefit for health insurance. A business, whether it’s one person or a corporation, can deduct the cost of health insurance. Therefore, an individual can start a business, buy insurance for his or her family and then deduct the cost when filing income taxes. However, like the HSA, the individual or spouse must not have access to health insurance through an employer. Also, the individual cannot deduct any cost of the insurance that’s more than the net profit from the business.

To help you sort through the myriad choices, start by asking an independent insurance broker to shop the marketplace for policies that fit your situation. An independent broker is not limited by one insurance company and can compare policies for you. Since they are compensated by the insurance company you select, make sure you are given at least three options and even submit your request to at least two brokers. Also try searching online at eHealthInsurance.com and consulting with a financial adviser, who may have further resources available.

HispanicBusiness magazine
Make Sure Financial Planners Know Your Values
June 23, 2008

Most people’s finances center only on how much money they have to meet today’s challenges. Neglected are tomorrow’s challenges, which is where the personal side of money management comes in. As the economy expands and contracts, so do our lives. Therefore, combining life planning with financial planning is necessary to protect wealth into the future.

When you combine both factors, you develop a plan for the best of times and the worst of times. It’s more important to prepare for the worst of times, which many Americans are going through now with rising unemployment and inflation. Three years ago when the money was easy, were you saving for the down times? If you were, today is likely not as painful as it is for those who lived paycheck to paycheck. During the past three years, were you investing correctly to meet a personal goal? If you were, it’s likely you achieved it.

An example of preparing for life’s planned or unplanned challenges is socking away cash. The savings rate in America has been negative, and that consequence is now being felt. A good rule of thumb is to put away one-year of living expenses in a safer investment such as a money market account or short-term bond fund. That way, no matter what the stock market does, you know you won’t lose money you need to get by with in the short run. And the rest of the money is invested for the longer term, easing the stress of seeing it decline during the rough patches.

If you work with a financial planner, incorporating the life and money equations is a must, or you are working with the wrong advisor.

Asking about an individual’s personal values should be a standard process for any financial planner. This helps establish and clarify financial priorities. Planners do this by using worksheets or a series of questions focusing on life issues. Planners also should help clients identify personal and financial goals and explain how recommendations align with those values. Planners who take this approach are showing they cherish a relationship as much as a client’s money.

Despite the importance of personal relationships, only 59 percent of planners say they use a communication process to understand a client’s values, according to the June 2008 issue of the Journal of Financial Planning, published by the Financial Planning Association.

“We believe that putting more emphasis on the communication tasks will move a planner-client relationship … from good to great,” the authors wrote.

Whether you go it alone or consult a planner, weaving life’s values and challenges with your money is the core of financial success.

Providence, R.I., Journal
Tax-loss harvesting is a way to lower IRS bill
Providence Journal
July 6, 2008

Saving for retirement not only builds up a nest egg, but it lowers taxes through the deduction from contributions to a qualified savings plans such as a 401(k) or IRA. But you can also save taxes by contributing to regular non-retirement investment accounts that can provide income for today.

Known as tax-loss harvesting, the deduction comes in the form of investment losses when stocks or bonds are sold. These losses are then used to offset profits from sales, known as capital gains. Essentially, this makes some or all of the capital gains tax free if losing investments are sold to the point of capital losses. As an example, a $6,000 gain in Apple stock and a $4,000 loss in Cisco stock results in a capital gain of $2,000, which is the only part of the $6,000 profit from the Apple stock that is taxed.

This strategy shouldn’t be used just for tax purposes, but rather is an excellent way to clean up a portfolio. Investments that no longer serve a role in the portfolio or haven’t performed as expected could be sold and reinvested. On the other end, stocks that have had excessive gains could have the profit locked in by selling and then reinvested to establish a new basis if the investor is confident the stock will continue to grow.

But if the stock is sold at a loss, the investor must wait 30 days after selling to buy the stock again. The so-called “wash rule” of stock investing applied by the Internal Revenue Service doesn’t allow an investor to take a loss if the stock is bought again within 30 days of selling. Another option would be to buy a similar stock. For example, if one international mutual fund is sold at a loss, buy a different international fund immediately. If you find your offsetting sales leave you for a loss, remember the maximum in losses that can be deducted is $3,000.

If you’re a little unsure about selling all that winning stock, an investor could also benefit this way by selling only a portion of the shares.

For investors in the 15-percent tax bracket or below, a different strategy exists: Profit all you want without worrying about losses. That’s because there is no long-term capital gains tax for the 10-percent and 15-percent tax brackets. So any stock held more than a year can be sold this year without having to pay taxes on the gain. This is a great benefit especially for those who may have lost their jobs or dropped into a lower tax bracket and need to sell some investments to pay the bills. Additionally, there is no income tax on qualified dividend income from the stocks or bonds.

For more information on capital gains and losses, read IRS Publication 550 at www.irs.gov

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