Month: March 2011

Should You Reconsider Investing in Municipal Bonds?

The municipal bond market has confronted turmoil in recent months. The turmoil, however, is primarily the result of fear, which means it may not be necessary to avoid municipal bonds altogether.
Many states are dealing with severe budget shortfalls, raising concerns that they may not be able to meet their obligations to bondholders. One investment strategist even predicted we could see 50 to 100 municipal bond defaults this year.
Such fears have driven up yields on municipal bonds, which has driven down prices. In turn, investors took a net $20.9 billion out of municipal funds in November and December 2010, according to Morningstar, further driving down prices.
To put the current situation in perspective, defaults are uncommon.
There were just 54 between 1970 and 2009 out of 18,000 municipal issues, according to Moody’s Investors Service.
And even when defaults occur, investors usually recover most of their money.
Moreover, after past sell-offs – like in 2004 and 2008, when municipal bonds lost 6% and 10%, respectively, according to the Wall Street Journal – the municipal bond market recovered relatively quickly.
Investors who appreciate the potential benefits of municipal bonds may not want to abandon the asset class altogether. Instead, they should take precautions.
You may want to start by assessing how much of your portfolio you want to have in municipal bonds and re-allocating assets as necessary. You may also want to ensure that that majority of your assets are in municipal bond funds that keep most of their portfolios in high-quality issues (perhaps AA or higher). Finally, you may want to stick to national municipal bond funds.

It’s Tax Time: Rule Changes You Must Know

Tax time is here again. But there are some 2010 rule changes to keep in mind. Following are some of the items:
  • The due date is April 18. Income tax returns for individual calendar-year taxpayers are normally due by April 15, but that date is a holiday in the District of Columbia.
  • You can extend the deadline to October 17 by filing Form 4868 on or before April 18.
  • Phaseouts for itemized deductions such as dependents, mortgage interest, state and local income and property taxes, and charitable donations were repealed for 2010 as part of the Bush-era tax cuts, so you can write off the full amount of your itemized deductions and exemptions on your 2010 Form 1040.
  • Individuals who do not itemize can no longer write off a portion of their state and local real estate property taxes by claiming an increased standard deduction.
  • The self-employed can deduct their health insurance premiums on line 29 of Form 1040 and on line 3 of Schedule SE.
  • The first $2,400 of unemployment benefits is no longer free of federal income tax.
  • You may have to repay part or all of the credit claimed for a 2008 or 2009 home purchase on Form 1040 – but in general, only those who bought homes in 2008 will be affected.
  • Your tax preparer might be forced to e-file your 2010 Form 1040 even if your returns for earlier years have always been done on paper.
  • The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their particular circumstances.

Should You Invest in Stocks That You Like?

The “invest in what you know” school of investing was popularized by legendary mutual fund manager Peter Lynch in his best-selling book One Up on Wall Street.

In that book, Lynch wrote about buying the stock of Dunkin’ Donuts because he liked the coffee and Hanes because his wife wore the company’s L’eggs pantyhose.

Today, many investors still follow this strategy, buying the stocks of companies they like because they assume others will like them as well.

As interesting as that concept is, however, it may not be a good strategy – at least not for the bulk of your investments.

One reason is the tendency individual investors have to simplify the strategy.

Lynch didn’t just buy Dunkin’ Donuts and Hanes. He thoroughly researched them first. In fact, in One Up on Wall Street he writes that “finding the promising company is only the first step. The next step is doing the research.”

Indeed, the ability to research stocks – not great taste in coffee, pantyhose and other products – is what made Lynch such a great investor.

That’s because even if a company makes a great product, it may not have the quality of management, solid balance sheet or other qualities to grow and increase stock value.

Understanding these ideas takes some financial knowledge and skill.

That’s not to say individual investors can’t research stocks. Many can and many do with success.

But do you really want to spend your time poring over balance sheets and financial projections?

If not, that’s where a financial advisor is helpful.

A financial advisor can help you analyze stocks and mutual funds and decide which ones work for you.

You get the benefit of solid financial knowledge without expending the effort and time to do all the research.

How to Make Charity Donations With Assets From an IRA

The massive tax bill passed by Congress in December brought good news for many Individual Retirement Account (IRA) investors. It resurrected an expired provision that allows special charitable donations of IRA assets.

The provision allows taxpayers who are 70½ years or older to contribute a total of $100,000 in IRA assets to one or more qualified charities.

Qualified charities include schools, churches and public charities, but not private donor-advised funds or foundations. The contribution must pass directly from the IRA sponsor to the charity.

The good news is that the charitable contribution can satisfy your required minimal distribution so you don’t have to report the payout as income. In fact, it bypasses tax calculations altogether.

The bad news is that donating in this way means you get no tax deduction for your donation, which means it isn’t necessarily the most tax-efficient way to donate while you are alive.

One strategy is to donate appreciated assets such as a long-held stock during your lifetime and donate other assets such as IRAs after your death. Donating appreciated assets when you are alive allows you to qualify for a full-market-value deduction, allowing you to avoid capital gains tax on growth.

Your financial advisor, who is familiar with your individual financial circumstances and goals, can help you decide which strategy might be right for you.