Month: May 2011

Index Funds Are Worth a Close Look

Has index evolution led to index pollution?
The 1976 launch of the Vanguard 500 Index Fund created an entirely new philosophy of investing – holding all the stocks in the market instead of trying to pick potential winners.
The concept of indexing is certainly simple. Instead of trying to beat the market, you try to meet the market. The expenses are usually low and the strategy has often worked. Many studies have shown that the bulk of traditional mutual funds haven’t been able to keep pace with index funds over time.
But the industry has grown, and today there are more than 1,000 index funds and exchange-traded funds (ETFs) available. Many of them target specific countries such as Malaysia, industries such as biotechnology, and even strategies such as long or short investing. It’s hard to determine which index fund or ETF is right for you.
The best advice is to keep it simple. If you think index funds are right for you, and you’ve discussed it with your financial advisor, you may want to stick with the basics – such as investing in one U.S. stock fund, one international stock fund and one bond fund.
If you feel the need for a more complex index fund because you want to correct overexposure or underexposure to a certain region or sector, that’s certainly an option. There are plenty of funds to choose from.
Indexing has become confusing, but it presents so many opportunities that it’s worth considering. Your financial advisor can help you determine if indexing is suitable for you based on your individual situation and goals.

Has index evolution led to index pollution?
The 1976 launch of the Vanguard 500 Index Fund created an entirely new philosophy of investing – holding all the stocks in the market instead of trying to pick potential winners.
The concept of indexing is certainly simple. Instead of trying to beat the market, you try to meet the market. The expenses are usually low and the strategy has often worked. Many studies have shown that the bulk of traditional mutual funds haven’t been able to keep pace with index funds over time.
But the industry has grown, and today there are more than 1,000 index funds and exchange-traded funds (ETFs) available. Many of them target specific countries such as Malaysia, industries such as biotechnology, and even strategies such as long or short investing. It’s hard to determine which index fund or ETF is right for you.
The best advice is to keep it simple. If you think index funds are right for you, and you’ve discussed it with your financial advisor, you may want to stick with the basics – such as investing in one U.S. stock fund, one international stock fund and one bond fund.
If you feel the need for a more complex index fund because you want to correct overexposure or underexposure to a certain region or sector, that’s certainly an option. There are plenty of funds to choose from.
Indexing has become confusing, but it presents so many opportunities that it’s worth considering. Your financial advisor can help you determine if indexing is suitable for you based on your individual situation and goals.

Is the Time Ripe for Taking a Shine to Gold?

Historically, gold has been considered a “safe haven” in times of economic and geopolitical instability as well as inflationary environments – meaning it might be an option to consider today.
Gold’s greatest potential advantage may be its tendency to perform differently from other assets.
As a result, it can help diversify a portfolio of traditional investments, such as stocks, bonds and real estate.
Of course, diversification cannot guarantee a profit or protect against a loss.
One potential pitfall when investing in gold is volatility.
Gold prices can fluctuate widely.
For example, the price of gold declined from more than $800 per ounce in the 1980s to $250 per ounce in the 1990s. It is now higher than $1,000 per ounce.
Gold investments come in many forms, namely bars, coins, exchange-traded funds that track the price of gold and stocks of companies that mine and process gold.
Indeed, many investors seeking exposure to gold do so through mutual funds that invest in such stocks.
The idea is that if gold prices rise, so, too, could the profits of gold-related companies.
Of course, this isn’t guaranteed, as there are many factors that influence the price of a gold-related company’s stock, the price of gold being just one of them.
One strategy for investing in gold is dollar cost averaging, which entails investing a fixed amount of money in gold every month regardless of the price.
This strategy, while not guaranteed to be effective, could potentially spread risk out over time.
While investing in gold may be appealing in today’s economic environment, there are many things to consider before doing so.
Your financial advisor can help you determine if gold investments are suitable for you based on your individual situation and financial goals.

Historically, gold has been considered a “safe haven” in times of economic and geopolitical instability as well as inflationary environments – meaning it might be an option to consider today.
Gold’s greatest potential advantage may be its tendency to perform differently from other assets.
As a result, it can help diversify a portfolio of traditional investments, such as stocks, bonds and real estate.
Of course, diversification cannot guarantee a profit or protect against a loss.
One potential pitfall when investing in gold is volatility. Gold prices can fluctuate widely.
For example, the price of gold declined from more than $800 per ounce in the 1980s to $250 per ounce in the 1990s. It is now higher than $1,000 per ounce.
Gold investments come in many forms, namely bars, coins, exchange-traded funds that track the price of gold and stocks of companies that mine and process gold.
Indeed, many investors seeking exposure to gold do so through mutual funds that invest in such stocks.
The idea is that if gold prices rise, so, too, could the profits of gold-related companies.
Of course, this isn’t guaranteed, as there are many factors that influence the price of a gold-related company’s stock, the price of gold being just one of them.
One strategy for investing in gold is dollar cost averaging, which entails investing a fixed amount of money in gold every month regardless of the price.
This strategy, while not guaranteed to be effective, could potentially spread risk out over time.
While investing in gold may be appealing in today’s economic environment, there are many things to consider before doing so.
Your financial advisor can help you determine if gold investments are suitable for you based on your individual situation and financial goals.

Self-Employment Taxes: What You Should Know

Self-employment tax is frequently the largest component of tax liability for someone engaged in a trade or business. In fact, this tax is owed on business profit even when no regular income tax is due. Self-employment tax is paid in addition to any regular income tax assessment.
Self-employment tax refers to taxes for Social Security and Medicare by taxpayers who work for themselves. It is a substitute for Social Security and Medicare taxes withheld from the pay of wage earners and paid by their employers.
You are self-employed when engaged in a trade, business or profession in which you offer products or services for payment. This applies to part-time endeavors. All independent contractors are self-employed, and their earnings are subject to self-employment tax. The self-employment tax was lowered to 13.3% in 2011 due to a temporary 2% reduction of federal tax on Social Security.
Self-employed individuals don’t have tax withheld from paychecks like employees. Consequently, self-employed individuals are missing withholdings for payment of Social Security and Medicare taxes as well as regular income tax.
They have to pay their tax liability directly to the U.S. Treasury.
When the self-employed make estimated tax payments throughout the year, the amounts paid include self-employment tax in addition to regular income tax. Estimated tax payments are normally four equal amounts during the year. A penalty is assessed on underpayment of estimated tax. Therefore, paying your entire self-employment tax liability late in a year normally incurs a penalty. However, self-employed individuals with fluctuating income throughout the year may send unequal payments and file Form 2210 with their tax returns.
A more common safe-harbor provision for estimated tax payments that averts penalty is payment that corresponds with tax liability of the preceding year. But using this method is often unsuitable for the newly self-employed who earned wages in prior years. Form 2210 may be the right option in such situations to avoid remitting excessive estimated tax.
Determining estimated tax payments that include self-employment tax requires a computation of business profit. Ordinary and necessary business expenses are deductible against money received. Accurate records of expenses are therefore essential to limiting tax liability. Most expenses commonly incurred and appropriate for a particular trade or business are deductible against gross receipts.
An accountant can provide valuable advice about expense records for the self-employed. For example, capital expenditures for fixed assets with long useful lives are recorded separately from other expenses. Deduction of automobile expense requires a mileage log for each vehicle, indicating the number of miles, date and business purpose.
Self-employment tax also applies to someone owning a single-member limited liability company or who is an active partner in a business partnership. The tax is payable when net income from self-employment is $400 or more per year. Self-employment tax is even owed by individuals who have income from a trade or business when they are already receiving Social Security benefits.

Three Ways to Boost Your Investment Income

If you are trying to live off your investments, you may be struggling right now.
That’s because interest rates are lower than they have been in years and the prices of many household items are rising.
What can you do if you need income?
Following are three options to think about:
Blue-Chip Stocks: Many large, solid companies offer dividend yields greater than 3%, which is an appealing alternative to bonds for many investors. And there are an increasing number of equity-income mutual funds designed to invest in an assortment of such stocks.
Selective Bonds: Bonds are a tough sell right now for investors seeking income, but there are good options out there. Treasury inflation-protected securities, which are bonds issued by the government, may be the most appealing option because they pay a certain interest rate plus the official inflation rate each year. Another option is high-yield corporate bonds. Although they are issued by riskier companies, and thus can be very volatile, they may provide higher income. The same is the case with government bonds issued by emerging-market countries such as Brazil and Malaysia, where faster economic growth means interest rates are already high and may be less likely to rise higher.
CD Ladders: Certificates of deposit (CDs) are the simplest way to earn interest while protecting principal, but they lock up your cash, meaning you will miss out on an opportunity if interest rates rise any time soon. A more compelling option may be a CD ladder. With a CD ladder, you simply put your money in a number of CDs that mature at various times over two or three years. As each CD matures, you roll the money into a new longer-term CD. That way you earn slightly more interest without losing liquidity.
Your financial advisor can help you determine if any of these options is suitable for you.
Contact your advisor for details.

Are You a Caregiver? Discover Ways to Cut Your Tax Bill

Almost 44 million Americans care for someone 50 years or older, spending about $5,500 a year providing that care. If you’re one of them, you may be entitled to a tax break by claiming the care recipient as a dependent on your tax return. However, there are some eligibility requirements:
  • The recipient must be either a relative (living with you or alone) or a nonfamily member who has lived with you for the past year.
  • The recipient must have an annual gross income, excluding Social Security benefits, of less than $3,650.
  • You must provide more than half of the care recipient’s annual financial support.
If the care recipient lives with you, you can include in your financial support calculation that person’s share of your mortgage, utilities and other housing-related expenses. If several people in your family together provide more than half of the care recipient’s financial support for the year, you may be able to file a “multiple support declaration” on IRS Form 2120 so one person can claim the entire dependent exemption. Caregivers who are not eligible due to the $3,650 income requirement may be eligible for a dependent-care credit of as much as $1,050 via IRS Form 2441.
The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither we nor our representatives may give legal or tax advice.

Almost 44 million Americans care for someone 50 years or older, spending about $5,500 a year providing that care. If you’re one of them, you may be entitled to a tax break by claiming the care recipient as a dependent on your tax return. However, there are some eligibility requirements:

  • The recipient must be either a relative (living with you or alone) or a nonfamily member who has lived with you for the past year.
  • The recipient must have an annual gross income, excluding Social Security benefits, of less than $3,650.
  • You must provide more than half of the care recipient’s annual financial support.

If the care recipient lives with you, you can include in your financial support calculation that person’s share of your mortgage, utilities and other housing-related expenses. If several people in your family together provide more than half of the care recipient’s financial support for the year, you may be able to file a “multiple support declaration” on IRS Form 2120 so one person can claim the entire dependent exemption. Caregivers who are not eligible due to the $3,650 income requirement may be eligible for a dependent-care credit of as much as $1,050 via IRS Form 2441.
The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither we nor our representatives may give legal or tax advice.