Author: simonpayn13

Do you have a brokerage account? If so, you’ve probably received a mailing or call about a new tax law that takes effect this year. Let’s hope you didn’t ignore it.

Starting in 2011, after you sell a stock, your broker has to provide the Internal Revenue Service (IRS) with the investment’s cost basis. This is the price you paid to acquire an investment. It’s the starting point for determining, after you sell a stock, whether you had a profit or a loss.

In the past, the IRS had no way of knowing whether taxpayers were accurately calculating and reporting capital gains and losses correctly. Some studies showed the errors were resulting in a large amount of underpaid taxes.

Brokers must begin tracking acquisitions and subsequent sales of stocks, real estate investment trusts and foreign stocks starting in January 2011, but mutual fund companies and dividend-reinvestment plans don’t have to do so until January 2012. For individual bonds and options, the law doesn’t go into effect until January 2013. Other assets, such as exchange-traded funds, fall under more than one rule, depending on the type of asset.

The new rules apply only to the sales of investments purchased after these dates. So, for example, if next year you sell a stock you bought back in 2008, your broker doesn’t have to provide the IRS with the cost basis.

What does this mean for you?

Right now you should indicate how you want shares to be sold when you sell them.

FIFO (first-in, first-out), LIFO (last-in, first-out) or HIFO (highest-basis-in, first-out) are common options.

You may also let your broker choose for you, or decide on a case-by-case basis. But if you don’t tell your broker what to do, the law will choose for you – and it will usually choose FIFO.

The tax 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 tax counsel for advice and information concerning their circumstances.

Many economists and investment theorists have attempted to translate their academic ideas into reality by opening investment funds. But is it a good idea to invest in them?

Some, such as Dimensional Fund Advisors, have been successful. Others, such as Long-Term Capital Management, which imploded in 1998, have been massive failures.

Today, the $800 billion Exchange-Traded Fund (ETF) market is full of funds operated by renowned academics.

An ETF is an investment fund that tracks a market index. Unlike an index mutual fund, however, it’s traded on an exchange like a stock. Many ETFs are basic, tracking a standard market index such as the S&P 500 Index or MSCI EAFE Index.

But other ETFs are complex investment vehicles that track subsets of market indices, such as dividend-paying stocks. Others track housing investments or oil prices. Some get very complex, combining bullish and bearish stock bets or pools of U.S. Treasury securities.

While market research by renowned academics has certainly helped shape how investments are managed, and the actual investments these academics create have sometimes performed well, they haven’t always. They’re also extremely complex.

Before investing in an ETF, we suggest you consult a financial adviser who can help determine if it’s the right investment for you given your financial circumstances and goals.

When you hear economists talk about risks in today’s environment, inflation is usually bandied about more than deflation – but the latter should not be discounted.

Deflation is a decrease in the general price of goods and services. It results in an increase in the real value of money, which allows one to buy more goods and services with the same amount of money.

Why is that bad? Because it could lead to what economists call a deflationary spiral, which is a situation in which falling prices lead to falling production, which, in turn, leads to lower wages, which, in turn, lead to a further decrease in prices.

Because of this vicious cycle, deflation is believed by many to be a cause of the Great Depression.

But is deflation a real risk in today’s economy? While many economists say no, others disagree. In fact, depending on how you measure deflation, it may already have arrived. For example, consumer prices have been fairly flat recently, according to the Department of Labor.

Whether deflation is a possibility or a reality, an important consideration is what implication it could have on your investment strategy.

Should deflation arrive, investors may want to seek dependable sources of income.

That could be good for solid fixed-income products like U.S. Treasurys, corporate bonds and high-quality municipal bonds.

Cash could also be a compelling place to put your money. If a savings account earns 0% interest but prices fall 1%, you’ve still made 1% in real terms, tax free.

Finally, gold might benefit from deflation, because the U.S. Federal Reserve Board would likely print money to prevent deflation, and that could help hard assets such as precious metals.

Your financial advisor can help you determine if deflation is a real risk – and if it is, how you might prepare.

For years, the price-to-earnings (P/E) ratio has been the go-to gauge of a stock’s value, but it may be losing its mojo. The P/E ratio compares a company’s current share price to its earnings per share. It is calculated by dividing market value per share by estimated earnings per share. The lower the P/E ratio, the cheaper a stock, in theory.

The problem with the P/E ratio in today’s economic environment is that the earnings can’t always be trusted. Corporate earnings estimates, say many analysts, are unrealistically high.

As a result, investors may want to seek other ways to value stocks that are quite removed from corporate earnings.

For example, investors may want to look at two other valuation measures, like enterprise value and free cash flow.

Enterprise value is a figure that values a company based on its entire capital base, which includes short- and long-term debt, preferred stock and minority interests, minus total cash.

Free cash flow is a figure that takes a company’s earnings and subtracts capital expenditures.

Because it reveals the amount of cash a company is able to generate after spending the money necessary to maintain or expand its asset base, it gives investors an idea of a company’s ability to boost dividends or buy back shares.

If you invest in stocks, your financial advisor can help you determine which ones are appropriate for you, based on a number of financial measures.

Taxes could soon take a bigger chunk out of your money – meaning now may be a good time to make the most of tax-advantaged investments in your retirement planning process.

The Bush administration tax cuts are scheduled to expire at the end of 2010 – and when they do, the maximum rate on ordinary income will rise from 35% to 39.6%, on long-term capital gains from 15% to 20%, and on dividends from 15% to 39.6%.

Additionally, in 2013, high-income households will have to pay more Medicare tax on wages and may also face a 3.8% Medicare levy on net investment income, thanks to healthcare reform.

While it’s possible that Congress will postpone the expiration of the Bush administration tax cuts, it’s still a good idea to plan for it and other rate hikes.

So, assuming you’re already maxing out your 401(k) plan contributions, what other steps can you take to make the most of tax-advantaged investments in your retirement planning process?

You may be able to contribute as much as $5,000 a year (plus an extra $1,000 if you’re 50 or older) to a traditional Individual Retirement Account (IRA) or Roth IRA.

If you don’t qualify for such an IRA, you can still put money in a Roth IRA indirectly by opening a non-deductible IRA (which anyone under age 70½ with earned income can do) and then convert it into a Roth IRA. If you have self-employment income, you may be able to put money in a SEP IRA or solo 401(k), which allows contributions of up to $49,000 this year (with an extra $5,000 for the solo 401(k) if you’re 50 or older).

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.

You’ve likely heard the old adage about sticking to high-quality stocks.

But what exactly are high-quality stocks?

When investment professionals refer to high-quality stocks, they’re referring to those of companies that have proven their ability to deliver strong and steady results over the long term. Following are three ways to spot such companies:

High ROE: Earnings don’t tell you how a company’s doing, but return on investment (ROE) does. ROE measures how much profit a company has earned relative to what shareholders have invested. For example, if a company generated a net income of $13 billion over a one-year period and shareholders invested $63 billion in the company, its ROE would be 20%. Companies with ROEs of 15% or higher are considered very efficient.

Steady Dividends: Companies that routinely pay generous dividends are clearly generating a healthy cash flow. But companies don’t necessarily have to pay high dividends to be strong. They just have to have enough general cash flow to be able to pay dividends if they want to. This is sometimes the case with technology companies.

Good Growth Prospects: High-quality stocks tend to have competitive advantages that can keep rivals at bay – and those advantages aren’t always clear. A fast-food chain may not seem to have an advantage, given that there’s a fast-food chain on just about every corner, but if the company has significant real estate holdings, the picture may change.

Many investors fail to take advantage of the opportunity to make catch-up contributions to retirement accounts -which may not be a good idea, as they can make a significant difference in retirement wealth.

Investors age 50 or older as of year-end can make catch-up contributions to 401(k), 403(b) and 457 plans as well as traditional and Roth IRAs.

Maximum catch-up contributions for the 2010 tax year are $5,500 for 401(k), 403(b) and 457 plans and $1,000 for IRAs.

How much extra could you accumulate by making catch-up contributions? Quite a bit.

Let’s say you turn 50 in 2010 and contribute an extra $5,500 to your 401(k) plan for 2010 and the next 15 years, until you reach age 65. At a 4% annual return, you’d end up with an extra $120,000.

At a 6% annual return, you’d end up with an extra $141,000. And with an 8% annual return, you’d end up with an extra $167,000, according to The Wall Street Journal.

Additionally, let’s say you turn 50 in 2010 and contribute an extra $1,000 to your IRA for 2010 and the next 15 years, until you reach age 65. At a 4% annual return, you’d end up with an extra $22,000.

At a 6% annual return, you’d end up with an extra $26,000. And with an 8% annual return, you’d end up with an extra $30,000, also according to The Wall Street Journal.

Married? If your spouse can make catch-up contributions as well, you could potentially double the amounts shown here as a couple.

As you can see, making catch-up contributions can potentially add up by the time you reach retirement age – so they’re worth considering.

Of course, these examples are hypothetical and are not intended to represent any particular product. Contact your financial advisor to determine how much you could accumulate with catch-up contributions.

Bondholders may have seen their portfolios come through the recent market turmoil in fairly good shape; however, they may not want to assume that performance will continue, due to the prospects for inflation and interest rate increases.

The U.S. government reacted to the financial crisis of 2008 and 2009 by pumping an unprecedented amount of money into the economy – two packages of fiscal stimulus totaling more than $1 trillion, according to Stimulus.org. That stimulus could cause inflation to rise.

The government has also kept interest rates near all-time lows in order to stimulate consumer spending. But many economists think rates are poised to increase, and that, along with a rise in inflation, will dampen bond prices.

While the threat isn’t immediate, it’s not too early to consider how you might try to protect your bond portfolio from these threats. There are a number of ways to do so. For example, you might consider moving your bond investments to mutual funds that invest in floating-rate loans or foreign bonds, both of which have become more affordable as Europe’s debt crisis has sparked a shift back to sectors viewed as so-called safe havens. Intermediate-term bond funds may also be an option for a rising-interest-rate environment because shorter-term bond prices tend to fall less sharply than longer-term bond prices when interest rates rise.

Your financial advisor can help you determine if any of these investments are appropriate for you.

Converting a traditional individual retirement account (IRA) to a Roth IRA may appeal to some investors because they have no withdrawal requirements – withdrawals from them are tax-free. But Roth IRAs aren’t for everyone.

First, the reason for converting may be flawed. Many investors want to convert to a Roth IRA because they anticipate higher U.S. tax rates, but regardless of the tax rates, most people fall into a lower tax bracket when they retire.

Second, the tax bite may hurt. Investors converting a traditional IRA to a Roth IRA have to pay income tax on any money they move.

Third, it can take 15 to 20 years for the tax-free growth of a Roth IRA to make up for the taxes paid at the time of conversion. Many investors interested in converting don’t have that much time until retirement, when they’ll start taking withdrawals.

Finally, converting can put you in a higher tax bracket right now – and the impact can be far-reaching. The money converted to a Roth IRA from a traditional IRA is considered income from a tax perspective, so if you aren’t already in the highest bracket, converting could increase your tax rate.

That, in turn, could have many implications. For example, if you’re collecting Social Security benefits, the rise in income could force you to pay taxes on those benefits.

Or if you have a child applying for college financial aid, that aid could be reduced.

Roth IRAs can be compelling investment options for many investors.

Your financial advisor can help you determine if a conversion is right for you.

The tax 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 tax advisor for advice and information concerning their particular circumstances.

The market downturn left many investors wary of putting money into 401(k) investments. Such investments fell to $50.5 million in 2010, compared to $60.6 million in 2007.

Following are some things to consider when putting money back into a 401(k) plan:

•    Most 401(k) providers get a cut of the expense ratio on the funds in which you invest, and it is often difficult for you to know exactly what fees the 401(k) plan is charging.

•    When you leave your job, you may have to pay to keep your 401(k) plan at your old company. Some employers pay the fee to administer your plan while you work for them, but they pull the plug once you are off the payroll.

•    Your fund choices may be poorer than you think. Average 401(k) investors have 18 fund options, according to the Profit Sharing/401(k) Council of America, but they may not be the optimal fund options. Ideally, a 401(k) plan should offer a handful of  “core” funds, like a money market fund as well as bond index, domestic equity index and international equity index funds.

If you aren’t happy with your plan, you may be able to transfer your 401(k) assets to an individual retirement account (IRA). Your financial advisor can help you determine if you are eligible for such a transfer.