Personal Finance Articles

Late last year, financial analyst Meredith Whitney rattled investors when she warned that many municipalities were poised to default on their bonds, and municipal bonds sold off.

Today, however, they’re making a comeback as volatility in other financial markets has rekindled interest in an asset class that has long been considered a solid investment.

Municipal bonds are issued by state and local governments, counties, cities, schools and water districts, and agencies.

They’re used to finance public projects such as roads, schools and airports and certain types of private projects, such as nursing homes and assisted-living centers.

Traditionally, investors have purchased municipal bonds primarily because they offer stability of principal and tax-free income.
Defaults in the market are rare, and the interest on municipal bonds is exempt from federal taxes. And because most states don’t require their residents to pay state and local taxes on interest received from bonds issued by political entities within the state, the interest may also be exempt from state and local taxes.

For example, in most cases a resident of Massachusetts wouldn’t have to pay federal taxes or state or local taxes on interest and dividends paid by a state of Massachusetts bond or a mutual fund that holds bonds issued by political entities within Massachusetts.

Because municipal bonds offer tax-free income, they are typically sought by investors with higher income levels. Why? Although the actual yield may be lower than on a taxable investment, the “tax-equivalent yield” – the yield after you’ve taken account of the fact that you aren’t taxed on the bond’s interest – may actually be higher.

Thus, the addition of municipal bonds to your portfolio may not only lower your tax bill – it may also help protect your portfolio from volatility. Your financial advisor can help you decide if municipal bonds are right for you.

Investors who have reached age 70½ can make charitable donations directly from their traditional individual retirement accounts (IRAs), saving taxes in the process.

But you need to act quickly, because this opportunity will expire at the end of 2011 unless Congress acts.

This donation option is called a qualified charitable distribution (QCD). Unlike most IRA distributions, which are taxable, the QCD is not.

However, a QCD must meet several tax-law requirements.

You must be 70½ and your IRA trustee must make QCDs directly to an eligible IRS-approved charity.

The QCD must meet normal tax-law requirements for a charitable donation that is 100% deductible, meaning if you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules, you can make a QCD.

The QCD must be otherwise taxable, meaning a Roth IRA distribution generally does not meet this requirement.

Additionally, there’s a $100,000 limit on total QCDs per year.

However, if both you and your spouse have IRAs, you are entitled to $100,000 each, for a combined total of $200,000 – and that’s the case even if you file jointly.

Finally, note that you can’t claim itemized deductions for QCDs as you would for traditional donations to charities.

That’s because QCDs are already tax-free.

But there are a number of ways you save taxes using QCDs.

First, QCDs are not included in your adjusted gross income.

Second, QCDs fulfill required minimum distribution (RMD) rules – so you can take an RMD without paying taxes on it.

Third, QCDs reduce your taxable estate.

What you don’t know can be costly – which is why you should be familiar with the ins and outs of your retirement savings plan.

Such plans include individual retirement accounts, 401(k) plans and other retirement savings vehicles.

You probably know such vehicles have some fees – but do you know what those fees are and how much they are?

Many American investors are unaware of the fees they pay their retirement plan providers.

In fact, a recent study by the AARP found that 71% of 401(k) plan participants think they don’t pay any fees, and 6% don’t know.

That’s a total of 77% of American investors who are misguided.

Annual maintenance and account termination, or account transfer fees, are perhaps the most common retirement plan fees.

Depending on what share class of mutual funds you own in your account, you may also be assessed a fee called a contingent-deferred charge as well.

That’s not to say all retirement plan fees are bad. Your plan provider has to be compensated somehow. But the question is, are the fees too much?

The good news is that starting Jan. 1, 2012, retirement plan providers will have to disclose the fees participants pay for their 401(k) plans.

Meanwhile, there are also many calculators that can help you determine what you’re paying in retirement plan fees.

Real estate investment trusts (REITs) may present a compelling investment option in today’s economic and market environment.

Despite the dismal state of the U.S. real estate market, many REITs have performed well recently.

Housing prices were down again in the first quarter of 2011, according to the S&P/Case-Shiller national home price index. The index shows that housing prices decreased 5.1% in the first three months of 2011, compared to the same period in 2010. Prices were also down 32.7% from their peak set five years ago.

However, as of May 31, U.S. REITs were up 14.09%, according to the MSCI U.S. REIT Index.

Investors purchased nearly $22 billion in new REIT shares in the first five months of 2011, almost triple the amount they purchased during the same period the year before, according to The Wall Street Journal.

A REIT is a company that owns and, in most cases, operates income-producing real estate.

The shares of REITs are traded on major stock exchanges.

Each year, REITS distribute at least 90% of their taxable income to shareholders in the form of dividends.

Of course, REITs aren’t for everyone. There are special risks associated with investments in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions.

However, investors may be able to mitigate these risks by seeking REITs in certain categories, such as the health care sector, which may benefit from growing demand as baby boomers age and the population enjoys a longer life span. Your financial advisor can help you determine if REITs are appropriate for you, given your individual financial circumstances and goals.

Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index.

A little-known tax break could help offset the cost for people considering a continuing-care retirement community (CCRC). With CCRCs, you pay a one time entry fee and ongoing monthly charges. In exchange, the CCRC provides housing and a range of accommodation, medical and other services. The level of services can be increased as your needs require. With traditional retirement homes, you pay a monthly fee.

The good news with a CCRC is that you don’t have to move as your needs change. The bad news is that the entry fee can be high, exceeding the upper six figures in locations where real estate is expensive. Monthly fees can also be expensive.

That said, a tax break can offset part of the entry fee and monthly fees. That’s because a percentage of CCRC costs can be considered medical expenses for tax purposes, even if the resident requires no medical care. How? Because the amount of CCRC fees considered medical expenses does not depend on the level of medical services you actually receive from the CCRC. It depends on the CCRC’s aggregate medical expenditures in relation to its overall expenditures. And you can write off those medical expenses to the extent they exceed 7.5% of your adjusted gross income.

A CCRC should be able to give you estimates of those percentages, but you may have to ask for them. Your financial advisor can provide you with guidance.

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 circumstances.

To many parents and grandparents, raising responsible children involves teaching them to be financially responsible – and many financial experts say it’s important to start early.

Although an increasing number of schools and other organizations, such as banks, are rolling out financial literacy programs, it’s important to build a foundation of knowledge at home.

How?

By talking to your children or grandchildren about financial matters.

Bring them into family discussions about income in order to teach them about budgeting and planning for the future.

You don’t have to do it alone. There are a number of new websites, books and even games that cater to kids of all ages.

There are also smartphone apps that focus on budgeting and saving.

The Kids Money iPhone app teaches kids about saving for long-term purchases, and the Android Kids Shopping Calc app teaches kids about budgeting by sending them shopping in a virtual store with a specific amount of money.

Local programs may also be available. For example, Boy Scouts can earn a finance-related badge by completing activities such as stock research and shopping comparisons, and the Girl Scouts are planning to roll out 13 finance-related badges with age-specific activities.

For example, a five-year-old will be asked to recognize different coins, while a 13-year-old will be asked to create a budget.

For more intensive training, consider summer camp next year. The Junior Achievement BizTown summer camp has children ages 10 to 14 create a simulated economy. They work at pretend jobs, such as bank teller; earn money; make bank deposits; pay rent; and balance their checkbooks. The camp costs $225 to $269 per week.

More information is available at www.ja.org/Programs.

The extension of the so-called Bush tax cuts through 2012 means you may still qualify for the 0% federal income tax rate on long-term capital gains and dividends.

This low rate applies to long-term capital gains and qualified dividends that would otherwise fall within the bottom two federal income-tax brackets, which are 10% and 15%. While that may seem hard to achieve, it actually may be easy for many Americans, particularly retirees.

The top end of the 15% bracket is $69,000 for joint filers, $46,250 for those who use head of household filing status and $34,500 for single filers. So, if you and your spouse file jointly, have two children and claim the standard deduction for 2011, you could have up to $95,400 of adjusted gross income (AGI), including some long-term gains and dividends, and stay within the 15% bracket. How? Because AGI reflects a number of write-offs, including any 401(k) and IRA contributions you make, moving expenses, and alimony payments, to name just a few.

AGI is also the number that comes before you subtract itemized deductions. So, if you itemize, your AGI can be even higher than the amounts listed above and keep you within the 15% tax bracket, allowing you to quality for the 0% tax rate on some long-term gains and dividends. Contact your financial advisor to determine how to take advantage of this low tax rate.

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.

Most Americans who die in 2011 or 2012 won’t be exposed to the federal estate tax, thanks to the $5 million federal estate tax exemption – but you may still need an estate plan in the form of a will and possibly even a living trust.

One goal of estate planning is avoiding probate, a court-supervised legal process that distributes a deceased person’s assets.

Probate typically involves red tape and legal fees, as well as your financial affairs becoming public information.

Having a will doesn’t help you avoid probate, but it is important.

If you die without a will, the laws of your state will determine what happens to your assets and your minor children. So, you’ll want to draft a will to name an executor for your estate, specify which beneficiaries should get which assets and name a guardian for any minor children.

However, whether your property needs to go through probate is actually determined by how that property is titled, not whether you have a will.

Therefore, in addition to drafting a will, you may want to consider a living trust.

With a living trust, you transfer legal ownership of certain assets to a trust.

Because a living trust is revocable, you can change its terms, or unwind it, at any time, as long as you are alive and legally competent.

But when you die, a trustee you have named to be in charge of the trust’s assets will distribute them in the trust according to your direction – bypassing probate.

Declining property values and changes in tax rules mean it may be a good time to transfer property to your heirs by using a qualified personal residence trust (QPRT).

With a QPRT, you create a trust and transfer your home into it.

In doing so, you reserve the right to live in your home for a specified period of time.

At the end of that period, your home passes to your beneficiaries, free of gift tax.

As for the potential tax benefits of a QPRT, you can move a big asset out of your estate at a fraction of the future value.

If you set up a QPRT at age 60 when your property is worth $2.5 million, you may discount the $2.5 million by an interest rate set by the Internal Revenue Service.

The Internal Revenue Service sets the rate monthly.

At a recent 3% rate, the current value of a $2.5 million gift to be made in 10 years is $1.59 million.

If you die before the trust ends, the home is included in your taxable estate and estate tax will be paid on it, meaning the purpose of the trust will be defeated.

But if you don’t die before the trust ends, your home will be distributed to your heirs without further transfer tax.

The strategy may make the most sense for individuals with a net worth above the estate tax exemption, which is currently $5 million per person.

However, such a strategy may also be a smart move for those whose homes might appreciate or if the estate tax exemption drops.

Qualified personal residence trusts can be complicated, though.

For example, you have to give up the home when the trust ends, even if you are still alive.

As a result, if you’re considering a qualified personal residence trust, it’s a good idea to speak with a financial advisor first.

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.