Strategy Advisor Newssm

News & Tips for Healthcare Providers, Attorneys, CPAs & Other Professionals

FINANCIAL PLANNING & TAX ADVISORsm

December 2003                                   Lamar Blount, Editor

© 2003 Noel Services, Inc.  All rights reserved.  

No reproduction or redistribution permitted without prior written authorization.

 

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CAN PARTICIPATING IN A 401(K) RAISE YOUR LIFETIME TAXES ?

ARE THERE ANY MUTUAL FUNDS YOU CAN STILL TRUST ?

LOOKING FOR THE RIGHT PLACE TO GIVE 

IF OTHERS BAIL, SHOULD I, TOO ?

WHY INVESTORS DON'T BEAT THE MARKET

10 WAYS FOR GAINING THE COMPETITIVE EDGE

NEW IRS RESOURCE FOR TAX-EXEMPT ORGANIZATIONS

COMPREHENSIVE TAX GUIDE FOR INDIVIDUALS AVAILABLE FROM IRS

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CAN PARTICIPATING IN A 401(K) RAISE YOUR LIFETIME TAXES ?

The National Center for Policy Analysis has published the work of economists Jagadeesh Gokhale and Laurence Kotlikoff, who  have produced research that shows that workers with incomes under $100,000 were likely to suffer an increase in lifetime taxes and a reduction in lifetime consumption as a result of participating in a 401(k) plan.  

How can this be possible? Basically, success in the 401(k) plan investments would cause the participant's Social Security benefits to be taxed.  Recent legislation greatly expands the limits on tax-deferred savings accounts, including 401(k) plans and IRAs, continuing a quarter century long effort by the federal government to convince Americans that saving through tax-deferred retirement accounts results in lower lifetime taxes.  

The premises behind tax deferral are the beliefs that people (a) will be in a lower tax bracket during their retirement years than during their working years and (b) will in effect have an interest-free loan on tax payments. Therefore, tax deferral represents an opportunity to avoid taxes when the rate of taxation is high and pay them when the rate is low. Twenty-five years ago this assumption was probably valid. But for millions of low- and moderate-income families today, the assumption is no longer true.

Action Tips: Investors and Financial Advisors are encouraged to consider the impact of future income taxes on Social Security and tax-deferred plan distributions. To read this entire National Center for Policy Analysis report click here.  Then reevaluate your long-term retirement funding plans. 

Click here for Scott Burns' Investment Calculator that compares Investing After the 2003 Tax Cut.

The awful conclusion of this report is that federal income taxation of Social Security benefits is sufficient to change 401(k) participation from a good deal to a bad one for moderate-income households.  For the vast majority of low- and moderate-income households, saving significant sums in tax-deferred retirement accounts is a bad idea. Only those at the top end of the income spectrum realize lifetime tax reductions. For such households, these tax savings are remarkably large. However, low- and moderate-income households contributing to Roth IRAs are guaranteed to save taxes over their lifetime. 

These findings are supported by another study by economists Brianna Dussealt and Jonathan Skinner of Dartmouth University, published in Tax Notes.  Go to http://www.ncpa.org/oped/bartlett/mar2000.html for a summary.  This study concluded that IRAs actually raise revenue for the government.  The reason is that investors generally earn a higher return on their IRAs than the government pays on its bonds. When they withdraw their funds and pay taxes on them, they are withdrawing a much larger amount than they put in. And taxes on withdrawals are more than enough to compensate the government for the lost revenue plus interest.  Dussealt and Skinner estimate the federal government made at least $14 billion in net revenue on all IRA contributions between 1982 and 1997, and perhaps as much as $54 billion.

The National Center for Policy Analysis is a nonprofit, nonpartisan research institute probably best known for developing the concept of Medical Savings Accounts (MSAs).  The Wall Street Journal called NCPA President John C. Goodman "the father of Medical Savings Accounts." 

ARE THERE ANY MUTUAL FUNDS YOU CAN STILL TRUST ?

Three years of lousy returns capped with a growing list of scandals makes many investors question whether there are any mutual fund managers with enough integrity to deserve your trust.  Amid the ongoing mutual fund scandals, there are things you can do to avoid getting burned. Jason Zweig , senior writer for Money magazine, listed in the November issue of Money magazine, 10 commandments for investors who want to keep the faith but not get burned.  

 

Here are some alarming statistics reported in the December 10 USA Today on the mutual fund scandal (so far): At least 16 financial firms have been implicated. Three mutual fund CEOs and 10 other executives have been fired or forced to resign.  15 brokers have been fired for allowing improper trading in mutual funds.  Retirement plan service company Security Trust was forced to close. 

Action Tip:  Click here to read the 10 Commandments for Mutual Fund Investors and then reevaluate your mutual fund holdings to see of you now believe some changes need to be made.

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LOOKING FOR THE RIGHT PLACE TO GIVE

Robert Fraley, was the founder of Leader Enterprises.  In 1999, Dixie Fraley joined the ranks of 13 million U.S. widows when her husband, Robert , perished in a plane crash with golf legend Payne Stewart .  Despite the painful trial of losing a husband, years of gentle training and unified planning left Dixie well prepared to manage the estate alone.   Click here to claim a free tape from Generous Giving of Dixie Fraley's speech.  Statistics show that Americans give proportionately less today than during the worst year of the Great Depression.  Perhaps it's time to consider your "giving" before the tax year ends.

Action Tip: If you are looking for special needs to give to before year end, SAN recommends that you go to http://www.generousgiving.org/marketplace/ and consider the opportunities to leave a legacy (and get a deduction).

IF OTHERS BAIL, SHOULD I?

In a November 25, 2003 article by Jeanne Sahadi , CNN/Money reported that "The fund scandal may cause large redemptions in some funds and that can punish investors who remain.  Following regulators' allegations of securities fraud at Putnam Investments, the nation's fifth largest mutual fund company, several state and city pensions have fired the firm and some individual investors have taken their money elsewhere. As a result, Putnam has lost $30 billion in assets (about 11 percent of total assets under management) since October 31.

 

That raises a question for all investors who own mutual funds that may be charged with improper trading: If investors start packing up their tents in your fund, should you follow suit?  Click here to read the full article and get Sahadi's advice on when (if ever) is it the right time to bail out.

 

WHY INVESTORS DON'T BEAT THE MARKET

A recent article by Gary D. Halbert in the FORECASTS & TRENDS E-LETTER discusses Dalbar, Inc's updated Quantitative Analysis of Investor Behavior,  that continues to show that individual investors are not realizing anywhere near market rates of return in stocks and bonds because of frequent switching among "hot" mutual funds and trying to time the market.  Click here to read the entire article.

Dalbar is a Boston-based financial services research firm that provides a number of services to the mutual fund and brokerage industries.  In its latest press release, the QAIB updated the original study to include performance information for the period from January of 1984 through December of 2002 (19 years).  The update continued to support the findings of the original study: the average mutual fund investor is not getting returns equal to those in the market.  The latest QAIB update contains the following statistics:

The average equity fund investor earned only 2.57% annually over the 19-year period included in the study, compared to annualized inflation of 3.14% and the S&P 500 Index average annual return of 12.22%.  That's right.  The average mutual fund investor's gain was less than inflation over the last 19 years and only a fraction of what the S&P 500 gained.

The average fixed income (bonds) mutual fund investor fared a little better, but not up to the market's performance.  Over the last 19 years, the average fixed income mutual fund investor had an annualized gain of 4.24% versus the long-term government bond index which averaged 11.70%.

The Dalbar studies look at the "average investor" in mutual funds by analyzing mutual fund inflows and outflows to arrive at their estimates for how the average investor did.  Not everyone fared so poorly, and some did even worse.  For example, if you bought a good S&P 500 Index mutual fund 19 years ago and held it, then you should have done as well, or about as well, as the S&P 500 Index which averaged over 12.2%.  Or if you bought a good long-term T-bond fund 19 years ago and held it, you should have made about. the 11.7% noted above.  Unfortunately, most investors did neither. Most investors get into and out of the market, usually at the wrong times, and they frequently switch funds trying to chase the top performers.

The Dalbar study shows us the danger of hopping from one mutual fund to another, chasing the latest "hot" performance and trying to time the market.   However, fighting the human nature to escape losses can be difficult, if not impossible, for many investors.  One way to potentially minimize the effect of market losses is to seek out market timing strategies that have historically moved to the safety of cash, or even gone "short" during market corrections or bear markets.  You can attempt to develop a market timing system on your own, but Halbert's advice is to stick with professional Advisors for the best results.

Action Tip: One of the best sources for locating top professional advisors for both professionals and individual investors is the MoniResearch Newsletter (phone 800-615-6664 or click here).  MoniResearch tracks about 70 Advisors, and actually provides verified performance results rather than allowing self-reporting by the Advisors.  In a recent edition of the newsletter, Shellans reports that 70% of the Advisors tracked by MoniResearch outperformed the S&P 500 Index, and 100% outperformed the NASDAQ Index over the last three years ended June 30.  

10 WAYS FOR GAINING THE COMPETITIVE EDGE
Here are the highlights of a very useful and practical session on business etiquette presented by Ann Marie Sabath, founder of At Ease Inc., at a recent Interchange Conference:

To learn more about business protocol and etiquette, visit her Web site.

NEW IRS RESOURCE FOR TAX-EXEMPT ORGANIZATIONS

The Internal Revenue Service has published a new brochure to help charities understand the tax laws conferring tax-exempt status.  Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt Organizations, is a compliance guide that explains the record keeping, return filing and disclosure rules for those organizations.  Click here to get you copy.

 

COMPREHENSIVE TAX GUIDE FOR INDIVIDUALS AVAILABLE FROM IRS

The IRS comprehensive tax guide for individuals, Publication 17, “Your Federal Income Tax,” has been updated for tax year 2003.  Publication 17 has been updated with important changes for 2003, including tax breaks for men and women serving in the military resulting from the Military Family Tax Relief Act of 2003, which was signed into law on November 11. Among other changes, Publication 17 explains the new dividend tax rates and provides the new lower income tax rates.  Click here for your copy.


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"Behold, a virgin will be with child and bear a son, and she will call His name Immanuel (God is with us)." - Isaiah 7:14

 

Merry Christmas from Strategy Advisor News !!!!!!

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