12/11/2000

Financial Thoughts of the Season

Every month I write an article on one specific subject. However, I have a list of financial subjects and thoughts that never get covered. Why? Well, mostly because they would not take an entire article to discuss and some because I just haven't written a full length article yet. So this month I have decided to cover a wide variety of financial subjects -- things to know and think about -- all in one article. I hope you like it.

1. Capital Gains on Mutual Funds - as you know, many mutual funds will pay out capital gains in December. If you opened a non-retirement account in 2000 and have found yourself in the unenviable position of having lost money, plus note that you may still be subject to capital gains. Find out now what your tax liability may be and plan/act accordingly.

2. Micro vs. Macro Management - this has been a rocky year for the market. Certainly, it has been a year to consider changing funds, rebalancing accounts, etc. However, with mutual funds, remember there are two levels of management. One level is the macro level in which you and your advisor make changes from one fund to another. However, remember that there are also changes happening on the Micro level -- the fund manager is selling shares, taking gains, moving to cash, repositioning the holdings, etc.

3. TOD Accounts - Transfer on Death Accounts (TOD) seem to be a little known item. TOD is a way in which you can register your non-retirement accounts. When you register an account as TOD you pick a person to which the ownership of the fund will be transferred upon your death. Thus, it acts like a beneficiary account.

4. Delegate Financial Management - We live busy lives. Most of us do not have the kind of personal time we want or need for our families, ourselves, recreation, etc. You cannot delegate away your time with the family, and you can not tell someone to go exercise for you, etc. However, you can delegate some of your financial management to a professional. Delegate what you can and are comfortable with as regards to financial management so that you do not cheat yourself or your family of the things in which you cannot delegate.

5. Don't Over Fund Retirement - Retirement is perhaps the biggest concern for most of us and we certainly want to live comfortably in our senior years. However, I believe you can over fund retirement and I am starting to see that happen. Remember, money in most retirement accounts comes out at your income tax rate not the capital gains rate and this may not be the position to want to have all your funds in at retirement or as you plan for it.

6. Annuities Within IRAs - I have met with many people that have IRA accounts, which are tax sheltered, that own an annuity contract as the investment. Thus, they have a double tax shelter- the IRA and the annuity within it. Since you do not need a double tax shelter, why pay the generally higher fees of an annuity and be stuck in the annuity due to possible surrender fees? Generally speaking the annuity is not necessary within an IRA and it is not always the wisest investment choice. Yes, annuities do have benefits, but the biggest one in my opinion is the tax deferral which you already have with an IRA account.

7. 529 Educational Savings Plan - You have probably heard of these plans as a way to save money for your kids for college. To date they have been offered by individual states. In the State of Connecticut the program is called CHET - CT Higher Educational Trust. Very soon, individual mutual fund companies will offer these options. This will give you the tax benefits of these plans but with more investment options and more control.

8. Making Money In A Down Market - 2000 will go down as a weak year for the stock markets. However, many market sectors have done well. A few of the stronger sectors this year have been mid caps, small caps, financial, health care, utilities, and biotech. If your portfolio was well diversified or if you predicted the movement to these sectors, you are probably ending the year on a good note. So remember, whether or not the broader market is up or down in 2001, some areas of the market will probably make money.

9. Don't Overlook Life Insurance - Life insurance at it's most common level is generally accepted as a necessary tool to protect loved ones. For most people this means finding the cheapest term policy and hanging on to it until it's no longer required. However, for some people life insurance can be an extra beneficial tool. Beyond protecting loved ones -- it can be an additional investment tax shelter, an effective supplement to your retirement plan, and advantageous when developing an estate plan.

10. Stretch Out IRAs - As many people start to develop estate plans, one thing they are noticing is that the bulk of their assets remain in retirement plans -- IRA Rollovers, IRA's, etc. Even with current and perhaps unexpected expenses, it is possible that the bulk of these assets will be left to heirs. Well, with careful selection of beneficiaries, it is possible to stretch out the income benefits of the IRA over the next generation. If you are eligible for a Roth Conversion IRA, you could stretch out these same benefits to the next generation, tax-free.

Please send questions or comments to dcoffin46333@wradvisors.com.