Facilitating Your Financial Future

IRS Releases 2012 Inflation Adjustments

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 06 Feb 2012 14:19:00 +0000

The IRS releases inflation adjustments for 2012.

On October 20, 2011, the IRS released inflation adjustments for 2012 (Rev. Proc. 2011-52). This revenue procedure applies to taxable years beginning in 2012, and transactions or events occurring in calendar year 2012, where applicable.

The full text of these changes can be found in IRS Rev. Proc. 2011-52.

Calculating Cost Basis Gets Easier This Year

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 23 Jan 2012 14:14:00 +0000

Brokers must track and report cost basis to both you and the IRS

Anyone who has ever been baffled by calculating the net proceeds from the sale of an investment will find some relief, starting with the 2011 tax return due April 17. If you bought any stocks after January 1, 2011, and sold them later in the year, you should be receiving information from your broker shortly that tells you the adjusted cost basis of those stocks. Your adjusted cost basis, which affects the amount of tax you may owe on the sale, represents the original purchase price plus any commissions or other fees, and takes into account factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends.

In the past, cost basis information has sometimes been available as a service; the Emergency Economic Stabilization Act of 2008 now requires all broker-dealers and other financial intermediaries to report the information on your 1099-B form. However, you won't be the only one to receive that information; your broker also is required to report the same information to the Internal Revenue Service. Individual taxpayers (or their tax preparers) will still be responsible for accurately reporting the net proceeds of a sale on their federal income tax returns, but the IRS will now have a better way to double-check those figures.

In some cases, you're still on your own this year

The new reporting requirements don't mean you can empty your files completely. Because they're being phased in, the rules don't apply to stocks bought before January 1, 2011, for which you'll still need to do your own calculations, or to securities held in retirement accounts. Cost basis reporting does go into effect this year for mutual funds and stock bought as part of a dividend reinvestment plan; however, it will apply only to shares bought after January 1, 2012, and will be reported on the 1099-B that will be available in 2013 for the tax year 2012. And cost basis for bonds, options, and other securities won't have to be reported until 2013, so those will still need to be monitored independently.

Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days). However, they only have to do so if the newly acquired securities are identical to the securities sold (meaning the securities share the same CUSIP identification number). They also are not required to report adjusted cost basis for wash sales when the purchase and sale transactions occur in different accounts.

You can tailor your reporting method to suit your tax situation

Investors sometimes use cost basis to help manage their tax liability on a securities sale. If you're one of them, the reporting requirements make it more important to determine in advance what accounting method you wish to use for each sale. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).

If you don't want to use your broker's default method, you may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three business days after execution of the trade). After the trade settles, you cannot change your mind about the method used.

Brokers also will be required to report to the IRS the cost basis of a short sale in the year in which the short is closed (in the past, it was done for the year a short sale was opened).

Neither Mitlin Financial, Inc., Forefield Inc. or Forefield AdvisorTM provides legal, taxation or investment advice. All the content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources. Mitlin Financial Inc. and the Forefield companies are unaffiliated.

Ringing In The New Year

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Tue, 27 Dec 2011 15:24:00 +0000

As we come out of the busy holiday season, we all need to begin to focus on 2012. Make 2012 the year that you get your financial house in order. The years seem to fly by and retirement is approaching sooner and sooner than you might think.

Make a resolution, contact us in 2012 to put a plan together for your future.

The Mitlin Financial, Inc. family would like to extend you and your family all the best for 2012, health and happiness!!

Regards,
Mitlin Financial, Inc.

Other Investment Companies and Investment Vehicles

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 19 Dec 2011 13:36:00 +0000

Introduction

There are many ways to invest in stocks, bonds, cash alternatives, real estate, and commodities. For example, you can buy individual stocks and bonds, apartment or office buildings, and commodity futures. However, unless you're able to afford a wide variety of individual securities or property, you may not be able to diversify sufficiently. Though diversification can't guarantee a profit or protect against the possibility of loss, it can help cushion the impact of a loss in a single security.

To achieve greater diversification than they might be able to manage on their own, many people choose to use an investment vehicle that offers the ability to put money into multiple securities with a single investment. Such investments also may offer other advantages, such as expertise in selecting specific securities, greater convenience, or lower costs than would be required to invest in the same assortment of securities individually. However, each type also involves its own type of risk apart from the risks involved with the individual securities it includes.

Depending on how a specific investment vehicle is structured, it may be classified as an investment company and regulated by the Securities and Exchange Commission (SEC). There are two major types of investment companies: management companies and unit investment trusts. With all investment companies, you should carefully consider a prospective purchase's investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the issuer. Read it carefully before investing.

·Management companies--Management companies are usually structured as a corporation or trust, typically with a separate investment advisor that takes care of the actual purchase and sale of securities. A management company may be an open-end company that continuously offers an unlimited number of shares that can be redeemed directly with the issuer; mutual fundsare the most prominent example of open-end companies. By contrast, a closed-end companygenerally issues a fixed number of shares but does not directly redeem those shares from the public.

·Unit investment trusts(UITs)--UITs generally invest in a relatively fixed selection of securities that are held for a specified period of time (often one to five years) and issue a fixed number of so-called units to the public when the trust is initially offered. There is typically little or no trading of securities within the UIT during the life of the trust, and therefore little active management. The market value of the trust fluctuates with market conditions and the value of the underlying securities. A UIT typically will redeem shares at the net asset value (NAV), though it depends on the policy of the trust.

Technical Note: A third type of investment company, known as a face-amount certificate company, issues debt securities that guarantee payment of a specific sum (the face amount) in the future. In exchange, the certificate's holder typically makes either a lump-sum initial payment or periodic payments to the face-amount certificate issuer. Only a few face-amount certificate companies are still in existence.

Some companies that would seem to be investment companies are actually excluded from the legal definition. Examples include private investment funds with no more than 100 investors or whose investors are considered qualified investors with substantial income and/or net worth, such as hedge funds.

Investment vehicles are not the same thing as investment companies. They do not represent a security per se, but a particular method for holding securities, or a unique way of investing in certain asset classes.

Exchange-traded funds

Like a mutual fund, an exchange-traded fund (ETF) is considered an investment company and is regulated under the Investment Company Act of 1940. However, an exchange-traded fund is priced and traded throughout the day and can be bought on margin or sold short--in other words, it's traded much as a stock is. Also, an ETF may be structured somewhat differently from a mutual fund in terms of how the fund buys and sells securities. Most ETFs are passively managed to try to replicate the performance of an index. An ETF may be structured as either an open-end fund or a unit investment trust.

Closed-end funds

A closed-end fund has some of the characteristics of a management company, but also resembles a unit investment trust in some ways. Like many open-end mutual funds, it is professionally managed and can be either diversified or nondiversified. However, it is similar to a unit investment trust in that it is priced and traded throughout the day on market exchanges. Also, the number of shares is fixed, and shares are generally not redeemed by the company that issues them. Share price is determined by supply and demand.

Other investment vehicles

Separately managed accounts (SMAs)

A separately managed account is a personal investment account that is customized and managed for you by one or more professional money managers. In an SMA, your assets are not commingled with those of other investors. With a mutual fund, you buy and sell shares of the fund. Even though each fund share represents a proportionate ownership of individual securities within the fund, your share of each of those securities is tiny. By contrast, you are the sole owner of each security within your separately managed account. You also can place securities you already own in an SMA; with mutual funds, you can't. As a result, you and your financial professional have more control over management of specific investments in an SAM. An SMA typically focuses on one asset class--for example, equities.

Unified managed accounts (UMAs)

Unified managed accounts are an outgrowth of the separately managed account concept. They offer a more efficient way to manage the asset allocation process and integrate a variety of investment vehicles. A separately managed account typically has a single investment manager (or management firm), and often invests in only one type of asset. A unified managed account allows you (or your financial professional) to aggregate multiple asset managers and investment vehicles within one account, and make investment decisions in the context of a much broader view of your overall finances.

Wrap accounts

A wrap account is a type of account that offers unlimited transactions within the account and charges a quarterly or annual fee (usually a percentage of the assets in the account) that covers all investing costs, including trading costs. It also may offer suggestions about how to invest those assets based on your investment objectives and risk tolerance. A mutual fund wrap account is typically made up of only mutual funds; a nondiscretionary advisory account is offered by brokerage houses and can hold a broader range of investments.

This article was provided by Forefield and distributed by Lawrence Sprung.

College Board Releases New College Cost Numbers

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 12 Dec 2011 17:08:00 +0000

College Cost Trends

Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.

Here are highlights from its latest report:

At four-year public colleges for in-state students, tuition and fees increased an average of 7.9% from last year to $7,605, and room and board costs increased an average of 4.6% to $8,535.
Total average cost for 2010/2011 is $20,339.

At four-year public colleges for out-of-state students, tuition and fees increased an average of 6.0% from last year to $19,595, and room and board costs increased an average 4.6% to $8,535. Total average cost for 2010/2011 is $32,329.

At four-year private colleges, tuition and fees increased an average of 4.5% from last year to $27,293, and room and board costs increased an average of 3.9% to $9,700. Total average cost for the 2010/2011 year is $40,476.

“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.

To read the Trends in College Pricing report, visit www.trends-collegeboard.com.

Student Aid Trends

The College Board notes that the average cost figure is not necessarily representative of what most college students pay. That's because approximately two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments. Some students and their parents also benefit from federal education tax benefits.

The College Board estimates that for the 2010/2011 academic year, students at public colleges will receive an average of $6,100 in grant aid from all sources and federal tax benefits, while students at private colleges will receive an average of $16,000 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.

Every year, the College Board releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.

Neither Mitlin Financial, Inc., Forefield Inc. or Forefield AdvisorTM provides legal, taxation or investment advice. All the content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources. Mitlin Financial Inc. and the Forefield companies are unaffiliated.

This article was provided by Forefield and distributed by Lawrence Sprung.

Keeping Market Volatility in Perspective

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 05 Dec 2011 16:35:00 +0000

When markets are volatile, sticking to a long-term investing strategy can be a challenge. To keep the ups and downs in perspective, it might help to look at past market cycles to see how recent market action compares.

Bears versus bulls

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-1949 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss--47%--occurred in 1931, but the all-time best annual return--a capital appreciation gain of just under 47%--happened just two years later in 1933.**

Points of reference

This year has seen extreme volatility, with weeks and even days when swings of several hundred points in both directions on the Dow seemed to become commonplace. In the first week of August alone, 2 of the Dow's 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***

While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn't begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987's "Black Monday," when the Dow fell almost 23%; that makes the Dow's 5.5% loss on August 8 of this year seem relatively tame by comparison. And August 8 was followed by the Dow's 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow's best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

Stocks versus bonds

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

Many experts predict that the global economic recovery will continue to create an uncertain investing environment in coming years, with both strong rallies and strong downdrafts. While there may be ongoing volatility in the markets that needs to be monitored, it's important to keep things in perspective; your ability to meet your long-term goals could be affected if you change your overall game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor's 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

DATA SOURCES: *Bull and bear market time frames, gains/losses: all calculations based on data from the Stock Trader's Almanac 2011 for the Standard & Poor's 500.

**1931 and 1933 annual stock returns: based on Ibbotson SBBI data for capital appreciation of S&P 500.

***Based on data from the Stock Trader's Almanac 2011 .

**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

Neither Mitlin Financial, Inc., Forefield Inc. or Forefield AdvisorTM provides legal, taxation or investment advice. All the content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources. Mitlin Financial Inc. and the Forefield companies are unaffiliated.

Year-End Tax Planning: 10 Things to Keep in Mind

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 28 Nov 2011 20:52:00 +0000

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there's still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.

1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you're able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.

2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.

3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you're in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.

4. Is AMT a factor?

If you're subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You're more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you've been subject to the AMT in the past, or think that you might be for 2011, you'll want to make sure that you understand how the AMT rules might affect you.

5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren't deductible, so there's no tax benefit for 2011--they're still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.

6. Special distribution requirements at age 70½

Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It's important to make withdrawals by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).

7. Depreciation and expense limits to drop for business owners and the self-employed

If you're a small business owner or a self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.

8. Last chance to deduct energy-efficient home improvements

This is the last year you'll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there's a lifetime credit cap of $500 ($200 for windows). So, if you've claimed the credit in the past--in one or more years since 2005--you're only entitled to the difference between the current cap and the amount you've claimed in the past.

9. Other expiring provisions

Barring additional legislation, this is the last year that you'll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.

10. Get help

Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

Neither Mitlin Financial, Inc., Forefield Inc. or Forefield AdvisorTM provides legal, taxation or investment advice. All the content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources. Mitlin Financial Inc. and the Forefield companies are unaffiliated.

New Student Debt Repayment Plan

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 21 Nov 2011 14:08:00 +0000

On October 26, 2011, President Obama announced a plan that seeks to help college graduates pay back their federal student loans. The plan is an executive order and does not require approval by Congress. It is scheduled to take effect beginning in 2012.

Background

Despite more aggressive debt shedding by American consumers since the recession, student loan debt continues to grow. According to the federal government, 36 million Americans have federal student loan debt. Last summer, total student loan debt surpassed credit card debt for the first time, and this year outstanding student loan debt is on track to reach $1 trillion, according to the Federal Reserve Bank of New York.

In addition, in September, the U.S. Department of Education released data showing that the percentage of student loan borrowers who defaulted in 2009 (the latest year for which figures are available) rose to 8.8% from 7%. That percentage is likely higher now due to the recession, as millions of cash-strapped college students attempt to pay back student loans in a tough economy. According to the Chronicle of Higher Education, last year the unemployment rate for college graduates under the age of 24 rose to 9.4%, the highest level in at least 15 years.

In the meantime, college tuition continues to rise; the College Board recently announced in its Trends in College Pricing 2011report that tuition costs for the 2011/2012 academic year increased 4.5% for private colleges and 8.3% for public colleges (to view the report, visit www.collegeboard.com/trends). The average total cost of attendance this year is now $42,224 for private colleges and $21,447 for public colleges. And next July, the interest rate on federal Stafford Loans is scheduled to double--to 6.8%--costing the average borrower thousands of dollars over the life of the loan.

Against this backdrop, following are the highlights of President Obama's plan.

Loan consolidation

Students who hold both direct federal student loans and federal student loans made by private lenders under the now defunct Federal Family Education Loan Program would be able to consolidate their loans between January and June 2012 into a single government loan at an interest rate of up to 0.5% less. The White House estimates this could help approximately 5.8 million borrowers.

Income-based repayment

President Obama's plan will accelerate the start of an income-based repayment program to 2012 from the original start date of 2014. The program, approved by Congress last year, caps monthly federal student loan payments at 15% of income and forgives all remaining debt after 25 years. Under the new plan, federal student loan payments will be capped at 10% of income with all remaining debt forgiven after 20 years. The White House estimates this could help 1.6 million borrowers.

Who qualifies?

According to the U.S. Department of Education, to qualify for loan consolidation, borrowers must have both a direct federal student loan and a federal student loan under the Federal Family Education Loan Program. To qualify for the accelerated component of the income-based repayment plan, borrowers must take out a loan in 2012 or later and have taken out a loan sometime between 2008 and 2012. Borrowers who are already in default won't qualify.

For more information on the new programs, you can call the office of Federal Student Aid, a division of the U.S. Department of Education, at 1-800-433-3243 (1-800-4fedaid) or visit www.studentaid.ed.gov.

Neither Mitlin Financial, Inc., Forefield Inc. or Forefield AdvisorTM provides legal, taxation or investment advice. All the content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources. Mitlin Financial Inc. and the Forefield companies are unaffiliated.

The Income Tax Planning Landscape: 2011

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 14 Nov 2011 14:15:00 +0000

At this time last year, income tax planning was particularly challenging. Several tax deductions had already expired, and significant changes, including new, higher income tax rates, were scheduled to take effect at the end of the year. Legislation passed in mid-December, however, hit the "reset" button, reinstituting already-expired deductions, and extending major tax provisions--including lower rates--for an additional one to two years.

As a result of the December legislation, 2011 tax planning takes place in an environment characterized by something that was missing last year--a relative degree of certainty. That being said, here are some things to keep in mind as you consider your current tax situation.

Tax rates/calculation

Federal income tax rates--The same six federal income tax rates that applied in 2010 will continue to apply in 2011 and 2012. So, depending on your taxable income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. Remember, though, that all of your taxable income is not necessarily taxed at that rate--instead, the rate at which you pay tax generally increases as your income increases. For example, if you're a single individual with 2011 taxable income of $100,000, you fall into the 28% tax bracket. However, your first $8,500 of taxable income is taxed at 10%, your next $26,000 of taxable income is taxed at 15%, and your next $49,100 in taxable income is taxed at 25%. Only $16,400 of your taxable income is actually taxed at 28%.

Rates for long-term capital gains and qualifying dividends--As in 2010, long-term capital gains and qualifying dividends continue to be taxed at a maximum rate of 15% through 2012; if your income (including any long-term capital gains and qualifying dividends) puts you in the 10% or 15% income tax brackets in 2011 and 2012, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)--While regular income tax rates and the maximum rates that apply to long-term capital gains and qualifying dividends were extended through 2012, the latest AMT "fix" (in the form of increased AMT exemption amounts) is effective only through 2011. So, if you think you may be subject to the AMT this year, the good news is that you know ahead of time what the relevant exemption amounts are ($74,450 for married individuals filing jointly, $48,450 for unmarried individuals, $37,225 for married individuals filing separately); the bad news is that the AMT situation for 2012 remains up in the air. You can probably expect another AMT fix later this year, but as it stands now, AMT exemption amounts will drop significantly in 2012, dramatically increasing the number of taxpayers ensnared by this parallel tax system.

Temporary payroll tax reduction

Available for 2009 and 2010, the Making Work Pay tax credit was a refundable tax credit equal to the lesser of 6.2% of earned income or $400 ($800 for married couples filing joint returns); the credit was phased out for those with higher incomes. The tax credit was not extended to 2011, but the December legislation created a new one-year 2% reduction in employee Social Security payroll taxes (the 2% reduction also applies to the self-employment tax paid by self-employed individuals).

So, if you're an employee, 4.2% of your 2011 wages (up to the 2011 taxable wage base of $106,800) is being withheld for your portion of the Social Security retirement component of FICA employment tax instead of the 6.2% that would normally be withheld. If you're self-employed, the 12.4% you would normally pay for the Social Security portion of your 2011 self-employment tax is reduced to 10.4%. So, if you earn $100,000 in wages, you'll have an extra $2,000 in take-home pay for 2011. Consider opportunities to take advantage of this extra income by, for example, increasing your retirement savings; applying the extra money toward a long-term goal could extend the benefit of this temporary tax reduction beyond 2011.

Other considerations

IRA qualified charitable distributions

Unless Congress passes additional legislation, 2011 will be the last opportunity for individuals age 70½ or older to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity. These charitable distributions can be excluded from your income, and count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA for 2011.

Depreciation and IRC Section 179 expensing

If you're a business owner or self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011. The "bonus" first-year depreciation deduction drops to 50% for property acquired and placed in service during 2012. Additionally, the maximum amount that can be expensed under Internal Revenue Code (IRC) Section 179 for 2011 is $500,000; in 2012, the limit is currently scheduled to drop to $125,000.

Small business stock

Generally, you can exclude 50% of any capital gain from the sale or exchange of qualified small business stock provided that you meet certain requirements, including a five-year holding period. For qualified small business stock issued and acquired in 2011, however, you'll be able to exclude 100% of any capital gain from income if the qualified stock is held for at least five years and all other requirements are met.

Energy efficient improvements

Though not as generous as it has been the last two years, a credit is still available to individuals who make energy-efficient improvements to their homes. You may be entitled to a 10% credit for the purchase of qualified energy-efficient improvements, including a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of specified energy-efficient property: $50 for an advanced main air circulating fan; $150 for a qualified furnace or hot water boiler; and $300 for other items, including qualified electric heat pump water heaters and central air conditioning units. There's a lifetime credit cap of $500 ($200 for windows), however. So, if you've claimed the credit in the past--in one or more tax years after 2005--you're only entitled to the difference between the current cap and the total amount that you've claimed in the past. That includes any credit that you claimed in 2009 and 2010, when the aggregate limit on the credit was $1,500.

This article was provided by Forefield and distributed by Lawrence Sprung.

GAO Report Suggests Annuities as Retirement Income Option

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 07 Nov 2011 15:38:00 +0000

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won't outlive.

Why income annuities?

Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

1) Help protect retirees against the risk of underperforming investments

2) Help protect retirees against the risk of outliving their savings (longevity risk)

3) Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and Provide a base of guaranteed income that may serve as a dependable "cushion" for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work

Income annuities aren't for everyone nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

1) With predictably shorter-than-normal life expectancies

2) Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses

3) Who are concerned about income taxes, since the income from annuities purchased with nonqualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates

4)Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?

The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.

Proposals to access annuities and increase financial literacy

Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals' financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.

Report recommendations

The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don't have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to (www.gao.gov/new.items/d11400.pdf).

This article was provided by Forefield and distributed by Lawrence Sprung.

Market Volatility and Your Emotions

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 26 Sep 2011 14:47:00 +0000

When dealing with a volatile market, sometimes the most difficult challenge is to manage your emotions. If you decide you need to re-examine your game plan, it should be done with as much care as you put into developing that plan in the first place. Your financial professional may be able to help you decide if any of the following may be appropriate for you.

Knowing what you own and why you own it

When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits into your overall portfolio can also help you consider whether a lower price might actually represent a buying opportunity. If you're not really sure what role a security plays in your portfolio, it's never too late to find out. That knowledge can be important, especially if you're considering replacing your current holding with another investment.

Have a game plan

Setting predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. If you're an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not guarantee a profit or protect against the possibility of loss, but it can help you understand and balance your risk in the future.

Remembering that everything is relative

Asset allocation generally is responsible for most of the variance in portfolio returns. If you've got a well-diversified portfolio, it could be useful to compare its performance to relevant benchmarks. If your investments are at least matching those benchmarks, that realization might help you feel better about your long-term strategy. Just because a particular index may have dropped doesn't necessarily mean your entire portfolio is down by the same amount. Even when everything seems to be struggling, some asset classes may be struggling less than others.

Telling yourself that this too shall pass

The stock market is historically cyclical. Though past performance is no guarantee of future results, there have been a half-dozen previous bear markets--declines of 20% or more--since the early 1970s,* and though it may have taken a while, the market eventually bounced back every time. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Neither the ups nor the downs are likely to last forever, even though at the time they may feel as though they will. Even in the midst of the Great Depression, there were short-term rallies and trading opportunities. And in some cases, people built fortunes over time by investing carefully just when things seemed bleakest. Even if you feel you need to make changes in your portfolio, they don't necessarily need to happen all at once. Don't hesitate to get expert help.

*Source: Stock Trader's Almanac 2011

Remembering your road map

If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into a type of investment you feel is well-positioned for the future. You could set a stop-loss order to prevent your investment in a security from falling below a certain level, or have an informal threshold below which you will not allow a given investment to fall before selling. Though all investing involves risk, including the possible loss of principal, and there can be no guarantee that any strategy will be successful, there are many possible ways to pursue your investment goals. Getting expert help can assist you in determining which if any might be useful to you.

This article was provided by Forefield and distributed by Lawrence Sprung.

Deadline Approaching for Undoing a 2010 Roth IRA Conversion

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 12 Sep 2011 13:11:00 +0000

If you converted a traditional IRA to a Roth IRA in 2010, and your Roth IRA has sustained losses as a result of the recent market downturn, you may want to consider whether it makes sense to undo (recharacterize) your conversion. You have until October 17, 2011, to undo your 2010 conversion. (If you've already filed your federal income tax return for 2010, you'll need to file an amended return if you recharacterize.) A recharacterization can help you avoid paying income tax on the value of IRA assets that have been lost in the downturn. When you recharacterize, your conversion is treated for tax purposes as if it never happened.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2010. However, due to the recent market volatility, that Roth IRA is now worth only $60,000. If you don't undo the conversion you'll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you undo the conversion, you'll be treated for tax purposes as if the conversion never happened, and you'll wind up with a traditional IRA worth $60,000--and no resulting tax bill.

Conversions made in 2010 present special planning issues. A one-time rule gives you the option of including all of the income from your 2010 conversion on your 2010 federal tax return, or reporting half of the income in 2011 and the other half in 2012. If you recharacterize, you'll lose the ability to utilize this special deferral rule.

If you recharacterize your 2010 conversion, you're allowed to convert those dollars (and any earnings) to a Roth IRA again ("reconvert") but you'll have to wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you recharacterized, and any earnings, is subject to a 30-day waiting period, any additional amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time. If you reconvert in 2011, then all taxes due as a result of the conversion will be included on your 2011 federal income tax return.

(You can also recharacterize a 2011 Roth conversion. However, the deadline for doing so isn't until October 17, 2012. If you recharacterize a 2011 conversion, you cannot reconvert those dollars until January 1, 2012, or, if later, 30 days following the recharacterization.)

Of course, the current market downturn also presents an opportunity to convert additional traditional IRA assets to a Roth at a potentially lower tax cost than just a few months ago.

Whether it makes sense to recharacterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA, the potential value of the special 2010 tax deferral rule to you, and your expectations of where the markets may be headed. Your financial professional can help you decide if a recharacterization is right for you.

This article was provided by Forefield and distributed by Lawrence Sprung.

Market Volatility: Looking for Opportunity

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Tue, 06 Sep 2011 13:32:00 +0000

In Chinese, the word "crisis" is composed of two parts. One symbolizes "danger"; the other represents "opportunity." If you can keep your head while all around you are losing theirs, you may be able to take advantage of remarkable opportunities. Though all investing involves risk, including the possible loss of principal, and there can be no guarantee that any strategy will be successful, your financial professional may be able to help you decide if any of the following may be appropriate for you.

Rebalancing at a discount

If you rebalance your portfolio periodically to try to maintain a certain percentage of your assets in a variety of investment types, market volatility might offer a good opportunity to consider your level of diversification. Rather than abandoning a single asset class entirely, you might look at adjusting your portfolio in a way that spreads your bets across a wider range of asset classes. Though diversification can't guarantee a profit or insure against a loss, of course, it might help better position your portfolio for the future. And the silver lining to indiscriminate broad-based market turmoil is that depending on the types of investments you want to add to your portfolio, you may be able to acquire them at a discount.

Being willing to use tough times

Anyone can look good during bull markets; being able to learn from a volatile market can better prepare you for the future. Sometimes the best strategy is to take a tax loss if that's a possibility, learn from the experience, and apply the lesson to future decisions. There are other ways to wring some benefit from a down market. If you've been considering whether to convert a tax-deferred plan whose value has dropped dramatically to a Roth IRA, a lower account balance might make a conversion more attractive. Though the conversion would trigger federal income taxes, that tax would be based on the reduced value of your account. A financial professional can suggest whether and when a conversion might be advantageous. Also, some sound research might turn up buying opportunities on investments whose prices are down for reasons that have nothing to do with the fundamentals.

Playing defense

During volatile periods in the stock market, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities, which tend to experience relatively stable demand for their goods and services whether the economy is doing well or poorly (though like all stocks, those sectors involve their own risks). Businesses in defensive sectors aren't immune from economic hard times, overall market movements, or problems within individual companies. However, the ups and downs of stocks considered "defensive" have generally been a bit less dramatic than in sectors where revenues are heavily affected by the economic climate (past performance is no guarantee of future results, of course). Dividends also can help cushion the impact of price swings. Dividend income has represented roughly one-third of the average monthly total return on the Standard & Poor's 500 stocks since 1926.

Using cash to help manage your mindset

Holding cash and cash alternatives can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful investment decisions instead of impulsive ones. A cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you're positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

That doesn't necessarily mean you should convert your entire portfolio into cash. A period of extreme market volatility can make it even more difficult than usual to pick the right time to make any large-scale move. Watching the market move up after you've abandoned it can be almost as painful as watching it go down. And are you sure you'll be able to pick the right time to move back into the market? Finally, an all-cash portfolio may not keep up with inflation over time; if you have long-term goals, consider the impact of a major change on your ability to achieve them. An appropriate asset allocation that takes into account your time horizon and risk tolerance should provide you with enough resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you've used leverage, a margin call.

Checking your withdrawal rate

If you're retired and relying on your investments to produce an income, market volatility can be especially challenging. If your nest egg has shrunk as a result of market turmoil, you may need to rethink the rate at which money is taken out. If you currently increase the amount you withdraw from your portfolio each year by enough to account for inflation, you may be able to do away with those increases for a year or two, especially if inflation is relatively benign.

If you're withdrawing, say, 4% of your portfolio per year but you're concerned about losses, you might consider not automatically withdrawing the same dollar amount in upcoming months. Instead, you could base your 4% withdrawals on your portfolio's current value and withdraw that amount. For example, if you've been withdrawing 4% of a $1.2 million portfolio that is now worth $900,000, you could withdraw $36,000 next year--4% of $900,000--instead of the previous $48,000. You also may want some expert help in determining whether your withdrawal rate itself--the percentage of your portfolio you withdraw each year--needs to be adjusted. Trimming your budget or finding additional income sources might help you avoid having to sell at an inopportune time.

Staying on track by continuing to save

Regularly adding to an account that's designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging. If you're using dollar-cost averaging--investing a specific amount regularly regardless of fluctuating price levels--you may be getting a bargain by continuing to buy when prices are down. However, you'll also need to consider your financial and psychological ability to continue purchases through periods of low price levels or economic distress; dollar-cost averaging loses much of its benefit if you stop just when prices are reduced. And it can't guarantee a profit or protect against a loss.
If you just can't bring yourself to invest during a period of uncertainty, you could continue to save, but direct new savings into a cash equivalent investment until your comfort level rises. Though you might not be buying at a discount, you'd at least be creating a pool of money to invest when you're ready. The key is not to let short-term anxiety make you forget your long-term plan.

This article was provided by Forefield and distributed by Lawrence Sprung.

Market Volatility and Your Emotions

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 29 Aug 2011 15:37:00 +0000

Trust as Beneficiary of Traditional IRA or Retirement Plan

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 22 Aug 2011 12:38:00 +0000

What is it?

A trust is a legal entity that you can set up and use to hold property for the benefit of one or more individuals (the trust beneficiaries). Every trust has one or more trustees charged with the responsibility of (1) managing the trust property, and (2) distributing trust income and/or principal to the trust beneficiaries according to the terms of the trust agreement. (A trustee can be an individual or an institution, such as a bank.) Many different types of trusts can be used to achieve a variety of objectives.

You may be able to designate a trust as beneficiary of your IRA or employer-sponsored retirement plan, if the IRA custodian or plan administrator allows such a designation. If the trust meets certain requirements, the beneficiaries of the trust can be treated as the designated beneficiaries of the IRA or retirement plan for purposes of calculating the distributions that must be taken following your death (required post-death distributions). As a designated beneficiary, better tax deferral opportunities are available.

Caution: This discussion applies to qualified employer-sponsored retirement plans and traditional IRAs, not to Roth IRAs. Special considerations apply to beneficiary designations for Roth IRAs.

Caution: Employer-sponsored qualified plans may require that you designate your spouse as beneficiary, unless your spouse signs a waiver allowing you to name a different beneficiary.

Naming a trust as beneficiary usually will not affect required minimum distributions during your life

Under federal law, you must begin taking annual required minimum distributions (RMDs) from your traditional IRA and most employer-sponsored retirement plans (including 401(k)s, 403(b)s, 457(b)s, SEPs, and SIMPLE plans) by April 1 of the calendar year following the calendar year in which you reach age 70½ (your "required beginning date"). With employer-sponsored retirement plans, you can delay your first distribution from your current employer's plan until April 1 of the calendar year following the calendar year in which you retire if (1) you retire after age 70½, (2) you are still participating in the employer's plan, and (3) you own 5 percent or less of the employer.

Your choice of beneficiary generally will not affect the calculation of your RMDs during your lifetime. An important exception exists, though, if your spouse is your sole designated beneficiary for the entire distribution year, and he or she is more than 10 years younger than you. The same exception may also apply if you name a trust as your sole beneficiary, and the sole beneficiary of the trust is your spouse who is more than 10 years younger than you.

If you name a trust as your beneficiary, the beneficiaries of the trust may be treated as the IRA or plan beneficiaries for purposes of required post-death distributions. This typically means that the trust beneficiaries will be able to use the life expectancy method to calculate distributions after your death (generally based on the life expectancy of the oldest trust beneficiary). See below for additional information.

Caution: If a trust is a designated beneficiary, all beneficiaries of the trust are considered in determining the oldest beneficiary. The only exception is an individual whose benefit is contingent on another beneficiary dying prior to the payout of the entire IRA or plan balance.

Caution: The calculation of RMDs is complex, as are the related tax and estate planning issues. For more information, consult a tax professional.

Caution: The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.

What rules must be followed for a trust beneficiary to qualify as a designated beneficiary?

Certain special requirements must be met in order for an underlying beneficiary of a trust to qualify as a designated beneficiary of an IRA or retirement plan. The beneficiaries of a trust can be designated beneficiaries under the new IRS distribution rules only if the following four trust requirements are met in a timely manner:

· The trust beneficiaries must be individuals clearly identifiable (from the trust document) as designated beneficiaries as of September 30 following the year of your death.

Caution: Final IRS regulations state that trust beneficiaries may not use the "separate account" rules that might otherwise allow each beneficiary to use his or her life expectancy when calculating required post-death distributions. You may need to establish separate trusts for each beneficiary to accomplish this goal. Consult an estate planning attorney.

· The trust must be valid under state law. A trust that would be valid under state law, except for the fact that the trust lacks a trust "corpus" or principal, will qualify.
· The trust must be irrevocable, or (by its terms) become irrevocable upon the death of the IRA owner or plan participant.
· The trust document, all amendments, and the list of trust beneficiaries (including contingent and remainder beneficiaries) must be provided to the IRA custodian or plan administrator by the October 31 following the year of your death.

Caution: There is an exception to the above deadline in cases where the sole beneficiary of the trust is your spouse who is more than 10 years younger than you, and you want to base lifetime RMDs on joint and survivor life expectancy. In this case, trust documentation should be provided before lifetime RMDs begin.

In addition to these requirements, a surviving spouse will not be considered the sole beneficiary of a trust if any of the IRA or plan funds in the trust can be accumulated during the surviving spouse's lifetime for the benefit of remainder beneficiaries.

Caution: You should consult an estate planning attorney regarding the above requirements, as a mistake may prove costly.

Advantages of naming a trust as beneficiary

A trust beneficiary can be treated as the IRA or retirement plan beneficiary

As mentioned, if you name a trust as beneficiary of your IRA or plan and meet certain requirements, the individuals named as beneficiaries of the trust can be treated as the designated beneficiaries of the IRA or plan. This is significant because it typically allows you to provide the individual trust beneficiaries with the same post-death options they would have if you named them directly as the IRA or plan beneficiaries. These individuals will generally have the opportunity to calculate post-death distributions using the life expectancy method (provided that the IRA custodian or plan administrator permits this method), potentially stretching distributions over many years. A longer post-death payout period will spread out the beneficiaries' income tax liability on the funds and prolong tax-deferred growth in the IRA or plan.

The only situation in which naming a trust as the IRA or plan beneficiary will limit post-death distribution options is when you want to provide for your surviving spouse. In this case, naming your spouse directly as IRA or plan beneficiary is generally a better strategy for income tax planning purposes (but maybe not death tax planning purposes) than naming a trust that has your spouse as beneficiary.

Caution: If the life expectancy method is used, post-death distributions must begin no later than the December 31 following the year of your death, and must be based on the single life expectancy of the oldest beneficiary of the trust (i.e., the one with the shortest life expectancy).

Caution: If the trust you have designated as IRA or plan beneficiary is not properly designed, you may be treated as if you died without a designated beneficiary. That would likely limit the payout period for post-death distributions, in many cases considerably.

Naming a trust can allow you to retain control after your death

When you designate one or more individuals directly as beneficiaries of your IRA or retirement plan, after your death, those individuals are generally free to do with the inherited funds as they please. This could mean, among other things, withdrawing all of the funds in one lump sum and incurring a large income tax bill. However, you can retain some control over the funds after your death by setting up a trust for the benefit of your intended beneficiaries, and then naming that trust directly as beneficiary of your IRA or plan. Your intended beneficiaries will still receive the IRA or plan funds after you die, but according to your wishes as spelled out in the trust document. This often gives you the ability to control the timing and amounts of distributions, preventing your children or other trust beneficiaries from squandering the funds.

Caution: In some cases, the tradeoff for receiving tax benefits may involve following IRS rules on distributions instead of completely designing your own distribution provisions for your trust. Also, income that is retained in a trust and not paid out to beneficiaries may be heavily taxed for income tax purposes.

Assets held in a trust may be protected from creditors

IRA or retirement plan funds left to a properly drafted trust for the benefit of your intended beneficiaries may enjoy considerable protection against their creditors, at least as long as those funds remain in the trust. In fact, leaving retirement assets to your beneficiaries via a trust will often provide greater creditor protection than if you left those assets directly to your beneficiaries. This can be a major advantage if one or more of your beneficiaries has substantial unsecured debts. Consult an estate planning attorney for further details, and to find out what type of trust will provide the most creditor protection.

A QTIP trust for your spouse may be beneficial

A qualified terminable interest property (QTIP) trust is a type of marital trust that allows you to provide for your surviving spouse during his or her lifetime, defer estate tax at your death, and control who the ultimate beneficiaries will be. If you name this type of trust as the beneficiary of some or all of your retirement assets, your spouse will receive distributions during his or her lifetime and, to the extent the entire account is not consumed, the balance may be left to your children and/or other beneficiaries. Retirement plan assets left to this type of trust are not subject to estate tax at your death, but the remaining assets will be included in your spouse's taxable estate at his or her death. Consult an estate planning attorney for further details.

Caution: To use a QTIP, your spouse must be a U.S. citizen. If your spouse is not a U.S. citizen, a special type of trust known as a qualified domestic trust (QDOT) may be appropriate. With a QDOT, as with a QTIP, all trust income is paid to your surviving spouse during his or her lifetime. However, unlike a QTIP where remaining trust assets are included in the surviving spouse's estate at his or her death for estate tax purposes, the assets will be taxed in the first spouse's estate at the surviving spouse's death or upon the earlier withdrawal of principal. Consult an estate planning attorney for further details.

A credit shelter trust may be beneficial

In some cases, you may want to name a certain kind of estate-tax-saving trust as the beneficiary of some or all of your IRA or retirement plan assets. This type of trust goes under many names, including "credit shelter trust," "B trust," "bypass trust," and "exemption trust." The size of the trust is usually tied to the size of the federal applicable exclusion amount ($3.5 million in 2009, $2 million in 2008).

The purpose of this type of trust generally is to allow your spouse (or other trust beneficiaries) to benefit from the assets placed in the trust, but to exclude those assets from estate tax, not only at your death, but also at your surviving spouse's death. Consult an estate planning attorney for further details.

Caution: If too much or all of your estate goes into this type of trust under the increasing applicable exclusion amount, then your surviving spouse may not be adequately provided for, unless you have specific provisions added to the trust document.

Caution: Since this type of trust may be forever exempt from estate tax, you may not want to diminish its value by funding it with retirement assets that are subject to income tax. If possible, other assets might be more appropriate sources of funding for the trust.

Disadvantages of naming a trust as beneficiary

Naming a trust for the benefit of your spouse may limit post-death options

If you want to provide for your spouse after your death, you can set up a trust for the benefit of your spouse, and then name that trust directly as beneficiary of your IRA or retirement plan. Your spouse, as beneficiary of the trust, could then be considered a designated beneficiary of the IRA or plan (as long as all of the above requirements are met). However, think carefully and seek professional advice before making this beneficiary choice. The use of a trust may limit or rule out certain post-death options that would otherwise be available to your spouse if he or she were named directly as beneficiary of the IRA or plan.

For example, under the minimum required distribution rules, your spouse would lose the right to treat an inherited IRA as his or her own account (even if your spouse were the sole beneficiary of the trust). If you want your spouse to ultimately receive your IRA or plan assets, the best way to achieve this goal is typically to directly name your spouse as beneficiary of those assets (unless there are specific reasons for using a trust instead). Naming your spouse as primary beneficiary provides greater options and maximum flexibility in terms of post-death distribution planning.

Caution: Nonspouse beneficiaries cannot roll over inherited funds to their own IRA or plan. However, the Pension Protection Act of 2006 lets a nonspouse beneficiary make a direct rollover of certain death benefits from an employer-sponsored retirement plan to an inherited IRA, effective for distributions received after 2006. However, plans are not required to offer this rollover option until 2010.

Trusts can be complicated and costly to set up

Setting up a trust can be expensive, and maintaining it from year to year can be burdensome and complicated. So, the cost of establishing the trust and the effort involved in properly administering the trust should be weighed against the perceived advantages of using a trust as an IRA or retirement plan beneficiary. In addition, remember that if the trust is not properly drafted, you may be treated as if you died without a designated beneficiary for your IRA or plan. That would likely shorten the payout period for required post-death distributions. Provisions of your trust need to take into account laws regarding the payout of trust income in connection with estate tax planning issues. Also, funding a trust that is exempt from death tax (e.g., credit shelter trust) with assets that have a built-in income tax liability reduces the net amount really in this trust.

Also, depending on the purpose of the trust and other factors, a trust may not be worthwhile. For example, the amount that is exempt from federal estate tax is increasing over the years until 2010, when federal estate tax is scheduled to be repealed for one year. (It is scheduled to be reinstated the following year.) Depending on the size of your estate and the amount of the estate tax exemption in the year of your death, using a trust for estate tax purposes may or may not make sense. Consult an estate planning attorney for further guidance.

This article was provided by Forefield and distributed by Lawrence Sprung.

FUTA Surtax Expires

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 15 Aug 2011 15:05:00 +0000

Federal Unemployment Tax Act (FUTA) surtax expired June 30, 2011

Business owners received a gift from the federal government recently: the temporary 0.2% Federal Unemployment Tax Act (FUTA) surtax expired June 30, 2011.

The surtax was part of the 6.2% unemployment tax rate that employers pay to the IRS on the first $7,000 of wages paid annually to each employee. The 6.2% gross rate represented a permanent tax rate of 6% and a temporary surtax of 0.2%.

Note: There is a 5.4% credit available for employers who pay their state unemployment taxes in a timely manner. This change yielded a net tax rate of 0.8% before the expiration of the 0.2% surtax, and now yields a net rate of 0.6%.

The 0.2% surtax was passed in 1976, and has been extended eight times. The surtax was most recently extended through 2010 and the first six months of 2011 by the Worker, Homeownership, and Business Assistance Act of 2009. In his budget, President Obama proposed making the surtax permanent. Congress, however, has allowed the provision to lapse, and it is not clear whether the surtax will be reinstated, retroactively or otherwise. Retroactive action could place employers in a difficult situation when calculating future required unemployment tax deposits (employers with an annual unemployment tax obligation exceeding $500 must deposit their taxes quarterly). The IRS has informally indicated that it will waive penalties on employers that calculate the tax at a 6% rate if Congress does retroactively reinstate the surtax.

The expiration of the surtax is expected to reduce federal unemployment taxes by $1.4 billion per year, or about $14 per employee per year.

This article was provided by Forefield and distributed by Lawrence Sprung.

Borrowing from Your 401(k)

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 08 Aug 2011 17:51:00 +0000

The basics of borrowing

A 401(k) plan will usually let you borrow as much as 50% of your vested account balance, up to $50,000. (Plans aren't required to let you borrow, and may impose various restrictions, so check with your plan administrator.) You pay the loan back, with interest, from your paycheck. Most plan loans carry a favorable interest rate, usually prime plus one or two percentage points. Generally, you have up to five years to repay your loan, or longer if you use the loan to purchase your principal residence.

The opportunity cost

When you take a loan from your 401(k) plan, the funds you borrow are removed from your plan account until you repay the loan. While removed from your account, the money isn't continuing to grow tax deferred within the plan. So the economics of a plan loan depend in part on how much those borrowed funds would have earned if they were still inside the plan, compared to the amount of interest you're paying yourself. This is known as the opportunity cost of a plan loan, because you may miss out on the opportunity for more tax-deferred investment earnings.

Can you continue to contribute to the plan?

If you take a loan, will you be able to afford to pay it back and continue to contribute to the plan at the same time? If not, borrowing may be a very bad idea in the long run, especially if you'll wind up losing any employer matching contributions.

What if your employment terminates?

If you terminate employment, your plan will typically provide that your loan is immediately payable. If you can't repay the loan, the outstanding balance will be treated as a taxable distribution to you (reduced by any after-tax contributions you've made). And if you're not yet 59½, a 10% early distribution penalty may also apply to the taxable portion of your distribution.

However, if you borrow from a Roth 401(k) account and you don't repay the loan, there will be no income tax consequences if your distribution is "qualified" (that is, your account satisfies a five-year holding period requirement, and you're either 59½ or disabled). Even if your distribution isn't qualified, only the earnings you've borrowed from your account, not your own contributions, will be subject to tax and potential penalty.

When should you consider a loan?

Plan loans may make sense in certain cases (for example, to pay off high-interest credit card debt, or to purchase a home). But make sure you compare the cost of borrowing from your plan with other financing options, including loans from banks, credit unions, friends, and family. To do an adequate comparison, you should consider:

Interest rates with each alternative
Whether the interest will be tax deductible (for example, interest paid on home equity loans is usually deductible, but interest on plan loans usually isn't)
The amount of investment earnings you may miss out on by removing funds from your 401(k) plan

This article was provided by Forefield and distributed by Lawrence Sprung.

The U.S. Debt Limit: Questions and Answers

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 01 Aug 2011 12:27:00 +0000

As August 2 approaches, you'll likely hear increasingly urgent debate over the nation's debt ceiling. That's the approximate date by which the Treasury estimates it will no longer be able to borrow under the current $14.3 trillion limit. Treasury officials have warned that if the Treasury can no longer borrow money, the U.S. might default on its existing obligations--in other words, be unable to make payments it already owes, whether those be for Treasury securities or government programs.

President Obama, Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke have warned that not raising the debt limit would have severe consequences. Leaders of both parties have said that the issue must be addressed, and have put forward proposals for tying any increase to tackling the country's budget deficit. However, they differ on how to begin to reduce that deficit.

While the debate is taking place right now, here are some answers to frequently asked questions that might help you understand the issues involved.

What is the debt ceiling?

The debt ceiling represents a limit on the amount the U.S. Treasury is allowed to borrow to manage the national debt (the total amount currently owed by the U.S. government). Before World War I, Congress often approved the terms of individual debt instruments issued by the Treasury to pay for spending authorized by Congress, including maturities, interest rates, and the types of financial instruments used. Eventually, members decided in 1939 to set an overall limit on the total amount the Treasury could borrow to pay the nation's bills without congressional authorization.

An increase in the debt limit does not authorize additional governmental spending; only Congress can approve future spending. However, Treasury officials have said that if the limit is not raised, the government would not be able to pay bills that have already been incurred. According to the Congressional Research Service (an arm of Congress), the debt ceiling has been increased 78 times since 1960 (10 times just since 2001), under both Democratic and Republican administrations.

The national debt has two aspects. Debt held by the public occurs when investors buy debt instruments sold by the Treasury to finance budget deficits and pay bills; it represents almost two-thirds of the current debt. Debt held by government accounts is created when the Treasury borrows from government accounts such as the Social Security, Medicare, and Transportation trust funds.

What would happen if the debt ceiling isn't raised?

There's no way to know the precise or full impact, since a default on the country's obligations is unprecedented in U.S. history. However, the Treasury is responsible for payment of a broad range of obligations that include not only Treasury bonds, notes, and bills, but also Social Security and Medicare benefits, military salaries, interest on the current national debt, and tax refunds, to name only a few.

Technically, the $14.3 trillion ceiling was exceeded in May. However, the Treasury has been able to use certain accounting measures to temporarily extend the nation's ability to borrow.

Bond rating agencies have already warned that an interruption in or curtailing of payments owed by the U.S. government would harm the nation's credit rating, which is currently among the highest in the world. If that happened, or if the country actually had to default or restructure payment schedules, greater uncertainty about the United States' ability to pay its bills would mean that both domestic and foreign investors would likely demand higher interest rates for buying Treasury securities.

Those higher interest rates would increase the country's borrowing costs, making the national debt problem even worse in the long term. They might also result in higher interest rates for other, nongovernmental loans such as mortgages, which some observers worry could hamper economic recovery. And even if there were technically no default, the mere absence of an agreement that addresses the issue before August 2 would likely raise the global anxiety level substantially.

Haven't we survived government shortfalls in the past?

Governmental funding gaps have occurred more than a dozen times in the last three decades, according to the Congressional Research Service. The most recent was in 1995-1996, when the failure of the Clinton administration and the Republican-led Congress to reach agreement on a spending bill led to a temporary government-wide shutdown. However, never in the country's history has it failed to pay its legal obligations--one reason why Treasury securities have historically been considered one of the safest investments in the world.

This article was provided by Forefield and distributed by Lawrence Sprung.

Money Market Deposit Accounts

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 18 Jul 2011 16:01:00 +0000

What is it?

Money market deposit accounts are like money market mutual funds, but deposit accounts are FDIC insured, while mutual funds are not.

Banks, savings and loan associations, and credit unions began offering money market deposit accounts in 1982 in response to the growth of money market mutual funds that were being offered through brokers and mutual fund companies.

The rate of interest paid on money market deposit accounts rises and falls with interest rates in general. Most financial institutions require a minimum deposit and may charge you fees if your balance falls below a minimum level.

Depositors earn interest (usually credited daily) based on current money market rates, which are usually reset weekly. Money market deposit accounts typically earn a rate of interest that is higher than rates paid on savings or checking accounts but lower than rates paid on certificates of deposit (CDs).

Strengths

Flexibility and liquidity

It's easy to open a money market deposit account, and you can make deposits and withdrawals virtually whenever you like. The highly liquid nature of these accounts makes them valuable for storing money you want to hold in reserve for future use or in case of an emergency.

Higher interest rates than savings accounts

Because money market deposit accounts invest in short-term debt instruments offering the potential for relatively high yields, they usually provide a return that is approximately one or two percent greater than a traditional savings account.

FDIC insured

Most money market deposit accounts offered by chartered institutions are insured for up to $250,000 per depositor per bank by the Federal Deposit Insurance Corporation (FDIC). Retirement accounts also are generally insured up to $250,000. Credit unions provide comparable insurance coverage. This insurance applies to each ownership format per bank. For example, a married couple with $250,000 each in accounts owned separately by each person and an additional $400,000 in an account held jointly in both their names would qualify for FDIC coverage of the entire $900,000.

Tradeoffs

Restrictions may apply

Some money market deposit accounts require large minimum deposits and may limit the number of withdrawals you can make during any given period. If you fail to maintain a minimum balance or if you exceed the permitted number of withdrawals, a penalty fee may be imposed. In addition, although some money market deposit accounts offer check-writing privileges, your bank may limit the number of checks you can write during a period or impose a minimum amount per check.

Tip: Read the fine print. Since restrictions may be different at each financial institution, shop around for the account best suited to your needs.

Tax considerations

Generally, interest on a money market deposit account is taxable in the year it is earned.

This article was provided by Forefield and distributed by Lawrence Sprung.

Standard Mileage Rate Increases for Second Half of 2011

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Tue, 05 Jul 2011 15:06:00 +0000

The IRS has announced an increase in the optional standard mileage rates for the second half of 2011 for use in computing the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes.

Effective July 1 through December 31 of 2011, the standard mileage rates are as follows:

Business use of auto: 55.5 cents per mile may be deducted (up from 51 cents per mile for the first six months of 2011) if an auto is used for business purposes

Charitable use of auto: 14 cents per mile may be deducted (remaining unchanged) if an auto is used to provide services to a charitable organization

Medical use of auto: 23.5 cents per mile may be deducted (up from 19 cents per mile for the first six months of 2011) if an auto is used to obtain medical care (or for other deductible medical reasons)

Moving expense deduction: 23.5 cents per mile may be deducted (up from 19 cents per mile for the first six months of 2011) if an auto is used to effect a work-related move to a new home

IR-2011-69 contains additional details.

This article was provided by Forefield and distributed by Lawrence Sprung.

Leasing a Car

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 27 Jun 2011 14:03:00 +0000

Definition

When you lease a car, you never actually own the car. Instead, you receive the use of the car for two to five years in exchange for your monthly payments. At the end of your lease term, you return the car to the dealer, although you may have the option to buy the car at the end of the lease. There are two types of leases: the closed-end lease and the open-end lease. With a closed-end lease you make your lease payments during the lease term, and at the end of the term you simply turn in the car (assuming you haven't exceeded your mileage allowance or damaged the car). However, if you choose an open-end lease, you may be responsible for a large additional payment at the end of the lease if the value of the car is lower than expected at the end of the term.

Prerequisites

· Your needs and attitudes fit the leasing profile

Key Strengths

· You can get a new car every few years
· Monthly payments are generally lower than car loan payments
· Down payment requirements are generally less stringent than for buying the same car
· It eliminates the hassle of disposing of your old car

Key Tradeoffs

· Lease contracts can be extremely confusing
· Penalties are generally assessed for early termination, exceeding your mileage limit, and excess wear and tear
· More liability insurance may be required on a leased car
· Total costs may be high if you buy the car at the end of the lease
· If you choose not to lease again, you have nothing to sell or trade in for a down payment on another car

How Is It Implemented?

· Decide what type of car you want
· Figure out the cost of buying vs. leasing the car you choose
· Research lease terms available from various sources
· Negotiate lease terms with the lessor of your choice
· Get it in writing

This article was provided by Forefield and distributed by Lawrence Sprung.

Disaster Survivors Frequently Targeted by Scam Artists

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 20 Jun 2011 14:44:00 +0000

If you're a survivor of the recent flooding, tornadoes, and thunderstorms that have affected parts of the country, you've probably got your hands full getting your life back in order. Unfortunately, the aftermath of these disasters also brings out unscrupulous scam artists looking to prey on disaster victims. Some of the most common scenarios for fraud include home repair, credit fraud, and fraudulent charities for disaster victims.

Home repairs

When dealing with home repair contractors, be cautious. Before hiring anyone, contact your insurance company, which may require that an adjuster appraise the damages before you do any extensive repairs or rebuilding. You may also want to ask your insurance company to recommend reputable contractors. When the adjuster arrives, be sure to check his or her identification and license information. Some scams involve a purported public adjuster disappearing with a victim's money after charging a large fee to handle the claim. Other potential scams could include filing false or inflated claims against your insurance policy; or worse, getting your personal information such as your Social Security number in order to commit identity theft.

Additionally, beware of contractors arriving in unmarked vehicles, and going door to door offering to help with repairs. Since most states require contractors to be licensed, ask to see a contractor's license, and if presented, write down the license number.

If you have extensive work to be done, try to get several written bids, then get a written contract that includes all costs, a description of the work to be done, a schedule for completion, and any guarantees that the contractor offers. While it's not uncommon to pay for a portion of the job up front it's also not unheard of for a phony contractor to "take the money and run." So don't be lured into paying the entire cost before the job is completed, even if it's to get a "great deal." And never pay cash; use a check or credit card.

Credit fraud

Surviving a disaster may leave you desperate for cash. Disaster victims may get a phone call offering a "guaranteed" loan or credit card at very low rates to help with the money crunch. While the rates for the purported loan or credit may be low, these offers usually require an up-front security or processing fee. Once paid, neither the loan nor credit card is ever delivered. There are some legitimate companies that do offer loans or credit to disaster victims. Most of these genuine companies will not "guarantee" credit before you apply, and they won't ask for a credit card number, bank account information, or Social Security number over the phone. And most reputable companies will operate through the mail or via the Internet, allowing you to do some research first. If the company says its offer is a "one time deal" that you can only take advantage of over the phone, chances are it's a scam.

Charitable fraud

You don't have to be a victim of a natural disaster to be caught in a related scam. You may want to help disaster victims by making donations to legitimate relief agencies, but there are also scammers looking to prey on your sympathies. Be leery of solicitors going door to door, even if they show credentials. If the solicitation is over the phone, ask for written information about the charity, including name, address, and website if available, and check with your state for information on the charity. Some phony charities will use a name similar to but not exactly the same as a well-known legitimate charity, so do some research before making that donation.

It is an unfortunate fact that there are individuals out there looking to prey on those who are the most vulnerable. Be cautious--if something seems too good to be true, it probably is. A little common sense can help you avoid becoming victimized a second time.

This article was provided by Forefield and distributed by Lawrence Sprung.

International, Global, Regional, and Emerging Markets Funds

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 13 Jun 2011 16:05:00 +0000

Looking beyond U.S. borders

In the past, American investors have focused largely on U.S. markets. However, that is rapidly changing. Although U.S. equities still represent the single largest segment of the global stock market, more than half of the world's total stock market capitalization lies outside the United States, and economic growth rates outside the United States have in some cases exceeded that of the United States. As a result, investors have increasingly begun to explore diversifying their holdings beyond U.S. borders. In the past, experts often recommended allocating no more than 10-20 percent of an investor's overall portfolio to international funds. However, with the growth of global markets, many experts now suggest an even higher percentage can be appropriate given the right circumstances.

Because economies in different parts of the world may move in different cycles, international diversification may help moderate the overall volatility of an investor's portfolio. However, on their own, overseas investments also can be more volatile than domestic investments because they are subject to special risks not associated with U.S.-only investments.

Mutual funds can be a particularly useful way to participate in overseas investments, for several reasons:

· Easy access to overseas markets--A mutual fund may be able to purchase securities that are either difficult or impossible to purchase individually. For example, to invest in a wide variety of securities that aren't traded on U.S. exchanges, you might have to set up accounts in many different countries and deal with multiple foreign currencies.
· Greater research capabilities--The availability and quality of investor information can vary greatly from country to country. For example, countries may have accounting and regulatory standards that are different from those of the United States. A mutual fund manager may have a greater ability to research and screen overseas securities than an individual investor might.
· Diversification--Like any mutual fund, a fund that invests overseas may offer greater diversification at a lower cost than you might be able to obtain on your own. It can diversify across not only many different securities but many different countries. However, diversification alone does not guarantee a profit or ensure against a loss.

Caution: It's important to remember that globalization has brought a greater correlation between the performance of U.S. and overseas markets than there used to be. That in turn has reduced to some extent the diversification benefits of investing overseas.

There also are tradeoffs to be considered that are unique to investing overseas:
· Geopolitical risk--Political and economic instability in a country can affect investment values, not only in that country but in its global trading partners. Factors such as nationalization of specific industries, currency measures, tax law revisions, and legislation that affects international trade all can have an impact on global investments. And in the case of international or global bond funds, a country's budget deficit or bond rating can affect the value of its bonds, and in turn any bond fund that holds them.
· Currency fluctuations--The value of holdings denominated in a foreign currency will fluctuate with the exchange rate between that currency and the U.S. dollar (see below).
· Liquidity risk--International markets may have much lower trading volumes than U.S. markets, and individual purchases may have a greater impact on an individual security and any funds that hold it.
· Market risk--Overseas markets can be more volatile than U.S. markets, and may require a longer holding period and greater risk tolerance to maximize the likelihood of a positive return.
· Higher costs--Because of the unique operational requirements of running an overseas investment, funds that invest overseas (including index funds) may have higher expenses and administrative fees than domestic funds. These added costs reduce your overall return and increase any losses.

Tip: Check on whether any domestic funds you already hold also include overseas holdings, and if so, what percentage of the overall portfolio they represent. Some mutual funds classified as domestic funds may have a surprisingly large percentage in overseas companies, particularly if a fund's name doesn't limit it geographically.

Tip: Remember that many large multinational U.S. companies now earn a large percentage of their revenues overseas. A mutual fund that invests in those companies can be another way to benefits from overseas growth.

You can invest internationally with either actively managed mutual funds, in which a manager selects specific countries and securities in which to invest, or by using an index fund that tracks one of the many indexes covering either a broad selection of countries or a more narrowly focused group.

Overseas funds come in many flavors, and terminology varies among investment firms. One company's international fund may be another's global or world fund. Be sure to obtain and read a fund's prospectus and carefully consider its investment objectives, risks, fees, and expenses before investing. And don't forget that just because it invests overseas does not mean that a foreign stock or bond fund is exempt from the same risks involved with any stock or bond mutual fund.

Currency fluctuations: To hedge or not to hedge?

U.S. investors may not get the same rate of return on a foreign investment as locals do. That's because exchange rates between the currencies of various countries are constantly changing. If a fund has holdings that are denominated in a foreign currency, those changes can affect the value of a portfolio when the position is translated into U.S. dollars. The value of those holdings may increase if that currency strengthens against the dollar; conversely, when the dollar rises, securities denominated in other currencies may lose value (at least for U.S. investors).
One factor to consider in your decision-making is whether a fund hedges its currency exposure. Some funds that invest overseas use forward contracts, currency futures, and other derivatives to try to limit the impact of those currency fluctuations on the value of their holdings. Others do not, hoping that any weakness in the dollar will increase the value of the fund's assets for U.S. investors. Still others may hedge only part of their currency exposure.

Whether you prefer an unhedged fund to try to benefit from possible currency fluctuations or one that uses hedges to manage the risk they involve, bear in mind that hedging currency exposure will increase a fund's expenses and therefore reduce its total return. And don't forget that currency movements are notoriously hard to predict; some of the best investors in the world have seen their expectations go awry.

Tax considerations

In addition to the general tax issues that apply to most mutual funds, overseas funds are subject to foreign income tax. Since these funds invest in foreign companies, they pay income tax to the countries in which those companies are based. Those taxes are generally passed along to shareholders, and your fund must notify you of your proportionate share of them. Don't worry that you'll find yourself writing individual checks to the revenue departments of foreign governments; foreign tax is deducted from the fund's assets and reported on the fund's yearly Form DIV-1099. This foreign tax is in addition to any U.S. taxes you might owe on dividends and/or capital gains distributed by the fund. However, you may be able to claim a deduction or a foreign tax credit on your federal income tax return for foreign tax paid. Consult a tax advisor for details.

International funds

An international fund (also known as a foreign fund) seeks investment opportunities--either stocks or bonds, depending on the type of fund--primarily outside the United States. Some of these opportunities arise because many solid top-performing companies are located in overseas countries such as Germany or Japan. Other opportunities arise because the economies of many countries or regions are poised for rapid growth. In either case, a diversified international fund can help manage country-specific risks.

If you're considering an international fund, it's especially important to find out where it invests. For example, some international funds exclude non-U.S. North American countries (Canada and Mexico); some don't. An international fund may focus on developed countries only, or mix both developed and emerging markets.

Global funds

These funds invest in securities whose issuers are located throughout the world, including the United States. As a category, they are generally viewed as the most stable of the overseas funds because they invest in the most diversified menu of countries from which to choose. Also, they tend to invest in large, well-established companies, though some also may have a portion of their assets in emerging markets.

Global funds take advantage of the increasing global interdependence of the business world. Many U.S. companies receive a large proportion of their revenues overseas, and the United States typically represents the largest single market for foreign companies. A global fund is designed to make the most of whatever markets around the world hold the most promise at any given time. The percentage of fund assets invested in U.S. stocks at any given time could vary widely, depending on how favorably U.S. companies compare with foreign companies. Typically, global funds invest the majority of their assets in foreign stocks.

One of the greatest strengths of a global fund is its potential reach. Because it invests all over the world, a global fund manager has greater flexibility; if one market or region is underperforming or is expected to underperform, a manager can shift assets to other parts of the world. (A global index fund has less short-term flexibility, since its securities selection will change only when the index does.)

Country and regional funds

Rather than investing across many different companies around the world, some funds specialize in one country or geographic region. For example, certain countries may have natural resources that can benefit from a commodities boom in oil or iron ore. Others may be attractive because of their large populations and rapid economic development. Still others might offer a relatively strong currency or stable political structure.

A single-country fund invests primarily in the equities of companies of a specific country. In some cases, however, country funds also invest in securities of companies outside the single country if those securities are expected to benefit from growth in the target country. A regional fund focuses on a particular part of the world, such as Europe or the Pacific Rim, buying the stock of companies that are headquartered in the region or that derive most of their business there.

Despite the important differences between them, country funds and regional funds share certain characteristics. For example, both limit their holdings to a narrower field than other global and foreign funds. In addition, most single-country or regional funds invest in equities rather than bonds, and normally pursue the investment objective of above-average capital appreciation (rising share price). Depending on where it invests, a single-country or regional fund also might be considered an emerging markets fund (see below).

Advantages

A fund that invests in a single country or region can help an investor make a narrowly focused investment without taking on the risk of buying an individual foreign stock. For example, a fund focused on a country whose economy is thriving because of its abundant natural resources might be used to try to capitalize on a commodities boom. Single-country funds also allow an investor who is familiar with a particular country or area to take advantage of that knowledge.
Tradeoffs
· Potentially greater risk than other overseas funds--Obviously, investing in a single region involves less diversification than investing around the world; investing in a single country means still less diversification. Investments in a single country are subject to political and economic conditions there. Even if there is no political or economic turmoil, there are always garden-variety changes in law and policy. For example, countries have been known to change tax policies and nationalize industries that are important to their economies. As a result, these funds should be regarded as a relatively small portion of a portfolio, and are normally not suitable for unsophisticated, risk-averse investors or those who need a reliable source of current income (few of these funds pay regular dividends).
· Increased exposure to currency fluctuations--Unless the fund hedges its currency exposure or the local currency is pegged to the dollar, the exchange rate between a single currency and the dollar can mean greater currency risk.

Emerging markets funds

These funds invest in countries or regions that have less fully developed economies, a population with a relatively low per-capita income, and/or a shorter history of participation in modern global markets. For example, despite their size and growing economic clout, China and India are both considered emerging economies because they are still undergoing substantial economic development and reform. Latin America, Eastern Europe, China, India, and the Far East all are considered to be emerging markets.

An emerging markets fund may focus on a broad representation of emerging markets or a narrow selection. For example, BRIC (Brazil, Russia, India, and China) countries have generated widespread interest among investors because of their growth rates and sizable populations, and some funds invest exclusively in these four countries.

Emerging markets hold great potential for investors who are comfortable with the greater level of risk involved. However, despite their promise, there is still a relative amount of uncertainty--especially in the short term--about whether and when these markets will ultimately realize their potential, and what crises might occur along the way. As a result, emerging markets funds are considered the riskiest of the overseas funds.

Advantages

· Growth potential--Growth rates in emerging regions and countries have begun to exceed those of the developed world, according to the CIA World Factbook. And some emerging markets have such enormous populations that many investors see the emergence there of a middle class with spending power as the next great global growth story. According to the CIA World Factbook, four countries alone--Brazil, Russia, India, and China--represent more than 40 percent of the world's population. That's a lot of untapped potential consumer demand for goods and services.

· Additional portfolio diversification--As with regional or single-country funds, emerging markets funds may offer a different level of portfolio diversification than international funds, which may rely more heavily on developed markets and therefore may more closely parallel conditions in the United States. For example, commodities feature prominently in many emerging economies, which may therefore respond somewhat differently to global economic conditions than countries focused on manufacturing or services.
Tradeoffs
· An emerging markets fund is likely to be more volatile than global or international funds, which may be dominated by the securities of larger companies in relatively developed countries
· Many emerging markets have had a history of political and economic instability
· The currencies of emerging market countries historically have been especially subject to volatility and the potential impact of inflation

This article was provided by Forefield and distributed by Lawrence Sprung.

Specialized Funds

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 06 Jun 2011 12:42:00 +0000

Narrowing your focus

One of the benefits of mutual funds is the diversification they offer. However, some are more diversified than others. Rather than taking a broad-based approach, some funds specialize. For example, a fund might invest in a subset of a general asset class, such as stocks or bonds. Or it might specialize in a particular way of investing, basing its investment objectives and securities selection on a clearly defined methodology. As with any mutual fund, information about a specialized fund's investment approach, objectives, risks, fees, and expenses are contained in its prospectus, which is available from the fund and which you should carefully review and consider before investing.

Though they are not necessarily appropriate for everyone, specialized funds can be particularly useful in helping to round out an already diversified portfolio.

Sector or niche fund

A sector fund invests primarily in the securities of companies that (1) are principally engaged in one segment of business activity, (2) belong to a group of industries, or (3) belong to a single industry. Areas that often are covered by sector funds include agriculture, health care, financial services, communications, technology, real estate, natural resources, and utilities, among others. These funds usually aim for capital growth, allowing investors to invest in a targeted industry or sector they think will do well in the future. They also may be referred to as "specialty funds" or "single-industry funds."

A sector fund's concentrated investment in a narrow slice of the market means that it can have strong returns when that sector experiences overall positive business trends over a relatively short time period. However, this narrow focus also can make a sector fund extremely volatile, which may result in sizable losses even when the broader market is performing well. For this reason, sector funds are not for everyone.

Benefits

· Potential for high returns--Many industries are highly cyclical in nature. If the industry in which a fund invests is in a strong part of its economic cycle, a sector fund may outperform the stock market as a whole.
· Less risky than investing in an individual company--Though diversification alone cannot guarantee a profit or ensure against a loss, there is less risk of losing your entire investment because of the fortunes of a single organization.
· Potential for capitalizing on or counteracting specific economic conditions or other market segments--Some industries tend to move in the opposite direction of others; for example, a natural disaster might create problems for insurance companies but spur new construction. Some funds specialize in investments that have traditionally been viewed as a hedge against inflation.

Tradeoffs

· Greater risk than a broadly diversified fund--Even though a fund may be diversified within its own industry grouping, its performance is still entirely dependent on that one industry. If the industry suddenly takes a sharp downturn or moves into a slow part of its business cycle, significant losses may result.
· Potential for double jeopardy--If your livelihood depends on a particular industry, you may be tempted to apply your knowledge of that industry by investing in a sector fund. However, you should remember that if your industry experiences difficulty, you could experience a double blow if both your income and your sector investment suffer.

Socially conscious/ethical investing funds

Socially conscious funds, sometimes known as socially responsible or ethical investing funds, are distinguished not by investing in a specific industry but by selecting investments according to a set of social, ethical, or religious priorities and guidelines. For example, a fund might avoid investing in particular companies, industries, or countries whose products, services, policies, or practices are at odds with the fund's social priorities. Examples of companies that often are excluded from socially conscious funds include those in the tobacco and gambling industries, those with significant interests in countries with repressive or racist governments, or those that contribute to environmental pollution. A fund also might actively seek as investment targets companies or industries that are perceived as supporting certain beliefs about religion, social justice, or ethical business practices.

If you feel strongly about the societal benefit or harm your investment might help support, a socially conscious fund can be both personally and financially rewarding. However, each fund has a unique set of investment guidelines, and anyone considering an investment in one should understand that specific fund's priorities and investing strategy to ensure that its goals match their own. Also, recognize that the fund may rule out many companies that have strong upside potential but whose activities don't fit the fund's agenda. That might or might not limit potential returns compared to funds with fewer restrictions. Though past performance is no guarantee of future results, reviewing data on the fund's track record can help you understand whether your principles may affect the return you can expect.

Nondiversified funds

Some funds focus their investing efforts by limiting the number of stocks the fund holds, investing a large percentage of assets in a single security. To meet the definition of a diversified fund, the SEC requires that at least 75 percent of a fund's portfolio must be diversified, meaning it can invest no more than 5 percent of that portion of the fund in a single company. Also, it cannot hold more than 10 percent of a company's outstanding stock. By contrast, half of a nondiversified fund--also known as a concentrated, compact, select, or focused fund--may be invested in as few as two securities (25 percent in each one). Generally, a nondiversified fund will hold fewer than 40 stocks; some hold fewer than 20.

The premise underlying a nondiversified fund is that most of any fund's returns are produced by a relatively few holdings. Nondiversified fund managers believe that to surpass average stock returns, the manager's attention and the fund's assets should be concentrated on his or her best investing ideas. According to this way of thinking, diversification is a double-edged sword. Just as it may help cushion the blow of poorly performing securities, diversification also can act as a drag on returns by reducing the impact of a portfolio's winners.

The potential downside to a nondiversified fund? Successful stock selection becomes even more essential than with a diversified fund. Also, the smaller the number of holdings, the greater the impact of gains or losses on a single stock; as a result, a nondiversified fund may experience relatively high volatility. Finally, because the number of holdings is so limited, a manager must be especially careful about choosing and monitoring each one. With a nondiversified fund, the manager's abilities become especially critical.

A nondiversified fund may be better suited to an aggressive investor, or one who also has other, more diversified holdings, than to a conservative investor with a lower risk tolerance.

Tax-efficient funds

Taxes are one of the most significant costs of investing, and tax planning can be a great concern for investors in mid to high tax brackets. A tax-efficient mutual fund (also known as a tax-managed fund) is designed and managed specifically to minimize its shareholders' income tax liability and maximize after-tax returns. Regardless of what specific investments a fund holds, its manager can employ a variety of strategies to avoid taxable distributions.

How taxes take a bite out of returns

When a fund sells securities in its portfolio, any net capital gains realized from sales are distributed to the fund's investors. As a shareholder, you generally must pay capital gains tax each year on your portion of the total capital gain distributions the fund pays out (unless the fund is in a tax-advantaged account). In addition, you may have current income from fund dividends, which include dividends and/or interest paid by the fund's individual securities. Some types of dividends and all interest payments are taxable at your ordinary income tax rate, whether received in cash or reinvested (again, except in the case of tax-sheltered retirement accounts). Dividends paid on stock mutual funds may be taxed at the lower long-term capital gains tax rates (for tax years 2003 through 2010).

What are some common tax-efficient strategies employed by these funds?

· Selling winners and losers together to offset capital gains--A tax-efficient fund may postpone selling appreciated securities until the sale of other securities in the portfolio produces capital losses that can offset those capital gains.
· Selling securities that have the highest cost basis--By taking cost basis into account when deciding which securities to sell, a manager may reduce the capital gain generated by the sale.
· Buying and holding--A portfolio manager who holds stocks for a long time rather than trading frequently avoids realizing capital gains that must be distributed annually to the fund's shareholders.

When is a tax-efficient fund useful?

Tax-efficient funds may be especially valuable for investors who are in a mid-level (25 percent) to high tax bracket, have reasonably large capital gains from mutual funds each year, or have other tax concerns. They are generally less helpful to short-term investors, or those whose money is in 401(k) plans or other tax-deferred vehicles.

How can I determine a fund's tax efficiency?

A fund's turnover ratio--the frequency with which the manager sells stocks in the portfolio during a calendar year--can indicate how tax efficient a fund might be. A turnover ratio of 100 percent means that the total value of all the fund manager's purchases of individual securities for the year equals the fund's total value. Generally, a fund with a low turnover ratio has lower realized gains.

A mutual fund must include its turnover ratio in its prospectus, which also must include its after-tax returns for 1-, 5-, and 10-year periods.

Inverse/bear market funds

An inverse fund is designed to mimic the performance of a particular market benchmark--except in reverse. It is inversely correlated to that benchmark (typically an index), and is designed to fall when its index rises, and rise when the index falls. In order to perform as a mirror image of an index, an inverse fund typically sells short futures contracts that are based on the chosen index. Not all funds geared toward bear markets are inverse index funds; some actively managed bear market funds may short individual stocks or invest part of the fund in defensive asset classes that are highly uncorrelated with the bulk of the portfolio.

In some cases, an inverse fund tries not only to move in the opposite direction from its index, but to move even more dramatically. It may use leverage to magnify its gains and losses--for example, to attempt to go up by twice as much as any drop in its benchmark. Of course, because leverage affects both gains and losses, a fund leveraged in that way also would likely go down by twice as much as any gain in the benchmark.

Inverse and bear market funds are one way to, in effect, short a particular market or sector rather than just individual stocks. As a result, they are sometimes used to hedge against the possibility that a long-only investment in a similar asset will lose value. They can be used to try to offset the risk of an individual sector, or to implement a market timing strategy. Inverse funds also can be used to try to profit from a declining market while restricting your potential loss; unlike shorting a stock or index, which does not limit your potential losses, the most you can lose with an inverse fund is your original investment plus any earnings (though a 100 percent loss may not seem like a great advantage).

Example(s): Jim has invested $50,000 in a mutual fund based on the S&P 500 index, and does not want to sell his shares because he would owe substantial capital gains taxes. However, he feels the stock market may be about to move down. He decides to buy $25,000 worth of shares of an inverse fund that also is based on the S&P 500. Shortly thereafter, the market takes a 10 percent drop, which means Jim's index fund investment is now worth $45,000. At the same time, Jim's inverse fund rises by 10 percent, so Jim's net loss on these two investments is now $2,500 instead of the full $5,000. If the S&P 500 had not dropped but had risen by 15 percent instead, Jim's $7,500 profit ($50,000 x 0.15 = $7,500) would have been cut in half, to $3,750, because the value of his inverse fund would have dropped $25,000 x 0.15 = $3,750).

Using inverse funds must be done with caution. The overall direction of the stock market over time has been up, so sustained use of an inverse fund might reduce long-term returns, and timing the market is notoriously challenging. Also, expense ratios, especially for funds that use leverage, might be relatively high. Finally, leveraged bear market funds that try to magnify an index's gains also mean correspondingly greater risk of loss.

Tip: Some exchange-traded funds also have similar inverse strategies.

Caution: An inverse fund may be designed to achieve its objective on a daily basis. However, any daily differences between the fund's performance and that of the benchmark index would compound over time; this is particularly true of a fund that employs leverage. Those differences can be magnified in volatile markets, and would tend to grow over time. If you're considering investing in such a fund, you should carefully assess the potential implications of holding it for an extended period of time.

Absolute return/market neutral funds

The typical mutual fund's performance is affected not only by a manager's skill in selecting securities but by the performance of the overall market. If the Standard & Poor's 500 Index is down, a fund that invests in similar stocks will likely move down as well. The measurement of how much of the variation in a fund's return is correlated to the behavior of the overall market is called its beta.

Some mutual funds attempt to achieve returns that neutralize market movements, so that the fund performs well regardless of whether a given market is up or down--at least in theory. Funds whose strategies try to neutralize the impact of market fluctuations are known as market neutral funds (sometimes called absolute return funds). Their managers aim not for relative return (performance relative to an appropriate benchmark) but for absolute return that can be generated regardless of market conditions. Typically, that number is over and above what can be earned in a cash equivalent such as a Treasury bill, though there's no assurance that goal will be achieved, or that such a fund won't suffer losses.

Most traditional mutual funds are long-only; they try to avoid investing in securities that are likely to drop in value. For a market neutral fund, such investments may be part of its game plan. There are many ways to pursue a market neutral strategy, but generally a manager tries to balance long investments with others that are likely to benefit from very different market conditions, and whose performance is not correlated with that of any long investments. For example, in addition to purchasing securities that are expected to increase in value, a market neutral fund might attempt to profit by selling short securities whose prices are likely to fall. Another manager might invest in two stocks or indexes whose prices generally move in tandem but currently diverge; the manager might sell one of them short while investing in the other on the theory that their prices will eventually converge again.

Typically, an equity market neutral fund will have roughly equal long and short positions; the idea is that the market exposure of each will cancel out the other. In theory, that would make a fund's performance independent of overall market movements. Because balancing long and short positions attempts to remove market performance as a contributing factor, in theory any return from a market neutral fund should be based purely on selecting the right securities (plus interest on any cash collateral resulting from the short sales). In a way, market neutral funds are the mirror image of index mutual funds, whose performance depends almost exclusively on market performance.

Market neutral investing strategies have been widely used by hedge funds, but some mutual funds also have adopted the approach, though there are more constraints on how a mutual fund may implement it. Managers often use sophisticated computer models to determine which investments might be highly uncorrelated, and therefore good candidates for a market neutral strategy. Depending on a fund's individual approach and objective, a market neutral strategy might involve not only stocks but debt derivatives, currencies, commoditie,s and arbitrage.

Benefits

· Returns are designed to neutralize the systematic risk involved with a given asset class. As a result, a manager's skill at securities selection may be less likely to be outweighed or hampered by factors unrelated to the specific portfolio.
· A market neutral portfolio attempts to produce a positive return during both down and up market cycles. As a result, it can be used to try to balance other investments whose returns are more tightly linked to overall market performance.

Tradeoffs

· Because the portfolio's return relies so heavily on the manager's correctly identifying both overvalued and undervalued securities, poor investment decisions may have greater impact on the portfolio than they might on a fund that also could benefit from a broad-based market rally.
· Unless the long and short portfolios are extremely well-matched and perform as expected, the fund may not be truly independent of market movements.
· Because such funds may have higher turnover, they may incur higher trading costs and therefore have higher expenses. Also, that higher turnover may mean higher capital gains that are passed through to investors, which in turn could mean higher capital gains taxes.
· Attempting to limit downside risk can also have the effect of limiting upside potential.

Long/short funds and 130/30 funds

As the name implies, a long/short strategy involves both long investments and short selling. In theory, a long/short fund manager attempts to profit from negative information about an investment that would otherwise be useless if the fund were long-only. By investing long in some securities and selling others short, a long/short strategy allows a fund manager to try to mitigate the impact of a market downturn, since the short sales would be intended to benefit from a drop in price. Many long/short funds are run according to quantitative models that identify candidates for investing, both long and short. However, some also screen potential investments by using fundamental analysis.

Though they may use similar techniques, long/short mutual funds are different from both market neutral funds and hedge funds. Long/short funds try to outperform a benchmark and reduce the impact of a down market; a long/short fund typically has a greater proportion of assets in long investments than it does in short sales. By contrast, a market neutral fund's objective in investing both long and short is to actually decouple the fund's performance from that of a given market, and it usually balances long and short investments almost equally. (However, different funs may have different levels of shorting.)

Compared to a hedge fund, a mutual fund is more tightly regulated in how extensively it can use hedging techniques. A mutual fund also provides greater liquidity than a typical hedge fund, though a long/short fund's fees may be higher than those of other types of mutual funds.

An extension of a long/short fund is what has become widely known as a 130/30 fund; in fact, such funds sometimes are known as active-extension or short-extension funds. The name is derived from the relative proportions of a fund's long and short investments; those proportions may vary from fund to fund. For that reason, they also are sometimes called 1X0/X0 funds. The X represents a variable number; for example, there also are 120/20 funds, 110/10 funds, and so on, though the 130/30 ratio has been the most widespread. Be sure to check a fund's prospectus to see the ratio it uses and how much it is allowed to deviate from that ratio.

A 130/30 fund buys a basket of securities deemed by either a quantitative model or the manager's judgment to be undervalued. It then sells short securities that are collectively valued at about 30 percent of the long position; these have been identified as overvalued. The fund then uses the proceeds from that short sale to purchase (go long on) additional undervalued securities that add up to 30 percent of the original investment. In effect, the fund has borrowed the value of the securities that are sold short, and used leverage to increase the fund's long position to 130 percent of its assets.

Benefits

· Using leverage can magnify the fund's gains. Using what is in effect borrowed money to increase market exposure can potentially lead to greater returns.
· A 130/30 fund allows the fund's manager to replicate an index--for example, with the initial 100 percent long position--while simultaneously actively managing the additional 30 percent long investment(s).
· A 130/30 fund offers some of the same investing advantages enjoyed by hedge funds with fewer restrictions on participation and withdrawals.

Tradeoffs

· Just as leverage can increase potential returns, it also can increase potential losses. And even though long positions would presumably offset at least part of any losses from short-selling, short sales can mean unlimited exposure to potential loss.
· The manager could be forced to close out short positions and return the borrowed stock at an inconvenient time, which could reduce the fund's overall return.
· Investing long and selling short require somewhat different perspectives and aptitudes, and a manager may not be equally skillful at both.
· The short component could involve higher trading costs and therefore higher fund expenses.

This article was provided by Forefield and distributed by Lawrence Sprung.

Stock Funds by Investment Objective and Style

noreply@blogger.com (Lawrence D. Sprung, CFP®) — Mon, 23 May 2011 12:32:00 +0000

What is an investment objective?

There are many ways to try to make money from investments. An investor might take on additional risk to try to profit from potential growth in the value of the shares of a stock. A retiree might prefer an investment whose chief benefit is the periodic income payments it offers. Someone else's priority might be to preserve the value of the original investment, even if that means the investment doesn't increase much in value over time.

Like all mutual funds, stock funds are managed based on a specific investment objective. That objective will determine the role a specific fund will play in your portfolio, and how well it might fit with your overall investing strategy. The investment objective determines what types of stocks the fund's manager may decide to purchase. A fund may be broadly based, investing in both large- and small-cap companies in many different industries. Or it may have a much narrower focus, concentrating only on blue chips, for example, or stocks in a single industry.

Typically, a stock mutual fund's objective will be either capital appreciation, income from equities, or both. For example, a stock fund might have both growth and income as objectives, or its primary objective might be capital appreciation, with income as a secondary objective.

A mutual fund's investment objective is not necessarily the same thing as its investing style, though the two may overlap. In addition to pursuing a fund's investment objective, a fund manager may adhere to a particular investing style. For example, a growth fund focuses on stocks that are growing quickly and that seem to have greater than average potential for appreciation in share price. By contrast, a value-oriented fund buys stocks that appear to be undervalued by the market relative to the company's intrinsic worth. Each may have growth as its investment objective, but they pursue growth in different ways. Some managers even blend the two approaches.

Like most mutual funds, a stock fund may be either passively managed, as an index fund is, or actively managed. It also may be an open-end or closed-end fund. Before investing in any fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.

Many mutual funds combine an investment objective with a specific category of stocks. For example, a fund might be an international fund whose objective is growth, or a growth fund that specializes in small-cap stocks. Here are some common stock fund types based on their investment objectives:

Growth fund

A growth fund's primary objective is capital appreciation over the medium to long term. These funds may invest in both well-established companies with above average growth potential and/or in fast-growing industries such as technology and health care. Investors in growth funds often are willing to pay a high share price because they expect future earnings to be much higher than current earnings. Growth companies often reinvest earnings in their businesses in order to continue to grow; therefore, they may pay only minimal dividends, if they pay dividends at all. As a result, growth funds may be more volatile than, for example, stock funds that focus on dividends from long-established companies in mature industries.

The risk with growth investments, of course, is the possibility of overpaying for future growth that may never materialize. Investing in a growth mutual fund allows you to spread your investment over many different companies. Though diversification alone can't guarantee a profit or protect against the possibility of loss, a disappointing performance by one company may be offset by the better performance of another. However, the tradeoff is that strong returns from one company can be diluted by weaker results from another. Some growth funds attempt to address that problem by limiting the number of companies in the fund.

Aggressive growth fund

To paraphrase an old saying, an aggressive growth fund is like a growth fund, only more so. Often known as capital appreciation funds, aggressive growth funds tend to take greater risk in pursuit of potentially higher returns than ordinary growth funds. For example, an aggressive growth fund might buy initial public offerings (IPOs) of stock from small companies and then resell that stock very quickly in order to generate immediate profits. Some aggressive growth funds may even use derivatives, such as options, to try to increase their gains, though that may also increase the fund's risk level.

Typical investments for an aggressive growth fund include stocks of start-ups, small companies, and companies in new industries or that have innovative technology or products. Such companies do not normally pay dividends, and returns are derived almost exclusively from capital appreciation, or growth in share value.

Aggressive growth funds have the potential to turbo charge a portfolio, especially when the market is going up. However, the companies in which they invest have a high failure rate and also are normally the ones hardest hit in bear markets. An aggressive growth investor should be prepared to have a relatively long time horizon or a high tolerance for volatile returns--preferably both. However, since much of the return on an aggressive growth fund would come from selling shares at a profit, capital appreciation returns would be taxed at the (ordinarily lower) capital gains rate rather than as ordinary income.

In addition to their greater volatility, aggressive growth funds involve several tradeoffs. They often have a relatively high expense ratio relative to other types of funds, because the cost of frequent trading and research on smaller companies can mount up. Also, because an aggressive growth fund may trade frequently, that buying and selling can generate capital gains and losses that are passed back to the fund's shareholders, who may then owe capital gains taxes even if they haven't sold any of their fund shares. As with any mutual fund, the individual shareholder has no control over how and when those capital gains are realized.

Value fund

As indicated above, a value fund invests in companies whose stock the manager feels has become undervalued because it is experiencing legal or management difficulties, is in an industry that's out of favor with the broader investment community, or has not yet been discovered or fully understood. The assumption is that the company will not remain undervalued indefinitely, and that the fund will make money by buying shares before the anticipated upturn--which of course may take longer than expected or may never happen at all.

Value funds typically invest in companies that exhibit certain fundamental characteristics, such as a stock price that's low relative to the company's assets, earnings, or cash flow; products or services that give the company a competitive edge; a quality balance sheet that demonstrates sound financials; high or increasing insider ownership; and strong, forward-thinking management.

A value fund's primary objective is long-term growth; some also may produce current income from dividends.

Equity-income/growth and income funds

Though they may seem like a hybrid category, both growth and income funds and equity-income funds are actually types of stock funds. An equity-income fund focuses primarily on income from equity--that is, dividends from common, preferred, and/or convertible stock rather than bonds. To pursue that income, an equity-income fund tends to invest in stocks of companies that have a history of regular dividend payments; often, these are large companies that are fairly well established, that may be proven industry leaders, or that have long records of positive earnings. For example, so-called blue-chip stocks are prime candidates for an equity-income fund. Though a fund may also consider a stock's potential for capital appreciation, the pursuit of income tends to be paramount.

A growth and income fund, as the name implies, strives for both growth and income. It may do so by investing in stocks that pay substantial dividends but that also are considered growth companies. Or it may combine growth stocks with other stocks whose primary attraction is the dividends they pay.

Because income is a key part of such funds' objective and can help counteract the volatility of stock values, both categories are generally considered less aggressive than a growth fund.

This article was provided by Forefield and distributed by Lawrence Sprung.