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Archive for September, 2011


Tax treatment of employer provided cell phone has been clarified.

IRS provided guidance on the tax treatment of employer-provided cell phones.  “Tax Treatment of Employer-Provided Cell Phones”  The IRS notice applies to years after December 31, 2009.  Employers should have a written policy stating the non compensatory business reasons for providing the cell phone.

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Identification Theft Can Happen to Anyone

One of my clients had their Email account hacked.  Everyone in her/his contact list received an Email describing a situation where cash was needed immediately.  We do not know if anyone wired any money.  The remaining concern is Identity Theft.
The custodian of her/his investment accounts was alerted.  They described their asset protection and loss protection programs.  This is also why you get quizzed before they will talk to anyone about their accounts.
Additional steps should be taken to correct the situation and protect your Identity.  Get a new Email account and stop using the old Email address.  
All user names and passwords should be changed.  Even if your banking and/or investments are not online, there are vendors that withdraw funds from your bank account or charge your credit cards periodically.  Since they have personal information about you, you should change these user names and passwords.  
Your computer should be cleaned.  If someone was able to hack your Email, there is a high probability that there is a virus on your computer.  Having a good virus protection on your computer is a good idea.  Another step is to have your computer cleaned, even if you have a virus protection program.  You should review the setting on your current virus protection. 
Another step, would be to purchase Personal Identification protection.  Consider at least 6 months protection, although a year or two would provide more protection.  If you are thinking you do not need this protection, reflect how likely you thought it would be for someone to steal your Email address before it happened to you.  

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Exchange Traded Funds (ETFs) Conference

I attended the Morningstar ETF Invest Conference September 21-23rd.  The uses of ETFs have increased dramatically.  The first ETF was introduced in the US in 1993 (The Standard & Poor’s 500 Depository Receipt).  The concept originated in 1989 in Canada.  
Tax efficiency is often mentioned as an advantage.  However the importance of lower costs, better transparency and intraday liquidity are significantly more important.  As the acceptances of ETFs have grown, there has been a demand for new ETFs.  The strategies and make-up of the newer ETFs expands the use of ETFs.  The variations within ETFs increase their versatility. 
There were sessions on how ETFs function and various ways they can be used in meeting the investors’ needs.  Each speaker was an expert and most aspects of ETFs were covered. 
There were also broad topics.  The views about the US economy ranged from good news to very slow grow.  It was enlightening to hear the factors and reasoning of the different views.  Implicit in both presentations was the inadequacy of what the media publishes. 
Jeffrey Zaslow spoke about what he learned from Randy Pausch.  Jeffrey was the co-author of “The Last Lecture” and is a columnist with the “Wall Street Journal”.  This presentation helped put things in perspective. 
The interaction with industry leaders, analysts and other practitioners created excitement and enthusiasm.  I will apply some of the ideas presented at the conference.  Other ideas will help me recognize future developments. 

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There is more to college planning than meets the eye

Today’s Wall Street Journal has an article about how to avoid the cognitive traps.  The approach suggested is similar to the approach required for financial planning.
I will highlight a few concepts from the article.  The first suggestion is to understand how you think.  How the information is presented does influence you.  You can reorganize the information to help make an objective evaluation of the alternatives.
Generally we all are influenced by short-term thinking.  However, college planning is about the long-term.  If you focus on only the cost, you may overlook other information.  In obtaining the lowest out of pocket cost, you may not consider the long term financial ramifications.  Will the monthly payments be affordable?  Will they impact what is available for other children?  Will the required work hours reduce the chances of keeping current with academic pursuits?
Projecting future benefits on first year salaries may dramitically understate the potential benefits.  Starting at a community college with the intent of transferring in the future to a bachelor’s program may reduce the chances of obtaining the bachelor’s degree.
“…for the great majority of students, the time spent in college, forgoing full-time work, has a bigger monetary value than the tuition you pay.”  READ MORE     

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Investing with indexes is attractive.

First Index Investment Trust, the first index mutual fund, was launched August 31, 1976.  John C. Bogle, the founder of The Vanguard Group, established the index fund on the premise that passive equity management would produce superior results over active management.  He believed that index funds would incur substantially lower costs.  He believed, and still believes, the managed mutual fund expenses are too high.  The higher expenses place a significant drag on the performance of managed funds.  Index funds’ expenses would have lower advisory fees, operating expenses, sales loads, portfolio transaction costs and excess taxes than managed funds. 
Exchange Traded Funds (ETFs) have further reduced the expenses.  Mr. Bogle is not a fan of ETFs.  He is concerned that many investors do not understand the make-up and limitation of the various indexes available.  They also would not realize that funds with similar names would be different.  That is, not all indexes are the same.  Furthermore, a lot of ETFs use strategies that are not appropriate for everyone.
There was much skepticism initially about the fund.  The fund was renamed the Vanguard 500 Index Fund, and today is the largest mutual fund.  READ MORE
David Blitzer’s article in the July/August 2011 issue of “Journal of Indexes” makes some strong arguments for the use of indexes.  “The prevalence of bubbles and the absence of prices tied to dividends, earnings and discount rates make investing with indexes attractive.  Besides being lower cost, index investing is attractive because bubbles are hard to recognize and even harder to predict, so picking the right stocks, is difficult.  Further, given how fickle a bubble can be, investors seek the protection offered by the diversification inherent in broad market indexes.” READ MORE 
James Zweig in his October 10th Wall Street Journal article, “The Age of ‘Macro’ Investing”, stated “Because so many mutual-fund managers failed to protect their shareholders against calamities of the past decade, index funds-which passively replicate the performance of entire markets-have come to dominate the scene.” READ MORE
The use of index investing continues to grow.        

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The President is expected to sign legislation that prevents the patenting of tax strategy methods.

September 8th the “Journal of Accounting” reported the passage of the legislation by congress.  The legislation will reduce the costs of complying with the tax laws. 
The law applies to applications pending or filed after the date of enactment.  Federal , state, local and foreign laws are covered.   Tax preparation and other software is not covered. 

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Should you reverse a 2010 Roth conversion?

With the stock market down, it may be appropriate to revers (recharacterize) a 2010 Roth Individual Retirement Account(Roth) conversion.  You have until October 17, 2011 to reveres a 2010 Roth conversion.
You paid tax in 2010 on the amount of the traditional Individual Retirement Account (IRA) that was converted in 2010.  If the current value of the Roth IRA is less than the amount converted you may want to recharacterize the conversion.  If you do recharacterize, you should amend the 2010 tax return.  The income from the conversion will be eliminated and you could receive a refund.  To be effective, the recharacterization must be done by October 17, 2011.
Next you will want to consider converting a traditional IRA to a Roth in 2011.  This will put you back to the position you were in before the recharacterization, but at a lower tax cost.  You must wait at least 30 days before you reconvert.  Depending on your view of the stock market, you may want to wait until closer to the end of the year. You will need to check with your tax return preparer to see what the tax savings are before proceeding.  Also check with the custodian to see how much time they need to complete the recharacterization by October 17, 2011.
Deadline Approaching for Unduing a 2010 Roth Conversion

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