Does a Non-Deductible IRA Make Sense?

This is the last week before the April 15th deadline for contributing to an IRA account for calendar year 2007.  Last week, I discussed how to choose between a deductible Traditional IRA and a Roth IRA.  If you missed the article, go to and click on ‘In The News’, then click on ‘Stewart’s Weekly Column’.

Many of you will not qualify for making a contribution to either the deductible Traditional IRA or a Roth IRA because you earn too much income.  If you do qualify, you should choose one or the other.  If you don’t qualify, you will be eligible for a non-deductible Traditional IRA.  People often ask me, “Should I contribute to a Traditional IRA if I don’t get a tax deduction?”  While the ‘right’ answer will depend on each person’s specific situation, generally speaking, contributing to a non-deductible IRA is a good idea.  The key benefit is tax deferral of all earnings.  There are several disadvantages you should consider:

  • Like a deductible IRA, you do have Required Minimum Distributions beginning at age 70½, meaning you can’t postpone taking your money out indefinitely, even if you don’t need it.
  • Withdrawals prior to age 59½ may be subject to a 10% federal penalty as well as ordinary income taxes.
  • When you begin withdrawals, you are taxed on a pro-rata basis between what you paid in (tax free) and your earnings (taxed as ordinary income).  This may be a disadvantage because of the possibility of converting what may have been long-term capital gains treatment on your profits, currently taxed at a maximum federal tax rate of 15%, into ordinary income, currently taxed at a maximum federal tax rate of 35%.

There is a way to convert your traditional IRA into a powerful source for retirement funding.  Currently you are prohibited from converting a non-deductible or deductible IRA to a Roth IRA if your adjusted gross income exceeds $100,000.  In 2010, this limitation is removed, allowing you to convert any or all of your IRA account into a Roth IRA.   By making non-deductible IRA contributions now, you’ll build up a war chest of money for conversion and since it’s a nondeductible IRA, much of the money will be cost basis (what you invested) and not subject to income tax upon conversion.  Any portion of your non-deductible IRA that represents interest, dividends or capital gains will be subject to ordinary income taxes.  If you convert a deductible IRA, all of the money will be subject to ordinary income taxes.  Under this strategy, it is important to pay any taxes from personal funds so that you convert 100% of your IRA accounts.  This will provide for maximum wealth accumulation.

After 2010, continue to make maximum contributions to your non-deductible IRA and convert to a Roth IRA each subsequent year.  In effect, this strategy lets you bypass the rules prohibiting contributions to Roth IRAs for taxpayers with too much earned income.  This approach should only be considered in the context of an overall investment and tax plan so be sure to consult your financial advisor before implementing it.

With the April 15th deadline looming, you have a decision to make.  Should you invest in a Traditional IRA or would you be better off investing in a Roth IRA?  Remember that your investment in either must be postmarked no later than April 15, 2008 for a 2007 contribution.  In making your decision, let’s look at several key differences in the two retirement plans:


  1. Tax benefits.  One of the primary benefits you seek when investing in a Traditional IRA is a current tax deduction for your contributions.  Once invested, your traditional IRA funds grow tax deferred, meaning there is no taxation of interest, dividends or capital gains until the funds are withdrawn during retirement.  Withdrawals during retirement are taxed as ordinary income, presumably at lower tax rates.  With a Roth IRA your contributions are not deductible but qualified withdrawals are forever tax-free. 
  2. Contribution limits.  For 2007 the maximum contribution limit for either the Traditional or Roth IRA is $4,000.  If you turned age 50 during 2007, you’re eligible for an additional $1,000 catch-up contribution. 
  3. Phase-out provisions.  Your ability to take a deduction or make a contribution may be restricted based on your modified adjusted gross income or participation in an employer’s retirement plan.  With a Traditional IRA, if you were a participant in a company sponsored retirement plan in 2007, the deductibility of contributions phases out if your modified adjusted gross income is $83,000 – $103,000 for married couples filing jointly; $52,000 – $62,000 for single filers.  If you were not a participant in a company sponsored retirement plan in 2007 but your spouse was, the phase-out occurs between $156,000 – $166,000.  If you are single and were not covered by a company sponsored retirement plan in 2007, there is no phase-out.  With a Roth IRA, your ability to make a contribution is phased out as your modified adjusted gross income rises between $156,000 – $166,000; and for single filers $99,000 – $114,000.
  4. Distributions.  Beginning at age 70½ you must take Required Minimum Distributions (RMDs) from your Traditional IRA.  There is no such requirement for Roth IRAs.   The government imposes a 10% penalty for distributions taken from a Traditional IRA prior to age 59½.   With a Roth IRA, you may take distributions of the amounts you have contributed without penalty at any time.  Distributions of earnings are subject to a 10% penalty unless the Roth has been established a minimum of 5 years and you are at least age 59½.  Other exceptions apply. 

Whew!  Assuming you can follow all the rules and you are eligible to contribute to either a deductible Traditional IRA or a Roth IRA, how do you decide which is best?  The answer is impossible to know for sure because it’s impossible to predict future changes in tax laws as well as changes in your circumstances.  My rule of thumb is that if you are currently in the 25% or lower tax bracket, go with the Roth IRA.  If you are in the 33% or higher tax brackets, use the Traditional IRA so that you benefit from an immediate tax deduction.  The 28% tax bracket is the ‘swing’ bracket where you could go either way.

The government-engineered bailout of Bear Stearns this past week underscores how concerned our government is about the fragility of our financial markets and the economy.  This is the first time since the Depression that our government has stepped up to rescue an individual company in such a dramatic way.  The origin of the present crisis can be traced back to the greed of numerous financial institutions all racing to gather profits. They made billions of dollars in home loans to families with sub-par credit who gleefully accepted creative home financing which often included 100% financing, interest-only payments or negative amortization loans.  Everything might have worked out if home values had continued to grow as they had over the past decade.  Instead, home prices began to fall and as these sub-prime mortgages began to reset at higher interest rates and payments, homeowners began to default on their payments.  This past summer, the media began shining a light on the depth and breadth of the sub-prime crisis and the government quickly mobilized a stabilization plan including:

  • September 2007.  The Federal Reserve changed the direction of interest rates by cutting the Fed Funds Rate by one-half percent from 5.25% to 4.75%.  Since then, the Fed has cut rates five additional times, most recently this past week.  The Fed Funds Rate now stands at 2.25%.  This floods the financial markets with potential liquidity for businesses and individuals assuming the banks are willing to loan out the money.
  • February 2008.  Amid growing concerns over the possibility of a recession, the government sprang into action with uncharacteristic unity from both sides of the congressional aisle with an economic stimulus package that included $117 billion of rebates to more than 130 million Americans beginning in May.  Additional tax incentives are available for businesses making the total package worth more than $150 billion.  The government’s assumption is that consumers will take the rebates and head straight to the mall thus stimulating the economy.  It remains uncertain whether people will spend the money or use it to pay down debt.
  • This past week.  The federal government engineers the bailout of financial behemoth Bear Stearns by fellow behemoth JP Morgan Chase & Co.  As part of the deal, the government agrees to swap treasury securities for up to $30 billion of Bear Stearns’ most questionable debt securities.
  • This past week.  Federal regulators ease capital requirements for Freddie Mac and Fannie Mae in an effort to lower mortgage interest rates and provide support for a slumping housing market.  Fannie Mae and Freddie Mac together own about 45% of all mortgages in the United States.

What does this mean to you and what should you do now?  It’s now quite apparent that the government is very worried about both the financial markets and the overall economy. Consequently, it has taken unparalleled steps to avert an implosion. If you anticipate needing cash from your portfolio over the next three to five years, make sure those funds are parked in the safety of a money market account or other similar instruments.  Consider raising any needed cash from your more aggressive stock or stock mutual fund holdings.  At this point, it’s impossible to tell whether this storm will continue to intensify or begin to dissipate so a measure of caution is a prudent strategy.

In the midst of chaos, there is always opportunity. Falling residential real estate prices both locally and nationwide mean now is an excellent time to buy a home, especially for first-time home buyers. In order to help stimulate our economy and help first-time home buyers, Congress passed the Housing and Economic Recovery Act of 2008, which offers a one-time refundable tax credit of up to $7,500 on the purchase of a home.   “Recent data indicates that the backlog of inventory of houses on the market is beginning to shrink…an indication that we may be reaching the bottom of housing prices,” says Ed Anderson, Vice President of Gibson & Anderson Construction, Inc.

A first-time home buyer is defined as a buyer who has not owned a principal residence during the three years preceding the purchase. Married taxpayers must both meet the ownership test. Ownership of a vacation home or a rental property not used as a principal residence does not disqualify a purchaser as a first-time home buyer. The home purchase must occur between April 1, 2008 and July 1, 2009. For purposes of the credit, the purchase date is the closing date.
First time home buyers purchasing a home for more than $75,000 will receive the full tax credit.   For home purchases less than $75,000 the tax credit is equal to 10% of the purchase price.
The tax credit is technically an interest-free loan from the government. “The credit or tax-free loan is not received at closing, but rather when you receive your federal tax refund,” says Matt Bearden, a mortgage loan officer with RBC Bank. The credit must be repaid at a rate of $500 per year beginning two years after the year in which the residence was purchased. Any unpaid balance is due upon sale of the residence.   As an added protection for homeowners, if at the time of sale the gain is not sufficient to cover the $7,500, the remainder of the loan is forgiven. The loan is also forgiven if the homeowner dies. Repayment of the credit is made at the time of filing your tax return. The interest savings of the credit could be as great as $8,100, assuming the $7,500 would have been financed over the standard 30-year mortgage at a rate of 7%.
Chad McWhirter at MortgageBanc, LLC says “This is a great way for first time home buyers to offset some of the up-front costs of buying a home”.
The credit does have income limits associated with it. The full credit begins phasing out for single taxpayers making $75,000 or more and married taxpayers making $150,000 or more. The credit is completely phased out for single taxpayers making $95,000 or more and for married taxpayers with incomes greater than $170,000.
Obtaining and receiving the credit is easy once the qualifications are met. The tax credit is simply claimed on the federal tax return. No other forms or applications are required and no pre-approval is necessary. Prospective home buyers will simply need to ensure that all requirements for receiving the credit are met. For homes purchased in 2009, the taxpayer even has the choice of taking the credit in either 2008 or 2009, whichever provides the greatest benefit. For more information visit
 Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only financial advice and management to families throughout the United States. Mr. Welch has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Visit his Web Site Consult your financial advisor before acting on this advice.

Within the past six months two clients have become victims of identity theft. Thieves have become particularly adept at cybercrime…using the internet to steal your money. In one case our client received an internet message complete with perfect bank logo and a message indicating there had been some possible illegal activity in his account. The ‘bank’ was requesting some confirming account information so they could ‘protect’ his account. For ‘security’ purposes, they needed him to confirm his Social Security number, account number and other personal information. It all looked perfectly legitimate. It wasn’t, and over the course of one week his entire account was wiped out. The good news for my client was that the bank replaced his funds. Identity theft has become a multi-billion dollar business and virtually everyone is at risk. Here are some simple steps you can take to help protect yourself:

  • Never respond to an internet on-line request for information, no matter how legitimate it looks. If you receive an ‘alert’ requesting information, pick up the phone and call the company directly. Do not use the phone number included in the email. In some cases, they actually have ‘shops’ set up to receive your calls and get your information. Always take the time to look up the phone number yourself.
  • Buy a shredder.Everyone receives numerous credit card offers in the mail on a monthly basis.Typically, we toss them in the trash.Thieves actually go through people’s trash to find personal information they can use to steal your identity!Your best defense is to buy a paper shredder and shred everything that a crook could use to gather your personal data.
  • Reduce the number of solicitations. Not only are marketing solicitations unwanted, thieves can grab a credit card offer for you and use it for themselves if they can get enough of your personal information. There are several sources for ‘opting-out’ of unwanted solicitations: allows you to stop credit card offers for 5 years. removes you from many of the nation’s marketing solicitation lists. removes your phone number from telemarketing lists.

  • Protect your information. Whether you pay your bills from home or your office, take steps to keep your information private. Something as simple as a locked file cabinet can keep your personal information away from prying eyes.
  • Encrypt your wireless internet connection. Today, everything is going wireless. This is a wonderful convenience but also creates an opportunity for hackers to get into your system and steal your confidential information. There is excellent, relatively inexpensive encryption software that will foil would-be hackers.
  • Order your credit report each year from the three credit bureaus. You are allowed a free copy of your report every 12 months. Be sure you get one from each of the 3 bureaus since some companies report to only one. For your free credit report go to: or call 800 685-1111 or call 888 397-3742 or call 877 322-8228

Last week I discussed potential issues for people who act as an executor of the estate of a deceased family member or friend.  Whereas an executor’s role may last six to twenty-four months, trustees often have the job for decades.  It can be a mammoth responsibility requiring many hours of dedicated service as well as accounting and legal requirements.  Before you say, “Yes, I’d be honored to serve”, make sure you fully understand what you are agreeing to do.

Read and understand the trust document.  As a trustee, you are a fiduciary and therefore liable for your actions.  Ignorance is never an accepted excuse for mismanagement.  Be sure and read the trust document before you agree to act as a trustee.  If there are items that you do not understand, ask for clarification in writing.  Trust documents typically call for the trustee to make many decisions of judgment.  For example, the trust may allow the trustee to disperse money to a beneficiary “to maintain his or her accustomed lifestyle”.  You have to decide what is appropriate in a given situation.  Do you buy them the BMW they want or would a Ford be more reasonable?

Meet with the beneficiaries periodically.  You will need to spend time with the beneficiaries to understand their needs.  Some beneficiaries can be quite difficult and you must be emotionally prepared to deal with confrontational situations.  Your best solution to maintaining good relations with beneficiaries is good, ongoing communication.  Remember, people hate surprises.

Record keeping.  You’ll need to maintain detailed records of all of your actions because you may have to go to court and prove everything you’ve done.  A trust is considered a separate tax entity and therefore you must file a separate tax return every year.

Manage the money.  I strongly recommend that you develop a written Investment Policy Statement (IPS) based on the investment powers outlined in the trust document.  As a trustee, the standard of care that you are held to falls under the ‘prudent expert’ rule, meaning that your investment decisions are subject to a high level of scrutiny.


Most trust agreements allow you to hire professional help, including an accountant to do the annual tax return, an attorney to assist you with legal matters, including interpreting the trust document, and investment advisors to help manage the money.  Even if you hire professionals to do much of the work, you continue to remain responsible for everything related to the trust.


If you are asked to act as trustee by a friend or family member, you may find you are being asked to serve without compensation.  In some cases this is appropriate but you should consider this carefully.  Often, your role as trustee will last for many years and it will take a great deal of time and work to do the job well.  Decide whether you are willing to do this work for free.


Acting as a trustee can be a very rewarding experience.  It gives you the opportunity to be involved, in a positive way, in the lives of people you care about.  At the same time, it is a tremendous responsibility and one that you should consider carefully before you accept.


When my firm reviews wills for our clients, we often find that an individual, typically a family member or close friend, has been appointed the executor of the estate.  Certainly, being asked to serve as executor of someone’s estate is an honor…indicating a level of trust and confidence in your abilities to carry out an important job.  However, most people have no idea of what they are truly being asked to do and the level of time and responsibility that may be required.

First and foremost, you should realize that as executor you must carry out your responsibilities with the care of a ‘fiduciary’.  This means that you are legally responsible for every aspect of settling the estate.  Let me be clear.  Being legally responsible means that you can become liable personally for any errors you make.

Responsibilities include:

  • Thoroughly reading the will along with any specific instructions of the deceased.
  • Registering the will with the probate court.
  • Determining who the heirs of the estate are.
  • Preparing a detailed inventory of all of the estate assets including real estate tangible personal property, bank accounts, investment statements, etc.
  • Paying off all liabilities of the deceased unless the will provides otherwise.  You must also provide a public legal notice alerting potential creditors of their right to file a claim against the estate.  If anyone files a claim, you must validate their claim.
  • Determining what assets pass directly to heirs versus those that pass under the will and therefore must be probated.  Examples of assets that might pass outside the will include retirement accounts and life insurance where an individual, trust or charitable organization is the named beneficiary.
  • Establishing any trusts that are created under the will.  Often people will leave assets to heirs under a trust agreement instead of outright.  This is almost always the case where there are children who are minors.
  • Reporting to the probate court and ultimately filing a final estate tax return.  In addition, you may be required to file a final income tax return for the deceased based on his or her year of death.
  • Paying any estate taxes due, if any, as well as all professional fees and other expenses associated with settling the estate.
  • Distributing the remaining assets to the heirs.  Here’s where it often gets interesting.  Many disputes arise over the specific distribution of estate assets, especially in the area of personal property.  It’s not unusual for these matters to cause significant family tensions including estrangement and legal entanglements.

This is just a brief list of some of your more significant responsibilities as executor.  Before you hit the ‘panic button’, there is help.  As executor you are allowed to hire professionals to assist you.  You can hire an attorney or accountant experienced in estate disposition matters to do the bulk of this work for you.  If fact, unless the estate is both simple and small, this may be your best choice.  To head off potential problems, at my firm we established The Family Council where we meet periodically with our clients and their heirs to review the estate plan and discuss any concerns of the heirs.  This is a strategy you may want to consider as well.

For many people, their home is their single most valuable asset.  Often, assets other than the home are modest, consisting of a small pension, Social Security and a relatively small retirement account such as an IRA.  Here are some strategies for turning your home into a productive asset.

Downsize.  I have had a number of retirement clients who have chosen to sell their home and purchase a smaller one, thereby releasing a portion of their equity that they can use for other purposes.  The reasons for this are many.  In some cases, they simply wanted a newer home with less maintenance, less taxes and little or no yard.  Others wanted a smaller home where all the living space was on one level.  The equity that is released can be added to their investment account and used to increase their retirement cash flow.  Many people do not understand the tax benefits of such a move.  Current law allows a homeowner to sell his or her primary residence and avoid paying any taxes on the first $250,000 of profit.  For married couples, the tax exempt amount is $500,000.  Any profits above the tax exempt amount are taxed at favorable long-term capital gains rates (15% federal).  Imagine being able to take up to $500,000 of profit tax-free and invest those proceeds into your personal investment account to increase your cash flow!  If this is a strategy that fits your situation, consider not only downsizing, but also moving to a less expensive housing area.  For example, if you live in affluent communities such as Mountain Brook, Vestavia, Homewood or Hoover, by moving to wonderful communities like Chelsea, Montevallo or Pell City, you’ll get much more home for your money while still being only a short drive to all of the amenities in the Birmingham area.

Reverse Mortgage.  If you have a strong desire to stay right where you are but need additional cash flow during retirement, consider a reverse mortgage.  To qualify for a reverse mortgage, you and your co-owner, if you have one, must be age sixty-two or older.  Lenders will typically offer a reverse mortgage of approximately 50% to 60% of the value of your home with monthly payments paid to you for as long as you live in your home.  Once you move out, the mortgage must be repaid, typically through the home sale, but you are not responsible if the home sells for less than the mortgage balance.  Any excess equity from the home sale is returned to you.  These payments to you are not subject to income taxes and will not affect your Social Security.

Refinance.  The new economic stimulus package offers a unique opportunity for some homeowners.  Conforming loans are loans that typically offer the best interest rates and, until the new law, were limited to loans up to $417,000.  The new law increases this limit to up to $728,750, depending on your geographical location.  If you currently have a mortgage based on a non-conforming loan (loans more than $417,000), you may benefit by refinancing.  Not only may you now qualify for lower conforming loan rates, but mortgage rates are currently in the 5% – 6% range.  Anyone who has an adjustable rate mortgage should review current fixed rates and decide if ‘locking in’ a long-term mortgage would be beneficial.

The big news story this past week was President Bush’s signing of the economic stimulus bill.  In a rare bipartisan effort, Congress agreed to provide rebates totaling $117 billion to 130 million Americans as early as May of this year.

Here’s who will receive the money:

  • People whose income is not enough to owe taxes but who have at least $3,000 of earned income in 2007 will receive $300 for singles, $600 for couples.  This includes Social Security recipients and veterans on disability.
  • Single tax filers will receive $600 while joint tax filers will receive $1200.  Tax filers will receive an additional $300 per child.  This means that a typical family with two children would receive $1,800.
  • Rebates will begin to phase out for single taxpayers with adjusted gross income (AGI) of $75,000 and fully phase out once AGI reaches $87,000.  For couples the phase out begins at $150,000 and fully phases out at $174,000.

You must file your 2007 tax return in order to receive your rebate.  If you have already filed your return, there is nothing else you need to do.  The government is counting on you taking your refund and heading straight to the mall.  A better strategy is to use the money to pay off credit card debt or add to your investments.

For home owners and prospective home buyers, the plan establishes a temporary increase in conforming loan limits for loans through Fannie Mae and Freddie Mac.  The old limit for a conforming loan, $417,000, has been increased to a maximum of $728,750 through December 31, 2008.  The new conforming limits are based on the ‘median’ home price in a given geographical area so you’ll need to check with your mortgage banker for the limits in your area.  With mortgage interest rates in the 5% range, now may be a good time to review your existing mortgage and consider refinancing, especially if you have an Adjustable Rate Mortgage.

To encourage business owners to spend money, the package allows you to fully deduct up to $250,000 (up from $128,000) of equipment purchases if total equipment purchases do not exceed $800,000 in 2008.  The new law also increases to 50% (from 30%), the amount of the adjusted basis for certain equipment, computer software and tangible property that may be claimed as a deduction in 2008.

The reason the government has decided to pass out free money is an attempt to ward off a recession caused by the subprime mortgage debacle.  They hope that by giving you the money, you’ll spend it, thus stimulating the economy, and that you will become more optimistic about the economy…meaning you’ll continue to spend.  In fact, it’s consumer confidence and consumer spending that have provided the pillars of support for our economy for the past several years.  The total value of the stimulus package is worth about $152 billion this year, or about 1% of total Gross Domestic Product (GDP).  There is no doubt that this will provide a shot of adrenalin to our economy.  Federal Reserve Chairman, Ben Bernanke, has also indicated his commitment to do whatever it takes to ward off a recession.  If they can also provide significant relief for homeowners caught in the subprime crosshairs, this just might work.


Picture this.  You handle the family’s finances and pay all the family bills.  In addition, you own a small business.  Among the assets held solely in your name are bank accounts, investment accounts and real estate.  You are in control and life is good until tragedy strikes. You’re in an automobile accident which leaves you in a coma.  Financial decisions need to be made; checks need to be signed but you are unable to do so.  What is going to happen?  Someone, typically a family member, is going to have to hire an attorney, go to court and get a Power of Attorney that will permit him or her to act on your behalf….a potentially expensive and time consuming task.  A better solution is for you to be “proactive” and have your attorney draw a Power of Attorney before you need one.


A Power of Attorney is a vital document for every adult. This document allows you to appoint another person as your “attorney-in-fact,” which gives that person the authority to act on your behalf in legal matters should you not have the capacity to do so. A power of attorney can be drafted in several forms:

  • Springing Power of Attorney. This document only becomes effective under certain conditions, usually due to incapacity. One significant disadvantage of the springing power of attorney is that when someone attempts to use it on your behalf, he or she may be required to “prove” that you are actually incompetent. This can create both inconvenience and significant delays.
  • General Power of Attorney.  Here, you give your attorney-in-fact the authority to act on your behalf at anytime. However, if you become incapacitated, this document is null and void.
  • General and Durable Power of Attorney. This document allows your attorney-in-fact to continue acting on your behalf in the event of your incapacity.
  • Limited Power of Attorney.  With a limited power of attorney you appoint someone to act on your behalf only under very specific circumstances. One possible reason might involve the signing of a specific legal agreement by your attorney-in-fact while you are out of the country.


What you need to do now.  First, you need to decide which Power of Attorney is most appropriate for your circumstances. Then you need to decide whom you would appoint as your attorney-in-fact. If you are married, a natural choice might be your spouse. But you should also have at least one successor attorney-in-fact. It should be noted that if you die, any and all Power of Attorney documents you have executed become null and void. Also, you should redo this document every four to five years. Many institutions such as banks are reluctant to accept a Power of Attorney document that is older than that. These are powerful legal instruments and care should be taken to keep up with them.


While you can get Power of Attorney standardized documents through bookstores and various software programs, I recommend that you have it drawn up by an attorney or at least reviewed by one.  Most attorneys will do this for a modest charge.  Your attorney will make sure that the document conforms to Alabama law and can help you decide which type Power of Attorney is best for you.

What’s the best way to take advantage of the sea-change that will begin in January 2009? Obama has promised to increase taxes for families making over $250,000 (single tax filers making over $200,000) while reducing the taxes on everyone else. Clearly, on the surface, this appealed to a majority of voters but its implementation may prove more challenging. First, families making over $250,000 represent approximately the top 2% of income earners. The actual tax dollars above that limit will likely be wholly insufficient to fund the tax cuts for everyone else plus the programs Obama intends to initiate including a new healthcare plan, expanded educational opportunities, a rebuilding plan for roads, bridges and schools, and increased spending on renewable energy. Second, wealthy Americans have always used the many loopholes in our tax system to minimize the impact of new income tax policy and this time will be no different. You can count on financial advisors, tax accountants and attorneys to develop tax avoidance strategies for their wealthy clients. Consider these strategies for starters:

  1. Take long-term capital gains before the end of the year. The current federal tax rate on long-term capital gains is 15%. Obama has promised to repeal all of the Bush tax cuts including this one. At this point, it’s impossible to know whether Obama will allow it to revert back to the old rate of 20% as indicated in his official campaign web site or opt for an even higher rate. Many people still hold stocks with very low tax basis. Between now and the end of this year may be your last opportunity to sell and pay taxes at what will soon be remembered as a very low tax rate.
  2. Buy municipal bonds. Assuming higher income tax rates for those making over $250,000 beginning in 2009, buying tax-free bonds now makes a lot of sense. If we assume the top marginal tax rate goes to 39.6% (and it could very well be much higher), a 5% municipal bond has a tax equivalent yield of nearly 7%…not bad for a bond.
  3. Plan charitable donations carefully. If you expect to be one of those whose taxes will go up significantly next year, postpone major charitable gifts until 2009 so as to capture more tax benefits. If you expect to be the beneficiary of lower taxes in 2009, consider making charitable gifts this year.
  4. Reconsider stocks. There will be winners and losers under an Obama administration. Likely winners would be well capitalized businesses associated with infrastructure rebuilding such as Caterpillar (CAT) or locally, Vulcan Materials (VMC). Pharmaceutical companies focused on generic drug manufacturing may also be beneficiaries as Obama seeks to drive the costs of healthcare down.   Examples include Novartis (NVR) and Teva Pharmaceutical (TEVA). Obama favors natural gas for energy so producers such as Energen (EGN) and Kinder Morgan Energy Partners (KMP) are worth considering. As you make your stock selections, look for companies trading in the bottom quarter of their 52-week lows in order to give you the most up-side potential. Even though Obama intends to raise the tax on corporate dividends, I still prefer companies with a long history of paying and raising their dividends. Dividends provide investors an added margin of safety and tend to reduce stock volatility over the long term.
Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only financial advice and management to families throughout the United States. Mr. Welch has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Visit his Web Site Consult your financial advisor before acting on this advice.

As a financial advisor who works with a large number of retirees and pre-retirees, I am often asked whether it is advisable to begin taking Social Security benefits as early as possible or wait until your full retirement age or later.  The answer is…it depends.  Lest you accuse me of sounding like yet one more politician during an election year, let me explain.  The age at which you are eligible for full Social Security benefits varies based on your date of birth.  This ‘full’ retirement date means that you are eligible for 100% of the benefits for which you qualify.  You can still take Social Security retirement benefits as early as age 62 but your payments will be for a reduced amount.  You can also postpone receiving your Social Security retirement benefits until as late as age 70 and receive an increased lifetime monthly benefit above your full retirement benefit amount. 


There’s no easy way around this complex issue. Deciding when to begin taking your Social Security retirement benefits will depend on your specific situation.  Let’s look at several different scenarios and see how each might effect your decision.


·        Health considerations.  If you are in poor health, you may want to consider taking early retirement benefits.  While your monthly benefit amount will be smaller, you will receive a greater number of payments.  If your current health is good, consider your family history.  If you have longevity in your family, this would favor waiting and taking the higher benefit at your full retirement age.

·        Job status.  You can begin taking early retirement income benefits even though you are still working.  Unfortunately, you are likely to receive a reduced benefit because there is a retirement earnings test if you have not yet reached your full retirement age.  If you receive early retirement benefits in 2008, you will lose $1 of Social Security benefits for every two dollars of earnings above $13,560. If you are likely to have earnings that exceed this exempt amount prior to your full retirement date, you would likely be better served to postpone receiving benefits until your full retirement date.  Once you reach your full retirement age, your earnings in retirement will no longer reduce your Social Security benefits. 

·        Your marital status.  If you elect to take a reduced early retirement benefit and then predecease your spouse, he or she will be eligible to receive only your reduced benefit.  So if your spouse is significantly younger than you or in excellent health with a family history of longevity, you may want to consider postponing beginning your benefits until your full retirement date.


To begin receiving Social Security benefits, you must notify the Social Security Administration (800 772-1213). The government recommends that you notify the Administration at least three months prior to the date you want to start receiving benefits.


To calculate your ‘break-even’ date for taking reduced early benefits versus waiting for full benefits, go to the Resource Center at and click on ‘Social Security Benefits Calculator’.  As you can see, making the right decision concerning your Social Security benefits is a complicated and important financial matter.  This is one area that you would be well served to seek the advice of your financial or tax advisor. 


The recent stock market volatility has placed an exclamation point on the need for everyone to establish their own set of ‘Money Rules’.  Here’s the backdrop:  The sub-prime home mortgage debacle has set off a chain reaction of financial and economic events resulting in a global stock market sell-off.  There’s an old saying, ‘When America sneezes, the rest of the world catches a cold’, or in the recent case, the world catches the flu.  What has changed is that we are so much more globally connected, that when any major economy, be it China, Europe or Japan, experiences significant economic woes, there will be a strong ripple effect felt worldwide.  All of this leads to greater market volatility, meaning the ups and downs will be increasingly more dramatic and will occur more often.

So what’s a person to do?  I am certain many people had sleepless nights this past week as they pondered their own financial fate in the wake of the extreme market volatility as all major indices temporarily crossed into Bear Market territory on Wednesday.  Here are my suggestions:

  1. If you feel panic right now, consider meeting with your professional financial advisor.  In many cases, following your instincts at a time when your emotions are extremely high will, in most cases, lead to your poorest decisions.
  2. If you are five to ten years or more away from retirement, this is not the time to panic but rather an opportunity to buy stocks on sale.  Use your money to invest in solid but beaten down companies.  If possible, invest some money each month, known as dollar-cost- averaging.  Buying into a declining market when you have a long time horizon is a good strategy.
  3. If you are retired or less than 5-years from retirement and you have two to five years or more of cash flow needs in the form of money market funds, certificate of deposits or short to medium-term quality bonds, you’re in good shape and likely need to do nothing more than observe the events and learn the lessons offered.

On a bigger picture scale, use this experience as a wake-up call and an opportunity to establish your own set of written ‘Money Rules’.  Money Rules are nothing more than your own set of guidelines for how you will manage your money during good times and bad.  Determine the appropriate investment allocation for you based on your stage in life and your own risk tolerance.  If you are young and have many years until retirement, invest more heavily in stocks and stock mutual funds and be sure you have a periodic investment plan where you are investing money each and every month.  As your retirement date becomes more imminent, be sure to shift funds into money market, CDs and high quality shorter-term bonds to cover two to five or more years of needed cash flow.  This will allow you to weather the stock market storms that are sure to come and go.  Be sure your Money Rules include a statement of how you will adjust your portfolio during extreme bear markets and extreme bull markets.  Being able to refer back to your written Money Rules during times of panic or euphoria may well be the thing that prevents you from making a big financial mistake.

There’s no doubt that paying for your child’s college education is a scary proposition for most people.  The average costs of tuition and fees for one year exceed $23,700 for private colleges and $6,100 for public colleges.  This is before you pay the costs of room and board, books and all the miscellaneous expenses which could easily add up to an additional $10,000 or more per year.  For example, if you have a 4-year old who you expect to attend college with current annual total costs of $25,000, you’ll need to accumulate approximately $250,000 in order to cover the estimated costs for four years.  When should you start saving?  If you start now, you’ll need to save approximately $800 per month in my example.  Every year you wait, the costs go up.  Your best defense is a good offense.  Here are your play options:

529 Plans.  My favorite choice for most families is the 529 Plan because it allows you to invest a lot of money and your money grows based on traditional investing strategies.  Here’s how it works:

  • You can contribute up to $60,000 ($120,000 for married couples) during any 5-year period.
  • While your contributions are not deductible, your earnings grow tax deferred and withdrawals, when used for qualified education expenses, are tax free.
  • You control the money.  In fact, if you don’t need the funds for your child’s education, you can withdraw the money.  You’ll pay income taxes on any profits plus a 10% federal penalty.

Our research for our own clients suggests that the State of Utah plan is among the top rated 529 plans in the country.

Prepaid Tuition Plans.  Pre-Paid Tuition Plans are offered by a number of states (including Alabama) and allow you to pre-pay college expenses for basic in-state tuition and fees.  Your contributions can be made lump sum, over a period of years (5-years, for example) or until your child attains age 18.  If your child goes to a college out of state, most plans offer transfer tuition funding based on the average cost of tuition and fees in your state of residence.  Some people mistakenly believe that the state guarantees your contributions will fully fund in-state tuition and fees.  They do not but I know of no cases where the state has not fully covered tuition and fees.

UTMA and UGMA.  I still find some people setting up Uniform Transfer (Gift) to Minors Account’s for children as a college funding strategy.  This is the least effective strategy since earnings are taxed at the parent’s income tax rate above a minimal threshold and the child receives legal control of the account at his or her age of majority (age 19 in many states).

Most people think of funding college as a huge expense when in truth, it’s a wonderful investment in your child’s future.  Research from the US Census Bureau indicates that college graduates, ages 25-34, earn 77% to 86% more than those only graduating from high school or who obtained their General Education Development (GED) certificate.  This added income could easily mean more than an additional $1 million dollars for your child over his or her career.

To help you study your many options, visit the Resource Center at and look at the links labeled ‘College Funding’.

Last week I discussed what you should do to prepare your investments for the New Year.  Now, let’s take a look at the key things you should consider regarding your personal finances.  Here’s a simple checklist that will make sure you start 2008 on the right financial foot:

  • Get organized.  Now is the time to set up your income tax filing system for 2008.   Take a moment to review your most recent tax return and set up files for each tax category.  Examples include charitable giving, medical expenses, miscellaneous business deductions, and mortgage interest.  Once you have your system set up, simply drop your receipts, copies of cancelled checks or copies of credit card statements into the appropriate folder.  An alternative is to set your control system using a software system such as Quicken.  You should also set up files for bank statements, credit card statements, mortgage statements, monthly bills, etc.
  • Check your life insurance.  One of the biggest financial mistakes I see people make is inappropriate life insurance.  In most cases, there’s not enough life insurance.  Here’s a simple test: Take eighty percent of your gross income and multiply it by twenty.  Your answer will give you a ball-park estimate of the amount of life insurance you should have on your life assuming that you have dependants.  Now check your answer against the amount of life insurance you own.  If you have significantly more or less than this number, schedule an appointment with your financial advisor or insurance professional for a review.  Also, double-check to make certain your beneficiaries are appropriate, including your contingent beneficiaries.
  • Review your benefits.  Visit your Human Resources department and review your fringe benefits package.  Determine if you are taking full advantage of the benefits offered.  If you have a cafeteria plan, review last year’s qualified expenses and estimate the amount of qualified expenses you will use this year so that you are able to maximize your pre-tax spending.  Many companies offer multiple health plans.  Be sure your current plan best serves your needs for the coming year.
  • Review your will.  Studies suggest that more that eighty percent of adult Americans either don’t have a will or their will is out of date based on their current circumstances.  Wills are typically complicated legal documents that are hard for most people to understand so consider visiting with your attorney for a review, especially if you have not done this in the past five years or if you have had significant life changes such as the birth of a child, divorce, or a death in the family.
  • Invest for your child’s future.  The cost of college continues to rise sharply each year, averaging more than six percent in most cases.  The best way to prepare is start investing early.  The best choice of investment for most families is the 529 plan.  These are plans offered by the various states as well as some colleges whereby your investment grows tax deferred and withdrawals are tax free when used for qualified expenses.

For more details on choosing the best 529 plan, be sure to look for next week’s column where I will cover this topic in detail.

With 2007 behind you and 2008 ahead of you, what should your financial focus be?  First, take a moment to assess your financial results for the past year.  Did your financial net worth grow?  And did it grow at an acceptable pace to meet your long-term financial goals?  One of the best tools you can use for this exercise is an Asset/Liability Form.  You can print one out from the Resource Center at  Once you have assessed your progress for 2007, now turn your attention to 2008.  What adjustments do you need to make to make certain 2008 will be a fruitful year?  Here are five suggestions for you to consider:

  1. Guesstimate your target retirement account.  When was the last time you stopped and thought about how much money you’ll need to accumulate to retire?  Here’s a quick test.  Start by visualizing what financial conditions will be different in retirement.  For example, your home mortgage may be paid off.  Making these adjustments, guesstimate how much money, annually, you’ll need to run your lifestyle.  Subtract any sources of retirement income (annually) such as Social Security or company pension.  Multiply your remaining answer by 20.  This will give you a broad estimate of what you need to accumulate in investments.  It may be an eye-popping number, but don’t distress.  See # 2.
  2. Invest more money.  Make it a habit to increase the amount you are investing each year, even if it’s only by a small amount.  Over time, this habit will pay off with multiple rewards.  This is especially true if you have access to a company retirement plan where the company matches part of your contribution such as a 401k plan.  An easy way to find money each year is to use one-half of any pay raises or bonuses to increase your investment program.
  3. Revisit or write your Investment Policy Statement (IPS).  If you have an IPS, look it over and decide if you want to make any broad changes.  On a macro level, your IPS defines your intended allocation between stocks, bonds and cash.  It then further subdivides stocks and bonds into various categories.  For a sample IPS you can use, go to the Resource Center at click on ‘Investment Policy Statement’.
  4. Rebalance your portfolio.  Once you’re clear on how you want your funds allocated, take the time to rebalance your portfolio using your IPS as your guide.  You should rebalance at least once per year; more often if there are significant changes in sectors within your portfolio.  If your target retirement account that you calculated in #1 looks really big, consider increasing your allocation to stocks (#3).  Historically, stock returns are about double that of bonds over long periods of time.
  5. Check your beneficiaries.  Even if you ‘know’ the beneficiary of your retirement plans are right, check them anyway.  I have seen way too many mistakes made where someone passed away and the beneficiary was wrong.  These situations can be nearly impossible to correct.  I’ve also seen cases where companies lose the documentation.  Take a moment, double check.

A little planning at the beginning of each year will go a long way towards achieving your long-term financial goals.

As we close out the first half of 2008, we find our economy dipping deeper and deeper into recession and the US stock market teetering on the brink of a bear market.  Our economic woes first appeared last year with rising home mortgage defaults as many homeowners found themselves upside down when their home values fell below mortgage indebtedness.  It’s now apparent that our esteemed financial institutions fell victim to their own greed as they became increasingly creative in their lending practices, often offering mortgages with little or no money down to people who had less than stellar credit.  To complete the perfect storm, we have gasoline prices at $4 a gallon and rising; food costs rising and unemployment at its highest level in two decades.

The consumer, who is responsible for more than two-thirds of our economic engine, is just about tapped out.  Evidence of this abounds as homeowners are falling behind on mortgage loans and home equity lines of credit faster than at any time in the past twenty years.  Delinquency in credit card payments is also rising indicating that consumers are fast running out of sources for paying their bills.

The stock market has responded by flirting in bear market territory with the Dow down almost 20% since its October 2007 peak.

So what can we expect for the second half of the year?  By all accounts, things are likely to get worse before they get better.  Consumer spending for May and June was boosted by approximately $71 billion in tax rebates with another $45 billion to come.  As the rebates run out, expect the economy to worsen.  On a global basis, the International Monetary Funds suggests that the credit crisis is a $900 billion problem, of which about $400 billion has already been written off…meaning we may be less than half way through the credit crisis, extending its reach into 2009.

How should you prepare yourself?  I have two schools of thought:

  1. In a credit crisis, cash is king.  Think of all the ways you can raise and conserve cash.  Be sure your cash is stored in a safe place such as US treasuries; FDIC insured bank deposits and CDs and high quality money markets.  Note that not all money market funds are equal.  Just last month, Legg Mason, Inc., a large brokerage firm, elected to contribute $240 million to bail out three money market funds of one of its subsidiary companies.
  2. Any crisis breeds opportunities.  Consider using this as an opportunity to invest over the next twelve months in beaten-down assets such as bank stocks and real estate.  Remember, the bottom of every bear market is preceded by overwhelming pessimism and capitulation.  If we are not there yet, it seems we will be in the not too distant future.

If it’ll make you feel better, not everyone is hurting.  According to the Wall Street Journal, in the oil-rich region of the Persian Gulf, one businessman made headlines and the Guinness Book of World Records for paying $14 million for a custom car tag reading “1” while his cousin paid $9 million for a tag reading “5”.  I don’t know about you, but the extra $5 million to be number one seems like a bargain.


“Keeping This Year’s New Year’s Resolutions”


How many of you have made a New Year’s resolution only to break it within a few weeks or months?  I see quite a few raised hands, including my own.  Why do you think it’s so hard to keep these important promises we make to ourselves?  My experience is that our resolutions lack the elements necessary for success.

  1. Create a written vision of your intention.  Decide what you truly want in your life and then write it down.  When you write down your intentions, a magical connection is created between you, your brain and the universe.  Your brain wants you to succeed and will automatically begin to tap into the universal strategies for success.  Begin by creating a vision or picture or movie in your mind of what your end result looks like.  Then, convert that to a written word-picture.  The more detailed, the better.  For example, if you want to change your body-type, visualize exactly what you would look like and feel like.
  2. Develop a written action plan.  Too often our goals lack precise strategies for accomplishing them.  For example, “I am going to lose 20 pounds in 2008”, provides the brain with very little information or guidance.  Better would be something like, “I choose to discard 25 pounds of body fat while gaining 5 pounds of muscle.  I am going to pre-plan and prepare 3 healthy meals and 3 healthy snacks a day plus exercise a minimum of 30 minutes 3 times per week.  Every Sunday, I’ll prepare and store that week’s meals and schedule my workouts directly into my calendar.  I’ll immediately remove all unhealthy foods from my home today and commit to keeping unhealthy foods out of my house.”  Now you have an action plan that is precise and you know just what to do.
  3. Create a very large ‘Why?’  Write down all the reasons for accomplishing your goal.  Again, the bigger the reasons, the more leverage you create for your intentions.    Ideally, your reasons are bigger than you.  If your reason for losing weight is to look good in your swimsuit this summer, it’s probably not enough.  However, if your reason is to become the healthiest person you can so that you have the energy to spend quality time with family and friends and create the freedom to live your life to the fullest…now you have a reason that is bigger than you!  Keep your statements in the positive tense rather than the negative tense.  Instead of saying, “I will quit smoking”, say, “I choose to become a fresh-air breather!”
  4. Keep it bite-sized.  While it’s important to stay focused on your ultimate vision, it’s even more important to create numerous ‘success points’.  Success points are ‘mini’ destinations along the journey to your ultimate vision.  Examples might include successful completion of your first weeks’ exercise and eating plan.  Another might be dropping 1 dress size or pants size.   Another might include lowering your resting heart rate from 74 to 70 beats per minute.
  5. Celebrate along the way.  It’s vital to celebrate your successes as you move towards accomplishment of your vision.  Use your success points as opportunities to celebrate.  Create as many success points as possible and create specific rewards.  For example, treat yourself to a new outfit once you drop a dress size.

This pre-planning with its ‘mini’ rewards can make this your best New Year ever!



“Tis the Season of Giving”


No doubt about it, December has everyone in the giving mood.  People are busy buying and exchanging gifts, acknowledging friendships and the love of family members.  Giving can also be smart tax planning while providing much needed support for those less fortunate in our community.  Here’s a summary of the most popular ways people give and get a tax deduction:

  • Cash.  Cash remains the most often way people give to tax-exempt organizations (charities and religious organizations).  In order for you to receive a tax deduction for 2007, the postmark for checks mailed must be dated no later than December 31st.  Deductions are limited to 50% of your Adjusted Gross Income.  Any excess contributions above this limit can be carried forward for up to five years.
  • Clothing.  This is an easy way to create a tax deduction and help a lot of people who could use additional clothing during the remaining winter season.  My rule of thumb is … ‘if you haven’t worn it in the past 24 months, give it away‘.  To secure your tax deduction, be sure to create a detailed list of items and their value and get a receipt from the charity indicating the gift was made before the end of the year.
  • Appreciated property.  A gift of appreciated assets such as stocks, bonds or real estate that you have held for more than one year allows you to save taxes two ways.  First, you get a deduction for the full current market value of the gift.  You also ‘give away’ the embedded capital gains taxes on the appreciation of the asset.  With stock, if you want to continue to hold the stock, simply use cash to replace your shares.  You’ll now have a tax deduction and the same number of shares but with a new, high cost basis.  The stock gift and properly endorsed stock power must be postmarked by December 31st to qualify for a 2007 tax deduction.  Note that due to falling interest rates, you may be holding appreciated bonds in addition to appreciated stocks.  Gifts of appreciated assets held for more than a year are limited to 30% of adjusted gross income.  Deductions in excess of that amount can be used in future tax years for up to 5 years.
  • Retirement accounts.  The Pension Protection Act of 2006 allows anyone who is age 70 ½  or older to gift up to $100,000 of their Traditional IRA directly to a public charity or charities without having to report any income.  While the donor does not receive a tax deduction, he or she avoids receipt of income from the transfer.  The transfer does qualify for the Required Minimum Distribution for 2007.  2007 is the last year these gifts are allowed.
  • Life income gifts.  I see a lot of interest in charitable gift annuities, whereby you make a gift to a charity or religious organization in exchange for a monthly life income.  At your death, the unused portion of the gift reverts to the charity.  As the donor, you can be the income beneficiary or you may designate someone else.  The amount of the deduction is based on the present value of the gift and your income stream is guaranteed by the charity so you’ll want to choose a charity in solid financial condition.



“Real Estate’s Silver Lining”


Open any major publication or tune into any national news program and you’ll be bombarded with negative stories about the real estate housing market in America.  There’s no question that the subprime lending debacle is a major event because major financial institutions fell victim to greed supported by poor lending practices.  Inevitably, all this negative press affects the mood and outlook of the general public…turning massive numbers of people into pessimistic viewers of the future.  However, it’s worth considering whether there’s another story or even a variation of the subprime news headlines. There are two sides to every story and there’s a silver lining in any difficult situation.  It is true that the problems in the subprime market are real.  For those of you who are not familiar with the term, subprime loans are loans made to people whose credit is sub-par.  The trouble began as mortgage lenders offered loans that required little or no money down and payment plans that included interest only or, in some cases, less than interest only, called negative amortization loans.  Loans often included ‘teaser’ rates…interest rates below prevailing market rates.  What the mortgage lenders counted on was continuous rising home values that would bail out home buyers and cover the lending institution’s risks.  But, the lenders’ bet did not pay off and has cost them millions or billions of dollars and left hundreds of thousands of new homeowners in financial peril as their mortgage payments rise under their adjustable rate plans.  The subprime market is clearly in difficulty but what about the rest of the real estate market?

“The media often paints an accurate but broad-brush picture…akin to a national weather forecast.    However, weather is local in nature and the real estate fundamentals for the Birmingham area remain strong”, says Ty Dodge, President and COO of Realty South, Alabama’s largest real estate sales company.

“From a historical perspective, 2007 will likely be the second or third best year in Birmingham for real estate sales”, Mr. Dodge adds.  Home prices remain fairly stable; unemployment is among the lowest rate in the country; and mortgage rates are extremely competitive.  “For people who should have been buying homes all along, it’s still a good time to buy”, says Matt Bearden of 1st American Bank.  Current mortgage rates for both a 30-year and 15-year mortgage range from 5.25% to 5.75%, near historical lows.

For those of you who are considering buying a new home, now may be one of the best buying opportunities.  “I can’t remember a time in my 33 years as a homebuilder where there was more selection and such affordable prices as right now…and as is bound to happen in the not too distant future, the pendulum will start swinging the other way…meaning decreased selection and increased home prices,” states Ed Anderson, Vice President of Gibson & Anderson Construction.

So let’s review the positives:

  • Employment and the economy remain strong in Birmingham.
  • Mortgage rates remain near historical lows.
  • Home prices remain stable in the Birmingham area.
  • If you are a buyer, you have great selection across virtually all of the Birmingham area communities.

These same facts are true for many communities throughout the United States.  Check your ‘local weather’.  You may just find a rosy forecast for buying real estate right now.



“Year-End Tax Planning Checklist”


With 3 weeks remaining in 2007, now is the time to take one final look to see how you can cut your income tax bill.  Here’s my checklist of ‘must-do’s’ before December 31:

  • Max out your 401k plan.  You should have at least one paycheck remaining and can have your employer ‘catch-up’ your contributions by using your remaining paychecks.  If you need the cash to pay bills, use your savings.  As a result, you’ll get a nice tax deduction for 2007.
  • If you are self-employed, you have until December 31 to sign plan documents if you want to set up a qualified retirement plan such as a 401k, profit sharing plan, or defined benefit plan.  You can then fund it early next year and still get a 2007 tax deduction.  If you are a solo self-employed, consider a Single-Person 401k.  You’ll be able to maximize your deductions with a minimal of administrative costs.
  • Avoid federal penalties and interest by making certain you have paid in the lesser of 100% of your tax liability from 2006 (110% if your 2006 adjusted gross income was over $150,000) or 90% of your actual 2007 liability.
  • Harvest your tax losses.  By selling stocks that have losses (stocks that are worth less than you paid), you create ‘realized’ losses that can be used to offset realized gains for 2007.  Up to $3,000 of excess losses over gains can be used against ordinary income.
  • Avoid buying mutual funds at year-end in taxable accounts.  You can end up with a nasty tax surprise since all mutual funds must declare 90% of their gains before year-end.  You could end up invested for a short time, have no gains but get hit with a taxable distribution.
  • Make gifts to family members.  You’re allowed to give up to $12,000 ($24,000 for couples) to as many people as you wish without paying gift taxes.  This reduces your estate for estate tax purposes and shifts future income and appreciation to the family member who may be in a lower tax bracket.
  • Make gifts to charities.  All gifts must be made by year-end in order to receive a deduction this year.  If you use your credit card to make gifts, the date of the charge determines the date of the gift.  For cash, the date of the receipt applies.  For stocks, the date of the actual transfer into the charity’s brokerage account determines the gift date.  Gifts by check are determined by the date of the post-mark.
  • Consider gifting to charities directly from an IRA account.  2007 is the last year you can gift up to $100,000 directly from your IRA account to a charity.  You must be age 70 ½ or older and other rules apply.
  • Make sure you take your Required Minimum Distribution (RMD) from your retirement account(s) this year.  If you are age 70½ or older and subject to Required Minimum Distributions (RMDs), you’ll face a stiff 50% penalty for not taking these required timely withdrawals.
  • By making your January 2008 mortgage payment in December, you’ll get to deduct the January interest in 2007.
  • While state income taxes are not due until January 15, 2008, paying them in December will get you a federal tax deduction in 2007.

Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year.



Medicare Part D Drug Plans Deadline Looms”



Once again it is the open enrollment period for the 2008 Medicare Part D Drug Plans. If you want to change to a different plan or you are choosing a plan for the first time, you must sign up by December 31.


There are a number of plan changes for 2008 so it’s important that you both review your existing prescription medications and your current plan to be certain you are getting the best deal. Picking a plan is individualized and it mainly depends on the prescriptions you are taking regularly. If you have had a lot of changes in your prescription drugs this past year then changing plans may save you money. If you determine that no changes are needed then no action needs to be taken during this open enrollment period. 


The reason you should start reviewing your options now, rather than waiting until the last minute, is that there is an abundance of complexity surrounding your options.  In Jefferson and Shelby counties alone, there are 53 Prescription Drug Plans and 24 Medicare Health Plans to choose from.  It’s important to note that the Prescription Drug Plans are ‘stand alone’ plans and offer only prescription drug coverage. It’s for people who want to stay on the traditional Medicare fee-for-service program for their other health care coverage.  The Medicare Health Plans cover both medical services and prescription drugs. It’s for people who prefer more managed care.  To do a comparison of the various plans, go to the Resource Center at and click on ‘Medicare Part D Drug Plans’.  Once in the web link, click on “Find & Compare Plans”.


2008 plan changes include:

  • Premiums: Most plans are increasing the premium for 2008.
  • Deductible: Increased to $275 ($10 dollar increase from 2007). No plan may have a deductible more than $275.
  • Co-insurance/Co-payments: Drugs are categorized in “tiers.” Each tier requires a different coinsurance amount.
  • Drug Formulary: Double check all current drugs and make certain your drugs will continue to be covered by your plan.
  • Prior Authorization Rules: Many plans have added prior authorization rules which require your doctor to contact the insurance company and state why it is necessary for you to take a particular drug.
  • Gap/ Doughnut Hole: Most plans will cover drug costs up to $2,510. This $2,510 includes your deductible, your co-payments and the insurer’s share of the costs.  After the $2,510 amount is reached, you fall into the so-called ‘doughnut hole’ where you become responsible for all additional costs until your out-of-pocket costs reaches $4,050. This can be deceiving because many individuals believe they only have to pay an additional $1,540 ($4,050 – $2,510).  However, the $2,510 included the amount that the insurance company paid. Therefore you must subtract the portion that the insurance company has paid to calculate your true out-of-pocket costs.


Some plans do offer coverage during the gap or doughnut hole period but they are only covering generic drugs and are generally best for those seeking only prescription drug coverage.




‘Tis the Season to be Frugal



Thanksgiving marks the beginning of the holiday spending season.  To make sure you don’t overspend this year and end up starting out next year with additional debt, follow this simple 4-step process:


Step 1.  Determine the total amount of money you can afford to spend on all gifts.  Here’s the BIG RULE: Your budget cannot exceed cash funds you already have.  Do not count on future paychecks to cover your holiday gift giving.  I know that for many people this means that your budget will be extremely small but stick to the rule. 


Step 2.  Make a list of everyone to whom you plan to give a gift.


Step 3.  Assign dollar amounts as “targets” for how much you will spend on each person on your list.  Be sure that your individual totals do not exceed your overall budget. 


Step 4.  Keep a running total of all of your spending whether you use your checkbook, cash or credit card.  Remember that your goal is no new debt.


If you find yourself ‘long on names and short on cash’, don’t despair.  Here’s a list of some of the best ideas for presents that come from the heart but don’t cost much:


  • Give ‘baked’ goods.  Everybody loves food and nothing says you care more personally that something you baked.  Every Christmas, I look forward to the spicy cheese ball from one long-time friend and home baked sugar cookies from another.
  • Make a donation to a charity.  Many charities offer multiple gift cards that acknowledge to the recipients that you have made a donation in their names. 
  • Pass along a cherished possession. There’s no rule that gifts have to be new. If you know someone has always admired something you own—a piece of jewelry you inherited or a framed print—why not pass along that item to that person. Wrap the item in fancy paper with a bow and include a note saying that you hope the item brings them the same pleasure that it brought you.
  • Give a ‘Time Certificate’.  Create by hand or computer a mock gift certificate. It can include babysitting, yard work…use your imagination.  This offer can be modest or extravagant—but the recipient will certainly know that you’re giving of yourself with this gift!
  • Create a Holiday CD.  Record some of your favorite holiday songs and make a CD using a CD “burner”. They’ll love the music and think of you every time it’s played.
  • Start a Photo Album.  In most families, there’s one person who loves taking and keeping photographs. If you’re that person, go through your albums, especially your old ones, and create some smaller albums for your relatives. Or reproduce one old picture, perhaps with relatives who have passed away, and frame it as a gift.
  • Write a note.  People often do not take the time to tell others how much they mean to them.  Write a note to the special people in your life.  You will likely find that it is the one gift they will cherish forever.


Remember, it not how much money you spend but sharing your heart that is at the true heart of giving.  Have a blessed holiday season!




“The Hidden Tax You May Owe”


As many as twenty-five million middle income Americans are likely to feel the pain of a hidden tax in 2007.  The Alternative Minimum Tax (AMT) was created in 1969 as a governmental strategy to make certain that a small number of wealthy taxpayers couldn’t avoid paying income taxes by making use of the many tax loop-holes available. Unfortunately, as often happens with governmental plans, what originally looked good on paper, has now turned into a hellish nightmare for “innocent” taxpayers…namely the middle class.  While you probably have heard the term ‘Alternative Minimum Tax’, few people understand what it means or how it might apply to them.  In essence, the Internal Revenue Service requires that you calculate your income taxes twice.  Your first calculation is the traditional way you’ve always done it.  Then, you must recalculate your taxes using the AMT rules.  Whichever calculation results in a higher tax is the one you owe.

Earlier this month, the Democratic led House passed legislation that restricts the number of taxpayers who would be subject to the tax, saving potentially affected taxpayers a total of about $51 billion.  Of course nothing is free and this bill also included higher taxes on investment fund managers, thus insuring that the bill will be resisted by Republicans and President Bush.  Failure to provide this ‘fix’ could cost affected taxpayers as much as $2,000 in additional taxes for 2007.

Here are a few of the ‘tax facts’ that are likely to cause you to be subject to the Alternative Minimum Tax:

  • Incentive stock options exercised during 2007.
  • Large deductions for state and local income.
  • Large amounts of long-term capital gains.
  • Large medical expense deductions.
  • Large property taxes or home equity loan interest.
  • Large write-offs for miscellaneous itemized expenses such as unreimbursed medical expenses.
  • Significant tax-free bond income from certain municipal bonds.

Assuming that our Congressional leaders fail to resolve the AMT problem for 2007, is there anything you can do to reduce the likelihood of becoming subject to the tax?  For individuals, your best moves include maximizing contributions for you and your spouse to tax deductible IRAs, and company 401(k) plans.  You should also review your personal investments for positions where you have losses that you can take this year.  Remember, up to $3,000 of excess losses over gains is fully deductible against ordinary income.  Also, postpone taking gains on securities you hold until 2008.  If you own your own business, consider prepaying 2008 expenses in 2007 and

conversely, postponing receipt of year-end income until early 2008.  The goal is to reduce your adjusted gross income (AGI) which provides a larger AMT exemption plus it reduces your state and local income taxes, which are disallowed when computing the AMT.

The AMT is a complicated tax so if you think there is any chance you’ll be affected by it, your best strategy is to meet with your CPA as soon as possible. That way, you can still do some tax planning before the end of the year.