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Welcome to
The Greenleaf Guide
January 2010 Newsletter |
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Question
I've read that the best time to invest in a mutual fund is right when it is launched. Do you agree?
Answer
Although a new fund with a known manager can be nimble and able to buy small stocks that are too thinly traded for larger funds (sometimes producing excellent returns), there are plenty of risks when taking on a chance on an unknown fund.
For one, expenses tend to be high since few economies of scale exist in a mutual fund with only a few million in assets. Both Merrill Lynch and ING launched principal-protection funds in 2002 just as the 2000-02 bear market ended. ING's funds had extra costs in order to guarantee principal preservation. In the end, U.S. Treasury bills did better than the funds over their short lifetimes.
Beware, also, of funds based on fads, rather than sound investment strategies. In the early part of the decade, various internet theme funds proliferated. Amerindo Internet B2B Fund lasted just three years after its May 2000 launch when managers Alberto Vilar and Gary Tanaka were arrested for stealing from their clients. The fund lost a cumulative 70%, and Vilar and Tanaka were convicted of money laundering and fraud.
Finally, watch out for funds that use yesterday's investing successes as their strategies. Robert Markman started Markman Global Infrastructure Build-Out Fund on Sept. 15, 2008, the day Lehman Brothers filed for bankruptcy, Bank of America bought Merrill Lynch, and the financial system went off a cliff. Not a great time to start a fund with almost three-fourths of its assets in economically sensitive industrial-materials stocks. It didn't last a year. |
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© Greenleaf Financial Group.
All rights reserved. Greenleaf Financial Group is a Registered Investment Advisor (RIA).
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Where and How Much
to Save in 2010
The start of the new year is when we typically start nagging -- gently nagging -- people to increase their workplace retirement plan and/or IRA contribution levels. Although most years feature increases in allowed savings amounts, that isn't the case for 2010. In fact, 2010 is nearly identical to 2009.
Here are your key figures for 2010:
401k, 403b, and 457 Plans
Employees up to age 50 may save $16,500 in these workplace plans. Those age 50 and above are allowed a "catch-up" contribution of $5,500 for total tax-deferred savings of $22,000 in 2010.
SIMPLE IRA Plans
Employees up to age 50 may save $11,500 in this workplace plan in 2010. Those age 50 and above are allowed a "catch-up" contribution of $2,500 for total tax-deferred savings of $14,000.
Since workplace savings plans are one of the best current income tax breaks available to individuals, we encourage you to make saving in your workplace plan a high priority.
IRA or Roth IRA Contribution Limits
Individuals up to age 50 may save $5,000 in an IRA in 2010, subject to income limits. Those age 50 and above are allowed a "catch-up" contribution of $1,000 for total tax-deferred savings of $6,000.
The Roth IRA Income Limit is:
$105,000 for single taxpayers
$167,000 for married taxpayers
These figures represent modified adjusted gross income for 2010 in order to make the full Roth IRA contribution. Income amounts slightly above these limits will still qualify for a reduced contribution.
The Traditional IRA Income Limit for those with a workplace savings plan are:
$56,000 for single taxpayers
$89,000 for married taxpayers
These figures represent modified adjusted gross income for the full Traditional IRA contribution. Income amounts slightly above these limits will still qualify for a reduced contribution.
Also, a spouse without a workplace savings plan may make the full Traditional IRA contribution as long as their married filing jointly modified adjusted gross income level does not exceed $167,000 in 2010.
All IRA savers still need earned income to qualify for IRA contributions. You may split your contributions between different IRAs if you qualify for both types. |
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The Skinny on Roth IRA Conversions
The financial press has been churning out articles describing investors' opportunity to convert a Traditional or Rollover IRA to a Roth IRA in 2010.
For one year only, the IRS is waiving the adjusted gross income limit of $100,000. Anyone, therefore, can convert a traditional IRA to a Roth IRA in 2010.
In addition, in 2010 only, the conversion amount – which is usually reported as income for the tax year of the conversion – can be split and reported in tax years 2011 and 2012 if desired.
Because of the tax cost, though, a conversion decision requires careful consideration.
Q: When is a conversion most favorable?
A: Individuals who meet some or several of the following circumstances:
1. You can not normally save in a Roth IRA or Roth 401k.
2. You believe your tax rate is lower now than it will be in retirement.
3. In retirement, you will live in a state with a higher income tax rate than your current state.
4. You have enough money in a non-IRA account to pay the tax cost.
5. You anticipate beginning Roth IRA withdrawals many, many years in the future -- or never.
6. You intend to give your Roth IRA to heirs.
Q. When should I consider a Roth IRA conversion?
A: These two scenarios are best:
1. If you think you’ll be in the same or a higher tax bracket in retirement, then it’s possible that the taxes you pay on a Roth conversion now will be less than the taxes you’ll pay on Traditional IRA withdrawals in retirement.
2. If you wish to provide assets to heirs, Roth IRAs offer estate-planning opportunities because heirs do not have to pay income taxes on Roth IRA withdrawals.
Q: What are the drawbacks of a conversion?
A: There are three key drawbacks.
1. Future tax rates and tax regulations are unknown and unpredictable.
2. Converting to a Roth IRA incurs a certain tax cost, whereas you won’t know if the conversion was financially beneficial until the future.
3. You will pay income taxes (federal, state, and local) on the amount that you convert to a Roth IRA. |
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