Capital Ideas

• Buy stuff. Business owners can take a tax deduction of up to $125,000 for equipment they buy in 2007 without having to depreciate it, says Mildred Carter, a senior tax analyst with research firm CCH. That includes computers, cars and even the iPhone that you use exclusively in your business. You can buy it all on Dec. 31 and still have it count against your 2007 taxes, but why wait that long?

• Sock away money. You can feed your IRA or private 401(k) until April 15, 2008, and still have it count for this year. But you have to make sure you establish your 401(k) or more specialized pension plan before the end of this year, warns Tom Ochsenschlager of the American Institute of Certified Public Accountants. You can do this even if you already have a pension-paying day job and simply moonlight as a business owner.

• Hurry up and drag your feet. As the end of the year approaches, sole proprietors can manipulate their own taxable income by paying all their bills promptly and getting a little bit slow to invoice. The money you pay out this year is deductible; the fees you don’t collect until January won’t get taxed until 2008.

• Keep clean. The IRS has said it’s going to close the tax gap, even if it means comparing state sales-tax filings with federal filings, investigating the supplies that businesses order or checking out the cars, houses and lifestyles of cash-based business owners. So, keep good records of the money you bring in, the money you spend, and the amounts you send to your bank account and your state tax authority. Filling out your returns in the spring will be a snap. And anyway, cheaters never prosper.

title: “Capital Ideas” ShowToc: true date: “2023-01-02” author: “Pauline Dias”

—How badly do investors fall behind? You can find out at Morningstar.com, which recently started keeping track of average investor returns. Go to Morningstar’s home page and enter the name of a fund in the “Quotes” box. When the fund page comes up, click on “Total Returns” to get its performance record. You’ll then see a tab for “Investor Returns.” Click there to find out how well (or poorly) typical investors did. They’re more successful in some funds than others.

—Where do investors fare the worst? In volatile funds where prices zoom and dip. One example would be the technology sector. Those funds grew at an annual 6.4 percent over the past 10 years while their average investor was losing4.2 percent. The same thing happened in communications funds, health-care funds and growth funds. The RS Emerging Growth Fund gained 10.04 percent a year over the past 10 years. Its typical investor lost 6.96 percent.

—Where do investors fare the best? In conservative funds, where returns are steadier. This group includes the giant, well-diversified stock funds, as well as funds that buy both stocks and bonds. T. Rowe Price Equity Income, for example, clocked 10-year returns of 10.52 percent. Its typical investor did almost as well at 10.13 percent.

—What’s the lesson? If you seek the thrill of risky funds, you have to stick with them during their poor years, too, if you hope to make money, says Russel Kinnel of Morningstar. If experience shows that you’ll sell too soon, buy the conservative funds. You’re more likely to hang in there and to get superior returns.

title: “Capital Ideas” ShowToc: true date: “2023-01-16” author: “Anna Carroll”

• Check the averages: Median U.S. household income is $48,000, and if your family brings in $88,030, you’re in the top quintile of households. If the members of your household are earning more than $157,176, you’re in the top 5 percent. When it comes to those credit-card balances, you should try to underachieve: $10,000 is now about the average credit-card debt per household, according to cardtrak.com.

• Pretend you’re a business: Denver financial adviser Charles Farrell evaluates clients’ health with financial ratios that are similar to the ones used for companies, and he pegs it to their age, too. At 30, you should have your highest levels of debt (including mortgage, student loans and credit cards) to earnings, with total debt double your annual earnings. As you age, that figure should get smaller, and stay below 1:8. At the age of 45, debts should equal your annual salary. By retirement at 65, those debts should be zero, he suggests.

You should also aim to be saving 12 percent of your income annually, and the savings you amass should exceed your annual income in your 30s, says Farrell. By the time you are 40, you should have 1.7 times your income stashed away for retirement, and by 50, aim for three times your earnings.

• Check cash flow: Lenders (at least the sensible ones) like to see borrowers keep their housing expenses—including mortgage payments, insurance and property taxes—to 28 percent of gross income. They also like to limit total debt payments (adding car and student loans and credit cards) to under 36 percent.

• Do the eat-and-sleep test: Too much math? The old saw about family finances holds that you can either eat well or sleep well—you can spend too much on luxuries and worry at night, or sleep soundly by living lean and saving more. If you’re paying all your bills, managing the occasional treat and saving money without tossing and turning in terror about your bottom line, you’re probably doing just fine. Or you’re in denial.

title: “Capital Ideas” ShowToc: true date: “2023-01-24” author: “Rick Rogers”

Bullard and his research partner, Edward O’Neal of Academic Wealth Management, looked at 53 mutual funds that mimic the performance of Standard & Poor’s index of 500 stocks. They all hold the same stocks, so the only difference among them is cost. Part of the cost goes to the broker or planner, for the advice that clients want. What’s left is the fund’s own operating cost. The study looked only at operating costs.

Brokers push the funds with high operating costs. The average broker-sold fund (a “load” fund; the load is the commission) charges twice as much as the average no-load. Costs triple when the data are weighted toward the larger funds that more investors buy. Bullard calls this the “broker penalty.” You pay for advice, then you pay again in the form of higher fees.

How much more do you pay? On a $10,000 investment, rising at 10 percent over 20 years, a typical no-load investor would pay $2,582 in operating costs, the study found.

An investor in a load fund—holding exactly the same stocks—would pay $7,600 in addition to the commission.

What to do. It’s easy to buy low-cost index funds yourself, from Vanguard or Fidelity. If you’d rather use a broker, ask for a fund that costs 0.75 percent a year or less. Good brokers oblige.

title: “Capital Ideas” ShowToc: true date: “2023-01-17” author: “Irene Chase”

Investors brushed off dividends during last year’s market run-up. Companies with no dividends rose 57 percent, compared with just 31 percent for dividend stocks. But dividends cushion market drops. Since December 1999, total return on dividend stocks (payments plus price gains) has been a dandy 45 percent, says Standard & Poor’s. Stocks with no dividends have returned just 5.2 percent.

Another nice thing about dividends is that companies often raise their payouts. From 1983 through September 2003 dividends earned on $10,000 invested in S&P stocks, and taken in cash, equaled $18,473, compared with $17,477 for a portfolio of bonds, says Steve Norwitz of T. Rowe Price. And you’ve got price appreciation, too.

The new charm of dividends hasn’t been lost on CEOs. A record 21 S&P companies started a dividend program last year, including Microsoft and Best Buy. Investors should soon catch on. In a bull market’s first year, smaller, more speculative stocks shine, says S&P’s Howard Silverblatt. In the second year performance often rotates toward larger issues, including dividend payers.

Mutual-fund investors have two good options: dividend-growth funds, which buy companies that are apt to raise their dividends; and equity-income funds, whose stocks pay higher dividends than average. For individual stockpickers, a good list to start with is S&P’s “dividend aristocrats”–57 companies that have raised their dividends in each of the past 25 years. You’ll find them at www.sandp.com. Go to “indices” and type “dividend aristocrats” in the search engine on the site.

title: “Capital Ideas” ShowToc: true date: “2023-01-05” author: “Michael Barnum”

^ Fixed-rate mortgages: The dollar cost of borrowing at today’s higher rates may not be as much as you think. A half-point increase on a $100,000 loan–say, from 6 percent to 6.5 percent–works out to $32.51 a month on a $100,000 30-year loan. Most of it’s interest and therefore tax deductible.

Fixed-rate, fixed-term second mortgages: They’re averaging 6.92 percent, so normally you’d shrug them off. But some homeowners hold older, higher-rate loans with only modest amounts left to pay. A second mortgage for the balance of the loan would cut your monthly costs without exposing you to the risk of rising rates. You often can find below-average rates at smaller banks and credit unions.

Hybrid mortgages: These loans offer fixed rates for a certain number of years, then switch to adjustable rates. You can still find 5.5 percent (or less!) for the next five years, after which your rate would change annually, up or down. “There’s no compelling reason to buy fixed-rate protection for a full 30 years,” Gumbinger says. Lock in your payments for the first few years, then consider what to do next.

Home-equity loans: They look pretty cheap–pegged at the prime bank lending rate (4 percent) or less. But unless you’ve been asleep all spring, you know that prime rates are likely to rise. An extra point on a $100,000 loan would cost $59.14 a month. These loans still save money if you can repay in a year or three. So if you’re taking a modest loan and will repay early and often, check ’em out.

title: “Capital Ideas” ShowToc: true date: “2022-12-31” author: “Larry Cruz”

Double sales charges. You don’t have to pay the same sales charge twice. If you paid a sales load the first time, you don’t have to pay a second time. This applies to mutual-fund A shares, where you pay the charge up front. It also covers the contingent deferred sales charge on B shares and C shares, levied if you sell the fund within six or seven years. Not all mutual funds follow this policy, but many do.

WolfPack, RatPack. As an example, say you bought A shares in the WolfPack Mutual Fund, paying 5.5 percent up front. (A shares are cheaper if you hold for the long run because of their lower annual fees.) Then you get a new broker who persuades you to switch to the RatPack Fund in order to earn himself commissions. You buy A shares again, paying another 5.5 percent. Halt! You don’t have to pay. RatPack allows you make the switch “free.” You do it through a Net Asset Value transfer, which guarantees that you won’t lose money on the change.

The same thing should happen if your new broker talks you into selling your B or C shares before seven years are up. Paying the deferred sales charge should get you new A shares free.

Get your money back. Not all funds offer NAV transfers. Those that do apply various terms and conditions. For example, you might have to make your new purchase within 30 to 90 days, using the proceeds of the previous sale. Ask your broker about this. If you’re just now discovering that you were overcharged, ask your broker for an adjustment. It doesn’t matter that the sale was long ago. You’re still owed, and the fund will pay.

The National Association of Securities Dealers is looking into whether firms give the waivers you’re owed. If not, it’s usually because they didn’t know–but Wall Street is learning fast.

title: “Capital Ideas” ShowToc: true date: “2022-12-26” author: “Rosemary Stiffler”

As a quick refresher, a state-run 529 helps you save for higher education. You invest in one or more of the mutual funds the plan offers. Any gains are free of federal tax when used for school. If you use your own state’s plan, you may get a deduction on any state taxes, too.

State of Play. You’d think that states would feel obliged to offer their residents good deals. Some do; some don’t. The gold standard is Utah, says Joe Hurley, an expert on 529s. It charges just 0.25 percent a year, plus an annual $25 maintenance fee. Investors get Vanguard index funds, also at a superlow cost. Mississippi, by contrast, charges 0.7 percent, plus $25 a year on small accounts. As a result, its TIAA-CREF index funds aren’t as cheap as they should be. When you buy through a broker or planner, figure on paying a further 1 percent a year, Hurley says. Plans are always cheaper if you buy directly from the state.

Open Arms. Because of tax breaks, it’s smarter to use a 529 than to buy the same fund on your own. But you don’t have to use your state’s plan, especially if it’s high-cost and you don’t get state tax breaks to compensate. Most 529s accept residents from other states–Utah included.

Fee Factor. Low costs are especially important in the years just before your child goes to school. By then, I hope you’ll have moved your money into safe, fixed-income investments, so you won’t take a loss just before the tuition comes due. But they don’t yield very much. Fees you didn’t notice when you kept your money in stocks can waste your returns in those final years. For data on all the state 529 plans, check the Web site savingforcollege.com.

title: “Capital Ideas” ShowToc: true date: “2023-01-28” author: “Michelle Laday”

The double play: Each state but Washington has its own “investment” 529. You can contribute for one child or more, putting the money into mutual funds. The account grows tax-deferred. All gains come federally tax-free when your child uses the money for higher education. That’s a double tax play right there. (Note that tax-free withdrawals last only through 2010 unless Congress renews them. If not, withdrawals will be taxed in your child’s bracket, not yours, so it’s still a win.)

The triple play: Tax break No. 3, for wealthy people, covers gift and estate taxes. You can normally give each child or grandchild up to $11,000 a year ($22,000 for couples), gift-tax-free. With a 529, however, you can give five years’ worth of gifts all in one shot (that’s $55,000 for singles and $110,000 for couples, in a single year). That gets the money out of your taxable estate. And, if you want, you can take it back.

Fourth and last: Here’s the tax break you might miss. Most states let you take your investment gains free of state income taxes, if there are any. You might even be able to deduct part or all of the money you contribute or get matching funds. But to receive these goodies, you have to be a state resident. You’ll lose them if you choose the plan of another state.

Salespeople need to get paid, so they steer you to plans with sales commissions. Often, that means selling you a 529 from another state, which may cost you a tax deduction. If your employee-benefit plan offers a 529, it may be from another state, too.

So check your own state’s plan before considering anything else. You’ll find all the details at savingforcollege.com. If you like what you see, you don’t need a salesperson. You can buy a 529 directly from the state yourself.

title: “Capital Ideas” ShowToc: true date: “2022-12-20” author: “John Berryman”

Dividends explained. A dividend is a share of the company’s earnings, distributed to stockholders. Most owners of mutual funds have their dividends automatically reinvested, so they’re always buying new shares. Many individual companies offer reinvestment plans, too.

Dividends and the Dow. Investors cheered on Oct. 3, when the Dow first exceeded the high it reached back in January 2000. But if you had owned a fund invested in all the Dow stocks, and reinvested your dividends, you’d have exceeded the old high two years ago, says Daniel Wiener of the Independent Adviser for Vanguard Investors, a newsletter that follows Vanguard mutual funds. Looking only at price, the Dow is up 2 percent since its 2000 high. Looking at price plus dividends, it’s up 17.1 percent.

Not all of the 30 Dow stocks are up. Only 10 had exceeded their 2000 high as of Oct. 13, but their gains alone were enough to lift the whole average up. The other 20 stocks lagged–a reminder of how hard it is to pick winners, even if you hold for long time periods.

What about the S&P average? It’s off 10.8 percent from its peak, looking only at prices, but just about even with dividends reinvested. Pre-bubble, the S&P rose faster than the Dow; now it’s the reverse. The Dow’s John Prestbo credits the change to the recent resurgence of blue-chip stocks, which the Dow represents. The S&P includes some midsize stocks, and suffered more from the tech bubble and bust. Not counting techs, the S&P is up 18.9 percent on prices alone, and 34.6 percent counting dividends.

title: “Capital Ideas” ShowToc: true date: “2022-12-04” author: “Lela Warden”

^ What employee stock options are: They’re a chance to buy your company’s stock sometime in the future at today’s market price. If the price rises, you’re “in the money.” If not, your options aren’t worth a cent. Options usually expire after 10 years, whether you’ve made money or not. In the late 1990s, when the fad was at its height, about 8 percent of people at public companies had options, says Paul Oyer of Stanford Business School.

^ The story of CBS: In 1999 the company switched to a less generous pension plan for existing employees, dropped pensions for new hires and substituted a stock-option plan for everyone. Younger workers loved it, sure that the stock would rise. Older workers worried.

^ What happened? The stock flew up for about a year and a half before the bubble burst. Those who exercised their options early made money. Those who didn’t–probably the majority–found themselves holding worthless paper. (CBS wouldn’t comment.) In May, the company ended the program, offering to exchange the paper for “restricted shares” of CBS stock. Employees will lose some or all of those new shares if they leave the company before three years are up.

^ What you should do with employee options: Exercise at least some of them if you’ve made money, set aside what you owe in taxes and diversify the remaining proceeds. You can’t predict how high the price will go or when it will collapse.

^ The options scandal: More than 100 companies issued options to execs that were secretly backdated to a day when the price was low. That gave the chiefs a guaranteed profit (CBS has not been named). Surprise, surprise–so far, there are no known cases of secret backdating on behalf of lower-level employees. All you get is risk.

title: “Capital Ideas” ShowToc: true date: “2022-12-31” author: “Wesley Holleran”

You’ve read that stocks yield a long-term average of 10 percent, with dividends reinvested. But that’s your nominal return, before adjusting for inflation. What matters is your real return–what future gains will buy in dollars and cents. Subtracting inflation, the stock market rose an average of 6.7 percent a year in the 101 years starting in 1900 (according to “Triumph of the Optimists,” a book by three British professors). You got better returns during the 1990s boom. But since 2000, the market’s lost about 3.5 percent a year in real terms. Good years and bad years even out.

On a 6.7 percent real yield, a 3 percent fee cuts your return to just 3.7 percent. Then there’s taxes–levied at ordinary income rates on withdrawals from annuities and retirement plans. In the 25 percent bracket, you lose another 2.5 percent in yield. You’re now down to a gain of just 1.2 percent in real, future purchasing power. You’re keeping slightly ahead of inflation, but I doubt that that was your goal when you purchased a fund invested in stocks.

You can’t do much about inflation. But if you ditched annuities and high-cost mutual funds in favor of funds with fees in the 0.5 percent range, your real return would rise to 3.7 percent. That’s big money, over time.

The real return on bonds has been 1.6 percent. After high fees and taxes, you’d lose money every year. Bonds, in particular, need to be bought in low-fee funds.Fees matter! If investors went on strike against high-fee investments, they’d get better deals–and they’d wind up with fatter nest eggs, too.

title: “Capital Ideas” ShowToc: true date: “2022-12-25” author: “Margaret Cartwright”

Current law: If you die holding a traditional 401(k), 403(b), 457 or Keogh plan, your spouse steps right into your shoes. He or she can roll the money into a personal Individual Retirement Account and continue deferring the tax. Other heirs arent so lucky. They have to cash out of the plan generally within one to five years and pay income tax.

The big change in 2007: Other heirs will have the option of rolling the money into an inherited IRA. They still don’t have spouse status. Spouses can leave the money untouched until they reach 701/2 while other heirs have to take at the very least annual payments over their life expectancies. Still, its a big gain. If you withdraw the minimum, the bulk of the IRA will continue to compound tax deferred. You can always take more than the minimum if you want.

What to do now: If you inherit a company retirement plan and youre not the spouse, leave the money there until 2007. Hope that the company changes its rules to allow nonspousal rollovers. Call your bank or mutual fund and say you want to open an inherited IRA (you can’t use an IRA you already have). Avoid these two big mistakes: (1) Non-spouses should not put the new IRA into their name alone! That eliminates your tax break, says IRA expert Ed Slott. Instead, keep the name of the former owner and add your own. For example: Mary Tudor, IRA, deceased Nov. 17, 2006, for the benefit of Elizabeth Tudor. (2) Have the company transfer the money into the new IRA directly. If you take a check in your own name, it will be taxed.

title: “Capital Ideas” ShowToc: true date: “2022-12-18” author: “Samantha Montoya”

^ The old rules. Savings in a child’s name were formerly taxed in the parent’s bracket until the child reached 14. After that, they were taxed in the child’s own bracket, which is typically much lower.

^ The new rules. Children’s savings are now taxed in the parent’s bracket until the child reaches 18. You’re still OK if the investment earnings are low. Children don’t have to report if their interest, dividends and capital gains won’t exceed $1,700 this year. But on larger amounts, their tax rates and yours are now the same.

^ What to do with new savings. Consider starting a 529 college savings account. Hold the account in the parent’s name for the child’s benefit. All the earnings will then be tax-free, if used for higher education. A majority of states also offer deductions on your state tax returns. To learn more, see savingforcollege.com.

^ What to do with savings a child already has. You’re typically holding them in a Uniform Transfers (or Gifts) to Minors account. You have four main choices: (1) Leave the account alone. It may be too small to worry about. (2) Start using the savings for some of the child’s expenses, such as computers and summer camp. In general, you should use the money only for extras, not for basic support items, such as food and clothing. (3) Move money into tax-free municipal bond funds. In the years just before your child goes to school, you might want a safe investment anyway. (4) Transfer the money into a 529 account. You’ll first have to sell the investments and pay tax on any gains, but all future gains will come tax-free.

title: “Capital Ideas” ShowToc: true date: “2023-01-11” author: “Teresa Jackson”

title: “Capital Ideas” ShowToc: true date: “2023-01-15” author: “Ryan Klopfenstein”

-How badly do investors fall behind? You can find out at Morningstar.com, which recently started keeping track of average investor returns. Go to Morningstar’s home page and enter the name of a fund in the “Quotes” box. When the fund page comes up, click on “Total Returns” to get its performance record. You’ll then see a tab for “Investor Returns.” Click there to find out how well (or poorly) typical investors did. They’re more successful in some funds than others.

-Where do investors fare the worst? In volatile funds where prices zoom and dip. One example would be the technology sector. Those funds grew at an annual 6.4 percent over the past 10 years while their average investor was losing 4.2 percent. The same thing happened in communications funds, health-care funds and growth funds. The RS Emerging Growth Fund gained 10.04 percent a year over the past 10 years. Its typical investor lost 6.96 percent.

-Where do investors fare the best? In conservative funds, where returns are steadier. This group includes the giant, well-diversified stock funds, as well as funds that buy both stocks and bonds. T. Rowe Price Equity Income, for example, clocked 10-year returns of 10.52 percent. Its typical investor did almost as well at 10.13 percent.

-What’s the lesson? If you seek the thrill of risky funds, you have to stick with them during their poor years, too, if you hope to make money, says Russel Kinnel of Morningstar. If experience shows that you’ll sell too soon, buy the conservative funds. You’re more likely to hang in there and to get superior returns.

title: “Capital Ideas” ShowToc: true date: “2023-01-20” author: “Todd Arias”

But before you book your round-the-world shopping trip, remember the currency factor: about half the gain of European properties comes from the dollar’s decline against the euro, says Ward Naughton of HiFX Inc., a San Francisco company that arranges financing for international deals. “At some point, you know that will turn.” When it does, Americans investing abroad could lose money. He recommends Asian properties, where economies are growing. Some tips: