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Take It To The Bank Tips

Retirement Planning
Personal Investing and Mutual Funds
Day Trading and Day Traders
Individual Retirement Accounts
Using Tax Preparation Software
Avoiding "Phising" and Other Scams
Telephone Support Menus, Ques and Number Searches

About These Tips

This section deals with helpful tips, observations and advice to help you manage your personal financial affairs. Over time, this will be updated and expanded. Naturally, as with any general advice, there can be exceptions. "Take it to the bank" means that you should be able to rely upon these suggestions under most circumstances, but nothing here is meant to imply that these are designed for any particular situation or individual. The tips are organized and grouped into Topics, but more than one topic may be relevant to a particular subject.
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Retirement Planning

If your company has a 401(k) Plan, contribute the most that your employer will allow with matching employer contributions before you contribute to an IRA. Most plans will provide for employer matching contributions up to a certain percentage of your salary. After that, you may be able to make contributions but the employer will not match the contribution. There is an upper limit that you can contribute that will depend upon the terms of the plan and your salary. In many instances, this maximum contribution is around $10,000. Whether to contribute beyond the employer matching amount depends upon your immediate cash needs as well as your investment options in the plan. If your investment options are limited, you may prefer to invest in your IRA instead, or not at all.

If your retirement is five years or more away, put most, if not all, of your 401(k) investment in index funds rather than specific mutual funds. Over the long term, mutual funds do not outperform the market, so you will be better off not paying the investment fees to the mutual fund manager. If your retirement is less than five years away, put a lesser amount into the index funds and some into a fixed income fund or shift to a balanced index fund.

If you are self-employed, consider setting up an HR-10 or Keogh Plan, or SIMPLE IRA   rather than a regular IRA. The amount you can contribute is much higher than for a regular IRA. However, the plan must be established by December 31 of the year you wish to make a contribution (and take a deduction), unlike an IRA. With any of these plans you can make contributions as late as April 15 for the previous tax year. (SIMPLE IRAs must have the employee part of the contribution made by January 31.)

TAX RATES

Currently, the maximum tax on dividends and capital gains is 15% (scheduled to expire in 2010).  If your taxable income for 2006 is less than $61,300 filing jointly, ($30,650 for Single or Married Filing Separately, or $41,050 for head of household) the dividends and capital gains are taxed at the same rate as your ordinary income.  Thus, distributions from a retirement account are taxed regardless of the source.  However, if you are in a higher bracket, the distributions will still be taxed as ordinary income, even if they are the result of capital gains, which most likely is why the fund increased.  Therefore, if you are in a higher bracket, you should not invest in a traditional IRA even if eligible.  Although the earnings are tax free while they accumulate, they are taxed at a higher (ordinary income ) rate rather than cattail gains when distributed.

In planning for the eventual tax rate for your decision for tax-deductible vs after-tax retirement contributions, consider that the higher taxable income from a tax-deductible plan may cause 85% of your Social Security to be taxed.  If you had a Roth 401(k) or Roth IRA, the distribution would not affect the taxability of Social Security, or any other items affected by taxable income such as the alternative minimum tax and phase-out of personal exemptions, just to mention a few..


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Personal Investing and Mutual Funds

Should you avoid mutual funds and portfolio managers? Research has shown that portfolio managers cannot beat the market over a long period of time or, if they can, the increased returns are so small that they cannot be measured. Funds that beat the market in one five-year period are no indication of what they will do in the next period. Furthermore, portfolio managers are not able to "time" the market as to corrections or identify bull and bear market peaks and bottoms, yet this is often one of the main selling points of mutual funds. Have them prove that they have reduced the fluctuation in their portfolio. Keep in mind that one can increase the performance of an investment over the market in the short run by assuming more risk. However, in the long run this riskier investment, be it a stock or mutual fund, will not outperform the market, adjusting for risk. If that is the case, why pay a portfolio manager? If you are a part time investor, what makes you think that you can do better than the best minds of Wall Street?

The April 20, 2000 column of The Motley Fool stated that "According to Lipper Analytical Services, in the past 10, 15, 20 years, no more than about 11 percent of all open-ended equity mutual funds were able to out-perform the market, as measured by the S&P 500."  Jane Bryant Quinn in her January 21, 2001 syndicated column, "Strategies can help with stocks," states, "As a strategy, however, you need to diversify over the entire market because you have no idea which stocks will lead the next wave up.  It could be techs again, but different techs--not the ones that you own now.  . . . . In real life, we tend to buy the most popular stocks representing the industries that recently have done the best.  We wind up with all our money in just a few sectors without even thinking about it. . . . That's why I like mutual funds for your serious life-changing money. Not narrow funds that buy only certain industries, like techs and telecoms.  Instead, buy the well-diversified funds, which own techs, telecoms, and all the others, too. . . . Principally, that means index funds.  Check the Vanguard Group at www.vangurad.com or 800-871-3879."

If you are not convinced, consider this. In February 1992, Money magazine identified "20 Great Mutual Funds to Buy Now." The following year it found "The 12 Funds to Buy Now" with only one repeat from the previous year. In February 1994 the magazine proclaimed, "The Nine Best Funds to Buy Now." None of the previous 32 funds were included. Finally in August 1994, it once again steered investors to "The 10 Best Funds Today." You guessed it, none of the 41 previous funds were included.

The Motley Fool, a column carried in many newspapers, reminded us in November of 1999 of the misleading use of average returns over a 5 year period to judge mutual fund performance.   According to Lipper Analytical Services, only 3.5 percent of all open end (equity) mutual funds outperformed the market average from the end of 1993 to the end of 1998.   Over the last decade, only about 10 percent of funds outperformed the S & P 500 Index.  A fund may have one amazing year, and had poor performance the other years, yet show an average greater than the index.  If you were not invested in all of the years, you would have lost money compared to the Index, and that one year may have been just luck.

If you do decide to purchase mutual funds from a broker, generally buy "A" shares rather than "B" shares.  A shares appear to have higher upfront cost but because B shares have a higher annual fees, the cost of owning B shares quickly eats up any savings from choosing the B share investment.

Day traders are also betting against the best financial theory as well as professionals.  The efficient market hypothesis, the cornerstone of modern financial theory, says that you cannot gain any investment advantage by looking at past price-volume statistics.  This is contrary to  USA momentum trading charts, I know, but look at what happened to the day-trader in Atlanta in 1999.  Ignore the temptation and TV advertisements-"they're" not going to rely on anyone or a big fat inheritance-and it is too bad because they're going to go broke.  Its estimated that 90% of day traders lose some if not all their money.  Maybe then they will learn as they claim.

PC Magazine (November 16, 1999) has a review of online investing with five brokerage firms.  Good discussion-none rate an A.

The bottom line is to decide how much risk you are willing to assume. If you are very conservative and traditionally invest in certificate of deposits or credit unions, strongly consider paying off your home mortgage. Although many financial planner think this is foolish because you can earn a much higher return in the market over the long run, they are not considering risk. Paying off your mortgage is a totally risk-free investment. If you are in the 33% marginal tax bracket and have a mortgage at 10%, the after-tax cost is 6 2/3% (assuming that you can itemize deductions). If you pay off the mortgage, you will put $66.67 in your pocket for each $1000 of your mortgage instead of the bank’s. This is equivalent to earning $100 on each $1000 of investment, paying the government $33.33, and putting $66.67 in your pocket—all totally risk-free. I’ve never had a client complain to me that they wished they had not paid off their home mortgage, but I have heard may regrets about their investments. You can always refinance.
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Day Trading and Day Traders

Definitions. The term "day trader" as defined by the SEC is "an individual, not registered as a broker-dealer or as a registered representative, who trades stock at a firm that allows the individual real-time access to the major stock exchanges and the NASDAQ market."  The NASDAQ added  that a day trader is "an individual who conducts intraday  trading in a focused and consistent manner, with the primary goal of earning a living through the profits derived from this trading strategy."  According to the IRS, an individual is an investor and not a trader when the individual's trading activities are not a business (IRS Publication 550, "Investment Income and Expenses").  The distinction is important for tax purposes.

If one is a day trader and in the business of day trading, all gains and losses are still from capital assets.  Only dealers selling securities from inventory (goods held for sale to others) qualify for ordinary income treatment. Day traders only sell from and for their own account and are not dealers (T.E. Wood, 16 TC 213, CCH Dec. 18,070).  Therefore all gains and losses are reported on Schedule D. (But see Market-to Market Election immediately below.)  They may deduct their related business expenses on Schedule C because they are in the business of trading.  Because the Schedule C would not show any income, the taxpayer is well advised to include a statement explaining this unusual reporting. If the IRS believes that the individual is an investor based upon all "the facts and circumstances", it will insist that the expenses be listed on Schedule A, subject to the 2% floor and requiring itemized deductions to benefit.

Market-to-Market Election. Traders may make a "mark-to-market election." Under this election securities that are held at the end of the year are "marked to market" by treating them as if they had been sold and then reacquired for fair market value on the last business day of the year.  Making this election allows all trades to be a business activity and all gains and losses ordinary business activity, reported on form 4797.  The election must be made by filing a statement with the IRS by the due date without regard to extension, for the year immediately preceding the year for which the election is to take effect, in other words, by April 15, 2007 for the 2007 tax year.  The election is filed with the 2006 tax return however-for the coming year.  It will apply to all future years unless the trader obtains permission from the IRS to revoke the election.

Individual Retirement Accounts

Consider a self-managed annuity rather than purchasing an annuity from a financial institution. The mortality tables in my "IRA Analyzer" can be used to determine how much you can withdraw each year and never run out of money in your lifetime, and probably your spouse’s if you and your are not more than 10 years apart in age. These financial instruments are notoriously high commission vehicles, often paying 30% of the initial investment as commission to the salesman. Furthermore, if you die early, your estate and heirs keep the money and not the insurance company.

If you can take a full deduction to a regular IRA, keep the regular IRA rather than converting to a Roth IRA. Although the present value of the tax savings is the same if you live your life expectancy, the value to you will be higher if you do not. By the same argument, if you can make partially deductible contributions to a regular IRA and also to a Roth IRA, make the deductible contribution to the extent allowed and the balance to the Roth IRA.  By taking pre-tax contributions, either to the traditional IRA or a 401(k) plan your heirs will pay the tax on the income as they receive distributions.  If you make after-tax contributions, either to a Roth IRA or to a Roth 401(k), you will be paying your heirs tax..

IRS Doesn't Give any Slack on Rollovers.  In Private Letter Ruling 9847031 the service ruled that an attempted rollover failed to satisfy the strict 60-day time limit even tough the taxpayer had given instructions to the trustee to transfer the fund in a timely manner.  The plan trustee improperly characterized part of the funds as nonqualified for a rollover.  A major portion of the funds were placed in a regular account instead of a IRA.  The owner did not learn of the mistake until 6 months later and then sent instructions directing the custodian to transfer the funds to the proper IRA account.  The transfer took place shortly thereafter.  The funds were first ruled as not having been transferred in a timely manner and subject to tax (and would have been subject to the 10% early withdrawal penalty had the taxpayer not been over 59). Not was it taxable but the subsequent deposit to the IRA was an "Excess" contribution subject to the 6% excise. tax.  Lesson to be learned- you must be vigilant and know the rules!

If you contemplate a rollover to a Roth IRA and you do not have the funds outside the IRA to pay the tax, leave approximately 110% of the expected tax to be incurred in the regular IRA to pay the tax and penalty. The exact amount to leave in the regular IRA to pay the tax and penalty can be computed by some algebra. My "IRA Analyzer" program will calculate this for you for your particular situation.
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Using Tax Preparation Software to Prepare Your Taxes

Having used both Taxcut and Turbotax in the past to prepare client’s returns, there are some things that you should know before you give up your CPA. First, in most cases, the first time that I prepared the client’s return it was wrong, even though the "Auditor" or similar function of the program said that there were no errors. And, in almost every instance, the resulting tax was higher than the final tax after I checked the return. There are several reasons for this outcome. First, the program cannot verify that the input is correct. Second, the interview portion of the program may ask you a question in such a way that your response is not obvious, or it uses the answer in a way that you did not anticipate, thus producing an incorrect tax treatment. If you are not a tax professional you would not recognize this. Third, the programs seems to act in a default mode that is the most conservative in computing the tax from the IRS point of view. In other words, if you fail to provide information or provide contradictory information, the program seems to make assumptions that lead to higher taxes.

The programs’ method for determining estimated payments is such that you will make the least amount of estimates. While that may seem to be what you want, this will not protect you from a penalty. Generally, the only way to be absolutely sure of not having a penalty is to pay taxes this year (by credits, estimates and withholding) equal to what your taxes were the prior year. Even this may not save you if your income increases significantly, i.e. by more than $75,000. One program did not offer this computation method as an automatic calculation. It had to be done manually.

These programs may not carry figures correctly from one line to the other if you override some value, even though you know the value you are entering is correct and the reason you are overriding the program’s value is because you cannot figure out how to get the program to provide the correct number. This is particularly true in passive loss calculations and for depreciation. Other problems exist if your situation is somewhat unusual, for instance if you have a home office in an apartment, the interview may not ask you for your rent expense or if you are separated from your wife but still wish to file a joint return it may not deal with two households.

The bottom line is that these programs will not teach you tax law nor advise you of positions that might benefit you as opposed to the IRS. They will not defend you if the Service challenges your return. They will not assure that your return is correct.

It is very easy to make input errors. You must develop input check totals to make certain that all of your information is entered and entered correctly. You should give your return a "cold" review. By that, I mean that you should print out the return and let it sit at lest overnight. Then review every line. Look for the obvious as sell as the detail. If you intend to file a separate return, it that what is prepared? Check how many depends are claimed. If you intended to itemize do you have a Schedule A or do you know why not? If you file a Schedule C, do you have a form SE? If you have more interest or dividends than appear on the face of Schedule B, have you attached the supporting detail schedules?
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Avoiding "Phising" and Other Scams

"Phising" and "Farming"
 Phishing is a scam using a fake website that employs the basic logo of the bank or financial institution you visit online where you are asked, usually by am unsolicited email, to verify your account by signing in to the official looking website.  Even if you do not give your account, the site typically asks for your username and password.  Once they have that, it is too late.  "Farming" is just one step further.  Many of the features of the actual site have been duplicated to look just like the sign-in page you usually use to contact the bank or company.  Before you sign in anywhere, check the address bar in the browser to verify you have not been "redirected" to a strange URL.  Call the financial institution if in doubt.  Forward the site to the fraud department whose address is usually found on the real site.

Internal Revenue Service Refunds and Returns
The IRS has seen a recent increase in these scams. Since November, 2005, 104 different scams have been identified, with 22 of those coming in June '06, the most since 40 were identified in March 06 during the height of the filing season, including Electronic Federal Tax Payment System (EFTPS).  First, as a general tip, the Internal Revenue Service will NEVER contact you by email to verify any information.  Hang up. Second, if you are suspicious, or question the legitimacy of any IRS contact,  go to the IRS web site, http://www.irs.gov/ and so a search on "scam" and then within results, "identity."  The site has many tips and useful information.

Check Cashing and Work at Home Schemes, Sweepstakes, Identity Theft
Many work-at-home and part-time business opportunities ask you to forward funds after you have deposited "certified" checks into your bank.  Do not do this!  If you have received legitimate checks, you could be participating in money laundering unknowingly.  Most likely, the checks are fake.  Under Check 21, banks must "make available" those funds in a very short time.  So even if the teller says the check is good, which could be verified by routing numbers and other means typically will tell you the check is good.  However, EVEN if you are told, or verify on line, the check is "cleared" or "funds are available," they are not until the  "funds have been collected."  Variations include government checks, cashiers checks, or any unsolicited or "fortuitous" check you receive.

Verify the company  or organization name and address (not a mail drop like "Post Office R-US" ) with the Better Business Bureau and Secretary of State before you send any funds or information.

Never respond to a telephone call asking for information.  If it sounds legitimate, ask for a number to call back and verify it with the purported company first. Often these are 30-day cell or even toll free numbers. The information requested is already available to a legitimate company.

Don't mail in Warranty Cards.  These are not necessary for your warranty and puts your name and personal information into "who knows" database.  It also is a source of junk mail.
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Telephone Support Menus, Ques and Number Searches

Tired of endless phone choices when you are trying to get  human telephone support from your financial institution, utility, Pay Pal, ebay?  How about being charged for 411 information, or tying to find toll-free numbers?  Want to find owners of telephone numbers (reverse look-ups)? Try the free voluntarily maintained website, http://gethuman.com/, It has a database listing of major companies with secret codes that let you by-pass the usual automated  telephone ques and endless choices.  It also contains many tips to locate numbers, even unlisted numbers and cell numbers.  Helpful in divorce for crank or harassing callers or verifying suspected fraud schemes.
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