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moneywise fall 2002
-an investment point of view;
-retirement savings - 2002;
-record retention;
-tax benefits if you pay for college;
-A ROTH conversion could be a good idea this year;
-pension distributions after death;
-a few short topics.

AN INVESTMENT POINT OF VIEW
Beginning with the industrial revolution, we have lived through the Civil War, World Wars 1 and 2, the Depression, the Cold War, the Civil Rights Movement, and Viet Nam. The economy had to adjust to a post-agricultural age and then to the end of the "smokestack" industries. There have been scandalous business practices that challenged our faith in our economic system. There were the robber barons 100 years ago, the stock scandals of the late twenties that were revealed in the early thirties, the Robert Vesco's of the sixties, the savings and loan scandals, and the Boesky's of the eighties. In each time of uncertainty, the stock market reflected our distress and fell. Each time, we worked our way out of the morass of troubles and rose to new heights. The stock market followed our enthusiasm. I need to believe this will happen, again (and again). I can't tell you when it will happen or who will benefit. I can tell you to stay invested and have a portfolio that has depth and breadth. After all, I just had my second grandchild. I cannot afford to believe this is the end of the world.

Here are the facts: The performance of the stock market as measured by the popular Standard and Poor's 500 largest companies shows that the value of a stock portfolio as of August 31, 2002 is down 17.2% since the beginning of the year, 17.9% for the past 12 months, and about 29% for the three years ending July 31. This is very depressing.

On the other hand, if you had put money into the same index fund 10 years ago, you would have averaged an 11% annual return. If you had invested when the index fund started in August of 1976, you would have averaged 12.6%.
This observation does not address investment results if you had invested at various times during this 26 year period. That would be relevant (and very important) only to your own specific circumstances. This is a calculation that you should do yourself (I can help you).

Here is my opinion (which really hasn't changed since I began proffering it in my first newsletter back in 1986). Money that you will need in the next 5 to 10 years (if you need an exact number, let's say 7.5 years) should be in fixed income investments. Money that you can leave for longer periods of time should be in equities. I am not ignoring real estate as a place for invested capital. This discussion is focused around stocks or fixed income. .

Nobody knows anything: Analysts trained at Harvard and Wharton who passed the very difficult CFA exams (with years of experience following specific industries and having personal relationships with insiders) cannot pick winning stocks and don't know when to buy and sell. We know this from reading the newspapers. I could list the names of "gurus" that have disappointed us in the past years, but you read the same papers I read. You should not plan to build your investment portfolio based on stocks that you pick and the time to sell them. Your best chance of success is a portfolio of index funds and managed growth and value funds. If you must "play the market" do it with an amount of money that you can afford to lose. Treat your personal stock portfolio the same way you would treat your Las Vegas or your Atlantic City money.
There are four different methods you could consider when deciding how you will manage your investments:

1. You can manage your own portfolio. This can be perfect for a disciplined investor who is willing to do his/her homework, read about investments, monitor and balance his/her portfolio on a regular basis. This is a terrible approach for a person who takes advice from friends but doesn't seriously investigate this advice. He/She buys new products when he/she has new money, but never monitors and balances the portfolio already developed. I do have an answer for those of us who want to take the self-managed approach and know that we will not actively manage the portfolio: buy index funds and a balanced managed fund like the Vanguard STAR fund. Invest regularly, keeping the proportion of index to managed at about 50% each, and you should do as well as you will do with any of the other approaches. As you read ahead, you may be tempted to telephone me and ask why anybody would elect the other options if he/she can do what I just described. Don't call. I really don't have an answer. I have no statistical data that leads me to conclude that you make more money with an active portfolio of stocks than with a portfolio of index funds and managed funds.

2. You can turn your money over to a manager, and let him/her do it for you. The annual fee is usually .75% to 1.5% of the value of the portfolio. The downside is obvious. You will be paying a lot of money for this service. The upside is that you should be buying the service of a person or group that will do all the things you should be doing yourself. If you get what you are paying for, this could be right for you. If you use this approach and don't monitor the manager, you could wind up being in the same position as a self-managed portfolio, except you would have paid large fees.

3. Another option is to speak with an advisor periodically and pay him/her a fee for reviewing and recommending an investment approach and specific investments. You would hope that this person would be recommending no-load products. This is the service I provide. I think this is a good approach for someone who is willing to take some responsibility for monitoring his/her own portfolio. This approach becomes another lost opportunity when the client has a meeting, takes the necessary steps, and then leaves the new portfolio lying fallow. Without quarterly (or semiannual) reviews of portfolio balance and appropriateness of investments, you are probably wasting your money on the single consultation.

4. Many investors go to a full service broker and let him/her hold their money. The broker will sell them products and earn his/her money from the commissions he/she receives on sales. This can be good or bad depending on the broker. Remember that a broker is a salesman. You want him/her to be looking out for you and getting good advice from his/her analysts.
Whatever path you take, try to avoid the classic error made by "unsophisticated" investors. Try not to sell when the market has already demonstrated that it is in trouble. Try not to buy when it appears that the markets are irrationally high. The best approach is to buy low and sell high. Since that is almost impossible to do with any consistency, the best approach of investing on a regular basis in good and bad markets should be your plan. To close where I opened, money that you will need in the next 5 to 10 years should be in fixed income investments. Money that you can leave for longer periods of time should be in equities.

REVIEW OF NEW RETIREMENT SAVINGS RULES
Effective with the 2002 tax year Congress made significant changes to rules about saving for retirement. I discussed these changes when we met. I wanted to review them again with you.

You may add $3,000 to your IRA this year. If you were 50 years old in 2002, you can add another $500. This amount may or may not be deductible, and you may be able to put this money into a ROTH IRA, depending on your individual circumstances. The contribution can be made until April 15, 2003.

If you participate in a 401k, 403b, or 457 plans, you may contribute $11,000 (another $1,000 if you were 50 years old in 2002). In some circumstances, a participant in a 403b plan (generally educators and hospital workers) may contribute another $11,000 to a new 401k. You will need to check with your employer.

For the self-employed, there is no reason to have a Money Purchase plan. The maximum allowed contribution of $40,000 (the actual amount is based on a percentage of income) can be met through a Profit Sharing plan alone. If you have a Money Purchase plan, you should speak with me about terminating it. In fact, if you are a self-employed person without employees, you should only have a SEP IRA... You can now make the same maximum contribution to a SEP IRA as you can to a Profit Sharing plan The record keeping requirements are much simpler for a SEP IRA.

A SIMPLE IRA can now accept contributions of up to $7,000. The big advantage of the SIMPLE is that the contribution is not based on a percent of income. If you have self-employment income of $7,000, you can contribute and deduct $7,000. If you had a SEP IRA, you would only be able to contribute $1,293 since it is based on a percentage of income. To be able to contribute $7,000 to a SEP, you would need self-employment income of $37,900. In fact, $37,900 is the break point for benefiting from a SIMPLE. If you have self-employment income in excess of $37,900, you could contribute more if you had a SEP. You can only contribute to one or the other in a particular year. With both plans, the contribution is elective each year, and you can put in less than the maximum.


RECORD RETENTION
Clients frequently ask me about the need to keep old records. The easy answer is: never dispose of anything. Take the files you no longer want to keep in your home or office and put them in a storage facility (there are facilities that specialize in record storage).

If you don't like that answer, I'll present you with some guidelines. I prepare your tax return so I'll address the issue of record retention for tax purposes. At the end of this piece, I'll offer some advice that is not related to tax information.
Generally, tax returns are subject to audit for three years from the due date of the return. If the 1998 return was due April 15, 1999, that return is subject to audit until April 15, 2002. The auditor can ask you to extend the time if they have begun an audit but will not finish by the deadline. You can refuse, but if you do the IRS or the state will make an immediate assessment based on the information it has. You will usually need to grant the extension.

An exception to the three year rule is if you under reported more than 25% of your taxable income. In those cases, the audit window is 6 years from the due date of the return. If you are being charged with tax evasion, there is no statute of limitations on the need to document the charges.

If you have data on an open return that must be documented with "old" data, you must provide the "old" data. Examples include current depreciation of real estate bought 25 years ago. If you are currently depreciating the property, you must be able to document the basis numbers you are using. If you sold stock bought 40 years ago, you are responsible for documenting the purchase price. If you are carrying forward a loss, it does not matter when the loss occurred; you must be able to document the item. There are many more examples I could cite, but I'll say to you that you should telephone me if you are not clear about a particular item.

I keep your tax returns for three years from the filing date. I do not keep your back-up documentation at all. I always leave the original documents with you.
There are reasons to keep documents that are not related to taxes. You should keep receipts for items that are under a warranty, or that may be subject to some type of product liability. I was lucky enough to have a receipt for a portable computer I bought in 1989, used without problem for three years, gave to my daughter who used it in college, and then threw away. There was a class action suit that Toshiba settled that had to do with an operating system problem that they were aware of but decided not to share with the owners. The settlement provided an amount of money to anybody who could prove that they bought the computer. I won.

TAX BENEFITS IF YOU PAY FOR COLLEGE
There are four ways to save tax dollars if you are paying for college now. I am not referring to the Section 529 College Savings Program that allows you to save in order to pay for college costs at some time in the future.

The first is the Hope Credit. You can deduct up to $1,500 from your actual taxes. The second is Lifetime Learning Credit, which allows you to deduct up to $1,000 from your actual taxes. If you earn more than $100,000 you cannot take advantage of these credits. You may take a credit for each qualifying dependent.

The third is a new deduction of up to $3,000 for joint filers who earn less than $130,000. If you are in a 40% combined federal, state and city tax bracket, your tax savings will be $1,200. You may take a credit for each qualifying dependent. You may use this deduction even if you take the standard deduction.

You can elect only one of these options. I'll work it out for you to be certain you use the one that is most beneficial.

WHY NOW COULD BE A GOOD TIME TO DO A ROTH CONVERSION
If you have total income of under $100,000 for 2002 and you have some traditional IRAs or 401k plans from former employers, you may want to consider paying the tax on the assets now, converting them to a ROTH IRA and get tax free growth for the rest of your life and the lives of your beneficiaries.

I know you think it takes an act of great faith in the future of the markets to do this, but that is not so. You can buy bonds and bond funds or CDs with your IRAs. There is never a reason to assume that your funds will not grow. If you do that, you are holding the wrong investments. If you believe the equity markets are low now and you plan on stay

DISTRIBUTION OF RETIREMENT FUNDS AFTER DEATH OF PARTICIPANT
This brief coverage of a very complex topic is meant to give you an overview of the options available to a beneficiary of a retirement plan. You should contact me as soon as possible if you are handling the distribution of retirement plan assets. There could be elections that must be made in the year of death, so don't delay.

In this article I am assuming two things: first that the plan named a beneficiary. If it didn't we've got a whole other set of concerns that I will not speak to now. Second, I am assuming that the beneficiary is not a surviving spouse. In those cases the choices are easier and there is little that needs to be done in the way of planning.

There are two basic rules. One is that a beneficiary can elect to withdraw all plan assets before the end of the fifth year after the death of the participant. The longer you wait the more tax deferral accrues to you. The distribution will be fully taxable in the year of distribution. A beneficiary can always do this.
The other choice the beneficiary could make is an election to take an annual distribution based on his/her life expectancy The IRS provides table to make this computation. The advantage is a longer deferral of taxes. This must be done by the end of the year following the death of the participant if the participant was under 70.5 years of age at death. A distribution must be taken n in the year of death if the participant was already 70.5 year of age.

SHORT TOPICS
- I have written about the importance of leaving a letter of instructions that alerts the person you have given it to (or told where it is) about the important things he/she should know about settling your affairs. One of my clients told me that he also included the things that the reader should not be looking for. For example, he said that he doesn't have a safe deposit box. His logic is that an affirmative statement eliminates any question of whether or not there was an oversight. I think this is a great idea. You should incorporate things that you think your reader may be looking for that you don't have. We can discuss the format of a letter if you telephone me (or when we meet).

-If you are self-employed and plan on contributing to a SIMPLE IRA for 2002, you must open the account before October 1, 2002 in order to fund it for this year. The amount you may contribute and deduct is $7,000. This is a very good plan for anybody who has self-employment income under $35,000. Telephone me if you have questions.

- If you are a member of the NYC Teachers Retirement System and you have a TDA, you should consider electing the fixed investment option. At the current time it is paying a guaranteed 8.25%. This return is impossible to get anywhere else. You can get forms from the TRS. The forms must be submitted by December 1 to be effective for January 1.

-New York State enacted legislation that allows a survivor of a 9/11 victim to get a refund of all 2001 taxes paid to NYS and NYC. The federal government enacted similar legislation last year. If you know any survivors who had to file tax returns for victims, be sure to ask if they are aware of the New York program. Have them telephone me if they need any guidance.

-A law that went into effect on January 1 of this year makes it possible for an employer to offer to pay for financial planning services for you with pretax dollars. If you pay (me) $400 with after tax dollars, you need to earn $615 to get $400. This benefit is exactly like "cafeteria plan" benefits you use for medical or child- care expenses.

-You should take a look at the Unclaimed Property web sites every few years to see if there are any assets that the state is holding for you. The site is

END OF YEAR CHECK
It is time to make certain that you have paid enough money to the IRS and to the various state and city tax collectors in order to ensure that you will not be in a penalty situation.

Please take a few moments to check your 2001 tax returns and write down the following amounts: line 58 of the 1040; line 55 of the NYS 201 (if you filed a resident return); line 54 of the NYS 203 (if you filed a non-resident return); and line 42 of the NJ 1040. These were your 2001 taxes.

The easiest way to avoid a penalty for underpayment of taxes is to be certain that the government is holding in 2002 an amount equal to your 2001 taxes. If you had 2001 Adjusted Gross Income of $150,000 or more, you will need to pay 112% of your 2001 taxes to the IRS and 110% to New York.

Another way to avoid a penalty is to have 90% of your actual 2002 tax liability paid by January 15 of 2003. To do this, we will have to make a solid projection (as I have already done with some of you).

Look at your withholding statements or pay stubs. Project your withholding to the end of the year (combine NYC and NYS) and add in any estimates you might be paying. Compare these figures to your actual 2001 taxes. If it appears that you might be in a penalty situation, telephone me before December 31.

I have given you specific instructions for the most common tax forms. If you file returns that I haven't discussed, you should telephone me to review your status.

If you request an extension to file, you must pay or estimate what you owe and send a check with the extension form. You never get an extension to pay late. If you know you can't meet the filing deadline, I'll help you file the proper forms and compute how much money to mail.

If you will be sending in money, telephone me for the proper forms. You should plan on paying state taxes before the end of the year, so we can deduct these payments in 2001. Federal payments are not due until January 15, 2003.

Here are some year-end reminders about withdrawal requirements for IRA and other pension accounts. If you are 70 ½ or older, you needn't take from each of your IRAs. You can figure out how much you'd have to take in total, and then withdraw that amount

from the IRA account you prefer. You start with the December 31 balances for 2001. Divide the balance by your life expectancy. You can use the new table or joint life expectancies tables in IRS Publication 590. A much better approach would be to telephone me before you make any elections. This will avoid making choices that might not be right for you.

If you are still working after age 70 ½, you are not required to withdraw money from your company pension plan. There is no longer a penalty for excess contributions or excess withdrawals for people in this situation.
The rules for withdrawals have been simplified. If you need to know more, telephone me.

SHORT TOPICS
- I have written about the importance of leaving a letter of instructions that alerts the person you have given it to (or told where it is) about the important things he/she should know about settling your affairs. One of my clients told me that he also included the things that the reader should not be looking for. For example, he said that he doesn't have a safe deposit box. His logic is that an affirmative statement eliminates any question of whether or not there was an oversight. I think this is a great idea. You should incorporate things that you think your reader may be looking for that you don't have. We can discuss the format of a letter if you telephone me (or when we meet).

-If you are self-employed and plan on contributing to a SIMPLE IRA for 2002, you must open the account before October 1, 2002 in order to fund it for this year. The amount you may contribute and deduct is $7,000. This is a very good plan for anybody who has self-employment income under $35,000. Telephone me if you have questions.

- If you are a member of the NYC Teachers Retirement System and you have a TDA, you should consider electing the fixed investment option. At the current time it is paying a guaranteed 8.25%. This return is impossible to get anywhere else. You can get forms from the TRS. The forms must be submitted by December 1 to be effective for January 1.

-New York State enacted legislation that allows a survivor of a 9/11 victim to get a refund of all 2001 taxes paid to NYS and NYC. The federal government enacted similar legislation last year. If you know any survivors who had to file tax returns for victims, be sure to ask if they are aware of the New York program. Have them telephone me if they need any guidance.

-A law that went into effect on January 1 of this year makes it possible for an employer to offer to pay for financial planning services for you with pretax dollars. If you pay (me) $400 with after tax dollars, you need to earn $615 to get $400. This benefit is exactly like "cafeteria plan" benefits you use for medical or child- care expenses.

-You should take a look at the Unclaimed Property web sites every few years to see if there are any assets that the state is holding for you.