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Some investors leave money on the table that is given to them, comes without risk and has nothing to do with investment returns, but rather with understanding how the tax code that pertains to your investments works as well as with keeping up with some changes that impact your lives. Over the past several weeks we have outlined several moves that you could have made by the end of 2008 to potentially save tax dollars. Now we turn to 2009 to identify the areas that are guaranteed to save investors tax dollars and are steps you should be taking (or not taking as we illustrate immediately below) now.
A portion of the Worker, Retiree, and Employer Recover Act of 2008 signed into law on December 17th, for calendar year 2009, suspends the Required Minimum Distribution for Individual Retirement Accounts. Generally, individuals are required to begin to withdraw from their IRA’s every year by April 15th following the year they reach age 70 1/2. According to Bob Trinz, Senior Tax Analyst for the Tax & Accounting Business of Thomson Reuters, this waiver is “is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some losses. The suspension for 2009 also applies to beneficiaries of retirement plan accounts and IRA owners.”
Another overlooked area that those employed can save taxes in is through investing in their company sponsored pension plan such as a 401(k), 403(b) or 457(b) plan. Given the precipitous drop in the stock market as well as the slowdown in the economy many investors are questioning whether or not they should continue depositing into one of these plans. In fact, several individuals have called our offices or contacted us on our radio show on 810 WGY with the intention of discontinuing their deposits. Assuming that there are no extenuating reasons for this action, we question them as to why they would stop depositing when the market is forty percent below where it was one year ago. We remind them that to “buy low and sell high” is the wish of all investors, but very few manage to accomplish this feat. Most tend to buy and then out of fear sell at a lower price, thus guaranteeing a lack of growth. Therefore, if you are investing in your company pension plan and are appropriately allocated for your objectives, keep on investing. Remember that you are dollar cost averaging at a historically low level as well as receiving a tax deduction on each dollar you contribute. Time will help you recover from these losses. Selling will only lock them in.
Moving away from steps you can take to minimize taxes and taking a look at a couple of issues that might impact your investment returns for 2009, we caution those investors that are currently investing into U.S. Treasury Securities or those considering such an investment. As the economy has come to a grinding halt, investors have fled most other types of securities designed for income such as corporate bonds, international bonds and preferred stock and rushed to U.S. Treasury Securities, thus pushing the yields down to record levels. For example, investors looking to lock up their money for ten years would receive only 2.23% on a U.S. Treasury Note. It is our belief that as this economic maelstrom passes, this “bubble” in U.S. Treasuries will deflate resulting in steep losses for unwary investors. We recommend that investors reposition some of their assets away from Treasuries and into more attractive fixed income securities such as Corporate Bonds, Municipal Bonds and Preferred Stock. We also believe that the U.S. dollar may weaken making international bond funds very attractive at this time.
Finally, given the drop in the stock market, many well-run mutual funds that were once closed are now open. We strongly recommend that investors take advantage of this window of opportunity to invest in one of these funds, as this window will not remain open forever. The Sequoia Fund (SEQUX) is one such example.
We realize this is a “mish-mash” of a column, but believe that if each issue that has been addressed above is tackled separately by the reader, a more successful 2009 will be your reward. From all of us at Fagan Associates to all of you, best wishes for a Happy, Healthy and Prosperous 2009!