WOW rates are low....

I thought I would share what many of you have already noticed in your money market funds--the yields are LOW.  According to Barron's, the average money market fund is only earning .03% and the average tax free money market fund is at .02%.  Remember, money market funds, savings accounts and checking accounts are not investments.  Over long periods of time the earnings on these types of accounts do not even keep up with inflation.  However, the reason we keep money in these accounts is to provide liquidity--ready access to cash that is risk free.  For this benefit, savers receive paltry returns.  One of the most frequent questions I get is what to do with this money when rates are so low--the answer is: how much risk are you willing to take?  If you can stand some risk, we can buy bond funds and perhaps some stock funds.  But if you don't want to lose any money--guess what, you're stuck with these abyssmal rates.

Stock Market vs. Bond Market

Every opportunity I get I will continue to talk about the different markets, specifically the stock market and the bond market.  When you hear folks talking about "the market" they usually are referring to the stock market.  A stock represents ownership in a public company.  A bond on the other hand is a debt obligation of whoever issues the bond: it could be the U.S. government, it could be corporations, it could also be government agencies.  In general, bonds have less price volatility than stocks and are considered more conservative (this is a general statement as there are many different types of bonds, some of them quite risky).  What you really need to know from this brief post is that the two markets typically move in opposite directions.  For example, last week "the market" (the stock market) was DOWN .71% and the bond market was UP .31% (both returns are based on Morningstar indexes).  The rule of thumb for diversifying portfolios is to have your money invested in BOTH the stock market and the bond market.  The percentage of each that you should own will be dependent on your specific circumstances including how much risk you are willing to tolerate and what assumed returns your financial plan dictates for you.

Results of a bank study

A study conducted by Union Bank found that most people believe financial stress negatively affects health.  The study also indicated that 60% of those surveyed felt they were not doing what they could to get themselves financially educated but believed that being fiscally fit is as important as being physically fit.  The article lists some very good suggestions for those starting out with the financial planning process or just a reminder for those who already are on the right track.  Read the article here:
https://www.unionbank.com/company_information/company_information/news/press_release_index/press_releases/study_confirms_financial_stress.jsp


Thanks to one of you for sending this to me--I always like to pass this good information along!

Charitable Deductions for 2009

From the IRS:
People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service. Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.

Estate Planning

Here is a brief answer to a question someone had about the current status of the Estate Tax:

On 1/1/2010 a funny thing happened that we all knew about but thought it would get changed before actually coming to fruition.  As of 1/1/10, the estate tax is repealed (that means 0% estate tax for anyone who dies now), the gift tax went down to 35% and the generation skipping tax was also repealed.  One caveat, upon a person's death, the inheritor receives the assets at the original cost so when the inheritor sells, she will have to pay capital gains on the sale.  There is an exemption amount but I'm not going to get into that here as it isn't really that important.

All of the above is only in effect for 2010.  On 1/1/2011, we revert back to a 55% estate tax/gift tax, a 1 million dollar exemption and the  generation skipping tax returns at 55%.

Congress has been working on a bill to make permanent the estate law changes enacted in the 2001 Tax Act, however they have been unable to do so as of this writing.  The worry is, if they do come up with permanent estate tax relief, will they make the changes retroactive, thereby nullifying any action people took during this time?  No one knows--it is a huge mess.

What many people with wealth are considering is GIFTING of assets and paying the tax at the 35% rate.  If permanent changes occur and made retroactive, I am sure there will be masses of people who will challenge the constitutionality of such a decision.  But in the worst case scenario, the person who gifted would end up paying the new gift tax rate (what ever that may be).

Finally--Year End Return Numbers

Well, 2009 ended on a good note for most areas of the market.  I'm still in disbelief that in one year we went from Armageddon to "everything is back to normal"--as least as far as the market is concerned.  From an economic perspective, we still have a long way to go.  But the market always leads.  Here are the year's numbers:


The Monthly Index Report for December 2009

Index	Dec-09	QTD	YTD	Description
S&P 500 Index*	1.8%	5.5%	23.5%	Large-cap stocks
DJIA*	0.8%	7.4%	18.8%	Large-cap stocks
Nasdaq Comp.*	5.8%	6.9%	43.9%	Large-cap tech stocks
Russell 1000 Growth	3.1%	7.9%	37.2%	Large-cap growth stocks
Russell 1000 Value	1.8%	4.2%	19.7%	Large-cap value stocks
Russell 2000 Growth	8.6%	4.1%	34.5%	Small-cap growth stocks
Russell 2000 Value	7.6%	3.6%	20.6%	Small-cap value stocks
EAFE	1.5%	2.2%	32.5%	Europe, Australasia & Far East Index
Lehman Aggregate	-1.6%	0.2%	5.9%	U.S. Government Bonds
Lehman High Yield	3.3%	6.2%	58.2%	High Yield Corporate Bonds
Calyon Financial Barclay Index**	-3.0%	-1.8%	-4.4%	Managed Futures
3-mo. Treasury Bill***	0.0%	0.0%	0.3%
All returns are estimates as of December 31, 2009. *Return numbers do not include dividends. ** Returns are estimates as of December 30, 2009.

Helpful Tip from the IRA on filing status

Eight Facts About Filing Status 

Everyone who files a federal tax return must determine which filing status applies to them. It’s important you choose your correct filing status as it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you.

Here are eight facts about the five filing status options the IRS wants you to know in order to choose the correct filing status for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2009, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2007 or 2008, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Link:

• Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)