INVESTING by tyndale

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									Retirement Advisor
A monthly resource for protecting your income
September 2009

By Your Name, Editor


INVESTING                                                      college education or as a source of retirement income.
                                                               U.S. savings bonds are examples of long-term zero
Zero coupon bonds: Low-risk investment                         coupon bonds.
vehicles that can pay off in the long run                           Short-term zero coupon bonds (which are called
                                                               bills) have maturities that are typically less than one
        ero coupon bonds have been described by                year, e.g., U.S. Treasury bills. Bills can also be issued

Z       some as “long-term bonds on steroids.” More
        accurately, zero coupon bonds are a class of
        bonds that is bought at a deep discount or at a
price lower than its face value (hence their other
                                                               by state governments, municipalities and corporations.
                                                                    Zero coupon bonds can be held until maturity or
                                                               sold on secondary bond markets at any time. The
                                                               current value of a zero coupon bond before it matures
name, “discount bonds”). They are typically available          is affected by the fluctuations in the interest
in denominations of $5,000 face amounts.                       rate. When interest rates rise, the value of the bond
     Unlike regular bonds, which make regular                  will fall and when interest rates fall, the value of the
payments (coupons), zero coupon bonds do not pay               bond goes up.
periodic interest during their life. Instead, the full face         Although no payments are received from zero
value – the returns from the compounded interest and           coupon bonds until they mature, investors may still
the difference between the discounted price of the             have to pay annual federal, state and local income tax
bond and redemption value – is paid in one lump sum            on imputed or “phantom” interest. However, some
at the bonds‟ maturity date.                                   states offer zero coupon bonds that are exempt from
     For example, a bond with a face amount of                 state and local taxes.
$20,000 and a maturity period of 20 years may be                    The price of zero coupon bonds on the secondary
purchased for about $6,500. At the end of the 20               market tends to fluctuate much more than other types
years, the investor will receive the full face value of        of bonds, because they pay no interest until maturity.
$20,000. (This is only an example; investors need to           The value will depend on prevailing market prices, the
speak with an advisor for an actual rate.)                     years remaining to maturity and the creditworthiness
     The return is backed by the full faith and credit of      of the bond issuer. There is a possibility of capital
the U.S. government, state governments or other                gain or loss if a bond is sold before it matures.
government bodies, so they are said to be safe.                     Rather than selling them in the secondary market,
Corporations also issue these bonds, but such bonds            financial analysts recommend retaining zero coupon
are riskier and therefore offer higher yields. They can        bonds till maturity to get the maximum benefit from
be more subject to calls – issuers recalling the bonds         these investment vehicles.
before maturity.
     Zero coupon bonds‟ maturity dates can be long or          TAX AND LEGAL
short term. Long-term zero coupon maturity dates
usually start at 10 and can be long as 40 years. The           Common tax mistakes of the self-employed
longer the maturity, the lower the price. Because their
                                                                         any self-employed people are do-it-yourself

                                                               M
value can grow to a specific amount on a specified
future date, they can be suitable investment vehicles                    people not only in business but also in
for long-range goals, such as paying for a child‟s                       paying their taxes. But self-employment tax



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rules are somewhat more complicated than the rules           chili cheese dog and take control of our health.” That,
that apply to the employed. As a result, many commit         in a nutshell, is the philosophy behind preventive care.
mistakes that lead to costly fines and penalties from             Chronic diseases such as diabetes, cancer and
the IRS as well as to paying more than required.             heart disease, as well as their preventable underlying
     The self-employment tax (SE tax), which is filed        causes such as obesity, smoking, alcohol use, poor
with the Individual Income Tax (1040) return, is a           diet and lack of exercise, account for approximately
Social Security and Medicare tax for individuals who         38 percent of all deaths in the United States, according
work for themselves. It is similar to the FICA taxes         to Dr. Susan Blumenthal, former assistant surgeon
withheld from the paychecks of most employees.               general. They also account for 75 percent – $1.5
However, because self-employed individuals are both          trillion each year – of U.S. health-care spending.
employers and employees, they are responsible for            Although prevention has been proven to reduce the
paying all the FICA taxes.                                   incidence of chronic disease, the U.S. government‟s
     Most people who are newly self-employed forget          investment in prevention has remained low.
that they now have to cover both the employer and                 President Barack Obama has said he would
employee portion of Social Security and Medicare tax.        require insurance companies to pay for cholesterol
Instead of the Social Security employee-only tax rate        tests, cancer screenings, mammograms,
of 6.2 percent, the SE tax rate is actually 12.4 percent.    colonoscopies, vaccines, and other routine checkups
The SE tax rate for Medicare is 2.9 percent and not          and preventive measures as one of the consumer
the 1.45 percent Medicare tax rate for employees.            protections in any health-care reform legislation.
     Another common mistake made by the self-                     Although few would dispute that preventive care
employed is missing out on legitimate deductions             saves lives, the Congressional Budget Office (CBO), a
because they are not aware that they qualify for these       nonpartisan agency that estimates the cost of
write-offs. Consequently, many business owners end           legislation, said expanding the use of preventive
up paying more than they owe the government. Here            measures and screening tests would actually increase
are examples of deductions that are available to the         medical spending overall. The CBO cited The New
self-employed:                                               England Journal of Medicine 2008 review that found
 Payments made to 401(k), IRA, KEOGH, or SEP                that about 80 percent of the hundreds of preventive
     and other qualified retirement plans.                   services included in the study added to the costs.
 Cost of toner for printers, reams of paper, shipping            Preventive care doesn‟t bring down cost because
     expenses, postage, software, pens, pads and other       the tests themselves are costly and often lead to more
     office supplies used directly for business.             doctor‟s visits and procedures.
 Cost of advertising materials for radio, TV,                    A separate study found that preventive services
     magazines, the Internet and other media.                such as measuring the cholesterol level of people at
     There are many other expenses that can be               high risk for heart disease would cost almost 10 times
claimed as “business expenses” and are therefore tax-        as much as the savings. As a result, the country‟s total
deductible. However, there are various rules that apply      medical bill could increase by 162 percent.
to the different deductions and it is important to                But even the CBO maintains that there is no
understand these rules before incorporating them into        reason to abandon preventive measures if the country
the tax returns.                                             decides they are worthwhile and as long as the cost is
                                                             recognized. “Just because a preventive service adds to
HEALTH AND WELL-BEING                                        total spending does not mean that it is a bad
                                                             investment,” CBO Director Douglas Elmendorf said.
Does preventive care save money?                             “Experts have concluded that a large fraction of
                                                             preventive care adds to spending but should be
         TV commercial for a new prescription drug           deemed „cost-effective,‟ meaning that it provides

A        for heartburn shows a guy suffering from the
         condition after eating a chili cheese dog.
         “Stop eating the chili cheese dog!” responded
Jonathan Harris, a managing editor for the
                                                             clinical benefits that justify those added costs.”

                                                             The legal and tax information contained in these articles is
                                                             merely a summary of our understanding and interpretation of
                                                             some current provisions of tax law and is not exhaustive. Consult
philanthropic group Causecast. “Let‟s put down the           your legal or tax advisor for advice concerning your particular
                                                             circumstances.


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