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					August 2001                                                                        Volume 6.3


          BFAS Money Line
           INVESTMENTS


Prosperity
Around the
Corner?
        Ezra Solomon once
said, “The only function of
economic forecasting is to
make astrology look
respectable.”
         Many economists have
pointed out that six straight
Federal Reserve rate cuts
almost always presage a bull
market. Analysts, nostalgic for
the spectacular gains in            growth. Long-term, the market      Asset Class        1 Yr
technology stocks during the        should continue it’s historical                      Return
late 1990’s, predict a near-        growth rate of 11%.
                                                                                        (7/31/01)
term, vigorous rebound.                     Of course, the turmoil
                                    in the Middle East could really    S & P 500         -14.32%
           My crystal ball is
pretty cloudy, but I remain         set back our economy and the       NASDAQ            -46.19%
concerned that the price-to-        stock markets. If war should
                                    break out, the U. S. could well    Lg Cap Gwth       -26.29%
earnings ratio on the market is
still a high 28 (historical norm    be pulled in to prevent Israel     Lg Cap Val        +17.51%
14 –16). Does that mean I           from being overrun by Egypt,
expect the market to drop to        Syria and Iraq. Even a             Mid Cap Gwth      -9.02%
7000? I certainly hope not!         supporting role could trigger an
                                                                       Mid Cap Val       +35.51%
                                    oil embargo with serious
          However, the lackluster   consequences to our economy.       Sml Cap Gwth      -4.76%
earnings outlook seems to put
a damper on high growth. One                 As you can see in the     Sml Cap Val       +31.78%
scenario we might see is            following table, value stocks
                                    and bonds continue to do           Foreign           -21.71%
several years of slow returns
that will allow earnings to         well in this uncertain             Interm Corp       +12.50%
catch up to currently high          market. Even a spring rally        Bds
prices. I think there is a small    could not overcome last year’s
                                    losses.                            Foreign Bds       +1.53%
possibility of high growth as
well as continued negative                                             Just remember, the current
                                                                       market is on sale. If the
  2                                                                  BFAS Money Line
Dow will be 20,000 in 2011 (a              If you are over 50,       income. In the past the
7% return), wouldn’t you          you can add an extra $1,000        spouse’s income seemed to
want to be invested now?          to your normal SEP                 only increase taxes and child
                                  IRA/401k/403b/457                  care costs. Now, if they make
           TAXES                  contribution next year (total      over $12,000 (and they are over
                                  $12,000) or an extra $500 to       age 50) instead of putting only
                                  your SIMPLE IRA/ordinary           $1,800, they may be able to
New Tax                           IRA/Roth IRA. Yearly
                                  increases in the catch-up mean
                                                                     put all $12,000 into a
                                                                     401k/403b!
                                  that, by 2006, you can add
Rules                             another $5,000 to SEP
                                                                     Tax Credit for Saving!
                                  IRA/401k/403b/457 plans,                     There is also a tax
         The new tax-cut law is   $2,500 to a SIMPLE IRA or          credit for low-and-moderate
too complicated to cover in any   $1,000 to other IRAs. Thus, in     income people to
detail, so I will just touch on   2006, you will be able to          encourage their
some high points.                 contribute $20,000 to your         contributions to retirement
        Although the reduction    401k plus $5,000 to your Roth      plans. The credit, applied to
in income taxes and estate        IRA.                               the first $2,000 in savings
taxes got most of the press,                                         contributions
                                  Rollover Everything
there were significant                                               (401k/403b/457/IRA), would be
changes in pension                           You also get more       in addition to the deductibility
opportunities and education       flexibility. Rollovers will be     already available!
savings as well.                  allowed between
                                                                     Credit   Single      Joint
                                  401k/403b/457 plans. Since
Put More In Savings               457 plans have been                50%      $0 -        $0 -
         Starting next January,   notoriously restrictive, this is            $15,000     $30,000
you will be able to divert more   really significant.
                                                                     20%      $15,001     $30,001
money than ever before to your    Spouse Can Save More                        -           -
pension plans. In 2002, the
                                           Another potentially                $16,250     $32,500
contribution limit on your
SEP IRA/401k/403b/457 plan        significant item is a provision    10%      $16,251     $32,501
increases to $11,000. The         increasing contributions to 25%             -           -
SIMPLE IRA limit raises to        (from 15%) for defined                      $25,000     $50,000
$7,000 and the ordinary           contribution plans (such as
IRA/Roth IRA limit goes to        401ks). Along with the new
$3,000.                           maximum $200,000 of covered                   This is information
                                  income, this means the             you need to share with your
         Each year thereafter,    maximum contribution can now
the limits increase until 2006                                       children as well! Not only do
                                  be up to $40,000. This should      they pay no taxes on their
when the limits will be $15,000   allow business principals to
for SEP IRA/401k/403b/457                                            contributions, but they also get
                                  shelter more in their retirement   a tax credit. You might even
plans, $10,000 for SIMPLE         plans (subject to highly paid
IRAs and $4,000 for ordinary                                         consider gifting to match
                                  employee testing).                 contributions so they maintain
IRAs/Roth IRAs ($5,000 in
2008).                                    In 2002, the               their living standard while
                                  combination limit of employee      building their retirement nest
Catch Up On Savings               and employer contributions to      egg.
         Even more important      401k/403b/457 plans has            Small Business Credit
for those of us over 50 is the    increased from 25% to 100% of
new catchup provision. It was     compensation. This could help               Finally, they also set
actually inserted to help         out many spouses.                  up an incentive for small
women who dropped out of          Sometimes a spouse works           businesses with no retirement
the workforce during child-       because he or she wants to,        plan to set one up. A small
raising, but we men can use it    rather than because the            business can receive a
also!                             family needs the extra             nonrefundable credit for 50%
                                                                     of the first $1,000 in
  3                                                                     BFAS Money Line
administrative and                           As more people                       Only some states have
retirement education                become aware of 529 plans,           these plans. Rhode Island is
expenses for a NEW                  they are becoming very               one of them. I have already
retirement plan (good for           popular. However, up until           seen Virginia residents being
each of first three years of        recently, people working with        sold the Rhode Island plan
plan).                              brokers seldom heard of them.        (which
                                    That’s because the brokers
Education IRA
         Education was a major
focus of the new tax law. The
Education IRA was
dramatically overhauled. As of
2002 you can contribute up
to $2,000 with the income
limits for contributions
raised to $95,000 - $110,000
for singles and $190,000 -
$220,000 for couples.
        Withdrawals will be
tax free and can now be
used for K – 12 tuition,
computer technology or
equipment or Internet
access and even actual
living expenses for college
in addition to tuition and
fees.
529 Plans
          That tax free
                                                    “ Dow Jonesy enough for you?”
distribution also applies to
the state 529 (educations
savings) plans (as well as pre-
                                    made no money by                     costs more than the Virginia
paid tuition plans). The tax free
                                    recommending them and lost           plan, due to the commissions).
growth makes the 529 plan
                                    commissions on money you
tough to beat. Most states                                                         Since Virginia
                                    put into the 529 plan.
also provide a tax break for                                             residents get a $115 tax
contributions to these plans.               Lately, several states       refund for a $2,000
Virginia provides a tax             have established 529 plans that      contribution, and the cost is
deduction of up to $2,000           provide commissions to               less, I find it hard to
per year per plan (with             brokers who recommend these          understand how purchasing
excess contributions carried        plans. The following table           a Rhode Island plan is better
over).                              shows what a broker gets:            for a Virginia resident. I
                                                                         know it’s better for the broker!
         Thus, if you set up four
                                                                         Beware!!
plans you get $8,000 off your
                                    Class   Commission       Annual
state taxable income for a total                                         Estate Taxes
tax break of $460 (5.75% times                               Svc Fee
                                                                                 The gradual increase in
$8,000). Even better for those
                                    A       3.5%             .25%        the estate tax exemption (it
over age 70, you get the full
                                                                         was going up to $1,000,000 by
deduction in the year of            B       2.5% back        .25%        2006) was greatly accelerated.
contribution; you don’t have                load                         The $1,000,000 exemption
to do it $2,000 at a time.
                                    C       None             .50%        starts next January,
                                                                         increases to $1.5 million in
  4                                                                    BFAS Money Line
2004, $2 million in 2006, $3.5     penny-wise and pound-               less value. However, they also
million in 2009 and                foolish; see your attorney!         provide asset protection from
unlimited exemption in                                                 creditors or divorce. If you
                                           Some of you are
2010. There is a sunset                                                believe the estate tax will never
                                   saying, “I’ve already got my
provision that says, in 2011, we                                       really go away or you are
                                   estate plan done. I don’t
revert back to our current                                             concerned about asset
                                   need more estate planning.”
estate tax regime.                                                     protection, you may want to
                                             Many estate plans are     retain your ILIT.
          This dramatic
                                   written to take advantage of the              DISABILITY
reduction in estate taxes
                                   current exemption amount
means fewer and fewer people
                                   through the creation of a Credit
will be paying estate taxes in
future years. Unfortunately,
                                   Shelter Trust. With the
                                   exemption amount increasing
                                                                       Elderly
many people assume they
no longer need to do estate
                                   dramatically, it’s quite likely
                                   that all of your assets might go
                                                                       Parents
planning. Several lawyers
                                   to the Credit Shelter Trust.
have told me this is already
happening. Nothing could be                 While most Credit
                                                                       Protecting
further from the truth!            Shelter Trusts specify income,
        The real reason to do
                                   and in some cases, principal
                                   available to the spouse, this
                                                                       Assets
estate planning is to make
                                   may not leave any money for                    One of the most
sure everything you
                                   the Marital Trust. Thus, the        difficult situations for parents
accumulated during your
                                   spouse may have no assets of        with disabled children is
lifetime goes where you
                                   his/her own.                        planning for what happens after
wish after you are gone.
                                                                       you are gone. If you are
Without estate planning, the                 What about the estate
                                                                       elderly and have limited
state may decide where your        tax repeal in 2010 and the
                                                                       means, you may be
assets go.                         sunset provision in 2011? How
                                                                       concerned about using up
                                   will that affect your planning?
          I know some of you                                           your limited assets for Long
                                   Should it be taken into
think you can save the                                                 Term Care needs, leaving
                                   account?
attorney’s fees by leaving                                             nothing for your child.
money in a joint account with                 Although estate taxes
                                                                                However, Congress in
right of survivorship or setting   are changing, gift taxes are
                                                                       OBRA ’93 specifically allows
up “Payable on Death” or           staying with us. Sure, you
                                                                       parents in this situation to
“Transfer on Death” accounts.      still get the $10,000 annual
                                                                       place their assets into a
These techniques will bypass       exemption, but the lifetime
                                                                       (d)(4)(a) Trust for their child
the probate process, but can       exemption for gifts over the
                                                                       and immediately qualify for
lead to other problems.            annual exemption stops at
                                                                       Medicaid support of Long
                                   $1,000,000. Lifetime gifting
          Putting investments                                          Term Care. Normally, placing
                                   over that amount will be taxed
into a joint account can create                                        money into a trust would
                                   at the maximum income tax
a gift so that only half of the                                        eliminate Medicaid access for
                                   rate (35%). This gives those
assets might get a step-up in                                          five years.
                                   with substantial assets a
basis when you die. Also, a
                                   perfect excuse to limit gifts               This can significantly
joint account with a child puts
                                   while living, since repeal of the   help elderly parents.
the investments at risk to the
                                   estate tax eliminates taxes
child’s creditors, or at risk of                                       Edited and Published by:
                                   after death!
being shared with the child’s
spouse in a divorce situation.              Irrevocable Life           Ronald S. Pearson, CFP
                                   Insurance Trusts (ILITs) with       Beach Financial Advisory
         In addition, not
                                   Survivorship Life Insurance         Service
everyone who inherits is
                                   policies may need to be re-
capable of managing their                                              6204 Ocean Front Ave.
                                   thought. If you believe the
inheritance. So, don’t be
                                   estate tax will really expire       Virginia Beach, VA 23451
                                   permanently, an ILIT will have
 5                          BFAS Money Line
(757) 428-6634
E-mail: rpearson@infi.net