More Short Stories March 8, 2002February 21, 2017 Brian Annis: ‘There’s at least one more hazard of shorting stocks that you didn’t mention: your position can be called in at any time because the real owner of the shares has sold them. Worst case, this will happen on a huge rally.’ ☞ True! Ordinarily, when the faceless person who’s loaned the stock sells it, your broker just arranges to borrow it from someone else. You don’t even know it happened. But sometimes that’s not possible and you are forced to buy the now-even-more-preposterously overvalued stock to cover your short position. Jack Ratcliff: ‘And when managers of an overpriced stock use that overpriced stock to purchase other companies, anyone short the stock being acquired is in for really BIG trouble. In late August, 1998, when Clarify (a smallish software company) was in the $8 range, my friend asked about shorting the stock but did not do so because I mentioned the possibility that someone might buy them out. Sure enough, Clarify began a steady climb to an incredible $150! Only AFTER it had soared to the sky, did we learn that it was being acquired by Nortel (as I recall). His contemplated 1000-share short sale, if left uncovered, would have cost him an eventual $142,000. Not that I am so smart, but I did learn that in order to make a small fortune by shorting stocks, you need to start with a large one.’
Lucy, Tivo and the Peso March 7, 2002February 21, 2017 It’s an old story. Lucy holds the football for Charlie Brown to run up and kick – she promises to hold it this time – and just as he lets loose, she pulls it away and he’s flat on his back. How many times did Charlie Brown fall for that? Well, those of you who’ve read The Only Investment Guide You’ll Ever (Ever! Really! Ever!) Need (which I have recently finished revising yet again) know that, for one thing, it contains a lot of annoying parenthetical asides (why does this not surprise you?) and, for another, that, despite the revisions, it leads off every time with the story of the Mexican peso. I won’t recount the whole thing here – that’s why God invented libraries (it was the devil, I fear, who invented parentheses) – but basically, Americans casting about for better than the paltry interest rate available in Chicago or Spokane would stash their money in Guadalajara to get a higher return. Which seemed smart until – bang! – they awoke one day to find the peso devalued 40% against the dollar, meaning an instant 40% loss in the value of their savings. Each time I revised the book, I found myself adding a new sentence or footnote to acknowledge the latest such event. Because Lucy, often as not, had done it again. Well, today I sat at lunch with a Mexican-American businessman who told me he could get 7% interest down south, versus 1.5% from his bank here in the US, but that he wasn’t biting. The peso, he says, trading at 9.1 to the dollar, is way overvalued and should be more like 13 to the dollar. He doesn’t know when the devaluation is coming, but he believes that it will. I don’t know either; but in case you’ve decided to juice up the return on your savings by converting your fortune to pesos, atender! It seems to be coming around again. # And speaking of Mexico, I replaced my troublesome Tivo with a brand new Tivo2 the other day – so far, so good – and I was interested to see that it was Made in Mexico. To one eager to see Mexico prosper (as presumably we all do), it was heartening. Kevin Respecki: ‘If you’re having trouble with your Tivo, you should really look into the Replay TV4000 by SONICblue. With these models I’m going to be able to watch Detroit Tiger games here in Hawaii that are recorded by my brother in Michigan. Anybody with a Replay TV4000 can share whatever they record with anyone else who owns one over a broadband connection. Plus all the other goodies like ‘commercial erase’ and digital photo storage. Go to the SONICblue website and check it out.’ ☞ I did, and it seems like a good bet for someone who already has his computer connected to a home network, or is undaunted by the task of setting one up. (I am totally daunted.) Some of the advantages Replay offers over Tivo appear to have been matched by the new Tivo2. And some of the complaints I remember hearing about the Replay (a clumsy remote you couldn’t read in the dark) appear to have been fixed with the Replay4000. If we consumers are lucky, both companies will aggressively compete, taking turns leap-frogging each other with advances in features and – I hope – in ease of use that make it more and more fun to get old. I don’t know whether Tivo or Replay themselves will make it, but the Tivo concept surely will. Within just a few years, I can’t imagine any TV set being sold without the Tivo/Replay functionality that lets you stop live TV – just freeze Tom Brokaw in mid-sentence while you answer the phone – and then start him back up again or have him repeat what he just said or watch him in slo-mo. I can’t imagine TV’s not allowing you to automatically record your favorite programs, as Tivo and Replay do now, without having to keep track of what time or channel they’re on. And commercials? I watch them sometimes, but only when I want to. It takes me only 20 minutes to watch the news each night (I fast-forward through the commercials and the story about . . . well, there’s always one skippable story), and that saves me 3,000 minutes a year, or 50 hours.
Really? He Anointeth His Head with Oil? March 6, 2002February 21, 2017 How do we get Rush Limbaugh to read David Brock’s new book? For months, in years gone by, Brock was the source for some of the most scathing charges Rush ever leveled – which is saying something. Rush even read portions of Brock’s journalism on air. Now it turns out – according to Brock – many of those charges were bogus. Nor was Brock alone in playing dirty. Even Theodore Olsen, Brock says, who currently serves as United States Solicitor General, encouraged the sleaze (in particular, the suggestion that Vince Foster was murdered, even though he believed it to be untrue). Seriously: how do we get Rush to read this book. Or, for starters, to read this review of it? Because Rush has made more money than he could ever need, and because he has had that awful brush with deafness, my guess is that he is at a stage in life where he could surprise people. He could read the book and, in an act of extraordinary courage, join in David Brock’s apology. Brock was misled; Brock misled Limbaugh; Limbaugh misled millions. And now he can fix that. Oh, and how about this article about our Attorney General? You already know that he ordered a statue in the Justice Department to be draped, at a cost of $8,000, because it showed a female breast. You know one of his top aides has claimed that the A.G. believes calico cats are a sign of the devil. You know about his ‘We have no king but Jesus’ speech to the good folks at Bob Jones University. What I did not know (if this article from the Guardian is accurate) was that his dad was a Pentecostal minister who spoke in tongues, and that each time he has been sworn in to political office, he has had himself anointed with cooking oil – most recently, the Guardian reports, by Mr. Justice Clarence Thomas. The same Clarence Thomas who, a decade or so earlier, watched silently as David Brock attempted to destroy Anita Hill’s reputation (‘a little nutty, a little slutty’). Could Justice Thomas possibly have even heard of ‘Long Dong Silver?’ It was beyond preposterous. From the above-linked Hendrik Hertzberg review in the New Yorker: Brock and Clarence Thomas’s other supporters had portrayed him as having a prudish distaste for pornography; Mayer and Abramson reported that, on the contrary, he was a habitual renter of hard-core videotapes. While looking for a way to refute this, Brock concluded that it was true. Nevertheless, in his review [of the Mayer/Abramson book] he wrote that there was no evidence-none-“that Thomas had ever rented even one pornographic video, let alone that he was a ‘habitual’ consumer of pornography.” “When I wrote those words, I knew they were false,” Brock writes in Blinded by the Right. [H]owever, to protect myself and my tribe from the truth and consequences of our own hypocrisy, smears, falsehoods, and cover-ups, I consciously and actively chose an unethical path. I continued to malign Anita Hill and her liberal supporters as liars. I trashed the professional reputations of two journalists for reporting something I knew was correct.” Now, let me be quick to put in a strong good word for pornography and another for speaking in tongues. I am not big on either one, but I enthusiastically support your right to enjoy them both. Quite seriously. Tens of millions of decent Americans – including Mr. Justice Clarence Thomas, apparently – get private pleasure and/or satisfy human needs with pornography. When the actors are not exploited, what’s wrong with that? (But hey: would you straight people please stop trying to get me to open e-mails with fathers allegedly doing terrible things to their daughters, ‘horny school girls,’ ‘lusty farm girls,’ ‘nurses ——- their patients,’ and teen-age co-eds allegedly doing bizarre things with farm animals? Bad enough I have to get all this spam about FREE LIFE INSURANCE QUOTES.) In a free country, what’s wrong with having the liberty to pursue happiness any way we want, just so long as it doesn’t hurt anyone else? Same goes for the cooking oil anointments, the calico cats, and anything else John Ashcroft is into that doesn’t interfere with his sound judgment and the passion with which I hope he defends the separation of church and state. But is it possible that he failed to tell the whole truth when, during his confirmation, the subject of Missouri’s desegregation fracas came up? Or that, given the depths of his religious beliefs, he lied when, during those same hearings, he denied blocking James Hormel’s ambassadorial nomination because Hormel was gay? Would it have been more truthful for him to say (in the manner of Jack Nicholson at the end of A Few Good Men), ‘You’re damn right I did!’
What to Hold in a Roth vs. a Traditional IRA March 5, 2002January 25, 2017 Paul Berkowitz: ‘A lot has been written about allocating funds between taxable and non-taxable accounts. But I haven’t seen any advice regarding allocation to Roth IRAs versus regular IRAs. Any suggestions as to which investments are optimum for each? Is it different depending on the time line? (I am 55 and within 5 years of retirement.)’ ☞ Hmmm. Well, first let’s repeat what you already know with regard to taxable versus nontaxable accounts: Put high-yield securities like bonds and REITs in tax-deferred accounts; likewise, tax-inefficient funds, if you buy them. (But why do you buy them? They also have higher fees and higher internal transaction costs weighing down their expected performance.) Put low-yielding securities and tax-efficient mutual funds (like index funds) in taxable accounts. Also, perhaps, international stock index funds, because the “foreign tax credit” they pass through can only be taken when held in a taxable account. Keep your risky holdings in taxable accounts, so that if you lose money, you can take the loss against your taxes, and if you make a big long-term gain, you get the nice low capital gains tax rate. (In a tax-deferred account, all the long-term gains ultimately get converted to ordinary income.) But what about your question? If you had both a recently established Roth IRA and a longstanding traditional IRA, what should you put in which? In the first place, I’d put all my new money into the Roth IRA as opposed to the traditional IRA. It will grow not just tax-deferred but tax-free. And there will be more flexibility (and less paperwork) when, sometime after age 59-1/2, you go to withdraw the money or pass it on to your heirs. Beyond that, I guess I would argue that dollars within the traditional IRA are less valuable than Roth dollars, because they will be taxed as withdrawn. (Dollars in a Roth IRA are worth $1 when withdrawn; dollars in a traditional IRA may be worth only 75 or 80 cents, perhaps even less.) Being less valuable, it’s less awful if you lose them. So as between two investments of varying risk, maybe you’d put the one you perceive as riskier in the traditional IRA. Then again, if the asset is riskier it may offer a higher hoped-for return. And if that materializes, you’d want to reap that higher return tax-free rather than have to share any of it with Uncle Sam. So if you could know your winners from your losers in advance – which you obviously can’t – you’d put the winners in the Roth and the losers in the traditional IRA. The one thing you can know is that risk diminishes with time. It’s quite risky to have your money in an index fund (say) for just a year or even three. It could drop precipitously. But over 25 years, if history is any guide, it is likely to do quite well – particularly if you are adding to it periodically, and thus reaping the advantages of dollar-cost-averaging. This argues pretty strongly for putting the riskier assets – the stock index fund, say, versus the bonds or TIPS – in the Roth IRA, for two reasons. First, the stocks, over time, are likely to outdo safer investments. Second, with a Roth IRA there’s no requirement to withdraw funds. With a traditional IRA, by contrast, once you turn 70-1/2, you must begin withdrawals, even if the stock market is in a trough. With the Roth, you or your heirs (if you can live without the money and chose to pass it on to them) can wait for a market peak, instead. Indeed, if you can afford to pay the taxes on the conversion, you might keep your eye out for a good year to convert some or all of your traditional IRA to a Roth IRA. Yes, you would pay tax now to do it. But having done so, that money grows and is eventually withdrawn entirely tax-free. And with no time limit on when you must begin making withdrawals. When to make such a conversion? Perhaps in a year when the value of your traditional IRA has been beaten down by a bad stock market. Convert it, paying the tax out of other savings; then watch it (eventually) grow back to where it once was, and beyond, forever free of tax. Either way, as you near the age at which you plan to start withdrawing from the IRAs – which may be 59-1/2 but need not be until 70-1/2 for a traditional IRA or ever for a Roth – you might want to begin taking less risk in either one . . . and especially less risk in the Roth, as those dollars are more valuable. Try to put winners in both, wish yourself luck, and go to the movies. But not before you read John Bogle’s remarks referenced in yesterday’s column, if you missed them, because they go a long way toward demystifying finance.
Investors: This Is Really Important March 4, 2002February 21, 2017 I know, I know. What to put in a Roth versus a traditional IRA. Like an author at 12:50 in the morning at the end of the old 90-minute Johnny Carson ‘Tonight Show,’ it keeps getting bumped. (But Johnny, I flew all the way out to Los Angeles!) Well, Johnny had his reasons and so do I. One of you (thanks, Paul Romaine) was good enough to direct me to what is very possibly the most important financial statement of the new century – by Vanguard founder John Bogle, not surprisingly – and I wanted to waste no time in commending it to you. Click here for the whole thing. And – because it is long – know in advance where it’s headed. In his remarks Bogle: reviews the ‘happy conspiracy‘ that leads to poor economic decisions and inflated stock prices that come back to bite us; explains and debunks the ‘managed earnings‘ game; lambastes the unrealistic assumptions managements have made about their pension fund returns (thereby to inflate earnings and the value of their stock options); attacks those executive stock option packages as obscene, ill-conceived and harmful to the shareholders (doing a much better job of it than I did in yesterday’s PARADE); attacks auditors (see, also, Floyd Norris’s excellent column on this in Friday’s New York Times), calling for a ‘a nationally-chartered Federal Accounting Commission’ to push for better financial disclosure standards; examines the perilous condition of our collective retirement prospects (25% of those eligible to participate in 401k’s do not; 18% of those who do participate borrow against their already-too-low 401k balances to finance current needs; far too many participants have all or most of their money tied up in their own company stock when they should have 10% or 20% at most; and where participants had just 30% of their 401k assets in stocks in 1990 – when stocks may have been fairly priced – that had risen to 81% at the start of 2001, when stocks, sky-high, offered much less value); and, finally . . . proposes something really important: namely, that the 75 or so top money managers, who collectively control more than half the shares in corporate America, form some kind of ‘Federation of Long-Term Investors’ to be a louder and more effective voice for shareholders. For example, they might push to have executive compensation plans tied more closely to business performance than to stock performance (giving incentives to build value rather than manipulate earnings or simply ride an upswing in the stock market generally) . . . push to have the cost of those options be reflected in earnings (they are not free, as current accounting pretends) . . . and more. It is a really important speech. And Bogle has the stature to change the world. He’s already done it once – over the decades, his Vanguard Group has saved investors billions of dollars in mutual fund fees. Maybe he can do it again. Click here.
Short Iraqi REITs at Twice the Price March 1, 2002January 25, 2017 THE NEW, HIGHER PRICE OF THIS COLUMN Bill Kistler: ‘>> Starting March 1, the price of this column doubles.<< Oh sure, and I bet you have an unsubscribe fee too!’ ☞ That’s where I make most of my money. REITS: AARON’S PICK Aaron Stevens: ‘You might advise M. Farbiarz to look into Equity Residential REIT (EQR). First, it has fantastic management pedigree (Samuel Zell has been in this business for his whole life). It invests in rental housing all over the country. I feel this is type of REIT is much more stable in an economic recession than those that build shopping malls or trade mortgages, but still has plenty of upside potential if/when the boom times return. Even better, EQR pays a handsome dividend (approaching 6.4%), and has consistently increased the dividend by about 8-10% per year.’ REITS: WHY PICK ‘EM AT ALL? Eric Haas: ‘I think it interesting that you advocate index mutual funds in your book, but you advocate individual securities on your web site. Rather than suggesting an individual REIT, how about a no-load REIT Index Mutual Fund, like the Vanguard REIT Index Fund? Isn’t diversification a good thing?’ ☞ Yep. But there’s also this issue I should have addressed yesterday. Just how closely do REITs correlate with the housing market? Answer: not as closely as you might think. What they do correlate with pretty closely is interest rates – inversely. That is, when interest rates go up, REITs come down. And interest rates may by now have at least as much room to rise as to fall. Robert Rogers: ‘If interest rates go up over the three years that M. Farbiarz wants to buy a house, he may be faced with higher interest rates on the mortgage he may need and a lower investment value in his REIT shares.’ SHORTER STILL David Morrison: ‘Two more factors that work against selling short: The long-term trend of the economy and the stock market is up. The long-term trend of the value of money is inflationary.’ ☞ So true. And a third is a point Warren Buffett has made (thanks to Roger Farley for reminding me of this) – that the managers of companies with overvalued stock can sometimes use that overvalued stock to acquire other companies, becoming at least somewhat less overvalued in the process. IRAQ and IRONY An interesting article in the Financial Times of London points out the leading role Halliburton played under CEO Dick Cheney in supplying Iraq with needed oil-drilling equipment. It was legal – just a bit ironic. The article appeared November 3, 2000, long before the average American felt any real threat from bad guys abroad. In these days of the Axis of Evil, it has resurfaced. It makes an interesting contrast to then-candidate Cheney’s remarks the previous August in an interview with ABC’s Sam Donaldson: Donaldson: ‘I’m told, and correct me if I’m wrong, that Halliburton, through subsidiaries, was actually trying to do business in Iraq?’ Cheney: ‘No. No. I had a firm policy that I wouldn’t do anything in Iraq – even arrangements that were supposedly legal.’ # Monday, really this time: What Should You Put in Your Roth, Versus Your Traditional, IRA?
Andy Day: No Columns Feb 29 or 30 February 28, 2002January 25, 2017 But I need one for today, so here goes: CORRECTION Judy’s comment on UGMA‘s yesterday was not entirely correct. If you read it before I fixed it, you might want to go back and see where it was misleading. BUYING A HOUSE M. Farbiarz: ‘I want to buy a house in three years, and have my money divided into two little sections. One section is money I’m *saving* for the house downpayment—that’s in a money market account. And the other section is the excess—money I don’t think I’ll need for the downpayment that I’m *investing.* Should some of that invested money be in an REIT? The idea is that if the value of houses zooms up in the next few years, I may find that my savings is too small for a downpayment. But then I’ll be able to dip into my REIT—which should go up in value along with housing prices. Andrew, does this make sense? And while we’re at it, why do you never mention REITs?’ ☞ Interesting idea. I like it. I do mention REITs from time to time, but apparently not enough. Of course, there are many different kinds of REITs, of differing risks and rewards, so do your homework and pick one you think fits your plan. (No, I don’t know which.) HOW DO YOU SELL SHORT? Matvey Shindel: ‘I’ve never held any short positions (and am not about to), but how does it practically work? Do you have to have cash in your brokerage account when buying or holding a ‘short’? How did the short sellers of Enron, for example, liquidated their shorts after Enron declared bankruptcy? What happens if the shorted stock is no longer traded?’ ☞ First off, you don’t WANT to liquidate your short sale, because when you do, short-term capital gains tax is due. In an ideal world, you’d stay short forever, never paying the tax. Once the security completely disappears and becomes worthless, you have to declare the loss and pay the tax. So the best short is the high-flier that falls back to earth but never entirely flattens. All this said, I’m glad you’re not about to short anything: shorting is very, very dangerous. And the odds are against you: You PAY the dividend, if any, rather than getting it. You pay a commission to do the short sale, of course, and another if you cover your short. You pay a high tax on any winnings, no matter how many years you held the short. (There is no such thing as a long-term capital gain on a short sale, since you never owned the asset for even a second, let alone a year and a day. Someone else owned the asset in a margin account and, unbeknownst to him or her, loaned ti to you. If he or she sold it along the way, your broker would ordinarily, though not always, manage to find someone else to lend the shares, and you wouldn’t even know it had happened.). And if the stock goes up to irrational heights before it crashes (if it ever does crash), you may well not have the nerve – or the collateral – to maintain your position. Instead, YOU will be the person who, in finally covering his short sale with a huge loss, buys at the very, very top. (Most often, that’s who’s paying those crazy, tippy-top prices: not people who want the stock, but short-sellers desperate to cover their losses and get out so they can . . . finally . . . get a night’s sleep.)
UGMA, Ugh and TiVo February 27, 2002January 25, 2017 Thanks for the several kind responses to yesterday’s column, including those of you who noted that this page is, after all, free. Irony of ironies, I am sorry to report – talk about awkward timing! – that just prior to receiving all those nice messages I had initiated a price hike, too late to recall, that will take effect at the end of the month. Starting March 1, the price of this column doubles. MORE UGMA Judy: ‘Re: Transferring UGMAs to 529 Plans – Everything you wrote is correct. BUT, one thing people should be aware of (and probably will be made aware of if it is coded as an “UGMA 529 Plan” is that money contributed to an UGMA or UTMA account is an IRREVOCABLE GIFT. Since 529 plans let you transfer money from one beneficiary to another (a nice benefit) you have to make sure you don’t do this if the money started as an UGMA. Let’s say you have 2 kids, John and Mary. You set up UGMAs for both of them with $10,000. Then you transfer them to a 529/UGMA Plan for each. John gets accepted at West Point. Fantastic – no tuition! So you think “No problem, I’ll just transfer the balance of John’s plan to Mary since he won’t need it. And a good thing, too, since Mary got into Harvard and I’m going to need every penny to pay for that!” Well, you can’t do this. The UGMA funds for John were an irrevocable gift to him. And 529 plan money has to be used for education. So let’s hope John goes to grad school.’ ☞ Well, not exactly. Less tells me that an UGMA/UTMA or child ownership of the 529 plan simply means the parent/custodian cannot transfer the funds away from the child. But once John reaches the age of majority, HE can change the beneficiary from himself to his beloved sister. Also, 529 rules allow the distribution of funds without penalty to the extent someone qualifies for a scholarship. John can take a distribution, pay regular income taxes on the 529 earnings (which he would have had to do had the money been left in an UGMA), and have no penalty on any of the distribution. No grad school required. JUST PLAIN UGH Jay Fratz: ‘You’re so obviously pandering for some future candidacy. What are you running for?’ ☞ I would never DREAM of running for office, and am grateful for those who have the energy and courage and public spirit to do so (at least those, on both sides of the aisle, with good motives, which I believe is most of them). But me? Never, ever, ever, EVER. TIVO/REPLAY Bill Spencer: ‘So you’re a Tivo fan. Last year I decided that the idea of a hard disk VCR made sense for me and I started to shop. I determined that the MSRP for ReplayTV was about $200 higher than Tivo, but the programming services for ReplayTV are free instead of Tivo’s monthly or lifetime fee. Then I walked into Circuit City and saw that they were selling a 30-hour Tivo for $300, and a 30-hour ReplayTV for $400. BUT, the ReplayTV came with a mail-in rebate for $100, making the units equal in price. I snapped up the ReplayTV and have had no problems with it since.’ Rick Mayhew: ‘Your ‘TiVo’ is actually either a Sony or a Philips unit. TiVo is the software. Did you buy both models, or just one? Which model is causing you the problem — Sony or Philips, or both?’ ☞ Philips. Lots of problems, which is doubly annoying because I have become so dependent on TiVo. Imagine having no telephone or refrigerator. OK, well, not THAT dependent. But just one order of magnitude less. I’ve been trading calls with TiVo hoping I might actually be able to get them to give us all a better deal when it comes to equipment problems. On the admittedly slim chance anything comes of it, I’ll let you know.
Demystifying . . . Something? February 26, 2002February 21, 2017 Friday’s column about Arianna Huffington’s AmeriCorps conversion and David Brock’s new book elicited a fair amount of comment. Geoff Arthur: ‘Years ago, I used to really enjoy reading you. However, your column has become less and less finance related. You seem to be entirely focused on politics (which I find incredibly boring). So I regret to say that I am removing your site from my ‘favorites’ list. You really ought to change the title of your column. Best of luck.’ ☞ Sorry to lose you. You are certainly right that I should change the title of the column, but that’s a part of the web site I have no idea how to manipulate. Readers: Got any suggestions as to what I should call it? If you come up with a good one, maybe I’ll try harder to get it done. But you know, politics and your money can be tightly related. And because democracy requires politics, if everyone were bored by politics and policy it would be profoundly . . . bearish. John Mahoney: ‘I’m sure you were mistaken when you stated that the reason for the drop in the surplus was the tax cut. Surely you realize that it was the result of the slowing of the economy and the resultant drop in tax revenue.’ ☞ The column referred to the LONG-TERM surplus. (‘Don’t for a minute think the long-term surplus disappeared because of the War on Terrorism, which costs little more than $1 billion a month. It disappeared primarily because we enacted a massive tax cut for the top 1% of taxpayers.’) You will recall that candidate and then President Bush promised us plenty of long-term surplus even allowing for the recession he expected. No need to wait to cut taxes for the top 1% until we knew we could afford it – it was fine, we were told, to enact tax cuts for the next decade right away. We’d still have plenty of money for a prescription drug benefit for seniors, we were told . . . we would certainly not have to dip into the Social Security surplus . . . we would definitely have the resources needed to bolster the military. In short, we were told, we could do it all. Remember? All that was after the dot-com bubble burst, not before. It didn’t seem to add up during the campaign, it didn’t seem to add up while it was being debated in Congress, and in fact – surprise, surprise – it hasn’t added up. Robert Johnston: ‘While you are big on intellectual honesty for everyone you seem to give yourself a bye when convenient – you have to know that the effect of the ‘tax cut for the 1%’ has not begun – do try to take a longer view, even when it doesn’t suit your purposes.’ ☞ Same point as above. Mark Gorman: ‘Your analysis of the changes in the political landscape rings true. The Republican party has shifted so far to the right that I (who voted for Reagan, Bush the elder, and Bob Dole) voted for Al Gore in the last election. What is striking is that so many people in the lower and middle classes vote Republican when it is clearly against their own economic self-interest.’ Tomorrow: What Should You Put in Your Roth, Versus Your Traditional, IRA?
UGMA – and Enron February 25, 2002February 21, 2017 Tomorrow: Your responses to Friday’s column. But today . . . ENRON: WHOSE FAULT WAS IT ANYWAY? Here’s an interesting piece from the Charlotte World. Yes, it concedes, greed contributed to the Enron mess. But the corrupting influence of gays and lesbians was a major contributing factor as well. ‘Not incidentally,’ reports the World, ‘all of the ‘Big Five’ accounting firms, including Arthur Andersen, now offer same-sex benefits.’ UGMA, UGMA! It is, I feel sure, the original caveman rallying cry. (I base this information on nothing but primal instinct.) You want more food? UGMA! UGMA! Your team is winning the Flintstone Olympics? UGMA! UGMA! A pretty cavewoman passes by? UGMA! UGMA! (Cavewomen would have had an entirely different cry, heavier on the treble, which I can hear in my head but not spell.) Al Stitz: ‘I started saving for my two kids’ college expenses back in the the late 80’s and early 90’s using UGMA [Uniform Gift to Minors] accounts. I typically have to pay income taxes in the kid’s names every year. Can I convert the UGMA accounts into Section 529 tuition accounts to save on taxes?‘ ☞ Who the heck knows? Less Antman, that’s who! I transmit one of these questions from a beacon on top of my computer . . . he receives it on his zirconium CPAger ring . . . sidles off unnoticed into a phone booth . . . changes into a cape and boots . . . and – off he goes! Let me preface his answer by explaining Al’s motivation. Money inside a Section 529 Qualified Tuition Plan grows tax-free . . . and can be withdrawn tax-free to pay for tuition. That’s a pretty great deal. The exact terms of the Section 529 plan vary from state to state (I like the Utah plan, among others), so a lot of people use savingforcollege.com to find a plan they like. But then the question becomes, how to fund it? Can you take the money you’ve already salted away in an UGMA bank or brokerage account – with you as the custodian because at 3, Janie couldn’t be expected to do the paperwork and make the investment decisions – and somehow switch it into one of these wonderfully tax-advantaged Section 529 plans? ‘You cannot ‘convert’ UGMA accounts to 529 accounts,’ Less reports, with a flourish of his cape, ‘but you can sell investments in a UGMA account and transfer the proceeds into a 529 plan . . . which should either be designated as a UGMA 529 or have the child as owner, to be technically in compliance with the law. You will incur taxes on the sale of the UGMA assets, if there are any built-in gains. But if the child is at least 14 or the child’s total income, including the gain, is less than $1,500, the federal tax rate on investments held over one year is 10% and on investments held over five years is 8%, and that isn’t a bad one-time tax to incur to make the future income tax-free (especially since the gains will eventually have to be realized to spend it on college, anyway). ‘A reasonable approach might be to stop reinvesting mutual fund distributions and instead take the cash and add it to a 529 plan. Then, sell as much as you can without pushing your child into the 20% long-term gains tax bracket (no problem if the child is 14, but limited to $1,500 total income if the child is younger), and add that to the plan as well. When the child is 14, sell the rest and add it to the fund. This assumes, of course, that you are willing to spend all the money in the 529 plan on college costs for the child. If you want the money available for other purposes, you must keep it out of the plan.’ Actually, you could do much the same thing transferring up to $2,000 a year into a Coverdell Education Savings Account (the old ‘Education IRA’). They, too, grow your money tax-free and allow completely tax-free withdrawal for tuition, and may involve less in the way of fees. And, Less says, ‘I’m pretty sure the income limitations on Coverdell Education Savings Accounts won’t apply, since the contributor is the child, not the parent. UGMA money – also known as UTMA money – is the property of the child.’