Volume 11 Number 4

From The Corner Office By Mitchell Freedman, CPA/PFS

In my first quarter 2006 portfolio report letter to investment management clients I cited a headline from an article in the Los Angeles Times that read, "First Quarter Was A Pretty Good Year." What a difference a few months can make. As of this writing, by historic standards, many equity asset classes and sectors are in correction mode and some are in the midst of a bear market. This is so despite substantial improvements in valuations on June 14 and 15, 2006. Many of the early 2006 gains have been erased and some benchmarks have negative returns for the year to date.

Asset classes and sectors that for the last several years have been among the best performers were down substantially from their recent highs. We at MFAC Financial Advisors had already taken some money "off-the-table." We have trimmed holdings in gold and precious metals and emerging markets. While we are not market timers we were of the opinion that it was difficult to justify some of the valuation levels. We are examining the performance of other asset classes as well, in order to make sure that we maintain the asset allocations and levels of risks that our clients have agreed upon.

Why have the equities markets turned? The economic information is uncertain. High gasoline and fuel prices have put pressure on consumers. Inflation's ugly aura seems to be rising. Interest rates have continued their inexorable increase. The Iraq situation is still adversely affecting both our economy and our national psyche. And these are only a few of the matters that investors are concerned with.

What should you do? Monitor your portfolios. Make sure to re-balance them to your decided upon asset allocation. If you have capital gains when you sell some of your best performers consider harvesting losses that you have in the portfolio. If you do harvest losses and still maintain your asset allocation, make certain that you do not run afoul of the "Wash-Sale" rules which could negate your tax planning efforts.

Above all, don't decide it's time to get out of the markets. A well diversified portfolio is still the soundest investment strategy over the long term. If you are interested in an evaluation of your portfolio and/or your tax situation, please contact me or your day-to-day contact at our firms.

Tips & Alerts Perform an E-Mail Diagnostic Check By Stacie Benjamin

• Proofread and spell check what you have written
• Review your "tone." It is easy to write something without realizing how it sounds; depending on your state of mind when you wrote it. It may sound harsh, condescending, rude, etc. without you meaning for it to be so. E-mails are easy to misconstrue.
• Be sure to include everything you want to say. Did you write too much? Too little?
• Make sure you have included your attachments

Applying the above procedures BEFORE you enter the recipient's e-mail address can save you grief.

Tax Notes New Tax Law Beats Up On Your Kids (Or At Least Their Taxes) By Tom Trent, EA

Once upon a time, a popular tax-planning technique was to shift income to a child, so that it was taxed at their, rather than the parent's tax rate. However, in the early '90's that technique suffered a blow with the passing of the so-called Kiddie Tax. This took away the ability to income shift, by taxing the unearned income (dividends and interest), above a relatively small amount, of a child under 14 at the parent's higher tax rate.

Now, get ready for another blow. The recently passed Tax Increase Prevention and Reconciliation Act (TIPRA), contains a provision which increases the age of children subject to the Kiddie Tax to 18, as long as either parent is alive at the close of the tax year and the child does not file a joint return for the tax year. This provision is applicable to tax years beginning after December 31, 2005. If you have a dependent child (or children) who were once subject to the Kiddie Tax, but not since they reached the age of 14, they will again be subject to this tax in 2006 and subsequent years, until they are 18.

Because this change is retroactive to January 1, 2006, it may change some of our client's current planning strategies, particularly for those with college bound children. If you would like more information on how this may affect your financial situation, please contact our office.

Roth 401(k): An Alternative By Tad Jakes

There have been a number of options to choose from when it comes to saving for retirement. Thanks to Congress, we now have one more. As of January 1, 2006 employers can offer the Roth 401(k) to their employees. The Roth 401(k) is a qualified plan and is essentially a hybrid of the Roth IRA and the Traditional 401(k), taking attributes of each and combining them to create a retirement account that will provide some great benefits and opportunities for employees.

When employees make contributions to a Traditional 401(k) they are contributing pretax dollars, meaning money that goes straight from their paycheck to their 401(k) without being taxed. When they start taking distributions from the plan, the withdrawals are taxed at their current tax rate. Taxes are due on the distribution of both contributions and earnings. A goal being to avoid paying taxes on a portion of your earnings when your tax rate is likely to be high and defer the taxes until your retirement years when you are likely to be in a lower tax bracket. This reasoning makes sense, but may not be the case when the time comes to take distributions.

The opposite holds true for the Roth 401(k). Contributions are made with after tax dollars, meaning the money has already been taxed at your current tax rate. When distributions are taken, the entire withdrawal is tax free because tax has already been paid on the contributions and Congress has provided that the earnings on those contributions are tax free as well. This is a significant benefit and is also how a Roth IRA works. The main difference is that the Roth 401(k) is a qualified plan sponsored by an employer and the Roth IRA is an individual account. In addition, Roth 401(k) contribution limits are much higher and there are no income limitations when considering eligibility.

So why would you want to pay taxes on your contributions in your high tax years and take the money out tax free in your low tax years? Because you don't know what your taxes are going to be when you retire. Marginal tax rates have been at low levels for the last several decades. There is always the possibility that tax rates could climb in the coming years and you could find yourself in the same or even a higher tax bracket during retirement than you are in now. Also, even if tax rates do remain constant, many people do not retire completely and still earn income from employment or investments, leaving them in a tax bracket that is higher than expected. For this reason, many individuals choose to pay taxes now knowing what tax they are going to pay rather then taking a gamble on what taxes will be when they retire. In addition, because the money is taken out tax free, they know exactly how much they have and don't have to factor in what they will lose in taxes when they take distributions. Lastly, the power of tax free compounded earnings is a distinct financial incentive with Roth accounts.

The Roth 401(k) is not offered by every employer because they are somewhat more complex than Traditional 401(k)s. While contributions by an employee can go into a Roth 401(k), all matching contributions made by an employer must go into a Traditional 401(k). Due to regulations, the money has to be kept separate so there must be a Roth 401(k) in place and a Traditional 401(k). Requiring the two adds some cost, but the benefits can be significant to employees.

The Roth 401(k) does have some similarities to the Traditional 401(k). Contributions limits are the same with a cap of $15,000 for 2006 and this does not include matching contributions made by the employer. A catch-up provision is also included wherein plan participants over the age of 50 can contribute an additional $5,000 per year. And lastly, eligibility requirements are the same and there are no limitations on income for eligibility consideration. However, aside from the differences in how the plans are taxed, the Roth 401(k) does allow some additional benefits when it comes to the timing of distributions. With a Traditional 401(k), participants must start taking minimum distributions by age 70½ or they will incur penalties. The same is true for a Roth 401(k), however, a Roth 401(k) can be rolled over into a Roth IRA where minimum distributions at age 70½ are not required, allowing more flexibility for the plan participant.

The benefits of utilizing a Roth 401(k) can be considerable to both the employer and employee given the right set of circumstances. From an employer's prospective it can provide a means of attracting new talent to the company and helping to retain existing employees by offering a company sponsored retirement plan that works for employees. From an employee's standpoint, this program can provide additional flexibility over a Traditional 401(k) all while allowing contributions and earnings to grow tax free, possibly making them better prepared to meet their needs later in life. For these reasons, if they are available, employees should consider this option.

Heard in the Hall

Mitch Freedman attended a CalCPA Financial Literacy Committee meeting in Redwood City on December 7, 2005. He also presided over a Board of Directors meeting of the California Jump$tart Coalition on December 8, 2005. Mitch attended an All-Star Financial Group meeting on January 6-7, 2006 in San Diego. On January 9-11, 2006 he, Tom Trent, Karen Cho, and Tad Jakes attended the AICPA Personal Financial Planning Technical Conference in San Diego. Mitch was a speaker and his subject was, "Financial Elder Abuse (Society's Shame)." He was also a panelist discussing PrimePlus/ElderCare matters at the conference. On January 20, 2006 Mitch attended a CalCPA Council meeting in Burlingame, California. The Orange County/Long Beach Chapter of CalCPA hosted Mitch's talk, "Investment Strategies to and Through the Spend Down Years" on January 24, 2006. On March 8th Karen and Mitch participated in a KABC7 call-in show, during which Mitch was interviewed. Mitch was a panelist during a "Dollars & Sense" program hosted by state Senator Kevin Murray March 11, 2006.

Bankrate.com featured Mitch in a January 2006 article titled, "1, 2, or 3 Checking Accounts." Mitch was also featured in an article titled, "The Growing Medical Care Component of Retirement Planning," in the March 2006 issue of Practical Accountant.