Ask Rande 10,000+

Top 206. Oct 3, 2001 9:10 AM

» Rande - Re: Mother-In-Law question for Rande

In response to message posted by Erik75:

Erik,

Good news for mom-in-law. Assuming a relatively low marginal income tax bracket, I'd be inclined to stick with the total bond index fund so long as mom realizes we're probably closer to the end of the easing cycle than not and NAV will fall should rates rise at some point. Over time, given a long enough time horizon, it all evens out and the current income will be better than what she would get with a money market fund. Finally, I'd figure out what the marginal addtional tax hit will be on the extra $20K and reserve that amount in a money market fund since it's already spent money.

-- posted by Rande

Top 207. Oct 3, 2001 9:12 AM

» Will_L - Re: Mother-In-Law question for Rande

In response to message posted by Erik75:

Erik, I'm thinking perhaps your mominlaw needs a horse investment. smile
This is Rande's wicket but I have Ibonds on my brain of late and wonder if that might be a possiblity for the lady. The money is in a very safe investment and a safe place away from relatives and bankers.

If your motherinlaw was doing nicely on her prior income, it is possible that she will not be tapping this new windfall anytime soon. In that case with Ibonds there is no tax until she does.

Between her social security and 7200 pension and any other income she might have she will have to pay some tax if she puts the money in a bond fund. She may feel better just seeing the money pile up rather than taking the annual annuity distributions. So many times elderly people just won't spend and would be bothered by having to do something with the annuity payments.

Somehow my significant other will never be plagued with not being able to spend more money, I'm guessing.

Now I'll get outta here and stop giving advice that is probably unsuited for her situation--but let me know if she's "aggressive" and would enjoy a four legged investment. smile

-- posted by Will_L

Top 208. Oct 3, 2001 11:56 AM

» Indexer - Taxes for Year 2001

Rande, Hope you don't mind my asking for some free advice on my tax situation, but Thruhiker and Kirk stimulated me to post. Here is what I am interested in. I am no longer working, and all my income comes from my portfolio. I have a number shares of a big company that have a cost basis of close to zero, and I am selling them when needed to pay the bills. I also have a big position in QQQ's, courtesy of my misguided belief in the prognosticating ability of a certain radio personality, that are now more than 50% down. So I have the ability to offset gains with losses. My question is what is the optimum amount that I should net as capital gains in order to get the most benefit from my deductions, and yet pay at the lowest tax rate. My Sched A itemized deductions this year should total approximately $82K. Also, I will have margin interest of approx $90K. Thanks in advance.

-- posted by Indexer

Top 209. Oct 3, 2001 1:51 PM

» Rande - Re: Taxes for Year 2001

In response to message posted by Indexer:

Indexer,

There are a number of issues. If you have no other income at all, then you would want to take in at least enough to utilize your itemized deductions, otherwise they're wasted. As for the margin interest, assuming the margin proceeds were used to purchase property held for taxable investment, the interest expense is only deductible to the extent you have net investment income (dividends, interest, etc. less deductible investment expenses). If you have no other portfolio income, you could elect to treat capital gains as ordinary income to utilize the margin interest expense (again, provided the margin debt was used to purchase investment property and not for something else).

So, assuming you have $172,000 in deductions, you could take in income to offset. You could also take additional long-term capital gains above the break-even point up to the 15% ordinary marginal tax bracket (a little over $21K for married filing joint last year) and get the lower 10% LTCG rate. Beyond that, if you decide to do some tax loss selling you could offset additional gains dollar-for-dollar. There wouldn't be much sense in taking extra losses over existing gains since there is evidently no income with which to offset the additional $3,000.

Importantly, since the deductibility of itemized deductions is phased out on a pro-rata basis for AGI over a certain level ($126,600 for MFJ in 2000), you need to do some number-crunching to find out exactly where the break-even point is and then where the 10% LTCG rate cutoff point is. If you have TurboTax or some other tax prep software, it would be a good idea to run some different scenarios (including state tax and federal AMT impact, if any). Otherwise, you might want to have your tax preparer do some "what ifs." Good luck.

-- posted by Rande

Top 210. Oct 3, 2001 1:52 PM

» ed_from_chico - Re: Mother-In-Law question for Rande

In response to message posted by Erik75:

Erik, I know this question was for Rande but if you and he will forgive my interruption, I'd like to suggest your Mother-In-Law consider Vanguard's GNMA (VFIIX) Fund.

The GNMA Fund invests at least 80% of its assets in Government National Mortgage Association pass-through certificates, which are fixed income securities representing part ownership in a pool of mortgage loans backed by the U.S. government. The balance of the fund's assets may be invested in U.S. government agency securities. The fund is appropriate for investors with an investment horizon of 4 to 10 years.

Interest rate risk. Because its bond holdings have an intermediate-term average weighted maturity, the fund's share price will fluctuate moderately as interest rates change.

Prepayment risk. In periods of declining interest rates, the fund may receive unexpectedly high payments of the principal portion of its GNMA certificates as property owners refinance their mortgages. If this occurs, the fund must reinvest the principal repayments in new GNMA securities at lower interest rates. This can reduce the interest income earned by the fund.

Income risk. Income from the fund can decline, either as earnings are reinvested or when securities mature and are replaced with lower-yielding securities.

Inflation risk. The rising cost of living may erode the purchasing power of your investment over time.

The important factor to me is that "Ginnie Maes" are backed by the U.S. government.

-- posted by ed_from_chico

Top 211. Oct 3, 2001 2:03 PM

» CaptRon - Ed

In response to message posted by ed_from_chico:

Because its bond holdings have an intermediate-term average weighted maturity, the fund's share price will fluctuate moderately as interest rates change.
Ed. Chart shows 10 year fluctuation of 10% or so. FWIW, some might consider this more than moderate, especially since we're at the top end of valuation now. Just a thought, not criticism...
http://bigcharts.marketwatch.com/javacha...

(Apolog to Rande for interruption)...8-)

-- posted by CaptRon

Top 212. Oct 3, 2001 2:04 PM

» Rande - Re: Re: Mother-In-Law question for Rande

In response to message posted by ed_from_chico:

ed,

The Vanguard GNMA fund is a good one. But I do prefer the Total Bond Market index fund because of the additional diversfication. As of June, over 60% of the Total Bond index was in US Govt debt -- around 14% of the total in Treasuries, 9% in GNMAs, and the rest in other federal agencies. The other 40% or so is in high-grade corporates. The overall credit rating on the portfolio is AA and the effective duration is only 4.6 years giving the fund both low credit and interest rate risk. The 12-month yield through 6/30/01 was 6.5% and the total return has beaten the GNMA fund over the last year or two with far greater diversification (total return for the Total Bond Index fund since 12/31/99 is 21.3% through yesterday). Over time, the two funds are similar in total return. Diversification is the tie-breaker for me.

-- posted by Rande

Top 213. Oct 3, 2001 2:13 PM

» Indexer - Re: Re: Taxes for Year 2001

Rande, Thank you for your answer. I do use Turbotax, and will run several alternatives to check. Also, I did not know that I could use capital gains as ordinary income tooffset margin interest deduction. Do you know if Turbotax does this automatically, or do I need to report the capital gains in a different manner (not on Sched D) in order to be reported as income to be used as an offset? Thanks again.

-- posted by Indexer

Top 214. Oct 3, 2001 2:37 PM

» Rande - Re: Re: Re: Taxes for Year 2001

In response to message posted by Indexer:

Indexer,

You make the election on Form 4952, "Investment Interest Expense Deduction," Line 4e. Why would anyone elect to treat LTCG as ordinary income? Well, if you don't forsee ever having sufficient portfolio income to utilize your investment interest expense deduction then it would just be dead money, carried over year after year. Better to use it and pay 0% tax than 20%.

BTW -- Again, just wanted to emphasize that the tracing rules apply to margin debt. In order to deduct investment interest expense the proceeds of the debt must be used to purchase property held for taxable investment. In other words, if you borrowed against your stocks to take a trip or pay other expenses then the interest on the debt wouldn't be deductible. Even if you used it to buy a residence or improve your home it wouldn't be deductible since home acquisition and home equity debt has to be secured by a deed of trust to be deductible. Just a common trap a lot of folks fall into -- thinking their margin interest is deductible just because it's borrowed against their investments. Under the tracing rules, it's how the proceeds are used that counts, not the collateral for the loan. The only debt where the tracing rules don't apply and where the interest expense is still deductible, is home equity indebtedness.

-- posted by Rande