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Running out of time for year-end financial planning

Investors should be feeling better now that the Dow Jones Industrials have crossed back above the 10,000 level and the Nasdaq Composite has crossed the 2,000 level. The market has rallied nicely since touching major lows on September 21, 2001. Portfolio managers seem to be putting some of the cash back to work that has been sitting on the sidelines.

    There are signs that we have seen a major market cycle bottom and that the economy is slowly beginning to rebound.   Typically investors, anticipating an economic recovery, begin to bid up stock prices when interest rates have fallen below a point where they no longer match the current inflation rate and a new economic recovery seems likely within six months. Both conditions are being met now, and the market is beginning to act significantly better. There is more optimism with each passing week, but investors should still be cautious. Every industry group won’t necessarily hit the bottom simultaneously; consumer cyclicals and non-technology industrials should come out of the recession first followed by the techs and telecoms. 

    Time is running out to complete your year-end financial planning. It has been a rough year in the stock market, but rather than fret about your paper losses, now is a good time to use them to lower your taxes and offset capital gains. If your holdings are mutual funds there is a way to get the tax loss without making major changes in your portfolio. Internal Revenue Service rules allow you to sell shares in a money-losing mutual fund and reinvest the money in a similar, though not identical, fund and still use the loss to reduce your taxes. You can even put the money back in the same fund as long as you don’t transfer within 30 days. If you stay within the same fund family there is little or no expense.

    Evaluate your stock portfolio, looking at the quality of the stocks you own and sector weightings. There might be an opportunity to reallocate your portfolio, creating capital losses that can lower your taxes or be used to offset capital gains elsewhere in your portfolio. When selling stocks in your portfolio you should consider selling specific tax lots. This allows you to pick the highest-cost tax basis.     

    There might be a benefit to converting all or a portion of your traditional IRA – individual retirement account – into a Roth IRA. There are different tax benefits associated with either choice; you should consult your accountant or financial advisor. 

    Now is also a good time to consider funding your IRA for the 2001 tax year. In the year 2001 the maximum contribution level for IRAs is $2000. The levels will go up to $3000 in 2002, $4000 in 2005 and $5000 in 2008. If you are over 50 years old in 2002 you may contribute an additional $500 to your IRA.  

    Gifting and charitable contributions can be an appropriate tax-planning tool just in time for the holiday season. 

       Nancy Hadley is an investment consultant with D.A. Davidson in Sandpoint. If you’re interested in charitable donations, ask Nancy or your accountant about the benefits of donating to public schools and libraries.


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Nancy Hadley

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