Go to Jeff Salisbury LWGate Home Page.From: persfin-digest <owner-persfin-digest@shore.net>
Subject: persfin-digest V4 #72
Date: Mon, 11 Aug 1997 18:09:50 -0400 (EDT)
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persfin-digest Monday, August 11 1997 Volume 04 : Number 072
IN THIS ISSUE:
ADVERTISEMENT: LAN ACCESS TO MCI MAIL [Oppenheimer Software <Connect-Sal]
Re: Step Up in Basis for Joint Tenants [BOB FORD <BOB_FORD@compuserve.co]
Common Law Spouse is a Loser for Estate Purposes [BOB FORD <BOB_FORD@comp]
RE: The System Would Collapse [Peter & Karen Diamond <diamnd@vsi.net>]
Re: VA Mortgage [BOB FORD <BOB_FORD@compuserve.com>]
Mutual Funds for College Savings? ["Michael P. Griffin" <mgriffin@ici.net]
Re: Borrowing to Pay for Daughter's Education? ["Lester M. Levy, MD" <lle]
Re: cars-consumer's report [colston@viagrafix.com (Lloyd Colston)]
Price on used 97 Camry LE ?? [vemuri@juno.com (Sudhakar Vemuri)]
Re: Ira's Limit Order Strategy [publix@quebec.net]
Re: Population Curve Follows S&P500 [publix@quebec.net]
Sales tax on used cars [Mark Coulter <coulter@csonline.net>]
Re: GE MM Fund, + Oakmark Small Cap Fund ["Mr. Brown" <sbrown@getonthe.ne]
Better to Use a Lawyer When Closing on a Home [jpoulter@islandnet.com (Ja]
Re: How Many Times is Sales Tax Due on a Car? [Avrum Lapin <avrum113@cybe]
Re:Homesteading [Avrum Lapin <avrum113@cyberg8t.com>]
Re: If we all bought Index Funds [Avrum Lapin <avrum113@cyberg8t.com>]
VUL cash value [JONESW@CCSUA.CTSTATEU.EDU]
The Roth IRA is often not best [JONESW@CCSUA.CTSTATEU.EDU]
The Role of Government [JONESW@CCSUA.CTSTATEU.EDU]
Fairness in Taxation [JONESW@CCSUA.CTSTATEU.EDU]
IRA/QP Success Taxes repealed [Rich Carreiro <rlcarr@animato.pn.com>]
Tax on Savings Bonds profits? ["Joseph Friedman, Ph.D., Professor of Econ]
Re: Limit Order Strategy? [Scott Presnell <srp@zgi.com>]
RE: If Too Many People Bought Index Funds, Would The System Collapse??? ["Narasimhan, Seshadri" <NarasimhanS@bernstein.com]
Re: VA Mortgage Question [stockr1@juno.com (Russ Stock)]
More on the Roth IRA [GeorgeS <pip@shore.net>]
Roth IRAs [David Martin <dmartin@seabreeze.hc.ti.com>]
RE: AI fraud prevention [Peter & Karen Diamond <diamnd@vsi.net>]
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Date: Mon, 11 Aug 1997 17:41:58 -0400 (EDT)
From: Oppenheimer Software <Connect-Sales@mcimail.com>
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------------------------------
Date: Mon, 11 Aug 1997 17:43:34 -0400 (EDT)
From: BOB FORD <BOB_FORD@compuserve.com>
Subject: Re: Step Up in Basis for Joint Tenants
>From: "Lester M. Levy, MD" <llevy@hoflink.com>
>Subject: Re: Step up in basis at death for Joint Tenants?
>SNIP
<<A question for the tax experts on the list:
>Not an expert, but when an asset in held in joint tenancy with rights of
>survivorship, the decedent's half is stepped up to fair market value at
>time of death, while the survivor's half remains with the original
>basis.
>Interestingly, in a community property state, an asset held as community
>property has its entire value stepped up to the fair market value at
>time of death of the decedent.
> -Lester M. Levy, MD llevy@hoflink.com
LESTER
I am not an expert either but that is the way stepped up basis works. I
know the tax law is not logical but logically shouldn't it be just the
reverse. We normally think that joint tenancy property can not be
divided. Yet the tax code divides it in 2 (or more) parts and gives a
stepped up basis to the part that was owned by the person that died.
Community property can be divided in 2 parts and each part put into a will.
Yet the tax code considers it to be only 1 part and gives the stepped up
basis to the whole thing.
Does anyone know the reason why the tax code is that way?
BOB FORD
BOB_FORD@COMPUSERVE.COM
------------------------------
Date: Mon, 11 Aug 1997 17:45:06 -0400 (EDT)
From: BOB FORD <BOB_FORD@compuserve.com>
Subject: Common Law Spouse is a Loser for Estate Purposes
>From: colston@viagrafix.com (Lloyd Colston)
>Subject: Common Law Spouse Dies Without a Will, Creating Messy Estate
>I am not an expert. I do have a client whose common-law spouse
>died without a will. The estate is a mess. (This is your plug for
>getting your wills all drawn up nice and neat NOW.)
>After all is said and done, it appears that the survivor will
>have about a snowball's chance in Hades of collecting anything more than
>25% of the land they owned as tenants in common. And it ain't worth
>much.
> Lloyd Colston
LLOYD
I am not an expert either but if their is a list of estate planning
mistakes, I bet having a common law spouse would be in the top 10.
The last time I checked, only 14 states recognize a common law marriage.
Oklahoma is one. However since one state must recognize the marriage of
another state it is not clear what happens when you claim common law status
in a state that recognized it and move to a state that does not. This
mutual recognition may be challenged in court if Hawaii allows marriage of
same sex partners.
There also are some states trying to pass legislation that a state does
not have to recognize the marriage of another state. What a mess that
would be if these proposed laws pass.
Also social security benefits for the spouse in a common law marriage may
be difficult to get.
If the estate is large, you can bet there will be a long and expensive
probate court fight over the estate. From a financial point of view,
having a common law spouse is a loser.
BOB FORD
BOB_FORD@COMPUSERVE.COM
------------------------------
Date: Mon, 11 Aug 1997 17:46:29 -0400 (EDT)
From: Peter & Karen Diamond <diamnd@vsi.net>
Subject: RE: The System Would Collapse
Paul asks, "If Too Many People Bought Stocks Will The System Collapse?"
I agree with Paul that we are in an unusual situation right now. Several
things are happening that are making the markets less efficient than normal.
1) People are beginning to save and invest in tremendous numbers both
through company plans and on an individual basis.
2) These people are investing in mutual funds, not individual stocks.
3) Fund companies are required to invest this money somewhere.
4) The influx of money drives stock prices up as demand increases.
5) These investors are holding for the next 10-20 years, so there is much
more buying than selling.
This creates an unnatural demand for stocks. Yes, supply and demand have
been disconnected. People are demanding investments and returns, more
than they are demanding the specific underlying securities. The system
is not going to collapse, but it is operating under unusual circumstances
which must correct themselves sometime.
I am younger (30) and I am happy to ride this wave for a while. My
concern is what will happen when all these people start to take
distributions and there is a surplus of sellers... Markets will likely
drop in response. The drop will probably be more of a long drawn out
slide, since the distributions will continue for many years. People who
are nearing retirement at that time will have to keep a close eye on
things to prevent losses where there is not enough time to recover.
Peter
------------------------------
Date: Mon, 11 Aug 1997 17:47:45 -0400 (EDT)
From: BOB FORD <BOB_FORD@compuserve.com>
Subject: Re: VA Mortgage
>From: amy kennedy <akennedy@connix.com>
>Subject: VA Mortgage Question
>Using VA to purchase home. Should we put down some cash ($10,000)or is
>it more advantageous tax-wise to have a bigger mortgage and use the cash
>to make the monthly payment? Anyone out there who can provide any tips
>on the VA process? House is $190,000. Income $80,000. Thank you. Amy
>Kennedy akennedy@connix.com
AMY
If you have $10,000 in cash to either use as a down payment or not, you
can make a financial decision by comparing rates of return on that
$10,000. Say your mortgages was for 9 percent and you are in the 33
percent tax bracket.
Your mortgage's real rate is 6 percent. Can you invest that $10,000 in an
investment that will yield you greater that 6 percent after taxes for 30
years? If you can you would come out ahead investing the money.
Please also consider that you need a cash reserve for emergencies. If you
used the $10,000 as part of the down payment and had little or no cash
reserve, you are taking a big gamble. There is no RIGHT answer to your
question. As you have seen in the list before "IT ALL DEPENDS".
GOOD LUCK
BOB FORD
BOB_FORD@COMPUSERVE.COM
------------------------------
Date: Mon, 11 Aug 1997 17:48:19 -0400 (EDT)
From: "Michael P. Griffin" <mgriffin@ici.net>
Subject: Mutual Funds for College Savings?
Any suggestions on the best mutual funds for college education funds?
Mike
Michael P. Griffin
UMASS DARTMOUTH
(Editor's Comment - People seem to like Twentieth Century GiftTrust. -IK)
------------------------------
Date: Mon, 11 Aug 1997 17:49:00 -0400 (EDT)
From: "Lester M. Levy, MD" <llevy@hoflink.com>
Subject: Re: Borrowing to Pay for Daughter's Education?
<<i am going to pay my daughter's education costs at a university in
california for two years (jr/sr) starting in august 1998, approx
$10K/year, i estimate. i am looking at options and advantages, and
thinking the following:
i could borrow the money on a home equity loan, and get a small deduction
on the interest.
i could then give her the money as a gift, which would be non-taxable
for her $10,000 year?
can i do both, getting sort of a double advantage?
alternatively, if i just paid her bills for her, i.e., write a check to
the university for tuition, books, etc., would she still have to claim
that as income, even though i'm paying it directly to the school?
My suggestion is to pay tuition, books, residence and meal costs
directly to the University. These moneys are then NOT a gift to your
daughter, and if needed, you can give her additional money without
running into potential gift tax problems since you would have the entire
$10,000 exempt amount to work with. Moreover, money received by her
would count more heavily when the University looks at assets when
considering school aid.
- --
-Lester M. Levy, MD llevy@hoflink.com
------------------------------
Date: Mon, 11 Aug 1997 17:49:33 -0400 (EDT)
From: colston@viagrafix.com (Lloyd Colston)
Subject: Re: cars-consumer's report
You might get some slight benefit from the FAQ at
http://www.viagrafix.com/colston/drivefaq.htm
While written for international visitors to USA, it does have
some links to information such as you request.
Let me know if I can help more.
- --
Lloyd Colston Success comes in cans, not can'ts
Pryor, OK USA
------------------------------
Date: Mon, 11 Aug 1997 17:50:17 -0400 (EDT)
From: vemuri@juno.com (Sudhakar Vemuri)
Subject: Price on used 97 Camry LE ??
Hi,
I am looking for 97 used Camry LE if I can get one.
How to arrive at the fair price for a used car. There
are no figures available at kelley/edmunds .. If the
invoice price of 97 Camry LE is 17,400. What
should be the price range for used one to start the
negotiations?
I find ads for rental returns. How good/bad are they
according to your experience ?
Thanks,
Sudhakar Vemuri
vemuri@juno.com
------------------------------
Date: Mon, 11 Aug 1997 17:50:56 -0400 (EDT)
From: publix@quebec.net
Subject: Re: Ira's Limit Order Strategy
> I've been thinking about using a limit order strategy to avoid being
>victimized by bid-ask spreads when buying and selling stocks. Say you
>want to buy a stock with a bid of 8 1/2 and an ask of 8 3/4. Why not
>place a limit order at 8 1/2 (or even a bit lower, say gambling that there
>will be a bit of selling action, try 8 3/8) to buy. You can use the same
>strategy to place a limit order to sell at 8 3/4 (or 8 7/8, etc.). Of
>course, there's always the risk that the order will never be executed, but
>that's the breaks. At least you won't have to worry about the spread; you
>have more control over the price.
I have been quite succesful with low bid on friday afternoons on NASDAQ
(and that's funny, isn't it?) and NYSE. Whan all is done, there seems to
be a lot of sell-at-market people left over demand, and my low bid
passes. Go figure.
Pat St-Arnaud
FMD Brokerage
Investors Jump Point
http://spike.quebec.net/~publix/FMD/
------------------------------
Date: Mon, 11 Aug 1997 17:51:25 -0400 (EDT)
From: publix@quebec.net
Subject: Re: Population Curve Follows S&P500
>Let's go back to demographics and the potential future of retirement
>in the United States.
There is a popular graph of the population curve moved 45 years forward
and the S&P500: The S&P grapg follows the population curve very closely
since early 70's...
Pat St-Arnaud
FMD Brokerage
Investors Jump Point
http://spike.quebec.net/~publix/FMD/
------------------------------
Date: Mon, 11 Aug 1997 17:53:18 -0400 (EDT)
From: Mark Coulter <coulter@csonline.net>
Subject: Sales tax on used cars
I couldn't agree more on the comment about sales tax being paid
multipule times on an auto. This is by definition "double taxation"
which is constitutionally forbiden. If a car changes hands twice a
year for it's entire life expectancy, imagine the tax that is
collected. This should be eliminated, not only for cars but for all used
merchandise.
The only way to avoid the tax is to always trade your car
in rather than sell and buy the new car outright. This way you only pay
tax on the difference in value (the amount of money changing hands) and
not the entire sticker price. If you can get a better deal by selling
your trade and buying the new car outright, (usual scenerio), take your
buyer to the dealer to do the title transfer. The dealer will then run
it through his books like a trade and save you the tax. Your buyer has
to pay the tax on your used car anyway so it might as well be applied for
your benefit.
Don't get me started on taxes! How about realestate tax. Picture
this (happens all the time):
1. Joe Schmo is 20 yrs old. Gets a job in the local factory, buy a
fixer-upper house for 20K.
2. Over the next 40+ yrs he builds on/renovates/landscapes and otherwise
improves his property.
3. Joe is now retired and living on a fixed income.
4. The problem is he can't afford to live in his house anymore. The
increased valuation from the improvements and inflation plus the general
tax increases over the years have priced him out of the home he worked so
hard for.
You see, you are just, effectively, renting from the govt. I feel
the only fair tax is an income tax and a sales tax on items other than
food and clothes. Any other thoughts? Write your congressman.
For the person looking for used car prices, try kbb.com in addition
to Edmunds.
Mark
(Editor's Question - Won't the new tax law, eliminating the capital gains
tax on sale of a primary residence up to $500K, help? -IK)
------------------------------
Date: Mon, 11 Aug 1997 17:53:58 -0400 (EDT)
From: "Mr. Brown" <sbrown@getonthe.net>
Subject: Re: GE MM Fund, + Oakmark Small Cap Fund
>GE Financial has a good one; high rate, free checks, no minimum check
>amount, low minimum, and they give you $25 to sign up!
Good Yes. I have had an account with them for several years, however
my account does have a 250.00 min. per check.
>Oakmark Small Cap is a reasonably small fund which means that the
>expenses have a smaller base to be spread over. It also means that
>they are small enough to still effectively manage the fund.
>Unfortunately for you, I'm pretty sure that the fund recently closed
>to new investors. I got in late last year :-)
Yes, the Oakmark Small Cap Fund is closed. I think they did this in
mid June. I got in just a few days before the deadline.
>> 2. How do these specific funds rate within these sectors ? Are
>> there other better (cheaper in terms of operating expense, or
>> other reasons) funds in other families ?
Look at Muhlenkamp.
Mr. Brown
------------------------------
Date: Mon, 11 Aug 1997 17:54:49 -0400 (EDT)
From: jpoulter@islandnet.com (Jack Poulter)
Subject: Better to Use a Lawyer When Closing on a Home
BOB FORD <BOB_FORD@compuserve.com> commented:
O>If you are not knowledgeable in matters involving real estate you should
O>get someone that is to advise you. That person probably will be a real
O>estate attorney.
O>A house purchase is probably the largest purchase you will make. A few
O>hours of a real estate attorneys time is cheap insurance.
Very sound advice, IMO, especially for a first time buyer.
The sale and purchase of a home involves written contracts, e.g.,
written sales contracts, listing contracts, mortgages, etc.
The contract is the basic legal instrument in all real estate
transactions (including leasing). A knowledge of the law of
contracts, as well as a knowledge of the manner in which the
contract is used, is essential if owners, sellers, purchasers,
brokers and salesmen are to protect their own interests and to be
aware of the effects of the contracts on their rights and
obligations.
Many sales are straightforward. A lawyer can protect you in
those cases which are not. Some jurisdictions guarantee a title,
others do not. Your lawyer is responsible for protecting your
interests and if he fails, you have a measure of protection if
things go wrong.
------------------------------
Date: Mon, 11 Aug 1997 17:55:24 -0400 (EDT)
From: Avrum Lapin <avrum113@cyberg8t.com>
Subject: Re: How Many Times is Sales Tax Due on a Car?
>The average car is sold 6 times.
>
>1. From the car manufacturer to the dealer (no sales tax)
>2. Dealer to first owner. (sales tax collected)
>3. First owner to second owner (sales tax collected)
>4. Second owner to third owner (sales tax collected)
>5. Third owner to fourth owner (sales tax collected)
>6. Fourth owner to junk yard (sales tax may or may not be collected)
>
...............
The "California" car dealer does not pay sales tax because he has a "Resale
License" from the Franchise Tax Board (FTB). He bought the car for resale
not for internal use. Using the car as a demo does not constitute internal
use. The junk yard also buys the car for resale (as parts). In CA when
a car changes hands privately the DMV collects sales tax from the new owner
(some times the car dealer acts as agent). Second hand dealers (of
anything) also collect sales tax from buyers. By law the holder of a
"garage sale" should take out a "one day resale permit" and collect sales
taxes but few do.
A manufacturer is exempt from sales tax on the raw material he purchases
but must pay it on say desks, copy paper etc that he uses in running his
business. He does not collect sales tax from anyone with a resale license
who states that the purchase is for resale. Note that sales tax is
collected only from a user whereas a value added tax is collected each time
an item changes hands and then only on the selling price less the cost of
materials.
My wife contemplated selling her home crafts at "fairs" which rent space to
"crafters" but demand a resale number. We took out a resale license and
this allowed her purchase raw material without paying sales tax. In case
of an audit she would have to show that the material so purchased was
either re-sold as is, was still held in inventory,or incorporated into a
new object or scrapped. There was a requirement to file an annual tax
return where-in we listed sales, and calculated the tax owed.
Once our municipality discovered that we had gotten a resale license (they
bought a list from the State) they demanded that we take out a city
business permit. At that time my wife decided that it wasn't worth the
hassle and gave up the business and we surrendered the resale license.
There was a secondary benefit to the resale license - it allowed us to get
a Price Club membership which offered a discount to "businesses" and
allowed them special quiet times to shop.
Avrum Lapin
Upland., CA
------------------------------
Date: Mon, 11 Aug 1997 17:55:57 -0400 (EDT)
From: Avrum Lapin <avrum113@cyberg8t.com>
Subject: Re:Homesteading
Homesteading can be done easily (and for a nominal, << $40 fee) at your
county assessor's office. I don't remember if it can be done by mail so you
might call first.
I believe that much of the benefits of homesteading are currently covered
by common law.
Avrum Lapin
Upland., CA
------------------------------
Date: Mon, 11 Aug 1997 17:56:35 -0400 (EDT)
From: Avrum Lapin <avrum113@cyberg8t.com>
Subject: Re: If we all bought Index Funds
If we all.....
Right now mutual funds own only 15% of the of the equity and half
the mutual funds are load funds. Only 8% of the new money which flowed into
the market last year bought Index 500 type funds. (my numbers come from a
Vanguard flier and differ from those quoted) We are a long way from all of
us being in index funds.
History shows us that at any point in time investment money favors
some segment (growth or value, large cap or small cap, technology or
finance) of the market. Prices in the favored segment rise relatively to
the unfavored segments. In time the early investors take their profits and
move on. Eventually the rest of the herd discovers that that segment of
the market is over valued and they move on causing the prices in that
segment to fall. The favored segment then becomes an unfavored segment.
The other factor which seems to comes into the pricing of a stock
within its segment is the estimate of the future value of the company.
While there are analysis of what future earnings might be there are only
guesses. I just don't see how a Coca Cola, a Netscape or a Microsoft can
command the prices that they do.
Today's favored segment is large cap growth and that is where the
money is still heading. Is it time to get out - who really knows. For
diversity and with limited funds to invest at a time it is hard to beat an
index fund. Even the largest holding in the Index 500 is only 2% of the
total holding. As long as there is a recognised index there is no problem.
Note however that small cap indexes (e.g. Wilshre 4500) constain many
stocks which are illiquid or in short supply and many of the small cap or
sector index funds tell you outright that they only hold "representative"
holdings.
The only time an active manager will beat an index is when small
sectors of small caps are in favor and then a fund in that sector will beat
a fund which is based on a broader segment but then you have to hope that
your active manager knows when a sector is about to take off and when its
time is passed.
I've wondered if someone can "tout" a sector into favor the way one
touts a penny mining stock.
Avrum Lapin
Upland., CA
------------------------------
Date: Mon, 11 Aug 1997 17:57:36 -0400 (EDT)
From: JONESW@CCSUA.CTSTATEU.EDU
Subject: VUL cash value
Cal Lester, you said,"However I would take exception to the last line
above," my line being, "Besides, the only way to avoid ALL taxes on the
VUL cash value is to die."
However, you then proceeded to indicate only that one can take out all of
the premiums, and much more besides as wash loans. I do not dispute that.
That does not make my statement false, because you must always leave a
substantial amount of the CASH VALUE in the policy. You can't get it all
out without paying income taxes.
Example: You pay premiums of $80,000 and the cash value grows to $200,000 free
of income taxes, though not free of substantial expense charges (typically more
than 20% deducted for expenses, which is why the savings part of a VUL is
generally 20% worse than a deductible or Roth IRA). Say you want to recover the
maximum you can tax-free at age 65. That would be only $170,000 or so, not the
whole $200,000. The other $30,000 or so of cash value you have to leave in the
policy until you die. This $30,000 covers the premiums for the rest of your
life on the built-in term insurance of $75,000 (which I believe is the minimum
death benefit you have to keep in the policy).
Of course, if you retire at age 65 and determine that you no longer need life
insurance, you can eliminate the term insurance by reducing the Death Benefit
to that minimum $75,000, leave $75,000 in cash value in it, and thereafter draw
off the earnings on the 75K tax-free as wash loans. But then you have $75,000
in cash value that you get no personal benefit from.
The most advantageous variable annuities I know of are TIAA and Vanguard, which
have annual expense ratios of 0.18% and 0.48% respectively. A VUL with annual
expenses of 0.75% will generally earn nearly 20% less than the variable annuity
before taxes. So a VUL can be better than a variable annuity for a person who
will be at the 28% tax rate after retirement, but rarely for a person who will
be at the 15% tax rate after retirement.
Cal, is this understanding wrong? And what VULs do you know of that have an
annual M&E expense ratio less than 1%?
Bill Jones
------------------------------
Date: Mon, 11 Aug 1997 17:58:20 -0400 (EDT)
From: JONESW@CCSUA.CTSTATEU.EDU
Subject: The Roth IRA is often not best
The following shows the difference between the new Roth IRA and various other
forms of savings. I have chosen a typical example to illustrate. I assume,
for each case, that you have an initial net out-of-pocket cost of $1000, that
you have typical tax rates, and that you invest in a mutual fund whose value
multiplies by 10 by the end of 25 years except for taxes and non-fund fees (and
thus earns roughly 9.65% annually).
The amount of tax-free in-your-pocket dollars you have at the time you cash in
the investment is, in order, as follows:
1. $11,143 for a deductible IRA or 401k, no employer match, no annual fee.
2. $10,000 for a Roth IRA, no annual fee.
3.. $8,667 for a 401k, no employer match, 1% annual fee.
4.. $8,020 for a non-deductible IRA, no annual fee.
5.. $7,506 for a variable life insurance policy, 1% annual (M&E) fee.
6.. $7,075 for a variable annuity, 0.5% annual (M&E) fee.
7.. $6,809 for a post-tax investment in stock, half earnings are distributed.
8.. $5,506 for a post-tax investment in bonds, all earnings are interest.
The implications for the Roth IRA are clear: For the majority of people (not
all), each out-of-pocket dollar put in a DEDUCTIBLE IRA or no-fee 401k produces
a higher final result than the new Roth IRA, but other investments (including a
NON-DEDUCTIBLE IRA) are worse than the Roth IRA.
These calculations show only the return and leave aside other very important
factors such as restrictions on withdrawals until 59.5, forced distributions
past 70.5 or age 85, annual limits on out-of-pocket contributions, etc.
The annual return assumption is what I thought reasonable (9.65% for a blend of
stocks and bonds; for #8, assume junk bonds); other reasonable choices produce
different final outcomes but no change in the rankings.
The tax assumptions are based on 28% federal income tax plus 2% state income
tax at the time of purchase, a total of 30%. At withdrawal, I assume 2% state
and 20% federal. The 20% federal is a blend of the 15% and 28% tax rates,
because it is reasonable that, after retirement, all income other that such
investments is somewhat below the cutoff for the 28% rate, so the investments
in question will be partly taxed at 15%. Other tax assumptions will produce
different dollar outcomes but no change in the rankings, except (a) if the tax
rate at retirement is NOT lower than at investment, the Roth IRA comes out the
same or better than a deductible IRA, and (b) if the tax rate is 16.5% or lower
in retirement, the variable annuity beats the VUL.
The fee assumptions are appropriate for the lowest-cost choices, such as
Vanguard for variable annuities or Ameritas for a VUL. The fee for a VUL
includes a mandatory state premium fee of 3.5%. The VUL result is deceptive
because the proceeds are taken from the cash value via tax-free withdrawals and
wash loans, but the typical person has to leave 10 to 30% of a VUL's cash value
for his/her heirs; it can't be spent while alive. That is, for most people, a
VUL gives you substantially less in your own pocket than the variable annuity
gives you; the extra goes in your heirs' pockets.
You may check the calculations on any spreadsheet. Note that for the deductible
IRA, you put $1429 in the fund and immediately get $429 (30%) back in taxes,
which has the same $1000 out-of-pocket cost as simply putting $1000 in the Roth
IRA. So the two kinds of IRA increase to $14,290 and $10,000 respectively, and
then you pay $3,147 (22%) in taxes on the deductible IRA in retirement.
For the last two (post-tax) investments, the tax rate WHILE earning is needed.
I assumed that all distributions were taxed during the first 15 years at the
28+2% rate and during the last 10 years at the 20+2% rate. Finally, I taxed the
capital gains part of the stock (#7) at maturity at 17%, a blend of the new
20+2% and 10+2% capital gains rates. Note in particular that, even if the
capital gains tax were 0%, the Roth IRA would be far better, because its gains
are not taxed at all. And the deductible IRA is even better than the Roth IRA
if your tax rate in retirement is lower than your tax rate when you invested.
Bill Jones
------------------------------
Date: Mon, 11 Aug 1997 18:00:55 -0400 (EDT)
From: JONESW@CCSUA.CTSTATEU.EDU
Subject: The Role of Government
Very nicely said, Mark Hamann. Did you write that Prisoner's Dilemma stuff
yourself, or did you find it in an extremely well-written book?
Susan says she does not believe that coercion, even by the government, is
moral. A perfectly legitimate opinion; I believe it is dignified by the name
of anarchism. But then isn't it totally self-contradictory for her to say, "I
believe that the only role of govt. is to protect individual freedoms." IT
CANNOT DO SO WITHOUT COERCION. We cannot have a government that does not
coerce.
Bill Jones
(Editor's Comment - Max Weber, the great German sociologist, defined
government as the organization that has a monopoly on legitimate violence
(military, police, capital punishment, etc.) -IK)
------------------------------
Date: Mon, 11 Aug 1997 18:01:21 -0400 (EDT)
From: JONESW@CCSUA.CTSTATEU.EDU
Subject: Fairness in Taxation
Ken Meinkin says re standard exemptions and graduated taxes: "but why should
low income people be exempt from paying their share? Why should they be
freeloaders? Why should high income people pay a higher percentage? They
already pay a higher $$ figure even at the same percentage."
We seem to be talking about what is fair, rather than the real reasons for why
various constituents are taxed and how much, which I believe is twofold: (1)
Politicians want to obtain lots of revenues, but (2) they don't want to do it
in a way that will cost them an election. So they choose revenue measures that
keep either the most voters or the most heavy contributors happy. Fairness has
absolutely nothing whatsoever to do with it.
As to why a hefty standard exemption is fair, my short answer is based on an
analogy: Is it fair that a company that does not show a profit does not have
to pay taxes? It is just as fair that a person gets a standard exemption. For
the long answer:
Taxes on companies are assessed on their net profits, which is income minus
costs. Taxing revenues would be silly (and would destroy the American
economy). If a company has a loss, they can carry it forward to the next year
to offset against their profits.
People should get the same consideration. So people should only pay income
taxes on their net profits, which is income minus costs of producing the labor
that produced the income. But what are a person's costs? Food, shelter,
clothing, etc., obviously. But if a person eats lobster, that is spending
their "profits" not obtaining the nourishment necessary to produce their labor.
You cannot reasonably tell which is which. So it is perfectly reasonable to
set a standard "cost of production" of say $10,000 per person. The exact
amount is indeterminable, but that is a reasonable estimate of what it costs to
support a single worker in modest circumstances.
So by this logic, every worker should have a $10,000 standard exemption but no
child should (we could set the cutoff at say age 16; since school becomes
optional at that point, we consider anyone past 16 to be a (potential) worker).
Taxes should be assessed on the amount above that. And by analogy with
companies, a worker who earns less than $10,000 should logically be allowed a
loss-carry-forward. Note how much sense this makes for students: A person who
goes to school full-time for four years after age 16 and only earns say $2000 a
year while doing it gets to carry forward a $32,000 loss. So their first
$32,000 of income beyond 10K is tax-free, which can only encourage going to
school, which is to the benefit of society.
As to whether rates should be graduated (say 15% for the first 20K and 30%
thereafter), above that 10K exemption for workers and total-cost exemption for
companies, whatever is done is fair, as long as it is done for both workers and
companies. Both should pay their fair share of taxes.
Of course, "should pay their fair share of taxes" has no relation to the
reality of taxation; we are all just fantasizing here.
Bill Jones
------------------------------
Date: Mon, 11 Aug 1997 18:02:21 -0400 (EDT)
From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: IRA/QP Success Taxes repealed
One thing that did seem to get much mention in all the press about the new
tax law is that the "success taxes" on IRAs and qualified plans have been
repealed.
Specifically, the 15% tax on the amount of distributions in excess of
$160,000 (indexed) which had been suspended for 1997-1999 is now
repealed. Also, the 15% tax imposed at death on the amount of IRA/QP
assets in excess of a calculated threshold is also repealed.
Rich Carreiro
rlcarr@animato.pn.com
------------------------------
Date: Mon, 11 Aug 1997 18:03:16 -0400 (EDT)
From: "Joseph Friedman, Ph.D., Professor of Economics and Finance" <joe@surfer.sbm.temple.edu>
Subject: Tax on Savings Bonds profits?
Does anyone know how if profits on US Savings Bonds are taxed as
long-term capital gains?
- --
Joseph Friedman, Ph.D.
Professor of Economics and Finance
Temple University
Phone: (215)204-8142
e-mail: joe@sbm.temple.edu
------------------------------
Date: Mon, 11 Aug 1997 18:03:46 -0400 (EDT)
From: Scott Presnell <srp@zgi.com>
Subject: Re: Limit Order Strategy?
Hello Ira,
I suppose one could argue you're following the stock too closely if you
know the price to that detail, but it seems a small time investment for the
return (since I can't help myself from habitually watching the web based
quotes anyway).
I use limit orders on a regular basis, not always just for the spread on
the lower priced stocks, but to try and get the lowest/highest price I
suspect the stock might reach in the near term: I have successfully used
limit orders "good for the day," or good until canceled" with Fidelity
touch tone trader, and web express.
> You can now place limit orders on NASDAQ and OTC stocks. That's a
>fairly recent development.
I've been placing NASDAQ limit orders for more than a year...
Thanks for the mailing-list/digest.
- Scott Presnell (srp@zgi.com)
------------------------------
Date: Mon, 11 Aug 1997 18:04:44 -0400 (EDT)
From: "Narasimhan, Seshadri" <NarasimhanS@bernstein.com>
Subject: RE: If Too Many People Bought Index Funds, Would The System Collapse???
>(Editor's Comment - Seems to me that it has the same danger as other
>derivatives (remember Orange County's bond investments)? Suppose everyone
>bought the index funds and nobody bought the stocks. Then the index fund's
>price would be based on a demand for the fund's shares, totally divorcing it
>from the economic worth of the stocks making up the index.- -IK)
There are two misunderstandings here. Let us take the simpler one first.
Derivatives: Yes, it is actually the simpler one! The conventional
definition of a derivative (options, futures, interest rate hedges,
currency hedges, floaters, inverse-floaters and the like) is that it is
an instrument that is linked to or tied to an underlying real security.
i.e., its value is DERIVED FROM the value of the underlying security.
Typically there is also a time period associated with the derivative
after which it will cease to exist. Of course, you can use the proceeds
to buy into another derivative, but that is a different instrument. In
fact, I have yet to hear of a derivative instrument that does not have a
time component beyond which it does not exist (Someone please correct me
if I am wrong).
Mutual fund shares: How is the price of a mutual fund share determined?
What do you get when you send money in on a particular day to buy a
certain number of mutual fund shares? What happens to the actual money
that is sent in? Well, let us start with the most familiar part of a
mutual fund, i.e., its "price" or the NAV. The NAV is the Net Asset
Value. It is calculated by taking the value of the holdings in the
mutual fund and dividing it by the total number of outstanding shares of
the fund. (Note that I am talking only about open-end funds. Closed-end
funds have a limited number of shares issued and trade similar to stocks
in companies).
Let me illustrate. If a fund has 200 shares of X ($9 per share) and 200
shares of Y ($11.50 per share) and $1500 in cash at the end of a day and
the fund has 100 shares outstanding. The NAV is [(200 * 9 + 200 * 11.50)
+ 1500] / 100 which gives us 5600 / 100 = $56.00. Thus you can see that
the value of the mutual fund share is determined by the value of the
underlying holdings. The price at which you can purchase shares of a
mutual fund is determined ONLY by the values of the underlying holdings.
This still does differentiate a mutual fund share from a run-of-the-mill
derivative.
THE CRUCIAL DIFFERENCE between a derivative and a mutual fund share is
who determines their values.
The price of a derivative is determined purely by demand and supply for
that security. This is determined by the bid and ask price. Other things
may be useful for the bidders and askers in determining what they
perceive the true value to be. However those "things" may, or may not,
have the perceived effect on the value of the derivative. For some
derivatives, such as American style options on stocks (as opposed to
European style options ... for more details request an options
disclosure document from your nearest broker) whenever there is an
imbalance between the value of a call option (say) and the underlying
stock, arbitrageurs will jump in and establish equilibrium. There are
well established formulae (e.g., Black-Sholes) that determines the
"fair" value of the option at any point in time.
The price of a mutual fund, on the other hand, is determined by the
underlying holdings. What do I mean? Who holds the holdings? Who
determines the price?
A mutual fund has a manager and a custodian. These two will always be
distinct and not share anything in common (in order to protect the
mutual fund shareholder). The custodian is in place in order to ensure
that if (or when) the manager goes under, the mutual fund shareowners
will get their due proceeds from the liquidation of the assets. Thus
although the fund manager makes all the buys and sells, the actual
settlement (delivery and receipt) of the securities is done by the
custodian. All the cash is also with the custodian. (Note that the
custodian is NOT in place to prevent mismanagement of the fund. That is
the duty of the board of directors that the fund manager reports to).
Typically, it is the custodian that provides the NAV of the fund to the
world. (Other sources may also exist to compute the NAV).
All of the above is written in the prospectus of the mutual fund (by
law). In the case of an S&P500 index fund, (e.g.) there usually will be
language that states that monies will be used to purchase shares in the
companies that comprise the S&P500. The precentages are fairly well
establised (by the previous day's values of the companies' shares) and
$1000 will purchase exactly the right amount of KO, MO etc. that will
constitute $1000 worth of the S&P500 index. This will be held by the
custodian ... not the fund manager. Thus the demand for an index fund
will NEVER cause an imbalance in the price of a share of the mutual
fund. Although variations in the underlying index's securities most
definitely will!
The supply and demand for the underlying stocks will be the ONLY factors
that will cause the value of the NAV to change. Although, if everyone
holding the fund's shares decide to cash out on the same day, the money
paid out will be determined by the prices at which the underlying shares
are sold. In the case of Magellan (e.g.), the sale of such a large
number of securities will most definitely depress their prices.
Contrast this with selling (or buying) a large number of derivatives.
The demand supply equation for that derivative alone (especially if it
is based on a scarcely traded security) will fluctuate wildly based on
bidders and askers PERCEIVED value of the scarcely traded security as
well as the PERCEIVED value of the derivative itself. This perceived
value can easily be a misperception as was recently demonstrated by the
misdirected traders at NatWest securities. They had to show a loss in
the latest quarter due to a mispricing of derivatives that has been
going on for a long time.
Of course, Orange County's misplaced bets on derivatives were just that
- - bets. In which case you win some and lose some. The same is true of
penny stocks, tulips and the weather.
I can go on but you people will probably be bored! Thanks for tuning in!
Please do write to the list with any questions so that I may bore a lot
of you at once (instead of one at a time!) ;-)
* Sai
------------------------------
Date: Mon, 11 Aug 1997 18:06:06 -0400 (EDT)
From: stockr1@juno.com (Russ Stock)
Subject: Re: VA Mortgage Question
My suggestion is to either go with the VA loan at NO MONEY DOWN or go
with a Conventional loan with the minimal 5% down. Don't do VA with the
$10000 down. I normally recommend that you put down as much as you
can REASONABLY put down. For more detailed questions/answers you can be
more specific in your posting, or e-mail me directly. Be happy to help.
Same for any others out there needing Financing help.
stockr1@juno.com
------------------------------
Date: Mon, 11 Aug 1997 18:06:58 -0400 (EDT)
From: GeorgeS <pip@shore.net>
Subject: More on the Roth IRA
Is it better to leave your money in a regular IRA, and pay taxes later, or
to pay the taxes now, and never pay any taxes again? Let's see how much you
collect in retirement
Regular IRA $$= Principle (1+Growth)^N (1- Retirement Tax Rate)
Roth IRA $$= Principle (1- Current Tax Rate) (1+Growth)^N
Or, introducing the wonders of commutation
Roth IRA Principle (1+Growth)^N (1- Current Tax Rate)
So , if
Current Tax Rate < Retirement Tax Rate Roth has more $$
Current Tax Rate = Retirement Tax Rate Same result
Current Tax Rate > Retirement Tax Rate Regular IRA has more $$
If your current tax rate is less than your retirement rate, the Roth is the
way to go. This is very unlikely, so do not get too too excited about the
benefits of the Roth
For those of you who worry about inflation, take growth to mean real rate of
growth. Notice the $$ we collect in either the Roth or Regular IRA are
collected in the same year.
Now, if a portion of the IRA is non taxable on conversion, the equation reads
Roth IRA $$=Principle(d + (1-d) (1- Current Tax Rate)) (1+Growth)^N
(the deductible fraction, d, grows tax free, the remainder is initially taxed)
The rule is now
(1-d)( Current Tax Rate) < Retirement Tax Rate Roth has more $$
(1-d)( Current Tax Rate) = Retirement Tax Rate Same result
(1-d)( Current Tax Rate) > Retirement Tax Rate Regular IRA has more $$
If (1-d)(Current Tax Rate) is less than the Retirement Tax Rate, then the
Roth is the way to go.
Algebra, it'll beat the pants off a CPA and a spreadsheet any day of the week,
costs less too:)
Now for an idea for those of us who need some time off. One way to reduce your
current tax rate is to.... NOT MAKE ANY MONEY... Should you choose to not
make any money in a given year (reducing your current tax rate to 0) the
Roth is definitely the way to go. This reminds me of the rock star in life
the universe and... , he spent a year dead for tax purposes.
------------------------------
Date: Mon, 11 Aug 1997 18:07:38 -0400 (EDT)
From: David Martin <dmartin@seabreeze.hc.ti.com>
Subject: Roth IRAs
I had a question about Roth IRAs. Suppose my only source of
retirement income is from a Roth IRA. Do I need to worry about the
AMT, or is the Roth IRA income not included in the AMT calculation?
The big advantage of a Roth IRA is that when you withdraw
money from it, it is not subject to income tax. But this is just a
promise made by politicians. They could always change the rules on
us. I've always heard that one of the principles of tax planning is to
always defer taxes to tomorrow. This might be a reason not to use a
Roth IRA over a deductible IRA. Of course, this line of reasoning
involves factoring in how much you trust politicians, which is a hard
number to quantify (Actually, for me, it is easy; it is zero.).
-David
------------------------------
Date: Mon, 11 Aug 1997 18:08:22 -0400 (EDT)
From: Peter & Karen Diamond <diamnd@vsi.net>
Subject: RE: AI fraud prevention
>>It is best to notify your CC company before you begin your trip about the
>>fact so you aren't inconvenienced.
I've never heard of this before and it sounds a little extreme to me.
Like most people, we take 1 long vacation each year, usually nowhere near
home. I don't think I should have to notify my credit card issuer that I
am going on vacation.
They claim they are doing it for "your protection" but it is really for
their protection at "your inconvenience", since they have to eat the cost
of fraud.
Peter
------------------------------
End of persfin-digest V4 #72
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