BEAR MARKETS:
Credit and money supply concerns, plus resurgent oil prices seemed to be the drivers behind the further negative movement in the equity markets on Friday.
The Dow Jones Industrial Average traded below 11,000 for the first time since August 2006 but finished at 11,100. The S&P 500 finished the day in bear territory, as well. There was much reporting about a widespread concern that the two U.S. mortgage giants, Fannie Mae and Freddie Mac could fail, despite Bush Administration assurances that won’t be allowed to happen.
Over the past 65 years, bear markets have lasted about 10 months on average (some have been considerably longer than the average). The first one of this century was deep and one of the longest on record, from 2000 to 2003. The long bull market that followed reached its peak in October/November 2007, and, in fits and starts, has been turning toward bear territory since then. Where will the market move next? There’s never a shortage of opinions. Your overall investment strategy should not be tied to making the right “bet” about where the market is going in the month or quarter. Maintaining a long-term viewpoint is historically the best course.
CONSUMER BORROWING:
The Federal Reserve reported that consumer credit increased by $7.8 billion in May. Most of the increase was in credit card usage rather than auto loans or college loans.
Clearly, consumers are using more debt to maintain their “lifestyle” in the face of higher prices, especially for food and energy. A dangerous trend I just read about is 401k plans that are allowing much easier access to “cash” in the form of loans using ATM cards. Loans against 401k plans are very inefficient and dangerous. If anything, it should be more difficult. Consumers were using home equity to support expense needs. Much of that has dried up, and now credit cards are filling the void. Watch out for 401k loans to be the next area of “ready cash”.
CONVERTING TRADITIONAL IRAS TO ROTH IRAS:
The income limit is $100,000 for a single individual and $100,000 for a husband and wife filing jointly. A taxpayer who is married-filing-separately is not eligible to convert a traditional IRA to a Roth IRA. Both the $100,000 cap and the prohibition on conversions by married taxpayers filing separately are scheduled to disappear permanently after 2009.
The conversion of funds from a traditional IRA to a Roth IRA is subject to income tax just as if the amount “converted” had been actually distributed to the participant. Thus, the distribution will be taxable as ordinary income just the same as a distribution of the same amount from the same plan would be. For conversions in 2010 only, the taxpayer will have the option of spreading the taxable income over two years, 2011 and 2012; otherwise, the conversion is taxable in the year it occurs.
GRANDPARENTS AND 529 (COLLEGE SAVINGS) PLANS:
A 529 plan can be an effective way for grandparents to contribute to a grandchild’s college education, while simultaneously moving assets out of their own estate. Contributions to a 529 plan grow tax-deferred, and withdrawals used for the beneficiary’s qualified education expenses are tax-free at the federal level.
A grandparent can open a 529 account and name a grandchild as beneficiary, or they can contribute to an existing 529 account. Grandparents can contribute a lump sum to a grandchild’s 529 accounts, or they can contribute smaller, regular amounts. A big advantage of 529 plans is that under special rules unique to 529 plans, individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. Another attractive feature of 529 plans is that under current law, grandparent-owned 529 accounts are excluded by the federal government’s financial aid formula–only parent-owned 529 plans count.
This update is provided by my good friend and business associate, Douglas MacGray from EGE Advisors and he is Senior Vice President, Financial Planning. If you would like to set up a free consultation with Doug, please give me (John Thomas) a call at 302-368-7132 and I will arrange it for you.
If you would like to apply for a Mortgage Loan, you can APPLY ONLINE HERE, you can call John Thomas at 302-703-0727.
John R. Thomas – NMLS 38783
Certified Mortgage Planner – Primary Residential Mortgage, Inc.
302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office
248 E Chestnut Hill Rd, Newark, DE 19713
