Act Now to Save NC Taxes on Section 529 College Savings Plan Contributions and Rollovers

Tax breaks for the North Carolina Section 529 College Savings Plan are expiring 1/1/2012 for joint incomes over $100,000.  Currently, NC joint filers are eligible for a deduction of up to $5,000 from their state taxable income for contributions to the plan.  Single filers can deduct up to $2,500 in contributions.  These deduction levels are regardless of your income level for the 2010 and 2011 tax years.  For a couple in the 7% tax bracket, this would equate to $350 in savings on contributions of $5,000.

One interesting wrinkle is that rollover contributions from other state’s 529 plans are also eligible for the deduction.  If you currently have balances in another state’s plan, you should consider rolling them into the North Carolina plan.  Couples should contribute or rollover at least $5,000 for both 2010 and 2011 to obtain the maximum tax deduction each year.  Withdrawals from a 529 plan are income tax-free if used for qualified higher education expenses (college and beyond).

Most people that we see do not have sufficient education savings for their children.  How much you need to save depends on a variety of assumptions such as the current cost of education, the inflation rate of these costs and the rate of return on your education savings.  For a child born today and attending UNC Chapel Hill at age 18, you would need to save about $517 per month until they begin college.*

The cost of waiting to begin saving is significant.  For a ten-year old, you would need to save about $1,008 monthly under the same assumptions. 

Now is the time to get started or increase your education savings, while getting a little tax benefit.  All forms are available online at www.cfnc.org.  The North Carolina plan uses Vanguard funds as investment options, and the cost is actually slightly lower than Vanguard’s own Nevada 529 plan (which I currently have for my children).  I intend to roll these balances over to the North Carolina plan.  If I can save $700 in state income tax over the next two years by pushing a few buttons, I will certainly do it.

*Assumes:  $18,000 current annual education cost (tuition, books, fees, room & board); 7% annual inflation on education costs; 8.6% annual total return on education investments.

Bill Hansen, CFA

October 8, 2010

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Weekly Market Update through 10/01/10

as of October 1, 2010        
  Total Return
Index 12 months YTD 3rd QTR Sept
Stocks        
Russell 3000 14.54% 5.24% 11.53% 9.44%
S&P 500 13.58% 4.35% 11.29% 8.92%
DJ Industrial Average 17.00% 5.98% 11.12% 7.85%
Nasdaq Composite 16.41% 5.26% 12.62% 12.18%
Russell 2000 17.89% 9.64% 11.29% 12.46%
EAFE Index* 2.82% -0.82% 15.79% 9.49%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.76% 7.98% NA 0.01%
Barclays Intermediate US Gov/Credit 7.38% 7.46% NA 0.01%
Barclays Municipal  5.50% 6.68% NA -0.14%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $81.80    $76.78
Natural Gas    $3.73    $3.77
Gold    $1,313.60    $1,298.90
Euro    $1.37    $1.34
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 45.33%      
S&P 500 43.06%      
DJ Industrial Average 41.90%      
Nasdaq Composite 50.61%      
Russell 2000 56.53%      
EAFE Index* 41.14%      
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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Weekly Market Update through 9/24/10

as of September 24, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 12.14% 5.16% 11.93% 9.84%
S&P 500 11.55% 4.54% 11.99% 9.60%
DJ Industrial Average 14.96% 6.26% 11.85% 8.55%
Nasdaq Composite 14.14% 5.72% 13.21% 12.76%
Russell 2000 12.96% 8.24% 10.39% 11.55%
EAFE Index* 0.68% -1.02% 16.06% 9.75%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.93% 7.51% NA -0.30%
Barclays Intermediate US Gov/Credit 7.52% 7.04% NA 0.09%
Barclays Municipal  6.33% 6.88% NA -0.11%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $76.78    $73.75
Natural Gas    $3.77    $3.89
Gold    $1,298.90    $1,279.90
Euro    $1.34    $1.30
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 45.93%      
S&P 500 43.86%      
DJ Industrial Average 42.76%      
Nasdaq Composite 51.78%      
Russell 2000 56.45%      
EAFE Index* 41.87%      
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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Weekly Market Update through 9/17/10

as of September 17, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 8.07% 2.95% 9.58% 7.53%
S&P 500 7.80% 2.42% 9.72% 7.38%
DJ Industrial Average 11.41% 3.79% 9.25% 6.03%
Nasdaq Composite 9.98% 2.79% 10.07% 9.64%
Russell 2000 7.22% 5.07% 7.15% 8.28%
EAFE Index* -3.67% -3.68% 12.94% 6.79%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.74% 7.11% NA -0.67%
Barclays Intermediate US Gov/Credit 7.28% 6.61% NA -0.31%
Barclays Municipal  6.78% 6.48% NA -0.48%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $73.75    $73.20
Natural Gas    $3.89    $3.84
Gold    $1,279.90    $1,247.60
Euro    $1.30    $1.27
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 44.60%      
S&P 500 42.60%      
DJ Industrial Average 41.21%      
Nasdaq Composite 49.80%      
Russell 2000 54.30%      
EAFE Index* 39.97%      
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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Is the Latest Tax Proposal What We Need?

The chatter for tax reform is increasing.  There is more talk of restructuring the tax code to provide a more permanent solution.  There is a bipartisan proposal worth noting…S.3018, by Senators Wyden (D_OR) and Gregg (R-NH). 

The proposal would limit the tax brackets to three.  Couples would pay 15% on the first $75,000 of income, then 25% on the next $65,000 and 35% over $140,000.  Note the 35% bracket starts much lower then the current $373,650 for that bracket.  This proposal would cut the income levels in half for single tax-filers.  They would also like to limit itemized deductions so the standard deductions would increase sizably, up to $30,000 for couples and half that for singles.

This would eliminate the alternative minimum tax and deduction phase outs for those with higher incomes. There is a 35% exclusion on dividends and long term capital gains, which affectively makes the top rate on those items 22.75%.  The proposal would also eliminate deductions on items such as moving expenses and deferred interest on newly issued savings bonds.  Employer provided meals and lodging would be taxed as income to the employee.

It is estimated that the net of all this would be a $200 billion tax hike on individuals over ten years.

However, the proposal would also lower the corporate tax to a flat 24%. That is much lower than the current 35% bracket.  This effectively lowers the corporate tax bill over ten years by $200 billion.  

Wow, that is a revenue neutral move for the government and a tough sell for law makers.  It would allow corporations to spend and invest more, which would allow them to hire more workers, so it could have a simulative effect on the economy.  However, this bill may not come to pass.  It could be turned upside down so that an individual’s taxes could decrease and corporation’s taxes could increase.  We will have to wait and see.  

Gregory D. James, CFP®

Partner

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Weekly Market Update

as of September 3, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 13.25% 0.99% 7.49% 5.48%
S&P 500 12.32% 0.41% 7.57% 5.28%
DJ Industrial Average 14.85% 2.12% 7.49% 4.33%
Nasdaq Composite 13.71% -0.93% 6.09% 5.67%
Russell 2000 15.87% 3.71% 5.76% 6.87%
EAFE Index* 1.61% -6.06% 10.15% 4.16%
*EAFE index does not include dividends.        
         
Bond market data not available due to holiday.      
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $  73.20    $  74.67
Natural Gas    $  3.84    $  3.72
Gold    $  1,247.60    $ 1,237.50
Euro    $  1.2749    $  1.2705
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 44.10%      
S&P 500 42.01%      
DJ Industrial Average 40.93%      
Nasdaq Composite 47.66%      
Russell 2000 54.67%      
EAFE Index* 38.84%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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Weekly Market Update:

as of August 27, 2010  
Total Return
Index 12 months YTD QTD MTD
Stocks
Russell 3000 6.09% -2.80% 3.45% -3.26%
S&P 500 5.36% -3.26% 3.64% -3.15%
DJ Industrial Average 8.87% -0.85% 4.37% -2.67%
Nasdaq Composite 7.22% -4.50% 2.27% -4.37%
Russell 2000 7.02% -0.61% 1.36% -5.16%
EAFE Index* -3.74% -9.68% 5.91% -3.20%
*EAFE index does not include dividends.        
         
Bonds
Barclays US Aggregate 8.96% 7.21% NA 0.71%
Barclays Intermediate US Gov/Credit 8.04% 6.39% NA 0.66%
Barclays Municipal  9.98% 6.88% NA 2.18%
         
         
    Current Prior
Commodity/Currency Level Level
Crude Oil    $   74.67    $   74.12
Natural Gas    $   3.72    $   4.08
Gold    $   1,237.50    $   1,225.50
Euro    $   1.2705    $   1.2697
         
         
RECOVERY!
Since 3/09/09
Index  annualized
Stocks
Russell 3000 41.07%      
S&P 500 39.09%      
DJ Industrial Average 38.75%      
Nasdaq Composite 44.76%      
Russell 2000 51.11%      
EAFE Index* 35.75%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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SDG Market Indicator: Future Nobel Prize Winner?

Every day, it seems someone has a new model that claims to predict the next stock market meltdown or boom.  Two of my colleagues, Mark Lewis and Sarah DerGarabedian, and I had a stock market theory we tested a couple of years ago.  We called it the “SDG Market Indicator.”  

At the time, Sarah’s almost one-year-old son was having some difficulties sleeping through the night.  Whenever she did not get a good night’s sleep, we noticed on most of those days the stock market dropped.  Over a 48-day period, we compared her sleep cycle against the market’s performance.  If she slept well the night before, the market increased 42 percent of the time.  The market was either flat or declined 58 percent of the time when she had an average to bad night’s rest.  

You are probably saying to yourself, “This is the stupidest thing I have ever heard.”  You are right.  Some people accept far-fetched theories like the SDG Market Indicator as sound market guidance, though.  As they chase the next theory’s prediction, they risk losing more than they could potentially gain.  

Market timing statistically does not work.  A study by Morningstar highlights the dangers of market timing.  This study shows that, during the period 1926 – 2009, an investor who invested $1 in stocks would now have $2,592.  The study also shows that if that investor missed the 37 best months during this time frame, but was otherwise invested in stocks, the investment would only be worth $19.66 at the end of 2009. 

At Parsec, we prefer to take the long-term view when evaluating the market.  It is impossible to predict on a day-to-day basis what the market will do.  However, as studies have shown, the market will eventually recover from declines.  It is all part of the cyclical nature of financial markets.  

The next time you see a hot new theory, just think of the SDG Market Indicator.  Now, I am off to force feed Sarah a turkey sandwich and slip an Ambien in her tea.  It is time for a few positive days in the market.

Cristy Freeman, AAMS
Senior Operations Associate

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Market update through 8/20/10

as of August 20, 2010        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 9.11% -2.34% 3.95% -2.80%
S&P 500 8.55% -2.66% 4.28% -2.55%
DJ Industrial Average 12.25% -0.27% 4.98% -2.10%
Nasdaq Composite 10.61% -3.36% 3.49% -3.22%
Russell 2000 8.80% -1.59% 0.36% -6.09%
EAFE Index* -1.57% -9.48% 6.14% -2.99%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 9.20% 7.33% NA 0.82%
Barclays Intermediate US Gov/Credit 8.31% 6.57% NA 0.82%
Barclays Municipal  9.88% 6.33% NA 1.65%
         
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $        74.12    $      81.19
Natural Gas    $          4.08    $        4.76
Gold    $  1,225.50    $ 1,184.50
Euro    $     1.2697    $    1.3188
         
         
RECOVERY!        
  Since 3/09/09      
Index  annualized      
Stocks        
Russell 3000 42.18%      
S&P 500 40.29%      
DJ Industrial Average 39.91%      
Nasdaq Composite 46.66%      
Russell 2000 50.90%      
EAFE Index* 36.51%      
*EAFE index does not include dividends.        

Mark A. Lewis

Research & Trading Associate

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How to Make a Little More Money on Your Excess Cash (with a Bit of Work on Your Part):

With short-term interest rates at very low levels, many are wondering if there is any way to earn a higher return on their cash balances. We generally recommend that clients maintain an emergency reserve of 3-12 months worth of after-tax living expenses. The specific amount varies by client and depends on a number of factors such as the level and predictability of your income as well as your personal preference. Many clients choose to meet their liquidity needs by keeping a home equity line of credit available, and keeping their cash invested with a long-term focus at their desired asset allocation.

This column will focus on how to get a little more yield on an existing cash balance. Currently, money market rates at Fidelity and Schwab are almost zero. As of last week, the national average for a 1-year certificate of deposit was 0.72%. One thing to consider for small cash balances is Series I Savings Bonds issued by the U.S. Government, which are currently earning an annual rate of 3.36% for the next 6 months.

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate (think “I” as in “inflation”). The 3.36% earnings rate for I Bonds purchased through April 30, 2010 will apply for their first six months after issue. The earnings rate combines a 0.30% fixed rate of return with the 3.06% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The inflation rate changes every 6 months, so your earnings rate will increase with increases in inflation. The fixed rate applies for the 30-year life of I bonds purchased during each six-month period. The bonds cannot be redeemed for 12 months after issuance, and there is a penalty of 3 months’ interest if they are redeemed before 5 years. Purchases are limited to $5,000 per Social Security Number in electronic bonds and $5,000 in paper bonds, so a couple could purchase up to $20,000 annually.

So why would you want to invest a portion of your liquid cash in something that carries a penalty for 5 years? Because if you act by April 30, you are in effect creating a 1 year CD with a yield of about 2.45%.

Here’s how it works:

You go to your bank and buy a series of $1,000 I Bonds. For the next six months, these bonds will earn interest at an annual rate of 3.36%. The rate will then reset, but we already know what the inflation component will be since CPI-U has already been published. We just don’t know the fixed rate, which is set every six months by the Treasury. If the fixed rate stays the same at 0.30%, the earnings rate for the next 6 months will be an annual rate of 1.84%. So you could reasonably expect a return of at least 2.45% over the next year versus 0.72% in a bank CD.

What if there is an emergency and you need the money? You cannot redeem the bonds for 12 months, so you need to leave some liquid cash on hand. After 12 months, just pay the penalty and you are still ahead of where you would have been (say 1.77% yield if you cashed the bond in after 12 months and one day, versus 0.72% in a bank CD).

You can then repeat this process to create a ladder of bonds maturing at different points, say every 3-6 months. You can set up an electronic account at www.treasurydirect.gov and manage this process from the comfort of your couch. You can just deposit any paper bonds that you buy into your account and convert them to electronic form.

All I Bonds that are outstanding have the same inflation component, currently 3.06% annualized. The only difference is in the fixed rate that each bond offers. If the fixed rate increases significantly, just redeem some bonds and pay the penalty. Then buy some new bonds with the higher fixed rate (but remember the $10,000 annual limit on purchases for each Social Security Number).

Some other benefits of I Bonds include:

–Interest is exempt from state income tax;
–If you buy the bonds on the last day of the month, you still get interest for the full month;
–You don’t have to worry about FDIC insurance or shopping around to different banks for the best rate. I Bonds are direct obligations of the government, whereas FDIC insurance is a fund consisting of a small percentage of deposits that are covered.

Bill Hansen, CFA
April 23, 2010

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