Synergy Financial Group Newsletter - April 2009

Synergy Financial Group

George Van Dyke
Financial Consultant Writing Off Worthless Securities on Your Taxes
401 Washington Ave Suite
700 It's a classic good news/bad news situation. If ensure that the transac-
Towson, MD 21204 you're holding a stock that has become worth- tion is not considered a
410-825-3200 sale, exchange, contri-
gvandyke@synergyfinancialgrp.com less, the bad news is obvious: you've lost your
www.synergyfinancialgrp.com
investment. The good (or at least better) bution to capital, divi-
news? You may qualify to deduct the invest- dend, or gift, which
ment as a loss on your tax return. could change the tax
implications.
Worthless stock or bonds are those that are
completely--the key word here being com- Don't ignore timing
pletely--without value. A company's filing for In general, you must claim a loss on a worth-
bankruptcy does not necessarily mean that less stock in the year in which it becomes
the stock is worthless; the stock may still trade worthless. (However, if you do neglect to
and retain at least some of its value. claim the loss in the appropriate year, you can
The mechanics do so later by filing an amended tax return
within 7 years.) IRS Publication 550 includes
If you own stock in a company that liquidates, more information about recognizing capital
you may receive at the end of the year a Form gains and losses.
1099-DIV, which lists the liquidating distribu-
tion made during that year. For tax purposes, What if a stock is worth almost nothing?
you should treat this distribution as if you had If a stock is no longer traded but is not for-
sold the stock, using the distribution date on mally defunct, there's another (though more
the form as the date of sale. You would sub- complicated) possibility for milking tax value
tract your cost basis from the amount of the from an investing mistake. You could sell the
distribution. shares in an arm's length transaction (to a
If you don't receive a 1099--and it's highly willing, unrelated buyer for fair value). Be sure
likely you won't--you may still be able to take a that ownership of the shares transfers to the
deduction for worthless stock, but the process new owner.
becomes more challenging. You'll need to be You also could check with your brokerage firm
able to present proof that the stock became to see whether it purchases virtually worthless
In this issue: worthless during the year in which you're de- shares from customers for a nominal amount
Writing Off Worthless ducting the loss. Examples of documents that to supply them with a trade confirmation for
Securities on Your Taxes might be considered proof include a letter tax purposes.
from the company stating that it has shut
IRAs and 401(k) Plans: Four Writing off worthless securities is far more
Strategies in a Declining down and there are no assets to pay share-
Market holders, or a letter from a broker stating that complex than this brief discussion might sug-
the stock no longer has value. For tax pur- gest. Consult a tax professional to ensure you
Longevity Insurance poses, worthless stock is treated as though don't make any missteps.
Is it possible to accidentally you sold the shares on the last day of the year
disinherit my heirs? in which they become worthless.
Abandoning a stock
You may also be able to claim a stock as
worthless if you abandoned it after March 12,
2008. To do so, you must relinquish all rights
to it and receive nothing in return; however,
you should consult a tax professional to
Page 2

IRAs and 401(k) Plans: Four Strategies in a Declining Market

No doubt, 2008 was one of the worst years in tax free. (The same income and marital status
the history of the stock market, and one of the limitations that apply to traditional IRA conver-
worst for retirement savings. Here are four sions also apply to rollovers from 401(k) plans
things you can do now to help make the best to Roth IRAs in 2009.)
of a bad situation. 3. Undo a 2008 conversion in 2009
1. Review your retirement plan What if you already converted your traditional
Review your overall retirement plan with your IRA to a Roth in 2008, and your IRA balance
financial professional. What, if any, adjust- has taken a significant hit since then? The tax
ments can you make to help you reach your cost of converting was probably much greater
retirement goals? If you were planning to re- than if you had waited until 2009 to convert.
tire in a certain year, determine if that's still Well, don't fret--you can undo a 2008 conver-
realistic, and calculate how much longer your sion up until the due date for filing your 2008
assets might last if you work a few years tax return, including extensions. Technically
longer. Can you reach your goals by using a called a "recharacterization," this procedure
smaller withdrawal rate assumption, or by allows you to treat the conversion as if it never
increasing your IRA or 401(k) savings? Does occurred.
your asset allocation still make sense? And if To undo your 2008 conversion, you need to
you don't have a plan for your retirement, now carefully follow these steps:
is a good time to think about establishing one.
• Inform your IRA providers (the one hold-
2. Convert your traditional IRA, or transfer ing the Roth IRA and the one providing
401(k) plan securities, to a Roth IRA the traditional IRA, if different) that you
Due to declining values, the tax cost of con- intend to recharacterize your Roth IRA to
verting to a Roth IRA has dropped dramati- a traditional IRA. You must provide this
cally for many investors. Consider whether notice on or before the date the assets
Roth conversions converting to a Roth IRA makes good finan- are transferred back to the traditional IRA.
cial sense for you. The taxable portion of your • Make sure the transfer is completed by
Individuals who would traditional IRA will be subject to ordinary in-
like to contribute or the due date for filing your federal income
come tax in the year of conversion, but quali- tax return for 2008, including extensions.
convert to a Roth IRA in fied distributions from your Roth IRA will be
2009 but don't qualify For most taxpayers, that can be as late
entirely free from federal taxes. as October 15, 2009. (If you've already
because of income
limitations might benefit For 2009, you're able to convert only if your filed a timely 2008 tax return, you can still
from making modified adjusted gross income is $100,000 recharacterize by making the transfer and
nondeductible or less (this dollar limit applies whether your filing an amended return by October 15,
contributions to a tax filing status is single or married filing 2009. Be sure to write: "Filed pursuant to
traditional IRA today, jointly). If you're married filing separately, you Section 301.9100-2" on your Form
and converting the can't convert at all in 2009. But if these rules 1040-X.)
funds to a Roth IRA in preclude you from converting, there's always
• Report the recharacterization to the IRS
2010, when the income next year--literally. These limitations are re-
(see Form 8606 for more information).
limits no longer apply. pealed in 2010, so anyone will be able to con-
Additionally, for Roth vert a traditional IRA to a Roth, regardless of You can even reconvert your traditional IRA
conversions in 2010 income level or marital status. back to a Roth in 2009 (if you meet the eligi-
only, any resulting bility requirements) beginning on the 31st day
Similarly, if you've decided a Roth IRA makes
taxable income will be following the recharacterization.
sense for you, and you're entitled to a distribu-
deferred until 2011 and
tion from your 401(k) plan, keep in mind that 4. Continue to contribute
2012 (with 50% taxed
you can roll over (that is, essentially convert)
in each year). Despite the recent downturn, for many people
your non-Roth assets to a Roth IRA (hardship
withdrawals, certain periodic payments, and IRAs and employer retirement plans remain
required minimum distributions (RMDs) can't important vehicles for retirement savings.
be rolled over). This may be especially attrac- Make sure you're taking full advantage of any
tive if you're entitled to an in-kind distribution company matching contributions you're enti-
of employer stock whose values are seriously tled to. And if you're age 50 or older, keep in
depressed--you'll pay tax on this reduced mind that you may also be able to make
value and any additional appreciation may be catch-up contributions (up to $1,000 for IRAs
and $5,500 for 401(k) plans in 2009).
 Page 3

Longevity Insurance
Are you concerned about Drawbacks
outliving your retirement
savings? You can try to There are some disadvantages to the basic
predict how much longevity insurance policies:
income you'll need for a • If you die before the payment period
specific number of years, begins, you may lose your investment:
but what happens if you there typically is no death benefit.
live longer than you
expected? That • They do not provide for inflation or
possibility is referred to cost-of-living adjustments.
as longevity risk. One
• There's typically a long (20 years or
way to deal with
more) deferral period.
longevity risk is to shift some of it to an insur-
ance company through the purchase of lon- • Payments don't begin until a
gevity insurance. predetermined age or after a set number
of years.
What is longevity insurance?
While life insurance helps to protect you from • The payment is fixed at inception. You'll
the financial risks of dying too soon, longevity get the same payment regardless of how
insurance offers some financial protection stock or bond markets perform over the
against the risk of outliving your retirement deferral period.
savings. Longevity insurance is actually a Advantages
deferred annuity that provides fixed income
payments for the rest of your life, beginning at Some issuers have tried to address some of
an advanced age, such as 85. The policy is the disadvantages of the typical longevity
usually purchased with a single payment insurance policy by offering options. But
many years before its expected payout date. these features come with a cost that generally
reduces the monthly payment. Optional
The primary advantage of longevity insurance features may include:
over a typical annuity is that the investment
required is usually much smaller. Say you • A death benefit, annual payment
want a guaranteed monthly income of $2,500 increase, and an installment refund.
beginning at age 85. If you wait until you • A choice of single-life or joint-life income How long might you
reach that age, you might have to invest about payments. live?
$185,000 in an immediate annuity to receive
guaranteed monthly payments of $2,500. Or, • The right to change the age at which The average life
you can buy a longevity policy at age 65 for income payments begin. expectancy at age 65
about $30,000 that will provide the same • The opportunity to take additional (for both sexes) is 18.7
guaranteed monthly income at age 85. (This withdrawals after regular payments begin. years. (Source:
example is for illustration only and does not National Vital Statistics
Factors to consider
reflect a specific product or investment return. Reports, Volume 56,
Annuity guarantees are subject to the claims- • Estimate how long your retirement Number 16, June 2008)
paying ability of the issuer.) savings will last. Since these statistics
• Consider your family's historical life are an average, 50%
Why consider longevity insurance?
expectancy. will not live to their life
It's hard to estimate how long you'll need your expectancy, while 50%
• Objectively evaluate your health and
retirement savings to last, because it's almost will live beyond it. That
lifestyle--is it conducive to a long life?
impossible to predict how long you'll live. The means there's a chance
chances are that you'll either spend too much • Consider your risk tolerance. Longevity you'll live well beyond
and deplete your retirement savings too soon, insurance offers the security of knowing age 85.
or you'll spend too little and potentially deprive there's an income available later in life.
yourself of a better retirement lifestyle. Lon- Longevity insurance isn't for everyone. But if
gevity insurance allows you the flexibility of you're concerned about outliving your
planning and investing for a fixed retirement retirement savings, consider whether longevity
time period, because you have the fixed in- insurance fits into your overall retirement
come of the insurance available if your retire- income strategy.
ment lasts longer than you estimated.
 Ask the Experts

Is it possible to accidentally disinherit my heirs?

Yes. One of the most tragic This can lead to unwanted allocations (for
estate planning mistakes is example, the disinheritance of children when
unintentionally disinheriting Mom or Dad remarries and everything passes
an heir. Here are some of to the new spouse). Make it a rule to review
the most common ways this and update your will periodically, especially
unfortunate situation can occur. after major life events such as marriage, a
birth or adoption, divorce, or death. Also, up-
Synergy Financial Group date beneficiary designations (for life insur-
George Van Dyke One of the biggest causes of accidental disin-
heritance is the simplest: failure to make a ance policies, retirement accounts, payable
Financial Consultant
401 Washington Ave Suite will. In this case, property passes according to on death accounts, etc.) annually. And, re-
700 the intestacy laws of the state in which you're member that beneficiary designations trump
Towson, MD 21204 "domiciled." provisions made in your will.
410-825-3200
gvandyke@synergyfinancialgrp.com
www.synergyfinancialgrp.com Making an ineffective or faulty will can also A fourth cause of accidental disinheritance is
result in misdirected allocations. For example, what's known as ademption. This is the failure
you may fail to provide for children born after of a specific bequest made in a will because
The opinions voiced in this you make your will (this is what happened to the property no longer exists in the decedent's
material are for general estate for some reason. For example, you
information only and are not Anna Nicole Smith and Heath Ledger). The
intended to provide specific lesson here is to forgo the do-it-yourself kit might leave your car to your son in your will,
advice or recommendations for and hire an experienced estate planning and then sell or gift it to someone else before
any individual. To determine you die. A similar situation can occur when a
which investment(s) may be attorney to draft and execute your will, and
appropriate for you, consult your review it every year or two. life insurance policy is allowed to lapse (so
financial advisor prior to check that your elderly parents don't forget to
investing. All performance Failing to update your will can result in alloca- make their premium payments).
referenced is historical and is no
guarantee of future results. All tions that are made according to an old will.
indices are unmanaged and
cannot be invested into directly.

The tax information provided is

not intended to be a substitute for
How do I purposefully disinherit an heir?
specific individualized tax
planning advice. We suggest that While you can easily disin- wish to disinherit him or her.
you consult with a qualified tax herit a nonheir by not men-
advisor. Be aware that in most states, you cannot dis-
tioning him or her in your will, inherit your spouse completely. If you live in a
Securities offered through LPL the rules are more compli- community property state, your spouse auto-
Financial, Member FINRA/SIPC cated when it comes to your matically owns one-half of the community
heirs. Merely not mentioning property, which generally includes property
the name of a child or that either of you acquired during your mar-
spouse in your will might not riage. In all states, spouses are protected
disinherit him or her, and from disinheritance because they're allowed to
doing so can even open the door for a will claim a statutory share (also known as
contest. In a will contest, the heir who is left "electing against the will"). A statutory share
out could argue that he or she was mistakenly can run anywhere from one-quarter to one-
overlooked. The outcome of a will contest half of an estate, regardless of the terms of
depends in part upon your state's law regard- your will.
ing an omitted (referred to as "pretermitted")
spouse or child. Also be aware that, while you have the right to
disinherit a child, that right is restricted by
To be sure that your intent to disinherit an heir laws that grant certain inheritance rights to
is unequivocal, you should consider including minors, and protect children of any age from
a disinheritance clause in your will. Such a accidental disinheritance.
clause can discourage the disinherited heir
Prepared by Forefield Inc, from contesting your will. This clause would You should consult an experienced estate
Copyright 2009 indicate the exact name of the heir you wish planning attorney if you're considering
to disinherit, and explicitly state that the rea- disinheriting an heir.
son he or she is not included is because you