Letter to Our Clients - December 2004

December 2004


To My Friends and Clients:

Whew! I do not know about you, but I am greatly relieved the election is over and the winner clearly identified.

Normally December and January are the two best months of the year for the stock market, yet November has proven to be the strongest month so far of 2004. We can only hope that December is even better.

However, the future remains uncertain at best. Some are waiting for the signals that this is the “perfect” time to invest. I suggest it is never obvious until the time is well past. At any given moment it will never be “safe” to invest in the market. On the other hand, it is never “safe” to be out of the market either. Care should be taken so that your portfolio can give you the growth you want, yet only to the extent you can be comfortable with the downward fluctuation which is part of “risk.”


One thing to keep in mind is that the most recent tax changes created a huge advantage for a) dividends from stocks, and b) gains from the sale of investment assets, such as stocks, real estate and businesses. The maximum federal tax rate on capital gains is now 15%, down from a 20% rate previously, and 28% before that.

More importantly, however, the maximum federal tax rate on “qualified” dividends is 15%, down from a 35% previous maximum, and an even higher rate under previous tax codes. This makes stock dividends much more tax-efficient than interest income from bonds, certificates and money market accounts. It may encourage investors to use and trust stocks more than in the past. This is turn may mean that the old formulas of whether the market is “cheap” or “over-valued” may no longer apply. It will take several years to know for certain, but it is a factor to keep in mind.


We are approaching the end of 2004. This is the time to engage in tax planning to the extent your situation justifies it. One of the easiest places to look is in your retirement plans.

Salary deferrals for 401(k)’s, SIMPLE IRA’s and 403b (TSA) accounts must be made by the end of the year in order to make a difference on your 2004 tax return. The limits for 401(k) and 403(b) plans for 2004 are $13,000, with an extra $3,000 available for those over 50 (making $16,000 total). For SIMPLE IRA’s the limit is $9000, with an additional $1500 for those over 50 ($10,500 total). These limits are scheduled to increase for 2005, but there is a strong likelihood that the tax laws will be changing again, so I will wait to discuss next year’s opportunities at a later time.


IRA contributions for 2004 can wait until April 15, 2005. However, if you know you are going to make a contribution, it is probably better to do it now, so that your money is working sooner in its tax-advantaged environment. IRA limits for 2004 are $3000, with an extra $500 available for those over 50 ($3500 total).

You can make deductible contributions, regardless of how much earned income you have, if you are not an “active” participant in a retirement plan at work. You can also make deductible contributions, even if you are in a retirement plan at work, if your family income is less than $65,000 ($45,000 if single). If your spouse belongs to a retirement plan but you do not, please contact us because you may be eligible for a deductible IRA and not even know it!

If you are contemplating contributing non-deductible money to an IRA, please contact us. There are very rare situations where I believe this is in your best interest.

Roth IRA’s are even more wonderful than the new tax rates on dividends and capital gains. With Roth IRA’s you do not get to deduct your contributions, but all your withdrawals come out tax-free as long as you follow some (relatively) simple rules. Unlike regular IRA’s, you do not ever have to withdraw from Roth IRA’s, and you can pass the tax advantage of these accounts on to your heirs.

Roth IRA’s should be of particular interest to those in their 50’s and younger, as there is the possibility of significant growth over the next 20 years and beyond.

The contribution limits for Roth IRA’s are the same as regular IRA’s ($3000/$3500). However, there are different eligibility tests based upon family income, so please contact me to see if a Roth IRA makes sense for you.

For parents or grandparents (or others) who would like to give money to loved ones but who do not want to “spoil” them, or have them “waste” the gift, consider setting up and/or contributing to an IRA or Roth IRA account in the name of the loved ones. We must be careful that the contributions do not exceed the allowable maximum from all sources. If the loved one’s financial situation makes it difficult or impossible for them to contribute to IRA’s and to build up funds for their retirement, this is a perfect way to make the kind of gift that keeps on giving for decades. Even if they are able to make their own contributions, your gift may free up their resources so they can invest elsewhere.

Our new letterhead and logo are now officially with us. Even if you have been to our website before, we recommend you visit it occasionally, as it has been updated and will contain new information on a periodic basis. As always, please be sure to contact us if we can be of assistance. All of us would like to thank you again for the opportunity to work with you, and we wish you the happiest of holidays, and good health and good fortune in 2005.

Robert K. Haley, JD, CFP®, CLTC