For many investors looking for higher returns and portfolio diversification, mutual funds are ideal investments. They offer a combination of professional management, liquidity and reduced volatility that makes them excellent vehicles for both growth and income investors. However, some investors follow simpler investment strategies that do not require active portfolio management, and therefore do not need to pay the high sales charges and ongoing management fees assessed by many funds.

There is, however, an alternative for those in this category. Unit investment trusts (UITs) provide diversification similar to mutual funds, but without the internal portfolio turnover. A unit investment trust is simply a set portfolio of securities that have been selected according to either a specific set of characteristics or perhaps a specific investment strategy. Just as a share of a mutual fund represents an undivided interest in each of the funds’ holdingd, each unit of the trust represents an undivided interest in each of the securities held within the trust. Each trust will hold the securities for a set term and then mature. Upon maturity, the securities in the trust are reset according to the trust’s objective if necessary. The process is then repeated. There are many types of this kind of trust; one of the most common examples of this is UITs that follow the “dogs of the Dow” strategy. The ten highest dividend-yielding stocks from the Dow Jones index are purchased within the trust and held for 13 months. Then the stocks within the trust are adjusted according to this strategy, and a new trust is issued for another 13 months. Because they are not actively managed, UITs do not generate capital gains or losses of any kind, except at maturity. They can pass through interest and dividends periodically, depending upon the investment objective of the trust. There are many different types of UITs that meet various investment objectives, such as growth, income, or sector exposure.

UITs also generally cost less to invest in than actively managed investments. Although most UITs generally have a nominal sales charge, they have no annual expense fees of any kind, due to their passive management. Even their initial fees tend to be fairly low. Many of the trusts that follow the “Dogs of the Dow” strategy usually have an entrance fee of around 1%. Although this fee is charged every time the trust resets, the aggregate cost is still often below that of a comparable mutual fund investment.

Your last Social Security statement contained three key numbers that you may still not know which is best to pick. One number was the benefit amount you will receive at age 62; the second was your benefit amount at your normal retirement age and the third was the amount you will receive if you work until age 70. While there are a number of factors that can affect both the final amount of your benefits and when you should begin taking them, the possibility of coming out ahead by simply investing the money should be examined. If you begin taking early or even normal distributions and invest them, chances are you will come out ahead of where you’ll be if you choose to wait. The following table breaks this down clearly:

Cash flow comparison of Social Security benefits, assuming life expectancy to age 90

However, the information in table 1 is not final, as the amounts from column II and IV must be combined in order to arrive at the correct final comparison. Taxes are not taken into consideration here either, but those who are eligible to make Roth IRA contributions will come out much further ahead of those who cannot.

^{Remember, while the differences in cash flow from the tables above may not seem that large, the growth scenarios at age 62 and 66 produce approximate liquid assets of $136,000 and $78,000, respectively. These are available to the participant for any reason at any time, such as to pay off a mortgage. (Of course, liquidating this balance will have an effect on the amount of benefits ultimately realized.)}

Although the IRS has allowed for tax-free rollovers from one IRA to another or from a qualified plan to an IRA for years, the Economic Growth and Tax Relief Reconciliation Act of 2001 added a new provision: a direct rollover from a self-directed IRA into a qualified plan. This new directive has created several opportunities for IRA holders in certain situations.

Perhaps the main advantage that this provision has created applies to qualified plan participants who have IRA accounts that are partially funded with after-tax contributions. In the event that a distribution must be taken, the IRS will prorate each distribution according to the ratio of pre-tax versus after-tax contributions. For example, if you have $200,000 in an IRA, and $50,000 of its value consists of after-tax contributions, then 25% of each distribution that you take will be taken from the after-tax contributions. The balance will be considered to come from the pre-tax contributions and is thus taxed as ordinary income. This means that if you were forced to withdraw $50,000 from your IRA for any reason, $37,500 of the withdrawal would be fully taxable. However, the new rollover rules under the EGTRRA provision give you a much better option. You could instead roll over $150,000 from your IRA into your qualified plan and simply withdraw the balance from your IRA. The entire balance will be considered a tax-free return of principal. Rolling the taxable portion of your IRA into your qualified plan will effectively allow you to escape the partial taxation of your withdrawal. (Of course, in order to take advantage of this provision, you must be a current qualified plan participant.)

This rollover provision also allows for greater liquidity from your IRA without taking any kind of distribution at all. If your qualified plan permits you to take out a loan against the balance of the plan, then rolling your IRA into the plan will increase the amount that you can borrow, generally by half of the amount that is rolled in. Therefore if you roll $100,000 from your IRA into your plan, then you will be able to borrow $50,000 more out of your plan (such ratios may vary from one plan to another.)

Credit scores seem to be one of the biggest sources of mystery and myth on the face of the planet. They are the financial equivalent of the Bermuda Triangle or Bigfoot. In fact, I would say that it’s the single largest subject I continually hear people give bad advice about.

Since your credit score has a huge effect on your budget, it’s important to understand exactly how it is calculated and how to take care of it. Let’s start by looking at how your FICO credit score calculation actually breaks down.

35% - Payment History
30% - Balance-to-Limit Ratio
15% - Length of Credit History
10% - Types of Credit Used
10% - Recent Applications for New Credit

So, let’s define these terms a little further…

Payment History:
The single largest portion of your credit score calculation comes from a simple question: “Did you pay all your bills on time?”

Someone with an occasional “30-day late” payment will not see their credit score affected too much. But, if you start piling on more 30-day late payments, or any 60-, 90-, or 120-late payments, prepare to watch your score plummet.

Balance-to-Limit Ratio:
The second largest component of your credit score comes from the total amount of available credit that you’ve used. If you have a $2,000 credit limit, but have only used $1,000, your ratio is 50%.

Generally, your credit score is affected negatively as your balance-to-limit ratio climbs, as well as the total dollar amount of your available credit. Also, lenders often use balance-to-limit ratio benchmarks (such as 33% and 50%) to decide if someone is too risky for a new loan.

Length of Credit History:
This category is one of the biggest myths with credit and one of the things I’m constantly trying to get people to avoid. The myth? That you need to “build credit.” In fact, the length of your credit history is only 15% of your overall score.

If you do not have a long enough credit history, a lender is ultimately going to look at your income to see if you can cover the payments. College kids and young couples do not need to worry about building credit. It backfires more often than it helps!

Types of Credit Used:
Certain types of credit are thought to indicate risky spending patterns more than others. For example, someone who is constantly signing up for credit cards at mall retailers appears impulsive.

If they were to have $5,000 in balances on these cards, it would be viewed more negatively than someone with $5,000 in student or auto loans.

Recent Credit Applications:
Lenders are always on guard for red flags; some indication that you might be a credit risk. If someone all of the sudden applies for a dozen different credit cards, it may be a signal that they are in the middle of a financial crisis.

Now that you know the basics of calculating your credit score, check back for part two of this series, which will cover checking and protecting your score.

As most of you have heard by now, the government has decided to send you some money in the hopes that you’ll spend it and help stimulate the economy. Unfortunately, many people are already committing themselves to flat-screen TV’s and vacations in Tahiti based on myths and misinformation about the size of their tax rebates.

To keep you from over-committing yourself and your rebate check, here’s a basic overview of the program:

Who Will Get Rebate Checks?

• 130,000,000 households
• The majority of people who file a 2007 tax return and their dependents
• Many other taxpayers who didn’t have to file a return
• Anyone with at least $3,000 in income (including Social Security and VA benefits)

How Much Will The Rebate Be?

• $300 – 600 per individual, or
• $600 – 1200 per married couple
• $300 maximum for each qualifying child
• There are “phase-outs” for adjusted gross income above $75,000 for single taxpayers ($150,000 for joint).

What is a “Qualifying Child?”

• Under age 17 at the end of 2007
• Lived with you at least half of the year
• Was dependent on you for at least half their support
• Was U.S. citizen, national, or resident alien

How Do I Figure Out Exactly What I’ll Receive?
You can use the IRS Rebate Calculator to estimate your check.

When Will I Get My Payment?
It depends on the last two digits of your Social Security number and whether you use direct deposit or receive a physical check.

Direct Deposit Schedule by Last Two Digits of Social Security Number:
00-20 May 2, 2008
21-75 May 9. 2008
76-99 May 16, 2008

Paper Check Mailing Schedule by Last Two Digits of Social Security Number:
00-09 May 16, 2008
10-18 May 23, 2008
19-25 May 30, 2008
26-38 June 6, 2008
39-51 June 13, 2008
52-63 June 20, 2008
64-75 June 27, 2008
76-87 July 4, 2008
88-99 July 11, 2008

Tax Rebate Scams To Watch Out For:

• Phone calls from an “IRS employee” needing your bank info for any reason.
• Rebate or audit email requesting certain info in order to process your rebate or avoid an audit.
• Email allowing you to download documents about the tax law changes (can contain viruses).

Entrepreneurs are the brave souls who make our economy go, or at least they were when our economy was actually going anywhere. Especially in this currently questionable financial climate, starting your own business is undeniably a dicey proposition. Start-ups go out of business all the time, often before they even have a chance to even really star up at all. The main culprit in the savage slaughter of these young establishments is the same perpetrator behind the bulk of our fiscal difficulties: Debt.

As an emerging entrepreneur, it is very easy to quickly accumulate debts that are substantial enough to kill your burgeoning business before it even gets off the ground. But it does not have to be that way. Take the time to examine your business workflow and you will likely discover a number of extraneous costs that can be eliminated to improve the health of your bottom line.

Here are eight common practices that lead to common results; learn to avoid them and you will be uncommonly successful.
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When asked what the most important factor is when choosing a financial planner, the majority of those who responded listed trust as the overriding characteristic. But how do you judge trustworthiness? Some financial service firms might present their experience and assets under management to convey their commitment to building trust with potential clients. But long histories, and billion-dollar portfolios do not necessarily translate into a trustworthy relationship.
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Many clients who are over age 70½ ask us if they can still make contributions to their Individual Retirement Accounts (IRAs) — and if so, what the maximum amount they can deposit is. The answer depends upon your individual situation.
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Have you watched the prices of real estate climb each year in your community and thought about how it might be a great idea to have a rental or commercial property in your IRA? Although real estate can be a good addition for your portfolio, owning it within an IRA can be packed with problems.
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When markets are down or sluggish, it’s easy to feel that your mutual fund is under-performing. Before assigning a term like “under-performing” to a fund, you should take many factors into account. If your fund is down enough to worry you, it’s a good idea to call your financial advisor with some key questions.
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Educated investors often look at a number of features of mutual funds, such as sales charges, beta, alpha and other technical characteristics. But one factor that is often overlooked is how tax-efficient the fund is.

A tax-efficient investment is one that can be reasonably expected to produce favorable tax consequences. For example, a 401(k) or variable annuity, whose taxes can be deferred, might be considered tax-efficient. A municipal bond fund, whose income is usually exempt from federal and state taxes, might also be considered tax-efficient (although municipal bond funds seek income that is federally tax-free, a portion of the fund’s returns may be subject to federal, state, and local tax and the alternative minimum tax).
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If you’re getting divorced, you have many issues to contend with, not only emotionally and relationally, but logistically and financially as well. Although much of the anguish from divorce is inescapable, some of the financial pain from this process can be alleviated with proper planning and cooperation between former spouses.
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Although there can be many reasons why your taxes this year could be higher than you expect, such as having to report a capital gain or taking a lump-sum retirement plan distribution, one of the major culprits of this problem can be the income you draw from social security. When social security began back in the thirties, it was originally slated as tax-free income. However, over the years Congress has enacted legislation that has eroded this tax-free status. The general parameters for the current taxation of social security are broken down as follows:
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Typically most Roth IRA distributions are tax-free. But there are a few exceptions to this rule, one of which can apply even after you have reached age 59 ½. While these exceptions are not very common, Roth IRA owners should be aware of them and when they apply.
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Health Savings Accounts are a relatively new type of medical savings account that allows for both tax-deductible contributions and tax-free distributions as long as the money is used to pay for qualified medical expenses. Perhaps best of all, any unused funds in these accounts can eventually be withdrawn as retirement income. HSAs can therefore provide not only a means to pay for medical insurance and expenses, but can also function as an additional avenue for retirement savings.
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You may be participating in a 401(k) or other type of employer-sponsored retirement plan. In addition to this, you may also be putting money away in a Traditional IRA. Although contributing to two retirement savings vehicles at once is commendable, you may actually be costing yourself at least part of the tax deduction you would normally receive by doing so.
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Two of the most classic phrases you hear thrown around by water-cooler tax experts are the “home-office deduction” and “writing off your equipment.” Everyone who knows nothing will insist that you can write-off just about every inch of your home, as well as your laptop, just because you return business emails from your couch.

While that would be nice, it’s the stuff of “IRS Urban Legends”. There are deductions, quite juicy ones in fact, that are offered for your home office use and equipment purchases. However, they are surrounded by complex rules to keep taxpayer abuse to a minimum.

The Home Office Deduction
Just because you occasionally work out of your house, doesn’t mean you can claim the home office deduction. In fact, if your employer (which includes yourself if you own the business) offers you a primary place to work, you are generally excluded from claiming the home office deduction.

In a nutshell, to claim the home office deduction, your home office must be your primary place of business and the space must be used for the exclusive use of the business. If you work at home full-time, but do not have a dedicated area that is not used for anything else, you cannot claim the deduction. Eligible taxpayers can deduct a proportionate percentage (based on home office square footage vs. total home square footage) of everything from property taxes to utilities.

The home office deduction is one of the more common audit triggers, so it’s generally recommended that you have a strong understanding of the rules before you try to claim it. IRS Publication 587 is a 30+ page guide to all the rules and calculations surrounding the home office deduction.

Deductions for Purchasing Equipment
If you’ve been around small businesses long enough, you’ll remember a day when all your long-term equipment purchases (a useful life longer than 12 months) had to be depreciated. Essentially, a portion of the equipment’s cost could be deducted every year against your business income.

Thanks to the Section 179 deduction, this is no longer true. The Section 179 deduction allows a business owner to deduct the entire cost of certain equipment, up to an overall limit, in the year that it is purchased. Proper use of the Section 179 deduction can effectively reduce a small business owner’s tax burden down to zero in any given year.

Eligible equipment includes things like manufacturing equipment, computer hardware, certain types of livestock, and storage equipment. Ineligible equipment generally includes land, intangible property, and inventory.

The maximum Section 179 deduction for 2007 is $125,000, subject to certain rules and limitations. For more information on the Section 179 deduction, check out IRS Publication 946.

It happens every year at this time. I start seeing emails from small business owners asking if there is any way to “shelter their business income from taxation.” Usually, this question comes from newer business owners who are accustomed to having Federal income tax withheld from their paychecks as employees, but failed to do it as an owner who pays themselves.

The bad news is that there is no silver bullet for avoiding taxation on significant amounts of your business income. The idea of a “tax shelter” is a neat one, but they don’t really exist in reality. If you want to lower the taxes on your business income, it ultimately requires you to divert the money into an IRS-approved deduction.

Keep in mind that a deduction might only save you 20-30 cents of each spent. It does not allow you to avoid paying tax on your income and then spending it on whatever you please.

Here’s the first part of my longer list of the favorite “tax-favored” expenditures for small business owners:

Any Type of Qualified Retirement Plan
If you can put off enjoying some of the profits of your business until later (as in age 59 ½), you can avoid taxation on whatever you are willing to contribute to a retirement plan for your company. In essence, anything you put into a tax-deferred retirement plan is deducted from the taxable net profits of your business.

There are limits on what you can contribute to the different plans, and provisions about how much you have to contribute for yourself if you have employees. But, many of the newer plans such as the Solo 401k’s and Simple IRA’s make it extremely easy and cheap to get one of these plans up and running.

FSA’s, HSA’s, and HRA’s (Oh My!)
Most of us have some predictable level of health care costs every year. If a small business owner is paying those out of their pocket, with after-tax earnings, they’re missing the boat. While you might be able to deduct these on your tax return, the amount may be limited by your adjusted gross income.

The IRS allows small businesses to use certain tax-favored accounts to remove money from an employee or owner’s paycheck, on a pre-tax basis, to pay for medical expenses during the year. When medical expenses are actually incurred, the employee or owner is reimbursed for their costs out of this pre-tax account, totally circumventing taxation on those amounts.

Flexible Spending Accounts (FSA’s) are formal plans that are usually set up in conjunction with medium size businesses through their payroll service. The funds in an FSA are subtracted on a pre-tax basis from each paycheck.

Health Reimbursement Accounts (HRA’s) are pre-tax plans that prepay an employee or owner their expected medical expenses each month, with no tax every being due on the money if it is actually used for health purposes. These funds are not considered part of an owner’s income, and are considered a benefit offered by the business to its employees.

Health Savings Accounts (HSA’s) are used in conjunction with high-deductible health medical insurance plans, and allow a self-employed person to make a deductible contribution to a private account. If the money does not get used for medical expenses, the HSA basically functions like an IRA and allows for withdrawals in retirement after age 59 ½.

Be sure to check back for more updates to this series. For more information on these topics, be sure to consult your accountant or tax professional.