August 2011 Issue 30
Greetings!   July was a big month for me personally as my son Tyler left for Navy Boot Camp.  He took his first plane ride of his life on July 12 and arrived in Great Lakes, Illinois around 10 pm.  We know he arrived safely since he was allowed a 15 second call to his Mom.  Since that phone call we haven't heard a peep, so I guess the Navy will keep him for a while longer at least.  Joking aside, I know Tyler will do well in the Navy, and I think he will do great in Boot Camp, but I sure would love to get a phone call from him soon.   

 

On to the markets and how we did in July which I will call the Month of the Debt Ceiling Debate.     
  
Open                    Close                Diff
DJIA                  12,412.07         12,143.24           -268.83
NASDAQ            2,775.08            2,756.38             -18.70
S&P 500             1,320.64            1,292.28             -28.36

(Yahoo Finance. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.) 

 
Debate in Washington is intense, public and nasty.  And even though we often think it is dysfunctional, this is how it must be.  Our two party system and three branches of government are not supposed to be too chummy; they're not supposed to get along and compromise on everything that comes down the road.  As conservative commentator George Will said in his July 27 editorial, Congress Stands its Ground, ". . . the branches of government are supposed to be jealous rivals."  

Imagine otherwise, it would be like watching the Harlem Globetrotters beat up on the Generals night after night and thinking that's basketball.  Conflict and dissension are required for good governance.  Sometimes though it is not pretty to watch.   

Our country has faced problems greater than whether we are a Triple AAA rated or Double AA rated debtor.  And we will survive this fiscal battle.  For a country our size, we are still the largest economy in the world, and we will continue to be the largest economy for many years to come.  We didn't get to be the most productive country in the world by wringing our hands over things like this.  We got to where we are because of the very structure of the government we have; a kind of government that adjusts and revises only in a slow and tortuous process.  A process that allows risk-takers and entrepreneurs to create value and innovation without worrying about whether some Congress or President is going to suddenly change the rules mid-stream. 

I think in a few years we will look back on this summer (like we do now with March 2009) and think, why didn't I buy more?  I don't think this is a time to sell or stand on the sidelines.  Conversely, depending on your investment horizon, I believe it is time to pick up some investments at fairly inexpensive prices.       
    

Marty  

The Office Flowers

 

I have received so many compliments about the front office area that I feel comfortable putting its photo at the bottom of the newsletter.  Usually that photo opportunity is reserved for me or my dog Duncan--but just this once I thought we would show-off the office.  See the photo below.    

 

By the way, I wrote "show-off" but that is probably the wrong term since to show-off means that I might have had something to do with the awesome flowers that are growing out there; in reality I didn't.  The credit goes to Sallee Hearne of Winged Horse Land Management in Crumpton (410-928-5641).  She designed the layout and planted the flowers.  Jenna waters them (when she remembers) and all I did was write the check to Sallee. 

 

The last few years I have tried (with very little success) to keep flowers growing--finally, after so many failures growing flowers and so many successes growing weeds I have given up.  I will let the professionals do it for now on.       

 

Marty   

Investing 101
 IRA to ROTH IRA Conversion    

The last two months we wrote about IRA's and Roth IRA's and the differences between the two.  What if we have an IRA and we wanted a Roth IRA instead?  Well, we can do a Roth IRA Conversion.  Pretty simple right?  Not so fast.  It is simple as far as paperwork and it is easier now than ever since in 2010 Congress opened the process up to people who make more than $100,000 in Adjusted Gross Income.  However, like everything involving taxes, income, IRA's and the IRS there are some pretty significant issues to consider. 

First of all, we must realize that any money converted from a regular IRA to a Roth IRA is taxed as income at today's income tax rates.  The money converted will be added to whatever other income you have in the year and it is taxed.  You originally saved it tax deferred so you can't move it out without paying the tax.  And by the way, the taxing entities--State, Local and Federal--could really use the tax revenue right now. 

Since we are going to pay the tax now, at 2011 levels (or if you do it next year at 2012 rates) we avoid paying taxes at possibly higher rates in years to come.  Plus, once in a Roth we don't ever have to take the money out like we do a regular IRA.  And even beneficiaries don't pay income taxes on Roth IRA's if they are inherited.  
 
Given the option up-front, I usually prefer opening up a Roth IRA instead of a regular IRA due to the tax-free earnings possible in a Roth.  This is especially true for younger investors who are saving for a period 30 or 40 years in the future when who knows what the tax rates or system will be.  But once we have an IRA established and funded I have found that it only rarely makes sense to convert it to a Roth.  There are times though that we can time the conversion just right to make it work.

The key then for determining if a Roth Conversion makes sense depends on the specifics of the investor and the goals for the money.  It is a highly individual decision.  For example, say for some reason a client's income dropped significantly during the calendar year--it might make sense to move some of the IRA money over to the Roth IRA and pay the income tax at the new lower tax bracket.  The conversion doesn't have to be all or nothing, it can be incremental, perhaps splitting the income between multiple years to soften the tax burden. 

Finally, the tax that is due should come from new money and not from the account.  So to convert a $50,000 IRA might cost an additional $10,000 in income tax due--that $10,000 could come from the IRA itself--but that defeats a lot of the benefits of doing the conversion in the first place.  If you're interested in the conversion possibilities give me a call and we'll go over some of the factors that I think would go into the decision.  Thanks, Marty
   

 
(Material in this newsletter is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness.  All illustrations shown are hypothetical in nature and do not represent any real investments or tax situations. Actual results may vary.  The S&P 500 index is an unmanaged group of securities considered to be representative of the stock market in general.  You cannot invest directly into an index.)

 

Office Front
Chesapeake Investment Advisors Inc.
 Martin Knight, MBA CFP®
410-810-0735
800-994-0221
Fax: 410-810-3422
 
Securities and Advisory Services offered through Geneos Wealth Management, Inc.  Member FINRA/SIPC