Minutes

AAII Orange County Chapter

Monthly Meeting, November 5, 2011

Balearic Community Center

1975 Balearic Dr.

Costa Mesa, CA  92626

President Bob Welge brought the meeting to order shortly after 9 am.
Beginning with preliminary announcements, Bob drew members’ attention to the
availability of Chapter contact information and minutes for the September
meeting on the side table, and of coffee at the back table. Bob reviewed the
chapter's mission statement and acknowledged the efforts of the Chapter’s leaders:
Facilities Chair Craig Stoddard, and Treasurer Dave McMillin.
Bob also pleaded for a volunteer to fill the currently-vacant Hospitality Chair
position.

Bob next announced the
schedule of future chapter meetings. December will be a bye. On January 28, 2012,
Jonathan Lansner will present his views on the
economy and business. Commitments for presentations in 2012 so far include: on
March 3rd, Three Ways to Multipy Wealth by Louis Petrossi,
Managing Director, Wealth Research Institute; on Friday, May 18th, a
presentation by Mark Skousen; and on November 10th, Truth About MACD by Jackie Ann
Patterson, Stock Trader & Editor of Back
Testing Report. Further details on these
future events, minutes of previous meetings, and other Orange County Chapter
information can be viewed on Bob’s website http://www.robertsgeneral.com.

Bob then introduced today’s
speaker, Herb Farrington and his presentation Tax Tips for Investors and Retirees. Herb is and Enrolled Agent and
a Certified Financial Planner; he does business as Tax and Financial Services.
Herb characterized the tax code as "complex, sneaky, illogical and
unfair." In particular, 50% or 85% of Social Security is doubly taxed and
Medicare, supposedly paid for previously by payroll deductions, currently subjects
one to surcharges on the premiums and soon to additional taxes on investment
income ("Obamacare tax"). Other tricks to
watch out for include a phasing out of deductions for residential rental
losses, the AMT (alternative minimum tax), and, per current tax law, in 2013, a
phasing out of personal exemptions and itemized deductions. Bottom line: as
income goes up, taxes go WAY up! To attempt to mitigate this, one can try to
defer recognition of taxable income, or convert taxable income to tax-deferred
or tax-free income.

For assets producing taxable
income, stocks (with dividends taxed at 15%) and real estate are recommended.

For assets (IRA's, 401k's, and annuities) producing tax-deferred income, bonds,
money market accounts, CD's (certificates of deposit) and ETN's are
recommended. These types of investment are less tax-efficient in taxable
accounts, since income from them is taxed at 35%.

For assets producing tax-free
income (including Roth IRA's), any investment selected to maximize return is
recommended.

Summary of taxable income
rates:

·
Qualified
long-term capital gain is taxed at 0% if adjusted gross income (AGI) is <
$34,500 (singles) or $69,000 (married filing jointly) and 15% if AGI is over
these amounts

·
Nonqualified
dividends, interest, and short-term capital gains can be taxed at as high as
35%

·
Accumulated
depreciation of rental real estate is taxed at 25% upon sale of the property

·
Collectibles are
taxed at 28%

·
All these rates
will increase substantially in 2013 unless Congress changes the law.

·
California taxes
all income at the ordinary rate, which can be as high as 9.3%

Taxable income should be kept
under $69,000 if possible. But if one has appreciated stock, it should be sold
so long as total income remains under $69k, so as to increase its basis while taking
advantage of this year's low capital gains rates. If one wants to keep the
stock, it can be immediately repurchased because the wash-sale rules don't
apply to appreciated stock. A final caveat with respect to taxable accounts: if
one purchases a mutual fund late in the year, one may be liable for taxes on
capital gains distributions that were already included in the purchase price.

There are substantial
differences between Traditional and Roth IRA’s: Traditional IRA’s have an
annual required minimum distribution (RMD) starting at age 70½, are tax-deferred, and withdrawals are taxed at the
ordinary tax rate; whereas Roth IRA’s have no RMD’s, are tax-free, as are the
withdrawals. Of course, the advantages of Roth’s are obtained at the expense of
having to pay taxes on them at the time of conversion. One might choose to do
this in a year of low income, when business or real estate losses are to be
realized, when there are tax credits to be taken, or in combination with large
charitable deductions. One can also convert over a period of years so
conversion taxes don’t have to be paid all at once. Finally, one has until
October 15th of the following year to reverse the conversion if it
proves disadvantageous.

Mr. Farrington then discussed
how RMD’s are calculated, how to handle charitable contributions from IRA’s,
and how to fill out the Form 8606 required to separate the effects of after-tax
vs. pre-tax contributions to IRA’s. Notably, after-tax contributions are not
taxable upon conversion. It is recommended to used
non-IRA funds to pay the income tax on the conversion. Further benefits of
conversion to a Roth IRA may include: (1) avoidance of paying taxes at possibly
higher rates in the future, (2) reduced exposure to AMT (alternative minimum
tax), (3) avoidance of taxes after a spouse’s death,
(4) reduced estate size, and (5) possibility of completely tax-free compounding
over one’s own lifetime, and those of one’s spouse and children. One can
convert now even though one is presently making withdrawals.

Mr. Farrington described a
particularly creative strategy involving Roth IRA conversions. As an example,
one could convert $100000 from a traditional IRA into two $50000 Roth
IRA’s at the beginning of the year. Then one waits to see which performs worse
up until the recharacterization deadline (which could
be as late as the filing deadline following a request for extension). Finally
one recharacterizes the poorer-performing Roth.

Investors desiring copies of
Mr. Farrington’s slides can request them by email; they are also scheduled to
be posted on the chapter’s AAII website.

Following the conclusion of
Mr. Farrington’s presentation, President Bob Welge
adjourned the meeting at 11 am.

____________________

Recorded by Ed
Sharman