With this strategy you first open a traditional IRA, make a non-deductible contribution ($5,000 in 2011 and 2012 or $6,000 with catch-up if 5o or over), and then convert it to a Roth IRA.   If you have previously converted your tax deductible IRAs to Roth IRAs, this is a no-brainer as there will be no taxable income due on the conversion.  However, if you have other holdings in a traditional IRA, this technique needs to be carefully considered as some of the money converted may be subject to current tax by virtue of the “pro-rata rule.”   When you convert IRA accounts to a Roth, you must factor in all your IRA assets (not just the new non-deductible contribution) to determine taxability.  For example, if you have $90,000 in a traditional IRA from a 401(k) rollover, and you make two nondeductible $5,000 contributions (2011 and 2012) to a new IRA, the conversion would be 90% taxable.

If you have questions about this technique or how it might affect you personally, please discuss this with your CPA or contact us for further assistance.

For example, gains from the sale of stocks or real estate or even a private business can be offset by losses from other investment assets. In addition, losses which exceed current year capital gains can be used to offset $3,000 of taxable income in 2011, with any balance carried forward indefinitely and used to reduce income taxes in the future.

If you are not one of our financial advisory clients, you will need to make sure to handle this on your own or ask your broker or financial advisor to do this for you. It’s certainly worth taking a look to see if this move could save you money.

If you would like our help in reviewing your personal situation, we would be happy to assist.　 Just email or call to arrange a time.

Aldous Huxley wrote that, “…human beings have an almost infinite capacity for taking things for granted.” This is understandable, and it is easy to be consumed with the “busy-ness” of life.

But at this time of year, we should all stop and recognize that we have been blessed in many ways, and we need to remember to “stop and smell the roses.” Many years ago, a good friend passed along the following quote from Charles Schultz, the creator of the Peanuts cartoon, “The people who make a difference in your life are not the ones with the most money or the most awards. They are simply the ones who care the most.”

As you reflect during this holiday season, take some time to give thanks for the folks who care the most about you and your family, whether they be children, parents, grandchildren, grandparents, teachers, mentors or simply good friends. These are all people who are deeply worthwhile and make you feel appreciated and special. Give thanks for these and our many blessings; it is almost certain to boost your spirits.

Thank you so very much. We wish you a truly joyous and blessed holiday season this year.

As an alternative, Lazear suggests his own “popcorn” theory.  In short, he suggests that the players in the current Euro situation are more like kernels in a hot pan.  They are all subject to the same financial issues, but like kernels in a hot pan, each kernel may pop independently of the others.  The underlying cause of the problem is not the failure of one country leading to the failure of another, but rather structural issues.  Economies are no longer capable of paying for the government programs that they have created.  If they persist in the status quo, the structural “hot pan” will cause them to fail.  It will not be caused by another country’s failure, but by inattention to the root causes of the problem.  The fact that one kernel pops does not trigger the others to follow.

Rather than worrying about propping up any individual domino to keep it from affecting the others, leaders must change the policies that created the problem in the first place.

http://online.wsj.com/article/SB10001424052970203554104577003924075089102.html

Lazear is an economist who teaches at the Stanford Graduate School of Business.  He formerly served as Chairman of the President’s Council of Economic Advisers and as chief economic advisor to President Bush from 2006 to 2009.

After the pitched battle to raise the debt limit ceiling and the follow on downgrading of U.S. Government debt by Standard and Poors, it is no wonder that August brought such volatile markets. Our chattering political class and their media handmaidens were quick to assign the blame for the arguments and the downgrade. Indeed, there is plenty of blame to go around and it belongs to Washington D.C., and to us fellow citizens for allowing the deficit spending culture of Washington to continue for so long. The battle to control federal spending pits the congressional impulse to continue to spend more of the public’s money against a difficult economic scenario, reluctant taxpayers, and confused citizens trying to make sense of it all.

For too long, our elected officials have made it a policy to give their constituents pretty much anything they wanted. Then and after the spending was committed, the bill would come and they would either (rarely) raise taxes or (more often) borrow to the make payment. This has resulted over time in massive deficit spending. However, our current fiscal and economic conditions conspire to reverse this spending impulse, calling to mind the old maxim, “You can have anything you want, but you can’t have everything you want.” It has become obvious to all involved that we cannot continue on the present path, and difficult choices must be made.

The nascent course reversal was not pretty to watch. While we are thankful that an agreement to raise the debt ceiling was reached, we are not handing out awards for getting along well with others. This was one of the most rancorous and politically charged legislative efforts in memory and we would prefer not to see it repeated. In fact, we think that the very nature of the debate contributed greatly to the early August market swoon by crushing investor confidence and providing Standard and Poors with their final argument to proceed with their downgrade of U.S. debt.

In spite of this rancor, we think that the result of the debate has created a much needed change in trajectory. Much has been made about how little the budget ceiling legislation has changed the future of our deficits. While this may be true in the short-term, it may miss the bigger point, which is that it has changed the future of our debates. There was actually a serious agreement and a new approach to reducing spending. At least we now know that this can be done. It will be up to future legislators and presidents to determine the level of follow-through, but for now, folks are focusing on the issue and we can at least acknowledge that this is progress.

Our Slow Path to Recovery

We are constantly reminded that the current economic recovery has been sluggish thus far, and very different from what economists ordinarily expect. GDP growth has been unusually slow, unemployment remains high, and government debt has swelled. This has been a disappointing outcome, especially given the multiple stimulus programs that were intended to help the recovery. It has caused concern and frustration among policy makers, employers, and investors alike.

However, we believe that most have mischaracterized our current recovery by comparing it to recoveries that follow ordinary recessions. Typically, an economic cycle consists of normal contractions and expansions, where a contraction (recession) is followed by a recovery that rapidly reclaims progress lost during the contraction. This type of normal recovery has been the experience and expectation for every recovery in the post-WWII era, but clearly, this has not happened this time.

The difference is that the recent recession was not caused by an ordinary set of circumstances; but by a financial crisis on a global scale. Gross over-indebtedness by consumers and financial institutions around the world, most notably in U.S. subprime mortgages, was the proximate cause of this crisis. The inability of consumers to keep up with these high-risk loans as we entered into a recession led to a crisis in the financial sector. This ultimately led to the financial crisis and market panic that reached its crescendo in the fall of 2008. Multiple government bailouts proved necessary to arrest the panic and the excessive debt eventually became the responsibility of the government, effectively migrating the debt from the private sector to the public sector.

In the recent economic text This Time is Different – Eight Centuries of Financial Folly, economists Carmen Reinhart and Kenneth Rogoff lay out with stunning accuracy the type of recovery that we are now experiencing. They make the point that this sort of recovery scenario: slow growth, high unemployment and swollen government debt – has typically followed past financial crises.

We believe that we are now in the midst of the final stage of the financial crisis, where consumers and financial institutions have been “bailed out,” and governments are struggling under the weight of a greatly increased debt load. Naturally, the weakest nations, such as Greece, are showing the clearest signs of strain. But by and large, almost every country around the globe is feeling the lingering effects of the financial crisis.

The final remedy to resolve a financial crisis, once and for all, is to get rid of the excessive debt. This typically happens in one or more of three ways: default, fiscal austerity, or debasement (inflation). Default can come in many forms, but most commonly as a restructuring in which lenders are repaid only partially. Austerity involves cutting spending and benefits coupled with higher taxes on the populace, making way for accelerated debt repayment. Debasement, or more commonly inflation, allows borrowers to repay existing debts with currency that is less valuable than the amounts that were initially borrowed, making the debt less expensive. The final resolution for the U.S. is likely to be some combination of austerity and inflation. The resolution for some countries in the embattled euro-zone may come through a combination of all three measures.

The good news is that there is a path to recovery, and once there, the global economy will be much leaner and healthier. The bad news is that the path is long and involves a steep uphill climb to get out of the deep hole in which we currently reside.

Having said that, on the investment side, things may not actually be as bad as they seem. Stock valuations are attractive and there are a number of economic indicators that imply that the recovery should continue. Our banking system is much stronger now and we are beginning to see an increase in lending. There are also record amounts of cash on company balance sheets which should eventually lead to hiring and investment once some of the lingering uncertainties are resolved. This may happen more slowly than we would like, but it appears to be underway.

Investing in Uncertain Times

We are reminded of an old saying, “now is always the most difficult time to invest.” Although this is always true, it is particularly difficult to be comfortable investing when we have been through a period of drastic market declines like 2007-09. While markets have had a tremendous recovery over the past couple of years, it is hard to shake the memory of the declines we experienced.

How investors feel about their portfolios is greatly influenced by what behavioral scientists call the “recency effect.” That is, whether market activity is good or bad, and especially when it has been particularly good or bad, we expect the recent trend to continue. Our human nature sets our expectations for things to remain the same. As one commentator recently (and wryly) observed, “past performance is a great indicator of future expectations.” This really speaks to the short-term focus that we live our lives by. Rather than accepting and planning for uncertainty, which is really what we should expect, we use the “rearview mirror approach” and plan for things to be as they have most recently been.

Many investors have a tendency to become unnerved by uncertainty and are involuntarily drawn to extrapolate the most negative (and usually improbable) possibilities. This emotional response can often lead to poor decisions in the short-term that can have very real and negative consequences in the long-term. The best ways an investor can fight this urge is to maintain a broad perspective, focus on long-term goals, and remain committed to a long-term strategy as a means of reaching those goals. Following these simple (but not necessarily easy) principles will help you to avoid the emotional trappings that high levels of uncertainty can create.

Looking at the pros and cons and the array of uncertainties, we remain inclined to pursue a long-term approach to investing and planning. The cornerstone to a well developed financial plan is a disciplined and well diversified strategy that is built with the expectation that in the long-term, markets will return to equilibrium, no matter how volatile and disruptive they appear to be in the short-term.