This year I will
GET HEALTHIER 
returns on my investments by
• Considering tax-exempt investments.
• Using little-producing assets to fund 
life-income charitable gifts.

Steps to Success — The best measure of an investment’s success is how well it meets your objectives. Your objectives are likely to change over the course of your life, and your investment strategies should too. Younger people generally should have a larger percentage of their assets invested for growth as opposed to income. This has the added benefit of reducing current taxable income during peak earning years.

As we age, most of us will not want as much of our assets exposed to market risks inherent in equities. Although an overly conservative investment plan can fall victim to inflation, most older people will want to shift more into income-producing investments. Unfortunately, liquidating holdings to reinvest for income can trigger the same capital-gain tax challenges noted above. And, your choice of alternatives should be made with an eye toward the bottom line.

Consider tax-exempt investments. Depending on your circumstances, you may realize a higher after-tax return from tax-exempt investments than from taxable ones. For instance, assume you can get a 5.25 percent tax-free return. The following chart shows the fully taxable return you would have to get in each tax bracket to net as much spendable income.

                                                              Equivalent
                        Tax       Tax-exempt      taxable
                     bracket         return           return
                        15%           5.25%            6.18%
                        28%           5.25%            7.29%
                        31%           5.25%            7.61%
                        36%           5.25%            8.20%
                       39.6%         5.25%            8.69%

Use assets that produce little or no income to fund life-income charitable gifts. It is possible to convert non-income producing assets into an important source of lifetime payments—all while generating major income-tax deductions and without paying capital-gain tax. Here’s how:

Example: Phil and Linda S, both aged 68, have retired recently. Several years ago they bought some undeveloped land in the path of their city’s growth near the edge of town for $40,000. With development going on around it, the land has increased in value to $200,000. That investment does not generate any income, though—something Phil and Linda feel they need now that they are retired. They would also like to find a way to fund a special project at Conception Abbey.

Phil and Linda decide to use $200,000 worth of land to create a special kind of trust that will pay them 6 percent of its value each year for as long as either of them lives after the land is sold. The first year they receive $12,000, all of which is a net increase in their cash flow since the land generated no income.

Even though they paid only $40,000 for the land several years ago, Phil and Linda do not owe any tax on their gain when they transfer it to the trust. Better yet, they get an income-tax charitable deduction of $67,036 because the remaining trust assets will pass to Conception Abbey when they are gone. In their 39.6 percent federal income-tax bracket, this saves them $26,546.

This year I will find a way to
MANAGE RISK
— the risk of holding
potentially volatile investments by
• Selling investments with uncertain potential.
• Using appreciated securities to fund charitable gifts.

Steps to Success — Monitor your investment portfolio regularly to be sure it is performing at levels you want. Also determine the risks of holding your investments. Some steps to reduce risk in your portfolio:

Sell investments with uncertain or downside potential. Many people are concerned about the safety of their investments because of the up-and-down nature of the stock market and the fact the Dow Jones Industrial Average, the Nasdaq, and the Standard and Poor’s 500 have often simultaneously moved in different directions this year. You may feel it is time to sell some of your holdings to protect gain you have built up over the last several years.

Certainly it is better to dispose of a stock than incur significant loss in value. There is, of course, a problem: If your investment has appreciated, a sale will result in a gain and will generate capital-gain tax—which can be sizable if the appreciation is substantial.

One solution is using appreciated securities to fund your charitable gifts. You can take a deduction for the full fair-market value of long-term appreciated stock you give to Conception Abbey. Plus, you don’t have to pay any tax on your paper gain.

Example: Donna B has watched her XYZ, Inc. stock bounce around for much of 2000. Even though she has seen it grow from her original investment of $10,000 to its current $100,000 value, she is concerned that it may have peaked. But she knows a sale will produce a gain of $90,000 and a capital-gain tax of $18,000 (20 percent x $90,000).

Let’s say Donna also wants to make a significant gift of $100,000 to Conception Abbey. Instead of cash, she uses the XYZ stock to make her gift. She is still entitled to a deduction of $100,000, which saves her $39,600 in her 39.6 percent tax bracket. But, she does not have to pay any tax on the $90,000 paper gain, avoiding $18,000 in capital-gain tax. Total tax avoided: $57,600.

Even if you are enthusiastic about a stock’s prospects, making a gift with appreciated securities may still be advisable. Use the cash you had planned to contribute to replace the stock in your portfolio to establish a higher basis against which future gain will be measured.

This year I will
PLAN FOR THE FUTURE
by making
good retirement-funding decisions by
• Contributing to an IRA
• Participating in my employer’s plan.
• Creating a Keogh, SEP,
or other personal retirement plan.
• Using charitable giving to generate more income.

Steps to Success — Virtually everyone with earned income is able to participate in some sort of tax-deferred retirement plan. In most cases it is extremely advantageous to utilize these opportunities to their fullest extent. If you are eligible, you will probably want to contribute to qualified retirement plans. In addition, carefully planned charitable strategies can enhance your retirement security.

Establish a traditional IRA. Most persons who are not eligible to participate in an employer-sponsored qualified retirement plan can establish an IRA. Contributions are limited to the lesser of either $2,000 or actual earned income and are fully deductible if you itemize. Even if you do participate in an employer’s plan, you may still be able to make IRA contributions that are wholly or partially deductible if your income is within the following ranges:

                                           Fully
                                       deductible    Phased-out
                                          under               at
                       Single       $32,000          $42,000
                     Married      $52,000          $62,000

Note: Spouses who are not employed outside the home and spouses who do not participate in employer plans may make deductible IRA contributions without income limits. If one spouse is covered by an employer’s plan and the other is not, the noncovered spouse can make a deductible IRA contribution if the couple’s AGI is under $150,000. The deduction is totally phased out at $160,000.

If you can’t participate in a traditional IRA, consider the relatively new Roth IRA. While contributions are not deductible, distributions are tax-free if it meets certain conditions the most important of which is that the recipient is over 591/2.

Participate in your employer’s plan. If your employer has a qualified retirement plan, make full use of it. Depending on the type of plan, the employer may even match some of your contributions. Your contributions (up to limits based on the type of plan) will reduce your taxable income.

What are
YOUR RESOLUTIONS?