Monday, January 26, 2004

*A Game Review* CashFlow - Investing 101 Why review a game in a tax and business newsletter? Because this game is designed to help develop business and investment skills. The American educational system is designed to develop good employees, not entrepreneurs or investors. Many people view a college education as a type of trade school. They believe getting a college education should result in getting a good job. When we enter the workforce, the tendency is to fall into "the rat race", spending about what we make and never becoming financially independent. In Rich Dad, Poor Dad, Robert Kiyosaki explained how this became clear to him at a young age. His actual "Poor Dad" father was a highly-ranked school administrator, who constantly argued with his wife over money matters. A friend's "Rich Dad" father took Robert under his wing and showed him how he acquired wealth. How can you show how investment principles work in a way that makes them clear in a fun way? A game! That is how Robert Kiyosaki came to develop the CashFlow game. I received a CashFlow game from my wife, Janet, for Christmas and played a round with my adult children, Dawn and James, on New Years day. Although the instructions say to plan on spending about three hours to play the game, it took us six hours this first time. The game is played in two parts. In the first part, "the rat race", your objective is to "get out of the rat race" by building your passive income to be greater than your monthly expenses. You draw a career card that gives you your beginning salary and monthly expenses. Those with a higher salary also have higher monthly expenses. Movement is determined by rolling dice. You get opportunities to make investments that can eventually generate the cash flow required to get out of the rat race. You can also have the "misfortune" of buying expensive "toys" or having children, requiring monthly payments that make it harder to exit the rat race. Monthly expenses can be reduced by paying off debts. The consequences of chance and choices are highlighted in the game. Progress is tracked on personal balance sheets and income statements. In the second part, "the fast track", the objective is to win the game by being the first person to buy your "dream" or to accumulate $50,000 in monthly cash flow from businesses purchased on the Fast Track. (You have to finish the game somehow!) This is an expensive game, but I believe the investment can be justified if it helps provide the mindset required for helping your family and yourself truly get out of the rat race. According to Kiyosaki, playing the game monthly should help you do just that. To get one, visit www.richdadpoordad.com. 2:04:22 PM

HSAs enacted in Medicare Act Congress has passed and President Bush signed on December 8 the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (H.R. 1). A feature of the Act, effective January 1, 2004, is Health Savings Accounts (HSAs). HSAs are replacing a previous medical insurance program, Medical Savings Accounts. HSAs provide a way to get "above the line" deductions for medical expenses. They will be available for taxpayers who have qualifying high-deductible medical insurance coverage. The minimum allowable deductible is $2,000 for family coverage and $1,000 for self-only coverage. Copayments can't exceed $10,000 annually for married and family coverage and $5,000 for individual coverage. Individuals can deduct HSA contributions up to the deductible amount on the medical insurance policy, to a maximum of $5,150 for family coverage and $2,600 for self-only coverage. Individuals born before 1950 can contribute and deduct an additional $500 for 2004. Income earned by the HSA is not currently taxed to the HAS owner. Withdrawals to pay medical bills of individuals covered by the plan are not taxable. (Unused amounts are carried over.) Other payments are taxable and subject to a 10% penalty. Payments made on or after reaching age 65 or due to death or disability are taxable but not subject to the penalty, so there is a retirement planning feature. HSAs may not be paid out over an extended period after death, like some other retirement accounts. Employers can make tax-deductible payments to HSAs for employees, and the payments are not currently taxable for the employees. Employers who offer HSAs must do so for all of their eligible workers. The IRS has also issued guidance for HSAs in a question and answer format. (Notice 2004-2.) This is not a complete explanation of HSAs. You will be hearing publicity about them, and should discuss their advantages and disadvantages with tax and medical benefits advisors. The ideal candidate for a HAS is young and healthy. 2:02:02 PM

IRS attacks certain Roth abuses. The IRS announced that it believes certain tax-avoidance transactions using Roth accounts are abusive and they intend to disallow them. The IRS gave the example of a corporation owned by a Roth account buying accounts receivable at a discount from another corporation owned by the Roth participant to shift income to the Roth-owned corporation. The IRS proposes to use its authority under Internal Revenue Code Section 482 to disallow the discount, treat it as a dividend to the Roth participant and a contribution to the Roth, subject to an excess contribution penalty. The IRS could also find the arrangement to be a prohibited transaction, which would disqualify the Roth. This type of an arrangement is now a "listed" trnsaction, subject to an "audit me" special disclosure on the participant's income tax return. With the tax-exempt characteristic of Roth accounts, the IRS will be watching carefully what tax avoidance schemes taxpayers and their advisors create for them. If you have an unusual approach for shifting income to a Roth account, be sure you have good advice and are not too greedy. (Notice 2004-8.)   2:00:30 PM

Resist the lure of rapid refund tax offers We’re in an era when mortgage rates are in the 4 to 5 percent range, and car loans are 4.75 to 6 percent. So, why would anyone pay 200 to 700 percent on a loan? Usually, it’s because people are money hungry. Over the next three months, people will give up huge amounts of money in “fees” because they want their tax return back as quickly as possible. Typically, these companies claim you’ll get your return back in three days, which sounds very appealing. But they charge you an exorbitant interest rate to do so. You’d be much better off to file the normal way and wait 10 or 12 days and get the full amount back. Besides, you shouldn’t be getting a very big tax refund anyway. If you’re expecting one, it means you’re giving an interest-free loan to the government. You need to reduce your withholding through your employer so you’re getting a very small refund or breaking even on your taxes. The people who will spend money on these loans have a hard time saving money. Why not use a payroll savings plan and invest automatically in a savings bond or CD. You are not allowed to touch the money for at least a year, and you don’t have to borrow money to get your own money back. 10:54:44 AM