5 Ideas to Fight off the Bear Market

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RISMEDIA, Oct. 29, 2008-”In wild and excessive swings of the stock market, investors have two choices: run and hide (go to cash or CDs), or take advantage of the situation. The run-and-hide approach can permanatize your losses, and, further, requires you to time your re-entry,” says Leon LaBrecque, the managing partner and founder of LJPR, LLC, a firm managing over $300 million in assets. LaBrecque is also a faculty member of the CMPS Institute, an organization that certifies mortgage bankers and brokers.

“There are a few who think this is the end; under the doomsday scenario, you are betting on the end of the world, but since you can’t collect from anyone if you win, you win nothing. Thus, this nasty and ugly mess is likely to be temporary (temporary is an ethereal term, and could mean three quarters to three years). Notwithstanding the time frame to some semblance or recovery in prices, this market presents opportunities. Stocks are on sale,” continued LaBrecque.

If you landed on earth today with cash, you’d find that houses are cheap; stocks are almost half off (more in many cases), interest rates are low, and gas prices have been reduced by half, all in a year’s time. There is a big sale going on. “Think of it this way,” says LaBrecque. “If the Dow goes back to where it was in October (back when real estate was higher, interest rates were higher, and gas was higher), you’d make 80-100%.”

Here are five ideas LaBrecque suggests you use to take advantage of the sale:

Tax-free returns, part one: Roth IRA contributions. LaBrecque and his firm like Roth IRAs; he advised they’re a virtually perfect vehicle for accumulation. “You put after-tax money into a Roth, and your withdrawals, including any appreciation and income, are tax-free,” he says.

Of course there are a few catches so be sure to discuss your individual situation with your financial advisor.

“Overall, Roth IRAs are good wealth accumulation tools; they’re even more attractive in a market sale.”

Roth conversions. What could be better than investing five or ten grand at a market low that will appreciate tax free? How about sticking a lot more in. Here’s where you look at a Roth conversion. “A Roth conversion is where you take an existing IRA, whether nondeductible, traditional, or rollover, and convert it into a Roth.

Of course there are catches with this strategy also so talk to an expert before making your final choice,” said LaBrecque.

Taking care of the kiddos, tax-free. “§529 plans (Like the MESP) and Coverdell ESAs are tax-free education savings vehicles,” continued LaBrecque. “Making a deposit to a §529 in a down market gives more potential appreciation on a tax-free basis. Unlike previous education savings instruments (UGMA/UTMA) these plans are completely tax free and are not considered the child’s asset for financial aid purposes.”

Of course the catch: Coverdell ESAs may be used for K-12 or college; §529 plans may only be used for college or higher education. There are also some other income/contribution restrictions.

Wealth Transfers on sale. “The decline in real estate and stock values provides an opportunity to make a gift to heirs,” said LaBrecque. By gifting appreciated property (business, ranch, real estate) that has suffered a market decline, you can potentially save all of the estate taxes on any future appreciation of the property. “A gift can be made to an LLC or to an irrevocable Trust instead of directly to an individual. Trusts and LLCs can restrict the use and transferability of assets to outsiders.”

The catch: This one, with the very big bucks, is also quite complex. There are income tax consequences to consider as well (there are weird rules about the basis of property transferred by gift: usually we want something appreciated and not at a loss.) In addition the valuation procedures are critical. “Overall, this is a complex transaction with substantial benefits.”

Wash the losses right out of your head. “In a down market, it makes some sense to harvest losses, ‘harvest’ being the euphemism for simply ‘take the losses’) in your taxable (non IRA or 401(k)) accounts,” he continued. However, losses are strange: you can only net losses against gains and then take a portion (currently $3,000 a year) against ordinary income. On the other hand, since you can carry-over losses indefinitely, it makes sense to realize losses. Especially if you own mutual funds that may pay a capital gain distribution at the end of the year.

You must be mindful of the IRS wash sale rules though, so consult with your advisor.

There you have it: five ideas to fight off the Bear and take advantage of a sale in the market. LaBrecque’s blog has a larger, more detailed explanation of these five ideas: http://ljpr.blogspot.com/2008/10/jump-into-market-not-off-ledge.html.

Leon LaBrecque is the managing partner and founder of LJPR, LLC, a firm managing over $300 million in assets. A true visionary who brings the experience of many different fields to the table, he has provided integrated, comprehensive financial advisory services to thousands of people for over two decades.

For more information, visit www.CMPSInstitute.com.

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