Locking in stock market gains

I made substantial gains in the stock market last year, but am getting nervous about how long these gains may last. While I am not ready to sell, I would like some strategy...

Charles Blair, DDS and John McGill, MBA, CPA, JD

I made substantial gains in the stock market last year, but am getting nervous about how long these gains may last. While I am not ready to sell, I would like some strategy to be able to lock in most of these gains while there are still gains and qualify for the 15 percent maximum tax rate on capital gains. What do you suggest?

If you feel the market has "topped out," obviously, you can sell. However, if you wish to lock in the profits and still have the opportunity to participate in future stock market gains, other strategies would be in order, says Bob Sytz, CPA, CFP, president of Select Consulting, Inc., a firm specializing in investment advisory services for high net-worth dentists nationwide β€”(866) 727-6100. For example, you could use stoplosses to set price limits below current market levels. This would help assure the stock would be sold in the event the market drops. Other more sophisticated strategies involve the use of "put" and "call" options, Sytz says. For more information, send a stamped (60 cents), self-addressed envelope to Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 and request "How to Prevent Stock Market Gains From Turning Into Losses."

I have $75,000 in cash, currently invested in a money- market fund yielding just 1 percent. I have considered taking this money and paying off the balance on my home mortgage of roughly the same amount, on which I am currently paying 7 percent interest. I discussed this with a friend of mine, and he said that I should not pay off my home mortgage, since I would lose my tax deductions for the interest expense. Moreover, I would be unable to deduct any future interest paid on a home equity line of credit. Is this correct?

No. As a general rule, interest on up to $100,000 of a home equity line of credit debt, secured by your principal residence, is always deductible. Furthermore, interest on any mortgage proceeds used for home improvements also is deductible. You should be able to pay off your home mortgage without worrying about the loss of future interest tax deductions.

We are ready to begin saving for our young child's college education. We were recently contacted by a broker recommending the purchase of a Section 529 college-savings plan investment with a high (4.5 percent) commission. He claimed that there were great tax advantages. While the contributions were nondeductible, the earnings would grow tax-deferred and could be paid out tax-free for my daughter's college educational expenses. Do you recommend this?

No. Your broker is correct in pointing out that Section 529 college-savings plans have tax advantages. Under these plans, individuals can make large, nondeductible contributions β€” in some cases up to $250,000 or more β€” that do grow tax-deferred. Moreover, the money can be withdrawn tax-free, as long as it is used for qualifying educational expenses.

However, recent tax-law changes have drastically reduced the tax savings available through these plans. Through saving on a personal basis or through custodial accounts, doctors can take advantage of the 15 percent maximum tax rate on capital gain and dividend income. And, by using the educational tax credits (HOPE and Lifetime Learning), many college-age students will owe little, if any, federal income taxes during the years when college-fund earnings are at their maximum.

You should also know that taxes and penalties are due if the funds within the 529 college- savings plans are not used for college or are transferred to certain other family members for their educational use. Another downside is that each 529 savings plan is limited to a narrow range of investment options.

As a result of the limited benefits and the significant investment costs, we believe that other college-savings options will provide greater advantages for doctors. For more information, send a stamped (60 cents), self-addressed envelope to Blair/McGill and Company and request, "Section 529 College Savings Plans: Where's the Beef?"

Dr. Blair is a nationally known practice-profitability consultant and is a member of the American Academy of Dental Practice Administration. Mr. McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, call (704) 424-9780 or visit the Web site at www.bmh group.com.

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