Whatever amount of money that you want to keep intact for a specific purpose, safety of principle will be increasingly vital during the economic downturn. You may want to save your home mortgage, protect your children’s education, or establish a special emergency fund in the event of illness.

The investments you make for this purpose has a low yield. This means the percentage of profit on the principle will grow in value relatively slowly. In reality, it is next to impossible to lose the principle with government securities, CDs and strong corporate bonds in insured institutions.

But, while those securities with a fixed interest return with a constant number of dollars, the purchasing power of those investments, when liquidated, decreases in times of inflation. The results are, as prices go up, dollars buy less, and less! In many instances, this creates increased interest rates which may counteract inflation. Whether you are lending your money to others, or you actually own all or part in an investment, make sure you put safety of principle and income return at the top of your list. In fact, make it top priority.

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Individual Retirement Accounts (IRAs) began to see a big change in 1987 with new tax laws. You or your spouse may be entitled to deduct from your taxable income, all, some, or none of the contributions to your IRA, depending on the type you select, your adjusted gross income and whether you or your spouse is eligible for an employer sponsored retirement plan.

The thing is, even if you don’t get any deduction from your income for your IRA deposits, it may still pay to keep making contributions (if you can afford it) to your IRA account. The taxes on any IRA interest or dividends receive special tax
protection.

For example, let’s say you have a high yield IRA that earns 10 percent annual interest. You and your spouse will receive 100 percent tax deferred income on the $4,000 contribution, or $400 per year without compounding.

If you leave the $400 in the account, then next year you can earn 10 percent on your new principle of $4,400 – not figuring compound interest. This interest buildup increases the size of your IRA until you are ready to withdraw funds from it. Taxes may be due immediately, but if you are retired, you will most likely be able to pay a lower tax rate.

The real eye opener, is that you may have more money available from your IRA than you think. Let’s say you and your spouse are currently working, and each of you opt for electronic deposit of your salary and you elect to have your bank electronically transfer $166.66 per month to your IRA account. You both soon realize that you each have accumulated

$1,999.92 toward your IRA by the end of the year. The theory is that if you never SEE the money, you never spend it!

However, you may find yourself near the year’s end without having set aside the needed sum ($4,000 for both of you). If this occurs, you might choose to borrow the money. This kind of strategy can actually work out well for you.

Another example, let’s say you take out a home equity loan. Your bank charges 10 percent interest, and you pay off the loan plus interest ($4,400) in one year, with monthly installments of approximately $367. You choose the standard IRA rather than the Roth IRA for this strategy. The $4,000 deduction for a standard IRA will reduce your taxes by $1,120 if you are in the 28 percent marginal tax bracket, and the interest on the home equity loan may be deductible under certain conditions.

Let’s also assume you earn 12 percent interest on the IRA. In the first year, you pay back the $4,400 on the loan. The $4,000 in your IRA earns $480 over the year for a difference of $80 a year in your favor. If you can manage to follow this strategy for five years, here’s what your numbers will look like:

You will have spent $2,000 (5 x $400) in interest on the loans. Your IRA will have earned you $2,400 (5 x $480) in interest, plus you will have accumulated $20,000 (5 x $4,000) toward your retirement.

During this time, you received a $1,120 tax reduction (from your $4,000 IRA deduction) every year for a total of $5,600 and possibly a deduction for the $400 interest on the loan. This mainly depends that your total mortgage (if any) interest does not exceed  the interest on the purchase price of the home, or any improvements you’ve made. For a 28 percent tax bracket, this amounts to $112 a year, or $560 for five years.

Now you’ve earned $2,400 in your IRA and received a possible $6,160 worth of tax breaks. If you compare the $2,000 interest you paid on the equity loans, you can see that IRAs are not just a tax strategy, but it’s a well thought out investment.

The current state of the economy probably won’t give you a base for an IRA investment strategy for tax reform, but taxes will always be one of the many factors to consider when planning for future investments. Due to different investment options with varying risks and returns, give this some thought as how close you are to retirement, and the amount of risk you’re willing to take.

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I am proud to say I was a tobacco farmer for 18 years during my young adult life. This lifestyle isn’t for everyone. Working until sun-up to sun-down, and sometimes at night wasn’t an option. It is the hardest work you’ll ever do. Period. Preparing the plant beds, fields, and fixing flue cured barns was a common practice. From planting to pulling to selling, growing tobacco was a family tradition. Not only was it a part of my heritage – it was in my blood.

Like any other farming community we had family to feed, bills to pay, and an everlasting commitment to give our children the best education while they helped on the family farm. Unfortunately, tobacco farming as a business today is slowly fading away from our area. The dismantling of America’s industrial base and giving away our jobs to foreign companies is enough to make anyone feel helpless.

The end of tobacco farming is very noticeable in our community. Old historic farm houses that once occupied early settlers with mules and plows sit empty. Some are completely destroyed by weather or other man made causes. Old tobacco barns are falling down and look dark and lonely like weather-beaten shacks. Empty pack houses litter the landscape with rusty tin roofs swaying in the wind.

In August 2008, a disaster drought was declared by Governor Kaine for Pittsylvania County, Virginia. All major crops suffered while everything in agriculture was considered critical. A late rain finally arrived, but it was too late. The damage was already done. Farmers were qualified for low interest loans to help feed cattle, get fuel and fertilizer. But for those who switched over to soybeans as an alternate crop experienced, yet another back-to-back loss.

What?s more amazing, there’s so much land just sitting there going to waste. While traveling about, I’ve passed by the same old farmland that looked exactly as it did 10 years ago. Think about land like that all around our nation – doing nothing. No activity – just growing weeds. If we plan on saving what’s left of our dwindling farmland, shouldn’t we also plan for the sake of our younger generation?

The $10 billion Federal Government tobacco buyout ended 70 years of subsidies. Those tobacco growers still in operation can defer capital gains taxes. However, this transition from a government subsidy system to a free market system has shut down the small quota owner, thus providing farm equity sell outs. Poundage from small farm units was sold to larger farms, therefore, leaving many areas with an abundance of empty fields and workers.

Which direction are our farmers headed? With more farms being sold by the day and more land being developed for housing means less for growing worthwhile food crops, much less tobacco. Machinery and technology must be converted to accommodate alternate food crops. This not only should increase incentive, but should secure a job workforce more stable than we presently have.

We need to be thinking about an alternate use for our dormant farmland before it’s too late. Goodbye Tobacco!

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