Financial Q&A: A cautious approach for new investors

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Q: I'm just out of college and working my first job. I've managed to save $2,000. Is it worth investing somewhere, or should I find a good CD to put the money into? I'm meeting my rent and food budgets, so if I lose this money completely, I'd be sad but not totally out of luck. Should I invest in the Asian market?

N.N., via e-mail

A: Financial experts who looked at your question agree that the absolute best thing you can do is tuck that $2,000 into a savings account as an emergency fund. Why? Rob Choiniere, a financial adviser in Wexford, Pa., says that when – not if – something unexpected happens (e.g., you blow your car's transmission), how will you pay for it? Answer: You'll have to borrow.

The first thing that anyone should do is to accumulate at least 10 percent of their annual income in a savings or money-market account and keep that as a minimum balance. Ultimately, Mr. Choiniere says that you should add another 20 percent of your annual income to those reserves, but that additional amount can be kept in a money-market account or three-month CDs (two equal purchases separated by one month).

Then, if the bottom drops out, you will have three months of income available to recover. This, Choiniere believes, is the best way to avoid the consumer debt spiral that is so prevalent today.

Q: What is considered long-term capital gains and what are qualified five-year gains? I am looking to sell my shares of a small LLC (limited liability company) and wondered what my tax rate will be. I could sell now and keep my annual income under $62,100. Or I can wait until 2009.

C.M., via e-mail

A: In general, says Don Hodson, an income-tax specialist in Anderson, Ind., a long-term capital gain comes from the sale of an asset that you purchased as an investment and that you have owned for more than one year (366 days). A long-term capital gain is typically taxed separately and at a lower rate than your ordinary income. The maximum tax rate on most long-term capital gains is 15 percent – a rate that would probably apply in your situation.

Without knowing your marital status or how much of the gain is included in your annual income figure, it's difficult for Mr. Hodson to say whether you should sell now or wait until next year.

He assumes that your question regarding a five-year gain is in relation to the sale of your interest in the LLC. The IRS allows you to exclude up to 50 percent of the gain you have from the sale of stock that meets the definition of "Qualified Small Business Stock" as long as you have held the stock for more than five years. If your interest had been in an S Corporation, the benefit of this section of the tax code could have been applicable; however, it is not available for interest in an LLC.

Lastly, you should understand whether you're selling your interest in the LLC or if you are in fact selling the assets inside the LLC. The answer could create very different tax situations.

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