Horizons Newsletter


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Shareholder newsletter 4Q, 2009.

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Horizons Newsletter

  1. 1. eTax Planning for 2010 . . . . . . . . .1 eNews Briefs . . . . . . . . . . . . . . . .2 eKeeping Track of Your Account . .4 eIs the Bear Market Over? . . . . .5 eFund Performance . . . . . . . . . . .6 in this issue Horizons 4th Quarter 2009 A quarterly newsletter for Homestead Funds’ shareholders Item number 00070337 Tax Planning for 2010 Plan better by understanding how IRS rules impact your investments While tax regulations change all the time, a few principles that stay constant are worth knowing and applying. Just as the Internal Revenue Service (IRS) taxes the income you earn from working, it also taxes the money your investments earn. Below we discuss the IRS rules on invest- ment income to help you manage your taxes. Rule 1: Use tax-deferred accounts The IRS encourages saving for your future by allowing you to postpone income tax on certain accounts until you withdraw from the account. This includes Individual Retirement Arrangement (IRA) accounts, as well as tax-deferred accounts for college such as Education Savings Accounts (ESAs). Both of these accounts are offered through Homestead Funds. Deferring annual income tax gives your investments a chance to com- pound and grow over time. The difference in total earnings between a taxable account and a tax-deferred account could be significant over the years, as you see in the chart on page 3. continued on page 3 A New Reason to Consider Converting to a Roth IRA If you were thinking about converting your A Roth IRA has the tax benefit of making Traditional IRA to a Roth IRA but were not sure your distributions tax- and penalty-free, about paying the taxes or whether you were provided you are age 59½ or older and your eligible, there’s a new reason to consider it. In account has been open for at least five 2010, any investor, regardless of income level, years. For general information on this sub- may convert assets from a Traditional to a ject, give us a call at 1-800-258-3030. For Roth IRA. Plus, investors who convert in 2010 tax-specific information, consult your tax can spread the tax bill over two years. professional.
  2. 2. 2 Homestead Funds’ News Briefs Welcome to Homestead Funds We recently welcomed several employees to Homestead Funds, including David Corea, José Cuellar and Leidy Suarez. Congratulations! Homestead Funds client service associates Kara Gardner, Alaina Schrager and Will Cunningham recently earned the Certified Mutual Fund Specialist designation. Recent Press In October, SmartMoney.com featured Homestead Funds in its “12 Good Funds That Won’t Break Your Budget” article. The November edition of Money magazine mentioned Homestead Funds in its “Savings and Credit” section. Annual Report The Homestead Funds’ annual report will be mailed to sharehold- in the Mail ers in February 2010. You can also view this document as well as year-to-date fund performance online at homesteadfunds.com. If you’d like less paper clutter in your home mailbox, sign up to be notified via e-mail when the prospectus, semi-annual report and annual report are posted on our website and are available for viewing. What to Keep, What to Toss Documents to save Documents to review Save the year-end QUARTERLY STATEMENTS: HOMESTEAD FUNDS’ ANNUAL REPORT, mutual fund state- Keep until you receive your year-end SEMI-ANNUAL REPORT AND PROSPECTUS: ments sent with this statement, then shred Review, then toss or recycle. To save paper and keep fund expenses down, newsletter. YEAR-END STATEMENTS: sign up for electronic document delivery Do not discard You’ll need them HORIZONS QUARTERLY NEWSLETTER: to calculate your IRS FORM 1099-DIV, IRS FORM 1099-B AND IRS FORM 1099-R: Read, then toss or recycle. You can cost basis if also read the current issue of Horizons Keep with your tax records (7 years), you own taxable at homesteadfunds.com then shred accounts.
  3. 3. 3 Tax Planning, continued from page 1 Rule 2: Avoid penalties by planning well If you are planning to roll over an account balance from Just as the IRS gives you the option of using tax-deferred an employer-sponsored retirement plan to an IRA, you accounts for long-term saving, it penalizes investors who must follow the rules or you may trigger IRS taxes or withdraw from those accounts before the stated goal. penalties. For example, cashing out the retirement plan That means if you are saving for retirement in an IRA but account if you leave an employer will result in a 20% you tap that account before the allowable date, the IRS mandatory income tax withholding on the amount as may assess a penalty. well as a 10% early withdrawal penalty if you are under age 55. That is a big price for cashing out—when what You may be penalized if you withdraw from your IRA you may have intended was to re-invest the account into before you reach age 59½. The penalty is a 10% tax on an IRA. If that is what you want, be sure to ask for a the amount you withdraw—that is on top of any regular “direct rollover.” And if you cash out by mistake, you have income tax on that amount. There are various exceptions 60 days from the date you receive the distribution to to this penalty, so consult your tax adviser for specifics. complete an “indirect rollover” to avoid the tax hit. Such You should also avoid over-contributing to your IRA. a rollover is limited—for each IRA owned by the account Investors can contribute up to $5,000 a year, or $6,000 holder—to one per year. a year if age 50 or above. If you contribute more than Rule 3: Start taking withdrawals at age 70+ that, excess contributions are subject to a 6% tax. Just as the IRS penalizes investors for taking out their money too soon, it may also penalize retirees for not withdrawing from their retirement accounts. Benefits of At age 70½, you must start withdrawing money from tax-deferred investing most retirement accounts, such as Traditional IRAs, Source: Standard & Poor’s Financial Communications including rollovers. These withdrawals, called Required Ages 55– 65 Minimum Distributions, or RMDs, are mandated by the INVESTMENT AGE SPAN Ages After-tax IRS. After years of postponing taxation, the IRS says that 45– 65 investment Tax-deferred it’s time to withdraw from the account and pay federal investment Ages income tax on the withdrawal. If you don’t withdraw at 35– 65 least the minimum amount, you may be subject to a tax Ages 25– 65 penalty of 50% of the amount you should have taken but 0 $250,000 $500,000 $750,000 $1,000000 did not. As a service to you, if you’re required to take an ACCOUNT VALUE RMD, you’ll receive a letter from Homestead Funds each Investing through tax-deferred accounts instead of year as a reminder. (Note: The Worker, Retiree, and after-tax accounts can make a tremendous difference in retirement savings. Shown in the graph, $250 is Employer Recovery Act of 2008 waived RMD require- invested monthly beginning at age 25, earning an 8% ments for the 2009 tax year.) return. Investing in a tax-deferred account would yield $878,570 at age 65, compared with $586,876 for after-tax investments. Distributions from IRAs may be subject to income tax and, if taken before age 59½, may be subject to a 10% premature Assumes a 28% tax rate on ordinary income and a 15% rate distribution penalty. Distributions from Education Savings on capital gains. Also assumes that capital gains represent 50% Accounts used for expenses other than qualified education of earnings, with 50% annual turnover, for an effective tax rate of 17.8%. Dividends are re-invested. This example is hypothetical expenses may be subject to federal or state income taxes as and does not represent the returns of any actual investment. well as penalty taxes.
  4. 4. 4 THE ABCS OF INVESTING Keeping Track José Cuellar of Your Account Registered Representative Keeping track of the investments Focus on the long term While you have access to all each year. These documents in your Homestead Funds account Homestead Funds sends you of your account information give you detailed information is easy once you know what to a quarterly account statement 24/7 if you are investing for the , about your investments but with your starting and ending long term, remember to keep contain no personal informa- focus on, where to find the infor- account balances for the an eye on the big picture. If tion. You can opt to receive mation you need and what records period, a summary of your you are investing in stock or these documents electronically to file away. Fortunately, total portfolio, details for each bond funds, you should expect if you’d like to reduce the Homestead Funds provides every- account and any recent trans- your account value to go up amount of printed mail you thing you need to help make this actions. Review your state- and down in value on a daily receive by calling Homestead task simpler and more convenient. ment carefully—it’s the best or monthly basis. Try to focus Funds at 1-800-258-3030. way to get an overall picture on the long-term results from Downloading account of what you own and what year to year or look for trends information it is worth. In January, you will over several years. You can download your receive a year-end statement Tax forms and fund personal account data into that includes a summary of reports a number of software pro- the transactions and starting If you are invested in taxable grams, including Quicken, and ending balances from the accounts, in February, you’ll TurboTax and most recently, previous year, which is particu- receive tax forms such as the H&R Block’s TaxCut. This larly valuable to review. IRS Form 1099-DIV. If you are can improve the accuracy In between the quarterly invested in one or more IRA of your information transferred account statements, you can accounts, in May, you’ll receive while saving you time as you access your account balance Form 5498, a document that update your financial informa- or check on how your reports the fair market value, tion in these programs. account is invested by logging any rollovers and contributions Maintaining your Homestead in to your account on the made to your account(s). Keep Funds’ account activity this Homestead Funds’ website these forms in a safe place. way can make tracking your at homesteadfunds.com or And remember that you can account easier and help calling the Homestead Funds’ also access your forms by you see how your Homestead automated phone line at logging in to your Homestead Funds’ assets fit into your over- 1-800-258-3030 any time Funds’ account online. all financial picture. of day or night. To speak with Homestead Funds is also a representative, call week- required to mail you share- days between 8:30 a.m. and holder documents, including 5:00 p.m. ET. the annual report, semi- annual report and prospectus,
  5. 5. 5 C U S TO M E R S E R V I C E T I P Investment Planning Help Whether you’re just starting R E S P O N D I N G TO YO U your career, in your peak earn- Shareholders like you call our client service associates with a lot of good questions. In this column, we’ll share our responses to some of those questions with the thought that for every shareholder ing years or on the verge of who calls to ask, there are a hundred who didn’t! We encourage you to call our helpful associates retirement, the Homestead with your questions as well as to check here each quarter to see if your question is featured. Funds’ website can give you some financial planning tips. You’ll see the faces of our Is the Bear Market Over? friendly client service associ- It seems the market has swung up again and the bear market is ates, who will show you how over. If that’s true, should I change my investment strategy? to simplify account manage- ment, learn which savings Since the severe bear market of 2008 that continued into the goals should be priorities first quarter of 2009, the stock market has rebounded sharply. based on your life stage and Remember, a bear market is generally defined as one in which get guidance on your invest- the share prices fall 20% or more in multiple broad market ment allocation decisions. indexes, such as the Standard & Poor’s 500 Index (S&P 500), Homestead Funds makes all from their previous highs. Following the painful bear market that of this and more available to many say ended in March, most equity indexes have experi- you at homesteadfunds.com. enced double-digit upturns. If you want more personalized What you should do now depends on your personal situation. assistance, please call us If you have a long-term investment strategy in place that at 1-800-258-3030. Our asso- matches your time horizon and you did not change your ciates can help you with a strategy during the bear market, you may want to stick with number of financial planning goals, including: Leidy Suarez your original strategy. In that case, it would be a good time Registered Representative to review and rebalance your portfolio. If, on the other hand, 4Establishing a financial plan you moved money out of stocks and parked it in cash, you for retirement may want to consider dollar-cost averaging to get yourself repositioned in the stock market. Dollar-cost averaging can help you potentially acheive a lower aver- 4Clarifying financial objectives age cost per share. Make sure that whatever strategy you decide on takes into 4Setting specific savings goals account the level of risk you are comfortable with. 4Determining a suitable asset allocation Bear and bull market magnitudes 500% Source: Standard & Poor’s Financial Communications 400% 40% 300% Magnitude of Bear Market To discuss your invest- 200% 20% Magnitude of Bull Market ment strategy with one 100% of our client service 0 0% associates, call us week- -20% -100% 08/03/56 12/12/61 02/09/66 11/29/68 01/11/73 11/28/80 08/25/87 07/16/90 03/24/00 10/09/07 days between 8:30 a.m. –10/22/57 –06/26/62 –10/07/66 –05/26/70 –10/03/74 –08/12/82 –12/04/87 –10/11/90 –10/09/02 –12/31/08 and 5:00 p.m. ET Since 1950, there have been 10 bear markets, defined as a drop of 20% at 1-800-258-3030. or more from the market’s previous high. During these bear markets, stocks (represented here by the daily closing prices of the S&P 500 Index) have fallen an average of 32.8% and gained an average of 136.2% in subsequent bull markets. Past performance does not guarantee future results.
  6. 6. 6 Fund Total Returns For Period Ending 09/30/09 Aggregate Average Annual Average Annual Average Annual Average Annual Year-to-Date 1 Year 5 Year 10 Year Since Inception (date) Daily Income 0.29% 0.61% 2.83% 2.68% 3.51% (11/90) Short-Term Govt. Securities 2.46% 5.41% 3.78% 3.93% 4.35% (5/95) Short-Term Bond 14.03% 11.60% 4.32% 4.54% 5.12% (11/91) Stock Index* 18.83% -7.39% 0.41% N/A -1.28% (10/99) Value 20.66% -7.42% 2.33% 4.23% 9.10% (11/90) Growth** 39.88% 9.43% 3.22% N/A -6.50% (1/01) Small-Company 35.73% 2.64% 4.70% 7.68% 5.94% (3/98) International Value 23.39% 4.51% 7.38% N/A 2.77% (1/01) For performance data current to the most recent month-end, call Homestead Funds at 1-800-258-3030 or visit homesteadfunds.com. Fund Annual Operating Expenses Management Aquired Fund Fees Total Annual Fund Expenses Waived Fees Other Expenses and Expenses Operating Expenses by RE Advisers Net Expense a Daily Income 0.50% 0.19% 0.02% 0.71% 0.00% b 0.71% Short-Term Govt. Securities 0.45% 0.37% 0.03% 0.85% 0.07% c 0.78% Short-Term Bond 0.60% 0.21% 0.01% 0.82% 0.01% c 0.81% Stock Index* 0.05% d 0.54% e 0.00% 0.59% 0.00% 0.59% Value 0.52% 0.18% 0.00% 0.70% 0.00% 0.70% Growth** 0.65% f 1.03% 0.00% 1.68% 0.73% g 0.95% Small-Company 0.85% 0.40% 0.02% 1.27% 0.00% 1.27% International Value 0.75% 0.26% 0.02% 1.03% 0.03% c 1.00% Daily Income Fund: Current Yield Seven-Day Effective Yield as of 12/01/09 0.0500% The total returns shown above represent past of the prospectus on pages 34 to 41 because the a 0.25% administrative fee paid to RE Advisers. performance, which does not guarantee future expenses shown on this page include Acquired f Thefees for the Growth Fund shown in this table results. Investment return and principal value Fund Fees and Expenses, and amounts shown have been restated to reflect the estimated annual- of an investment will fluctuate. An investor’s in the Financial Highlights reflect the operating ized expenses for the fiscal year ending on shares, when redeemed, may be worth more expenses and do not include Acquired Fund Fees December 31, 2009. The Fund changed from or less than their original cost. Current per- and Expenses. a passively managed index fund to an actively formance may be higher or lower than the b Expenses may be waived pursuant to an expense managed fund on December 5, 2008. performance data quoted. limitation agreement between RE Advisers and g Expenses are waived pursuant to an expense Investments are subject to risk and market the Funds. This contractual waiver is for a one-year limitation agreement between RE Advisers and fluctuation. Losses could occur. Call us at period ending April 30, 2010. At that time, the the Fund. The contractual waiver is for a one-year 1-800-258-3030 to speak with one of our client waiver may be renewed. In addition, effective period ending April 30, 2010. At that time, the service associates and request a prospectus. August 14, 2009, RE Advisers has voluntarily waiver may be renewed. The amount of waiver Investors are advised to consider fund objec- agreed to waive fees or reimburse expenses to shown is estimated. tives, risks, charges and expenses carefully the extent necessary to assist the Fund in attempt- before investing. The prospectus contains this and other information. Read the prospectus ing to maintain a positive yield. There is no guaran- tee that the Daily Income Fund will maintain a * Performance information for the Stock Index Fund reflects its investment experience in the carefully before you invest or send money. positive yield. This voluntary arrangement may be S&P 500 Index Master Portfolio from October 15, revised, discontinued or re-continued at any time. 2007 to period end. Prior to October 15, 2007 , , An investment in the Daily Income Fund is not c Expenses are waived pursuant to an expense the Stock Index Fund invested all of its assets in insured or guaranteed by the Federal Deposit a different master portfolio. Insurance Corporation or any other government limitation agreement between RE Advisers agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, and the Funds. The contractual waiver is for a one-year period ending April 30, 2010. At that ** Performance information for the Growth Fund (formerly the Nasdaq-100 Index Tracking StockSM it is possible to lose money by investing in this time, the waiver may be renewed. Fund) reflects its previous investment strategy of Fund. The Daily Income Fund is a money mar- d The matching, as closely as possible, before expenses, fees for the Stock Index Fund shown in this ket fund. For money market funds, the yield the performance of the Nasdaq-100 Index®. On table reflect expenses of both the feeder fund and quotation more closely reflects the Fund’s cur- November 18, 2008, by the approval of sharehold- the Master Portfolio. The management fee repre- rent earnings than the total return quotation. ers, the Fund revised its investment objective and sents the total expenses of the Master Portfolio. a Net this change became effective on December 5, 2008. Expense shown here differs from the expense e “Other Expenses” for the Stock Index Fund include ratios shown in the Financial Highlights section Distributor RE Investment Corporation. 12/09