Kim 9/23/13 Kim 9/23/13

Financial Considerations for 2014

What changes should we consider making for next year?

2014 is really not too far away. Fall is the time of year when the financially savvy start to look for ways to reduce their taxes and make year-end moves in pursuit of key financial objectives.

What might the big picture hold? Absent a crystal ball, let’s turn to the September edition of the Wall Street Journal’s Economic Forecasting Survey. The WSJ asks 52 economists for their take on things each month, and here is how they see 2014 shaping up for America: GDP of 2.8%, a jobless rate declining from the present 7.3% to 6.6% by the end of next year and consumer inflation of 2.5% or less through the end of 2015. These analysts also see the Federal Reserve keeping the benchmark interest rate at 0-0.25% for all of 2014. As for the yield on the 10-year note, their consensus projection has it hitting 3.28% in June 2014 and 3.57% in December 2014. They also see home prices rising 5.22% YOY in 2014 after a 7.85% gain across 2013. Oil, they think, will average $102.73 a barrel on the NYMEX this December, declining to $98.17 a barrel next December. For its part, the International Monetary Fund projects 3.8% inflation-adjusted global growth next year, and a 4.3% tumble for global non-fuel commodities in U.S. dollar terms. These are all macro forecasts worth keeping in mind.^1,2

Now, how about your picture? Beyond these macro forecasts that may affect your business and personal finances, what moves might you consider?

Can you max out your IRA or workplace retirement plan contribution? If you have, congratulations (especially if you benefit further from an employer match). If you haven’t, you still have the chance to put up to $5,500 into a traditional or Roth IRA for tax year 2013, $6,500 if you are 50 or older this year, assuming your income levels allow you to do so. (Or you can spread that maximum contribution across more than one IRA.) Traditional IRA contributions are tax-deductible to varying degree. The contribution limit for participants in 401(k), 403(b) and most 457 plans and the Thrift Savings Plan is $17,500 for 2013, with a $5,500 catch-up contribution allowed for those 50 and older.^3,4

Incidentally, the FY 2014 federal budget set out by the White House proposes some changes to IRAs & 401(k)-style plans in 2014. First, if an individual’s total tax-deferred retirement savings through these plans is great enough to produce yearly retirement income of $205,000 for the individual and his/her surviving spouse, then further contributions to such accounts would be nixed. (Today, it would take savings of nearly $3.5 million to produce such a retirement income stream.) Second, the Stretch IRA strategy would basically vanish: the FY 2014 budget proposes that all IRA inheritors follow the 5-year rule, in which an inherited IRA balance is reduced to zero by the end of the fifth year after the year in which the original IRA owner dies. (Disabled IRA inheritors and certain other beneficiaries would be exempt from the 5-year rule.)⁵

Should you go Roth in 2014? The younger you are, the more sense a Roth IRA conversion may make. If you have a long time horizon to let your IRA grow, have the funds to pay the tax on the conversion, and want your heirs to inherit tax-free distributions from your IRA, it may be worth it. If you think you will pay less tax in the future or you might die with a large charitable bequest, then it may not be a wise move.

Can you harvest portfolio losses before 2014? This is the time of year to think about tax loss harvesting – dumping the losers in your portfolio. You can claim losses equivalent to any capital gains recognized in a tax year, and you can claim up to $3,000 in additional losses beyond that, which can offset dividend, interest and wage income. If your losses exceed that limit, they can be carried over into future years. It is a good idea to do this before December, as that will give you the necessary 30 days to repurchase any shares should you wish.⁶

In terms of taxes, should you delay a big financial move until 2014? Talk with a tax professional about the impact that selling or buying a home or business might have on your 2013 taxes. You may want to wait. Receiving a bonus, getting married or divorced, exercising a stock option, taking a lump-sum payout – these events have potentially major tax consequences as well. Business owners may want to consider whether to make a capital purchase or not.

Look at tax efficiency in your portfolio. Investors were strongly cautioned to do this at the end of 2012 as the fiscal cliff loomed; it is a good idea before any year ebbs into the next. You may want to put income-producing investments inside an IRA, for example, and direct investments with lesser tax implications into brokerage accounts.

Finally, do you need to change your withholding status? If major change has come to your personal or financial life, it might be time. If you have married or divorced, if a family member has passed away, if you are self-employed now or have landed a much higher-salaried job, or if you either pay a lot of tax or get unusually large IRS or state refunds, you will want to review this with your tax preparer.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - online.wsj.com/public/resources/documents/info-flash08.html?project=EFORECAST07 [9/12/13]

2 - forbes.com/sites/billconerly/2013/09/02/economic-assumptions-for-your-2014-business-plan/ [9/2/13]

3 - irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits/ [9/12/13]

4 - shrm.org/hrdisciplines/benefits/articles/pages/2013-irs-401k-contribution-limits.aspx [10/19/12]

5 - blogs.marketwatch.com/encore/2013/09/09/budget-talks-could-alter-401k-ira-rules/ [9/9/13]

6 - dailyfinance.com/2013/09/09/tax-loss-selling-dont-wait-december-dump-losers/ [9/9/13]

Kim 9/9/13 Kim 9/9/13

Will the Syria Crisis Shock the Markets?

Are fears of a correction & runaway oil prices overblown, or justified?

U.S. military action in Syria appears imminent. Assuming it happens, what happens to the financial markets?

Investor reaction on August 27 (the day U.S. intervention was mentioned as a possibility) was not exactly surprising. Gold entered a bull market again, oil prices reached a six-month peak (surpassing $109 a barrel), the Dow fell 170 points and the CBOE VIX rose 12%. Overseas markets broadly slumped; emerging market stocks hit a 7-week low. India’s rupee fell to a record low versus the dollar. The yield of the 10-year Treasury dipped to 2.72%, decreasing for a third straight day. All of this left market analysts with major questions to consider.¹

Will oil hit $150 a barrel? While U.S. investors keep an eye on the NYMEX, the international benchmark is Brent crude. Some analysts do see Brent crude hitting $120-125 in the coming weeks – Michael Wittner, global head of oil research for Societe Generale, told CNBC that he believes that will happen, in the event of military intervention. Wittner also thinks that Brent crude has about a 20% chance of pushing past $150, but not wholly on what goes on within Syria. “Our big worry is Iraq. The Sunni vs. Shiite conflict in Syria has a direct parallel in Iraq, and the violence in Iraq has reached levels not seen since 2008," Wittner wrote in a note to investors. A key oil pipeline in northern Iraq ferrying oil to Turkey has endured multiple attacks since May, severely hampering Iraq’s daily oil exports. Other analysts worry about attacks on pipelines in Saudi Arabia.²

On the other hand, U.S. oil output is at a 20-year peak, and Saudi Arabia and other major players in the oil market could tap strategic reserves or increase production in response to a short-term price spike. As business and consumer demand for oil and gasoline typically weaken at some point in response to price hikes, prices would likely moderate.²

Greg Priddy, director of global oil at Eurasia Group, told CNBC that he doesn’t see a big disruption in the oil market ahead – he envisions a “very limited attack” that is “not going to change the situation in the region right now.” As toppling Bashar al-Assad’s government could put rebels in charge but also risk opening a door to al-Qaeda, the view of some analysts – Brent crude temporarily hovering around $120, U.S. oil prices keeping below that level – may prove correct. “This would have to turn into a region-wide conflagration in order for prices to stay [at that level],” John Kilduff of Again Capital remarked to CNBC. “If rockets start flying into Gaza and into Israel and other things happen, such as an attack on Saudi Arabia, all bets are off.”²

Would U.S. stocks plunge? The Dow is on pace for a decline of more than 5% in August, so bears wonder if a correction is in progress. No one has a crystal ball, but it is true that the U.S. equity markets have weathered geopolitical crises well in the recent past. Our stock market rose in the year prior to our military’s involvement in Libya in March 2011, fell that summer, then rose again. The fall coincided with the debt ceiling struggle on Capitol Hill, not the unrest in Libya. In the case of the Persian Gulf War and the War in Iraq, U.S. stocks were in the doldrums in the quarters preceding the fighting yet rose about the time hostilities began.³

As MarketWatch columnist Mark Hulbert commented this week, “Rising interest rates and above-average valuations are a bigger threat to the stock market than the possibility of U.S. military action in Syria.” Opening a wide historical window, he cites a fundamental article from the Journal of Portfolio Management co-authored by none other than Larry Summers, who stands a chance of being our next Federal Reserve chairman. It looked at the impact of 49 major geopolitical events on the stock market from 1941 to 1987, measuring the S&P 500’s absolute return on those momentous days (Pearl Harbor, the assassination of JFK, etc.). The S&P’s average movement across those 49 days was 1.46% : significant, but not radically removed from the average 0.56% variance occurring across all other market days in a 46-year period. For the record, the S&P rose 0.60% on August 28 while the CBOE VIX dipped 3.6% to 16.17.^3,4

Could this crisis make the Fed reconsider tapering? Recent days have seen a real flight to quality – to gold, to the dollar, to Treasuries. You have a couple of currencies seemingly in freefall: the Indian rupee and the Turkish lira. For that matter, Brazil’s real recently hit a five-year low versus the greenback. Indonesian stocks just dropped 5% in a single market day. In short, some key emerging markets/developing economies are having it rough – and a lack of economic growth in those nations may not bode well for America. If the trouble in Syria worsens and leads to further trouble for them, some analysts think the Fed might postpone the careful unwinding of QE3 – either out of caution, or out of global economic necessity.⁵

The takeaway? As Ron Florance, a deputy CIO at Wells Fargo Private Bank in Scottsdale, Arizona, told Reuters on August 28: “Yesterday was a little overdone but investors need to be ready [and realize] that volatility is going to be here for a while.” Just think twice before letting short-term volatility affect long-term investment plans.⁴

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - marketwatch.com/story/syria-intervention-fears-hit-global-markets-2013-08-27 [8/27/13]

2 - tinyurl.com/pjxsoau [8/28/13]

3 - marketwatch.com/story/what-us-intervention-in-syria-would-mean-2013-08-28 [8/28/13]

4 - reuters.com/article/2013/08/28/markets-global-idINL2N0GT1BA20130828 [8/28/13]

5 - marketwatch.com/story/syria-emerging-market-crisis-will-stop-the-taper-2013-08-28 [8/28/13]

Kim 9/3/13 Kim 9/3/13

Implications of Rising Mortgage Rates

Are they threatening the recovery? Or is their effect overstated?

Between early May and mid-July, the average interest rate on the 30-year fixed-rate mortgage rose about 1%. Rates on 30-year FRMs have basically held steady since hitting a peak of 4.51% in Freddie Mac’s July 11 Primary Mortgage Market Survey – in the August 15 edition, they averaged 4.40% – but they could rise dramatically again.^1,2

When mortgages become a bit costlier, things can get a bit tougher for home buyers, home sellers, home builders, real estate brokers, the construction industry, the labor market, the service industry and the broad economy. As housing’s comeback is a key factor in this current economic recovery, how worried should we be that home loans are growing more expensive?

Analysts are divided about the impact. A July Wall Street Journal poll of economists drew rather mixed opinions: 40.0% of respondents felt that more expensive mortgages “won’t have a noticeable effect” on the housing recovery, 35.6% thought that they “will slow sales” and 24.4% believed that they “will slow home-price gains.”¹

So far, the lure of increasing home values appears to outweigh disappointment over pricier home loans. In the latest S&P/Case-Shiller Home Price Index (released at the end of July and covering the month of May), both the 10-city and 20-city composites showed the biggest year-over-year gain since 2006. Rising home prices (and rising stock prices) contribute greatly to the “wealth effect” felt by consumers. So there is a chance that a 100-basis-point rise in the 10-year Treasury yield (it hit 2.82% on August 15) and conventional mortgage rates may not do as much damage as feared. After all, both consumer confidence and consumer spending have improved even with a 2% hike in payroll taxes and this spring’s federal budget cuts.^3,4,5

Maybe we haven’t seen it yet. The fundamental housing market indicators in our economy are lagging indicators, presenting statistics a month or more old. The Case-Shiller composite home price figures are based on three-month averages ending in the latest month of the index – in other words, the May survey reflected data from March, April and May, and May is when mortgage rates began their ascent.³

New home sales figures compiled by the Census Bureau must also be taken with a grain of salt. The pace of new home sales reached a five-year peak in May, but here is the asterisk: the Census Bureau actually measures new home sales in terms of signed sales contracts rather than closings. So a sizable percentage of those homes were not yet constructed, and the actual closing could have been months away. As it turns out, 36% of the signed sales contracts in May were for homes yet to be built – meaning they were in all probability three to nine months from completion, with most of the involved buyers unable to lock in mortgage rates in early May as they would have preferred.⁶

Which of two outcomes will occur? Summer home sales statistics may reflect more impact from higher mortgage rates. Perhaps they will communicate that the housing market is no longer red-hot, but reasonably healthy. The real estate industry, Wall Street and Main Street can all live with that.

The bigger question is whether consumer spending and GDP will keep improving as mortgage rates presumably keep rising. If the economy gathers or at least maintains momentum and the “wealth effect” continues to boost consumer morale, then the housing market should see sustained demand – a desirable outcome. If mortgage rates rise due to inflation (or some other factor unrelated to growth), then consumers may decide that costlier mortgages are simply too much of a stumbling block to home buying, gains in home values nonwithstanding.³

Two things can’t be denied. One, consumers have grown more optimistic recently (and wealthier, at least on paper). Two, home loans are still really cheap these days, at least by historical standards. Those two factors may maintain demand in the real estate market in the face of rising interest rates.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - blogs.wsj.com/economics/2013/07/19/will-rising-mortgage-rates-halt-the-housing-rebound/ [7/19/13]

2 - freddiemac.com/pmms [8/15/13]

3 - forbes.com/sites/moneybuilder/2013/08/14/with-mortgage-rates-in-a-holding-pattern-what-will-housing-prices-do/ [8/14/13]

4 - nasdaq.com/article/how-we-know-the-federal-reserve-is-in-control-cm265615 [8/7/13]

5 - usatoday.com/story/money/markets/2013/08/15/stocks-thursday/2658439/ [8/15/13]

6 - realestate.aol.com/blog/2013/06/27/rising-mortgage-rates-impact-homebuilders/ [6/27/13]

Kim 8/13/13 Kim 8/13/13

What if Fannie & Freddie Went Away?

How might things change for mortgage lenders & borrowers?

Is a new home financing system ahead? In the text of a speech delivered August 6, President Obama said: “I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market.” This statement came as part of call for winding down Fannie Mae and Freddie Mac and revamping home financing in America.^1,3

How might the playing field change? Right now, Fannie and Freddie backstop almost 90% of U.S. home loans. They are also $187.5 billion in debt to taxpayers, a result of the 2008 bailout that rescued them from the edge of insolvency. Two measures are already underway in Congress to replace both government-sponsored enterprises within the next few years.^2,3

If a bipartisan bill introduced this spring by Sen. Bob Corker (R-TN) and Mark Warner (D-VA) becomes law, it would transfer lending risk over to private capital. The proposed legislation would require private lenders to assume the first 10% of losses on individual home loans, and stay sufficiently capitalized to counter major losses. A new federal agency – the Federal Mortgage Insurance Corporation, or FMIC – would regulate the mortgage industry and act to insure banks in a crisis. Just how would it be funded? A fee would be assessed on each mortgage issued. In the vision of the bill, the FMIC would pay for itself thanks to those fees and have enough left over to fund the construction of affordable multifamily properties and provide assistance to low-income homebuyers.^2,3,4

Another bill written by House Financial Services Committee chairman Rep. Jeb Hensarling (R-TX) would terminate Fannie Mae and Freddie Mac without a replacement – the FHA would be the last remaining U.S. mortgage backstop. As Bloomberg notes, no House Democrats have emerged to support that bill – and as the Baltimore Sun notes, the bill drafted by Sens. Corker and Warner stands little chance of getting past the House. So it seems the playing field might be reshaped only after considerable compromise, and not in the short term.^2,3

Aren’t Freddie & Fannie turning a profit now? Yes, but none of it is paying for their bailout. The GSEs have now returned more than $131 billion in dividends to the Treasury, but that money represents ROI for Uncle Sam. It doesn’t whittle away the $187.5 billion owed to taxpayers.^3,5

What would happen to mortgage rates without Fannie & Freddie? They would almost certainly rise. Private lenders have little motivation to finance home loans the way the rules are now, and it would take significant incentives to bring them back into the market. As Moody’s Analytics chief economist Mark Zandi told CNBC, “[That] will mean higher mortgage rates. The question is how much higher.” In particular, first-time or lower-income homebuyers might find it tougher to qualify for a loan. (In one key respect, it has grown tougher: the average credit score for a Fannie and Freddie loan in 2012 was 756, compared to 720 in 2006.)^4,6

Would the 30-year FRM become an endangered species? That is another concern. Without Fannie and Freddie around to guarantee home loans against defaults, the worry is that the standard American mortgage would become scarce. In many other nations, 30-year home loans are unconventional. The fear is that banks would address the default risks of 30-year mortgages by asking for larger down payments and demanding higher interest rates.^2,4

True change will likely take a few years. It is hard to imagine Fannie and Freddie liquidating their portfolios and going out of business soon. Reform will probably proceed gradually – very gradually. President Obama’s call to unwind both GSEs and the recent proposals to replace them certainly amount to interesting food for thought.²

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - cbsnews.com/8301-250_162-57597284/wind-down-fannie-mae-freddie-mac-obama-says/ [8/6/13]

2 - baltimoresun.com/news/opinion/editorial/bs-ed-obama-housing-reform-20130808,0,5392371.story [8/8/13]

3 - sfgate.com/business/bloomberg/article/Obama-Says-Housing-Market-Still-Needs-Limited-4710318.php [8/6/13]

4 - csmonitor.com/Business/new-economy/2013/0808/If-Obama-eliminates-Fannie-Mae-Freddie-Mac-will-mortgage-rates-go-up [8/8/13]

5 - reuters.com/article/2013/08/08/us-usa-fanniemae-results-idUSBRE9770JL20130808 [8/8/13]

6 - tinyurl.com/mg2xxs4 [8/7/13]

Kim 7/29/13 Kim 7/29/13

Pension Questions After the Detroit Bankruptcy

How many retirees face the possibility of less recurring income?

On July 18, Detroit became the largest American city to file for Chapter 9 bankruptcy. What will happen to the pensions of its 20,000+ retired public employees? There is a possibility they could be reduced – perhaps greatly. In the wake of Detroit’s fiscal problems, current and future pension recipients across the country are wondering about the stability and amount of their promised incomes.^1,2

In Michigan, the fate of the pension checks for these employees may be determined in the courts. While a federal judge is overseeing Detroit’s bankruptcy proceedings, Michigan’s state constitution states that pension benefits can’t be altered. On July 24, the aforementioned federal judge froze assorted state-court lawsuits brought against the city arguing that the bankruptcy filing was unconstitutional (at the state level). As much as Detroit might want to scale back pensions for fiscal relief, it may be prohibited from doing so.¹

When pensions shrink after municipal bankruptcies, how bad is it? For a sobering example, look at Central Falls, RI, which filed for bankruptcy in 2011. Following that declaration, the city whittled away more than 50% of the pension checks issued to a third of its retirees. For example, the average retired firefighter’s annual pension income went from $68,414 to $30,786.²

That’s certainly drastic, and it may not be replicated in Detroit or in Stockton, CA (the second largest American city to go bankrupt). Stockton is reducing bond payments, but so far has refrained from slashing pensions. (As it happens, the city’s biggest creditor is CalPERS, the California Public Employees’ Retirement System.) California’s state constitution also bars reductions in pension benefits, so Stockton’s retired public employees may be waiting on the courts as well.¹

Municipal pensions aren’t the only ones at risk. Polaroid went bankrupt, and as a consequence, its retirees are receiving pension checks courtesy of the federal Pension Benefit Guaranty Corp. (PBGC) – checks that, as MarketWatch columnist Robert Powell recently noted, represent “a fraction of what they were supposed to receive.” The biggest multiemployer pension fund in America is that of the Teamsters (the Teamsters’ Central States, Southeast & Southwest Pension Plan). When 2012 ended, it held $17.8 billion in assets. Its liabilities were at $34.9 billion.²

The worst-case scenario is worth considering – just in case. If you receive a pension or are in line for one, developments like these may give you pause. It might be time to ask “what if” – what options you might have if your pension shrinks.

Suppose your pension income was cut 20-30%. What choices would you make? Would you try to live on less, and maybe move to a region where living expenses might be lower? Would you explore becoming a consultant or a solopreneur, or look into part-time work? Could you find methods to generate passive income, or make financial moves to replace any recurring income that would be lost?

With too many pensions on shaky ground these days, a conversation with a financial professional about these what-ifs is a very good idea.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - nation.time.com/2013/07/25/the-wages-of-bankruptcy-stocktons-cautionary-tale-for-detroit/ [7/25/13]

2 - marketwatch.com/story/will-your-pension-disappear-post-detroit-2013-07-24 [7/24/13]

Kim 7/23/13 Kim 7/23/13

How Impatience Hurts Retirement Saving

Keep calm & carry on – it may be good for your portfolio.

Why do so many retirement savers underperform the market? From 1993-2012, the S&P 500 achieved a (compound) annual return of 8.2%. Across the same period, the average investor in U.S. stock funds got only a 4.3% return. What accounts for the difference?^1,2

One big factor is impatience. It is expressed in emotional investment decisions. Too many people trade themselves into mediocrity – they react to the headlines of the moment, buy high and sell low. Dalbar, the noted investing research firm, estimates this accounts for 2.0% of the above-mentioned 3.9% difference. (It attributes another 1.3% of the gap to mutual fund operating costs and the remaining 0.6% to portfolio turnover within funds.)²

Impatience encourages market timing. Some investors consider “buy and hold” passé, but it has certainly worked well since 2009. How did market timing work in comparison? Citing Investment Company Institute calculations of equity fund asset inflows and outflows from January 2007 to August 2012, U.S. News & World Report notes that it didn’t work very well. During that stretch, mutual fund investors either sold market declines or bought after market ascents 57.4% of the time. In addition, while the total return of the S&P 500 (i.e., including dividends) was -0.13% in this time frame, equity mutual fund investors lost 35.8% (adjusted for dividends). ³

Most of us don’t “buy and hold” for very long. Dalbar’s latest report notes that the average equity fund investor owned his or her shares for 3.3 years during 1993-2012. Investors in balanced funds (a mix of stocks and bonds), held on a bit longer, an average of about 4.5 years. They didn’t come out any better – the report notes that while the Barclays Aggregate Bond Index notched a 6.3% annual return over the 20-year period studied, the average balanced fund investor’s annual return was only 2.3% .²

What’s the takeaway here for retirement savers? This amounts to a decent argument for dollar cost averaging – the slow and steady investment method by which you buy shares over time, a little at a time. When the market sinks, you are buying more shares as they have become cheaper – meaning you will own more (quality) shares when they regain value.

It also shows you the value of thinking long-term. When you save for retirement, you are saving with a time horizon in mind. A distant horizon. Consistent saving from a (relatively) early age and the power of compounding can potentially have much greater effect on the outcome of your retirement savings effort than investment selection.

Keep your eyes on your long-term retirement planning objectives, not the short-term volatility highlighted in the headlines of the moment.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - finance.yahoo.com/news/p-fund-tops-p-500-142700129.html [5/3/13]

2 - marketwatch.com/story/7-reasons-why-retirement-savers-fail-2013-06-26 [6/26/13]

3 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/11/05/herd-behavior-hurts-fund-investors [11/5/12]

Kim 7/15/13 Kim 7/15/13

How Much Health Care Reform Will We See By 2014?

Can the federal government follow through on its ambitions?

In 2014, we were supposed to see profound health care reform per the 2011 Affordable Care Act – but how much of that reform will roll out on time?

The federal government has already conceded that it can’t enforce the employer mandate portion of the Affordable Care Act by 2014. On July 2, the Obama administration gave businesses with 50 or more employees a 1-year reprieve from having to provide affordable health insurance to full-time employees (people working 30 or more hours weekly).^1,2

So how about the state health insurance exchanges that are scheduled to be up and running by October 1? How about the planned expansion of Medicaid? Will these reforms also be delayed? The House of Representatives has scheduled a mid-July vote to attempt to do just that. Lastly, do small businesses have any enthusiasm about health care reform?³

What’s the progress on the state exchanges? The progress report isn’t good. As the Wall Street Journal noted last month, even the Government Accountability Office thinks that a “timely and smooth implementation of the exchanges by October 2013 cannot yet be determined.”⁴

Small businesses and the self-employed are supposed to be able to find affordable coverage through these online marketplaces. The small business exchange rollout has already encountered glitches. In some states, only one insurance carrier has shown interest in them; the state of Washington is simply postponing its exchange because no carrier wanted to provide small business plans statewide. In 2014, businesses will be asked to select and offer one insurance plan from the exchanges to their workers. In the initial conception, they could elect to offer employees multiple insurance options. The federal Centers for Medicare & Medicaid Services are overseeing the implementation of the individual exchanges in 33 states; 17 other states and the District of Columbia are setting up their own exchanges.⁴

Individual exchanges in 34 states will be created via the federal government – but on July 5, it quietly granted another concession. The Department of Health and Human Services relaxed a requirement for the 16 other states and the District of Columbia to verify the income and health coverage status of applicants to those individual exchanges. These 17 exchanges will only check the income eligibility of applicants at random next year, and they will wait until 2015 to check if applicants are getting employer-sponsored health benefits.⁵

The WSJ learned that states running their own exchanges had missed, on average, 44% of the interim deadlines for these projects through the end of March. Still, DHHS chief technology officer Todd Park told CNBC that the state exchanges are "on track" and will allow open enrollment beginning October 1.^4,6

Where do things stand state-by-state with the Medicaid expansion? Just 23 states and the District of Columbia have signed up for it. (You’ll recall that the Supreme Court allowed states to opt out of it when it ruled that the ACA was constitutional in 2012.) In these states and in Washington D.C., those with earnings of up to 138% of the federal poverty level may qualify for Medicaid (that works out to earnings of $15,856 for an individual and $32,499 for a family of four). The expansion of Medicaid in these states doesn’t require the federal government to recreate the wheel, but delays could happen in other ways. In Michigan, for example, state legislators have passed their own version of a Medicaid expansion requiring a 90-day federal review process, which will put Michigan weeks behind in enrolling participants in expanded Medicaid coverage.^6,7

Do employers even care about the ACA’s incentives? The ACA opens the door for employers to markedly increase the percentage of employee benefits represented by wellness incentives. Yet in a survey of 1,000+ employers conducted by Virgin HealthMiles and Workforce Magazine, just 25.8% of companies surveyed said they intended to draw on wellness provisions of the ACA to enhance employee health benefit offerings. A lack of information about such incentives may be a factor here for both employers and employees. In fact, the survey also polled almost 10,000 workers at these companies and found that while 87.2% looked at health and wellness packages when considering a job, half of the respondents said they were “not aware of, or need to know more about, health and wellness programs offered by employers.”⁸

Frankly, what’s to get excited about? An analysis from insurance consulting firm Millman says that individual premiums could grow 25-40% costlier due to the ACA with small market group premiums rising 6-12%. On the other hand, Humana estimates that by renewing individual and group health plans before 2014, a workplace with predominantly younger and healthier employees could see rates rise by 15% or less. Unsurprisingly, a number of major carriers are expected to offer early renewals.⁹

President Obama noted the possibility of “glitches and bumps” along the way to the ACA’s full implementation. They are evident now.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - kansascity.com/2013/07/03/4328512/qa-on-impact-of-health-law-delay.html [7/3/13]

2 - money.cnn.com/2013/07/03/smallbusiness/obamacare-employer-mandate/index.html [7/3/13]

3 - abcnews.go.com/blogs/politics/2013/07/house-to-vote-next-week-to-delay-individual-mandate/ [7/11/13]

4 - online.wsj.com/article/SB10001424127887324520904578553871314315986.html [6/19/13]

5 - reuters.com/article/2013/07/08/us-usa-healthcare-obamacare-idUSBRE96700R20130708 [7/8/13]

6 - webmd.com/health-insurance/news/20130711/is-us-health-care-reform-on-track-for-2014 [7/11/13]

7 - lansingstatejournal.com/article/20130707/NEWS04/307070073/Clock-ticking-Michigan-Medicaid-expansion [7/7/13]

8 - benefitspro.com/2013/06/03/employers-ignoring-ppaca-wellness-incentives [6/3/13]

9 - benefitspro.com/2013/05/31/putting-off-ppaca-with-early-plan-renewals#.UdQRNFW13Vk.email [5/31/13]

Kim 7/8/13 Kim 7/8/13

Retirement Seen Through Your Eyes

After you leave work, what will your life look like?

How do you picture your future? If you are like many baby boomers, your view of retirement is likely pragmatic compared to that of your parents. That doesn’t mean you have to have a “plain vanilla” tomorrow. Even if your retirement savings are not as great as you would prefer, you still have great potential to design the life you want.

With that in mind, here are some things to think about.

What do you absolutely need to accomplish? If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to achieving them. (This may be the most exciting aspect of retirement planning.)

What would revitalize you? Some people retire with no particular goals at all, and others retire burnt out. After weeks or months of respite, ambition inevitably returns. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow ... and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones. You may find yourself called to volunteer as never before, or motivated to work again but in a new context.

Who should you share your time with? Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family”. Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family. You may define it as you wish and allocate more or less of your time to your family as you wish (some people do want less family time when they retire).

Regardless of how you define “family” or whether or not you want more “family time” in retirement, you probably don’t want to spend your time around “dream stealers”. They do exist. If you have a grand dream in mind for retirement, you may meet people who try to thwart it and urge you not to pursue it. (Hopefully, they are not in close proximity to you.) Reducing their psychological impact on your retirement may increase your happiness.

How much will you spend? We can’t control all retirement expenses, but we can control some of them. The thought of downsizing may have crossed your mind. While only about 10% of people older than 60 sell homes and move following retirement, it can potentially bring you a substantial lump sum or lead to smaller mortgage payments. You could also lose one or more cars (and the insurance that goes with them) and live in a neighborhood with extensive, efficient public transit. Ditching land lines and premium cable TV (or maybe all cable TV) can bring more savings. Garage sales and donations can have financial benefits as well as helping you get rid of clutter, with either cash or a federal tax deduction that may be as great as 30-50% of your adjusted gross income provided you carefully itemize and donate the goods to a 501(c)(3) non-profit.¹

Could you leave a legacy? Many of us would like to give our kids or grandkids a good start in life, or help charities or schools – but given the economic realities of retiring today, there is no shame in putting your priorities first.

Consider a baby boomer couple with, for example, $285,000 in retirement savings. If that couple follows the 4% rule, the old maxim that you should withdraw about 4% of your retirement savings per year, subsequently adjusted for inflation – then you are talking about $11,400 withdrawn to start. When you combine that $11,400 with Social Security and assorted investment income, that couple isn’t exactly rich. Sustaining and enhancing income becomes the priority, and legacy planning may have to take a backseat. In Merrill Lynch’s 2012 Affluent Insights Survey, just 26% of households polled (all with investable assets of $250,000 or more) felt assured that they could leave their children an inheritance; not too surprising given what the economy and the stock market have been through these past several years.²

How are you planning for retirement? This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing plan in light of changes in your life, then confer with a financial professional experienced in retirement planning.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

The material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.bankrate.com/finance/financial-literacy/ways-to-downsize-during-retirement.aspx [2/28/13]

2 – wealthmanagement.ml.com/Publish/Content/application/pdf/GWMOL/Report_ML-Affluent-Insights-Survey_0912.pdf [9/12]

Kim 5/19/13 Kim 5/19/13

Has “Sell in May” Gone Away?

Investors aren’t yet backing out of stocks this spring.

Healthy skepticism hasn’t motivated much selling. An old belief has lingered on Wall Street for years – the belief that investors should get out of stocks in May and get back into stocks in October. But here we are in May – and while analysts are wondering how much more upward progress stocks can make, gains are still occurring. On May 9, the S&P 500 closed at 1,626.67 – up 1.82% so far for the month after going +1.81% for April.¹

A May retreat is hardly a given. You can readily find articles questioning the current rally, insisting a pullback is ahead. After all, didn’t stocks swoon in spring 2010 and spring 2011? Wasn’t last spring just an aberration?

The selloffs of spring 2010 and spring 2011 weren’t really prompted by seasonal behavior. You had the EU debt crisis, the twin calamities hitting Japan, and the debt ceiling fight (and the resulting U.S. credit rating downgrade) occurring. By contrast, across May-September 2012 the S&P 500 rose more than 4%.²

Going back decades, the case for selling in May appears just as inconclusive. During 1965-1984, the S&P lost ground 15 times in May – but that 20-year stretch included a 16-year secular bear market. From 1985-1997, the S&P 500 never had a down May.^2,3

Conditions could support further gains. Earnings are sometimes called the mother’s milk of stocks, and we’ve seen about 5% Q1 earnings growth. The Fed is still purchasing $85 billion of Treasuries and mortgage-backed securities per month. Hiring has picked up. Consumer prices are barely rising. Money is regularly flowing into stock-based mutual funds this year for the first time since the market downturn of 2008.^4,5

Beyond these factors, there is still enough optimism on Wall Street to counter skepticism. If the current bull market is getting long in the tooth, few see a bear market quickly emerging.

As CNBC.com recently noted, Morgan Stanley chief investment strategist David Darst maintains an informal 6-point bear market “checklist” – and Darst sees none of the six bearish signals currently flashing (Fed tightening, recession looming, bond spreads widening, evident investor euphoria, stretched stock price valuations, retreat in small caps + transportation + bank stocks). While the Fed’s easing may be fueling the rally more than anything else, QE3 is still continuing undiminished.⁵

The “sell in May” idea actually emerged in Great Britain, not America. Years ago, London brokers would go on holiday in May and head back to their desks in September, resulting in thin trading and subdued returns in the interim. Supposedly, this was how the “sell in May” pattern originated, and it may not even apply in Great Britain anymore: investors selling the Dow Jones STOXX 600 in May and buying back in for September would have lost money in three of the five years from 2008-12.⁶

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - money.cnn.com/data/markets/sandp/ [5/9/13]

2 - dailyfinance.com/on/sell-may-investing-stock-market/ [5/3/13]

3 - forbes.com/sites/greatspeculations/2010/03/11/secular-bear-market-reaches-10th-anniversary/ [3/11/10]

4 - cnbc.com/id/100723658 [5/9/13]

5 - cnbc.com/id/100720862 [5/8/13]

6 - reuters.com/article/2013/05/07/us-markets-stocks-seasonals-idUSBRE9460IT20130507 [5/7/13]

Kim 5/7/13 Kim 5/7/13

Setting Up Your Estate to Minimize Probate

What can you do to lessen its impact for your heirs?

Probate subtly reduces the value of many estates. It can take more than a year in some cases, and attorney’s fees, appraiser’s fees and court costs may eat up as much as 5% of a decedent’s accumulated assets. Think tens of thousands of dollars, perhaps more.¹

What do those fees pay for? In many cases, routine clerical work. Few estates require more than that. Heirs of small, five-figure estates may be allowed to claim property through affidavit, but this convenience isn’t extended for larger estates.

So how you can exempt more of your assets from probate and its costs? Here are some ideas.

Joint accounts. Jointly titled property with the right of survivorship is not subject to probate. It simply goes to the surviving spouse when one spouse passes. There are a couple of variations on this. Some states allow tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship. A few states allow community property with right of survivorship; assets titled in this way also skip the probate process.^2,3,4

Joint accounts may be exempt from probate, but they can still face legal challenges – especially bank accounts when the title is modified by a bank employee rather than a lawyer. The signature card may not contain survivorship language, for example. Or, a joint account with rights of survivorship may be found inconsistent with language in a will.⁵

POD & TOD accounts. Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank accounts and securities (and even motor vehicles in a few states). As long as you live, the named beneficiary has no rights to claim the account funds or the security. When you pass away, all that the named beneficiary has to do is bring his or her I.D. and valid proof of the original owner’s death to claim the assets or securities.³

Gifts. For 2013, the IRS allows you to give up to $14,000 each to as many different people as you like, tax-free. By doing so, you reduce the size of your taxable estate. Please note that gifts over the $14,000 limit may be subject to federal gift tax of up to 40% and count against the lifetime gift tax exclusion, now at $5.25 million.⁶

Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. (A pour-over will can be used to add subsequently accumulated assets; it will be probated, however.)^2,7,8

The trust owns assets that the grantor once did, yet the grantor can use these assets while alive. When the grantor dies, the trust becomes irrevocable and its assets are distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate) and it can save heirs court costs and time.⁷

Are there assets probate doesn’t touch? Yes. In addition to property held in joint tenancy, retirement savings accounts (such as IRAs), life insurance death benefits and Treasury bonds are exempt. Speaking of retirement savings accounts...²

Make sure to list/update retirement account beneficiaries. When you open a retirement savings account (such as an IRA), you are asked to designate eventual beneficiaries of that account on a form. This beneficiary form stipulates where these assets will go when you pass away. A beneficiary form commonly takes precedence over a will, because retirement accounts are not considered part of an estate.⁸

Your beneficiary designations need to be reviewed, and they may need to be updated. You don’t want your IRA assets, for example, going to someone you no longer trust or love.

If for some reason you leave the beneficiary form for your life insurance policy blank, it could be subject to probate when you die. If you leave the beneficiary form for your IRA blank, then the IRA assets may be distributed according to the default provision set by the IRA custodian (the brokerage firm hosting the IRA account). These instances are rare, but they do happen.^9,10

To learn more about strategies to avoid probate, consult an attorney or a financial professional with solid knowledge of estate planning.

Citations.

1 - www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [4/17/13]

2 - www.kiplinger.com/article/retirement/T021-C000-S001-four-facts-of-living-trusts.html#iwrC4LSHbmjf9emt.99 [4/4/13]

3 - www.inc.com/articles/1999/11/15611.html [11/99]

4 - www.law.cornell.edu/wex/tenancy_by_the_entirety [8/19/10]

5 - www.newyorklawjournal.com/PubArticleNY.jsp?id=1202585770799 [1/28/13]

6 - www.chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

7 - blog.nolo.com/estateplanning/2011/08/24/trusts-revocable-v-irrevocable/ [8/24/11]

8 - www.nytimes.com/2011/02/10/business/10ESTATE.html [2/10/11]

9 - www.investopedia.com/articles/retirement/03/031803.asp [11/8/09]

10 - www.smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

Kim 4/29/13 Kim 4/29/13

Reassessing Retirement Assumptions

What makes financial sense for some baby boomers may not make sense for you.

There is no “typical” retirement. Many baby boomers want one and believe that they will have one, and their futures may indeed unfold as planned. For others, the story will be different. Just as there is no routine retirement, there are no rote financial moves that should be made before or during this phase of life, and no universal truths about the retirement experience.

Here are some commonly held assumptions – suppositions that may or may not prove true for you, depending on your financial and lifestyle circumstances.

#1. You should take Social Security as late as possible. Generally speaking, this is a smart move. If you were born in the years from 1943-1954, your monthly benefit will be 25% smaller if you claim Social Security at 62 instead of your “full” retirement age of 66. If you wait until 70 to take Social Security, your monthly benefit will be 32% larger than if you had taken it at 66.¹

So why would anyone apply for Social Security benefits in their early 60s? The fact is, some seniors really need the income now. Some have health issues or the prospect of hereditary diseases influencing their choice. Single retirees don’t have a second, spousal income to count on, and that is another factor in the decision. For most people, waiting longer implies a larger lifetime payout from America’s retirement trust. Not everyone can bank on longevity or relative affluence, however.

#2. You’ll probably live 15-20 years after you retire. You may live much longer, especially if you are a woman. According to the Census Bureau, the population of Americans 100 or older grew 65.8% between 1980 and 2010, and 82.8% of centenarians were women in 2010. The real eye-opener: in 2010, slightly more than a third of America’s centenarians lived alone in their own homes. Had their retirement expenses lessened with time? Doubtful to say the least.²

#3. You should step back from growth investing as you get older. As many investors age, they shift portfolio assets into investment vehicles that offer less risk than stocks and stock funds. This is a well-regarded, long-established tenet of asset allocation. Does it apply for everyone? No. Some retirees may need to invest for growth well into their 60s or 70s because their retirement savings are meager. There are retirement planners who actually favor aggressive growth investing for life, arguing that the rewards outweigh the risks at any age.

#4. The way most people invest is the way you should invest. Again, just as there is no typical retirement, there is no typical asset allocation strategy or investment that works for everyone. Your time horizon, your risk tolerance, and your current retirement nest egg represent just three of the variables to consider when you evaluate whether you should or should not enter into a particular investment.

#5. Going Roth is a no-brainer. Not necessarily. If you are mulling a Roth IRA or Roth 401(k) conversion, the big question is whether the tax savings in the end will be worth the tax you will pay on the conversion today. The younger you are – roughly speaking – the greater the possibility the answer will be “yes”, as your highest-earning years are likely in the future. If you are older and at or near your peak earning potential, the conversion may not be worth it at all.

#6. A lump sum payout represents a good deal. Some corporations are offering current and/or former workers a choice of receiving pension plan assets in a lump sum payout instead of periodic payments. They aren’t doing this out of generosity; they are doing it because actuaries have advised them to lessen their retirement obligations to loyal employees. For many pension plan participants, electing not to take the lump sum and sticking with the lifelong periodic payments may make more sense in the long run. The question is, can the retiree invest the lump sum in such a way that might produce more money over the long run, or not? The lump sum payout does offer liquidity and flexibility that the periodic payments don’t, but there are few things as economically reassuring as predictable, recurring retirement income. Longevity is another factor in this decision.

#7. Living it up in your 60s won’t hurt you in your 80s. Some couples withdraw much more than they should from their savings in the early years of retirement. After a few years, they notice a drawdown happening – their portfolio isn’t returning enough to replenish their retirement nest egg, and so the fear of outliving their money grows. This is a good argument for living beneath your means while still carefully planning and budgeting some “epic adventures” along the way.

Your retirement plan should be created and periodically revised with an understanding of the unique circumstances of your life and your unique financial objectives. There is no such thing as generic retirement planning, and that is because none of us will have generic retirements.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - www.forbes.com/sites/janetnovack/2011/02/15/the-big-decision-when-to-take-social-security/ [2/15/11]

2 - money.usnews.com/money/retirement/articles/2013/01/07/what-people-who-live-to-100-have-in-common [1/7/13]

Kim 4/22/13 Kim 4/22/13

Gold’s Big Plunge

Why did its price drop more than 13% in two days?

Suddenly, a bear market in gold. On April 12, the precious metal settled at $1,501.40 on the COMEX – diving 4.1% in a single trading day and 20.5% under its all-time closing high of $1,888.70 on August 22, 2011. Statistically, that was the end of a lengthy bull market – one marked by 12 years of annual gains.^1,2

As gold bulls discovered, the selloff was just getting started. April 15 was the worst day for gold in 30 years – prices slid 9.4% lower on the COMEX to a close of $1,360.60.³

Buyers crept back into the gold market April 16, and the yellow metal staged something of a rebound – but why did prices plummet so quickly? While the tragedy at the Boston Marathon stunned Wall Street and the nation, the key factors behind gold’s two-day retreat came from overseas.

One influence: a sell signal from Cyprus. Late last week, reports emerged that the central bank of Cyprus was going to sell its excess gold reserves. Those reserves are scant by global standards – around 40 metric tons – but investors worried that other distressed eurozone nations might follow suit.^1,3

Another influence: China’s Q1 GDP. On April 15, its National Bureau of Statistics estimated first quarter growth at 7.7%, down from 7.9% in the fourth quarter. Economists polled by Reuters had projected China’s Q1 GDP at 8.0%. This riled Wall Street, and it was certainly unwelcome news for gold bugs as China’s appetite for gold seems to generally be quite strong. Stock and commodity investors were counting on the PRC’s growth to pick up, and instead they got one more signal of economic slowing adding to a perception of weaker global growth, implying less inflation and less demand to send gold prices higher.^3,4

Another lesson in diversification. Historically, many investors have hedged with gold – holding a little in their portfolios, but not too much. During the 2008-09 bear market in stocks, the flight to quality was strong and gold played the role of the “safe haven”. Now, stocks are strong and gold prices have suddenly sunk. Both of these downturns illustrate why many investors feel it is wise to allocate portfolio assets across different investment classes.

Citations.

1 - www.marketwatch.com/story/gold-prices-slip-with-weekly-declines-in-sight-2013-04-12 [4/12/13]

2 - www.cnbc.com/id/100644021 [4/16/13]

3 - www.usatoday.com/story/money/personalfinance/2013/04/15/gold-plunges-in-panic-selling/2085867/ [4/15/13]

4 - www.cnbc.com/id/100640654 [4/14/13]

Kim 4/8/13 Kim 4/8/13

Mistakes Families Make with 529 Plans

5 common errors to avoid + 2 big factors to consider.

Most families that start 529 college savings plans have done their “homework” about these programs. Missteps are made, though, often with the distribution of 529 plan assets. Here are some of the major gaffes, and the major factors anyone should think about before enrolling.

Assuming a university will withdraw 529 plan assets for you. When the time comes, you have to tell the 529 plan that you need the money and specify the payee. Typically, a 529 program offers you either a check written out to you, to your student, or a payment made directly from the 529 plan to the university. There are two big reasons why a check made payable to the student may be the best option.

*A 529 plan distribution triggers a Form 1099-Q. You most likely want your student’s name and Social Security number on that form, not yours. If your student’s name is on the 1099-Q and your student has qualifying higher education expenses (QHEE) equaling or exceeding the gross distribution figure for that tax year listed on the form, that whole 529 plan withdrawal becomes tax-free and the distribution from the 529 doesn’t show up on the student's Form 1040. If your name is on the 1099-Q, the distribution doesn’t show up on your 1040. Even if your student’s QHEE equals or exceeds the magic number on the 1099-Q for the tax year, an omission may trigger an IRS notice to you, and you will have to defend the exclusion.¹

*Let’s say you accidentally overestimate your student’s qualified education expenses, or maybe parents and grandparents make withdrawals without each other’s knowledge. In this event, the earnings portion of the distribution is partly or fully taxable. If the distribution is paid out to you, then the earnings are taxed at your federal tax rate. If it is made payable to your student, then the earnings are taxed at his or her federal tax rate, which barring the “kiddie tax” is presumably just 10-15%.¹

Having a payment made directly the school can lead to a second common mistake.

Inadvertently reducing a student’s financial aid potential. When a university takes a direct payment from a 529 plan, its financial aid office may make a dollar-for-dollar adjustment to the need-based aid a student receives. Often, it is viewed the same as scholarship money.¹

Since the IRS bars you from using multiple education tax benefits to pay for the same education expenses, using tax-deferred 529 plan earnings to pay for the first semester of college may disqualify your student for an American Opportunity Credit. You should read up on the IRS income restrictions on education credits or consult a tax professional. Paying the first few thousand dollars in freshman year expenses with funds outside the plan may allow your student to retain eligibility.²

Mistiming the distributions. It can take up to two weeks to arrange and carry out a 529 plan distribution; telling a financial aid office that you are using 529 funds to pay tuition just a few days before a tuition deadline is cutting it close.³

Some families withdraw 529 monies during freshman year, which can conflict with federal tax returns. If a tuition payment is due in January, withdrawing it in December will create an incongruity between total withdrawals and expenses. The same will apply if a withdrawal is made in January, but tuition was due in December.³

Botching the tax break offered to you on the distribution. To get a tax-free qualified withdrawal from a 529 plan, the withdrawn funds have to be used for qualified, college-related expenses. If the distribution isn’t qualified, it will be considered fully taxable, and you may be hit with a 10% federal penalty plus state and local income taxes. If you withdraw more plan assets than necessary, any excess distribution is also nonqualified. Calculating and withdrawing the "net" qualifying expenses of your student’s college education could help you avoid this last problem, or alternately, you could report the excess 529 funds on the student's 1040.^3,4,5

Ceasing 529 contributions once a student enters college. You can keep putting money into a 529 plan throughout your student’s college years, with the opportunity for additional tax-deferred growth of those savings.²

Finally, two other factors are worth noting. These would be a 529 plan’s expenses and deductions.

Tax deductions represent a key reason why families choose in-state 529 plans. Most states that levy income tax offer 529 programs with deductions or credits for taxpayers. It varies per state. In Michigan, a married couple can deduct the first $10,000 of 529 contributions annually, which leads to a state tax savings of up to $425. Some other states offer no deductions.⁶

Some 529 plans have different advantages. If your home state’s 529 plan expense ratio exceeds 1%, consider another state’s plan. (You can find objective rankings of 529 plan expenses online.)

Lastly, compare the expenses and fund choices offered by a 529 plan to those of other funds or investment vehicles found outside the 529 wrapper.

Make no mistake, 529 plans offer great potential advantages for households striving to meet future college costs. Just remember to read the fine print, especially as your student’s freshman year draws closer.

Citations.

1 - www.bankrate.com/finance/college-finance/3-ways-to-take-a-529-plan-distribution.aspx [10/5/09]

2 - www.usnews.com/education/best-colleges/paying-for-college/articles/2012/08/01/4-costly-mistakes-parents-make-when-saving-for-college [8/1/12]

3 - www.savingforcollege.com/articles/20101001-5-blunders-by-first-time-529-plan-spenders [10/01/10]

4 - www.foxbusiness.com/personal-finance/2011/11/14/dont-make-your-52-plan-distribution-taxing/ [11/14/11]

5 - www.529.com/content/benefits.html [3/28/13]

6 - www.forbes.com/sites/baldwin/2013/03/27/the-two-step-guide-to-529s/ [3/27/13]

Kim 4/1/13 Kim 4/1/13

When a Family Member Dies

A financial checklist for the most difficult of times.

The passing of a loved one irrevocably alters family life. After a death, there is so much to attend to that addressing financial matters related to a family member’s passing may be put on hold. This should be done, though, and it is better to do it sooner rather than later. Here, then, is a list of what commonly needs to be looked after.

Request copies of the death certificate. Depending on where you live, you have two or three places to turn to for this document. You can phone, email or personally visit the office of the county recorder (or county clerk, as the term may be). You can alternately contact your state’s vital records department (sometimes called the state registrar or department of health), though it may take a little longer to get the document this way. In addition, some large and mid-sized cities maintain their own registrars of births and deaths.

Call advisors, executors & business partners as applicable. The deceased’s lawyer and CPA should be quickly notified, along with any business partners and the executor of his or her estate. You must have a say in the decision-making that follows. The goals of protecting family assets, carrying out your loved one’s bequests, and determining the next steps for a business will follow.

Call your loved one’s current or former employer(s). Notify them even if he or she left the work force years ago, as retirement savings or pension payments may be involved. As the conversation develops, it is perfectly appropriate to ask about pertinent financial matters – say, 401(k) or 403(b) savings that will be inherited by a beneficiary or what will happen to unused vacation time and/or unpaid bonuses.

Funds amassed in a qualified retirement plan sponsored by an employer (or an IRA, for that matter) commonly go to the primary beneficiary who has been named on the most recent beneficiary form filled out by the account owner. That sounds simple enough – but certain rules and regulations can make things complicated.¹

As a general rule, if the late 401(k) or 403(b) account owner was your spouse, then you are the presumed beneficiary of the 401(k) or 403(b) assets. Under the Employee Retirement Income Security Act (ERISA), workplace retirement plans are directed to abide by this guideline. If someone else has been named as the primary beneficiary of the account with your consent, then the assets will go that person.¹

If the late 401(k) or 403(b) account owner was single, the assets in the account will go to whoever is designated as the primary beneficiary. The beneficiary designation will override any wishes stated in a will (for the record, the Supreme Court ruled so in 2009).¹

To arrange and confirm the transfer or distribution of such assets, the beneficiary form must be found. If you can’t locate it, the employer and/or the financial firm overseeing the retirement plan should provide access to a copy. The financial firm should ask you to supply:

*A certified copy of the account owner's death certificate

*A notarized affidavit of domicile (a document certifying his or her place of residence at the time of death)

If the named beneficiary of the retirement plan assets is a minor, his or her birth certificate will be requested. If the named beneficiary is a trust, the financial firm will want to see a W-9 form and a copy of the trust agreement.²

As to what to do with the retirement plan assets, there are really only three courses of action: you can a) transfer the assets into an IRA, b) transfer them into an IRA you own if the account owner was your spouse, or c) take the assets as a lump sum and pay the resulting income tax on that money, with the possibility of moving into a higher tax bracket.²

The value of these assets will be included in the estate of the deceased, unless the named beneficiary is a spouse or a charity.³

If you have been widowed, call Social Security. If you already receive benefits, you may now be eligible for greater benefits.

If your spouse received Social Security and you did not, you may now qualify for survivors benefits – and you should let Social Security know as soon as possible, as these benefits may be paid out relative to your application date rather than the date of your loved one’s death.

If this is the case, you may apply for survivors benefits by phone or by visiting a Social Security office. You will need to have some extensive paperwork on hand, specifically:

*Proof of the death (death certificate, funeral home documentation)

*Your late spouse’s Social Security #

*His/her most recent W-2 forms or federal self-employment tax return

*Your own Social Security # & birth certificate

*Social Security #s & birth certificates of any dependent children

*Your marriage certificate or divorce papers, as relevant

*The name of your bank & the number of your bank account for direct deposit purposes

If you have reached full retirement age, you will likely get 100% of the basic benefit amount that your late spouse was receiving. If you are in your sixties but haven’t yet reached full retirement age, you may receive anywhere from 71-99% of that amount. If you have a child younger than 16, you will get 75% of your late spouse’s basic benefit amount and so will your child.⁴

Call the insurance company. Assuming your loved one had some form of life insurance, contact the policyholder services department of that insurer and confirm the steps for claiming the death benefit. A claimant’s statement will have to be filled out, signed and presented to the insurance company (one for each named beneficiary of the policy), and a certified copy of the death certificate must be attached to said statement(s). Some insurers also want you to fill out a W-9 form, which tells the IRS about any interest paid on the value of the policy.⁵

Death benefits are generally paid out within days of a claim. Presumably, they will be paid out in a lump sum. If that is the case, they won’t be taxable. Occasionally, insurers will allow the beneficiary to receive the payout as a stream of monthly income.⁵

It isn’t unusual for people to own multiple life insurance policies. The AARP, AAA and myriad banks and non-profits market group life coverage to members/customers, and mortgage lenders and credit issuers offer forms of life insurance for borrowers. Tracking all of this coverage down is the problem, and canceled checks and bank records don’t always provide ready clues. Not surprisingly, companies have appeared that will help you search for obscure life insurance policies (for a fee, of course), and you should be able to locate these businesses through your state insurance department.⁵

If the family member was a veteran, call the VA. Your family may be entitled to funeral and burial benefits. In addition, the Veterans Administration offers Death Pensions and Aid & Attendance and Housebound Pensions to lower-income widows of deceased wartime veterans and their unmarried children.

These pensions are needs-based. To be eligible for the Death Pension, a widow or child’s “countable” income must fall below a certain yearly limit set by Congress. (A “child” as old as 22 may be eligible for the Death Pension.) The deceased veteran must not have received a dishonorable discharge, and he or she must have served 90 or more days of active duty, at least 1 day of it during wartime. If he or she entered active duty after September 7, 1980, then in most cases 24 months or more of active duty service are necessary for a Death Pension to eventually be paid. The Aid & Attendance and Housebound Pensions provide some recurring income to pay for licensed home health aide or homemaker services.⁶

It is wise to contact a Veterans Services Officer before you file such a pension claim, as he or she can be a big help during the process. You can find a VSO through your state veterans’ affairs department of or through the VFW, the Order of the Purple Heart, the American Legion or the non-profit National Veterans Foundation.⁶

A final individual income tax return may be required for the deceased. You or your tax advisor should consult IRS Publication 17 for more detail. Also, search for “Topic 356 - Decedents” on the IRS website. Deductible expenses paid by the deceased before death can generally be claimed as deductions on such a return.⁷

If you have been widowed, consider the future. In the coming days or weeks, you should arrange a meeting to review your retirement planning strategy, and your will, beneficiary designations and estate plan may also need to be updated. The passing of your spouse may necessitate a new executor for your own estate. Any durable powers of attorney may also need to be revised.

Citations.

1 - online.wsj.com/article/SB10001424053111904007304576496612749922654.html [9/7/11]

2 - www.schwab.com/public/file/P-1625576/CS13416-02_MKT13598-10_FINAL_118091.pdf [12/10]

3 - www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/planning_with_retirement_benefits.html [2/11/13]

4 - www.ssa.gov/pubs/10084.html#a0=2 [2/11/13]

5 - www.360financialliteracy.org/Topics/Insurance/Life-Insurance/Claiming-Life-Insurance-Benefits [3/20/13]

6 - nvf.org/death-pension [3/20/13]

7 - www.irs.gov/taxtopics/tc356.html [1/29/13]

Kim 3/13/13 Kim 3/13/13

What Does the Dow’s Record High Really Mean?

Does it signal anything more than bullish sentiment?

Next stop, 15,000? As the Dow Jones Industrial Average settled at a new all-time high of 14,253.77 on March 5, the psychological lift on Wall Street was undeniable – the market was finally back to where it was in 2007. Or was it?¹

For many Americans, the Dow equals the stock market, and the stock market is a direct product of the economy. It doesn’t quite work that way, of course. Right now, it is worth examining some of the factors that have driven the Dow to its series of record closes. Does the Dow’s impressive winter rally signal anything more than unbridled bullish enthusiasm?

The small picture. Investors should remember that the Dow Jones Industrial Average includes just 30 stocks – 30 closely watched stocks, to be sure, but still just 30 of roughly 2,800 companies listed on the New York Stock Exchange. The S&P 500, with its 500 components, is considered a better measure of the market. When you hear or read that “stocks advanced today” or “stocks retreated this afternoon”, the reference is to the S&P. As the Dow kept settling at all-time peaks in early March, the S&P was consistently wrapping up trading days at 5-year highs but still remained about 2% off its 2007 record close.^2,3

You could argue that the Dow is even less representative of the broad stock market than it once was. In 2007, Kraft, Citigroup and General Motors were among the blue chips; since then, they’ve been tossed out and the index has gotten a little more tech-heavy.¹

If you add up all the share prices of the 30 stocks in the Dow, you will not get a number over $14,000. The value of the Dow = 7.68 x the total share prices of all 30 Dow components. How did Dow Jones arrive at the magic multiplier of 7.68? It is a direct reflection of the Dow Divisor, which is a numerical value computed and periodically adjusted by Dow Jones Indexes. For every $1 that shares of a DJIA component rise in price, the value of the Dow rises 7.68 (the Dow Divisor, you see, is well beneath 1 – on March 7 it was 0.130216081).^4,5,6

The DJIA isn’t indexed to inflation, so hitting 14,167 in 2013 isn’t quite like hitting 14,167 in 2007. It is a price-weighted index as well (i.e., each Dow component represents a fraction of the index proportional to its price), which also makes a comparison between 2007 and 2013 a bit hazy.¹

The big picture. The Dow surpassed its old record thanks to many factors – the resurgent housing market, the Institute for Supply Management’s February purchasing managers indices showing stronger expansion in the manufacturing and service sectors, an encouraging ADP employment report, and of course earnings. Perhaps the most influential factor, however, is central bank policy. The Federal Reserve’s ongoing bond-buying has stimulated the real estate industry, the market and the overall economy, and fueled the DJIA’s ascent. The parallel, open-ended effort of the European Central Bank has diminished some of the anxiety over the future of the euro. In early March, the ECB and the Bank of England again refrained from adjusting interest rates and ECB president Mario Draghi mentioned the need for the bank to retain an “accommodative” policy mode until the eurozone economy sufficiently improves.³

In the big picture, two perceptions are moving the market higher. One is the conclusive belief that the recession is over. The other is the assumption that the Fed will keep easing for a year or more. Pair those thoughts together, and you have grounds for sustained bullish sentiment.

How high could the Dow go? Any time the Dow flirts with or reaches a new record high, bears caution that a pullback is next. Though many analysts feel stocks are fairly valued at the moment, a combination of headlines could inspire a retreat – but not necessarily a correction, or a replay of the last bear market.

While the market has soared in the first quarter, the economy grew just 0.1% in the fourth quarter by the federal government’s most recent estimate. That may have given some investors pause: the Investment Company Institute said that $1.13 billion left U.S. stock funds in the week of February 25-March 1, which either amounts to bad timing, an aberration (as it was the first outflow ICI recorded this year), profit-taking or skittishness.⁷

If the Dow hits 14,500 or 15,000, that won’t confirm that the economy has fully healed or that the current bull market will last X number of years longer. It will be good for Wall Street’s morale, however, and Main Street certainly takes note of that. Lazard Capital Markets managing director Art Hogan seemed to speak for the status quo in a recent CNBC.com article: “We’re certainly in an environment where good news is great and bad news is just okay. The market has just found the path of least resistance to the upside in the near term and it’s hard to find something to knock it off there.”⁷

Kim Bolker may be reached at 616-942-8600 and kbolker@sigmarep.com. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – business.time.com/2013/03/06/dow-jones-closes-at-record-high-so-what/ [3/6/13]

2 – www.nyse.com/content/faqs/1050241764950.html [3/7/13]

3 – money.cnn.com/2013/03/07/investing/stocks-markets [3/7/13]

4 – www.dailyfinance.com/2013/02/28/dow-14000-economy-meaning-djia-explainer/ [2/28/13]

5 – www.investopedia.com/terms/d/dowdivisor.asp#axzz2MtpUOJVi [3/7/13]

6 – online.wsj.com/mdc/public/page/2_3022-djiahourly.html [3/7/13]

7 – www.cnbc.com/id/100533269 [3/7/13]

Kim 2/25/13 Kim 2/25/13

Putting Your Tax Refund to Work

Where could that money go besides a bank account?

Should your refund be saved? According to a TD Ameritrade poll, 47% of U.S. taxpayers expect a refund this year. What do they plan to do with the money?¹

The answers may surprise you. While 15% of the survey respondents indicated they would spend their refunds on discretionary purchases, 47% said they would save the money and 44% indicated they would use some or all of it to whittle away some debt. Just 15% said they would invest it, and only 6% said they would direct it to a charity.¹

Besides deposit accounts, consider other destinations. Putting your refund into your savings or checking account is sensible enough – but with the interest rates most bank accounts earn today, you may be wondering about alternatives. Here are some other options.

Your refund could let you put more money into your workplace retirement plan. Does your employer offer to match your retirement plan contributions? If so, you might want to think about contacting your plan administrator or human resources officer and increasing your elective salary deferrals into the retirement plan this year by the same amount as the refund. If you deposit those refund dollars in a checking or savings account, you can offset the increase in the amount of salary you defer by distributing the refund dollars from the bank account to yourself. Hopefully, that checking or savings account generates at least some interest on those deposited funds as well.²

It could help you increase your 2012 (or 2013) IRA contribution. If you didn’t make the maximum allowable IRA contribution for 2012 – $5,000 across all of your traditional and Roth IRAs, $6,000 for those 50 or older – you could boost that contribution as a byproduct of your refund.²

Assuming you haven’t sent your 2012 federal return to the IRS yet, you can redo your taxes to show your 2012 IRA contribution(s) raised by the amount of the refund you will be getting. As the deadline for 2012 contributions is April 15, 2013, you could either make your additional 2012 IRA contribution using your refund (if you file early and get your refund back nice and early) or with equivalent cash from your savings or checking account, knowing that you will then use the refund to reimburse yourself. Whatever way you choose, please make sure that you earmark your additional contribution for the year 2012; otherwise, the IRA custodian will interpret it as a contribution for this year. (If you’ve already sent your 2012 taxes to the IRS, you could still pull this off with the help of a 1040X form to amend your return).²

Another option: use the refund you get from your 2012 taxes to increase your 2013 IRA contribution.

You could tell the IRS to put the money in bonds. Starting in 2011, the IRS gave taxpayers who received refunds a third option: in addition to a direct deposit or a check in the mail, their refunds could be redirected into U.S. Series I Savings Bonds. Up to $5,000 of refund dollars can be invested this way (in multiples of $50).³

You could use the dollars for home improvement. If you want to go green (or even greener) and you have the time, initiative and patience to tackle an energy-efficient home improvement project, here is another option. You could get as much as a $500 tax credit for your effort.²

You could make an additional mortgage payment or pay property tax. Assuming your home isn’t underwater, you may want to use the refund dollars to reduce mortgage principal. Also, mortgage companies often keep a few thousand bucks in escrow to pay various tax and insurance expenses linked to your home, and some of them will actually let a borrower’s savings account stand in for their escrow account. If they permit, you could make such payments out of an account of your own while it earns a (tiny) bit of interest.²

Lastly, think about avoiding a refund in 2013. In figurative terms, your federal tax refund amounts to an interest-free loan to Uncle Sam. If you don’t particularly want to make that “loan” again, see if your W-4 can be tweaked to decrease that possibility this year.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 – files.shareholder.com/downloads/AMTD/2319508826x0x633008/9024d25b-97d6-410e-bc67-f7e1bcf7f17c/Tax_Refund_Release_Final_2013.pdf [2/6/13]

2 – www.cnbc.com/id/100457342 [2/13/13]

3 – www.irs.gov/uac/Ten-Things-to-Know-About-Tax-Refunds [4/11/13]

Kim 2/18/13 Kim 2/18/13

Ways to Save for College

Comparing & contrasting the potential of some popular vehicles.

How expensive will college be tomorrow? The Department of Education projects that by 2030, the tuition cost of obtaining a four-year degree at a public university will surpass $200,000. Staggering? Indeed, but college is plenty expensive already. In 2012, tuition averaged $15,100 a year at public colleges and $32,900 a year at private colleges.¹

A Sallie Mae study finds that today’s students, on average, can only pay for 24% of their college expenses. It is little wonder that student loan debt exceeds credit card debt today.¹

How can you start saving to meet those costs today? With interest rates being what they are, don’t look to a garden-variety savings account. Even if current interest rates soon ascend to 2% or 3%, you would be at a disadvantage even if the bank account was large as tuition costs are climbing more significantly than inflation.

The message is pretty clear: to meet college costs, you need either a prepaid tuition plan or a savings vehicle that taps into the power of equity investing. Let’s look at some options.

Prepaid 529 plans. Offered by states and public colleges, these plans let you buy tomorrow’s tuition with today's dollars. You purchase X dollars of tuition today, and that is guaranteed to pay for an equivalent amount of tuition in the future.

You can do this in two different ways. Some of these prepaid plans are unit plans, in which you pay for X number of college credits or units now with a promise that the same amount of credits will be covered in the future. In other words, you’re locking in tuition at current rates.

As an example, let’s say a year of college at Hypothetical State University requires 36 units. Mom and Dad use a unit plan to pay $7,500 for those 36 units now for their 6-year-old daughter. In turn, the plan promises to pay whatever those 36 units cost when she starts her first semester at Hypothetical State 12 years from now, even though it might be much more.²

The other prepaid 529 plan variant is the contract plan, or guaranteed interest plan. In these prepaid plans, you make a lump sum contribution (or arrange recurring contributions), essentially buying X number of years of tuition. In turn, the plan guarantees to cover this predetermined amount of tuition expenses in the future.²

Usually, beneficiaries of prepaid tuition plans must be residents of the state offering the plan, or prospective students of the college offering the plan. In the wake of the recession, some of these plans are not accepting new investors as some states are worried about underfunding.^2,3

529 college savings plans. These state savings plans allow you to invest to build college savings rather than simply prepay them. Plan contributions are typically allocated among funds, and possibly other investment classes; the plan’s earnings grow without being taxed. The withdrawals aren’t taxed by the IRS either, as long they pay for qualified education expenses.²

You can contribute up to six-figure sums to these 529 plans – there’s a lifetime contribution limit that varies per state. Most of them are open to out-of-state residents. If the market does well, you can harness the power of equity investing through these plans and potentially make a big dent in college costs.²

There are two caveats about 529 plans. Should you elect to withdraw money from a 529 plan and use it for non-approved purposes, that money will be taxed by the IRS as regular income – and you will pay a penalty equal to 10% of the withdrawal amount. 529 balances can also negatively affect a student’s chances for need-based financial aid. In a given school year, that eligibility can be reduced by up 5.64% of your college savings.³

Coverdell ESAs. Originally called Education IRAs, Coverdell Education Savings Accounts offer families some added flexibility: the withdrawals may be used to pay for elementary and secondary school expenses, not just college costs. These are tax-deferred investment accounts, like 529 savings plans. Unfortunately, the current annual contribution limit for a Coverdell is $2,000. Any remaining account balance must generally be withdrawn within 30 days after the beneficiary’s 30th birthday, with the earnings portion of the balance being taxable.^3,4,5

Roth IRAs. Yes, it is possible to use a Roth IRA as a college savings vehicle. While the IRA’s earnings will be taxed, withdrawals used to pay for qualified college expenses will not be taxed and will face no IRS penalty. Additionally, if your son or daughter doesn’t go to college or comes into some kind of windfall that pays for everything, you end up with a retirement account. While Roth IRA balances don’t whittle away at a student’s chances to get need-based financial aid, the withdrawal amounts do come under the category of untaxed income on the FAFSA.³

Would a trust be worth the expense? Rarely, families set up tax-advantaged trusts for the purpose of college savings. In the classic model, the family is incredibly wealthy and the kids are “trust-fund babies” bound for elite and very expensive schools. Unless you have many children or your family is looking at potentially exorbitant college costs, a trust is probably overdoing it. The college savings vehicles mentioned above may help you save for education expenses just as effectively, all without the administrative bother associated with trusts and the costs of trust creation.

Citations.

1 – money.usnews.com/money/blogs/my-money/2012/07/25/how-much-will-you-need-to-send-your-child-to-college-in-2030 [7/25/12]

2 – www.axa-equitable.com/plan/education/529-plans/529-vs-prepaid-tuition.html [2011]

3 – money.cnn.com/101/college-101/savings-plan.moneymag/index.html [1/10/13]

4 – money.msn.com/tax-tips/post.aspx?post=9dba01a0-b233-4e6e-97ef-aecbc62188e3 [1/9/13]

5 – www.irs.gov/uac/Coverdell-Education-Savings-Accounts [9/11/12]

Kim 2/12/13 Kim 2/12/13

Common Deductions Taxpayers Overlook

Make sure you give them a look as you prepare your 1040.

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit (as was the case when some filers ignored the Making Work Pay Credit), you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work in 2012? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job in 2012, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence in 2012, you can take a deduction for job-related moving expenses even if you don’t itemize.¹

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.²

Health insurance & Medicare costs. About 7% of us pay health coverage costs out of pocket. If you are in that 7%, you may write off 100% of your premiums as an adjustment to your business income per the Small Business Jobs Act of 2010. That write-off privilege extends to you, your spouse and 100% of your dependents.^2,3

Some small business owners have qualified for Medicare. If you are one of them, and you and/or your spouse aren’t eligible for coverage under an employer-subsidized health plan, then you may deduct premiums paid for Medicare Part B, Medicare Part D and Medigap policies. You don’t have to itemize to get this deduction, and the 7.5%-of-AGI test for itemized medical costs isn’t relevant to this.¹

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid in 2012 per the fiscal cliff bill passed into law on January 2.¹

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter in 2012? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.¹

Education & training expenses. Did you take any classes related to your career in 2012? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs. Even certain periodical subscriptions may qualify for such deductions.²

Eating out on business. The cost of a business lunch, breakfast or dinner – or a lunch, breakfast or dinner associated with business development – qualifies for an itemized deduction.²

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile for 2012, and tolls and parking fees qualify as well).¹

Superstorm Sandy losses. The IRS allows filers living in federally declared disaster areas to file casualty claims for the year in which the disaster occurred, and the flexibility to amend the previous year’s return. This means that you can deduct 2012 casualty losses on either your 2011 or 2012 federal tax return.⁴

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs and take a 2012 mileage deduction ($0.555 per mile plus tolls and parking fees).¹

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $35,000 in death taxes, you can deduct that $35,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $17,500 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on. If you withdrew such inherited assets in 2012, you have the opportunity to claim the appropriate deduction for the 2012 tax year.¹

And now, some opportunities for quasi-deductions that often go overlooked...

The child care credit. If you paid for child care while you worked in 2012, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.¹

Parents as dependents. If you have parents whose taxable incomes are underneath the $3,800 personal exemption for 2012 and you pay more than half of their support, they might qualify as dependents on your federal return even if they live at a different address.⁴

Filing status shifts. Are you a single filer? Do you have a relative or one or more children who qualifies as a dependent? If so, you could change your filing status to head of household, which could save you some tax dollars.⁴

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)¹

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

Citations.

1 – www.kiplinger.com/article/taxes/T054-C000-S001-the-most-overlooked-tax-deductions.html [1/3/13]

2 – money.msn.com/tax-tips/post.aspx?post=382d5150-a740-4f31-b091-4711dc07bafc [1/18/13]

3 – vaperforms.virginia.gov/indicators/healthfamily/healthInsurance.php [1/23/13]

4 – www.cnbc.com/id/100400925 [1/23/13]

Kim 2/4/13 Kim 2/4/13

Building An Emergency Fund

Creating a financial cushion for stressful times.

How would you respond to sudden financial demands? We all define “emergencies” differently, but we are not immune to them. How can we plan to stay afloat financially when they occur?

Most households are not financially prepared for an emergency – not even close. A recent study from the National Foundation for Credit Counseling found that 64% of Americans had less than $1,000 in funds earmarked for a crisis.¹

While the recession did its part to siphon emergency funds from families, attention must be paid to rebuilding those funds. It may be difficult; it may be inconvenient. That doesn’t make it any less of a priority.

Emergencies tend to be linked to long-term debt. Having a designated emergency fund can help you attack that debt. When most people think of financial emergencies, they think of medical problems and burdensome costs that their insurance won’t fully absorb – but there are other paths to long-term debt, such as a sudden layoff, a natural disaster, a family issue with financial underpinnings or even an abrupt need to move to another metro area, for whatever reason.

How large should the fund be? You decide. An old rule of thumb is six months of net income or six months of expenses. If you are snickering or laughing out loud at your chances of saving that much, you aren’t alone. If your prospects of building a five-figure emergency fund seem remote, try to create one equivalent to two or three months of net income. Any amount is better than none.

How do you do it without hurting your standard of living? Few of us have a lump sum we can just reassign for emergencies. So consider these subtle savings opportunities.

> You could pay cash whenever possible, opening the door to incremental savings that credit card companies would otherwise take from you. A few dozen bucks can become a few hundred bucks, then a few thousand bucks over time. Incidentally, in a nationwide survey conducted by Chase Blueprint and LearnVest, 31% of people polled cited credit card debt as a major barrier to achieving financial objectives. The credit card debt carried by this 31% averaged about $5,000. Clearly, living on credit cards will thwart your effort to build a rainy day fund.²

> You could vow not to spend frivolously, thereby retaining money you might be tempted to throw away on impulse.

> You could sell stuff – stuff somebody else, maybe down the street or across the country, might want. Incidental shipping and handling costs could seem irrelevant next to the cash you generate.

> You could arrange direct deposit or start a seasonal savings account. The psychology behind both moves is simple: you are less likely to spend money if it doesn’t pass through your wallet.

Here’s how not to do it. Try to avoid building a crisis fund through self-defeating methods. For example:

> Don’t start an emergency fund with a loan. Do it with your own accumulated savings, bonus money from your job performance, royalties – whatever the origin, use money you have made or and/or saved yourself, not money you have borrowed from lenders or relatives.

> Don’t do it using payday loans or cash advances. High-interest short-term loans and cash advances on credit cards are often pitched as rescues to struggling households. Thanks to their absurd interest rates, payday loans are not financial “life rafts” by any means. Cash advances on credit and debit cards come with disproportionately high fees. Sadly, people who go in for these loans and advances once commonly go in for them again.

> Don’t refrain from paying certain bills. Let’s say that you have eight debts you have to pay per month. If you only pay three of them each month and carefully alternate which debts get paid down, can you create an emergency fund with the money you avoid paying? Well, yes – but you may imperil your credit rating in the process.

If you don’t have a designated emergency fund, you can build it up in the same way that you probably invest: a little at a time, with relatively little impact on your lifestyle. It can be done. It should be done.

Citations.

1 – www.learnvest.com/knowledge-center/5-ways-to-start-an-emergency-fund/ [8/14/12]

2 – www.foxbusiness.com/personal-finance/2012/11/01/seven-reasons-why-need-to-create-emergency-fund-now/ [11/1/12]

Kim 1/28/13 Kim 1/28/13

The 2 Biggest Retirement Misconceptions

While the idea of retirement has changed, certain financial assumptions haven’t.

We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.¹

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.²

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the AmericanAcademy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.³

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

Kim Bolker is a Representative with Sigma Financial Corporation and may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 – nytimes.com/2008/04/27/weekinreview/27sack.html?pagewanted=print [4/27/08]

2 – usatoday.com/tech/science/2005-10-23-aging-centenarians_x.htm [10/23/05]

3 – usatoday.com/money/perfi/retirement/2010-04-30-401k28_CV_N.htm [5/3/10]

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Gold’s Big Plunge

Mistakes Families Make with 529 Plans

When a Family Member Dies

What Does the Dow’s Record High Really Mean?

Putting Your Tax Refund to Work

Ways to Save for College

Common Deductions Taxpayers Overlook

Building An Emergency Fund

The 2 Biggest Retirement Misconceptions

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