Tag: Future Plan

Rollover of After-Tax Dollars from 401(k) Plans

Published on by dredheadz

Background

Here’s the dilemma. You have a traditional 401(k) that contains both after-tax and pre-tax dollars. You’d like to receive a distribution from the plan, convert only the after-tax dollars to a Roth IRA, and roll the pre-tax dollars into a traditional IRA. (By rolling over/converting only the after-tax dollars to a Roth IRA, you avoid paying any income tax on the conversion.)

For example, let’s say your 401(k) plan account balance is $10,000, consisting of $8,000 of pre-tax dollars and $2,000 of after-tax dollars. Can you simply request a total distribution of $10,000, instructing the trustee to directly roll the $8,000 of pre-tax dollars to a traditional IRA and the remaining $2,000 of after-tax dollars to a Roth IRA?

In the past, many trustees allowed you to do just that. But in recent years the IRS had suggested that this result could be achieved only with indirect (60-day) rollovers, not direct rollovers. The legal basis for this IRS position was, however, not entirely clear. (The problem with indirect rollovers is that they are subject to 20% mandatory withholding and, if not executed correctly, could be fully taxable–and distributions prior to age 59½ might also be subject to a 10% federal income tax penalty.)

IRS Notice 2014-54

On September 18, in Notice 2014-54 (and related proposed regulations), the IRS backed away from its prior position. Based on the Notice, it is finally clear that employer-plan distributions can be split into more than one retirement vehicle with, for example, pre-tax money transferred directly to a traditional IRA (with no current tax liability) and after-tax money moved directly to a Roth IRA (with no conversion tax). Even though the new rules aren’t scheduled to go into effect until January 1, 2015, taxpayers can apply this guidance to distributions made on or after September 18, 2014. (The guidance also applies to 403(b) and 457(b) plans.)

The Notice provides the following technical rules:

•When calculating the taxable portion of a distribution from a 401(k) plan, all distributions you receive at the same time are treated as a single distribution, even if the proceeds are going to multiple destinations. This is important for allocating pre-tax and after-tax contributions to a distribution. For example, assume your 401(k) account is $100,000, consisting of $60,000 (6/10s) of pre-tax dollars and $40,000 (4/10s) of after-tax dollars. You request that $20,000 be rolled directly over to an IRA and $20,000 paid to you. This is treated as a single $40,000 distribution from the 401(k) plan. Of this $40,000, $24,000 (6/10s) is pre-tax dollars, and $16,000 (4/10s) is after-tax dollars.
•If you receive a distribution (as defined above), and roll all or part of the distribution over to one or more eligible retirement plans, your pre-tax dollars will be deemed allocated first to any direct rollovers you make, and then to any 60-day (indirect) rollovers you make. After all your pre-tax dollars have been so allocated, any remaining amounts rolled over will consist of after-tax dollars.
•If you are making direct rollovers to more than one eligible retirement plan (or indirect rollovers to more than one plan), you can direct the trustee how to allocate the pre-tax dollars among those retirement plans prior to the time the direct rollovers are made.

Examples

The Notice includes the following examples:

Julie participates in a 401(k) plan. Her $250,000 account balance consists of $200,000 of pre-tax dollars and $50,000 of after-tax dollars. Julie leaves her job, and requests a distribution of $100,000. The $100,000 distribution is deemed to include $80,000 of pre-tax dollars ($100,000 x $200,000/$250,000), and $20,000 of after-tax dollars ($100,000 x $50,000/$250,000). Julie requests that $70,000 be directly rolled over to the 401(k) plan maintained by her new employer and that $30,000 be paid to her in cash. Because the pre-tax amount of the distribution ($80,000) exceeds the amount directly rolled over ($70,000), the amount directly rolled over to the new plan consists entirely of pre-tax dollars. The remaining amount paid to Julie (prior to any withholding tax) consists of $10,000 in pre-tax dollars and $20,000 in after-tax dollars. Prior to the 60th day after the distribution, Julie chooses to roll over $12,000 to an IRA. Because the amount rolled over in the 60-day rollover ($12,000) exceeds the remaining pre-tax dollars ($10,000), the amount rolled over to the IRA consists of $10,000 of pre-tax dollars and $2,000 of after-tax dollars.

The facts are the same as in Example 1, except that Julie chooses to make $82,000 of direct rollovers — $50,000 to the new 401(k) plan and $32,000 to an IRA. The remaining $18,000 is paid to Julie. Because the amount rolled over ($82,000) exceeds the pre-tax amount of the distribution ($80,000), the direct rollovers consist of $80,000 in pretax amounts and $2,000 in after-tax amounts. Julie is allowed to allocate the pre-tax dollars between the new 401(k) plan and the IRA prior to the time the direct rollovers are made.

The facts are the same as in Example 1, except that Julie chooses to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. Julie is permitted to allocate the $80,000 that consists entirely of pre-tax dollars to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax dollars.

Conclusion

Prior to Notice 2014-54, it was possible to achieve a tax-free Roth conversion of after-tax dollars in an employer plan, but it was a fairly complicated procedure using 60 day (indirect) rollovers, not direct rollovers, which involved several steps and required taxpayers to have sufficient funds outside the plan to make up the 20% mandatory withholding that applied to the taxable portion of the distribution. The ability to accomplish the same result in a more efficient manner using direct rollovers is welcome relief.

IRS Notice 2014-54 is titled Guidance on Allocation of After-Tax Amounts to Rollovers, and can be found at www.irs.gov/pub/irs-drop/n-14-54.pdf.

Designing a Benefit Package for Your Small Business

Published on by dredheadz

If you’re a small business owner, you face many challenges in growing your company. One of them is recruiting and retaining the best talent for your needs. When your primary goals are managing costs and increasing revenue, how do you sufficiently entice new recruits and reward current staff members for continually putting their best efforts forward? One way is ensuring that you provide a competitive, cost-effective benefit package comprised of both traditional and not-so-traditional benefits.

Traditional benefits

In order to remain competitive, nearly all employers should offer some form of health insurance and retirement savings plan. Yet according to the U.S. Department of Labor, only 57% of small employers (those with fewer than 100 employees) offer health coverage and just 49% offer a retirement plan. (Source: National Compensation Survey, March 2013)

Health insurance

Small businesses can typically choose among traditional plans or managed care/health maintenance organizations (HMOs). Traditional plans are typically more expensive but tend to provide more access to providers. HMOs generally carry lower costs but have fewer options for care providers. Some small employers opt for a high-deductible health plan (HDHP) along with a health savings account (HSA). In an HDHP, employees carry a higher burden for up-front costs, but the HSA allows them to set aside money on a tax-advantaged basis to help defray these costs.

Note that a provision in 2010’s Affordable Care Act requires employers with 50 or more full-time employees (as defined by the Act) to offer adequate health insurance that’s affordable or face a possible penalty. “Adequate” means that the company’s share of total plan costs must equal at least 60%. Coverage is “affordable” if an employee’s share of the premium is less than 9.5% of his/her household income. Originally, the provision was to take effect in 2014, but the Department of Health and Human Services recently delayed implementation until 2015. In addition, employers with fewer than 25 full-time employees will be eligible for a credit to help them pay for health insurance.

Retirement plans

In today’s economic and political environment, most adults view retirement planning as a high financial priority. That’s why it’s important to include a retirement savings option in your benefit package. There are several options available to small employers, including traditional 401(k) plans, SIMPLE savings plans, and SEP-IRAs. A financial professional can help you choose the plan that’s right for your company’s needs.

Other options

Other traditional benefits include the following group insurance policies:
• Life insurance: These policies generally provide employees’ survivors a death benefit in a set amount or an amount based on salary (e.g., two times salary).
• Disability insurance: These plans provide employees with an income stream should they become disabled. Benefit amounts are typically a percentage of salary.
• Vision and dental coverage: These plans tend to be highly valued by employees, as the costs associated with dental and vision treatments, which are generally not covered by health insurance, can be quite high.

Not-so-traditional perks

In addition to traditional benefits, there are several not-so-traditional perks you can offer to help set your organization apart in the competition for talent.

Wellness programs

Some employers offer workplace-based wellness programs. According to a 2013 RAND Health study sponsored by the U.S. Departments of Labor and Health and Human Services, about half of U.S. employers offer wellness promotion initiatives. The study found that such programs can help reduce risk factors such as smoking and increase healthy behaviors like exercise. In particular, incentive-based wellness programs help improve overall employee engagement and encourage individuals to take responsibility for their own well-being. Although the study did not reveal a significant reduction in health-care costs for the period analyzed, authors did note trends that might lead to lower costs over the longer term. (Source: Workplace Wellness Programs Study, RAND Corporation, 2013)

Flexible work arrangements

In today’s hectic world, time is nearly as valuable as money. A company that values the work-life balance of its employees is nearly as highly valued as one that offers the best insurance or retirement plan. For this reason, one of the most popular and appreciated employee benefits available today is a flexible work environment. Once the hallmark of only small and “hip” technology companies, flexible work arrangements are growing in popularity. In fact, flexible scheduling is now offered by many larger, more established organizations as well.

Some examples of flexible work programs include:
• Flex schedules: work hours that are outside the norm, such as 7:00 a.m. to 4:00 p.m. instead of 8:00 a.m. to 5:00 p.m.
• Condensed work weeks: for example, working four 10-hour days instead of five 8-hour days
• Telecommuting: working from home or another remote location
• Job-sharing: allowing two or more employees to “share” the same job, essentially doing the work of one full-time employee (e.g., Jan works Monday through Wednesday noon, while Sam works Wednesday afternoon through Friday)
• Part-time or a combination: allowing employees to cut back to part-time during certain life stages, or use a combination of strategies to meet their needs

Allowing your employees to tailor their work schedules based on their individual needs demonstrates a great deal of respect and can generate an enormous amount of loyalty in return. Even if your business requires employees to be on-site during standard operating hours (such as a retail establishment), having a process in place that supports occasional paid time off to attend to outside obligations can have tremendously positive effects. These obligations might include doctors’ appointments, family commitments, and even unexpected emergencies, such as a sick relative. In some cases, these benefits have no costs associated with them, while in others, the costs may be minimal (e.g., the price of a smartphone or laptop to help employees remain productive while on the go).

Social activities

Sponsoring periodic activities can help workers relax and get to know one another. Such events don’t need to take much time out of the day, but can do wonders for building morale. Bring in lunch or schedule an office team trivia competition or group outing. If you work in a particular industry in which colleagues share a common passion, consider organizing events around that interest. For example, a sporting goods retailer could close up early on a slow-business afternoon and go for a hike or bike ride.

Concierge services, discounts

You may also be able to negotiate with other local companies for employee discounts and services. Laundry service, dry cleaning pickup/drop-off, and meal providers that can deliver hot, family-sized take-home dinners may help employees save both time and worry–and stay focused on the job.

Financial planning/education

For many people, money worries can be distracting and time consuming. Consider inviting a local financial professional into your office to provide counseling sessions for your employees. While you don’t necessarily have to pay for any services provided, simply offering the opportunity to get such help during work hours will be appreciated by your workforce.

Involve your employees

The best benefits are those that meet the needs of your employees. Before making any assumptions, solicit ideas from your employees and then conduct a survey to see what benefits they value the most. Consider putting together teams of associates to help with the idea generation and execution. By involving your employees in the decisions that matter most to them, you demonstrate that you value their time, efforts, opinions, and hard work.

QUARTERLY MARKET REVIEW: JULY-SEPTEMBER 2014

Published on by dredheadz

The Markets

Volatility returned to equities markets in Q3. A strong August was followed by losses in September, when any rallies began to focus around selected winners rather than benefitting stocks across the board. Investors exhibited a decided preference for large caps; the S&P 500 closed above 2,000 for the first time ever and the Dow industrials also set new all-time highs. The Nasdaq returned to a level it hadn’t seen since March 2000 and regained the lead for 2014. However, the Russell 2000, which has struggled for most of the year, fell deeper into negative territory year-to-date, while the Global Dow suffered from political conflicts abroad and concerns about global growth.

Bond investors continued to demonstrate surprising resilience. In early September, the yield on the benchmark 10-year Treasury fell to 2.35%–a level it hadn’t seen in more than a year–as prices rose. However, as the Federal Reserve continued to taper its economic support and ramped up discussion of how and when to increase rates, demand began to taper off (though geopolitical anxieties and a strengthening dollar kept the decline in check). Gold, which started the quarter at roughly $1,320, ended below $1,220. It was hurt in part by a stronger U.S. dollar, which by the end of the quarter had hit its highest level against the euro in almost two years. Dollar strength coupled with weaker global demand also meant lower oil prices; a barrel fell from $107 a barrel to roughly $93 during the quarter, a level it hasn’t seen since January.

Market/Index 2013 Close As of 9/30 Month Change Quarter Change YTD Change
DJIA 16576.66 17042.90 -.32% 1.29% 2.81%
NASDAQ 4176.59 4493.39 -1.90% 1.93% 7.59%
S&P 500 1848.36 1972.29 -1.55% .62% 6.70%
Russell 2000 1163.64 1101.68 -6.19% -7.65% -5.32%
Global Dow 2484.10 2534.47 -3.22% -2.73% 2.03%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.52% 17 bps -1 bps -52 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Quarterly Economic Perspective

  • After contracting 2.1% in Q1, the U.S. economy grew at an annual rate of 4.6% during the second quarter. The Bureau of Economic Analysis said increases in consumer expenditures, exports, business spending on equipment, and spending by both state and local governments were major contributors to the growth. Meanwhile, after-tax corporate profits also rebounded from their Q1 slump, rising 8.6%.
  • The Federal Reserve’s monetary policy committee continued to unwind its economic support. Its September bond purchases were only $15 billion, and they are scheduled to end in October. The committee also reaffirmed that the key Fed funds interest rate won’t increase for a “considerable time” after that. However, a survey of members showed that most now expect steeper increases than previously estimated, with rates hitting 1.4% by the end of 2015 and 2.9% by December 2016.
  • Despite a slight improvement in August’s unemployment rate (6.1%), the number of new jobs added in August was a disappointing 142,000, according to the Bureau of Labor Statistics. The continued slack in the labor market is one reason cited by the Federal Reserve for its caution about raising interest rates.
  • The housing recovery showed signs of tapering off. New home sales fell in both July and August, and the National Association of Realtors® said a shortage of the cash buyers who had helped boost existing home resales in July cut resales the following month. Housing starts and building permits also slowed in August after a strong July, according to the Commerce Department, while the rate of home price increases in the S&P/Case-Shiller 20-City Composite Index began to taper off.
  • After a strong July, manufacturing gains began to taper off. The Commerce Department said durable goods orders rose and fell based on orders for commercial aircraft, which hit a record high in July and plummeted a month later; aside from transportation, durable goods orders rose 0.7% in August. Auto production also saw a strong July and weaker August, and after six straight months of gains, the Fed’s gauge of industrial production edged downward in August.
  • By quarter’s end, the Bureau of Labor Statistics said falling energy costs had helped cut consumer inflation by 0.2%. That left the annual inflation rate for the previous 12 months at 1.7%, down from Q1’s 2.1%. The 1.8% annual inflation rate for final-state wholesale prices also was lower than Q1’s 2%. The Bureau of Economic Analysis said both personal income and consumer spending saw gains throughout the quarter.
  • Conflicts over Ukraine continued to raise concerns about how Russian retaliation for Western sanctions might affect the fragile European economy. A eurozone GDP that essentially flatlined in Q2 and weakness in both Germany and Italy led the European Central Bank to promise more aggressive stimulus measures.
  • The Chinese economy continued to show signs of slowing in some key areas. By August, growth in industrial production was almost 7% instead of the previous month’s 9%, housing sales were down nearly 11% from the beginning of 2014, and HSBC Corp.’s Purchasing Managers’ Index remained at 50.2–barely above the level that would represent contraction.

Eye on the Month Ahead

With October’s Fed bond purchases expected to be the last, next month’s monetary policy committee announcement will be watched to see if a rate hike is still a “considerable time” away. Global investors will assess whether additional expected support from the European Central Bank is likely to help jumpstart the economy there.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); http://www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What I’m Watching This Week – 29 September 2014

Published on by dredheadz

The Markets

Volatility was the name of the game last week. In addition to a multination campaign of airstrikes against terrorist targets in the Middle East, a decline in U.S. durable goods orders and an upward revision to U.S. GDP sent equities yo-yoing. Friday’s rally couldn’t overcome earlier losses, particularly those suffered by the Nasdaq and Russell 2000. Meanwhile, increases in the price of the benchmark 10-year Treasury sent its yield lower.

Market/Index 2013 Close Prior Week As of 9/26 Weekly Change YTD Change
DJIA 16576.66 17279.74 17113.15 -.96% 3.24%
Nasdaq 4176.59 4579.79 4512.19 -1.48% 8.04%
S&P 500 1848.36 2010.40 1982.85 -1.37% 7.28%
Russell 2000 1163.64 1146.92 1119.33 -2.41% -3.81%
Global Dow 2484.10 2605.20 2551.32 -2.07% 2.71%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.59% 2.54% -5 bps -50 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The U.S. economy grew faster during the second quarter than previously thought. The Bureau of Economic Analysis’s final estimate showed gross domestic product rising 4.6% rather than 4.2%; exports and business investment were responsible for much of the upward revision.
  • Durable goods orders plummeted 18.2% in August, according to the Bureau of Economic Analysis. However, the decline followed a 22.5% increase in July and was largely the result of a 74% drop in orders for commercial aircraft and parts, which had hit a record high the previous month. Aside from the decline in transportation-related equipment, new orders actually rose 0.7%.
  • New home sales were up 18% in August; the Commerce Department said that was 33% higher than the previous August. However, sales of existing homes fell 1.8% during the month, in part because there were fewer cash buyers. Though the National Association of Realtors® said August’s number represented the second-best pace of 2014, it was 5.3% lower than a year earlier.
  • Treasury officials announced new rules designed to make so-called “tax inversions” more difficult. (Inversion is a practice in which domestic corporations merge with foreign firms and reincorporate overseas, which reduces the U.S. corporate taxes owed.) The regulations could affect several pending mergers of U.S. corporations with overseas companies.
  • Legendary bond mutual fund manager Bill Gross stirred up the relatively placid bond world by resigning from Pacific Investment Management Co.–reportedly after internal conflicts at the firm–to take a position at Janus Capital Group.

Eye on the Week Ahead

Next week will paint a broad-brush picture of the current state of the U.S. economy, including housing, manufacturing, and consumer spending. As always, unemployment data will be assessed for its potential impact on the timing of future Federal Reserve action. And given recent weak data on overseas growth, any stimulus measures announced by the European Central Bank likely would be welcomed by international investors.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Deadline Approaching for Undoing a 2013 Roth IRA Conversion

Published on by dredheadz

If you converted a traditional IRA to a Roth IRA in 2013 and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (recharacterize) your conversion. You have until October 15, 2014, to undo your 2013 conversion. (If you’ve already filed your federal income tax return for 2013, you need to file an amended return by the tax filing deadline if you recharacterize.) A recharacterization can help you avoid paying income tax on IRA assets that have lost value since the conversion. When you recharacterize, your conversion is treated for tax purposes as if it never happened.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2013. Further assume that your Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you recharacterize, your IRA administrator will make a direct transfer of the assets from your Roth IRA back to your traditional IRA. For tax purposes, you’ll be treated as though the conversion never happened, and you’ll wind up with no resulting tax bill (or a tax refund if you already filed and paid taxes on the conversion).

If you recharacterize your 2013 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you must wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you recharacterized (and any earnings) is subject to a 30-day waiting period, any additional amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time. If you reconvert in 2014, then all taxes due as a result of the conversion will be included on your 2014 federal income tax return.

(You can also recharacterize a 2014 Roth conversion. However, the deadline for doing so isn’t until October 15, 2015.)

Whether it makes sense to recharacterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA and your expectations of where the markets may be headed.

Top Year-End Investment Tips

Published on by dredheadz

Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions beforeDecember 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you’ll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after December 31 for tax reasons.

Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you’re not meeting your financial targets, or more conservative if you’re getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it’s now selling at a more attractive price. Diversification and asset allocation don’t guarantee a profit or insure against a possible loss, of course, but they’re worth reviewing at least once a year.

Know when to hold ’em

When contemplating a change in your portfolio, don’t forget to consider how long you’ve owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, your ordinary income tax rate could be much higher than the long-term capital gains rate, which applies to the sale of assets held for more than a year. For example, as of tax year 2013, the top marginal tax rate is 39.6%, which applies to any annual taxable income over $400,000 ($450,000 for married individuals filing jointly). By contrast, the long-term capital gains rate owed by taxpayers in the 39.6% tax bracket is 20%. For most investors–those in tax brackets between 25% and 35%–long-term capital gains are taxed at 15%; taxpayers in the lowest tax brackets–15% or less–are taxed at 0% on any long-term capital gains. (Long-term gains on collectibles are different; those are taxed at 28%.)

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates. You must have held the stock at least 61 days within the 121-day period that starts 60 days before the stock’s ex-dividend date; preferred stock must be held for 91 days within a 181-day window. The lower rate also depends on when and whether your shares were hedged or optioned.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you’ve experienced this year. Though tax considerations shouldn’t be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as “harvesting your losses.”

Example:  You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

Time any trades appropriately

If you’re selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a “wash sale,” and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don’t want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You’d end up with the same position, but would have captured the tax loss.

If you’re buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you’ll owe taxes this year on that money, even if your own shares haven’t appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Note:  Before buying a mutual fund, don’t forget to consider carefully its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.

Know where to hold ’em

Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it’s generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments’ typically lower returns. And doing so generally turns that tax-free income into income that’s taxable at ordinary income tax rates when you withdraw it from the retirement account.

Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don’t qualify for the lower tax rate on capital gains and dividends.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold–for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.

Example:  You have invested periodically in a stock for five years, paying various prices, and now want to sell some shares. To minimize the capital gains tax you’ll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price.

Depending on when you bought a specific security, your broker may calculate your cost basis for you, and will typically designate a default method to be used. For stocks, the default method is likely to be FIFO (“first in, first out”); the first shares purchased are considered the first shares sold. As noted above, most mutual fund companies use the average cost per share as your default cost basis. With bonds, the default method amortizes any bond premium over the time you own the bond. You must notify your broker if you want to use a method other than the default.

What I’m Watching This Week – 22 September 2014

Published on by dredheadz

The Markets

Whether it was Fed-induced relief, anticipation of one of the world’s largest IPOs, or anticipation of the tech world’s largest iPhone ever (so far), something put equities investors back in a record-setting mood once again last week–at least those who were interested in large-cap stocks. The S&P 500 and Dow industrials hit their 34th and 18th all-time record highs of 2014 respectively, while the Nasdaq was basically flat and the small caps of the Russell 2000 saw a loss.

Market/Index 2013 Close Prior Week As of 9/19 Weekly Change YTD Change
DJIA 16576.66 16987.51 17279.74 1.72% 4.24%
Nasdaq 4176.59 4567.60 4579.79 .27% 9.65%
S&P 500 1848.36 1985.54 2010.40 1.25% 8.77%
Russell 2000 1163.64 1160.61 1146.92 -1.18% -1.44%
Global Dow 2484.10 2593.43 2605.20 .45% 4.88%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.62% 2.59% -3 bps -45 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

    • The Federal Reserve’s monetary policy committee reaffirmed its “considerable time” estimate for starting to raise interest rates once its bond-buying program ends in October (absent any economic surprises). However, increases could be steeper than previously thought. A majority of members expect the Fed funds interest rate (the rate at which banks lend to one another) to rise to almost 1.4% by the end of next year, almost 2.9% by December 2016, and 3.75% a year later. Only three months ago, the 2015 and 2016 rate forecasts were 1.125% and 2.5%. The Fed also will keep reinvesting the proceeds of its existing holdings until rates begin to rise, and will begin to test using so-called reverse repo agreements (essentially a type of money-market instrument) as part of its strategy for raising rates.
    • Falling energy costs in August, including gas prices, more than offset higher prices for food and shelter, leaving the consumer inflation rate down 0.2% for the month. According to the Bureau of Labor Statistics, that left the CPI-U index up only 1.7% for the last 12 months–well within the Federal Reserve’s target range. Meanwhile, the BLS said final-stage wholesale prices remained essentially flat for the month, with a 1.8% inflation rate for the last year.
    • As the summer wound down in August, housing starts and building permits slowed but remained higher than the previous summer. The Commerce Department said housing starts were down 14.4% for the month but were 8% higher than in August 2013, while despite a 5.6% decline in August, building permits were 5.3% higher than a year earlier.
    • U.S. manufacturing data was mixed. While the Philly Fed index continued to show growth, the pace retreated a bit from its three-year high of the previous month, slipping from 28% to 22.5%. Also, the Fed’s gauge of industrial production nudged downward 0.1% in August–the first decline since January–and its July gains were revised downward. However, the Fed’s Empire State index rose to its highest level since October 2009, going to 27.5% from 14.7%.
    • The Conference Board’s index of leading economic indicators continued to rise in August, though the 0.2% increase represented a more sluggish pace than during the previous two months. The Conference Board said housing permits and business spending on capital equipment held back the index.
    • (Still) a united kingdom: Scotland voted to remain part of the UK. After an initial relief rally, the British pound saw a post-vote pullback that left it little changed from before Thursday’s election.
    • Economic data from China showed slowing in some key areas of the country’s economy. Though industrial production was up 6.9% in August from a year ago, that was down substantially from July’s 9% increase. Also, housing sales were down nearly 11% since the beginning of the year. However, interest in Chinese economic data paled in comparison to the attention paid to the IPO of Alibaba, reportedly one of the world’s largest ever.

Eye on the Week Ahead

With the Fed meeting, the Scottish independence vote, and Alibaba’s IPO now in the rear-view mirror, housing stats plus the final Q2 GDP number will give investors some economic data to focus on.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What I’m Watching This Week – 15 September 2014

Published on by dredheadz

The Markets

The record-breaking march of the stock market faltered last week, as all indices posted losses. Perhaps the setback was due to a lack of economic influences, or because investors were nervously anticipating the results of next week’s Federal Open Market Committee (Fed) meeting, wondering whether Chair Janet Yellen will indicate a leaning toward higher rates. Or perhaps, as some observers believe, it was just time for a mild adjustment. Yields on the 10-year Treasury jumped to their highest point since early July.

Market/Index 2013 Close Prior Week As of 9/12 Weekly Change YTD Change
DJIA 16576.66 17137.36 16987.51 -.87% 2.48%
Nasdaq 4176.59 4582.90 4567.60 -.33% 9.36%
S&P 500 1848.36 2007.71 1985.54 -1.10% 7.42%
Russell 2000 1163.64 1170.13 1160.61 -.81% -.26%
Global Dow 2484.10 2631.64 2593.43 -1.45% 4.40%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.46% 2.62% 16 bps -42 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Job openings remained near a 13-year high in July 2014, according to the Bureau of Labor Statistics (BLS). At 4.7 million, the number of open jobs changed very little from a month earlier. The hire rate (3.5%) held steady from June. The number of hires inched upward to approximately 4.9 million in July from nearly 4.8 million in June, reaching the highest level since December 2007.
  • In a prime-time address to the nation Wednesday night, President Obama announced an expanded effort to “degrade, and ultimately destroy” the Islamic State of Iraq and Greater Syria, or ISIS. Details included expanding airstrikes in Iraq, introducing airstrikes in Syria, and sending additional troops to Iraq for training and advisory missions.
  • The Commerce Department reported that sales by wholesalers rose 0.7% from June to July, and were up 7.5% from a year earlier. Inventories inched up 0.1% from June, and were up 7.9% from a year earlier.
  • Consumers shopped at their strongest rate since April, also according to the Commerce Department. Retail sales rose 0.6% from July to August, to a total $444.4 billion. Sales were 5% higher than one year ago.
  • The United States joined the European Union in imposing further sanctions on Russia Friday, with impacts on Russian interests in the energy, banking, and defense sectors.

Eye on the Week Ahead

This week promises to make up for last week’s trickle of economic data. Investors will have an eye on industrial production; inflation, manufacturing, and housing data; international capital flows; Wednesday’s Fed meeting; leading economic indicators; and any changes in trading volume due to this quarter’s quadruple witching options expiration at the end of the week.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What I’m Watching This Week – 8 September 2014

Published on by dredheadz

The Markets

Amid a flood of mostly positive economic data and what at first blush appears to be good news from Ukraine, nearly all market sectors finished the short week in positive territory. Even surprises from the European Central Bank and Friday’s jobs numbers seemed to have minimal impact on investors, as the S&P 500 continued its record-breaking run.

Market/Index 2013 Close Prior Week As of 9/5 Weekly Change YTD Change
DJIA 16576.66 17098.45 17137.36 .23% 3.38%
Nasdaq 4176.59 4580.27 4582.90 .06% 9.73%
S&P 500 1848.36 2003.37 2007.71 .22% 8.62%
Russell 2000 1163.64 1174.35 1170.13 -.36% .56%
Global Dow 2484.10 2618.91 2631.64 .49% 5.94%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.35% 2.46% 11 bps -58 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The manufacturing sector reported its strongest economic reading since March 2011. The Institute for Supply Management’s Purchasing Managers Index (PMI) came in at 59% for August, up 1.9 points from July’s reading of 57.1%. Part of the increase was due to record levels in the New Orders Index, which registered its highest reading in more than a decade.
  • The positive results in new orders was echoed by the U.S. Census Bureau, which reported that new orders for manufactured goods rose by a record-setting 10.5% in July, the highest reported increase in 22 years. Manufactured goods orders have risen in five of the last six months. Shipments, unfulfilled orders, and inventories also hit record levels. Transportation equipment saw a 74.1% increase, and was the reason for the unprecedented rise. Excluding transportation, new orders actually fell by 0.8%.
  • New records were also reported in auto sales, as manufacturers noted sales of nearly 1.6 million cars and trucks in August. Sales are on pace to reach 17.5 million this year, a level not seen since July 2006. Industry observers said that much of the increase was due to low interest rates and other incentives.
  • Construction rose by 1.8% in July to a seasonally adjusted annual rate of $981.3 billion, according to the U.S. Census Bureau. The figure is 8.2% higher than a year earlier. Through July, construction spending totaled $535.4 billion, nearly 8% higher than the $496.3 billion spent during the same time frame in 2013. Growth was led by nonresidential private construction and public construction, particularly highways.
  • The Federal Reserve’s beige book report was generally favorable, stating that economic activity had expanded since the previous report and noting that “none of the Districts pointed to a distinct shift in the overall pace of growth.” Notable areas of growth included consumer spending, auto sales, and tourism.
  • The Commerce Department announced that the trade deficit shrank to $40.5 billion in July, down from $40.8 billion in June. Exports rose by $1.8 billion, while imports rose by $1.5 billion.
  • The European Central Bank (ECB) surprised observers Thursday with the announcement that it would cut all interest rates, and launch programs to buy asset-backed securities and euro-denominated covered bonds. Details surrounding the new programs will be provided at the ECB’s October meeting. In announcing the moves, ECB President Mario Draghi said, “These decisions will add to the range of monetary policy measures taken over recent months,” adding that they reflect significant differences in monetary policy cycle among the eurozone’s major advanced economies. He also noted that the moves will “support the provision of credit to the broader economy.”
  • Labor productivity (output per hour) rose 2.3% during the second quarter of 2014, while the costs of labor edged down 0.1%. During the quarter, hours worked rose 2.6% and output increased 5%. Productivity increased 1.1% from second quarter 2013 to second quarter 2014. Unit labor costs increased 1.7% over the previous four quarters.
  • After months of positive news, the Labor Department reported disappointing job growth for August, and revised figures downward for earlier this summer. Despite an unemployment rate that continued to decline–down to 6.1% in August from July’s 6.2%–nonfarm jobs rose by just 142,000 in August. For the previous 12 months, nonfarm payrolls increased by 212,000, on average. After accounting for revisions in both June and July, the total number of added jobs in those months was 28,000 less than previously reported.
  • Ukraine and pro-Russian rebels signed a truce that took effect Friday evening, local time, in what observers hope will be the beginning of the end of the five-month conflict. Friday also brought news of a new “spearhead” force of several thousand land troops agreed to by NATO allies to address growing threats in the Middle East and other areas, if needed.

Eye on the Week Ahead

In a week that promises minimal influence in the way of economic data, investors may be watching events abroad, particularly to see whether the Ukrainian cease-fire agreement holds.

What I’m Watching This Week – 2 September 2014

Published on by dredheadz

The Markets

Investors brushed off geopolitical fears last week and regained their appetite for risk, taking the S&P 500 to its 32nd record high of the year and returning the small-cap Russell 2000 to positive territory for 2014. Meanwhile, the yield on the benchmark 10-year Treasury hit a level it hasn’t seen in more than a year as higher demand pushed prices up.

Market/Index 2013 Close Prior Week As of 8/29 Weekly Change YTD Change
DJIA 16576.66 17001.22 17098.45 .57% 3.15%
Nasdaq 4176.59 4538.55 4580.27 .92% 9.67%
S&P 500 1848.36 1988.40 2003.37 .75% 8.39%
Russell 2000 1163.64 1160.34 1174.35 1.21% .92%
Global Dow 2484.10 2606.33 2618.91 .48% 5.43%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.40% 2.35% -5 bps -69 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The U.S. economy grew slightly faster during the second quarter than previously thought. The Bureau of Economic Analysis said the 4.2% figure for gross domestic product was revised upward from 4% primarily because of a higher figure for commercial construction and business investment in equipment. Meanwhile, corporate after-tax profits rebounded from a -16.3% decline in Q1, rising 8.3% during Q2.
  • A 318% increase in orders for commercial aircraft led to a 22.6% surge in durable goods orders in July. The Commerce Department said that excluding transportation, orders actually fell 0.8%, while business investment in equipment was down 0.5% after a strong gain the previous month.
  • Sales of new homes fell 2.4% in July, according to a Commerce Department report. That raised questions about the state of the housing market, especially since the National Association of Realtors® had reported the previous week that home resales had actually risen 2.4% during the month.
  • Meanwhile, home prices showed continued signs of leveling off in cities measured by the S&P/Case-Shiller 20-City Composite Index. Though the index gained 1% in June and was up 8.1% year-over-year, all 20 cities experienced slower annual growth rates for the first time since February 2008. An S&P spokesman predicted that mortgage rate increases, anticipated next year, “will further dampen price gains.”
  • Americans spent less and saved more in July as income growth slowed. The Commerce Department reported that consumer spending was down 0.1%, in part because of reduced auto and department store sales, while incomes rose 0.2% rather than the 0.5% seen during the previous two months. As a result, the savings rate hit 5.7%–its highest level since late 2012.
  • Burger King became the latest company to draw fire for so-called “tax inversion” by announcing it is negotiating to buy Canadian chain Tim Hortons. The agreement would allow Burger King to move its headquarters to Canada and reduce its corporate tax burden.
  • The inflation rate in the eurozone continued to slide, hitting 0.3% in August. The decline, coupled with European Central Bank President Mario Draghi’s stated willingness to consider additional economic stimulus, prompted speculation that the ECB could take action at its next meeting on September 4. The eurozone unemployment rate was 11.5%, down only slightly from a year earlier.

Eye on the Week Ahead

In addition to monitoring an onslaught of economic data, global investors will look to the European Central Bank’s Thursday meeting for possible stimulus measures similar to the ones the Federal Reserve has been winding down.