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Mid-Year Personal Review

image004-300x176July is the perfect time for a mid-year review of your personal finances and tax outlook.  By spending some time now, you can save money later.  Let’s take a look at some of the issues you can review.


  • Evaluate Savings:  One of the best ways to save is through the various tax advantage savings plans.  The most common is the 401k program.  Every dollar, up to $16,500 ($22,000 for those over age 50) deposited into a 401k reduces your taxable income, and therefore, your tax bill.  If you are not currently participating… START!  If you are already participating, make it your goal to increase your contributions over time until you hit the maximum. 
  • Evaluate Your Portfolios:  How are your assets allocated?  Should you consider moving part or all?  Now that the dust has settled, it is a great time to review your options.  A word of caution… make sure you get a full disclosure of all risks and fees before investing.  Review your investment portfolio with your financial advisor before making any decisions.
  • Tax Savings Strategies:  Many activities, such as home improvements, may provide tax benefits.  The Energy Tax Act offers tax incentives for energy efficient products installed in your home.  The benefit allows taxpayers’ credits up to 30% of the cost of the improvements.  There is a maximum credit of $1,500 for 2009.  Consult your tax advisor for more information.
  • Review Your Withholdings:  Many Americans end up owing taxes because they did not have enough withheld during the year.  This year will likely be worse than normal.  The Make Work Pay Bill provision of the stimulus package automatically lowered withholdings for most taxpayers.  The problem is many of those same taxpayers will not be entitled to the $400 (single) or $800 (for couples filing jointly) tax break.  If you are one of these individuals, you could find yourself $800 short in your withholdings.  Check with your tax advisor for help.
  • Buying a Home:  If you are a first-time homebuyer, or if you have not owned a home in the last three years, you can claim a refundable credit of 10% of the purchase price, up to $8,000.  This credit applies to homes purchased after December 31, 2008 through December 1, 2009.
  • Buying a New Car:  New for 2009, you can claim sales taxes paid on the purchase of a new car.  There are also additional credits, up to $7,500 for the purchasing of a hybrid or “plug-in” car.  Congress has just passed this so-called, “cash for clunker” bill.  Under this legislation, you can turn in a gas guzzling car and receive between $3,500 – $4,500 in tax credits toward the purchase of a high-mileage vehicle.  There are a number of requirements that will make it difficult for most Americans to qualify, but if you do, it is a great opportunity.
  • Commit to Getting Organized:  Start filing important statements and receipts.  Safely store all tax-related documents, financial statements and insurance contracts.  If possible, keep an electronic copy of all important documents.


Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

July 6, 2009

Americans Are Saving More

image004-300x176The American savings rate continues to climb.  For the last two decades, the savings rate hovered around zero percent.  Now, it has leaped to over 6%.  The recession and the credit freeze seem to be the turning point.  But, is this change in the savings rate temporary?  That is the big question.  Economists are concerned that without a spike in consumer spending, the economic recovery will be less robust.

While the overall economy might suffer a bit from a more restrained consumer, your personal economic recovery will benefit from your increased savings.  Fifty years ago, the American savings rate was 12%.  During the recent economic boom times, more and more people stopped saving and increased their consumer debt.  Credit cards became ubiquitous.  People refinanced their mortgages, taking equity out of their homes, spending it on consumer products.  Businesses too, got caught up in the credit frenzy, over leveraging their books.  Now, both individuals and businesses are cutting back.

Americans are going back to basics.  They are paying off debt and increasing their savings.  Ben Franklin was quoted as saying, “that a penny saved is a penny earned”.  That is good, old fashion common sense.  We need to save for rainy days.  But, Franklin did not live in times with income and social security taxes.  In today’s environment, a dollar saved is more like a $1.30 earned.  After all, you must first earn $1.30 to net $1.00 after taxes.

Paying off debt is the best action anyone can make.  For every dollar of credit card debt you reduce, you save 18% – 20% in interest.  It is virtually a guaranteed return on your dollar.  Today, Americans are paying down debt at an increasing clip.

These changes in attitude do not seem temporary.  A structural change is occurring in our society.  Americans are remembering what is really important… family and friends… not possessions.  Flamboyant excess is out.  The virtue of “all things in moderation” has taken its place.

Does this structural change spell trouble for the economy?  If Americans continue to spend less and save more, that will likely slow the economic recovery.  But, capitalism needs capital as fuel for long-term growth. Over the last twenty years, American business relied on foreign investments as its capital source.  An increased savings rate will mean more “home-grown” capital sources for American business, which, in the long term, will be a positive for economic growth.

In summary, Americans increased saving rate might slow the economic recovery in the short term, but it produces positive benefits for the economy as a whole.  But, for your personal economic recovery, increasing your savings and paying off debt will reap nice rewards.  Financial advisors generally agree that a 10% savings rate is the benchmark.  This rate should increase as you approach retirement.  The key to saving is to pay yourself first.  Put your monthly savings ahead of all your bills, and then you can spend whatever is left.

Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

June 29, 2009

Economy to Grow in Third Quarter Low Inflation Risk

image004-300x176According to a survey released today by the Securities Industry and Financial Markets (SIFMA), the economy is expected to start growing in the third quarter of 2009, but the expansion will be slow through the first half of 2010. 

The economic survey of economists from the association’s member firms predict a .8 percent GDP for the July through September period, accelerating to 1.9 percent in the fourth quarter.  The prediction for 2010 is forecasted at 2.1 percent.

The survey, which was conducted from May 27th – June 12th, also showed the majority of respondents did not believe inflation was an immediate threat.  The core inflation rate, which excludes energy and food, is predicted to be 1.6 percent in 2009 and 1.2 percent in 2010.

June 29, 2009

The One Trillion Dollar Opportunity


No, we are not talking about some new government bail-out program or new health care spending initiative.  We are, however, discussing a huge opportunity for over 13.5 million Americans who have been locked out of one of the best vehicles to save for retirement, the Roth IRA.  

Starting in 2010, everyone will be eligible to convert their traditional IRA to a Roth IRA regardless of their current income.  It is estimated that the amount that will become eligible to convert a Roth IRA will exceed one trillion dollars! 

The main advantage of a Roth conversion is that you pay income tax on the amount transferred once and you are done.  You never have to pay income tax on the gains or withdrawals from the Roth IRA again (provided you meet the 5 year holding period).  It is one and done.

By way of background, the Roth IRA came into existence in 1997 as an alternative to traditional IRAs.  While traditional IRA contributions are tax deductible, Roth IRAs are not.  Earnings in both are tax deferred, but the real difference is that withdrawals from Roth IRAs are tax free while withdrawals from traditional IRAs are subject to income tax.  Additionally, traditional IRAs require a minimum withdrawal amount beginning in the year that you turn age 70½.  Roth IRAs do not have that requirement.

Roth IRAs give participants the ability to invest in nearly anything they want without having to pay income taxes.  In 2009, only those with incomes below $120,000 for singles and $176,000 for married couples can contribute to a Roth IRA.  For those who have a traditional IRA and would like to convert to a Roth IRA, the income limit is $100,000.  But, and it’s a big but, the conversion limit disappears in 2010.  Virtually everyone can convert part or all of their traditional IRA to a Roth starting on January 1, 2010.

While converting to a Roth IRA means one and done for income tax purposes, there are some issues you must be aware of before jumping in.  First, among these is the fact that you will be required to pay income tax on any amounts transferred from the traditional IRA to the Roth IRA.  For example, if you converted a traditional IRA with a value of $100,000 into a Roth IRA, you would be required to pay tax on the $100,000 conversion amount.  If you were in a 25% tax bracket, that amount would be $25,000 in additional taxes in 2010.

Second, special privileges apply to Roth conversions that are completed in 2010.  In that year, you have an option to pay the tax one of two ways… all upfront in 2010, or deferred… split 50% in 2011 and 50% in 2012.  Any year thereafter, the tax will be due the year the transfer is made.  The gamble here is whether or not taxes will go up or down in 2011 and 2012.  If they stay the same or go down, deferring the tax payment to 2011 and 2012 makes sense.  If they go up, paying all the tax in 2010 is the wise choice.  The decision as to how to pay the tax must be made before the end of the 2010 tax year.

Many Americans believe that taxes will likely be higher in the years ahead.  In such a case, Roth conversions make a great deal of sense.  However, if taxes decrease, or if you find yourself in a substantially lower tax bracket in the future, staying in a traditional IRA might be the better choice.  Since none of us has a crystal ball, many Americans plan to split up their traditional IRA, rolling over a portion of it into a Roth IRA, and keeping a portion in the traditional plan.

A strategy that is gaining popularity is rolling over a portion of one’s 401k assets into an IRA with the idea of converting it to a Roth IRA in 2010.  A different back door strategy with Roth IRAs is to make annual contributions into a traditional IRA with the idea of converting to a Roth at a later date.  This idea is especially popular for those whose IRA contributions do not qualify for the tax deduction, and their income is too high to qualify for a Roth IRA based on annual income limits.  If you convert a traditional IRA where all your contributions were made with after-tax dollars, then only the interest gained in the IRA would be subject to tax in the year of the conversion to the Roth.  There are currently no rules against making annual IRA deposits every year and then converting it to a Roth IRA.

Another difference with the Roth IRA is that it is not subject to “double taxation” at death like the traditional IRA.  For example, suppose you had an IRA with a value of $500,000 at the time of your death.  The $500,000 would be included in your estate for estate tax purposes whether or not your IRA was a Roth or a traditional IRA.  But, after paying estate tax, your traditional IRA would be subject to income tax while your Roth would be income tax exempt.  This is a huge advantage in estate planning.

One last point… with a Roth IRA, you can enjoy a lifetime of tax free income and then leave your Roth IRA to your children or grandchildren and they will not have to pay income tax either.  They can continue receiving monthly tax-free income based on their life expectancy.  You can literally provide tax-free income for decades to come.

2010 Roth conversions provide a unique opportunity.  For most people, it is not a question of whether or not to convert, but rather what percentage should I convert.  This is a big question and it deserves thoughtful analysis and input.  Your Money Concepts’ independent financial advisor is here to help.  We will look at your entire financial picture, helping you put the pieces together.  We will work with you to provide you with the input of ideas and facts so that you can make an informed decision.

Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

June 23, 2009

Is the Recession Coming to an End?

image004On June 10, 2009, Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, addressed North Carolina’s State Senate Appropriations Committee. In his speech, he indicated that he sees signs that the U.S. economy will pull out of recession this year.  Mr. Lacker believes that the consumer sector will bounce back sooner than most experts believe.  While unemployment will remain high, he forecasts the end of the recession for housing will occur late this year.

On June 11, 2009, Dennis Lockhart, the President of the Federal Reserve Board of Atlanta, addressing the National Association of Securities Professionals, said that the rate of economic decline is moderating and the economy will likely recover in the second half of the year.  He predicted slow to moderate growth in 2010.

image005Mr. Lacker and Mr. Lockhart are just two of the many experts who now believe that the downward momentum of this recession is easing.  A report released by the Federal Reserve indicated that they believe the second quarter growth rate will moderate to between -1% to -3%.  This would represent a major easing in the downturn.  The last two quarters saw the economy contract by over 6% and 5% respectfully.

image006Hopeful signs are being seen.  The stock market has moved forcefully up from its March 9th lows.  Corporate profits came in better than expected. Industrial production has shown some signs of life.  Productivity is on the rise.  And even the amount of layoffs being announced is going down.  Next week, ten major financial institutions have permission to pay back their TARP funds.  Two smaller banks plan to do the same, which will bring the total payback of TARP to $70 billion.  All this will happen while we have only spent just $40 billion of the $787 billion in Stimulus funds.

In the short term, things are looking better, but many economists are concerned over the longer term.  Many worry that inflation might reignite, or that the world’s investors (Chinese) might turn away from U.S. Government bonds causing rates to spike.  This year alone, the Federal budget deficit will swell to over $1.84 trillion.

To fund that kind of spending, the Treasury Department will be issuing more bonds than ever before in history.  Just this week, the Treasury Department successfully issued over $80 billion in new bonds.  So far this year, we have seen rates climb on Treasuries, but the increase appears to be more of a return to normalcy than anything else.

On the inflation front, Bart van Ark, Chief Economist with the Conference Board, believes it will remain stable throughout 2010.  One of the reasons for his confidence is the poor labor market, which keeps wages in check. Another is the consumer.  Consumers are now saving more than at any time in the last fourteen years.  This new trend to save is here to stay.  Further, the easy credit that fueled consumer spending has dried up.
Currently, the only sign of inflation is in oil and other commodities.  The price rise in these is more indicative of a worldwide feeling that the worst of this global economic recession is behind us.  The Federal Reserve will have to keep a keen eye on inflation.  The Fed has pumped trillions into the economy to keep us out of a depression.  It’s working, but the hard part is knowing when to turn off the spicket.  In the meantime, we will continue to look for signs of economic growth.

Pimage008lease feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.

June 16, 2009