We’ve moved!

October 24, 2013

As of late October 2013, our commentary and insights will be posted in the content area of the freshly redesigned Wealth Enhancement Group site.

Please visit us at http://www.wealthenhancement.com/insights.


Tax Implications of the Affordable Care Act

October 18, 2013

The insurance exchanges associated with the Affordable Care Act opened up October 1, and while the impact of the new marketplace remains to be seen, one thing is certain. Many people aren’t aware of the tax implications of the Affordable Care Act.

We’ve listed a few frequently asked questions about taxes and the Affordable Care Act to help clear some things up:

Q: I’m a 56 year-old retiree (lucky me!), and I’m planning to sign up for coverage through one of the new exchanges that just opened up. Is there an opportunity for me to receive tax credits to help with my premiums?

A: Maybe. If you exceed the income limits below, you can still receive coverage through the new health care exchanges, but you will not be eligible for premium assistance via federal tax credits. If you fall within these ranges, the insurance exchange websites provide tools to help you calculate your total premium assistance tax credit.

ACA income table

Q: What is considered income in the equation to see if I qualify for premium assistance tax credits?

A: Income is considered:

  • Adjusted Gross Income, plus:
  • Non-taxable Social Security benefits
  • Excluded foreign earned income
  • Tax-exempt interest

Income is not

  • Certain Roth IRA distributions
  • Withdrawals from savings or basis (Cost basis of an investment is the initial amount deposited, plus any additional capital gains or dividends that have been reinvested into the investment, which have already been included on your tax return.)
  • Life insurance loan proceeds
  • Line of credit proceeds

Q: What if I’m close to the income thresholds, but I’m not sure exactly where I land?

A: Come and see a financial advisor who can help you both determine your income AND develop a tax-efficient income distribution strategy to help you qualify for premium assistance tax credits.

Q: What else do I need to know about tax implications of the Affordable Care Act?

A: If you have a high household income (>$250k for those married, filing jointly), you should be aware of a Net Investment Income tax of 3.8% that went into effect 1/1/2013, as well as an additional Medicare surtax of 0.9%.

Government Shutdown: Our View

October 7, 2013

The failure in Washington is disappointing, if not a surprise. However, history tells us it is not necessarily a bad thing for investors. The 16 government shutdowns over the past 37 years, which have ranged from one to 21 days, have not been particularly negative for stock market investors, averaging only a 2% decline for the S&P 500. More importantly, from a longer-term perspective, they preceded above-average returns. The S&P 500 Index has risen 11% on average in the 12 months following the shutdowns, compared with 9% for all periods. Notably, in the last government shutdown 17 years ago in late 1995, the S&P 500 rose 21% in the subsequent 12 months.

As the government shutdown began on the morning of October 1, stocks actually rose after falling modestly in the preceding days. That reaction makes sense, since selling stocks into short-term political uncertainty has been costly for investors in recent years.

Of course, the shutdown is not the only issue facing investors from Washington. We are also approaching a breach of the debt ceiling on October 17, leading to the remote-but-heightened threat of default on some U.S. obligations if lawmakers fail to increase the limit on total U.S. federal government debt. Fear over the threat posed by the debt ceiling seems well contained at this point. For example, the VIX, often called the “fear gauge,” is currently around 16 and not at the 48 level seen in August 2011, when the debt ceiling was last the subject of a battle in Washington and stocks fell 17%. Also, default concerns currently seem minimal with the discount on the one-month T-bill at just six basis points versus 17 basis points at the peak of fear in early August 2011. Perhaps this is because the economic and fiscal backdrop in the United States, and especially Europe, is much improved relative to the 2011 episode.

While it is good news that the markets have been relatively steady, without a negative market reaction there is less pressure on politicians to compromise. Furthermore, the longer the shutdown goes on and the closer we get to the debt ceiling deadline, the more the market is forced to make politicians act. We continue to monitor events closely and believe this is not a time for indiscriminate selling but rather a time to look for opportunities to buy on weakness.

Hindenburg Omen

September 25, 2013

Over the past few weeks, you may have heard financial pundits and analysts referring to the “Hindenburg Omen.” As you likely know, the ill-fated Hindenburg zeppelin took about half a minute to burn and come crashing to the ground, so it’s clear what this market signal used by technical analysts is supposed to magically foretell. Believers of this market signal suggest that the market is going to crash within the next 30 days.

Wealth Enhancement Advisory Services does not believe this market signal has any actual predictive power in and of itself. Studies that have been done on the validity of this “omen” are plagued with data mining and small sample size issues, both of which undermine any conclusions. Nevertheless, we think it’s important that you understand the basis of what the financial news outlets are discussing.

What exactly is the Hindenburg Omen?

According to believers, this market omen is supposed to be followed by a market crash within approximately 30 days of the trigger. A trigger occurs when the following four events occur on the same day:

  1. The daily number of NYSE new 52-week highs and lows are both greater than 2.8% of the sum of NYSE issues that advance or decline that day,
  2. The NYSE index is greater in value than it was 50 trading days ago,
  3. The McClellan Oscillator is negative, and
  4. The number of new 52-week highs cannot be more than twice the number of new 52-week lows.

 Why should I be skeptical of this so-called omen?

If you are wondering how this seemingly random set of criteria can predict a market crash, it probably can’t. The fact of the matter is, proponents of the Hindenburg Omen that cite its historical reliability tend to ignore some important issues:

  1. The omen tends to have many false positives. Even though there has been a Hindenburg Omen before every market crash, there have been many Hindenburg Omens that have not been followed by a market crash. You’d miss out on a lot of market upside if you sold after every omen trigger.
  2. Since there have been only a handful of market crashes in the past century, small sample size bias is a huge issue with the research.
  3. The existence of the Hindenburg Omen is probably the result of data mining. In other words, researchers dug through piles and piles of data until they finally found a set of criteria that has been true prior to every market crash. But even though the set of criteria has been true, it doesn’t mean the criteria has any actual predictive power.

So what should you do? Keep your wits about you. The media thrives on eye-catching headlines, and it doesn’t get any better than “Hindenburg Omen Predicts Market Crash”. Could the market crash in the next 30 days? Sure, but it could crash over any 30 day period. There is no evidence that the Hindenburg Omen has any true ability to predict a crash. Our goal is to create effectively diversified portfolios that seek to minimize losses were such an event to occur – and seek to deliver higher potential returns if it doesn’t.


Fiduciary responsibility vs. suitability: Is your advisor acting in your best interests?

September 12, 2013

If you’ve been paying attention to the financial headlines lately, you’ve probably noticed that quite a few of them have been dedicated to the Dodd-Frank legislation of 2010, which contained several action items intended to “clean up” the financial services industry. Three years later, one item in particular is making headlines: a statement that authorized the SEC to establish a rule requiring securities brokers to act as fiduciaries.

What does that mean for you?

Well, if your money is currently managed by a brokerage firm, it potentially means a lot. Right now, brokers generally are not held to a fiduciary standard, meaning they generally don’t have a legal obligation to act in your best interests. They are required by law to make recommendations that are suitable for your needs. This means that certain brokerage firms can sell you proprietary products and/or other products they stand to benefit from the sale of.

To be clear: This doesn’t mean that proprietary products are bad; it simply means that you have the right to question why your advisor is suggesting a particular product. If s/he stands to gain from its sale, you may want to do your own due diligence and investigate whether this is truly the best option for your personal retirement goals.

Registered Investment Advisors (RIAs or RIA firms), which is the heading that Wealth Enhancement Advisory Services falls under, are required by law to act in a fiduciary capacity. This means that we legally must act in our clients’ best interests at all times when making financial recommendations.

So, you may be asking, why would anyone NOT want to work with someone who is legally required to work in their best interests?

Where people usually decide whether or not to use a fiduciary versus someone a non-fiduciary revolves around cost and the future of their relationship. Generally speaking, fiduciaries charge a fee and non-fiduciary advisors charge a commission. The fees charged by an RIA, for example, might be higher than the commissions one comes across with a broker.

And maybe that’s OK with you – maybe you’re not looking for a long-term partnership with an advisor that gives you continuous advice; maybe you just want some one-off advice for one particular move. In that case, it may be more reasonable to go with a broker. Either model may be right for you, based on your investment objectives.

The U.S. Department of Labor is already weighing on what they think should be done: Jason Zweig of The Wall Street Journal reported on August 9, 2013 that “as early as October, the U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts (IRAs).”

How this impacts you, the consumer, remains to be seen. If the SEC ends up establishing a fiduciary standard for brokers, there could be major changes ahead for the financial services industry.

Nothing changes for the RIAs, though. We’re still held to the same high standard we’ve been upholding for years at Wealth Enhancement Group. Through our fiduciary responsibility to our clients, you can be sure that when you work with us, your advisor is consistently giving you advice that’s objective, unbiased and always in your best interest.

Financial aid for college: Does getting a job help or hurt your student’s eligibility?

August 19, 2013

Remember the good ole days? Back when you could have a summer job working as a camp counselor, a babysitter or a lifeguard, and help fund a significant portion of your college expenses?

While these were – and still are – noble endeavors that can teach young adults valuable lessons about social and financial responsibility, when it comes to paying for college these days, they’re simply not that useful anymore.

In fact, depending on how much one makes, it may actually be doing some harm.

Why? Because the federal financial aid formula factors in a student’s income. In fact, a student’s income and assets are the biggest piece of the financial eligibility formula. Any income over a base protection amount ($6,130 earned in 2012 for the 2013-14 school year) is heavily assessed, and all assets held in the student’s name are assessed at a maximum of 20%. Student assets can include things like their own bank accounts, trust accounts, UGMA/UTMA custodial accounts and education trusts. Retirement assets like Roth IRAs are not included.

For example, if Junior has $10,000 in a Roth IRA, it won’t impact his financial aid eligibility one iota. If he has $10,000 in his bank account, though, his eligibility may drop by $2,000.

This isn’t to say that Junior shouldn’t take that amazing (paid!) internship at a local law firm, but from a college planning perspective, it may be in both his and your best interest to take the income he receives from that job and place it in an account in your name, since parental assets are assessed at a much lower rate than a student’s (approximately 5% versus 20%).

Junior can also avoid taking a major financial aid hit by getting a work-study position on campus, which doesn’t factor into financial aid considerations. He’ll still get the benefits of a regular job – income and discipline – without the financial aid penalty. Moreover, since most work-study positions are on campus, he likely won’t have to take a portion of his income to pay for transportation to and from his job.

Planning for college funding is complicated – and we’re here to help. If you feel overwhelmed by the number of options available to you, consider attending our upcoming webinar, “Education Planning and Funding: 4 Steps to Help Ensure Your Plan Makes the Grade,” on August 21, 2013.


Deciding when to retire

August 1, 2013

For many working Americans, the most important financial decision they will ever make is deciding when to retire.

Retirement age can vary greatly from one person to another. Obviously, very wealthy professionals, executives, business owners and others may have the means to retire comfortably whenever they’ve had enough of the daily grind.

But for the vast majority of working Americans, retirement is something that must be planned and paid for through a lifetime of saving and investing. Until you’ve saved sufficient assets to fund a viable retirement, your options are very limited.

There are a number of factors to consider in planning for your retirement. Whether you work through these issues on your own or with the help of a financial advisor, you need to give serious consideration to when and how you wish to retire.

Here are several questions you need to answer before you can set a retirement date:

How much money will you need each month to pay your bills? In some cases, you may be able to live on less than you did during your working years, but in my experience working with clients, I find that they often spend more in retirement because they have more leisure time. They may travel more and become involved in more outside activities. The other factor to keep in mind is inflation. The cost of living tends to double about every 25 years, so you’re going to need twice as much money to cover your expenses in 25 years than you need now.

How’s your health? If your health is declining, you may have no choice but to retire as soon as possible. But if your health is still good and you have the interest and energy to continue working, you might want to work beyond age 65—either full- or part-time. By working longer, you can use your earnings to live on rather than tap into your retirement savings, and can even add to that savings and give your investments more time to grow.

What is your family’s history of longevity? If your parents or most of your family has a history of living well beyond age 65, it will be important for you to build up an investment nest egg that can sustain you for two or three more decades. That may mean that you’ll have to work well into your sixties and possibly beyond to build up a large enough retirement account to get you through your golden years.

The biggest mistake would be to retire too soon. While the lure of carefree retirement days may tempt you to leave the work force early, you need to be sure you have enough assets and income to pay the bills for two or three decades to come.

Before you take any action, you might want to discuss your situation with your tax advisor or financial advisor to see which course of action would make the most sense for you.

Post-DOMA Financial Planning

July 23, 2013

In late June, the U.S. Supreme Court found that Section 3 of the federal Defense of Marriage Act (also known as DOMA) violates the equal protection clause of the Fifth Amendment of the Constitution. This monumental decision carried with it significant implications for same-sex couples, particularly when it comes to financial planning issues like tax strategies, education planning and retirement accounts.

Generally speaking, planning for same-sex married couples will be very similar to opposite-sex married couples, as same-sex married couples will file either Married Filing Jointly (MFJ) or Separately. For most, but not for all, this should be a benefit from having to file single or head of household due to differences in marginal tax brackets (and corresponding rates) as well the standard deduction, personal exemptions, and Adjusted Gross Income (AGI) phase-out levels. Incomes (and deductions) will be combined, and since each situation is a little different, some taxpayers may be eligible for more benefits, others less.

Read on for a brief overview of how certain areas of financial planning are impacted by this ruling:

Marriage Penalty

  • There are marriage “penalties” for certain items, such as the Net Investment Income surtax that begins in 2013, hitting MFJ taxpayers at $250K in MAGI, versus $200K for single/head of household filers ($250K is a far ways off from the $400K that would be double the single level).
  • Other items subject to a marriage penalty: itemized deduction and personal exemption phase-out levels, ordinary income and long term capital gains rates, child tax credits, IRA deductibility, and Roth IRA contributions.

Education Planning

  • One might find that a single person whose income might have been too high to qualify before for tax credits, such as the American Opportunity/Lifetime Learning Credits, now might be able to via filing jointly.
  • Spouses can now withdraw funds without penalty from their IRA for education expenses for the other spouse. This was not previously available to same-sex couples.

Retirement Accounts

  • Same-sex spouses can now rollover a deceased spouse’s IRAs via spousal rollover, versus treating as a non-spouse beneficiary with an inherited IRA.
  • Same-sex couples can use both spouses’ earned income for purposes of retirement account contributions, in the case that one spouse had earned income and the other did not.
  • Same-sex spouses now receive spousal rights to 401(k)s, pensions, etc.

Overall, same-sex married couples will now enjoy many of the same benefits that were previously only available to opposite-sex married couples. The financial benefits of marriage could be all for naught, though, if you don’t have an effective financial plan in place. If you have questions about how your marital status may affect your plan, meeting with a financial advisor can help clarify what strategies may work best for your specific situation.

Quirky market predictors

July 11, 2013

The so-called “Hemline Index,” which gained popularity back in the 1920s, suggested that as women’s hemlines rise, the markets generally go up, and vice versa: when more modest hemlines are de rigueur, this generally doesn’t bode well for the economy. The “Lipstick Theory” similarly suggests that as the markets go down, lipstick sales go up.

While the Hemline Index has generally been discredited over time, the Lipstick Theory has a more solid rationale. When markets are down, Lipstick Theorists believe, consumers generally feel less wealthy, so they’ll spend money on small indulgences (like lipstick) to make them feel better, as opposed to luxuries like designer clothes.

Sounds reasonable, right? How about something a little…sweeter?

There’s a new theory of economic indication that’s making headlines at the moment – it’s called the “Chocolate Indicator,” which is based on tracking chocolate-and-other-confectionary giant The Hershey Company’s market movements. A study conducted by CNBC demonstrated that, dating back to 1985, when Hershey stock has moved up or down, the S&P 500 tended to follow suit nine months later – a whopping 86% of the time.

Chocolate sales

It’s an impressive correlation, but we wouldn’t advise you to base your next market moves on it. While demand for consumer staples is used by many as a market predictor, it isn’t infallible. No one can consistently time the market perfectly – not even those who analyze markets for a living. Basing your portfolio moves on one single stock alone? You could be setting yourself up for disaster.

Sure is one deliciously fun factoid, though.

High-dividend stocks: Are they really worth the price?

July 3, 2013

If there’s any indication that investors are still skittish about the markets, let this example add fuel to the fire. The following graph charts the popularity of Google searches for the phrases “dividend stocks” (blue line) and “hot stocks” (red line) from 2005-2013.

High Dividend Stocks

Is anyone surprised that investors are apparently flocking to what they perceive to be “safer” stocks, rather than seeking out the next big thing? Probably not, given the turbulent state of our markets. The problem is: dividend stocks, especially those that are offering a high yield, may not be as safe as you think they are.

Read more in our current newsletter.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Stock investing involves risk, including loss of principal.