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.

Market Volatility – Our View

June 26, 2013

The market is acting odd. Ben Bernanke is hinting that he is going to scale back the loose monetary policy that has, theoretically, been supporting the US economic expansion. He is hinting at the change because he thinks the economy is reaching a level of stability that growth can continue with more normal policy out of the Fed. The improving economy would usually be a good news story for stocks; the most knowledgeable economist in the country thinks the economy is getting better – how is that not good news?

Well, sometimes when economic growth picks up, it results in higher levels of inflation, and that inflation can have a nasty impact on stock price. However, that doesn’t seem to be the case this time around. In fact, inflation expectations are falling, not rising; so inflation doesn’t explain what’s going on. What seems to be happening is a fundamental disagreement between investors and the Fed. The Fed thinks it’s safe to stand up and walk around the plane, while Wall Street thinks we need to keep the “fasten seat belt” sign lit, and to keep it fastened tightly! Wall Street’s concern is that if the Fed is wrong, and if they withdraw support too fast, the economy could slip back into recession.

We don’t envy the Fed’s position. If the Fed continues with their bond-buying, the chorus of Wall Street pundits will scream about inflation. If they take off the safety belt sign, the chorus screams about recession. It seems like a lose-lose situation, but in the end it doesn’t even really matter all that much. The markets are choppy, and always will be. The proof of the direction of the economy will be in the numbers: are companies earning more? Are people getting back to work?

Bernanke knows what he’s doing; if the numbers don’t demonstrate continued growth, he’s not taking the seat belt off. So, while there is a lot of turbulence right now, we don’t think we will go flying out of our seats anytime soon.


5 reasons you may be overdue for a life insurance policy review

June 5, 2013
  1. Life events can prompt changes in your insurance needs. Some life events cause your needs to go up. Changing jobs, having children, buying a home, or updating your estate plan can require purchasing additional coverage. But there are also some life events that actually decrease your need for insurance. Maybe your children have grown up and moved out, or you’ve paid off the mortgage on your home. Events such as these can reduce your insurance. Either way, your life insurance needs are at stake.
  2. You haven’t revisited policies you purchased years ago. Life insurance proposals are written with the best of intentions and are based on the economic circumstances in which they are created. However, interest rates and market fluctuations can affect the overall health of some policies. Many clients who took out universal life policies in the 1980s incurred high interest rates when originally purchased. When interest rates declined, many people expected to find their policies almost paid off, only to find that they were in danger of lapsing. If you have a permanent life insurance policy, you should do an annual re-projection of the policy to make sure it is still going to do what it was designed to do.
  3. The type of insurance you need has changed. In your retirement years, you’ll likely put more thought into your estate plan. Creating an irrevocable life insurance trust can be an effective way to transfer assets to your loved ones in a more tax-efficient manner, and to provide tax-free proceeds to cover expensive settlement costs.
  4. You’re overwhelmed by the complexities of insurance policies. Insurance policies are complicated, and risk management specialists can provide clarity so that you can determine if your life insurance policy can deliver what your family needs. For example, you’re probably aware that life insurance can help provide an immediate source of income for your heirs upon your passing, but did you know that establishing an irrevocable life insurance trust can help maximize this lump sum?
  5. New policies and features may better suit your needs. The insurance world is constantly changing, and new products are constantly being developed. A few examples in the life insurance arena include policies that can provide long-term care benefits and assist business owners with transition planning, insuring a key partner or employee, and securing business loans.

The key to an effective life insurance policy review is to consider everything in your risk management file. Our team of insurance specialists at Wealth Enhancement Group will not only help you discern how your policies are working for you, they can also help determine how they fit into your overall financial situation.

Request your free life insurance policy review >>

529 plans – A tax-efficient way to pay for college

May 29, 2013

Piggy bank with grad capIt’s the week of 5/29 – what better day to discuss the ways you and your family can benefit from a 529 plan?

If you’re a parent or a grandparent, you’ve probably worried about how you’ll help pay for your children’s college education. With the price of tuition outpacing the general inflation rate, planning for college has become a more critical component of financial planning than ever before. A 529 plan can be an immense help when it comes to paying some of these expenses, but it can depend on the plan you choose and how early you begin investing in it.

529s can help you save

In a nutshell, a 529 plan allows you to accumulate funds to help pay for a designated beneficiary’s qualified higher education expenses at an eligible educational institution. The plan gets its name from the section of the Internal Revenue Code (Section 529) that outlines its provisions. They are generally available to anyone, regardless of a family’s income level, and they’re tax-advantaged to boot, meaning that investment earnings from the plan are allowed to grow federal income tax-free, and withdrawals used to pay for qualified education expenses are also tax-free.

There are two types of 529 plans: prepaid tuition plans and college savings plans. Both are generally sponsored by state governments and administered by one or more investment companies.

Prepaid tuition plan

  • Contributions are made to a qualified trust
  • Lets you lock in tomorrow’s tuition at today’s rates
  • Allows you to purchase a number a course units/academic periods that are redeemed when a beneficiary becomes old enough to attend college

College savings plan

  • Lets you choose from a menu of investments typically managed by mutual fund companies
  • Amount available to help pay higher education expenses depends on growth in account
  • Offers more return potential, as well as risk

Eligibility and withdrawal rules

Generally speaking, everyone is eligible to contribute to a 529 plan – it’s not limited by age or income. Depending on the program, you could contribute upwards of $200,000 on behalf of a beneficiary. It’s a good idea to check with your program sponsor for details on how various factors such as age, current education costs and projected inflation rates could influence your maximum contribution limits.

As previously mentioned, tax-free withdrawals from the account may used to pay for qualified education expenses such as tuition, fees, books and supplies, among many other options. And it’s not just for undergraduate education – they may be used for graduate school expenses, as well! Withdrawals that are not used for higher education expenses are subject to ordinary income taxes – either at the owner’s rate or the beneficiary’s rate – and an additional 10% penalty tax.

Is a 529 your best option for saving for college?

Not always. A 529 plan can be a great tool, but it’s best for those who are relatively certain the beneficiary will eventually attend college. If the original beneficiary of the account opts not to pursue higher education, the account owner may change the beneficiary, but only if the new beneficiary is a member of the same family. Currently, there’s no federal income tax to transfer the account, but this could change.

To read more about what to consider when saving for college, including the 4 reasons why it’s worth the effort to save and invest specifically for your children’s college education, check out Bruce Helmer’s book: Real Wealth: How to make Smart Money Choices for what matters most to YOU.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investment in such state’s qualified tuition program.  Withdrawals used for qualified expenses are federally tax free.  Tax treatment at the state level may vary.  Please consult with your tax advisor before investing.

Warren Buffett hates bonds, but we don’t

May 16, 2013

When Warren Buffett, the so-called “Oracle of Omaha,” makes a bold statement about investing, people’s ears perk up. While his May 6th declaration that fixed income is “a terrible investment right now” might have made more than a few headlines, his sentiment was hardly anything Earth-shattering, as some pundits have been claiming for years that investors should rethink their fixed income investments.

It’s an understandable position: interest rates are at extreme lows, and if they rise due to change in Fed policy or inflation expectations, bonds could lose a lot of value.

While we agree that on a relative basis, stocks look more attractive than bonds right now, and that bonds seem riskier than they used to be, we don’t think that you should get rid of your entire fixed income allocation. We believe that:

  1. A prudent investor should still hold some bonds, and
  2. Your bond portfolio should be diversified, just like your stock portfolio.

Why you should hang on to your bonds

While no one can predict the future with 100% accuracy, an effectively diversified portfolio can help minimize the shocks of a volatile economy. Consider this scenario: if the market suffers another downturn, you need something that can perform well in a recessionary environment – something like bonds. In such a situation, if interest rates fall even further, bond prices will rise, and this gain might help offset some of the losses that may occur in your equity portfolio. If you react to some of these headlines and sell out of all your bonds, your portfolio might suffer more dramatically in a recession.

Of course, we have to consider what may happen on the other end of the spectrum: if there’s a period of growth and inflation, interest rates will likely rise. In this scenario, you could potentially lose money in bonds, but if you’re effectively diversified, the strength of your equity portfolio may offset some of those losses. That being said, there’s no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Not all bonds are the same

Keep in mind that while some pundits are talking about Treasuries, those aren’t the only bonds out there. Just like there are many different kinds of stocks – growth, value, small cap, large cap, etc. – there are many different kinds of bonds.

For example, US government bonds look expensive at the moment, but emerging market local currency bonds still offer good returns with acceptable levels of risk when added to a well diversified portfolio.

The bottom line?

The Oracle of Omaha may have gotten everyone’s attention, but there’s more to the story than the headline. While there may be heightened risk in fixed income, we believe that careful exposure to fixed income is a key component of an effectively diversified portfolio that prepares your portfolio for a variety of economic environments.