Roth IRAs: Maybe Time for a Fresh Look

rothWith the 2013 income tax rates now settled, it’s a good time to review the advisability of Roth vs. traditional IRAs. As you know, Uncle Sam gets his tax money either way. You pay a smaller amount earlier with Roth accounts or a larger amount later with traditional IRAs. 

Your expected rate of income tax in retirement is key. If you think you’ll be in a lower tax bracket when you retire, then a traditional IRA might be best. With a traditional IRA, you get the upfront deduction at current tax rates and pay tax on the IRA at lower rates as you withdraw the money. If, on the other hand, it is likely that your tax rate at retirement would be equal to or more than your current income tax rates, then Roths should be considered. With a Roth, withdrawals in retirement are generally tax-free and there is no required minimum distribution for you or your spouse at age 70 ½. Furthermore, by paying the tax now, you have locked in the tax rate on the IRA, regardless of future tax rate changes by Congress.

Generally, you can establish Roths three ways: 1) Roth IRA contributions, 2) on-going Roth contributions to a 401(k) or Roth 403(b) at work, or 3) a Roth conversion. Here are some specific situations where use of a Roth may be advisable.

  1. Young workers who are starting their career and have current low income tax rates. If you have sufficient earned income, you can still invest $5,000 for 2012 and $5,500 for 2013 into a Roth or a traditional IRA. As an example, if a young person invested $5,500 in a Roth for 10 years and it grew for 30 years thereafter all at a 5% return, the Roth account 40 years from now would be $300,000, all tax-free. 
  2. Taxpayers who experience a low year in taxable income (for example, they might be between jobs), might consider a Roth conversion for a portion of their traditional IRAs. 
  3. Taxpayers, who expect that they will not need their IRA and 401k funds during their retirement and that their retirement income tax rates will be similar to their current rates, should consider a Roth conversion. By converting to Roth and paying the tax now, you are not forced to take withdrawals. Furthermore, when you and your spouse are gone, your children (and grandchildren) can continue to get the benefits of tax-free earnings, since they are only required to take distributions based on their life expectancies and can stretch the Roth for decades.
  4. Taxpayers who want to convert may consider doing an installment program. You would convert an appropriate amount each year, making sure that you don’t change your current income tax bracket. For example, for 2013, the 25% marginal income tax bracket for married couples applies to taxable incomes from $72,500 to $146,400. 

Most of you will be meeting with your CPAs in the next 6-7 weeks. It’s probably a good time to also get their input on Roths for you. Tell them that DWM, your proactive, fee-only financial planner, encouraged you to ask.

Does Your Family Operate Like a Business?

fee-only financial planners, stress-free financial planningA recent Wall Street Journal article, “Family Inc.,” highlighted how many families are coping with a potentially stressful and chaotic American family life. Many have adopted techniques developed by corporations designed to deal with group dynamics.

One technique known as agile development, started with Japanese manufacturers and was adopted by Silicon Valley startups. Workers are grouped into small teams with daily progress sessions and weekly reviews. Families apply these concepts by having family meetings, which “increase communication, improve productivity, lower stress and make everyone happier to be part of the family.” Some families answer three questions each week reviewing 1) what went right this week, 2) what went wrong this week, and 3) what will we work on next week.

Accountability is a huge component. Many families use a large board to monitor progress, with all family members making tick marks as chores and objectives are completed. The kids typically are empowered to determine their own rewards and punishments. It has been shown that children who set their own goals and evaluate them regularly become more internally driven and have more self-control.

Parents aren’t invincible nor are they immune from accountability. Effective business teams have all members contributing. Family teams need the same dynamic. Also, flexibility must be built in. The agile family philosophy recognizes that change is ever-present and builds in a system that is adaptable.

All families have some conflict. Some are now using problem resolution techniques found in businesses. More or all of the family members need to be part of the decision-making process. Use of the system of “vote first, talk later” is often used. Otherwise, those who talk first may have too much influence. 

These new group dynamic techniques may be even more important for families than companies. In a workplace, sometimes conflicts can be deferred or ignored. But, in families, extended conflicts can lead to divorce and estrangements.

Many successful families also work on financial literacy. They talk openly about money with their children. Some parents don’t want to burden their children with the truth, yet they may be giving them a bigger burden by not telling them. Allow the children to make their own mistakes with small amounts of money, like their $5 allowance. And, put them to work. Have them cut grass or have a lemonade stand. Many successful adults were involved in business as children.

Families are very important to us at DWM. As our clients know, we are pleased to meet with and help family members of clients, generally without charge. We have organized and facilitated successful family meetings. We have assisted younger family members in improving their financial literacy. We’re happy to help. Give us a call.

WSJ (2/15/13): “Beware the Great Rotation”

fee-only financial planners, stress-free financial planningStocks have continued upward (6-7%) in 2013 while bond performance has been flat or slightly negative since January 1st. Not surprisingly, many feel a “great rotation” has started and the stock market will “melt up” as investors sour on bonds and move from fixed investments to equities. Not so fast.

Since 1970, according to the Investment Company Institute, approximately 71% of all mutual funds were invested in stocks. At the end of 2012, that percentage was 65.7%. Hence, the current allocations to stock mutual funds are not abnormally low. Furthermore, in a study published last May in the Journal of Financial Economics, it was determined that even though the stock market often rises when investors move from fixed to equities, almost all of that increase is reversed in four months time.

Michael Kahn in the Barron’s issue Saturday cautioned that technical analysis would show that the stock market may be near a top.  Volume has been shrinking and many pundits are calling for a needed “correction.” Furthermore, the market has gone 15 months without a 10% correction and three months since a 5% correction. According to Mr. Kahn, a correction may be near.

Most importantly, we’re all waiting for Washington to govern. Certainly part of our current sluggish growth is the result of the financial crisis of 2008 and deleveraging. But an equally important factor is the uncertain economic and tax environment in our country. On Friday, Fed Chairman Ben Bernanke said that the U.S. economy is “far from operating at full strength.”  And now retailers are feeling the impact of increased payroll taxes as of 1/1/13.  January and early February sales were not good for Wal-Mart and others.

And, on March 1st, unless Washington acts, the sequester cuts will occur. This will cut $85 billion from discretionary spending; reducing defense programs by 8% and domestic programs by 5%. It is estimated these cuts will cost the economy more than one million jobs over the next two years. Certainly, we need to reduce the deficit and, at the same time, look at a potential Grand Bargain to deal with spending, investment and tax reform. We need a long-term fiscal restructuring for social security and Medicare.

Unfortunately, Washington is deeply divided. Thomas Friedman on Sunday put it this way:  “You can feel the economy wants to launch, but Washington is sitting on the national mood button. We the people still feel like children of permanently divorcing parents.”

There are lots of good signs out there. The American economy is recovering. Housing is coming back. The energy revolution is reducing costs. Financial sector and household balance sheets are looking better. What we need now is to break the deadlock in Washington. When that happens, our economy can start moving toward full strength. Only then, are we likely to see the real great rotation take place.

DWM 4Q12 Market Commentary

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Happy New Year! After a relatively strong first three quarters for both the equity and fixed income markets, fourth quarter readings were pretty muted. Frankly, that’s pretty good considering all of the headwinds we faced going into this last quarter of 2012. Probably the biggest story of all was the so-called “fiscal cliff”. It reminded us of all of the Y2K scares of a decade or so ago. Legislation to forestall this “cliff” passed before trading could start in the new year, and the market reacted by sending up stocks nicely. Ironically, this cliff agreement offered little to address our significant long-term debt issues. The proverbial “can” in WashingtonD.C. was indeed kicked down the road again. 

 Let’s celebrate the honorable return achievements of 2012 before looking ahead to 2013. 

Stocks finished the year up about 16% in most areas (S&P500: 16.0%, S&P600 Small Cap: up 16.3%, S&P400 Mid Cap up 17.8%, and MSCI World Index (ex-US) up 16.4%), reflecting a nice, unusual level rise across almost all equity investment styles.

Bonds showed some fair returns for calendar year 2012: Long-term Treasuries up about 3.5%, the US Aggregate Bond Index up 4.2%, and Munis up a solid 6.8%.

Commodities (which DWM classifies as alternatives) did not produce much evidenced by the Dow Jones-UBS Commodities Index falling 1.1% on the year. Also in the alternative area, some illiquid investments like equipment leasing and private timberland REITs did not provide as much bang for the buck this year. DWM expects these investments to recover as the global economic recovery continues. On the other hand, there were niches in the alternative landscape that fared quite well like public REITs and some absolute return strategies. A few noteworthy liquid alternative funds to mention are Marketfield Long/Short (up 13%+), RiverNorth/Doubleline Strategic Income (up 12%+) and Pimco All-Authority (up 17%+). A portfolio of liquid alternative funds continued in 2012 to help investors’ overall portfolios with solid results and non-correlation benefits in respect to the rest of the portfolio holdings.

All in all, 2012 was a rewarding year for most investors that weren’t sitting in cash. 

Looking forward to 2013, headwinds include lack of household income growth, lackluster consumer confidence, and further Washington political theater.In fact, the latter is a major problem as Congress continues to kick the can down the road. The cliff agreement was no “grand bargain” or a deal looking at both tax revenue and spending cuts in a way that can get our Federal deficit under control any time remotely soon. Certainly, Moody’s didn’t like it, basically putting the US on notice that it will most likely cut its AAA rating if it can’t make something happen soon. And something will need to happen quickly as the federal borrowing limit (aka “debt ceiling”) will be reached around the end of February. Remember the ludicrousness that played out in 2011 the last time we came close to hitting the ceiling?!? Expect more of the same. Long story short, Washington policy stalemate will continue to be a major story.

There are some real positives domestically like the recovering housing market, expanding manufacturing activity, and improving trade balance. But things aren’t so rosy overseas where the Eurozone is still in recession and China’s financial sector looks dicey. For a world where we are becoming more and more connected, we should all hope for a successful global economy. 

In conclusion, 2012 results show that positive results can occur in what may seem like shaky times. DWM cherishes the opportunity of providing its clients with solid investment results and sound financial planning that can help people achieve their long-term goals. DWM wishes a prosperous and healthy 2013 for you and your family.    

Brett M. Detterbeck, CFA, CFP®

 

DETTERBECK WEALTH MANAGEMENT

How To Fulfill Your 2013 Resolutions

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From the Charleston Mercury, January 10, 2013

Happy New Year, readers! I hope you had a great Holiday. How are you doing with your New Year’s resolutions?

Historically, getting physically fit is at the top of most lists. Exercising and eating right keeps you healthy and makes you look and feel better.

It’s no surprise that health clubs are packed in January and early February. By Valentine’s Day, it’s typically back to normal. Many people hate exercising and need outside help. Some hire a personal trainer, or coach, to provide services they can’t do or won’t do themselves. This helps them fulfill their resolution.

The coach, with expertise and commitment to your physical well-being, helps you:

  • Honestly and realistically assess your current condition
  • Identify attainable short and long-term goals
  • Establish a routine
  • Provide discipline, follow-up and encouragement through regular meetings
  • Monitor progress and modify the plan and the routine as conditions change.

Is it any wonder that people using coaches have a better success rate in fulfilling their resolution for improved physical well-being?

Another top New Year’s resolution is to get one’s financial future in order. However, most of these promises are never kept. Many people who can’t or won’t do it themselves are reluctant to use a financial coach, or financial planner. And, by Valentine’s Day or sooner, this resolution is broken as well.

Financial fitness is a lot more than simply investing your money. It’s a process. Good financial planners are like a good coach, helping you get your finances in order, in a holistic way. They will help you:

  • Realistically assess your assets and liabilities
  • Review your tax situation, retirement and college plans, estate planning and insurance needs
  • Put together a plan for the future 
  • Monitor progress, provide encouragement and follow-up through regular meetings
  •  And, as your situation and the world changes, help you modify your plan so that it continues to have a very good chance of success (aka not running out of money).

Financial planning can help eliminate fears and provide financial well-being and peace of mind. The world economy is still fragile. There are lots of uncertainties both home and abroad. A good financial coach can help you regularly assess your situation and let you know, using their expertise, that you are on the right track, and if not, how to get there. Your financial coach may even reduce some guilt by “giving you permission” to spend some more, if everything else in your plan is in order.

 If you’re serious about keeping that New Year’s resolution to get your financial future in order in 2013, consider hiring a financial coach.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago. Les may be contacted at (843)-577-2463 or les@dwmgmt.com.

“Fiscal Cliff” or “Speed Hump”?

fee-only financial planningAre you sick of this “fiscal cliff’ metaphor? I am. Sure, Washington needs to deal with taxes and spending. But, to constantly hammer into peoples’ minds the metaphor of us going over the cliff is absurd.

Of course, the media loves to catch our attention with fear. Our brains, particularly our amygdala, are hard-wired to be aware of potential dangers. The amygdala is one of our first filters for incoming information; always looking for problems. The media knows this and continues to saturate us with a disproportionate amount of bad news.

Certainly, Washington needs to deal with the scheduled tax increases and spending cuts. Without an agreement, there could be a $640 billion impact on the economy; $500 billion of increased taxes and $140 billion in spending cuts. That could reduce our GDP by 4%-that’s not good. Without an agreement, our annual deficit of $1 trillion or more would be cut in ½. That’s good.

The politicians actually agree on more than half of the $640 billion in question. Republicans and Democrats alike want to continue the low tax rates for the middle class, minimize the impact of the AMT, and not cut defense spending. So, $375 billon of agreement already. In addition, spending cuts and tax hikes, if they happened, would be phased in over time. Lastly, agreements and legislation can occur in December or early 2013 and be applied retroactively. These ticking clocks that show the number of days, hours, minutes and seconds to December 31 when we go over the fiscal cliff drive me crazy.

The bigger picture is how we are going to handle our long-term budgets. The last four years have been tough. $5 trillion has been added to our national debt. Our debt is currently 70% of GDP. Without change, it will likely exceed 100% in the next decade and could be twice that in the next 20-25 years. Those are real problems. With all the talk of non-discretionary spending cuts and taxes on the wealthy, the real focus needs to be on the entitlements; particularly social security, Medicare, Medicaid and the like. Without change, we are on a slippery fiscal slope.

At the same time, there’s lot of good news. Consumer sentiment and net worth are up, debt is down and housing has seemingly hit bottom and is more affordable than ever. Business sentiment is up; businesses are making money, have cash and can borrow at the lowest rates since the 60s.

In my opinion, we are not approaching a fiscal cliff; but, rather, another fiscal speed hump. Hopefully it causes Congress and the White House to slow down and deal with important issues rather than kicking the can down the road. If Washington could just help lift us all out of the uncertainty of both short-term and long-term financial issues, things could really be looking up.