Believers in the January indicator, rejoice! If the first month holds any significance as a barometer of how equities might perform during the rest of the year, January clearly got 2012 off to a good start…
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Economic Perspective

• Unemployment rate down for 4th straight month
• GDP: grew at annual rate of 2.8% in 4th quarter
• Federal Reserve: keeping interest rates low through end of 2014
• S&P downgraded long-term ratings on 9 eurozone countries
• Consumer inflation unchanged in December
• Interest rates on 30-year fixed mortgages 3.88%: new all-time low

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Retirement Plans & IRA Limits

Many retirement plan and IRA limits are indexed for inflation each year. Some of the key numbers for 2012 are discussed in this article.
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2011 Tax Season Considerations

You don’t want to pay more in taxes than you have to. So, here are some things to keep in mind this filing season. (View More)

401(k) Corner: New Disclosure Rules for 401(k)

71% of employees think their 401(k) is FREE…they’ll soon learn the truth! (View More)

Eye on the Month Ahead

As Greece draws closer to the scheduled date for receipt of its next bailout installment, an agreement with private bondholders will become increasingly critical. As the Q4 corporate earnings season comes to a close, investors will try to gauge whether the results can be sustained into the new year, and whether large caps will continue to be eclipsed by the Nasdaq and small caps.

Believers in the January indicator, rejoice! If the first month holds any significance as a barometer of how equities might perform during the rest of the year, January clearly got 2012 off to a good start. For the first time since October 2010, the Nasdaq had the strongest monthly gains of the four domestic indices; it’s now up more than 20% from its 2011 low last October and is just 60 points away from its 2011 closing high. The small caps of the Russell 2000 weren’t far behind for the month, and their 30% gain since last October has outpaced the rest of the domestic indices. The blue chips of the S&P 500 and the Dow industrials had their best January since 1997, and are up more than 19% and 18% respectively since last October. Even the Global Dow saw renewed investor optimism despite a flurry of credit rating downgrades in Europe.

Demand for U.S. Treasuries remained steady, especially after the Fed forecast low interest rates through late 2014. The euro continued to suffer, hitting $1.27 at one point before rebounding to end the month just under $1.32. Oil prices hovered around $100 a barrel, and after retreating for months last fall, gold turned upward once again to end January at roughly $1730 an ounce.

*Equities data reflect price changes, not total return.

Due date: April 17, 2012

The due date for 2011 federal income tax returns is April 17, 2012 (April 15 is a Sunday, and April 16 is Emancipation Day–a Washington, DC, holiday). Whether you’re preparing your own taxes or paying someone else to do them for you, you’ll want to start pulling things together sooner rather than later. That includes gathering a copy of last year’s tax return, W-2s, 1099s, and deduction records.

If you’re not going to be able to file your federal income tax return by the due date, file for an extension using IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 15, 2012) to file your return. Don’t make the mistake of assuming that the extension gives you additional time to pay any taxes due, though. If you do not pay any taxes you owe by April 17, 2012, you’ll owe interest on the tax due, and you may owe penalties as well. Special rules apply if you’re living outside the country or serving in the military outside the country on April 17, 2012.

There’s still time to contribute to an IRA

You generally have until the due date of your federal income tax return to make contributions to either a Roth IRA or a traditional IRA for the 2011 tax year. That means there’s still time to set aside up to $5,000 ($6,000 if you’re age 50 or older) in one of these retirement savings vehicles. It’s worth considering, in part because contributing to an IRA can have an immediate tax benefit. That benefit comes in the form of a potential tax deduction–with a traditional IRA, if you’re not covered by a 401(k) or other employer-sponsored retirement plan, you can generally deduct the full amount of your contribution. (If you’re covered by an employer-sponsored retirement plan, whether or not you can deduct some or all of your traditional IRA contribution depends on your filing status and income.)

A Roth IRA is a little different; if you qualify to make contributions to a Roth IRA (whether you can contribute depends on your filing status and income), the contributions you make aren’t deductible, so there’s no 2011 tax benefit. Nevertheless, a Roth IRA may be worth considering, because qualified Roth distributions will be completely free from federal income tax.

Roth conversion regret?

Did you convert a traditional IRA to a Roth IRA in 2011, only to see the account drop in value as a result of ongoing market volatility? Wish you could go back in time so that you wouldn’t have to pay tax on the value of the IRA assets that was lost in the downturn? Turns out, you can.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2011, but that Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal income tax on $100,000, even though the current value of those assets is only $60,000. If you undo the conversion, you’ll be treated for tax purposes as if the conversion never happened, and you’ll wind up with a traditional IRA worth $60,000–and no resulting tax bill. You generally have until the due date of your 2011 return, including extensions, to recharacterize your 2011 Roth conversion (note that special rules allow individuals who file timely 2011 returns to recharacterize up until October 15, 2012–talk to a tax professional for details).

If you do recharacterize your 2011 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you’ll have to wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. If you reconvert in 2012, then all taxes due as a result of the reconversion will be included on your 2012 federal income tax return.

Expiring provisions

A number of key provisions have expired. So, without additional legislation, 2011 will be your last chance to take advantage of these opportunities. These now-expired provisions include increased “bonus” depreciation and IRC Section 179 expense limits that drop significantly in 2012. Additionally, 2011 will be the last year that individuals who itemize deductions will be able to elect to deduct state and local general sales tax in lieu of state and local income tax. And, both the above-the-line deduction for qualified higher education expenses and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals will not be available starting with the 2012 tax year.

If you’re lucky enough to be eligible to participate in a 401(k), 403(b), 457(b), or SAR-SEP plan, you can make elective deferrals of up to $17,000 in 2012, up from $16,500 in 2011. If you’re age 50 or older, you also can make a catch-up contribution of up to $5,500 to these plans in 2012 (unchanged from 2011). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If your 401(k) or 403(b) plan allows Roth contributions, your total elective contributions, pretax and Roth, can’t exceed $17,000 ($22,500 with catch-up contributions). You can split your contribution any way you wish. For example, you can make $10,000 of Roth contributions and $7,000 of pretax 401(k) contributions. It’s up to you.

If you participate in a SIMPLE IRA or SIMPLE 401(k) plan, you can contribute up to $11,500 in 2012 (unchanged from 2011). If you’re age 50 or older, the maximum catch-up contribution to a SIMPLE IRA or SIMPLE 401(k) plan in 2012 is $2,500 (unchanged from 2011).

*Contributions can’t exceed 100% of your income. Special catch-up rules apply to 403(b) and governmental 457(b) plans.

IRA limits remain the same for 2012

The amount you can contribute to a traditional or Roth IRA remains at $5,000 (or 100% of your earned income, if less) for 2012, and the maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to an IRA in addition to an employer-sponsored retirement plan. But if you (or your spouse) participate in an employer-sponsored plan, your ability to deduct

traditional IRA contributions may be limited, depending on your income. Roth contributions are also subject to income limits.

Some other key numbers for 2012

For 2012, the maximum amount of compensation your employer can take into account when calculating contributions and benefits in qualified plans (and certain other plans) is $250,000 (up from $245,000 in 2011).

The maximum annual benefit you can receive from a defined benefit pension plan is limited to $200,000 in 2012 (up from $195,000 in 2011).

And the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2012 is $50,000 (up from $49,000 in 2011), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

A number of retirement plan and IRA limits are indexed for inflation each year. Many of the limits have increased for 2012.

The global village became more connected as 2011 was consumed by debt, debate, downgrades, and potential default both here and overseas. U.S. economic data had to struggle for months against headwinds from abroad that preoccupied Wall Street even as Wall Street itself got occupied. (Read More)

2011 Annual Economic Perspective

• Unemployment rate drops
• GDP: economy gradually began to improve
• Inflation: high at wholesale level but average for consumers
• Housing starts, home sales and prices (Read More)

New Year’s Financial Resolutions

As you make financial resolutions for 2012, looking back at what happened last year can help you make some positive changes this year. (Read More)

401(k) Corner: Fees & Liability

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Driving markets worldwide were concerns about the impact of the Arab Spring revolts on oil markets, the triple disaster in Japan that left the world gasping for autos and parts, and most especially the shaky state of Europe’s finances and banks with heavy sovereign debt exposure. After Greece, Portugal, and Ireland turned to their peers for financial support, the contagion threatened to spread to larger and potentially more threatening economies. As Italian and Spanish bond yields hit the 7% level considered unsustainable, investors worried they might be both too big to fail and too big to bail out despite an enhanced rescue fund and a new agreement increasing the Eurozone’s ability to impose fiscal discipline on members.

However, some of the turmoil was home-grown, such as the congressional combat that held the United States’ credit rating hostage and threatened a first-ever default. Though the buck-inheriting supercommittee failed to prevent $1.2 trillion in budget cuts scheduled to start in 2013, the conflict ultimately didn’t faze bond investors, who sought refuge from Europe’s travails in U.S. Treasuries. Despite the upheaval caused by the global financial system’s need to deleverage, the U.S. economy ended the year looking a bit stronger, with increased potential for continued recovery in 2012–assuming that Europe can manage not to implode in the meantime.

*Equities data reflect price changes, not total return.

 The Markets

• Equities: A strong first quarter helped push the Dow to its highest level in almost three years, and by the end of April, the Russell 2000 was at its highest level on record. However, May launched a downhill slide punctuated by the occasional hair-raising bout of volatility. Three of the Dow’s 12 largest daily point gains in history occurred in 2011 (two in August alone); unfortunately, August also featured three of the Dow’s 12 largest point declines ever. Nevertheless, the Dow was the only index of the four to show a gain for the year. The volatility cost the small-cap Russell 2000 dearly; despite a good start and strong finish, it ended the year down 14% from its April high. The Nasdaq also suffered, ending 2011 with a 9% fall from its April high and its first losing year since 2008. And despite all the ups and downs, the S&P 500 ended 2011 almost exactly where it began. Not surprisingly, global equities were harder-hit than their U.S. counterparts as credit markets showed signs of strain, threatening both emerging and developed markets.
• Bonds: Despite the Federal Reserve’s easing its way out of quantitative easing, U.S. Treasury yields hit historic lows thanks to the European debt crisis and the Fed’s intent to preserve rock-bottom interest rates through mid-2013. After sinking to roughly 1.7% in September, by year’s end the benchmark 10-year yield had recovered slightly but remained below 2%, while spreads between the 2-year and 10-year bonds narrowed over the year.
• Oil: Despite the uncertain global economy, oil prices continued to rise at a slow but relentless pace. After spending much of 2010 under $80 a barrel, oil not only surpassed $90 in 2011, but ended the year near $100.
• Currencies: After reaching US$1.48 in the spring, the euro plummeted in 2011′s last four months, ending the year just below US$1.30. By May, the dollar had lost nearly 10% against a basket of six currencies, languishing for much of the summer before the European debt crisis helped return it to roughly even for the year.
• Gold/silver: Global anxiety steadily pushed gold to record after record in 2011. The ascent became jet-propelled in August, when the price hit an all-time high near $1,900 an ounce only weeks after reaching $1,700 for the first time. However, by year’s end the luster had begun to fade; despite a late-fall rally, the precious metal closed out 2011 at roughly $1,550 an ounce. Silver also went parabolic for a time, hitting a high near $49 an ounce in the spring before ending the year not far from its $29 starting point.

Automate your retirement savings

In 2011: The economic slowdown took its toll on retirement savings.

In 2012: While the economy–and its impact on financial markets–may be out of your hands, you can still look for ways to increase your retirement savings. First, determine whether you’re leaving any money on the table. If you participate in an employer-sponsored retirement plan such as a 401(k) or a 403(b), contribute the maximum amount you can–particularly if your employer matches some or all of your contributions.

Contributing to an employer-sponsored retirement plan can help you save more consistently. Because your contributions are deducted automatically from your salary each pay period, you won’t be tempted to skip one now and then. And this year, why not resolve to steadily increase your retirement contributions? Your employer may allow you to sign up for automatic contribution increases based on a certain schedule or triggering event (e.g., annually or whenever your pay increases).

If you’re self-employed or contributing to a traditional or Roth IRA on your own, you can still automate your contributions by having money sent directly from a savings or checking account to your retirement account.

Plan ahead for a cash crunch

In 2011: According to the Federal Reserve, use of consumer credit rose in 2011 after falling for two straight years.

In 2012: If you’ve reigned in your spending but are still burdened by debt (especially credit card debt), your lack of emergency savings may be partly to blame. For example, even if you pay much more than your monthly minimum credit card payment, you’ll be caught in an endless cycle of debt unless you can avoid using your credit card for new expenses. Resolve to have at least three to six months of your living expenses set aside in a liquid account such as a savings or money market account so that you have cash on hand to pay for unexpected expenses (e.g., costly car or home repairs, large medical bills) instead of racking up new credit card debt and interest charges.

Review your investments

In 2011: Market volatility was the norm.

In 2012: You can’t control the market, but you can control your response to market volatility. Is your asset allocation still in line with your investment goals, time horizon, and risk tolerance? Is it time to rebalance your allocation in light of changing market conditions and/or your changing needs? Are you taking appropriate advantage of available investment products or offerings? Reviewing your portfolio periodically can help you stay on track.

Check your insurance coverage

In 2011: Floods, hurricanes, tornadoes, earthquakes, and wildfires were widespread.

In 2012: The federal government issued more disaster declarations in 2011 than in any other year on record, serving as a reminder that it’s important to review your property and casualty coverage to make sure you’re adequately protected. Is there coverage you really should have (e.g., personal umbrella liability, renters insurance, or flood protection), but don’t?

Update your estate plan

In 2011: New estate and gift tax laws took effect.

In 2012: Your estate plan should be reviewed in light of the changes made last year to estate and gift tax laws. Certain life events, such as changes in employment, family circumstances (marriages, divorces, births, illness or incapacity, and deaths), or even the valuation of your estate, may also affect your estate plan.

Europe’s ongoing debt problems hurt domestic equities last month, causing them to reverse much of October’s strong gains. The Dow–the sole gainer for the month–bounced in and out of positive territory for the year, managing once again to regain the 12,000 threshold… (Read More)

November Economic Perspective

• Eurozone bond-buying and Central Bank aid
• GDP and Unemployment
• Congressional SuperCommittee
• Retail sales & Black Friday
• Lower energy costs; CPI falls, Incomes rise, Savings increase
• Housing starts; new home sales (Read More)

5 Year-End Tax Considerations

Legislation passed in 2010 extended lower tax rates; here are five things to keep in mind. (Read More)

Gift Tax Strategies

The current applicable exclusion, low rates, and depressed property values create a favorable environment for making certain gifts. (Read More)

The Problem With Do-It-Yourself Estate Planning

As the number of Internet websites have quickly multiplied, do-it-yourself estate planning is on the rise. (Read More)

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401(k) Corner: New Rules

2012:  New Fee Disclosure rules may surprise You
Many small business owners and employees are too busy to focus on their retirement plans, but it will be interesting to see how many notice when new fee disclosure rules come into place in 2012.  Business owners and HR practitioners should realize that they have the responsibility for compiling and disclosing fees to employees.   (Read More)