Weakening economic data and renewed anxiety about Europe brought equities’ winning streak to an end in April. (Read More)

Economic Perspective

• U.S. payrolls rose at their slowest pace since October
• GDP growth slowed in Q1 to 2.2%
• New home sales were down 7.1% for the month
• Manufacturing data was relatively weak
• FOMC gave little indication of new round of quantitative easing
• President Obama signed legislation to jumpstart emerging growth companies (JOBS Act) (Read More)

Hidden Taxes

What is your true cost? (Read More)

Pay Down Debt or Save and Invest?

There are a variety of strategies for paying off debt which can reduce the total interest paid. But should you pay off the debt? (Read More)

Rate of return on investments versus interest rate on debt

Probably the most common factor used to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return on the investments than the after-tax interest rate on the debt if you were to invest your money instead of using it to pay off the debt.

For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. You would generally need to earn an after-tax rate of return greater than 18% to consider making an investment rather than paying off the debt. So, if you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 18% isn’t good, it may be better to pay off the debt than to make an investment.

On the other hand, say you have a mortgage with a $10,000 balance on which you pay deductible interest of 6%. If your income tax rate is 28%, your after-tax cost for the mortgage is only 4.32% (6% x (1 – 28%)). You would generally need to earn an after-tax rate of return greater than 4.32% to consider making an investment rather than paying off the debt. So, if you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 4.32% is good, it may be better to invest the $10,000 rather than using it to pay off the debt.

Of course, it isn’t an all-or-nothing choice. It may be useful to apply a strategy of paying off debts with high interest rates first, and then investing when you have a good opportunity to make investments that may earn a higher after-tax rate of return than the after-tax interest rate on the debts remaining.

Say, for example, you have a credit card with a $10,000 balance on which you pay 18% nondeductible interest. You also have a mortgage with a $10,000 balance on which you pay deductible interest of 6%, and your tax rate is 28%. So, if you have $20,000 available to invest or pay off debt, it may make sense to pay off the credit card with $10,000 and invest the remaining $10,000.

When investing, keep in mind that, in general, the higher the rate of return, the greater the risk, which can include the loss of principal. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but will you have the money needed to pay them?

Some other considerations

When deciding whether to pay down debt or to save and invest, you might also consider the following.

• What are the terms of your debt? Are there any penalties for prepayment?
• Do you actually have money that you could invest? Most debts have minimum payments that must be paid each month. Failure to make the minimum payment can result in penalties, increased interest rates, and default. Are your funds needed to make those payments?
• How much debt do you have? Is it a problem? How do you feel about debt? Is it something you can easily live with or does it make you uncomfortable?
• If you say you will save the money, will you really invest it or will you spend it? If you pay off the debt, you will have assured instant savings by eliminating the need to come up with the money needed to pay the interest on the debt.
• Would you be able to borrow an additional amount, if needed, and at what interest rate, if you paid off current debt? Do you have an emergency fund, or other source of funds, that could be used if you lose your job or have a medical emergency, or would you have to borrow?
• If your employer matches your contributions in a 401(k) plan, you should generally invest in the 401(k) to get the matching contribution. For example, if your employer matches 50% of your contributions up to 6% in a 401(k) plan, getting the 50% match is like getting an instant 50% return on your contribution. In addition, there are tax advantages to investing in a 401(k) plan.

How taxes are hidden

Taxes are hidden in many ways. For example, you see the payroll taxes that are deducted from your payroll check each pay period. What you do not see are the taxes that your employer pays. For example, in addition to income tax, your employer pays half of the Social Security tax as well as unemployment tax on your wages. Like all costs paid by your employer, these taxes get passed on to you as an employee (as a factor in compensation paid), as well as to shareholders and to clients and customers. And if you’re receiving dividends from a corporation, keep in mind that taxes have already been paid on that income.

But most hidden taxes are paid by consumers. Sometimes these taxes are disguised as fees, surcharges, tariffs, duties, assessments, dues, excises, levies, licenses, and tolls, among others. And sometimes they’re simply rolled into the price of goods and services and are either completely undisclosed or they appear somewhere in the fine print, which is often left unread by the consumer.

Planes, trains, and automobiles

Many hidden taxes are associated with travel. For example, when you pull up to the pump, you can clearly see the price for the gas, but the “taxes included” disclosure is usually posted somewhere else. How much of what you pay goes to tax revenue? Well, it varies by each state and its tax policy at the time, but it can range from 8¢ per gallon (Alaska) to 47.7¢ per gallon (California). (Source: Tax Foundation, Tax Data, February 25, 2011)

Taxes associated with traveling by air can include ticket excise tax, flight segment tax, arrival and departure fees, September 11 security fees, passenger facility fees, and–if your travel is international–agricultural inspection, customs, and immigration user fees. There are 16 or more fees that can add up to $61 (or 20% of your total cost) or more. (Source: Airlines for America, www.airlines.org, 2012) And those are just the U.S. taxes; there can be foreign taxes as well.

Car rental, hotel, and meal taxes can also add up. The GBTA Foundation, the education and research foundation of the Global Business Travel Association (GBTA), reported from its 2011 annual study of the top 50 U.S. travel destination cities that the travel taxes and fees imposed on travel-related services increased the traveler’s cost an average of 56% over and above any general sales taxes paid, and that taxes for a single night at the national average room rate of $95.61 were $13.12. The combined lodging taxes levied by state, county, and city averaged 13.73%. (Source: News Release, July 21, 2011, www.gbta.org).

Sin taxes

A seemingly favorite way for government to tax is with the so-called “sin” taxes. Ostensibly, these taxes are imposed to reduce behavior that society considers unhealthy, immoral, or just undesirable in some way. That is why there is a tax on soda, alcohol, tobacco, gambling, and ammunition and firearms. According to the Alcohol and Tobacco Tax and Trade Bureau, revenue collected in 2011 for just some of the above-referenced items totaled approximately $26 billion. (Source: Statistical Release, December 1, 2011, www.TTB.gov)

Why are taxes hidden?

Not surprisingly, hidden taxes largely go unnoticed. The result may be that this can make it difficult for us to choose wisely the goods and services that we purchase, or to have a true accounting of our total tax burdens.

• U.S. payrolls rose at their slowest pace since October. According to the Bureau of Labor Statistics, the 120,000 new jobs only managed to cut the unemployment rate to 8.2%, though it was the 11th straight month of either stable or falling unemployment.
• U.S. economic growth slowed in the first quarter of 2011. The Commerce Department’s initial estimate of gross domestic product was 2.2%, substantially lower than the previous quarter’s 3%. Consumer spending picked up 2.9% in Q1, but business spending was off.
• There was pain in Spain as bond yields neared 6%, unemployment rose above 24%, and the country’s economy officially fell into recession by shrinking for the second consecutive quarter. Standard & Poor’s cut the nation’s sovereign debt to BBB+ and warned of further downgrades; it also downgraded 11 of Spain’s largest banks.
• Off with their heads: The frustration about Europe’s finances that has previously brought down heads of state in Greece, Spain, and Italy took its toll on two more governments. French President Nicolas Sarkozy, a key German ally in crafting a eurozone financial battle plan, ran second to Socialist Party candidate François Hollande in first-round elections and will face a tough runoff contest in May. Also, the prime minister and cabinet of Holland resigned after failing to win budget cuts needed to meet eurozone debt guidelines.
• The Commerce Department said consumer spending rose 0.3% in March and incomes grew 0.4%, helping to nudge the savings rate upward slightly to 3.8%. Meanwhile, retail sales were up 0.8%, and roughly 6.5% higher than a year earlier. The Bureau of Labor Statistics said the annual consumer inflation rate remained below 3% despite a 0.8% monthly increase, and inflation at the wholesale level was flat for the month.
• There was little encouraging news out of the housing market. The Commerce Department said new home sales were down 7.1% for the month, the S&P/Case-Shiller index of home prices hit its lowest level in almost a decade (down 3.5% year over year), and the National Association of Realtors® said sales of existing homes fell 2.6%. However, the Commerce Department also reported that housing starts, down 5.8% for the month, were still 10.3% higher than a year ago, while building permits–an indicator of future activity–were up 4.5% for the month and 30% from last year, though most of that was multifamily housing.
• Manufacturing data also was relatively weak. Durable goods orders fell 4.2% for the month, according to the Commerce Department, while the Fed’s surveys of manufacturers in both the New York and Philadelphia regions showed slowing growth. The Fed also said industrial production was flat for the month, though gains earlier in the year left it up 5.4% for the quarter.
• Despite spotting hints of softening in the economy, the Federal Reserve’s Open Market Committee gave little indication that a new round of quantitative easing post-QE2 is being contemplated.
• President Obama signed legislation that exempts emerging growth companies from certain securities regulations, making it less costly for them to go public. The Jumpstart Our Business Startups (JOBS) Act also reduces the amount of auditing and reporting required, and authorizes “crowdfunding” of startups. A second piece of legislation, the Stop Trading on Congressional Knowledge (STOCK) Act, makes it a criminal offense for public officials such as members of Congress, the president, and many federal employees to trade securities based on nonpublic knowledge obtained through their jobs. Finally, legislation based on the so-called “Buffett rule,” which would have established a minimum 30% federal income tax rate for individuals earning at least $1 million annually, failed to garner enough votes for further consideration in the Senate.

Eye on the Month Ahead

Investors will try to gauge what the results of the May 6 French presidential election might mean for the eurozone’s future. They also will begin assessing whether generally strong Q1 earnings reports are enough to offset dicey economic data, and whether those earnings are likely to continue into the rest of 2012.

Key dates and data releases: personal income/spending (4/30); construction spending, U.S. manufacturing, auto sales (5/1); factory orders (5/2); business productivity/costs, U.S. services sector (5/3); unemployment/payrolls (5/4); international trade, import/export prices, U.S. Treasury budget (5/10); wholesale inflation (5/11); consumer inflation, retail sales, international capital flows, business inventories, Empire State manufacturing survey (5/15); Federal Open Market Committee minutes, housing starts, industrial production (5/16); Philadelphia Fed manufacturing survey (5/17); home resales (5/22); new home sales (5/23); durable goods orders (5/24); home prices (5/29); pending home sales (5/30); second estimate of Q1 GDP (5/31).

Those concerns and a lack of Fed interest in boosting interest rates helped drive 10-year Treasury yields back below 2%. Despite Spain’s problems, the euro stabilized a bit to end the month at $1.32, and oil prices stayed between $101 and $104 a barrel. And after a rough start, gold bounced back to end the month with a slight loss at roughly $1,660 an ounce.

*Equities data reflect price changes, not total return.

Equities – onward and upward

As the U.S. economy continued its slow march toward recovery and Europe managed to fight off the threat of a Greek default on key bond payments, even higher gas prices couldn’t stop equities from powering upward… (Read More)

Economic Perspective

• GDP final estimate for Q4-2011: 3%
• Unemployment continued falling: 8.3%
• Greece: largest sovereign restructuring on record: 54% cut
• FOMC – interest rates “exceptionally low” through late 2014
• Home sales outpace 2011 but home prices at mid-2006 levels.
• Spiking gas prices equal higher inflation: 2.9% trailing 12 mo.

(Read More)

Asset Protection Beyond Insurance

Insurance may not provide all the protection you need or it might not be available, so you may need to consider these strategies. (Read More)

401(k) Corner Roth 401(k) – is it right for you?

While taxes are fresh on your mind, now might be the best time to review whether you should contribute to your 401(k) with pre-tax or after-tax money. Contributions that are put back before-taxes are the Traditional 401(k), while those that are put back after-taxes are the Roth 401(k).  (Read More)

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Your tax planner can help you in determining if this is advantageous for you.

A few questions that are representative of those asked of us are…

Will the Employer Match and Profit Sharing be in tax-deferred or Roth monies?

The Employer Match and Profit Sharing contributions will always be tax deferred, even if your contribution is a Roth contribution.

I’m a trustee of a traditional 401(k) plan, and I’d like to contribute to a Roth 401(k), do I have to set up a completely new 401(K)?

No, but you likely will need to amend your Plan Document to include language in it.  Discuss this with your provider.

Do Required Minimum Distribution rules count towards Roth 401(k)’s when I turn 70 ½?

Yes, RMD’s also apply to Roth 401(k) balances.  However, Roth 401(k) monies that are rolled over into a Roth IRA do not have RMD requirements.

Do the same contribution limits apply to Roth 401(k)s and Traditional 401(k)s?

                Yes.  However, since the limits are the same, and the Roth 401(k) contribution has already been taxed, it is effectively a larger contribution.  For larger tax deferral avenues, click here.

Are there more fees involved with a Roth 401(k)?

Fees will be consistent with Traditional 401(k), however, you will likely incur costs to amend your Plan Document.

These asset protection strategies generally involve transferring legal ownership of assets to other persons or entities, such as corporations, limited partnerships, and trusts. The logic behind shifting ownership of assets is fairly straightforward: your creditors can’t reach assets you don’t own.

Shifting assets to a C corporation

The law views a C corporation as a separate legal entity. As such, business assets owned by a C corporation are considered separate from your personal assets, which will generally not be at risk for the liabilities of the business.

However, protection from liability may be lost if the business does not act like a business, such as when the business acts in bad faith, fails to observe corporate formalities (e.g., organizational meetings), has its assets drained (e.g., unreasonably high salaries paid to shareholder-employees), is inadequately funded, or has its funds commingled with shareholders’ funds.

Shifting assets to other entities

A limited liability company (LLC), limited liability partnership (LLP), or family limited partnership (FLP) is a legal entity that can be used to separate business assets from personal assets.

An LLC is generally taxed like a partnership with income and tax liabilities passing through to its members (and not double-taxed as a C corporation), but it is viewed as a separate legal entity and can be used to own business assets, protecting your personal assets from business claims against the LLC.

If you have business partners, an LLP may protect you from the professional mistakes of your partners. That is, if one of your partners is sued for negligence, and the LLP is also named in the lawsuit, the partner sued may be liable personally for any judgment, but the LLP should protect your personal assets from the reach of any judgment creditor of the LLP.

An FLP is a limited liability partnership formed by family members only. Generally, a creditor can only obtain a charging order against the FLP, which allows the creditor to receive any income distributed by the general partner (who is usually a family member). It does not allow the creditor access to the assets of the FLP. Although each of the entities discussed above are alike in that they can protect your personal assets, they are very different in other ways. Make sure the entity you choose satisfies all of your needs.

Shifting assets to a trust

There are many different types of trusts that can be used to protect assets. A protective trust may protect assets intended to eventually pass to another person. For example, you transfer assets to a protective trust naming yourself and another as beneficiaries. The trust allows you to receive only income from the trust, with no access to the trust principal. At your death, the assets are to pass to the other beneficiary. If you’re sued, the creditor can only receive your right to trust income, but not the assets of the trust. These trusts usually contain a spendthrift provision that makes it difficult for creditors to reach trust assets to satisfy claims against trust beneficiaries.

The laws in a few states, such as Nevada, Alaska, and Delaware, enable you to set up a domestic self-settled trust. You can create this type of trust, transfer assets to the trust, and name yourself as beneficiary. The trust gives the trustee discretion over whether or when to distribute trust property or income to beneficiaries. Creditors can only reach property that the beneficiary has a legal right to receive. Therefore, the trust property will not be considered the beneficiary’s property, and any creditors of the beneficiary, including you, will be unable to reach it.

Many foreign countries have laws that make it difficult for creditors to reach trust assets held in that foreign country. In order for a creditor to reach assets held in a foreign or offshore trust, a court must have jurisdiction over the trustee or the trust assets. Because the trust is properly established in a foreign country, obtaining jurisdiction over the trustee in a U.S. court action will not be possible. Thus, a U.S. court will be unable to exert any of its powers over the offshore trustee.

Protecting assets doesn’t include fraud

Protecting your assets by legally repositioning them does not extend to actions intended to hide assets or defraud creditors. So, make sure you implement any asset protection strategy before there is any hint of trouble, and be sure to carefully document that you are doing so for sound business or other reasons.

Source: Broadridge

As investors grew increasingly comfortable with equities again, reduced demand for bonds sent yields back above 2%. Tensions with Iran pushed oil prices as high as $108 per barrel, pushing both gas prices and inflation higher despite concerns about slowing economies abroad. Gold regained some of the ground lost last year but then gave back almost half of those gains to end at roughly $1,670 an ounce. And after a strong move during 2011′s final quarter, the dollar stabilized a bit.