Monthly Recap November 2011

The Markets . . . A Look Back

November was an interesting month for all markets, to say the least! An optimistic beginning of the month was quelled by continued concerns of Europe’s economies, this time centered on Ireland’s bailouts and planned fiscal austerity. Fears of default and concerns of the validity of the Eurozone as a common currency area, made spreads increase across the board but this was felt mostly by Ireland, Spain, Portugal, etc. As a result, U.S. markets were choppy and European markets were down, mostly due to a decrease in value of the Euro compared to the dollar.

Small cap U.S. stocks continue their general outperformance, likely due to having less international sales and correlation.

The fixed income markets also make for an interesting study. The beginning of the new Fed purchases (“Quantitative Easing 2”) was not able to drive down interest rates, with the yield curve shifting up along most maturities. This increase in yield, against a backdrop of stimulus, makes one wonder if the Fed’s levers to decrease interest rates have now turned into “pushing on a string”. Consistent with increasing interest rates with a fairly steady-state economy, high credit quality bonds were punished relative to lower credit quality bonds.

Currently, we continue to maintain (but not increase) yield in the fixed income market by taking credit risk, rather than interest rate risk.

Since month-end, a substantial release of optimistic economic information has caused markets to react in a positive direction.

Investment Strategies

Forget about the January effect, here are a few strategies that can help your situation regardless of market direction.

1.) Got long term bonds?

a. Chances are they’ve appreciated. Here’s a strategy to convert regular income to capital gains and reducing your tax rates by up to 20% on interest payments. Sell your appreciated bond by 12/31 and pay the capital gains tax (at 15-25%). Buy back the same bond and elect to deduct the premium from the interest payments (your CPA will know how to do this). (Not applicable for muni bonds or bonds held in non-taxable accounts)

2.) Too much income to contribute to a Roth IRA?

a. Here’s a no brainer: Contribute $5K per spouse to a non-deductible IRA and convert it to a Roth by 12/31. If you don’t have any other IRAs you’ve just effectively contributed to a Roth without a tax consequence. If you do have IRAs, it still probably makes sense but takes a bit of math to calculate your taxes on it. Do this every year and it will start to add up.

b. Why a Roth?

i. There are multiple benefits to a Roth IRA when compared to a Traditional IRA. Here are a few:

1. No Required Minimum Distributions at age 70 ½…you decide when to take your money rather than being mandated to pull RMD’s.

2. Roth’s grow Tax Free. Every penny you pull out of your Roth some day will be tax free as opposed to IRA’s which are still taxed on growth within the account.

3. Estate Planning – pass more of your assets to your children/beneficiaries by paying taxes today for a Roth and effectively lowering your estate tax.

4. Tax Planning – many believe that tax rates are at an all-time low and can only go up from here. With that mindset, take a tax discount by paying today at lower rates and avoid impending changes to the tax code.

3.) Stock Options:

a. This can be complicated but planning ahead and timing conversions and sales can drastically increase the amount you get to keep. Upon the initial grant of any stock options, bone up on the rules and strategies as this planning is best done over the course of years.

Estate Planning Strategies

Are we going to have an estate tax next year? Who knows? Aside from the sage advice of “Die on 12/31/2010 rather than 1/1/2011”- here’s a useful tip:

For those that believe their estates will be over the future exemption, 2010 is a wonderful year for gifting at a low 35% tax rate. There’s no reason for the gift to be dated earlier than 12/31- if you pass before 12/31 that same gift would pass through your estate with no estate or gift tax. The lack of a Generation Skipping Tax further makes 2010 a wonderful year for gifting.

Year-end Strategies for Business Owners

1.) Contribute to a retirement plan. This decreases taxable income and helps shield assets from creditors and lawsuits. Don’t have one? This should be reviewed by the end of the year for the proper vehicle for you, as many retirement plans have year-end deadlines. Many employers overlook the benefit of the decrease in payroll taxes due to implementing this for their employees.

2.) C-Corp owners: Benefit from current low dividend rates by issuing a dividend by year-end if suitable for your business.

3.) Selling a business: Push to complete the sale by the end of the year to benefit from current low capital gains rates.

There are many more year end strategies available, some as old as the Tax Code itself. Please consult a professional in each area (Registered Investment Advisor, CPA, Attorney), as each strategy is highly individualized.

Taxes: Are You Paying Too Much?

You should  know . . .

• State of the current tax situation
• The new tax code; clarification and timeline for more guidance
• New rules/extensions for this year
  • Business credits and Section 179 Depreciation extended
  • Health bill changes
  • Credits for hiring
  • Credits- health insurance
• Year-end strategies
  • Retirement plan tax shields – Profit sharing, SEPs, other income deferrals
  • Roth Conversion

Topics Include . . .

• Discussion of the new tax code
• Year-end techniques to lower taxes for business and personal

Learn more at the next B.O.S.S. Workshop (Business Owner Strategy Sessions)