Tuesday, May 24, 2011


It’s been over 16 years since I experienced the miracle of watching my son Josh’s birth, and Dakota and I are proud to report that our new addition has finally arrived! Ava Louise Rollins was born on Sunday, May 22nd at 12:00 p.m., weighing 6 pounds 3 ounces and measuring 19.5 inches long.

Ava was early to the party, arriving four weeks prior to her expected due date. As you can see from the pictures, however, she is healthy and thriving, and Dakota is doing just fine. I’m certainly lucky and thankful for my beautiful family. Dakota and Ava are expected to be released from the hospital this Thursday, and we are anxious for our family to finally be together at our home.

I’m looking forward to spoiling Ava over the coming years, and I can tell you that she’s already got me wrapped around her very tiny finger. I know how fast children grow and plan on enjoying every minute with Ava. I still can’t believe that Josh is already a 6’4”, 200-pound 16-year old; it feels like he was born just yesterday!

Amusingly, my mailbox was full of letters from the AARP this morning. The irony did not go unnoticed; I am well aware that I will be 79-years old when Ava turns 18. However, if 62 really is the new 42, then everything will be copacetic. So far, so good – I have the energy of someone much younger than I, and I have the time and resources to make sure Ava is exposed to the finer things in life.

Admittedly, I was no spring chicken at nearly 46-years old when Josh was born. But for me, there have been many benefits to starting a family later in life. With Ava’s birth, my clients can rest assured that I will not be retiring anytime soon. I plan on working at Rollins Financial at least another 18 years.

Lastly, while Dakota and I appreciate your caring thoughts and sentiments during this exciting time, in lieu of your generous gifts, we kindly ask that you consider contributing to a 529 plan of a child to whom you are close (which Rollins Financial would be happy to manage).

Best personal regards,
Joe Rollins

Friday, May 20, 2011

Q&A Series: Roth Conversions

We received follow-up questions to our Q&A post regarding Roth 401(k)s from Lou, a Rollins Financial client.

Q: I’m 54-years old and my employer offers the Roth option under our 401(k) plan. I currently make traditional 401(k) contributions, but after reading your Q&A post about Roth 401(k) plans, I’m wondering if converting would be a wise decision for me. Also, can you expound upon the tax considerations concerning Roth conversions?

Thanks for your questions, Lou. With more employers offering Roth 401(k) plans, we receive questions likes yours quite frequently. It’s good that you’re doing your research before going forward with an in-plan conversion, however, because this option is not always the best course for individuals. I’ll explain why below.

The Basics

As I stated in my answer to Monica’s question, Roth 401(k) plans are a combination of Roth IRA and traditional 401(k) plans. Contributions to Roth 401(k)s are not tax deductible (which means less take-home pay), but withdrawals after age 59½ are penalty- and tax-free. In traditional 401(k) plans, contributions are tax deductible, and taxes are only paid upon withdrawal after age 59½.

Interestingly, before the Small Business Jobs Act of 2010 (SBJA) was enacted in September of 2010, you could only convert traditional 401(k), 403(b) and 457(b) plans to a Roth-type retirement plan by taking a distribution and rolling it into a Roth IRA outside the plan. This was a headache for plan sponsors since distributions could only be made to the extent permitted under the plan document. Furthermore, if the plan documents expanded the distribution options to increase the amounts that could be rolled over, participants could use distributions for purposes other than Roth conversions, defeating the purpose of a retirement plan.

The SBJA, however, solved this problem by allowing conversions of amounts held in traditional 401(k), 403(b) and 457(b) plans to designated Roth accounts in the same plan. The law also allowed for plan amendments insofar as creating a new distribution option solely for in-plan Roth conversions (IPRCs). The caveat? Generally, IPRCs are only available to participants who are age 59½ or older, are disabled, or who have died. “Qualified reservist distributions” for participants who are called to active duty in the Armed Forces are also eligible for IPRCs. Thus, an employer must amend its non-Roth plan to provide a Roth contribution option as wells as to allow in-service, non-hardship distributions to specifically allow current employees not meeting the eligibility requirements to do an IPRC. If your plan allows for in-service conversions, then you are free to do an IPRC as you deem appropriate.

The SBJA also relaxed the rules concerning converting from a traditional IRA to a Roth IRA. Prior to the SBJA, only taxpayers with a modified adjusted gross income of $100,000 or less in the year of conversion – and who were not married filing separately – could convert from a traditional to a Roth IRA. Beginning in 2011, however, all taxpayers – even those with a modified AGI of $100,000 or more – have the option to convert to Roth IRAs from traditional IRAs. Again, the consideration is whether it’s better for you to make a tax deductible traditional IRA contribution and pay taxes on the distributions from the account at retirement or pay the taxes (and cost of the conversion) up-front and have tax-free withdrawals once you retire with a Roth IRA.

Evaluating the Options

As I explained to Monica, most young people can expect for their tax rate in retirement to be the same or higher than it is now. As such, they are typically better off paying the taxes now (i.e., less take home pay) by contributing to a Roth 401(k) or Roth IRA and allowing the assets to grow for 30 to 40 years. On the other hand, individuals in their peak earning years who will likely be in a lower tax bracket in retirement will likely benefit from traditional 401(k)/IRA contributions. Simply put, it may not make sense to pay taxes today at a higher rate if it’s likely you’ll be in a lower tax bracket when you retire.

When it comes to Roth conversions, it’s important to note that you must report and pay taxes on the amount you convert on your individual income tax return for the year of the conversion. For example, someone with $100,000 in a traditional 401(k) or IRA who’s in the 28% federal tax bracket would pay $28,000 in taxes – plus whatever may be owed in state taxes – during the year of conversion. Also, if you don’t pay the taxes using outside funds and instead have withholding taken on the conversion amount, you will be subject to the 10% early withdrawal penalty on the amount withheld since that amount is not part of the rollover. In short, it may not be practical to do a Roth conversion, unless you expect to be taxed at a higher rate at retirement. And, as you can see, it's rarely wise to use your retirement assets to pay the taxes on the conversion.

If you’re not sure what your future tax rate may be – or if you have a large traditional portfolio that would require a substantial tax payment at conversion – you might want to consider a partial conversion to a Roth. The diversification benefits from having some money in a Roth and some in a traditional retirement account may make this the most tax-efficient plan for you.

Keep in mind that Roth accounts, including those converted from traditional retirement accounts, must be held for at least five years – and participants must be at least age 59½ – before tax-free withdrawals can be taken. If you don’t meet the exemptions under those rules, you’ll face a 10% penalty on distributions taken before the five-year holding period or if you are younger than 59½ and take a distribution.

So, what happens if you do a Roth IRA conversion only to regret the decision soon after? Don’t fret; a Roth can be recharacterized (switched back) to a traditional IRA or qualified plan. The taxpayer would have until the following April 15th to reverse the transfer (October 15th if an extension was timely filed). However – and this is important – IPRCs cannot be recharacterized.

If you qualify for taking an IPRC from your 401(k) plan under the standard eligibility requirements outlined above, you now have two choices: you can either roll traditional amounts into a Roth IRA or roll them into an in-plan Roth account (plan documents permitting). Again, in-service employees can only do IPRCs. But depending on your individual circumstances, converting outside the plan may be better. Here are some additional items to consider:
  • If you won’t be relying on the assets to provide income during your retirement and are more interested in accumulating wealth to pass on to your heirs, then converting to a Roth IRA is much more favorable. This is because qualified plans – including Roth 401(k)s – require participants to take required minimum distributions (RMDs), after age 70½, but Roth IRAs do not.
  • The recharacterization provision available to Roth IRAs – but not to IPRCs – is a significant advantage. If you do an IPRC and change your mind shortly thereafter, you can’t switch back to the traditional account.
  • IPRCs are advantageous to individuals who are in professions with high liability risks (e.g., doctors and lawyers). This is because in-plan assets are offered greater protection than assets in a Roth IRA.
Based on the foregoing, for most individuals qualifying under the standard eligibility requirements, it’s better to convert outside the plan rather than inside when offered the choice.

Thanks so much for your question, Lou. As in all tax and financial matters, it’s important to fully evaluate your particular situation when deciding whether or not to do a Roth conversion. This post just touches on Roth conversion basics and scenarios. It’s a complex subject, and I suggest consulting with a professional for a more specific and thorough evaluation of your requirements.

We encourage our clients and readers to send us questions for our Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Friday, May 6, 2011

Q&A Series: Roth 401(k) Plans - the Best of Both Worlds

This week's question comes from Monica, a young reader who is just starting her career and has questions about saving for retirement.

Q: I graduated from college in December and finally landed my first “real” job. My employer offers a 401(k) plan, but is that the way for me to go? Or are there better ways for me to save for my retirement? Should I have other savings besides what I save for retirement?

Congratulations on graduating from college, Monica! You should be proud of yourself for this great achievement and for finding employment relatively quickly in today’s job market. It always pleases me to hear of a young person taking responsibility for his or her financial life – especially when it comes to retirement savings. This isn’t a typical priority for many people your age, although it is essential to your financial well-being.

The Basics

There are many types of retirement savings plans available to individuals, but you should definitely take advantage of an employer sponsored 401(k) plan if it is being offered to you. Why? Because most companies match a percentage of employee contributions, which is basically free money if you contribute at least up to the matching amount. Also, since 401(k) contributions are taken directly out of your paycheck, you probably won’t miss the money. Lastly, and most importantly, contributions are tax deductible and earnings are tax-deferred until you start withdrawing the money after age 59½. So, a 401(k) plan is a great place to start saving for retirement.

I’m assuming from your question that your employer offers a traditional 401(k) plan, but some employers are now offering Roth 401(k) plans, which are a combination of a Roth IRA and a traditional 401(k) plan – and is really the best of both worlds. I’ll explain why below, but you should inquire with your company’s human resources department to find out if the Roth 401(k) option is offered and to obtain information about the investment options they provide.

Roth IRAs are a definite consideration for those of you whose employers do not sponsor retirement plans and whose income is below the current threshold of $107,000 for single filers and $169,000 for married filing jointly filers. Contribution limits above those thresholds reduce or completely phase out above certain income amounts. Roth IRAs allow for earnings to grow tax-free, although contributions are made with after-tax dollars so you receive no tax deduction. Furthermore, withdrawals are tax-free after age 59½, which is a remarkable benefit since you’ll likely be in a higher income tax bracket by then.

Similarly, in the case of Roth 401(k) plans, your contributions are not tax deductible and withdrawals after age 59½ are also penalty- and tax-free. But unlike a Roth IRA, there are no income restrictions for Roth 401(k)s. Most young people can expect for their tax rate to be the same or higher than it is now in retirement, and as such, they are typically better off paying the taxes now (i.e., less take home pay) by contributing to a Roth 401(k), if that option is available. On the other hand, individuals in their peak earning years who will likely be in a lower tax bracket in retirement will likely benefit from traditional 401(k) contributions. You should also bear in mind that if you leave your job, the balance in your Roth 401(k) can be rolled over into a Roth IRA. Rolling over your 401(k) to an IRA when you leave your job is always a good idea and it is not a taxable transaction.

Keep in mind that you are allowed to contribute to an IRA – whether Roth or regular – even if you contribute to a 401(k) plan. The current limits are $16,500 to a traditional or Roth 401(k) ($22,000 for individuals 50 or older) and up to $5,000 to a Roth and/or traditional IRA ($6,000 if you are 50 or older). And, if you contribute to a Roth 401(k), you can also divide your contributions between a traditional and a Roth 401(k), although your total contributions to both cannot exceed the $16,500 limitation. So, as you can see, there are a lot of potential retirement savings options available to you, each providing opportunities to save with different tax treatments.

For someone in your age group, Monica, I’d suggest deferring 10% of your annual salary for your retirement savings, whichever option you choose. For individuals in their thirties who are just starting, I’d suggest boosting the contribution amount to at least 20% of annual compensation (and increasing the percentage even more for older individuals) until you reach the maximum contribution.

Other Savings

There are other important items to save for outside of retirement, like an emergency fund in the event you become ill or lose your job. A good goal for an emergency fund is to have the equivalent of at least three- to six-months of your monthly expenses in an account that you can easily access. If you have an emergency fund in place and something unexpected happens, it shouldn’t completely ruin your hard work in financially preparing for your future.

Those items are the necessities, but of course, there will surely be things that you will want for yourself – like a vacation, a car, or even a down payment on your first home – that will require some planning. After you’ve got your retirement savings plan in place and your emergency fund is completely financed, you can start planning for those goals. And an excellent way to do that is by putting your expendable income to work for you by opening an investment account.

Monica, if you keep on this current path, you will be better set financially than most individuals your age, and almost assuredly, better set for your retirement years. Best of luck to you in achieving your next set of goals!

We encourage our clients and readers to send us questions for our Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Monday, May 2, 2011

Don’t be Fooled by the Financial Headlines -- Corporate Profits are the Story!

From the Desk of Joe Rollins

As you may have noticed, I took an extended leave of absence from posting to the Rollins Financial Blog. Due to tax season, the months of February through April are an intense time for our office. We work extended hours and have little time to post regularly to the Blog. This isn’t to say that nothing has happened in the financial world that warrants a post.

From the fallout from the March 11th earthquake in Japan to the near government shutdown due to the budget battle between Democrats and Republicans in April – along with the weak economic recovery – there was certainly enough negative news to make one believe that investing is a waste of time. However, nothing could be further from the truth, and I will explain why in this post.

As I’ve written before, corporate profits are what drive stock market performance, not geopolitical events. Contrary to several forecasts, April was a good month for the financial markets. During April, the S&P 500 had a total return of 3%, and it’s up an impressive 9.1% for the first four months of 2011. The Dow Industrial Average was up 4.1% for April and has an even higher rate of return for the year through April 30, 2011 of 11.5%. The NASDAQ Composite notched a 3.4% gain for the month of April and stands at 8.6% for the year through April 30, 2011. What is even more surprising to the stock market bears is that all the major financial indices stand near double-digit gains for 2011 as I write this post.

We’ve witnessed an amazing comeback in the financial markets with double-digit gains in 2009, 2010, and for the first four months of 2011. I am one of the few people who believed that the markets would make a roaring comeback from the bear market lows of 2008, and thankfully, that’s exactly what happened.

For the year to date, the U.S. stock market has been the outstanding performer. If you have diversified your portfolio to international funds and to some bond positions, you have more than likely had a rate of return somewhat less than the S&P 500 year-to-date.

The tragic effects of the earthquake and tsunami in Japan have dragged down the Asian markets for the quarter, but the long-term financial effect should be minimal. Furthermore, the unrest sweeping through much of the Arab world erupted in Libya in February, causing American and European forces to begin a broad campaign of strikes against Colonel Qaddafi and his government on March 19th. This has forced up the cost of oil prices even though the oil supply in the United States will be largely unaffected. Interestingly, however, these history-making geopolitical events have not prevented the stock market from continuing to move higher.

There are specific reasons why the markets continue making gains despite such harrowing world events, which investors should keep in mind when making portfolio decisions. Almost 80% of the Fortune 500 companies that have announced earnings for the 1st quarter of 2011 have exceeded their expectations. Corporate profits for the 1st quarter of 2011 are now projected to exceed the highest corporate profits level ever in the history of the U.S. financial markets. Additionally, corporate profits are anticipated to be even higher for the second half of 2011, and will continue to grow in 2012. Since corporate profits are the most important indicator of future stock prices, stock market investors can’t ask for a more favorable financial environment.

It’s been projected that the S&P 500 corporate profits for 2012 will exceed $100 per share. Applying a modest multiple of 15 times earnings, the S&P 500 will potentially have a value of $1,500 per share. A multiple of 15 for the S&P 500 would be an average multiple, but multiples of 18 to 19 in an economic environment where corporate profits are accelerating are certainly not unusual. Given the current S&P 500 level of $1,363 per share, this $1,500 value provides an implicit future gain based on earnings alone in excess of 10%.

I continue receiving questions from clients regarding the issue of the falling U.S. dollar. I reiterate that the downward adjustment of the U.S. dollar is a positive for the U.S. economy, not a negative. I previously explained that the lower revisions to the dollar is nothing but a positive for the U.S. economy, as it makes U.S. manufacturers more competitive in international markets and puts more Americans to work by creating manufacturing jobs in this country. A verification of the positive effects of a lowered dollar is the balance of payments with foreign countries over the last years of the trending lower dollar. During that same timeframe, the trade gap is half of what it was three years ago. Today there are more manufacturing jobs in the United States than there have been in decades. Contrary to the promoters of doom, the lowering of the dollar has been a net positive for the U.S. economy.

Another amusing prediction of doom relates to the international holders of our debt. It’s not unusual to hear that the U.S. is destined for financial disaster because the holders of our debt will refuse to buy and will ultimately sell our debt, making it impossible for us to continue to borrow. This logic is nothing short of absurd.

First and foremost, the Chinese must buy our debt; it’s not optional. If China all of a sudden decided to dump all of its U.S. denominated debt on the open market, they would probably be doing us a tremendous favor. They need us a lot more than we need them. By selling U.S. denominated securities and repatriating the money back to China, the value of their own currency would immediately be forced significantly higher and the U.S. dollar value would be forced down.

This is strictly the economics of supply and demand: lowering the U.S. dollar and forcing the Chinese yuan higher would devastate China’s economy by making products produced in China no longer competitive in the international markets. Conversely, U.S. manufactured goods would be more competitive, reducing jobs in China and increasing jobs in the United States. Surely the Chinese would not make such self-destructive financial moves.

The favorite doom and gloom prediction in the current environment concerns the U.S. government deficits. While our deficits are undoubtedly staggering and depressing, the media’s assumption that these deficits will be ongoing and will never trend lower is preposterous.

It’s true that U.S. deficits can’t continue for the next decade without an adverse impact to our country, but I haven’t seen any evidence that this is what we’re facing. For the first time since the Obama Administration took office, there’s finally some recognition of the incredible financial mismanagement that has occurred. Massive governmental spending didn’t stimulate the economy and a new financial projection was required.

The GDP’s growth at 1.8% for the 1st quarter of 2011 after three years of federal expenditures of close to $4 trillion (when the federal government only receives approximately $2 trillion in revenue) is further proof that Keynesian economics simply do not work. I recall President Obama campaigning that he would end the federal deficit by the end of his first term. As we approach that date, more deficits have been run up in the last three years than in every preceding president’s term combined. But the good news is that change is on the horizon.

The following graph doesn’t need much explanation, but it should be encouraging.

The Obama Administration submitted a budget for 2011 on February 14th, which is represented by the higher line on the graph. As you can tell from the line, this budget would essentially make the current deficits permanent for the next 20 years.

On April 5th, the House of Representatives submitted their budget (represented by the lower line on the graph). While this budget would not close the deficit, it does bring federal spending to pre-Obama levels where revenue has the potential to close the gap.

The middle line represents the Obama Administration’s revised budget. It appears that they finally figured out that the American people did not want to continue subsidizing gigantic governmental spending forever. Even though the revised budget is still way too high, it’s better than their first budget. It should also be remembered that no budget was ever submitted for the federal expenditures for 2010. The good news is that everyone in Washington wants decreased spending; the bad news is that no one can seem to agree on what items to cut (but they are finally talking about it.

Washington finally appears to be focused on reducing the deficits. Politicians who aren’t offering leadership in that goal will likely be replaced. I predict that within the next decade, the federal budget will be brought to more manageable levels, and therefore, the debt will be lower rather than higher. Once economic activity picks up, the increase in tax receipts due to this higher level of activity will do the heavy lifting in bringing the deficit back under control.

In summary, most of the headlines forecasting disaster in the U.S. economy are unsupported by the facts. The Federal Reserve has done an excellent job in stimulating the economy while slowly withdrawing the stimulus to help create a soft landing from a difficult time. However, for the purpose of investing, the proof of the pudding is strictly corporate profits.

For the 1st quarter of 2011, corporate profits reached the highest level ever in the history of the financial markets and are forecasted to trend even higher going forward. If you need any other evidence reflecting that long-term investing is the best way for you to realize profits, just review the slope of higher corporate profits instead of the predictions of gloom and doom.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins