Timing IRA Contributions

This week’s blog is similar to one we ran as part of our Q&A series a few years ago. We often have clients who question our reasoning for making IRA contributions as early as possible, so I would just like to reiterate our stance.


In the past, many of you have received some form of communication from Rollins Financial suggesting you should make an IRA contribution early in the year. Many undoubtedly wonder, “What’s the rush?” Although you actually have until the tax filing deadline of the following year to make your IRA contribution, we find it to be in your best financial interest to make the contribution on the first business day of the year (which for 2014 is January 2nd).

As many of you know, stocks do not rise in value in a straight line. However, during 2012 and 2013 there was not a single day during either year that the S&P was negative in YTD performance. This means the best time to have invested was, in fact, day one! Granted this is an unusual situation, and if we actually knew ahead of time the best day out of the 15½ month window to make your IRA contribution, we would obviously suggest you make it on the day when investments are the cheapest. Unfortunately, no one can predict when that day will be. And if they could, they surely would not be reading this blog (or writing it for that matter).

That being said, let’s focus on the likeliest scenario. Stocks have produced positive annual returns in approximately 72% of the calendar year time periods since 1926. The probabilities suggest that there is value in contributing as early as possible. And here’s why….

As an example, let’s make the following assumptions:

• Our Expected Return is 8% annually (some years will be higher and some lower, but we’ll expect this average over the next 35 years)
• Each Participant will make an annual lump sum contribution of $5,500 to their respective IRA
• Each person will retire at 65 (we’ll use this as the year end age)
• This is their only means of savings

If we make the noted assumptions, you can see the results in the following table:


After reviewing the table, you’ll notice the savers, who choose to invest their IRA contributions at the beginning of the year and are exposed to the 8% return for the entire year, will realize higher returns. The 30 year old who contributes and invests for 35 years realizes total returns of over $75,000 more by making his/her contributions early in order to gain the full benefit of each year’s returns. The 40 year old is better off by nearly $32,000, and finally the 50 year old who has only invested for 15 years has nearly $12,000 more than if he/she had waited and contributed at the end of the year.

I also performed the same test for those of you who can contribute to a SEP-IRA. Since SEP-IRA contribution limits are much higher, the potential benefits are also greater when making early contributions. Let’s start with the assumption that a 40 year old with 25 years until retirement can contribute $30,000/year annually to a SEP-IRA. This hypothetical investor could end up with an IRA balance at retirement containing an additional $175,000 in value by making his/her SEP contributions at the beginning of the year vs. waiting until the tax filing deadline to make the contribution.

What’s the moral of the story here? Be proactive! Make the most of your annual IRA contributions; don’t wait until the end of the year or until the filing deadline in April to make your contribution.

Thank you again for visiting RollinsFinancial.com and we hope you have found this information useful. Please feel free to email us and provide us with your thoughts and comments.

Best regards,
Eddie Wilcox, CFA, CFP®

Happy Holidays from Our Family to Yours!

Wishing you the joy of family, the gift of friends, and the best of everything in 2014!

"He was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself!
A wink of his eye and a twist of his head,
Soon gave me to know I had nothing to dread." Clement C. Moore
(Ava, on the other hand, was terrified!)

In celebration of the Christmas holiday, our office will be closed on Tuesday, December 24th and Wednesday, December 25th. Our regular office hours will resume on Thursday, December 26th.
AND, in celebration of the New Year holiday, our office will be closed on Tuesday, December 31st and Wednesday, January 1st. Our regular office hours will resume on Thursday, January 2nd.

If you have a matter that requires immediate attention when our office is closed, please contact me at jrollins@rollinsfinancial.com. You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com or Robby Schultz at rschultz@rollinsfinancial.com.

May your holiday season be filled with peace, joy and laughter!

Warm regards,
Joe Rollins

Let the Good Times Roll

From the Desk of Joe Rollins

November has come to a close, and it too proved to be another excellent investment month. 2013 is shaping up to be one of the best investment years in a decade. Aside from all of the constant negative talk about the market and its potential for loss, it has proven to be quite an extraordinary year.

For the month of November, gains were added on top of an already very profitable year. During the month of November, the Standard & Poor’s 500 had a total return of 3.1%, while the NASDAQ Composite and the Dow Jones Industrial Average had an excellent return of 3.7% for the month and the Russell 2000 Small-Cap index gained 4.1% for the month. Through the end of November 2013, the S&P 500 is up 29.1%, the NASDAQ Composite 36%, the Dow Jones 25.5%, and the Russell 2000 is up an astonishing 36.2%. In contrast to those impressive returns, the Barclay’s Aggregate Bond Fund has suffered a 1.7% loss for the year thus far.

November was consistent with the many positive months of 2013. Virtually all of the domestic stock funds were up from 2-4% for the month, while most of the international funds were either down or only marginally profitable. Bond funds, for the most part, were down for the entire month except for the high-yield bond funds which were marginally profitable during November. Like so many months before, the municipal bond funds continued to lose money during November and, for all practical purposes, every municipal bond fund is down for the year.

I am asked almost daily when I think the market will implode, or more specifically if I think that we are in a stock market bubble. If, in fact, we are in a bubble, it is one of the most unusual ones of all time. The market has gone practically straight up since 2009, yet stocks continue to be fairly reasonably priced. I find no extraordinary divergence between fair value and the current trading on the stock market.

One of the reasons why the market continues to be fairly priced is because interest rates are extraordinarily low. Every time I hear someone compare the current stock market to a period from a prior year, I always ask them to compare valuations with current interest rates. We receive a call almost daily from a prospective investor, trying to beat the yields on a money market account CD. If you have not figured it out by now, the reason there are such meager interest rates is because the Federal Reserve wants them to be that way.

It is fairly clear that the actions of the Federal Reserve are designed to inflate asset values. When you inflate asset values, you create a wealth effect wherein people feel comfortable spending their money on items such as new cars, homes, and other capital assets. One way to accomplish this is to make interest rates so unappealing that people begin to seek other ways to earn higher rates of return. For the last 18 months the Federal Reserve has consciously moved to keep interest rates low. They have succeeded in forcing cash out of people’s savings accounts and into other assets. This has also accomplished their goal of moving real estate to firmer ground while appreciating the real estate and equity markets, which is the exact end result that the Federal Reserve desires.

The perception by some that the stock market is too risky at the current time continues to baffle me. If you look over the last 20 years, there certainly have been periods of time when the market suffered losses, both big and small. In 1994, the market was marginally lower, losing less than 2%. And of course, we all remember the 2000-2002 losses that occurred after the NASDAQ Composite run-up in the dot.com rally. The stock market lost money in 2000, 2001, and 2002, and made a very dramatic move to the downside. Not long after that, in 2008, the market suffered one of its worst losses of all time, losing 37% in one year. Consequently over the past 20 years, the market lost money in five of those years, or 25% of the time. While that 37% loss in 2008 seems to be etched in everyone’s mind, they seem to forget that since then, the market, beginning with 2009, has increased yearly by the following percentages - 26, 15, 2, 16 and now 29%. Despite five years of losses in the past 20 years, the market still has an annualized return of 8.2%. If you consider that your money market account is currently earning zero and the market is returning 8.2%, it makes you question why anyone would keep money in cash these days.

Although virtually everyone reading this blog has cash available in money market accounts, they tend to only invest money annually or even less often and usually in large blocks. This limited investment strategy has proven to be unsuccessful. A significant amount of money could be made by investing monthly, which is referred to as Dollar-Cost Averaging. Made easy by electronic transfers from your individual checking account or money market account, your money could easily be put to work in a market that is earning handsome returns as opposed to earning virtually zero while sitting in cash.

While certainly nobody knows what the month of December holds from an investment standpoint, historically it has been a very good month. We have not had a negative December since 2007 and it is highly unlikely that we will see one in 2013. As previously mentioned, the period of time from November through April has historically been the most profitable time for investing in stocks because a lot of the money invested in pensions, IRAs, and other type of retirement accounts are invested during this period. If you have money that is not invested, now would be the time to take advantage of this excellent market. Additionally, we are quickly approaching January which would be a great time to make your IRA contributions for 2014.

Please feel free to give us a call to set up an appointment to discuss new ways that you can begin to save more and invest in enterprise by participating in the stock market.

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

Best regards,
Joe Rollins

"If you want to turn your life around, try thankfulness. It will change your life mightily." - Gerald Good

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.
- John F. Kennedy

In celebration of the Thanksgiving holiday, the offices of Rollins Financial and Rollins & Associates will be closed on Thursday, November 28th and Friday, November 29th. Our regular office hours will resume on Monday, December 2nd at 8:30 a.m.

If you require immediate assistance during this time, please contact any of our staff via email - Joe Rollins at jrollins@rollinsfinancial.com, Robby Schultz at rschultz@rollinsfinancial.com, or Eddie Wilcox at ewilcox@rollinsfinancial.com.

Be safe, have a wonderful Thanksgiving and please know we are very thankful for all of you!

Warm Regards,
The Staff of Rollins Financial

48 Hours in The Big Apple

As I am positive that you must be tired of me constantly writing about economics and the stock market, I vow to write nothing of the two in today’s blog. You may rest assured though that we are watching the market closely as it continues to move higher. By any definition, this has been an extraordinary year but, as promised, I will not discuss that today.

Last weekend, I attended what was to be your typical stock market seminar in New York, sponsored by a nationally known mutual fund company. Since I love New York but can only handle a few days there at a time, I thought I would make a quick trip up and back to attend this conference. One of my great loves has always been The Broadway Theatre. As a child, I was lucky enough to actually see Mary Martin in “South Pacific” on Broadway, and have been a huge fan of Broadway musicals ever since. I have seen so many and although most of them are just light-hearted entertainment, I have been lucky enough to see some of the great ones. For me, no trip to New York is complete without seeing at least one show.

I arrived at LaGuardia Airport around 3:00 p.m. on Thursday and had just enough time to get to the hotel, unpack, and get to the theatre to see the newly debuted “Motown The Musical”. Going in, I really did not know much about this show but because I have loved Motown music since high school, I knew I had to see it. Buying a ticket from a scalper, I was fortunate enough to end up in the very first row and able to hear the singers perform without amplification. It was quite an amazing show and I highly recommend it.

I cannot tell you how many memories this show brought back for me. To hear the music of The Temptations, The Four Tops, Smokey Robinson, Stevie Wonder and Marvin Gaye was quite a welcomed blast from the past. And to witness the house almost come down when Michael Jackson and The Jackson 5 sang along with the Supremes was quite a sight to see. While I found the script a tad weak and mostly uninspiring, the music alone made up for this lack of substance as I found myself singing and dancing in my seat in no time.

Early the next morning, I attended the seminar, which incidentally was held in the Metropolitan Opera House in New York City. Anyone who knows me understands that attending an event such as this is the only way you’ll ever find me at the Met. But as much as I do not like the opera, the significance of the venue was not lost on me. Even sitting in the 5th balcony was very special.

As expected, the seminar was as interesting as can be when listening to presidents speak about their companies. After the morning break there was entertainment scheduled, although the performers were not revealed to us ahead of time. Believe it or not, over the next couple of hours I saw two incredible singers. The first was Katharine McPhee, who you may know as a runner-up on American Idol who later went on to star in the TV series “Smash”. As I expected, she was quite extraordinary. Next up was Melissa Etheridge and her band. Melissa of course has had a number of hits and was quite entertaining as well. The biggest highlight for me though was getting to personally meet both of these talented performers. I can assure you from the hug I received that Katharine McPhee, who is about 5’8”, desperately needs to eat a cheeseburger.

This seminar has always been known for its special late afternoon entertainment, and since Celine Dion and her full orchestra performed last year, I knew I would not be disappointed. And boy was I right! After a few more hours of discussing stocks and bonds, the surprise musical guest was finally revealed. Unbelievably, they paraded out Barbra Streisand and her entire orchestra.

A few years ago, tickets to see her on tour were approximately $1,500 each, so to think I would ever see Barbra Streisand perform for FREE was a dream I never could have imagined. Although I may not agree with her politics and find her to be painfully outspoken, there are few, if any, performers that can match her talent. To actually see Barbra Streisand in the Metropolitan Opera House was an event that I will never forget – and did I mention it was free?

After the event was over, I hustled back down to Broadway again in time to see “Jersey Boys” from the fourth row. This was actually the tenth time I have seen “Jersey Boys” – four times in Las Vegas, three times in Atlanta, and now three times in New York. For those around my age, the music is just as good and relatable as “Motown the Musical” but the storyline in “Jersey Boys” is much, much better. And believe me, there is no bigger thrill than witnessing the actor playing Frankie Valli sing “Can’t Take My Eyes Off Of You”. Even though I had already seen the show nine times, I was again completely amazed by the cast, the characters, and the overwhelming talent. I have seen a lot of live performances over the years and in my opinion you won’t see any greater talent than on the Broadway stage, especially in New York.

I was lucky enough to see the Phantom of the Opera when it first opened on Broadway in 1990 and I will never forget sitting in the audience when Michael Crawford and Sarah Brightman actually shook the theatre with their incredible voices. Although the theatres are small in New York, the floors uneven, the bathrooms inadequate, and virtually everything about the district old and decayed, the uniqueness of sitting in this 500 seat theatre should be experienced by all. You will never see such talent so up close and personal anywhere else in the world.

As to not waste a single minute, I got up early on Saturday morning and was at the Metropolitan Museum of Art when it opened. I never tire of walking through the Impressionism collection at the Met Museum. I am a big admirer of Renoir and am always amazed by how vibrant and beautiful the colors of these paintings still are after 125 years. I was also fortunate enough to check out some of the other great artists like Rembrandt and Van Gogh. However, to me, nothing compares to the revolutionary impact of the Impressionists. I often think to myself, why don’t we have any artists like Renoir or Monet today? Perhaps we do, and we’ll just have to wait 100 years to find out who they are.

As I took a cab directly from the Metropolitan Museum of Art to LaGuardia for my 3:00 p.m. return flight, I realized I had been in New York for exactly 48 hours and not a minute was wasted during that brief but unbelievable time. Although culture and my name are rarely (actually never) used in the same sentence, this weekend was quite extraordinary, by any definition.

While none of the above has anything to do with economics, the stock market, or even taxation, I just thought you may be interested in hearing of a weekend that would rival even that of the rich and the famous. While I do not fall into that category yet, it sure felt like it for 48 hours!

Best regards,

Joe Rollins

2013 Year End Tax Planning

After Congress passed and the President signed into law the American Taxpayer Relief Act of 2012 (ATRA), dramatic individual income tax increases went into effect in 2013. The ATRA shifted America from a two dimensional tax system to a five dimensional tax system. The advent of a five dimensional tax system makes 2013 year-end tax planning imperative. On top of the regular income taxes and the Alternative Minimum Tax (AMT), ATRA introduced higher tax brackets for high income taxpayers, limitations on personal exemptions and itemized deductions (PEP and Pease), and a new net investment income tax (NIIT). These increases include the following:

• The highest income tax bracket on ordinary income and short-term capital gains increased from 35% in 2012 to 39.6% in 2013
• The highest income tax bracket on long-term capital gains increased from 15% to 20%
• A new 3.8% net investment income tax (NIIT) went into effect for high income individuals
• When the NIIT is added to the top income tax brackets, the tax rates could be as high as 43.4% for ordinary income and short-term capital gains and 23.8% for long-term capital gains
• Taxpayers over the applicable threshold amount for PEP may have some or all of their personal exemptions phased out
• Taxpayers over the applicable threshold amount for Pease may have up to 80% of their itemized deductions phased out

Tax planning is necessary not only to help your family minimize or avoid these new tax increases, but also to ensure that your expected tax liability estimates for 2013 and beyond are correct. This letter will suggest some ways to avoid or minimize the adverse effects of these changes in 2013 and later years. Planning for these tax changes is a major undertaking so you should start the process as soon as possible.

Planning for the 3.8% NIIT
For tax years beginning January 1, 2013, the tax law imposes a 3.8% NIIT on certain net investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuity income and royalties. Specifically excluded from the definition of net investment income is self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation and IRA or qualified plan distributions. MAGI is generally the amount you report on the last line of page 1, Form 1040.

The applicable threshold amounts are shown below.

• Married taxpayers filing jointly - $250,000
• Married taxpayers filing separately - $125,000
• All other individual taxpayers - $200,000
• Estates and Trusts - $11,950

The following simple example will illustrate how the tax is calculated.

Example: Al and Barb, married taxpayers filing jointly, have $300,000 of salary income and $100,000 of NII. The amount subject to the NIIT is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over their threshold amount of $250,000 for married taxpayers filing jointly ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the NIIT payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and/or NII and reduce the base on which the NIIT is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) timing of estate and trust distributions, (7) charitable remainder trusts, (8) charitable lead trusts, (9) other types of trusts, (10) installment sales, (11) gain and loss harvesting, (12) intra-family loans, (13) oil and gas investments and (14) maximizing above-the-line deductions. We would be happy to explain how these strategies might save your family large amounts of NIIT.

Estimated Tax Planning
As a result of these recent tax increases, some taxpayers’ quarterly estimated tax liabilities may not be sufficient. Tax planning is imperative to ensure that your estimated tax liability is accurate and to avoid any penalties that may be imposed if your quarterly estimated tax liability is not accurate. Furthermore, tax planning is necessary to give you peace of mind come April 2014. We will be able to take into account your family’s financial situation, the new five dimensional tax system, and any tax planning strategies to provide you an up-to-date 2013 expected tax liability.

Lastly, a plan needs to be put in to place concerning your state tax liability. Depending on your family’s financial situation and when you pay your state taxes, we may be able to reduce your federal tax payable, including the AMT.

Accelerating and Deferring Income
An opportunity that should be noted is accelerating income into 2013 if you expect to be in a lower tax bracket in 2013 than in 2014 and later years. Perhaps the best way to accelerate ordinary income into 2013 and reduce income in later, higher tax bracket years would be to convert a traditional IRA to a Roth IRA in 2013, if a conversion otherwise makes sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2013 or selling and repurchasing bonds trading at a premium. Finally, taxpayers might consider exercising non-qualified stock options in 2013. Taxpayers with the opposite situation—higher ordinary income in 2013 than in 2014 and later years—might wish to defer income into 2014. Many of the same strategies listed above for reducing MAGI and/or NII may also be used to defer income.

Similarly, capital gains could be harvested in 2013 if the taxpayer is in a lower tax bracket in 2013 than in 2014 and later years. This is especially true if the taxpayer has long-term capital gains and is in the 10% or 15% ordinary income tax brackets in 2013, as the long-term capital gains will be taxed at 0%. Moreover, if the taxpayer has gains in 2013, losses could be harvested to offset those gains.

If you would like some assistance in modeling scenarios and developing projections to help determine which strategies are right for you, please don’t hesitate to call any of our Rollins & Associates tax professionals at 404-892-7967 or email us at mail@rollinsfinancial.com to schedule an appointment to begin discussing your options now.

Q&A Series – Individual Health Insurance Mandate and Potential Penalties

This week’s question comes from Mary, a client who is wondering what will happen if she chooses not to obtain health care coverage for 2014.

Q. I have been reading about and listening to news coverage regarding the Affordable Care Act and the new health insurance provisions. I am very healthy and, knock on wood, have not had health insurance for the past two years. However, I’ve heard that if I don’t get health care coverage by March 31, 2014, then I’ll be subject to a penalty. Is that accurate? And is there any way around this penalty?

A. Great questions, Mary. In fact, you are one of many of our clients that have expressed concerns and/or apprehension about not completely understanding the Affordable Care Act (ACA) and the upcoming provisions that begin January 1st of next year. Let me start by saying that it is true that starting in 2014, you and your family must have adequate health care coverage or you will be facing a penalty, known as the “shared responsibility payment” when you file your 2014 federal income tax return in 2015. As always, however, there are exceptions to every rule. We’ll touch base on those exceptions a little later in our discussion.

First, let’s dive a bit deeper into the ACA’s individual shared responsibility provision. The “shared” part of the provisions refers to the fact that our government system, both federal and state, as well as insurers, employers and individuals are given a shared responsibility to take part in this health care reform designed to improve the availability, quality, and affordability of health insurance coverage in the United States. And whether you agree or disagree with the health care reform, this provision calls for each individual to have minimum essential health coverage for each month of that particular calendar year, qualify for an exemption (to be discussed shortly) or pay a penalty with your tax return.

The provision applies to individuals of all ages, including children. If you have dependent children that you claim, you are responsible for their coverage or the resultant penalty. As described above, the provision requires minimum essential health coverage for each individual. While the specific details of the coverage requirements are beyond the scope of this particular blog, you should be aware that if you already participate in an employer-sponsored plan, are covered by Medicare or Medicaid, or have some other form of health coverage, your coverage most likely will count as minimum essential coverage and you will not need to do anything other than continue your current coverage to comply with the new requirements. If you are considering purchasing health care coverage through the Health Insurance Marketplace, the exchange can help you find minimum essential coverage that fits your budget and your needs.

Also, keep in mind that there is transition relief if you are enrolled in a non-calendar year plan. There is also a relief period, known as a short coverage gap, which allows you to have a one-time gap in coverage as long as it lasts less than three months. So, if you are considering swapping plans, you have some leeway in the timing. It is also noteworthy that you will be treated as having minimum essential coverage for a month as long as you have coverage for at least one day during that month. These coverage provisions will be very important in determining the amount of months that you are covered versus not covered when calculating the penalty.

So, now that we have some background on the subject, let’s return to Mary’s original question. What happens if you take the risk of not insuring yourself or your family? As we’ve mentioned, you will be subject to a penalty when filing your income tax returns. But is it worth it to pay the penalty versus the cost of health insurance? You may decide that it is. While we certainly cannot advise you on whether or not to make that decision since foregoing insurance can be very risky, especially if you were to become ill, we can certainly help to educate you on the penalty you might face.

The penalty, or shared responsibility payment, is a somewhat complicated calculation. In the most basic form, the monthly penalty is the lesser of the national average bronze-level health insurance premium for the taxpayer’s family or an applicable dollar amount. The applicable dollar amount is the greater of a flat dollar amount ($95 in 2014, $325 in 2015, and $695 in 2016 per person, capped at 3 times the amount) or a percentage (1% in 2014, 2% in 2015, 2.5% in 2016) of the taxpayer’s household income over their respective filing threshold. And you thought they might make this easy??? In order for us to estimate your penalty, you’d need to know your household income (the modified adjusted gross income of all relevant members of your family) and the number of months that you were uncovered insurance-wise. The other pieces of information can be obtained from government literature.

Let’s look at a very basic example. Suppose Mary is a single individual who decides to waive coverage for the entire 2014 year, meaning she is uncovered for 12 months. Let’s further assume that she has a household income of $120,000, a filing threshold of $12,000 and the national average bronze-level plan premium for an individual is $5,000. Here we go. Since Mary is a single individual, for 2014, her applicable dollar amount is $95 (previous paragraph.) We compare this with the applicable percentage (previous paragraph) of excess household income over her filing threshold ($120,000-12,000 = 108,000 x 1%) or $1,080. We need to use the greater of those two amounts, $1,080. Since our example illustrates that she was uncovered for a full 12 months, we compare this total applicable dollar amount of $1,080, to the full premium for the bronze-level policy given to be $5,000. The lesser of these two amounts will constitute the penalty. So, Mary would owe a penalty of $1,080 when filing her 2014 income tax return.

Assuming everything else remained the same in our previous example, suppose Mary was uncovered for 6 months instead of the full year; our calculation changes at the last step. Instead of comparing an applicable dollar amount of $1,080 to a bronze-level premium of $5,000, which were amounts for a full non-covered year, we pro-rate those amounts for the 6 months that she was uncovered. So, in this case, the penalty would be the lesser of $540 ($1,080/12 x 6) or $2,500 ($5,000/12 x 6). Mary’s penalty for being uncovered for 6 months would be $540.

While these are extremely simple examples, and there are many factors that can change the course of this calculation, you can see that in 2014, your penalty may not be as high as you might have anticipated. Therefore, you should give careful consideration as to whether the penalty is worth the risk of remaining uninsured. Also, if you have a family, the penalty calculation is even more involved since there are multiple members that may be each differently insured or uninsured. And, as evidenced above by the inflated flat dollar amounts and percentages of excess income, the more time that elapses between when the provisions take place, the higher the penalty will grow. By the time 2016 rolls around, the flat dollar amount will have risen to $695 and we will need to use a 2.5% percent figure in our excess income calculation. Assuming Mary’s entire situation remained the same for the all three years, her uncovered penalty would rise from $1,080 (calculated above for 2014) to $2,160 in 2015 and $2,700 in 2016.

Okay, so now that you may be thoroughly confused, although slightly relieved that the penalties are not as considerable as you might have expected, it’s time to highlight some of the ways that you can avoid both having health insurance and having to pay a penalty. There will be exemptions granted for members of religious sects that are recognized as conscientiously opposed to accepting insurance benefits, members of recognized health sharing ministries and members of federally recognized Indian tribes. Exemptions can also be obtained on account of short coverage gap (discussed earlier), hardships that render you unable to obtain coverage, unaffordable coverage options (the minimum premiums are greater than 8 percent of your household income), incarceration, and no U.S. presence. In addition, if your income is below the filing threshold and you are not required to file an income tax return, you are exempt from the essential minimum coverage requirement. For those seeking an exemption, the Health Insurance Marketplace will be able to provide certificates of exemption for many of the exemption categories, although some of these exemptions can be claimed only upon filing a federal income tax return.

One final thought to consider when weighing your options. Please keep in mind, that you can obtain health care coverage at any point in time. In other words, if you assume the risk that you will not need health insurance and subsequently fall ill, you will not be precluded from purchasing health insurance when that occurs. There are no pre-existing exclusions with these new policies. You will, however, incur the penalty up until the point in which you obtain coverage.

In summary, while the ACA shared responsibility provisions take effect January 1, 2014, many of you will not need to alter your current health care coverage at all to meet the standards. Some of you will choose new health care coverage, while some of you may decide to remain uncovered and face any applicable penalties. If you fall into one of the exempt groups, you should contact the exchange to obtain a certificate of exemption. And if you are still undecided and want to explore your options further, we are happy, as always, to provide a complimentary review of your individual financial situation. Thanks again for your well-timed questions, Mary.

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 & Associates and Rollins Financial in mind when seeking professional advice on tax matters as well as financial planning and investing.

Best regards,
Danielle Van Lear, CPA/PFS

I Do Not Like Green Eggs and Ham

From the Desk of Joe Rollins

I have intentionally not published a blog since the recent issues surrounding the 2014 fiscal budget and the expansion of the National Debt. I thought it better to wait until the issues were sorted out before I commented on the state of the financial markets. I couldn’t resist using the above title to this blog as it was so reflective of the dramatic (and stupid) demonstration by Senator Ted Cruz, from the great state of Texas, when he attempted unsuccessfully to filibuster the Senate regarding defunding Obamacare. I certainly intend to cover this as well as the importance of the equity markets during the month of September and the first half of October in this blog. However, first, there are other matters I came across recently that I wanted to share with you.

By chance, I happened to catch an HBO special titled “Muhammad Ali’s Greatest Fight”. Assuming that the show was a documentary about or tribute to one of the great Muhammad Ali’s boxing matches, I tuned in. Quite interestingly, and to my surprise, the special focused on the Supreme Court case of Muhammad Ali, in 1971, and his application for deferment from the Vietnam draft, citing his conscientious objector status on religious grounds against any type of war. We all know that the case ended in Muhammad Ali’s favor, but the politics behind the decision and the connection to the Supreme Court were extraordinarily interesting to me. This case clearly demonstrated that in many instances, the Supreme Court decides many cases not on judicial or legal precedent, but on personal feelings, political bias, or fear of reprisal by the general public. Therefore, it should not go unnoticed that Ali did not win on the merits of the case, but due to a technicality.

Personally, I had not been aware that so much political activity influences the Supreme Court. So, determined to get a better understanding on the matter in order to speak more intelligently on the subject, I noted that much of the HBO show was primarily based upon a 1979 book written by Bob Woodward and Scott Armstrong, titled The Brethren. And, although only about 15 pages in the book were dedicated to this particular case, I found the entire book overwhelmingly interesting. It described the conservative nature of the courts in the 1970’s and the personal idiosyncrasies of the particular justices during that time. I found the book to read completely unbiased toward a specific political agenda, rather simply discussing each case and the background of each decision. It later surfaced after his death that Justice Potter Stewart was actually the inside source of information for the book, since Justice Stewart so highly respected Bob Woodward for his reporting on the Watergate and President Nixon scandals.

In order to become further knowledgeable on the subject, I read another book titled, The Nine, by Jeffrey Toobin. This book, written more recently in 2008, also addressed cases and decisions of the Supreme Court, but at a later time when the Supreme Court was migrating from their once conservative roots to a more liberal bias. I found this book also to be interesting and well-written, however, unlike “The Brethren,” it clearly exhibited a liberal bias which appeared to taint its writer. Despite this bias, the book did an excellent job of illustrating the inner-working of the Supreme Court system.

Finally, I read a third book, written by Howard L. Bingham and Max Wallace in 2000, on which the HBO special, Muhammad Ali’s Greatest Fight, was based. Different from the other books, this particular novel chronicled Muhammad Ali’s life from childhood through the time he was involved in this particular case. While very little emphasis was given to the mechanisms of the Supreme Court, the book focused on Muhammad Ali, his feelings and the influence the case and its decision had on the boxer himself.

I bring this up, not because it has any relevance on economics, the stock market or investing, but as an aside to the political environment and the external pressures on the justices in the Supreme Court. I find that by understanding some of the history and the background behind our court’s major decisions and the magnitude by which these decisions can be impacted by politics, it can shed some light on some of the more current events of our political and judicial systems. I highly recommend these books if you are interested in reading about some of the most influential and important Supreme Court cases and the reasoning behind those case decisions.

I promised you in earlier blogs that when Congress discussed the extension of the federal debt limit there would be high volatility in the markets during early October. These predictions were accurate in early October when this occurred in Washington D.C. The President and the two bodies of Congress reminded me of the way children act on a middle school playground, albeit a political arena; among all of the discussions, there was a lot of political fluster, accusations, misinformation, and at the end of the day nothing really happened. Thus, the reason behind why I typically advise investors to ignore the happenings in Washington; over the last 15 years or so, it appears that Congress has little or no effect on the equity markets over the long term financial picture. Unquestionably there are short term variations and volatility, but over the course of time, the economy controls the movement of equity markets, not politics.

Since little was accomplished regarding the budget and the extension of the debt, there will now be a new deadline for action by Congress of late January or early February, 2014. So once again, early next year you can expect the same volatility, and most likely the same Congressional outcomes, experienced in October. The only saving grace to us as Americans and investors is if this happens, and Congress fails to do anything in early 2014, the sequester will kick in once again and Congress will be forced to reduce expenditures. It has recently been revealed that over the last two years the federal government has spent less money in each respective “new year” than the previous year. This is the first time that a spending reduction has occurred in subsequent years since the Korean War. Although I am convinced that given the opportunity, spending by both the President and members of Congress would exceed all budgetary limitations, we can be thankful that they can be forced to reduce expenditures under the sequester limitations.

Although Congress was able to shut down the government for a few weeks after that embarrassing rendition of Green Eggs and Ham, even that seemingly simple act was screwed up by their ineptness. After the shutdown was over, it was announced that all government employees would receive back-pay for their time off during the furlough and many of those that received unemployment during that time would not be required to pay it back. So basically all that Congress did was provide a two week paid vacation for all government employees as well as an additional kicker of extra compensation. If this is any prediction of how Obamacare will be run then we’re really in trouble, as once again it is has been illustrated that the government does absolutely nothing well.

The markets, however, have been nothing short of extraordinary in 2013. As I write this posting on October 22, 2013, the S&P 500 is up 24.42% for the year. The markets held strong for the month of September, a typically very weak month. The S&P 500 was up 3.1%, the NASDAQ composite was up 5.1%, and the DOW Jones industrial average was up 2.3%. Even more unusual, we are deep into the month of October and the markets are trending even higher at this point.

Also during the month of September, bond performance resulted in some minor gains and international funds earned decent returns thereby making a historically weak performing month a truly unique one. Due to almost assuredly higher interest rates, I do not anticipate these bond gains to be sustainable in the future although I continue to be encouraged that equity markets will continue to rise over the next few months.

In summary, I could write a long dissertation on the progress of the United States economy, but it is sufficient at this point to say things are improving; residential construction is operating at full capacity, employment is marginally up, corporate America is generating profits at record levels, and interest rates continue to remain very low. Although certainly not roaring, the economy continues to make progress and American investors continue to earn welcomed returns.

We are approaching the historically strongest time for equity market performance. Between November and April, the equity markets have historically returned the majority of their profits. I look forward to this investment time and can only hope that the upcoming periods add to the positive investment results we have already experienced during 2013.

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

Best regards,
Joe Rollins

Roth IRA Conversions and Both Sides of the Fence

Whether you have been saving for 40 years or 10 years, now is the time to see if a Roth conversion is right for you. You can convert a variety of retirement accounts to a Roth IRA, depending on the plan and any limitations it might have, a traditional IRA, employer sponsored 401k and some 403b are excellent options.

Have you ever wondered if paying taxes on your IRA or 401(k) now would save you money in the future? Do you have a low taxable income this year or next year? Are you retired? If you answer “Yes” to either of these questions, then it might be time to take a look at your retirement accounts.

Let’s talk about your income now versus your future income. We all hope we will make more money in the future. For most people this is true. Professionals in their late 30’s to late 40’s should have some retirement savings socked away, and if all goes well, this is the lowest tax bracket they will be in until they retire. For those already on the other side of the retirement fence, you have your Required Minimum Distribution (RMD) and maintaining your standard of living to consider. Believe it or not, these two ends of the saving and spending spectrum are closer than you realize.

If you are in your 30’s and 40’s, would you rather pay 15% or 35% on the money have stashed now? Do you want that money you have to grow tax free (in most cases)? For example, let’s say you have $30,000 in your traditional IRA or employer sponsored 401k, tax on that now could be as low as $4,500. One thing to consider is if you do a conversion inside of your employers 401K (if it is allowed) you will have to come up with the funds to pay the taxes with your outside money; this is the conversion that has this requirement.

Let that same money grow and have your income increase and that same $30,000 could be worth $127,483 in 20 years and you could be in a 35% tax bracket. The tax on it then would be $44,619!!! You could save $40,119in taxes!! Pay tax now for the benefit of it being 100% tax exempt for the next 30 years along with the appreciation. This seems like a no brainer. Twenty years from now when you are buying that beach house the extra $44,619 would come in handy.

For those who have traversed the working years and are now setting out on enjoying the fruits of your labors, let’s make sure you have more fruit. Let’s say you have been responsible in your retirement savings and have a comfortable reserve. You have done the math and know how much you are going to need to cover your current lifestyle going forward. There are several benefits of having dollars in Roth IRAs versus Traditional IRAs. The main benefit is that unlike Traditional IRAs, which grow tax deferred and are then taxed at ordinary income rates upon distribution, Roth IRAs grow tax free and distributions are tax free for federal income tax purposes. A benefit of a Roth IRA that is often overlooked is that it does not necessitate required minimum distributions at age 70½ years of age like a Traditional IRA. As a result, Roth IRAs can be passed down to children, where they will be distributed tax free over the children’s lifetimes.

So, regardless if you are in the middle of your career or the beginning of your retirement, a Roth conversion can make the things you want in the future more attainable now. Call us and we can run the numbers and see if it makes sense for you.

Best regards,
Monica Tulley

Self Directed IRA’S – What Can You Put In There?

Occasionally we have clients ask us about adding alternative investments to their IRA accounts. Most inquiries that we receive come from those looking to add actual gold or a piece of investment property to their IRA funds. Other requests include adding a privately held company or limited partnership to an account; or even art and other collectibles. In many cases you can use your IRA funds to buy and hold these investments; however you will likely need to open a separate account through a separate provider that offers these self-directed IRAs. Generally, neither Charles Schwab nor Fidelity will be able to handle these types of investments. The self-directed IRA would therefore be held apart from any IRA you may have consisting of stock, bond and mutual fund investments.

Art and collectibles, like stamps, are not eligible to be held in IRA accounts of any kind. Assets dedicated to personal use, including real estate, are also not eligible to be held in a self-directed IRA. An example of this would be purchasing a vacation home available for use by you or your family members and wanting to deposit that home into your self-directed IRA. This would not be allowed. However, rental property, gold bullion or an investment in a private company (with some restrictions) would all be permissible in a self-directed IRA. There are several providers who offer this service, although none are generally recognizable to the public.

First, we are not big proponents of self-directed IRA’s in part because the account custodian often charges a significant fee for merely keeping record of these investments. In addition, many of the investments that folks would like to include in their self-directed IRA are often very illiquid and hard to value. Monetizing these alternative assets can be difficult in an emergency, when it’s time to start accessing your IRA for retirement income or for required distributions after age 70 ½. Finally, we believe that often times there are flaws with the investment thesis behind these ideas.

As I mentioned before, gold seems to be a common request. “Can I buy gold bars and gold coins with my IRA money?” Sure you can hold certain gold coins in your self-directed IRA, but as an alternative you could invest in a gold ETF or companies that mine gold, creating less hassle and less expense. In addition we find that investors often want to own gold for dubious reasons, the most popular being to protect against inflation or a weak U.S. Dollar.

Some research suggests that the best correlation with gold is actually its negative correlation with real interest rates, not inflation. We’ve seen this play out in 2013 as interest rates began to normalize just as gold had begun to tumble. Needless to say, this correlation is not perfect as we can find instances where this relationship does not hold true, but it is still worth considering. The somewhat unpredictability of gold, as well as its lack of correlation with any other asset class, is often cited by those who believe that there is, in fact, a benefit to owning gold. Since there are no earnings, dividends or interest with which to assess gold or other precious metals, it is very difficult to value. It is impossible to justify whether the true price of gold should be $500 or $1,500, which is another reason we do not recommend gold as a permanent position.

Over any relatively short period of time you will likely be able to find one asset class or another that stands out as the leader during that brief stretch. Sometimes it’s going to be stocks, sometimes bonds, sometimes commodities and at other times real estate. Looking at asset returns over very long periods of time indicates that investing in enterprise (stocks) has historically produced superior returns compared to the other categories. Large Cap US Stocks have produced annualized returns of 10% over the past 85 years or so, while gold has produced annual returns of closer to 5%, which is below the nearly 6% annual returns that bonds have produced. Real Estate return data is harder to come by but by most accounts the returns are lower than stocks, but still higher than bonds and gold.

So is a self-directed IRA right for you? Most likely not, but as always, if you would like to schedule an appointment, we would be happy to provide a complimentary review of your financial and tax situation.

Sincerely,
Edward J. Wilcox, CFA

Say Goodbye to Summer...

From the Desk of Joe Rollins

It’s hard to believe that September is already here; summer came and went in the blink of an eye, without a whole lot of sunshine. I don’t recall playing a single round of golf the past few months that wasn’t on soggy ground. Despite the rain, it was a pretty eventful summer for me and my family.

In August, my son, Josh, began his first week as a freshman at Auburn University then shortly after, my daughter, Ava, began her first week at Peachtree Presbyterian Preschool as a 2 year old. Poor Ava just cannot grasp the fact that although she and Josh both go to school, they do not attend the same one and cannot ride a school bus together. I guess this concept will take a little while for her to understand, which is fine by us as this show of innocence is just another one of her endearing qualities.

Josh's first day

Ava's first day
In addition to the start of a new school year for my children, August also brought my 64th birthday as well as having owned my own company for literally half my life. When I began this firm in my living room in 1981, I really didn’t know what the future would hold. I felt relatively sure I could get a few clients, but figured if all else failed I would just go back and work for another CPA firm. Thirty-two years later we are still growing every day, adding new clients located throughout the United States and even overseas. Despite my optimism, I truly never believed I would still be at it more than three decades later. It has been an amazing run but I’m not even close to the finish line.

People ask me all the time when I intend to retire, and my response is easy and simple - possibly one day, but definitely not right now! When my daughter is 18 years old, I will be the ripe old age of 80, so most likely they will have to carry me out from behind, or under, my desk.

But now let’s move on to more important matters. While virtually all financial assets were down for the month of August, we still managed to have an extraordinarily good first eight months of 2013. The Standard & Poor’s 500 index (S&P 500) of stocks was down 2.9% for the month of August, yet it is still up a sterling 16.2% through August 31, 2013. The NASDAQ has been the best performer for this year, up 19.9%, despite being down 0.9% for August. The Dow Jones Industrial Average was also down 4.2% for August, yet continues to be up 14.9% for 2013.

It really did not matter what you were investing your money in during August, essentially everything was down. Almost all international equity funds were down similarly to the U.S. markets. Even bond funds were down for the month. I cannot help but think that people panicked at the mention of potential military conflict in Syria and began selling financial assets, whether stocks, bonds, or otherwise. This is just another example of how the uninformed often react spontaneously.

As I have discussed in these blogs so many times before, we are investors, not traders. Whatever happens in Syria is not likely to have a long-term effect on the financial markets or corporate profitability. Since Syria produces very little oil, the logic for the oil prices skyrocketing is ridiculous. While it’s perfectly possible that the conflict in Syria could spread to other countries, it is highly unlikely given the scope of the engagement being considered. After all, we have already told them when and where we will be firing off what is sure to be some of our old, outdated missiles and have also informed the citizens of the country to avoid the area where they may land. Therefore, this most likely will not become a financial issue worth considering.

In October, we are expecting the next fight on the extension of the federal debt limit. We could all debate this for months on end, but the truth of the matter is that at the end of the day they will extend the federal debt. While the markets may be volatile during these discussions, you may rest assured that in the end an extension will be in order. It seems like more than ever the players in Washington want to have their five minutes in the spotlight, and this gives them a perfect opportunity to do so. There will be some horse-trading that occurs behind the scenes, but at the end of the day it will have no long-term investing implications for us, thus giving us no reason to trade around this event.

So where do we stand going into the last four months of 2013? I have reviewed all of the economic data and now believe the S&P 500 will end the year at around 1750. As of September 3, 2013 it was 1634. If we were to in fact reach that level, the S&P, including dividends, would be up an outstanding 20% for the year 2013. I have looked at a lot of data and feel comfortable with the notion that we will be somewhere in high double digits rather than the low double digits that I previously projected.

What gives me this level of comfort is that it looks like the S&P earnings for 2014 will be roughly $120 per share. If you give those earnings a reasonable multiple of 15, the S&P should be trading at 1800 during 2014. Since the market tends to forecast the future rather than reflect the past, a 1750 year-end balance would be a reasonable estimate of the market going forward. All of these numbers appear to be seasonable and therefore illustrate that the market is not over-valued at the current time.

In May of 2013, the Federal Reserve made an announcement that they would begin tapering their purchases of bonds before the end of 2013. At the time of their announcement, the ten-year Treasury bond was selling at 1.6%. Today, the ten-year Treasury bond yield is selling at almost 2.9%, having almost doubled in the last four months. Such a move in interest rates is almost without parallel. As a result of the skyrocketing interest rates, virtually all bonds are trading negatively for the year. In most years, bonds are a nice addition to stocks in that they take the volatility out of the market and reduce risk. Unfortunately, this has not been the case in 2013.

The "Fed Model," which is a formula for a fair stock market valuation often attributed to Alan Greenspan, is calculated by taking next year’s S&P earnings and dividing them by the ten-year Treasury interest rate. Currently, next year’s earnings are considered to be $120 divided by 2.9% which would reflect a current valuation of 4137. As previously mentioned, the S&P is currently at 1634. Therefore, interest rates would need to be over 6% to justify this level of the S&P.

That analysis indicates that either the market is grossly undervalued or that interest rates are way too low; at the current time it appears that interest rates continue to be too low signifying that the market is not being undervalued. My suspicion is that interest rates will continue to go up for the remainder of 2013, resulting in a negative rate of return for bonds. Every time I mention interest rates, I like to remind people that in October of 2008, the ten-year Treasury bond was at 4%. That was considered to be the beginning of the financial crisis, and five years later interest rates have not approached anywhere close to that level.

From a true economic standpoint, the status quo continues to be constant. The GDP was updated recently for the third quarter up to 2.5 from 1.7. While certainly not tremendous GDP growth, it’s still a long way from negative. As employment improves and housing stabilizes, the economy continues to show a slow but steady increase leading me to believe that none of the economic circumstances we are seeing today will alter my forecast for the end-of-the-year stock market levels.

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

Best regards,
Joe Rollins

Labor Day Holiday

”Sometimes it's important to work for that pot of gold. But other times it's essential to take time off and to make sure that your most important decision in the day simply consists of choosing which color to slide down on the rainbow.” - Douglas Pagels

In observance of Labor Day, the offices of Rollins Financial and Rollins & Associates will be closed on Monday, September 2nd. Please note that all major U.S. stock exchanges and banks will also be closed due to the Labor Day holiday.

If you require immediate assistance on Monday, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com. Our office will re-open for business on Tuesday, September 3rd at 8:30 a.m.

Be safe, and have a great holiday weekend!!

Best regards,
Rollins Financial, Inc.

Markets Update – Stock Market Continues to Trend Higher

From the Desk of Joe Rollins

July 2013 was another excellent month for the stock market. The S&P 500 was up 5.1% for July and 19.6% for the year-to-date; the Dow Jones Industrial Average was up 4.1% for the month and 19.9% for the year-to-date; and the NASDAQ Composite was up 6.6% and 20.9% for the year-to-date. During July, the Dow and the S&P both reached record levels while the NASDAQ reached its highest level in more than 12 years. Succinctly, if you were invested in the U.S. stock market during July, you likely would have earned more money in one month than a five-year CD pays an investor during the entire five-year period.

From an investing standpoint, July was an interesting month. For the first time in quite a while, the stock-pickers outperformed the index funds. Many of the actively managed portfolios exceeded the indexes by one to two full percentage points.

For the first time in many months, the international funds actually showed some positive returns. For example, European funds are starting to show positive returns along with Japan. As everyone has probably heard, Japan is trying to stimulate its economy and is basically committing all of its central government’s resources to contribute to increasing growth. Japan has basically been in a recession for the last 25 years and they have agreed to release all necessary federal stimuli to improve the economy. Personally, I’m not a believer in the Japanese way of doing things, and therefore, I don’t pursue Japanese investments.

Meanwhile, Europe is showing some early signs of improvement, but they’re a long way from being out of the woods from a financial standpoint. Until they figure out a way to stimulate the private business sector in Europe, they just cannot grow. Basically, almost all of the international funds are underperforming compared to the U.S. stock market, which is one of the best in the world.

For the month of July, bond funds showed a miniscule return and nearly all taxable and municipal bond funds are showing serious year-to-date losses. The only bond funds that are showing some life are the high yield bond funds, which actually had a decent return during July and at least have small positive returns year-to-date. However, with the high likelihood that interest rates will be going up in the coming months, bond funds may well continue to be a challenging asset class for investors.

Stock market returns this year have been nothing short of outstanding, and almost no one – including me – could have projected that the S&P would be up almost 20% in a little over half the investing year. At the beginning of the year, I projected that 2013 would end with low double-digit returns. Although things could certainly change between now and the end of the year, my projection has already been surpassed. Naturally, I’m often asked what to expect for the rest of the year considering the high returns we’ve realized thus far. Here’s my answer:

September is notoriously a difficult month for investors. Added to that month’s normal seasonal negative behavior in the market is the anticipation that the Fed will cut back on its bond purchasing program. For those reasons, I certainly expect for volatility to increase over the next 60 days. However, I don’t see the major markets totally unwinding. As long as there are no better alternatives to stocks, I expect the market – even if volatility is an issue – to trend higher.

There’s presently a great rotation occurring out of cash and bonds and into U.S. equities. In fact, bond funds are seeing record withdrawals with the vast majority of that money ending up in U.S. equities. With money market accounts paying zero and CDs paying only marginally higher, these types of investments will guarantee a loss of purchasing power over time unless, of course, there is no inflation.

Practically the only investment currently returning real returns over the rate of inflation is U.S. equities. Volatility will continue to be evident until other investments stabilize, but it is our intention to be principally invested in high quality U.S. equities.

I believe the final investment returns for the 2013 year will be fairly close to where they are presently. If 2013 ends with a 20% return, we would all agree that it was a very satisfactory investment year. Nevertheless, I’m not willing to cash in our chips today because I may be as wrong about this as I was about the low double-digit returns I forecasted at the beginning of the year. I have no reason to believe that the market will be lower at the end of the year than it is today, but I’m unwilling to get out because we need to participate when the market moves up.

A while ago, I read a book by Peter Lynch, the famous Magellan Fund manager during its heyday from 1977 through 1990. Lynch’s investing philosophy is to stay invested at all times regardless of economic circumstances, and he famously pointed out that "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

As that remark pertains to this particular year, I believe it is wise to follow Lynch’s sound advice. As such, we will stay invested, even if there is a correction on the horizon.

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

Best regards,
Joe Rollins

Q&A Series – Roth IRA Conversions and Withdrawals

This week’s question comes from Jack, a client who is wondering if he can convert his traditional IRA into a Roth IRA or make an outright contribution.

Q. I’ve heard there is no longer an income limitation on folks that want to convert their traditional IRA into a Roth IRA. Is that accurate? And is it something I should consider or would you advise making a direct contribution to my Roth IRA instead?

A. You are correct, Jack. There is no longer an income limitation that would prevent someone from converting their traditional IRA funds to a Roth IRA. Keep in mind, however, that when you elect to convert your funds, you will be taxed on the converted amount in the year of the conversion to the extent that your conversion exceeds any basis you maintain in your traditional IRA.

Therefore, if you have no basis (i.e. you have never made any non-deductible contributions to your traditional IRA) the full conversion amount would be taxable. And if you decide to do a partial conversion of your balance, under the law all of your IRAs get aggregated to determine the taxable amount. The complex calculation of determining how much of your conversion that would be taxable is beyond the scope of this blog (other than the example below), but we would be happy to calculate the taxable portion for you if this is something that you intend to do.

Whether or not you should move forward with a conversion depends entirely upon your specific taxable situation. Quite possibly, you have very little income and can sustain the taxable conversion keeping you in the lower tax brackets. If not, and it will bump you up to a higher tax bracket, then it may be wise to retain the funds in your traditional IRA until you need to begin taking distributions. We can certainly perform a complimentary review of your income tax situation to see if a conversion would make financial sense for you.

In order to contribute directly to a Roth IRA, you must meet certain income thresholds. For 2013 single taxpayers, the phase-out to make a Roth IRA contribution begins at $112,000, and for married filing jointly couples the phase-out begins at $178,000. Since most average to high taxpayers will fall above these limits, they will not be eligible to make direct Roth IRA contributions. And if you fall above these limits, you most likely are unable to make a deductible traditional IRA contribution (not being covered by a company retirement plan could change the deductibility). Therefore, it begs the question – could I make a non-deductible (after-tax) traditional IRA contribution and then immediately convert it to a Roth IRA?

That sounds like an excellent way to avoid the income limitations of direct Roth IRA contributions. However, there is a catch, and it can be a costly one if you are not aware of it. As mentioned above, upon conversion, all of your IRA accounts are aggregated to determine the taxable portion. Therefore, if you make a $5,500 (maximum) non-deductible (after-tax) contribution to your traditional IRA with the thought of turning around and converting it tax-free to a Roth IRA, you need to make absolutely sure that you don’t have ANY other IRA accounts in your name. If you do, they will be combined to determine the taxable portion of that $5,500 conversion. So, yes, even though you contributed that $5,500 with after-tax dollars to a separate IRA, if you have other IRAs with little or no basis, almost all of that $5,500 will be taxable upon conversion.

Let’s continue our example. Let’s say you decide to make a non-deductible contribution of $5,500 with the intent of converting it tax-free to a Roth. But you also have a traditional IRA worth $50,000 and a SEP IRA worth $100,000. Your collective IRA balance, prior to any conversion, is $155,500 ($50,000 IRA + $100,000 SEP + $5,500 IRA contribution.) Let’s also assume that only your 2013 contribution of $5,500 was non-deductible (after-tax). This gives you a basis in your IRAs of $5,500. Upon aggregating all of your IRAs that have no basis ($50,000 + $100,000), we can calculate that approximately 97% ($150,000/$155,500) of all distributions (and conversions) will be taxable to you. So of that $5,500 that you contributed with after-tax dollars, now 97% ($5,335) is taxable to you upon conversion.

Keep in mind that this simple example illustrates the potential taxability of a conversion where one was not aware there would be any. Now, you should also be aware that this could potentially work – and work very nicely to avoid those income limitations - but ONLY if you have no other IRAs. If you think you fall in that category, please contact us and we can review your specific situation to determine if this strategy will work for you.

It is also worth mentioning that once you have established a Roth IRA and have made contributions, you can always withdraw the basis (your contributions) at any point in time with no penalty or taxability. If you are trying to withdraw your Roth IRA conversions, those may be subject to certain limits beyond the scope of this blog and should be discussed to determine any taxable effect.

So, Roth IRAs can be a very effective tool as an alternative to a savings account. Whatever money you put in, you can take out if needed. Keep in mind that this withdrawal would not include gains, but nonetheless can be an effective strategy for a forced savings plan. While this is certainly not the point in establishing a Roth IRA account, there is comfort in knowing that you can always access your contributions if the need arises. This is not the case with a traditional IRA. Once the funds are invested in a traditional IRA, you cannot access them without tax or penalties (under most cases) under distribution rules, regardless of whether they were deductible or non-deductible contributions.

If you are able to contribute directly to a Roth IRA, you should consider doing so. If you are above the Roth IRA income limitations and can make a non-deductible contribution, you should consider that as an option. If you have no other IRAs, you can usually take advantage of the strategy discussed above and make a non-deductible contribution subsequently converting that contribution to a Roth IRA. But if you have other IRA accounts, be careful of employing that strategy as part of your conversion will most likely be taxable. Again, we would be more than happy to provide a complimentary review of your specific situation if you would like to take advantage of any of these discussed ideas.

In a nutshell, the more you can begin to put away now for your retirement down the road, the more you will help to grow your nest-egg. Jack, thank you for your question as it allowed us to share a potential strategy with our readers and you that may be useful in your particular situation.

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 & Associates and Rollins Financial in mind when seeking professional advice on taxation, financial planning and investing.

Best regards,
Danielle Van Lear, CPA

ESTATE PLANNING DOCUMENTS AND BENEFICIARY DESIGNATIONS

Dear Readers,

As humans, we understandably tend to avoid facing our inevitable mortality, but creating a basic estate plan doesn’t have to mean hours of work and expensive attorney fees. The most difficult part is organizing your thoughts to address the distribution of your assets and, if you have children, how you want them to be cared for and by whom.

As we’ve stated in prior posts, you need to have these three basic documents in place regardless of whether or not you are wealthy:

a Last Will & Testament;

a Durable Financial Power of Attorney; and

an Advance Directive for Healthcare with Medical Power of Attorney.

If you do not have this documentation in place, do not pass go and do not collect $200. Go directly to an estate attorney and get these items drawn up stat!

Even for folks who have their estate documentation in place, the topic of beneficiary designation is often overlooked or misunderstood. It is imperative to check that you’ve properly designated your beneficiaries on your IRAs, 401(k)s and life insurance policies. That’s because these assets pass directly to your named beneficiaries and are not subject to probate (i.e., they are not distributed through your will). Even if your will provides for other beneficiaries, the beneficiaries you designate on your life insurance policies, IRAs and 401(k)s are binding and they are the only beneficiaries who will receive those particular assets.

Moreover, after life-changing events like the birth of a child, death of a spouse, divorce or remarriage, it’s especially important to review your beneficiary designations. You should also name a contingent beneficiary should your primary beneficiary predecease you or die at the same time as you. Furthermore, your designations should be reviewed from time to time and shared with those assisting you with your estate planning to ensure it aligns with your active estate documents.

Finally, make sure you keep your estate documentation in a safe, accessible place in your home (not just a safe deposit box, because it can sometimes take a court order for someone else to access its contents). Be sure to include a schedule of your various accounts and policies with beneficiary designations along with your advisors’ contact information. It’s also wise for your advisors to maintain copies of your estate documentation and assets schedule.

Putting off getting your estate documentation in place and failing to periodically review your beneficiary designations can have terrible consequences for your loved ones. Please let us know if we can help you get your financial house in order, and as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Eddie Wilcox, CFA

Q&A Series: The 3.8% Medicare Tax on Investment Income – START PLANNING NOW IF YOU HAVEN’T ALREADY!

This week's question comes from Christine, a high-earner with a substantial investment portfolio.

Q: I know we’re over halfway through the year, but I’m wondering what sort of strategy to employ regarding the Medicare tax on investment income that started at the beginning of 2013.

A: We’ve always felt that tax and investment planning go hand-in-hand, Christine, so we appreciate your question. With the increase to Medicare taxes under the health care reform package of 2010 that began on January 1, 2013, there is no stronger case for cohesive tax and investment strategies.

Background

As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, households with high incomes will be paying more into the Medicare system, via taxes on both earned and unearned income.

To start with, the Treasury Department defines high-income households as wages, unearned income or modified adjusted gross income (“MAGI”) of more than $200,000 for single individuals and above $250,000 for married filers. MAGI is adjusted gross income increased by excludable foreign-earned income and a few other items.

Beginning in 2013, workers with wages above the noted thresholds will have to pay an additional 0.9% in Medicare payroll taxes. This results in a high-income earner’s share of Medicare payroll taxes increasing from 1.45% to 2.35% of all wages. This includes self-employed individuals who exceed the thresholds.

Moreover, beginning in 2013, high-income households are subject to a new 3.8% Medicare tax on net investment income, also referred to as “unearned income.” The Treasury Department’s definition of unearned income includes capital gains, dividends, interest, annuities, royalties and rent received. It also includes income derived in the ordinary course of a trade or business if that activity is passive for the taxpayer.

“Net investment income” does not include tax-exempt interest from municipal bonds or municipal bond funds, withdrawals from retirement plans, or payouts from traditional defined-benefit pension plans or annuities that are part of retirement plans. Life insurance proceeds, veterans’ benefits, Social Security benefits, and income from S corporations or partnerships in which you actively participate are also exempt.

Note that it is perfectly possible for a taxpayer to be subject to the Medicare investment tax and not the Medicare payroll tax in circumstances where wages fall below the threshold but net investment income increases MAGI above the threshold.

Also take note that if you’re married and each spouse earns less than the stated individual threshold amount, but your total earned income combined exceeds the married filing jointly threshold, your employers won’t take your spouse’s income into consideration when figuring your Medicare tax withholding; they are only obligated to withhold 1.45% for Medicare tax. This means that you will owe the additional 0.9% on the amount by which you and your spouse exceed the combined income threshold. If you fall into that bracket, you should find out if you are potentially required to make estimated tax payments or if you should increase your withholding to cover this additional tax.

Keep in mind that taxpayers in the lower marginal bracket will qualify for the 15% rates in qualified dividends and long-term gains. However, taxpayers in the top marginal bracket of 39.6% (individual filers with incomes above $400,000 and couples above $450,000) pay a 20% long-term capital gains and qualified dividends rate plus the 3.8% Medicare surtax. There are other items these taxpayers need to consider, and therefore, it’s imperative to strategize with your tax and financial professionals as soon as possible to help navigate the potential tax consequences they are facing. We would be happy to help you in this capacity.

The Right Strategy

Now, on to the fun stuff – how to reduce or eliminate your tax burden if your income is above the stated thresholds. If you’re still working, reducing MAGI can be difficult, but one strategy is to maximize your qualified retirement plan contributions via your pre-tax wages. This is a great way to reduce your income if you’re close to the threshold while also building your tax-free retirement assets. Likewise, small business owners with 401(k) plans should consider contributing more to the plan, and if none exists, serious thought should be given to establishing a plan.

As discussed above, qualified distributions from 401(k), 403(b), IRAs, tax-sheltered annuities, and eligible 457 plans as investment income are not subject to the tax. They do, however increase MAGI in the year of distribution. So, if you expect to be close to the MAGI threshold when you begin taking minimum required distributions, you might consider the effect future taxable distributions will have on your exposure to the tax. A review of your particular situation may reveal that it would be better for you to contribute to a Roth (if you qualify to do so) since Roth investment income isn’t taxed immediately, nor is it taxed when it’s distributed (provided you have met the requirements).

As for coming up with a strategy concerning your net investment income, taking a look at municipal bonds or municipal bond funds might be worthwhile. But, municipal bonds are subject to their own specific risks as some municipalities continue to struggle with their fiscal situations. Indexing strategies or buy and hold strategies and tax loss harvesting may be especially useful as tax rates have crept higher. Also, focusing on entities paying qualified dividends can also alleviate some of the tax burden. For instance, the income produced by a corporate bond could be subject to a nearly 43.4% tax rate for those in the highest bracket. However the qualified dividend income generated from that same company’s common or preferred stock would be subject only to a 23.8% tax rate.

In very specific situations, it may also be useful to hold taxable interest investments or non-qualified dividend-paying investments in tax-deferred IRAs or tax-deferred annuities. Moreover, in rare cases and depending on your specific situation, permanent life insurance where the cash value isn’t considered net investment income when withdrawn may also make some sense. We would not suggest employing these particular strategies without a full review of your precise situation.

Thanks so much for your question, Christine. There are some complex planning challenges with this new tax, but with help from a qualified tax and financial advisor, you should be able to execute a well-designed plan that could reduce the potential impact of this new tax. Rollins Financial and Rollins & Associates would be happy to review your particular situation and devise a unified tax and investment strategy for you. Let us know how we can help!

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,
Danielle Van Lear, CPA
Eddie Wilcox, CFA