8 Wealth Issues: Retirement Planning

Two 2014 court decisions you need to know about

In this installment of our 8 Wealth Issues blog, I thought it important to focus on two recent court decisions that clients need to understand as they will effect your retirement nest egg. These include a ruling on the tax treatment of rollovers & the asset protection of inherited IRAs.

One Indirect IRA Rollover per Year
What was once allowed is now prohibited. In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.1

Starting in 2015, you are allowed one IRA-to-IRA rollover per 365 days - period. A subtle but important change has been made. Publication 590 has long stated that a taxpayer can generally only make one tax-free rollover of any part of a distribution from a single IRA to another IRA during a 12-month period. That didn’t preclude a taxpayer from making multiple IRA-to-IRA rollovers using multiple IRAs during such a timeframe.1,4 So beginning next year, you can only make a tax-free IRA-to-IRA rollover if you haven’t made one within the past 365 days.3

Don’t grumble just yet. If you want to move money between IRAs more than once next year, there is still a way you can do it. The new IRS rule change doesn’t apply to every type of IRA “rollover.” Here’s the good news. IRS Announcement 2014-15 states: “These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B).”3

In other words ... the new restriction does not apply to trustee-to-trustee transfers.

Inherited IRAs are not protected from bankruptcy
The other court case that was recently decided involved inherited retirement assets. In the case of Clark v. Rameker, the Supreme Court decided unanimously on June 12 against Heidi Heffron-Clark and her husband Brandon C. Clark, finding that an IRA Ms. Clark inherited directly from her deceased mother in 2000 isn't eligible for protection from creditors. The couple had filed for Chapter 7 bankruptcy back in 2010, and at that time identified the inherited IRA — then valued at $300,000 — as exempt from the bankruptcy estate.

The court's decision was unanimous, and held that Inherited IRAs differ from traditional IRAs in 3 ways:

1. Holders of inherited IRAs cannot invest additional money into the account, whereas those with traditional and Roth IRAs can do so.

2. The tax code requires inherited IRA holders to withdraw the money from the account, either taking all of the money in the IRA within five years after the death of the owner or taking minimum annual distributions each year.

3. Inherited IRA holders may also take all of the money out at any time and for any purpose without penalty. Roth and traditional IRA holders, meanwhile, are subject to a 10% penalty for withdrawals before age 59.5.

Those three characteristics led the court “to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement,”5

Conclusions

In light of these two court decisions, people should be reminded of two things. Planning needs constant review in light of decisions in Washington that affect the assumptions we make in financial plans. Reviewing the uses & purposes of different accounts and their application to your financial life is vitally important. The other consideration people should make is in regard to making IRA rollover and transfer decisions. Be sure you understand the tax ramifications as you make these requests and work with a professional who can ensure that your deferred savings stays deferred.

This information has been derived from sources believed to be accurate This article is for informational purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that we are not engaged in rendering legal or tax advice through this article. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. IRS Circular 230 Disclosure: Any discussion pertaining to taxes in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

Citations.
1 - wealthmanagement.com/retirement-planning/seeing-double [2/4/14]
2 - marketwatch.com/story/new-ira-rollover-rule-coming-in-2015-2014-04-04 [4/4/14]
3 - irs.gov/pub/irs-drop/a-14-15.pdf [4/16/14]
4 - tinyurl.com/lnd86vs [4/24/14] 5 – investmentnews.com/article/20140623/FREE/140629977# [6/23/14]

Perspectives from Above the Noise – Week of June 23, 2014

A recent run of data suggesting that the U.S. economy rebounded strongly during the second quarter gained further confirmation last week. Inflation data for May also provided more evidence that inflationary pressures may be building. The Consumer Price Index (CPI) increased by 0.4%, which was the largest monthly increase since February 2013 and double what economists were expecting. Food prices jumped the most since March 2011 and energy prices rose by 0.9%. Even core CPI, which excludes food and energy, increased by 0.3% — the most since October 2009.

With hotter-than-expected inflation data and a recent string of solid economic reports, all eyes turned to the Federal Reserve. However, last Wednesday’s release of the Federal Open Market Committee’s (FOMC) policy statement and subsequent press conference with Fed Chair Yellen offered no real surprises. As expected, the Fed continued its tapering strategy and reduced its asset purchases by another $10 billion to $35 billion per month.

For the week, the S&P 500 gained +1.38%, the Dow Jones Industrial Average added +1.02%, and the MSCI EAFE (developed international) rose +0.86%.

Here are the 3 stories this week that rose above the noise:

U.S. existing home sales, inventory surge in May

The U.S. housing market is beginning to show signs of strength following a weak start to 2014. Existing U.S. home sales grew by 4.9% in May, well ahead of the consensus expectation for 2.2% growth. May home sales growth was the strongest since August 2011 and the second consecutive monthly increase.

The inventory of existing homes for sales increase by 2.2% to reach 5.6 months of available supply, which resulted in housing prices experiencing the smallest year-over-year increase in over two years.

Merger Fever Can Be a Menace for Shareholders

A recent surge in mergers and acquisitions activity has been a factor in propelling U.S. equities to record highs. However, prior merger and acquisitions (M&A) booms have in aggregate resulted in wealth destruction for public shareholders and offer some reason for caution as detailed in a recent article from The New York Times.

Moreover, academic research by Matthew Rhodes-Kropf of Harvard Business School and numerous others has concluded that M&A booms have historically tended to end with significant declines in broad equity prices. However, timing the end of M&A booms is difficult if not impossible and other macro indicators on balance remain positive for equity markets at this point.

In Yellen We Trust Is Bond Mantra as Inflation Dismissed

Recent economic and inflation data appears to be at odds with continued low bond yields and a recent Bloomberg article attempts to reconcile these data points. Bond investors seem to be signaling a strong belief that the Federal Reserve will maintain exceptionally low rates for a prolonged period after quantitative easing ends despite the recently improved data.

While demand for risk-free assets and low yields globally are undoubtedly also keeping U.S. yields suppressed, implicit in the continued low yields on long-duration Treasuries is some belief that inflationary pressures will remain subdued. Incoming inflation data for the remainder of the year will likely have a growing impact on bond markets as the debate over the appropriate level for bond yields heats up.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. 

Perspectives from Above the Noise – Week of June 16, 2014

Last week began with some additional data points adding to evidence that the domestic economy is growing at an above-trend rate in the second quarter. By Wednesday global markets were experiencing the first hint of volatility in weeks. U.S. investors were forced to consider the implications of some unexpectedly early mid-term election headlines following the defeat of House majority leader Eric Cantor in his primary election bid by Tea Party-backed candidate David Brat. The surprising election loss may have contributed to some of the mid-week market volatility as it not only created some uncertainty over who will replace the business-friendly Cantor as speaker, but the odds for political compromise on some important economic issues such as immigration reform also may have taken a hit with Cantor’s defeat.

One data point released on Thursday that should give big growth bulls some pause was retail sales for May, which increased less than expected following a three-month surge. This month's gain was half of the 0.6% median forecast of economists surveyed by Bloomberg

For the week, the S&P 500 fell -0.68%, the Dow Jones Industrial Average dropped -0.88%, and the MSCI EAFE (developed international) lost -0.25%.

Here are the 3 stories this week that rose above the noise:

Flare-Ups in Iraq, China, Russia-Ukraine Region Add Risks to U.S. Economic Outlook

According to a recent survey by The Wall Street Journal, economists feel the biggest threat to the U.S. economic recovery is a negative international event. In recent months, there has been a flare-up in geopolitical risks. For example, the conflict in Iraq is intensifying and could cause oil prices to rise further. U.S. equities have held up well this year and reached new highs despite increasing international risks. However, U.S. equities remain vulnerable to a selloff, especially if consumer and investor confidence sours from rising oil prices.

IMF Cuts US Growth Forecast to 2% for 2014 But Maintains 3% Growth Outlook for Next Year

In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8 percentage point to 2 percent, citing a harsh winter, a struggling housing market and weak international demand for the country's products. The fund maintained its 3 percent growth outlook for next year, saying a meaningful economic rebound is under way.

Still, the IMF said significant slack remains in the economy and U.S. officials must do more to stimulate growth in the near term. The remarks came ahead of a Fed policy meeting this week in which officials will consider whether to change or clarify guidance on future rate decisions.

How Demographic Changes Could Boost Americans’ Wages

A blog posting from The Wall Street Journal details some interesting analysis from a real estate consulting firm which suggests that a shrinking labor pool could lead to a tighter-than-expected labor market in the coming decade. Changing trends in immigration, retirement age and technological advances are difficult to predict and could provide some offsets to the rise in wages predicted in the article. However, the trend in wages will be important to watch in the coming years with implications for consumer spending, corporate profit margins and inflation.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. 

Perspectives from Above the Noise – Week of June 9, 2014

Equity bulls got a fresh shot of monetary stimulus courtesy of the European Central Bank (ECB). The ECB took the unprecedented step of becoming the first major central bank to deploy a negative deposit rate, effectively charging banks to park reserve holdings over and above their minimum reserve requirements. The move is aimed at prodding banks into lending more to Europe’s small- and medium-size business sector, which is a key job creator. At the same time, the ECB stepped up efforts to promote a greater asset-backed securities market to further assist private enterprises. Both moves assume that European loan demand is being held back by credit availability — which is unclear, however.

 

Finally, there were few surprises in Friday’s monthly employment report, as U.S. stocks rose to fresh record highs. Nonfarm payrolls grew by 217,000 in May, right in line with consensus expectations for a 210,000 gain.

For the month of May, the S&P 500 rose +1.34%, the Dow Jones Industrial Average gained +1.24%, and the MSCI EAFE (developed international) added +0.91%.

 

Here are the 3 stories this week that rose above the noise: 

The Nifty Fifty Market
While market volatility remains at benign levels, “a massive divergence is going on between the haves and have-nots, or the largest capitalization stocks and the rest of the U.S. equity market.” 

As of June 2, the 50 largest stocks in the Russell 3000 Index are up 4.1% in 2014 while the average return for the rest of index (51-3000) is -1.1%. The question looking ahead is whether this performance variability is based on the attractive relative valuation of larger companies or a harbinger of more difficult times ahead. Pension Partners LLC argues that the rotation points to the latter. 

Why the Euro Is Strong after ECB Went Negative
A The Wall Street Journal blog posting discusses why the euro has not continued to sharply weaken following the European Central Bank’s (ECB) announcement last week that it would be the first major central bank to implement a negative deposit rate. The article points out that the ECB’s policy announcement was really just an incremental move relative to the large quantitative easing programs implemented by the U.S. Federal Reserve and the Bank of Japan. 

Moreover, analysis by Ned Davis Research showed that overnight deposits at the ECB have already fallen by 96% and what remains is not enough to have a material impact on the Eurozone economy. Thus, the ECB’s move to a negative deposit rate largely looks like a policy designed to get headlines and impact psychology. If this analysis proves correct the euro may not weaken as much as the ECB desires and deflationary pressures in Europe may persist.

Robust Earnings Cloud Reason for Worry
As the S&P 500 hits new highs, it has once again become short-term overbought and a pullback would not be unexpected. One reason for the correction could be earnings and the potential for disappointment around the second-quarter earnings season. 

An article in The Wall Street Journal points out that while nearly 70% of first-quarter 2014 earnings reports beat analyst expectations, there was less to meet the eye to the latest reports and that could give the bulls some pause. First, there was a record number and percentage of companies issuing negative guidance. Second, margins may have peaked. Finally, the multiple investors have placed on earnings may not show significant further expansion since they are close to the high of this bull market from 2009.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Mid-Year Commentary Edition

Last week, we welcomed clients for our annual Client Night at the Movies. This evening has really turned into a marquee event for us to catch up with our clients socially, thank them for being such a valued part of our business, and continue to provide access to information. As per the usual schedule for this event, a portfolio manager is always in attendance to provide commentary on investment market activity.

This year, Rusty Vanneman, the Chief Investment Officer at CLS Investments discussed what he sees as elements leading the market right now, and what he’s keeping an eye on for the second half. Rusty and I also had a moment to discuss what he sees as the biggest surprises for the year so far.

For the month of May, the S&P 500 rose +2.35%, the MSCI EAFE (developed international) gained +1.62%, MSCI Emerging Markets (emerging markets) rocketed +3.48%.

Here are the 3 surprises for the year so far:

Lower Bond Yields/Interest Rates

While the big gains in Russia of late may seem surprising, the biggest surprise to most investors is the large drop in interest rates this year. Though investor sentiment was strongly bearish at the beginning of the year, rates have dropped for the bellwether 10-year Treasury by over half of 1%. Yields for the 10-year Treasury were over 3% late last year. In the closing days of the month, they were at 2.4%. (For a frame of reference, yields for 10-year Treasuries were below 1.5% a few summers ago.)

Why have yields fallen? There are at least a handful of contributing reasons: There has been a lack of supply growth in bonds, at least not enough to offset demand. There have been concerns about equity valuations and geopolitical news. Trading volumes in the bond market have been relatively light, which can make the market a bit easier to push around.

While return prospects for bonds are not exciting given the low rates, but we also still appreciate the powerful diversification benefits to owning bonds. Thus, maintaining bond exposure may still be a good idea, while keeping fairly defensive positioning by holding interest rate sensitivity low.

Rising Inflation Expectations

If one knew that bond yields were to drop over half of 1%, and they knew nothing else, one would also typically expect that inflation expectations would drop. That, however, has not been the case this year. Inflation-sensitive assets, such as commodities and Treasury Inflation-Protected Securities (TIPS) are both on fire this year, providing above-average returns. Again, this is interesting, as bond yields have fallen and official inflation data hasn’t exactly spiked higher.

Falling real interest rates (inflation-adjusted interest rates) are often inflationary. In the event of an inflation uptick, commodities usually perform well and TIPs usually beat nominal Treasuries. Due to this development consideration to modest increase in exposure to these asset classes may be necessary for an actively diversified investment portfolio.

Rising Stock Prices

Higher stock market prices at this point in the year wasn’t necessarily a surprise – unless one heard that bond yields had dramatically fallen, that inflation expectations were rising, and that small cap stocks were significantly trailing the broader market. On the last point, a healthy stock market usually has small cap stocks leading the way. An emphasis on high quality may be in order, as higher-quality securities tend to perform better in a choppy, directionless market in addition to a slower-growth environment. This likely includes a lean toward larger companies who have been the leaders throughout this lengthy bull market.

CLS Investments significantly contributed to this market commentary.

The views expressed herein are not meant as investment advice and are subject to change. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.

The S&P 500® Index is an unmanaged composite of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The index is composed of the 3,000 largest U.S. stocks. The Russell 2000® is an index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small‐cap companies. It is a widely recognized indicator of small capitalization company performance. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The MSCI EAFE International Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The iShares MSCI Emerging Markets ETF is an exchange traded fund which seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in emerging markets, as represented by the MSCI Emerging Markets Index. The Barclay’s Capital U.S. Aggregate Bond® Index measures the performance of the total United States investment-grade bond market. The Barclay’s Capital 1-3 Month U.S. Treasury Bill® Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than1 month, are rated investment grade, and have $250 million or more of outstanding face value. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index.

Bonds are a type of debt instrument issued by a government or corporate entity for a defined period of time at a fixed interest rate. The most common risks for bonds are non-diversifiable risks, but bonds may be subject to diversifiable risks including, but are not limited to, call risk, reinvestment risk, and credit risk. High Yield bonds, or junk bonds, will be subject to an even greater degree of these aforementioned risks as well as subject to credit risk and business risk.

Investing in commodities refers to investing in trade goods used in commerce. When traded on an exchange, all commodities must meet a minimum acceptable grade called the Basis Grade. Diversifiable risks may include, but are not limited to business risk, capital risk, and regulatory risk. Treasury Securities are securities issued by the U.S. Government. Generally issued to fund its operations and backed by the full faith and credit of the U.S. Government, treasury securities are considered extremely low risk investments and may include: Treasury Bills (T-Bills), Treasury Notes, Treasury Bonds (T-Bonds), or Treasury Inflation Protected Securities (TIPS). The return on treasury investments is measured by the Treasury Yield. The primary diversifiable risk is opportunity risk

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.