Federal estate taxes have long since been a lucrative source of funding for the federal government.
Source: A Brief History of Estate Taxes
Federal estate taxes have long since been a lucrative source of funding for the federal government.
Making & Keeping Financial New Year’s Resolutions. What could you do in the months ahead?
How will your money habits change in 2017? What decisions or behaviors might help your personal finances, your retirement prospects, or your net worth?
Each year presents a “clean slate,” so as one year ebbs into another, it is natural to think about what you might do (or do differently) in the 12 months ahead.
Financially speaking, what New Year’s resolutions might you want to make for 2017 – and what can you do to stick by such resolutions as 2017 unfolds?
Strive to maximize your 2017 retirement plan contributions. Contribution limits are set at $18,000 for 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan; if you will be 50 or older in 2017, you can make an additional catch-up contribution of up to $6,000 to those accounts. The 2017 limit on IRA contributions is $5,500, and $6,500 if you will be 50 or older at some point in the year. (If your household income is in the six-figure range, you may not be able to make a full 2017 contribution to a Roth IRA.)1
Under 40? Set up automatic contributions to retirement & investment accounts. There are two excellent reasons for doing this.
One, time is on your side – in fact, time may be the greatest ally you have when it comes to succeeding as a retirement saver and an investor. An early start means more years of compounding for your invested assets. It also gives you more time to recover from a market downturn – a 60-year-old may not have such a luxury, but a 35-year-old certainly does.
Two, scheduling regular account contributions makes saving for retirement a given in your life – month after month, year after year. You can contribute without having to think about it, and without having to wait months or years to amass a lump sum. Those two factors can become barriers for people who fail to automate their retirement saving and investing.
Can you review & reduce your debt? Look at your debts, one by one. You may be able to renegotiate the terms of loans and interest rates with lenders and credit card firms. See if you can cut down the number of debts you have – either attack the one with the highest interest rate first or the smallest balance first, then repeat with the remaining debts.
Rebalance your portfolio. If you have rebalanced recently, great. Many investors go years without rebalancing, which can be problematic if you own too much in a declining sector.
See if you can solidify some retirement variables. Accumulating assets for retirement is great; doing so with a planned retirement age and an estimated retirement budget is even better. The older you get, the less hazy those variables start to become. See if you can define the “when” of retirement this year – that may make the “how” and “how much” clearer as well.
The same applies to college planning. If your child has now reached his or her teens, see if you can get a ballpark figure on the cost of attending local and out-of-state colleges. Even better, inquire about their financial aid packages and any relevant scholarships and grants. If you have college savings built up, you can work with those numbers and determine how those savings need to grow in the next few years.
How do you keep New Year’s resolutions from faltering? Often, New Year’s resolutions fail because there is only an end in mind – a clear goal, but no concrete steps toward realizing it.
Mapping out the incremental steps can make the goal seem more achievable. So, can visualizing the goal – something as simple as a written or calendared daily or weekly reminder may reinforce your commitment to it. Two New York University psychology professors, Gabriele Oettingen and Peter Gollwitzer, have developed what they call the “WOOP” strategy for achievement. Its four steps: pinpoint a challenging objective that can be met; think about the best result that could come from trying to reach the goal; identify any obstacles in your way; and distinguish the “if-then” positive steps you could take that would help you realize it.2
Financial new year’s resolutions tend to boil down to a common goal – the goal of paying yourself first. That means saving and investing money for your future rather than paying your creditors or buying expensive consumer items bound to depreciate. Think ahead – five, ten, or even twenty or thirty years ahead – and make this the year to plan to accomplish money goals, both big and small.
Author: Michael Bellush, Wealth Advisor
The Power of Compound Interest
Benjamin Franklin used compound interest to make big contributions to his two favorite cities. Watch this short but powerful video to learn how he did it!
2017 Retirement Plan Contribution Limits
Minor inflation means small, but notable, changes for the new year.
Each October, the Internal Revenue Service announces changes to annual contribution limits for IRAs and workplace retirement plans. Are any of these limits rising for 2017?
Will IRA contribution limits go up? Unfortunately, no. Annual contributions for Roth and traditional IRAs remain capped at $5,500 for 2017, with an additional $1,000 catch-up contribution permitted for those 50 and older. This is the fifth consecutive year those limits have gone unchanged. The SIMPLE IRA contribution limit is the same in 2017 as well: $12,500 with a $3,000 catch-up permitted.1,2
Bedford, Indiana Financial Advisor Michael Bellush reports that there are some changes pertaining to IRAs for 2017. The limit on the employer contribution to a SEP-IRA rises $1,000 in 2017 to $54,000; this adjustment also applies for solo 401(k)s. The compensation limit applied to the savings calculation for SEP-IRAs and solo 401(k)s gets a $5,000 boost to $270,000 for 2017.1
Next year will bring an adjustment to IRA phase-out ranges. Your maximum 2017 contribution to a Roth IRA may be reduced if your modified adjusted gross income falls within these ranges, and prohibited if it exceeds them.1
*Single/head of household $118,000-133,000 ($1,000 higher than 2016)
*Married couples $186,000-196,000 ($2,000 higher than 2016)
If your MAGI falls within the applicable phase-out range below, you may claim a partial deduction for a traditional IRA contribution made in 2017. If it exceeds the top limit of the applicable phase-out range, you can’t claim a deduction.1
*Single or head of household,
covered by workplace retirement plan $62,000-72,000 ($1,000 higher than 2016)
*Married filing jointly,
spouse making IRA contribution
covered by workplace retirement plan $99,000-119,000 ($2,000 higher than 2016)
*Married filing jointly,
spouse making IRA contribution not
covered by workplace retirement plan,
other spouse is covered by one $186,000-196,000 ($2,000 higher than 2016)
*Married filing separately,
covered by workplace retirement plan $0-10,000 (unchanged)
Will you be able to put a little more into your 401(k), 403(b), or 457 plan next year? No. The maximum yearly contribution limit for these plans stays at $18,000 for 2017. (That limit also applies to the Thrift Savings Plan for federal workers.) The additional catch-up contribution limit for plan participants 50 and older remains at $6,000.1
Are annual contribution limits on Health Savings Accounts rising? Just slightly. In 2017, the yearly limit on deductible HSA contributions stays at $6,750 for family coverage and increases $50 to $3,400 for individuals with self-only coverage. You must participate in a high-deductible health plan to make HSA contributions. The annual minimum deductible for an HDHP remains at $1,300 for self-only coverage and $2,600 for family coverage in 2017. Next year, the upper limit for out-of-pocket expenses stays at $6,550 for self-only coverage and $13,100 for family coverage. HSAs are sometimes called “backdoor IRAs” because they can essentially function as retirement accounts for people 65 and older; at that point, withdrawals from them can be used for any purpose.3,4
Are you self-employed, with a defined benefits plan? The limit on the yearly benefit for those pension plans increases by $5,000 next year. The 2017 limit is set at $215,000.1
Any market volatility we may experience in the short term should not be attributed to who was elected president, as markets do not have political affiliations.
Donald Trump has completed his landmark quest and will become the nation’s 45th president after a contentious and often divisive campaign. In addition, the Republican Party has retained control of both houses of Congress. This outcome marks a significant reversal from just a few weeks ago when a Hillary Clinton presidency was highly probable and even a Democratic Party sweep of Congress was possible.
While this outcome is certainly a shock to many, it is important to remember that the result isn’t a surprise to the plurality of American voters that spoke their collective will at the ballot boxes. The strength of a democracy is not in whether we like the outcome, but rather in how we accept the result as the voice and will of our republic.
While many things are promised on the campaign trail, all newly elected presidents enter with a constrained ability to enact their agenda unilaterally. As a result, immediate and sweeping political changes are a process, which give markets and the American public time to digest and react. Although often derided by partisans, the inability of a president to swiftly change policies is a strength of our political system, not a weakness of it.
Moreover, any market volatility we may experience in the short term should not be attributed to who was elected president, as markets do not have political affiliations. Rather, this volatility would reflect the market’s adjustment to a surprise presidential winner and the market’s tentativeness regarding the vast uncertainty over which of President-elect Trump’s stated policies he will be able to enact. The first major step towards clarity will come with Trump’s choices for key administration officials; his selections will give a better sense of the priorities for the Trump administration. This should provide further understanding and facilitate calm markets.
For the first time in 10 years, the Republican Party will have control of the presidency and both houses of Congress. As in all things, this may solve some problems, and perhaps exacerbate others. For example, potentially divisive upcoming issues, such as the necessary expansion of the debt ceiling and reforms to the corporate tax code, could be easier to navigate. There is a common perception that the markets like divided government. While that may often be correct, it is not necessarily true at every point in time.
Most importantly, however, over time we have witnessed corporations and financial markets adapting smoothly to new political environments. The uncertainty surrounding the Trump presidency could be greater than a typical transition; therefore, the markets may take additional time to process any changes. However, the uncertainty itself is not unusual.
Separating political views and emotions from investment decisions is difficult. Whether this election result was your favored outcome or not, what we have learned over the years is that although presidents can set an overall tone for the markets, over the long term, it is the underlying fundamentals of the economy and the strength of corporate profits that matter more. Overall, we continue to be encouraged by the underlying fundamentals in the economy and the related resilience of the stock market. Recently, encouraging economic data, including a record 73 consecutive months of private sector jobs growth, high consumer confidence, and an increase in manufacturing activity, all suggest a recession in the next year is unlikely. And, although the stock market has been essentially flat over the past three months, the S&P 500 has returned 5.2% year to date (through market close on November 8, 2016).
As this historic election cycle comes to a close, I suggest casting a “vote of confidence” for the U.S. economy and markets. While uncertainty will certainly be prevalent over the short run, our political and economic systems are resilient and can, after a period of adjustment, adapt to new realities. As investors, we all need to try and put this election into perspective, as our investment horizons extend far beyond any political cycle. And, the keys to your investment success of relying on independent investment advice and sticking to your long-term investment strategies should not change, regardless of who is in office.
As always, if you have questions, I encourage you to contact me.
Bedford Federal Wealth Management
Saving is a great start, but planning to reach your financial goals is even better.
Saving is a great start, but planning to reach your financial goals is even better.
Are you saving for retirement? Great. Are you planning for retirement? That is even better. Planning for your retirement and other long-range financial goals is an essential step – one that could make achieving those goals easier. Bedford Federal Wealth Management works with clients to put together a plan to work toward those important financial goals.
Saving without investing isn’t enough. Since interest rates are so low today, money in a typical savings account barely grows. It may not even grow enough to keep up with inflation, leaving the saver at a long-term financial disadvantage.
Very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time.
Investing without planning usually isn’t enough. Most people invest with a general idea of building wealth, particularly for retirement. The problem is that too many of them invest without a plan. They are guessing how much money they will need once they leave work, and that guess may be way off. Some have no idea at all.
Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk and defer or reduce taxes. A good financial plan – created with the assistance of an experienced wealth planner – addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives.
With a plan, you can set short-term and long-term goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can plot a way to wind down your business or exit your career with confidence. You can also get a good look at your present financial situation – where you stand in terms of your assets and liabilities, the distance between where you are financially and where you would like to be.
Last year, a Gallup poll found that just 38% of investors had a written financial plan. Gallup asked those with no written financial strategy why they lacked one. The top two reasons? They just hadn’t taken the time (29%) or they simply hadn’t thought about it (27%).1
October is National Financial Planning Month – an ideal time to plan your financial future. The end of the year is approaching and a new one will soon begin, so this is the right time to think about what you have done in 2016 and what you could do in 2017. You might want to do something new; you may want to do some things differently. Your financial future is in your hands, so be proactive and plan.
Our advisory firm has developed an efficient and holistic 4-step wealth planning process that we call Wealth Blueprinting.™ We utilize a Wealth Blueprinting™ Financial Organizer that serves as an online portal for our clients’ financial plans. It also serves as a secure personal financial organizer.
Author: Michael Bellush
The benefits of a ROTH IRA.
The Roth IRA changed the whole retirement savings perspective. Since its introduction, it has become a fixture in many retirement planning strategies.
The key argument for going Roth can be summed up in a sentence: Paying taxes on retirement contributions today is better than paying taxes on retirement savings tomorrow.
Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.
You contribute after-tax dollars. You have already paid federal income tax on the dollars going into the account. But, in exchange for paying taxes on your retirement savings contributions today, you could potentially realize great benefits tomorrow.1
You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.2
You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are age 59½ or older and have owned the IRA for at least five tax years. The IRS calls such tax-free withdrawals qualified distributions. They may be made to you during your lifetime or to a beneficiary after you die. (If you happen to die before your Roth IRA meets the 5-year rule, your beneficiary will see the Roth IRA earnings taxed until it is met.)2,3
If you withdraw money from a Roth IRA before you reach age 59½ or have owned the IRA for five tax years, that is a nonqualified distribution. In this circumstance, you can still withdraw an amount equivalent to your total IRA contributions to that point, tax-free and penalty-free. If you withdraw more than that amount, though, the rest of the withdrawal may be fully taxable and subject to a 10% IRS early withdrawal penalty as well.2,3
Withdrawals don’t affect taxation of Social Security benefits. If your total taxable income exceeds a certain threshold – $25,000 for single filers, $32,000 for joint filers – then your Social Security benefits may be taxed. An RMD from a traditional IRA represents taxable income, which may push retirees over the threshold – but a qualified distribution from a Roth IRA isn’t taxable income, and doesn’t count toward it.4
How much can you contribute to a Roth IRA annually? The 2016 contribution limit is $5,500, with an additional $1,000 “catch-up” contribution allowed for those 50 and older. (The annual contribution limit is adjusted periodically for inflation.)5
You can keep making annual Roth IRA contributions all your life. You can’t make annual contributions to a traditional IRA once you reach age 70½.2
Does a Roth IRA have any drawbacks? Actually, yes. One, you will generally be hit with a 10% penalty by the IRS if you withdraw Roth IRA funds before age 59½ or you haven’t owned the IRA for at least five years. (This is in addition to the regular income tax you will pay on funds withdrawn prior to age 59 1/2, of course.) Two, you can’t deduct Roth IRA contributions on your 1040 form as you can do with contributions to a traditional IRA or the typical workplace retirement plan. Three, you might not be able to contribute to a Roth IRA as a consequence of your filing status and income; if you earn a great deal of money, you may be able to make only a partial contribution or none at all.3,5
A chat with the financial professional you know and trust will help you evaluate whether or not a Roth IRA is right for you given your particular tax situation and retirement horizon.
Election Series: Which party has been better for stocks?
After the second presidential debate this week, the race continues to heat up. According to Senior Market Strategist Ryan Detrick, “‘Under which party do stocks perform better, Democrats or Republicans?’ is always a popular question. As we discussed in our Midyear Outlook, going back to 1900, the Dow has done slightly better under a Democratic president than a Republican president. Although stocks have performed slightly better under Democrats over time, the bottom line is that gridlock is the best case for stocks.” Gridlock is a split Congress or a president from the party opposite the one in control of both houses of Congress.
Here is how the S&P 500 has done under various presidents going back to President Eisenhower. Only three times has the S&P 500 been negative during a president’s term, with all three happening under a Republican president, and all three taking place during an economic recession. History has shown that economic recessions usually lead to lower equity prices. The best total return was the 84.5% gain during President Obama’s first term, which came on the heels of the Great Recession and the rebound from a deep bear market.
Stocks & Presidential Elections…
What does history tell us – should we value it?
As an investor, you know that past performance is no guarantee of future success. Expanding that truth, history has no bearing on the future of Wall Street.
That said, stock market historians have repeatedly analyzed market behavior in presidential election years, and what stocks do when different parties hold the reins of power in Washington. They have noticed some interesting patterns through the years, which may or may not prove true for 2016.
Do stocks really go through an “election cycle” every four years? The numbers really don’t point to any kind of pattern. (Some analysts contend that stocks follow a common pattern during an election year; more about that in a bit.)
In price return terms, the S&P 500 has gained an average of 6.1% in election years, going back to 1948, compared to 8.8% in any given year. The index has posted a yearly gain in 76% of presidential election years starting in 1948, however, as opposed to 71% in other years. Of course, much of this performance could be chalked up to macroeconomic factors having nothing to do with a presidential race.1
Overall, election years have been decent for the blue chips. Opening a very wide historical window, the Dow has averaged nearly a 6% gain in election years since 1833. Across that same time frame, it has averaged a 10.4% gain in “year three” – years preceding election years.2
Many election years have seen solid advances for the small caps. The average price return of the Russell 2000 is 10.9% in election years going back to 1980, with a yearly gain occurring 78% of the time.1
Do stocks respond if a particular party has control of Congress? A little data from InvesTech Research will help to answer that.
InvesTech studied S&P 500 yearly returns since 1928 and found that the S&P returned an average of 16.9% in the two years after a presidential election when the White House and Congress were controlled by the same party. In the 2-year stretches after a presidential election, when Congress was controlled by the party that didn’t occupy the White House, the price return of the S&P averaged 15.6%. When control of Congress was split – regardless of who was President – the S&P only returned an average of 5.5% in those 2-year periods.2
Could stock market performance actually influence the election? An InvesTech analysis seems to draw a correlation, however mysterious, between S&P 500 performance and whether the incumbent party retains control of the White House.
There have been 22 presidential elections since 1928. In those 22 years, the incumbent party won the White House 86% of the time when the S&P advanced during the three months preceding Election Day. When the S&P lost ground in the three months prior to the election, the incumbent party lost the White House 88% of the time. Of course, other factors may have been considerably more influential in these elections, such as a given president’s approval rating and the unemployment rate.2
Annual returns aside, is there a mini-cycle that hits stocks in the typical election year? Some analysts insist so, with the cycle unfolding like this: stocks gain momentum during primary season, rally strongly as the presumptive nominees appear and party conventions occur, and then go sideways or south in November and December.3
There might be something to this assertion, at least in terms of S&P 500 performance. A FactSet/Wall Street Journal analysis shows that, in election years starting in 1980, the S&P has advanced an average of 4.9% in the period between when a presumptive nominee is declared and Election Day. After Election Day in these nine years, it declined about half a percent on average.3
How much weight does history ultimately hold? Perhaps not much. It is intriguing, and some analysts would instruct you to pay more attention to it rather than less. Historical “norms” are easily upended, though. Take 2008, the election year that brought us a bear market disaster. The year 2000 also brought an S&P 500 loss. While a presidential election undoubtedly affects Wall Street every four years, it is just one of many factors in determining a year’s market performance.1
Bedford Federal Wealth Management
A look at the two plans & the effects they might have over the next decade.
Hillary Clinton & Donald Trump have big plans for America. How might their proposed federal budgets impact the federal deficit and the national debt?
Any discussion of this must proceed from a fundamental understanding: regardless of who wins the election, the Congressional Budget Office estimates that the deficit will near $800 billion in 2020.1
Hillary Clinton’s budget would boost health, education, & infrastructure spending. It would increase Affordable Care Act subsidies; resolve the “family glitch,” making some households ineligible for such credits; and eliminate the “Cadillac tax” on “high-cost,” employer-sponsored health plans. It would direct grants to states, so that students whose parents earn less than $85,000 a year could attend public universities in their home states for free. (That threshold would incrementally rise to $125,000 within four years of implementation.) Another $275 billion (or more) would be spent on projects to rebuild highways and bridges.1,2,3
To help cover the increased expenditures resulting from the proposals in her budget, Clinton would utilize the 3.8% investment surtax, which is currently levied on incomes greater than $200,000 or $250,000 for individuals and couples, respectively, and apply it to pass-through business income as well. Thus, this surtax would not only be implemented to eligible households, but also to limited partners, members of LLCs and owners of S-corporations. In addition, owners of CPA firms, law firms, consulting firms and other professional services businesses would face payroll taxes on their incomes.3
Under the Clinton plan, the non-partisan Committee for a Responsible Federal Budget sees the federal government spending $350 billion more on higher education, an additional $300 billion on infrastructure, $300 billion on paid family leave and almost $500 billion on other programs over the next decade. About $1.25 trillion in tax increases would offset this, it projects.2,3
Donald Trump’s budget would also carry out some big changes. As of late August, Trump had not released a greatly detailed budget proposal. He has outlined some moves he would like to make. For one, Trump would do away with the Affordable Care Act. He would also curtail illegal immigration, and, possibly deport millions of undocumented workers. Each of these plans would take $50 billion to accomplish, according to CRFB estimates. Trump says that he would “at least double” what Clinton proposes to assign to infrastructure repairs, meaning an expenditure of $500 billion or more. He also seeks to overhaul the Department of Veterans Affairs to make the health care it provides more privatized. That could cost about $500 billion.2,4
Tax reform is high on Trump’s agenda: he proposes eliminating the estate tax, capping the corporate income tax at 15%, and raising the standard deduction to $25,000 for single filers and $50,000 for joint filers. These tax reforms would reduce federal government revenue by around $9.25 trillion over the next decade, the CRFB projects.2,5
How could these budget ideas impact the federal deficit over the next 10 years? The CRFB analyzed each candidate’s proposals this summer and made calculations based on CBO forecasts of cumulative GDP from 2017-2026. The CRFB notes that if the status quo simply continued, federal revenues would run 4.0% less than federal spending across the next decade. Under Clinton’s proposals, the gap would be 4.1%; under Trump’s proposals, it would be 9.0%.2
And how about the national debt? The CRFB forecasts the national debt rising by $250 billion under the Clinton budget and $11.5 trillion under the Trump budget.1
In terms of reducing the debt, both Trump and Clinton may be promising more than they can deliver. CRFB projections show that if Congress implemented Clinton’s major budget proposals, the federal government would have to reduce overall spending 6-15%, raise marginal tax rates 3.5-8.5%, ramp up real GDP growth 35-125%, or, possibly, even use these moves in tandem to keep the national debt from rising further.6
Trump has volunteered a radical idea to attack the debt: a haircut for owners of Treasuries. Institutional investors would redeem Treasuries at less than their face value. So would individual investors, including seniors and retirement savers. Economists have roundly criticized this suggestion.6
In the future, these budget proposals may be greatly amended. Any politician makes compromises in pursuit of a legislative goal, and the politician who becomes our next president will, undoubtedly, make or accept compromises when it comes to his or her envisioned budget.
Michael Bellush, Wealth Advisor
This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. 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. All indices are unmanaged and are not illustrative of any particular investment.
1 – nytimes.com/2016/08/01/business/economy/clinton-trump-either-way-count-on-deficit-spending-to-rise.html [8/1/16]
2 – crfb.org/papers/promises-and-price-tags-fiscal-guide-2016-election [7/27/16]
3 – crfb.org/blogs/analyzing-clintons-health-and-education-expansions [8/3/16]
4 – fortune.com/2016/08/03/donald-trump-infrastructure/ [8/3/16]
5 – taxanalysts.org/tax-analysts-blog/trump-s-tax-plan-version-20/2016/08/12/194511 [8/12/16]
6 – kiplinger.com/article/credit/T025-C000-S001-where-clinton-and-trump-stand-on-the-public-debt.html [8/5/16]