Archive for November, 2013:

negative interest rates?

Written on November 26th, 2013 by Jamesno shouts

Maybe just coincidence, but I have seen several articles out that are discussing extreme measures to stimulate growth both in the US and Europe.  The issue is that despite the Fed’s QE program of injecting $85 billion / month into the economy and keeping the benchmark rate very low, that growth and job creation are not responding as fast as they would like.  This same problem is occurring on the other side of the Atlantic as well.  So what do you do when unprecedented stimulus measure don’t work?  You pull out the nuclear option and crush savers by making them pay for the right to keep their cash at banks!  And what do you do if that doesn’t work?  You devalue the currency so much that even if they stuff it under their mattress it will lose value (purchasing power).

So why would Central Banks consider this?  To them savers are not helping grow the economy.  They want you to spend and invest that money instead of saving it.  The concept borders on insanity to this financial planner, and I would not even bring it up if it weren’t for several articles I have recently seen on financial news websites and a recent speech by Larry Summers delivered to the IMF (discussed in this week’s Bloomberg BusinessWeek Magazine).  I hope that this is just crazy economists coming up with theoretical ideas that will never materialize, but this topic should be one to watch.  Remember that Larry Summers was one step away from being nominated to the most powerful financial position in the world, the US Federal Reserve Chief.

Marketwatch article: http://blogs.marketwatch.com/thetell/2013/11/25/bank-look-to-charge-customers-to-hold-their-money-if-fed-says-stop-being-lazy/

Marketwatch article: http://www.marketwatch.com/story/draghi-talk-of-negative-deposit-rate-not-new-2013-11-21

BusinessWeek article with Larry Summers: http://www.businessweek.com/articles/2013-11-18/larry-summers-has-a-wintry-outlook-on-the-economy

medicare resources

Written on November 8th, 2013 by Jamesno shouts

It’s open enrollment season for Medicare and Medicare Prescription Drug Plans through Dec 7th.  During this time you can jump back and forth between Original Medicare and an Advantage Plan, switch Advantage Plans, join a Medicare Drug plan.  Confusing isn’t it?  I spent a little time in the insurance world long ago but this area still confuses me enough that I have to really devote some time to grasp all the moving parts.

If you are in the 65+ age bracket some things to consider when shopping your plans:  health status, medications and health providers.  Armed with that info you then need to begin your search for plans where your health providers are “in network” and your needed meds are on the Tier 1 list of approved medications.  Start your search with that focus first and try not to focus on who has the lowest initial premium.  If shopping on premium alone you could then get a nasty surprise when it comes to out of pocket costs.

As for resources, the first would be the www.medicare.gov website.  It is loaded with all the info you could ever hope to learn on Medicare, for all you analytics.  Another source for an independent review would be a Medicare consultant such as Goodcare:  http://www.goodcare.com/consumers/promotions.php  this organization will walk you through all the variables and counsel you on the best type of plan based on your parameters.

Filed under Insurance Tags:

IRS changes rule for Flex Spending Accounts

Written on November 6th, 2013 by Jamesno shouts

Many employers offer Flex Spending Accounts (FSA’s) that allow employees to contribute up to $2500 per year pre-tax and use the money toward healthcare costs (co-pays, pharmacy, etc).  Up to this point the issue was that each year the money was on a use it or lose it basis, so employees were left scrambling at year end to figure out ways to spend down their account.  Now the IRS is relaxing the rule and employers can now allow participants to “carry over” up to $500 in the account to the next year.  The only caveat is that the employer has the decision on whether to allow this or not.  Don’t assume so unless your employer has stated that is the case.

Read more:  http://www.financial-planning.com/news/treasury-relaxes-use-or-lose-rule-for-flexible-spending-accounts-2687132-1.html

to defer or not defer?

Written on November 1st, 2013 by Jamesno shouts

I routinely get asked by clients if they should participate in Deferred Comp plans.  What is a Deferred Comp plan you ask?  Good question, so here are the basics:

  • a deferred comp plan is a program whereby you can “defer” some income or bonus each year into an account pre-tax.
  • it is not a 401k, but considered a “non-qualified” type plan and generally offered to management level and higher compensated employees
  • the idea is you defer some income and don’t have to pay tax on it at your present tax rates and it gets to grow in a “pre-tax bucket”.  Sort of like contributing to  a 401k, but that is where the similarities end.
  • There isn’t a contribution limit, you can defer as much of your income as your employer will allow.

So this is where I really wrestle with the benefit of the Deferred Comp plans:

  • the plans can generally be “funded” or “unfunded” meaning that it may or may not be real dollars in the account.  It might just be an obligation of the employer at some point in the future.
  • Also, for the plan to truly be pre-tax then it has to be considered at risk to your employers creditors if they (your company) ever declared bankruptcy.
  • Lastly, these plans cannot be rolled over into an IRA like you can with a 401k when you leave your employer.  They have to be taken as a lump sum and booked as ordinary income.  So you defer all those years and wham you get hundreds of thousands in compensation and are lumped in the 39.6% tax bracket.

I am quite certain there are many folks that will tell me I am completely off base and that Def Comp plans are great, but these are generally the reasons I tend to shy away.  I tend to follow the old mantra “a bird in the hand is worth two in the bush”.

Just to show a description of my thinking, I ran a spreadsheet showing the two scenarios.  Hypothetically let’s say your employer allowed you to defer your $20k bonus each year.  The column on the left shows what is left after tax (assuming 25% avg rate) and then your total account value growing at an after tax 4% each year.  The column on the right shows deferring the entire amount pretax and it grows at 6% each year.  The deferred column rocks along nicely and is way outperforming the aftertax investment, the problem is when you retire at year 20 and take that as a lump sum your after tax amount is a bit disappointing.

I know there are things not considered here such as some people need to have forced savings or they would spend their bonus and what if their tax rate was already at the top level, etc.  However, until I am convinced otherwise I just don’t particularly like these plans.  If you disagree send me an email and I’ll be happy to reconsider!

to defer or not defer?
after tax deferred – pretax
     year    bonus    cumulative growth at 4%     full deferral cumulative growth at 6%
1 $15,000 $15,000 $20,000 $20,000
2 $15,000 $30,600 $20,000 $41,200
3 $15,000 $46,824 $20,000 $63,672
4 $15,000 $63,697 $20,000 $87,492
5 $15,000 $81,245 $20,000 $112,742
6 $15,000 $99,495 $20,000 $139,506
7 $15,000 $118,474 $20,000 $167,877
8 $15,000 $138,213 $20,000 $197,949
9 $15,000 $158,742 $20,000 $229,826
10 $15,000 $180,092 $20,000 $263,616
11 $15,000 $202,295 $20,000 $299,433
12 $15,000 $225,387 $20,000 $337,399
13 $15,000 $249,403 $20,000 $377,643
14 $15,000 $274,379 $20,000 $420,301
15 $15,000 $300,354 $20,000 $465,519
16 $15,000 $327,368 $20,000 $513,451
17 $15,000 $355,463 $20,000 $564,258
18 $15,000 $384,681 $20,000 $618,113
19 $15,000 $415,068 $20,000 $675,200
20 $15,000 $446,671 $20,000 $735,712
cashing out   $735k will put you in 39.6% tax bracket + 6% state =   $404,641