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Book Review: Saving Capitalism from Short-Termism

Sep 19th, 2011
by jblankenship.
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How to Build Long-Term Value and Take Back Our Financial Future

This is a great book. I got a lot out of the sections that bring to the surface a lot of the issues that we’ve been seeing in our economy.  These issues have been written about in countless places, but author Alfred Rappaport also proposes workable options that could be put into place to resolve these issues, a step that has been lacking in other places I’ve seen these issues discussed.

But I’m getting ahead of myself.  The issues I’ve referenced above are the sort of systemic issues we’re seeing in economy in general and specifically the financial services industry.  Included in these issues are the wild short-term fluctuations we have been seeing in the markets, in part due to the ways that CEOs are compensated, how investment managers are compensated, and how those compensation systems influence behaviors and methods of management.

Specifically, in today’s world CEO compensation is typically tied to earnings, on a quarter-over-quarter and year-over-year basis, which tends to cause the CEO to forego longer-term investments and moves in favor of moves that result in short-term earnings increases.  Once or twice this kind of activity might not cause much problem, but always opting for the short-term over long-term value creation has resulted in the kinds of wildly-fluctuating markets that we’ve seen in the past couple of decades.

Along the same lines, investment managers, specifically fund managers, tend to be compensated similarly with short-term views.  I’ve written about this in the past in an article explaining how many managed mutual funds wind up being closet index funds due to the nature of the compensation system, but I didn’t go into how managed funds could use a different method of compensation to resolve this.

These issues have been around for quite a while – oddly enough I recently found reference to the accounting shenanigans that are still in use today, in a book written in the early 1970’s, Super Money by Adam Smith.  Clearly the problem has been going on for a long time, and resolving it is going to take major changes.

Mr. Rappaport takes the situation a step further by providing real, workable examples of ways that the compensation systems could be re-aligned to provide long-term value from both the standpoint of the CEO and the investment manager.  The resolutions aren’t simple, and putting them into place will require buy-in from CEOs, corporate boards, and others stakeholders in the overall process.  Since the systems that we’re using have been in place for so long, it’s going to take guts from everyone involved – but the payoff should be enormous.

The payoff that Rappaport refers to is the creation of long-term value, which is in the best interest of all involved parties.  Just think of it!  An economy where we’re focused on longer-term values, rather than living and dying with each quarterly earnings report.  Massive fluctuations day-to-day fluctuations in the markets would be a thing of the past, and investing would become much less “exciting” – more like an actual saving activity than the crazy, topsy-turvy world we’ve had to get used to.

It’s a tall order to be certain, but the ideas that Mr. Rappaport has detailed are within reason and workable, but as I mentioned before they require buy-in from all stakeholders.  The ideas also require a sea-change in thought processes but as of now, they’re the only valid option that I’ve seen put forth.  I think anyone who is in a position to help put these ideas into play should read this book as soon as possible.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Sep 19th, 2011
by author: jblankenship.

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Posted in: Book review, economic update, fiduciary, rant.
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What Can Be Done to Save Social Security?

Sep 9th, 2011
by jblankenship.
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lifering
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This is, of course, one of the most volatile questions on the political landscape these days.  We have some constituencies claiming that the whole plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system.

True, the system is in dire straits – not bankrupt, but needing attention.  Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes.

Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed.  In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – with older workers hanging on longer, younger workers can’t fill those jobs.

And eliminating the system altogether just isn’t workable.  Roughly 55 million Americans are currently receiving benefits – many with little else to live on in retirement.  A great many more are coming on the rolls every day, as the Baby-Boom generation hits the magic age(s).

Privatization, although once very popular, has lost its luster in recent years due to the market’s fluctuations.  The fact is that the majority of folks are just not very good at managing their own money – and the stakes are too high to give them a shot at what could be their only sustenance in retirement.  401(k) plans are great, but the facts are scary:  the Employee Benefit Research Institute’s (EBRI) March 2011 report showed that nearly half (46%) of all surveyed Americans who have saved anything at all have less than $10,000 saved (not including homes or defined benefit pension plans).  What’s worse is that over a third (36%) of those surveyed figured that if they saved up $250,000, that should be enough to retire comfortably, when in actuality that figure might cover the individual’s healthcare needs only.  And further, EBRI has indicated in countless reports year after year that when a 401(k) plan is in place, the actual returns achieved are dismal compared to the market average, due mostly to reactionary moves by investors operating without proper guidance.

So what can be done?  Means testing, for one thing.  Donald Trump doesn’t need Social Security, and neither do his young children – but they’re eligible (and are likely receiving it).  That’s not to say that eliminating the Donald and his peers from the recipient rolls will balance out the system; many more Americans will likely have to forego at least a part of the benefit that they’ve been expecting.

We’ve had a form of means testing in place since 1983 – via the taxability of Social Security benefits.  And since the limits haven’t been adjusted since that legislation was put into place (actually since the 1993 legislation), this means test is becoming more and more “taxing” to folks with any additional income on top of Social Security every year.  But it probably doesn’t go far enough.

Another item that could be dealt with is the payroll tax ceiling – currently at $106,800 – that could be liberalized a bit without too much ruckus.  Granted, this does mean a new, or rather increased, tax, but when you weigh that against the alternatives, it’s not a bad option to consider.

All in all, the Social Security system has its problems, to be sure. It is, after all, a form of social insurance – meaning that some folks will get far less from the system than they put into it, and others will get far more from it than they put in.  But we’ve got it in place and it’s working (pretty well anyway), so we just need to make some adjustments to make sure that the system can make it through the rough patches.

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Posted on Sep 9th, 2011
by author: jblankenship.

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Posted in: fiduciary, rant, social security benefits, tax.
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Expanded Adoption Tax Credit

Aug 22nd, 2011
by jblankenship.
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Recently the IRS published their Summertime Tax Tip 2011-10, which lists out six facts about the expanded adoption tax credit.  The credit is considered “expanded” due to the changes made by the Affordable Care Act of 2010, which increased the amount of the credit, while also making the credit refundable.  Refundable credits are such that, even if your tax on your tax return is less than the credit, whatever amount of your credit surpasses the tax can be refunded to you (much like the Earned Income Tax credit).

Six Expanded Adoption Credit Facts

Here are the six facts that the IRS lists:

  1. The adoption tax credit, which is as much as $13,170, offsets qualified adoption expenses making adoption possible for some families who could not otherwise afford it.  Taxpayers who adopt a child in 2010 or 2011 may qualify if you adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.
  2. Taxpayers with modified adjusted gross income of more than $182,520 in 2010 may not qualify for the full amount and it phases out completely at $222,520. The IRS may make inflation adjustments for 2011 to this phase-out amount as well as to the maximum credit amount.
  3. You may be able to claim the credit even if the adoption does not become final.  If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
  4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself.  These expenses may include adoption fees, court costs, attorney fees and travel expenses.
  5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and you must attach documents supporting the adoption.  Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.  You can still use IRS Free File to prepare your return, but it must be printed and mailed to the IRS, along with all required documentation.  Failure to include required documents will delay your refund.
  6. The IRS is committed to processing adoption credit claims quickly, but it also must safeguard against improper claims by ensuring the standards for this important credit are met.  If your return is selected for review, please keep in mind that it is necessary for the IRS to ensure the legal criteria are met before the credit can be paid.  If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.

For more information see the Adoption Benefits FAQ page on the IRS’ website.

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Posted on Aug 22nd, 2011
by author: jblankenship.

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Posted in: 2011 tax year, irs, tax credits.
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The “Tax on Sale of Your Home” Email Myth

Aug 8th, 2011
by jblankenship.
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If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks.

The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you.

Here’s the email:

Will you ever sell your house?
Did you know that if you sell your house after 2012 you will pay a 3.8% FEDERAL sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the health care bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)  Why 2013? Could it be to come to light AFTER the 2012 elections?

REAL ESTATE SALES TAX

So, this is “change you can believe in”?

Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, the re will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either

<web address deleted>

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW. 

Okay, so here are the facts:

It is a fact that under the Patient Protection and Affordable Care Act of 2010 there is a new 3.8% surtax on unearned income for folks above certain income levels.  I wrote about this surtax in relation to Roth conversions last year, but I didn’t go into detail about this email myth – I hadn’t started receiving them with the frequency that I have lately.

So the kernel of truth in the email is that some home sales could be impacted by this new surtax.  The real truth though is that in the case of a home sale, if the taxpayer has lived in the home for 2 out of the previous 5 years, up to $250,000 of gain in the value of the home is exempt from taxation.  The exclusion of gain amount is doubled to $500,000 for a married couple filing jointly who both meet the “2 out of 5” test.

The other test that would have to be met in order for a home sale to be hit with the surtax is that you have Modified AGI in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, or $200,000 for single and head of household filers.  If you don’t have income above that level, the surtax would not apply to you at all.

In other words, the situation described by the email could come about if you had an income greater than the levels outlined above, and one of the two circumstances below is met for the home sale:

  • You own a home that you and your spouse have lived in for at least 2 out of the previous 5 years and the home has appreciated more than $500,000 in value (or $250,000 for single filers); or
  • You own a home that you have not lived in during the previous 5 years that has appreciated in value in any amount.
  • Note: If you lived in your home less than 2 years out of the previous 5, the exemption is pro-rated.  For example, if you lived in the home only 1 year out of the previous 5, half of the exemption would be available.

I doubt if many folks will come anywhere near meeting those circumstances.  It’s not impossible, but I think far less possible than the email leads you to believe, and the surtax certainly does not apply to ALL real estate sales.

Don’t get me wrong, I don’t want extra taxes imposed in these circumstances, either.  I do think people should know about this tax, but I want them to understand the tax in the correct context.  If you’d like more information on this myth, see what Snopes has to say about it.

Feel free to forward this link to anyone and everyone on your email list, so that the corrected word gets out.  Voters do need to know.

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Posted on Aug 8th, 2011
by author: jblankenship.

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Posted in: 2012 tax year, health plans, income tax, irs, Medicare, principal residence, tax.
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UBTI in an IRA

Aug 3rd, 2011
by jblankenship.
4 comments
Erythronium hendersonii, Henderson's Fawn-Lily
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I’ve mentioned before about various types of transactions that are not allowed in your IRA, but we’ve not actually covered the topic of Unrelated Business Taxable Income (UBTI) in your IRA.  UBTI isn’t prohibited within an IRA, but it does pose problems and adds a great deal of complexity to your account.

Unrelated Business Taxable Income

So, what is UBTI anyway?  The concept of UBTI pre-dates IRAs – it was originally developed in relation to charitable organizations, trusts, and other tax-exempt entities.  The IRS developed this concept to ensure that tax-exempt organizations didn’t have a competitive advantage over taxable organizations, such as for-profit corporations.  The way that income is determined to be “unrelated” is by checking these two tests:

  • Is the income from a trade or business that is regularly carried on?
  • Is the trade or business unrelated to the tax-exempt entity’s exercise of the entity’s tax-exempt purpose?

If these two tests are met, then the income may be UBTI.  Here’s an example that may help you to better understand the concept of UBTI (taken from IRS Publication 598:

An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. The students are paid a percentage of the sales price. In addition, the shop sells products made by local residents who make articles at home according to the shop’s specifications. The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. Although many local participants are former students of the school, any qualified person may participate in the program. The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax.

The concept of UBTI covers many more situations, and you can find out much more about other types of activities that can generate UBTI by going to IRS Publication 598.

IRAs

Since IRAs are, until distribution, exempt from tax, UBTI applies to certain types of income received within an IRA account as well (all of this applies to Roth IRAs as well as traditional IRAs).  The IRS Code defines any active trade or business as unrelated to the IRA’s tax-exempt purpose.

There are exceptions as well (of course there are!).  The exceptions for tax-exempt organizations are numerous and complicated.  The following is a partial list exceptions specifically for IRAs:

  • dividends
  • interest (includes “points”)
  • royalties
  • rent from real property (real estate)
  • sales proceeds from real property, as long as the property is not held as inventory or held in the normal course of a business (e.g., flipping)

This is nowhere near an exhaustive list – see Publication 598 for more details.

Examples of ways that an IRA investment could generate UBTI include: full ownership of a pass-through business, such as a limited partnership or S-Corporation; use of IRA funds to loan to a business – and the terms of the loan include participation in the profits of the business (as opposed to simple loan payments); and use of IRA funds to flip properties (via a partnership or LLC, for example), since the property is considered inventory and not investments.

Another way that UBTI is generated is through debt-financed income (also known as UDFI).  UDFI occurs in a case like this:  An IRA purchases a piece of real estate to be held for rental property.  In the purchase of the property, the IRA put 50% down in cash and financed the remaining 50% through the seller.  Even though rental income is considered to be exempt (see the list above), since debt was used to acquire the property, half of the rental income (reducing as the debt is paid off) would be considered UDFI, and therefore subject to taxation.  The good news is that the proportional part of the expenses associated with the debt-financed income would offset the income.

Okay, so my IRA has UBTI.  Now what?

If your IRA generates UBTI, it doesn’t disqualify the IRA (like prohibited transactions would).  No, what UBTI does is requires your IRA to file an income tax return.  This is unusual since an IRA is supposed to be tax-exempt, but since the UBTI is generated, income tax will be owed on the income if it reaches certain levels.

If the IRA generates gross income of $1,000 or more during the tax year, the IRA must file Form 990-T by April 15 of the following year, just like individual tax returns.  The issues that arise with this include:

  • The IRA must have a federal tax id (EIN).
  • The custodian is considered responsible for filing Form 990-T, but most self-directed IRA custodians transfer this responsibility to the account owner.
  • The IRA custodian may not have all of the information required to file the return, as much of the information in these privately-held investments is given directly to the account owner.
  • The account owner ultimately has the final responsibility to file the Form 990-T, and lack of understanding of the rules can cause major issues for the account owner.
  • The account owner also will be required to file quarterly estimated tax payments as long as the investment is in place.  Every three months, a tax payment must be made to the IRS if the total tax for the year is expected to be greater than $500.

Form 990-T is a four-page form, and filling it out can be a fairly complex undertaking – one that you’re not likely to enjoy filling out (as I’m sure you do most tax forms).

Lastly, UBTI is one of those cases where income within an IRA is actually destined to be double-taxed.  Even though you pay tax on the UBTI as it is earned within the IRA (at trust rates, not individual rates, which are more compressed), when you take the money out of the IRA you’ll be taxed again.  Paying tax on UBTI doesn’t create non-taxable basis in the IRA, in other words.

With so many other eligible investment options, why not stick with the simple, non-UBTI investments for your IRA?  If you must invest in one of these investments that could trigger UBTI if it were in an IRA, just go ahead and invest your taxable monies in the endeavor – you’ll save yourself a lot of grief.

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Posted on Aug 3rd, 2011
by author: jblankenship.

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Posted in: investment, IRA, iras, real estate investment, retirement plan, Roth IRA, tax, ubti, udfi, unrelated business taxable income.
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A Review of Quickbooks versus Peachtree

Aug 1st, 2011
by jblankenship.
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Peaches
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Recently, a software reviewer named David Matthew of Software Advice alerted me to a review he has prepared, comparing the most recent versions of Quickbooks and Peachtree accounting software packages.

(Matthew’s review of the products is located at the links above.)

I think he does a pretty good job of looking over the options available between the two packages, but the unfortunate part is that, even with this comparison review it’s a tough decision between the two. If all you have to go on is this review and you have not specifically developed a list of requirements, you might not know for sure if one product will work better for you over the other.

If you’re starting out from scratch, you must consider your experience and background, as well as whether or not you’ll be sharing the information with other business partners.  In that case, you’ll also have to consider the experience and background of those partners as well.

I imagine for most pro accountants, either package will work as well as the other, but there could be an advantage (if you expect to share information with others) to going with the “industry standard” package from Quickbooks.  On the other hand, if you have a problem with the likes of Intuit (and Microsoft, and Google, for example) taking over the world, you might consider going with Peachtree.  The costs are similar between the two products, as is the functionality for the most part.

All in all, if you’re looking to make a purchase of one of these two products, you will be doing yourself a favor to look over David’s review – it will help you think through some of the requirement questions you need to answer before you make your purchase.  And while you’re looking at the above-mentioned review, you might look around the Software Advice blog, there are lots of great articles on software to see there as well.

Thanks, David, for the insightful review!

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Posted on Aug 1st, 2011
by author: jblankenship.

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Posted in: Links, software.
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Proposed Changes to the Inflation Index

Jul 22nd, 2011
by jblankenship.
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One of the many proposed changes that is being considered to help resolve the current budgetary issues is to change the index used to adjust Social Security benefits from the current method, using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, to a much more conservative index known as the Chained Consumer Price Index for all Urban Consumers (or C-CPI-U).  (See this article on How Social Security COLAs are Calculated for more information.)

Unfortunately, the reason behind making this is change is the fact that it will ultimately save money for the Social Security system, directly at the expense of the beneficiaries of that system.  Here’s what you can expect:

As an example, the CPI-W indicates a year-over-year increase from June 2010 to June 2011 of 4.1%.  Over the same period, the C-CPI-U only shows an increase of 3.4%.

This is due to the factors used in calculating the C-CPI-U, which considers that as inflation increases, spending on certain items will decrease, since consumers will purchase cheaper items or less quantity of items as the prices increase.  The Bureau of Labor Statistics, who tracks these things and comes up with the indexes, suggests that the chained index more accurately reflects the way real-live consumers operate with regard to inflation.

Estimates by the actuaries for the SSA indicate that this change could result in a $1000 per year reduction of benefits (or actually, forgone benefit) by the age of 85.  The estimate is that over any 30-year span, using the C-CPI-U instead of the CPI-W would result in a 10% lower total benefit being paid out.

Each year’s increase, if this new index is put into place, is anticipated to be two- to three-tenths of a percent lower than the increase would have been under the current index.

The change in index is not only proposed for Social Security benefits but also for certain tax provisions as well, such as standard deduction, and tax rate tables.  In both cases, the taxpayer (at all levels, not just the “rich”) will be impacted negatively.

As always, the only way to try to impact this is to contact your representatives in Congress and let them know that you’re not in favor of having your miniscule increases reduced further in the name of budget cutting.  There are plenty of places where pork can be removed from the budget before hitting our seniors with this, in my opinion…

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Posted on Jul 22nd, 2011
by author: jblankenship.

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Posted in: 2011 tax year, cola increase, cost of living adjustment, retirement benefits, social security benefits, social security checks.
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NonDeductible IRA Contributions: Good or Bad Idea?

Jun 29th, 2011
by jblankenship.
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ideas
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If you find yourself in the position of having too high of an income to make a deductible contribution to your IRA for the year ($110,000 for joint filers in 2011, $66,000 for Single and Head of Household), you may be wondering if it’s a good idea to make a non-deductible contribution to your IRA.

There are two opposing camps on this issue, and the deciding factor is how you’re intending to use the funds in the near term.

It’s a Good Idea

If you’re intending to convert your IRA to a Roth and your income is too high to just make the contribution directly to the Roth account, the non-deductible IRA may be the right choice for you.  This way you’re effectively working around the income limitations of the Roth contribution ($179,000 for joint filers in 2011 or $122,000 for single or head of household filers).

You also have more funds available in your IRA account, which provides you with the ability to take advantage of economies of scale – certain mutual funds have higher minimum purchase amounts, for example.  Since the money is in an IRA you don’t have to track holding periods, non-qualified dividends versus qualified dividends, and your paperwork is reduced.

In addition, depending upon your state laws your money may be protected against creditors since it’s part of an IRA.

No, It’s a Bad Idea

If you’re not planning to convert this IRA to Roth, you’re effectively increasing the tax cost of your investment gains (under today’s law).  Since withdrawals of investment gains from your IRA are taxed at ordinary income tax rates (up to 35% under today’s rates), you’re effectively giving yourself a tax increase over the capital gains rate which is 15% at the maximum these days.

Instead of making a non-deductible contribution to your IRA, you could just make your investment in a taxable account.  Then within this account you could make investments geared toward long-term gains rather than income or dividends, therefore deferring tax until you sell the investment.  And when you do sell the investment it will be taxed at the currently much lower capital gains rate versus the ordinary income tax rate (which would be applied if you made your contribution in the IRA).

Conclusion

So – depending on what you’re planning to do with the account, a non-deductible contribution could be a good idea or a bad idea.  You will have to make that call.  Hopefully the information above will help you with your decision.

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Posted on Jun 29th, 2011
by author: jblankenship.

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Posted in: 2011 tax year, conversion, IRA, ira contribution limits, ira money, non deductible ira contribution, Roth conversion.
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Mileage Rate Adjusted for Second Half of 2011

Jun 27th, 2011
by jblankenship.
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The IRS recently released Announcement 2011-40, in which was announced an increase of 4.5¢ per mile for the standard mileage rates for certain classes of vehicle use.  This increase is due to the nationwide increase in gasoline prices.

As you may already be aware, so far this year the business mileage rate has been 51¢ per mile.  This will remain the same until June 30, 2011, and on July 1, 2011, the rate will increase to 55.5¢ per mile.  You’ll have to keep good records (as always) on your mileage in order to properly take advantage of this increase.

The medical and moving mileage rates will also increase by 4.5¢ to 23.5¢ a mile, up from 19¢ for the first six months of 2011. The rate for providing services for charitable organizations is set by statute and remains at 14¢ a mile.

These rates will remain in effect until a future announcement adjusts the rate again.

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Posted on Jun 27th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2011 tax year, income tax.
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Book Review: Uncertainty is a Certainty

Jun 17th, 2011
by jblankenship.
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uncertaintyisacertainty

This was a surprising and refreshing book.  The full title is Uncertainty is a Certainty, Fables for Fiduciaries. The author, Guerdon T. Ely, has done the near impossible: the very topic of fiduciary duty has been known to induce a near coma-like status in even the most devout financial professional, but Ely has distilled the critical concepts into a very easy-reading tome that keeps the reader interested, even engaged, in his explanation of what is required of the fiduciary.

For the uninitiated, a fiduciary is a financial professional who has the responsibility of handling financial affairs for another entity – it could be a trust, a pension plan, or an individual or family.  There is a set of rules that explain the duties of a fiduciary, known as the Uniform Prudent Investor Act, or UPIA for short (we certainly love our acronyms in this industry, don’t we?).

This bit of law, originally adopted in 1992, serves as the default guide for a fiduciary in managing the financial affairs which he or she is responsible for.  There are many different components of the law that are complicated to understand – enough that a great many financial professionals would have a hard time explaining some of the concepts, even though they may be required to follow these tenets.

Guerdon Ely uses stories from his own experience to relay and interpret these key concepts. These stories cover such wide-ranging topics as meeting a group preschoolers; working as a beekeeper; and being behind the scenes at professional golf tournaments. By catching up the reader into the world of his story, before you know it he’s deftly explained a key tenet of the UPIA – in a way that’s easy to understand and retain.

A couple of examples include:  Using a boyhood story of being dared to go higher and farther to explain the concept of risk tolerance; meeting Alice Cooper and Clint Eastwood by happenstance on a golf course to help explain how illusory image has become the bane of our financial industry; and time spent backpacking around the country as a twenty-something young man to help explain the benefit of focusing on efficiency and value in dealing with financial matters.

I’d say that the audience for this book is primarily financial professionals – whether or not you’re required to have a fiduciary standard of care for your clients.  But at the same time, folks outside the industry can benefit from this book as well, since a good understanding of the concept of the fiduciary can serve as a protective shield as you explore your options for service in the financial industry.

Either way, if you have even a passing interest in the UPIA and it’s concepts, I think you owe it to yourself to pick up a copy of this book and read it.  You won’t be disappointed, I promise you.  And it’s likely that you’ll learn something you didn’t know – which is always valuable.  I truly enjoyed this book, and I recommend it to all who may have an interest in the topic.  You can visit the website for Uncertainty is a Certainty by clicking the link.

Posted on Jun 17th, 2011
by author: jblankenship.

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Posted in: #noTOP, Book review, fiduciary, financial planning.

Don’t Forget – Social Security Tax is Going Up Next Year!

Jun 15th, 2011
by jblankenship.
2 comments
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This year you may have been blissfully enjoying an increase in your paycheck without realizing it.  Remember the Tax Act of 2010?  One of the provisions in that little gem of legislation was to reduce the Social Security withholding amount for the calendar year 2011 by 2%.  This means that you’re only having to pay out 4.2% for Social Security tax during the 2011 tax year – and next year you’ll back back in the 6.2% world.

But that’s not where it stops.  There is another increase in the offing for 2012: the tax wage ceiling is scheduled to increase as well, from the $106,800 level that it’s been at for the past two years, to an estimated $110,100.  This means that if you’re at the top of the wage base, your withholding and employer portion of Social Security tax will increase from $11,107 in 2011 to $13,652 in 2012 – an increase of more than $2,500.

This increase is most impactful for the self-employed, since we lucky ones have to pay both sides of the Social Security tax on net self-employment income.

So – just don’t forget as you’re planning your income and expenses for the coming year, withholding is going to be a little more in 2012 than it has been this year.

That’s all for now.  You can go back to what you were doing. :)

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Posted on Jun 15th, 2011
by author: jblankenship.

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Posted in: 2011 tax year, 2012 tax year, social security tax.
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Book Review: The Old Rules of Marketing Are Dead

Jun 3rd, 2011
by jblankenship.
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The Old Rules of Marketing Are Dead

The complete title of this book is:  The Old Rules of Marketing Are Dead – 6 New Rules to Reinvent Your Brand & Reignite Your Business, and it’s written by Timothy R. Pearson.  Mr. Pearson is the former Vice Chair, Global Managing Partner, Marketing and Communications (and first Chief Marketing Officer) for KPMG, along with numerous other positions in management consulting, boards and societies.  It’s from the perspective that he gained in the position at KPMG that much of the book is written, so it is understandable that the viewpoint is primarily about large corporations.

That’s not to say that there is nothing in this book for the small business – you simply need to adjust the language to meet your situation.  For example, when the book refers to your marketing team, for the small business person that probably just means “you” – the same as your accounting team, management team, sales team, and back office operations team.

Mr. Pearson does a good job of walking us through the new paradigm in marketing that has come about in our post-Great Recession world… a world where Google, Facebook, Twitter, and blogs are the fastest growing communications media, replacing “old school” physical newspapers, magazines and television as we know it.  Adding context to the discussion are events such as the BP Deep Horizon oil spill of 2010 and the events that led up to the Great Recession of 2008-2009.

Pearson uses these historic events to provide examples of how businesses like Goldman Sachs might have reacted differently from the standpoint of effective communications (obviously a huge part of marketing) and could have changed the outcome for the company.  He then uses that information to explain how, to succeed in today’s world, businesses must reinvent themselves using fundamental structures and new technologies.

Foremost, this book can serve as a primer for anyone that needs to organize the activity of marketing in literally any size of business.  The book takes the reader through concepts such as understanding the core of the business, developing a foundation for your marketing and communications, utilizing technology to communicate effectively with your customer, and providing leadership in the effort (as appropriate).

I think Pearson explains these concepts in a manner such that anyone can use this book as a place to start on the process to understand, develop, and put into action a marketing strategy to reinvent your particular brand.

One point where I felt like the author seemed to be slightly out of touch was in his listing of advancing social media, where not once but twice he includes MySpace in his list.  I don’t think it’s a damning issue, especially since he acknowledges Facebook and Twitter first, but listing MySpace and not including the likes of FourSquare and Yelp as advancing and dominating social media does seem a bit odd.

All in all, I found this book to be a very good overview of the sorts of issues that the modern-day marketing professional faces (even if the marketing professional is a sole proprietor).  Pearson’s experience and know-how in the world of marketing is communicated in an easy to understand manner.  The principles presented are put into recent context (BP oil spill, Great Recession, etc.) so that the reader can relate to the principle easily.  It’s a good book and I would recommend it to anyone with marketing as a task.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Jun 3rd, 2011
by author: jblankenship.

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Posted in: Book review.
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A File and Suspend Review

May 20th, 2011
by jblankenship.
6 comments

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

I get a lot (a LOT) of questions about the File and Suspend tactic for Social Security benefits, so I thought some more review would help.  For the uninitiated, File and Suspend is a tactic that married couples can use to help maximize their total Social Security benefits.  In this post I’ll try to cover some of the more common questions.

File and Suspend works like this: One of the two in the couple can file an application for Social Security benefits and then immediately suspend in order to not receive the benefits. This can allow the other spouse to utilize the first spouse’s record to receive a Spousal Benefit.  Other eligible dependents (such as children under 18) can also receive benefits based upon the filed and suspended record.

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There are a few factors to note about File and Suspend:

  • You must be at least at Full Retirement Age (FRA) to File and Suspend.
  • Either spouse can File and Suspend, but not both.  By Suspending, you are not eligible to receive a Spousal Benefit.
  • If the non-Suspending spouse is under FRA and begins receiving Spousal Benefits, he or she will no longer be earning Delayed Retirement Credits (DRCs) on his or her own record.  Plus both the Spousal Benefit and the “own” benefit of the non-suspending spouse will be permanently reduced by filing before FRA.
  • The spouse that has not Filed and Suspended can receive Spousal Benefits based on the other spouse’s record at any age over 62 – but the amount of the benefit will be reduced if the spouse receiving Spousal Benefits is less than FRA.  At FRA, the Spousal Benefit would be 50% of the filed and suspended worker’s Primary Insurance Amount.

Why File and Suspend?

The main reason for File and Suspend is to allow the Suspending spouse to delay receiving benefits, earning up to 8% in Delayed Retirement Credits (DRCs) per year.  This will not only increase the amount of benefit that the Suspending spouse will receive when he or she files for benefits, but it will also increase the amount of Survivor Benefits for the other spouse.  At the same time, the other spouse can be receiving Spousal Benefits based on the first spouse’s record.

Here’s an example: The husband has a PIA amount of $2,300, and his wife has a PIA amount of $1,500.  The couple are both at FRA.  The husband Files and Suspends, and the wife can immediately begin collecting a Spousal Benefit equal to 50% of the husband’s PIA – $1,150.  At the same time, both spouses are accruing DRCs on each of their own records.  Both of them can delay filing for benefits on his and her own record until age 70, at which point they will each have achieved the maximum benefit on their own records.  When she reaches age 70, the wife will file for her own benefit and discontinue receiving the Spousal Benefit.  The husband will also re-file at age 70.

Another example: The wife has a PIA amount of $2,000, and the husband has a PIA of $1,000.  The wife is at FRA, and the husband is a year younger.  When the husband reaches FRA, the wife could File and Suspend, and the husband can begin receiving a Spousal Benefit of 50% of the wife’s PIA, delaying filing for his own benefit in order to receive the DRCs.

The husband in the second example could choose to begin receiving Spousal Benefits before FRA.  In that case though, he would not be eligible for DRCs.  This is due to the rule that requires a “deemed filing” if you file for Spousal Benefits prior to FRA.  A deemed filing is the same has having filed for your own benefit, and as such your benefit and the Spousal Benefit will be reduced, permanently, due to the early filing.

A third example: The husband has a PIA of $2,000 and the wife has a PIA of $500.  The husband is two years younger than the wife, she is 66 (FRA) and he is 64.  The wife has begun receiving her own benefit at FRA.  Since the husband is not yet at FRA, File and Suspend is not available to him.  However, once he reaches FRA, he can File and Suspend, and the wife can begin collecting a Spousal Benefit, increasing her own benefit to 50% of his PIA.

It’s important to note that for all of the examples, the spouse that is described as having Filed and Suspended could just as easily filed for his or her own benefit and begun receiving it immediately, rather than suspending.  This would also enable the other spouse to begin receiving Spousal Benefits.  The spouse that is collecting benefits on his or her own record would just no longer be accruing DRCs for his or her future benefit.

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Posted on May 20th, 2011
by author: jblankenship.

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Posted in: #noTOP, file and suspend, Social Security, social security benefits, survivor benefits.
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Tax Bill Higher Than You Expected?

Apr 18th, 2011
by jblankenship.
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Now that you’ve (hopefully) filed your return for 2010, you may have noticed that the bill was higher than you expected.  This may be due to some subtle changes to the tax law that affected your return for this year.  Listed below are some of the changes that you may have been impacted by:

Social Security taxation: Especially if you had unusual income taxed in 2010, such as a Roth Conversion, you could be subject to as much as 85% taxation of your Social Security benefit.

Alternative Minimum Tax: If you’ve been impacted by this, not only are your ordinary income tax items taxed at a higher rate, but your capital gains and dividends could be taxed at a rate higher than 15% as well.  This happens for folks with incomes between $150,000 and $439,800 (or $112,500 and $302,300 for singles) as the AMT exemption phaseout occurs.

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Child Tax Credit: If your income is over $110,000 ($75,000 if filing Single), the Child Tax Credit reduces by $50 for each $1,000 over that limit.  This has the effect of increasing the marginal tax rate by 5% for each child, as your income increases.

Passive Loss phaseout for rental realty: If your AGI is greater than $100,000, the deduction of up to $25,000 of losses from rental real estate is phased out up to an AGI of $150,000 when the deduction is eliminated altogether.  This can increase the marginal tax rate by 50% ($25,000 credit eliminated as your income increases by $50,000).

There may be other reasons that impact your tax bill, but these are some that have recently come to light as typically occurring.

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Posted on Apr 18th, 2011
by author: jblankenship.

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Posted in: #noTOP, 2010 Tax year, capital gains rate, income tax, income tax credit, investing, Roth conversion, Social Security, social security benefits.
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Book Review: Investing and the Irrational Mind

Apr 15th, 2011
by jblankenship.
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This was an interesting book for me.  I found that the research that author Robert Koppel has compiled from various sources throughout academia lends a great deal of insight into the “why?” of activities by individuals, professional traders, and others that take part in the great game of investing.

Even though the majority of the discussion and analysis that Koppel brings forth deals with professional traders, the behavioral psychology applies to individual, non-professional investors as well.

An example of a particularly interesting passage is one where Koppel quotes Nassim Taleb from his book, The Black Swan – effective responses to Black Swan Events (such as the 2008 economic crisis or the 9/11 crisis):

  • What is fragile should break early, while it is still small. Nothing should ever become too big to fail.
  • There should be no socialization of losses and privatization of gains.
  • People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  • Do not let someone making and “incentive” bonus manage a nuclear plant – or your financial risks.
  • Counterbalance complexity with simplicity.
  • Do not give children sticks of dynamite, even if they come with a warning.
  • Only Ponzi schemes should depend on confidence.  Governments should never need to “restore confidence”.
  • Do not give an addict more drugs if he has withdrawal pains.
  • Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
  • Make an omelet with the broken eggs.

The above list should give you some insight into this book.  It’s not your typical, conventional viewpoints on the activity of investing – buying and selling stocks, bonds, mutual funds and the like. Koppel takes what he knows from his own personal experience (former member of the Chicago Mercantile Exchange, hedge fund partner, and president of his own division at Rand Financial) as well as discussions with dozens of other folks in the industry, and applies recent psychological findings to it.

Through this application of psychological findings it becomes clear that there is a specific set of skills that leads to success in investing.  Koppel infers that this set of skills is learnable – once you discover and assuage the negative patterns of thought and action that lead to failure.  Much the same as a master sommelier’s ability to discern a wine’s source grape from a mere whiff and a slurp, the professional investors who have learned these skills are often capable of “pulling the trigger” on a purchase or sale of a financial asset in the face of compelling psychological factors that would urge a man to choose otherwise.

Some of these factors include: having a goal for your investing activity; having a plan for both getting into and getting out of every position; understanding your own irrational thought processes and developing a framework for overcoming them; and using your most powerful investing tool – your intuition.

Koppel explains these factors and skills in terms not only of investing, but of sports, love, gambling, and many other facets of life – since the folks who have developed the skill set apply the skills to many areas.  It just so happens that some of these successful folks are also investors for a living.

Although I doubt if reading this particular book will remedy all psychological ills that the investor faces, it does help, in my opinion, to begin to put a face on the things that we do to ourselves that work against our success in investing.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Apr 15th, 2011
by author: jblankenship.

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Posted in: #noTOP, Book review, investing.
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Re-Converting Your IRA

Apr 6th, 2011
by jblankenship.
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Safety Cone to Penguin Slip On Conversion Kit
Image by accent on eclectic via Flickr

Okay, so we’ve covered Roth Conversions – where you distribute the funds from your traditional IRA to a Roth IRA.  Then we covered Recharacterizations – where you can “undo” the conversion by moving all or part of the converted funds and the earnings associated with it back into a traditional IRA.  The end result is that, for those funds converted and recharacterized, from the eyes of the IRS, nothing happened to the account (except that you may have put the money back into a different IRA).

So, if you went through a Roth Conversion and then Recharacterized it, the assumption is that you wish to eventually re-convert those funds to a Roth account.  When are you allowed to do this?

There are two limits on the Re-Conversion of funds to a Roth account once they’ve been through the Conversion/Recharacterization wringer:

  1. This first limit is that you cannot convert the same funds to Roth IRA twice in the same calendar year.  This means that if you converted your account over to Roth in July of 2010 and recharacterized those same funds back into a traditional IRA in October of 2010, you cannot reconvert the funds again in calendar year 2010.  You must wait until at least January of 2011 to re-convert.
  2. The second limit is that you cannot re-convert funds that have been recharacterized within the previous 30 days.  From the example in #1 above, clearly this isn’t a problem since you already have to wait until the next calendar year from the recharacterization, which is more than 30 days away.  If instead you recharacterized that original conversion in January of 2011, you have met the calendar year requirement – but now you have to wait for at least 30 days after the recharacterization before you can re-convert the funds.

It is important to note that all of this conversion/recharacterization/re-conversion is specific to the funds (that is, the account) that you have converted.  If you have multiple IRA accounts you could conceivably have converted and recharacterized funds from one account within a few months (in the same calendar year), and then do another conversion of funds from one of your other accounts without the two limits above having an impact.

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Posted on Apr 6th, 2011
by author: jblankenship.

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Posted in: #noTOP, conversion, IRA, retirement accounts, Roth Conversion, Roth IRA, roth ira conversion.
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A Restriction on the Home Buyer Credit

Mar 21st, 2011
by jblankenship.
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Here is a case where, even though the IRS documentation did not state it directly, the real rule of the law makes an explicit statement, and therefore the Code is where the final rules are taken from. In this particular case, there is a situation where the home buyer credit is not available: if the home is purchased from a parent or another close relative (and vice versa). And the taxpayer who relied only on an IRS publication found out the hard way that the Internal Revenue Code is the final word on the subject.

There was a recent Tax Court case (Nievinski, TC Summary Opinion 2011-10) that challenged the limitation, and the Tax Court ruled in favor of the Service.  The argument was that, in a particular document, IRS Publication 4819 “Important Information About the First-Time Homebuyer Credit”, there was no express explanation of this limitation.

Confusing signal
Image via The Library of Congress

Unfortunately for the taxpayer in this case, the Code section 36(c)(3) does expressly prohibit the credit for such a transaction between related persons, and related persons definitely does include parents and other ancestors.

The same would be true in reverse, the parents could not have purchased the home from a child and claim the credit.

In addition, this ban on claiming the credit also applies to heirs buying a home from an estate, as well as to residences that were purchased after November 6, 2009 from an in-law.

The lesson here is that total reliance on IRS publications will not keep you out of dutch if the Code provides a counter or more complete explanation of the rules and regulations.  Make sure that you get the complete Code explanation – especially in the case of a move that is a little “on the edge” and seems like it may be too good to be true.

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Posted on Mar 21st, 2011
by author: jblankenship.

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Posted in: 2009 tax year, first time homebuyer credit, irs, tax, tax credits.
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Book Review: The Last Economic Superpower

Mar 11th, 2011
by jblankenship.
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last economic superpowerHave you found yourself wondering over the past couple of years just how the Great Recession came about? What sorts of things led up to this meltdown, and how far in advance did it all start?  What might we do in the future to keep something similar from happening again?

In his book, The Last Economic Superpower, Joseph P. Quinlan does a wonderful job of answering those questions and many, many, more.  While the text does get long on statistics and therefore a bit technical to comprehend, I think Quinlan has done an excellent job overall of walking the reader through the precursors to the crisis, the crisis itself, and what our present situation looks like as a result.

The first section of the book covers all the events leading up to the late-2008 global economic crisis, tracing issues back to the very roots of the rise of globalization after World War II, then specifically pointing out how the Nixon administration’s elimination of the gold standard in 1971, finally examining how Ronald Reagan’s economic policies helped to usher in the economic globalization that we experienced between 1983 and 2008.  All of these events are put into context with the 2008 economic crisis.

After the precursors have been reviewed, Quinlan examines the actual meltdown itself and what it means to all countries across the globe.  Not only does he explain the impacts that the US has endured, but he also takes time to explain the impacts to many EU members, China, Brazil, Russia, India and many other emerging economies.  He also explains the ascent of the G-20 over the original G-7 (or G-8), and how this will likely impact the global economy going forward.

But then Quinlan takes things a step further, dusting off his crystal ball.  The final two chapters of the book review two different paths that the global economy could take – away from globalization (similar to the post-WWI era), where each nation fends for themselves and continues on a path toward isolation; or toward globalization, led by the only remaining economic superpower (the US), the new players of the global economic stage (China, India, Russia and Brazil), and our long-time economic partners in the EU, with an eye to bettering the overall world, not just each individual nation’s needs.

Each chapter offers compelling facts that make either outcome seem plausible.  Recent events in the Middle East (since the writing of this book) have seemed to give opportunities for the rest of the global community to begin acting out one scenario or the other – and it remains to be seen just how things will work out.

I really enjoyed this book – but I’m a financial geek.  I suspect if you’re not as interested in these matters as I am on a day-to-day basis, you may find the book somewhat long on technical statistics, facts, and figures, but I felt like that information was important to the subject.  If you’re at all interested in a good overview of the global economic situation of recent years and what the outcome could be for the US and the world, I think you should give this book a read.  Not only is it helpful to understand the how and why of the 2008 crisis, but it will also help you to understand how investing today must include international exposure – not only in developed and emerging market equities, but also in the fixed income (credit) markets.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Mar 11th, 2011
by author: jblankenship.

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Posted in: #noTOP, Book review, economic update, globalization.
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Proposed Social Security Wage Base Increases

Mar 4th, 2011
by jblankenship.
2 comments

chicken on the way by runran

October 19, 2011 update: the expected wage base increase has been confirmed as $110,100 for 2012.  For more information, see this article.

The Social Security Administration has released the proposed figures for the increase in the wage base for taxation for 2012 and projected some figures for the years up to 2015.  This is the limited amount of income against which Social Security withholding tax is applied.

For 2009 through 2011, the wage base has been static – at $106,800 for each year.  The amount did not increase for these years since the average wage index (AWI) actually decreased from 2008 to 2009, and the modest increase in the index from 2009 to 2010 did not make up for the decrease in the prior year.  For 2011, the AWI is expected to increase once again, by 3.08%.  This sets the projected wage base for 2012 at $110,100, up a total of $3,300.

Future wage bases have been projected for the years up to 2015 as well:  for 2013, the base is projected at $113,100; for 2014, $117,600; and for 2015, $122,700.

Keep in mind that these are, at present, only projections.  The actual figures will be set in the fall, typically in October or November.

Also – in 2012, the temporary 2% reduction in the Social Security withholding tax will expire, so if the projected wage base of $110,100 does go into play, then the maximum amount of Social Security withholding that you can be assessed for the 2012 tax year will be $6,826.20, up from $4,485.60 in 2011.

For more information, see this article at Social Security Owner’s Manual.

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Posted on Mar 4th, 2011
by author: jblankenship.

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Posted in: 2012 tax year, Social Security, social security administration, social security tax, tax.
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