MASTERING ROLLOVER DECISIONS

Unfortunately, there is no one-size-fits all template that can be used to determine which option is best for a person. Each persons retirement plan must be evaluated individually, based on its own merit and the persons specific situation.

There are numerous variables to consider. These include fees, available investments, services provided, the 10% early distribution penalty, creditor protection, convenience, required minimum distributions and estate planning.

The ability to roll over is not limited to participants in the company plan.

A spouse who is a beneficiary can roll over inherited company plan funds to his or her own traditional or Roth IRA. Non spouse beneficiaries can directly roll over inherited plan assets to an inherited IRA (or directly convert the inherited plan to an inherited Roth IRA).

Probably the strongest argument for an IRA rollover is the ability of a beneficiary to stretch the money for years, keeping it growing in either a tax-deferred traditional IRA or tax-free in a Roth IRA. A non spouse beneficiary can stretch distributions on an inherited IRA over his or her life expectancy.

But many company plans do not allow the stretch option.

Another advantage to a rollover is that IRAs are more flexible than company plans in terms of estate planning and investment choices. IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries. Individuals can name anyone they wish as their IRA beneficiary.

In many company plans, a participant must name his or her spouse as beneficiary unless the spouse signs a waiver.

In an IRA, individuals can customize investment choices. In addition, investment changes can be made faster in an IRA because there is usually not as much bureaucracy as in a company plan.

Another attraction of a rollover is that it is much easier to access funds in an IRA than in company plans.

Another potential appeal is that an IRA can be a convenient place for a person to consolidate all retirement funds.

IRAs can be aggregated for calculating RMDs. The employee usually has to take his RMD from each company plan separately.

STAY WITH A COMPANY PLAN

If a person is interested in delaying RMDs as long as possible, continuing with the company plan may be a good idea because of the “still-working” exception that may apply. The individual may be able to delay the required beginning date until April 1 of the year after he or she retires. This rule does not apply to IRAs.

At the other end of the time spectrum, individuals who may need their retirement funds early should also give serious consideration to sticking with the company plan. If a person is at least 55 years old when he/she leaves their job, and he/she needs to tap retirement funds, distributions from the company plan will be subject to tax but no 10% penalty. But, if the funds are rolled to an IRA, withdrawals before age 59 ½ will be subject to the 10% early withdrawal penalty. The age 55 exception does not apply to IRA distributions.

For some people, creditor protection may be a concern. Company plans have an advantage here, as they receive federal creditor protection. State laws protect IRAs, and they can vary significantly.

An IRA cannot be invested in life insurance, but life policies can be held in a company plan. For some people, the life insurance offered through their company plan may be the only such coverage a person can qualify or pay for.

If a lump-sum distribution from a company plan includes highly appreciated company stock or bonds, a person may roll it over to an IRA, but he/she may not want to. Under a special rule, the participant can withdraw the stock from the plan and pay regular income tax on it, but only on the original cost to the plan and not on what the shares are worth on the date of the distribution.

The difference is called the net unrealized appreciation (NUA). A person can elect to defer the tax on the NUA until he/she sells the stock. When he/she does sell, he/she will pay tax only at his/her current long-term capital gains rate. The ability to use the NUA tax break is lost if the stock is rolled to an IRA.

The Optimism Quiz: Are you a Pessimist, Optimist or a Realist? (Excerpts from December 2016 Article of Success Magazine)

Being an optimist has benefits that extend beyond feeling cheery. In fact, optimists react better to stress, have more satisfying romantic relationships and are less likely to suffer from depression and hypertension. See if you have what it takes to be an optimist in this little quiz.

Rate the following statement as:

1 = Strongly disagree
2 = Somewhat disagree
3 = Neutral
4 = Somewhat agree
5 = Strongly agree

No looking ahead at the answer guide!

___ 1. I am grateful for even the smallest things in life.
___ 2. I am motivated by other people’s stories of achievement.
___ 3. I don’t let what others do or say negatively affect me.
___ 4. I welcome and accept change.
___ 5. I acknowledge the important people in my life.
___ 6. I try to feel like a kid whenever possible.
___ 7. I take the time to eat right, exercise and relax.
___ 8. I still enjoy my favorite hobbies.
___ 9. I hold myself accountable to achieve my purpose and passion.
___ 10. I am persistent in all of my efforts until I feel I have completed them.

Scoring:

10 – 22 = Pessimist
23 – 36 = Realist
27 – 50 = Optimist

Optimists have some of the highest qualities of gratitude, hope, altruism and persistence.

Keep a positive outlook!

Improve your Life

As An avid reader of Success Magazine I found these 10 action steps that may help enhance your life. Try it!
1
Drink Up
This week, commit to drinking more water and nixing the sugary drinks. Note the changes in your skin tone, happiness and energy levels.
2
Light the Fire
Schedule a brainstorm session to solve a nagging problem. Encourage all new ideas, even the off-the-wall ones.
3
Let the Games Begin
Plan a family game tournament and prepare special treats for the event. Soak up the bonding time and save the to-do list for tomorrow.
4
Add It Up
Tonight evaluate your spending habits. Choose one small weekly expense (one less cappuccino or one less restaurant meal) to cut from your budget. Tuck away those savings for a vacation next year.
5
Get Inspired
Pick a movie or book that inspires you this weekend. Watch it alone and jot down whatever crazy ideas pop into your head. Revisit your notes and act on the best ones.
6
Face Up
Sign up to do one thing that scares you – a singles happy hour, a skydiving course, a cooking class. Commit to pushing yourself out of your comfort zone.
7
Buddy System
Call a friend you haven’t seen in a while. Schedule a coffee or lunch date to catch up and remember the importance of making your friends and family feel special.
8
Take Stock
Tonight, write down your top three passions. Assess whether your current lifestyle matches or is headed toward achieving that list.
9
Speak Up
Whenever your creative genius strikes – a more efficient process, a new place for the company lunch, a crazy idea you’ve been scared to mention – act on it quickly. Relish your newfound confidence.
10
Give Back
Find a local charity organization and schedule time to volunteer. Enlist family, friends and co-workers to join you.

Earning More

Check out these 11 ways to make money on the side.

Whether you’re unemployed, underpaid or simply want a little more walkin’ – around money, NerdWallet.com, a personal-finance website providing clarity about life’s decisions, compiled this list of flexible ways to earn more.

If you live in a large city…

1. Drive for a ride-booking service like Uber or Lyft.

2. Deliver something delicious. Try earning cash on your own schedule by delivering restaurant meals for companies such as DoorDash or Caviar.

3. Become a personal shopper. Companies (Instacart is one) will pay you to grocery-shop for their customers.

4. Do odd jobs. Consider signing up to be a “Tasker” who runs errands in one of the 19 metro areas where TaskRabbit operates.

If you’re good at…

5. Writing-try freelancing

6. Math-be a tutor

7. Photography-submit your photos.

8. Illustrating-do graphic design.

If you want to work from home…

9. Join a focus group

10. Sign up for Mechanical Turk. Taking on simple tasks-writing user reviews and answering business surveys, for instance-on Amazon’s Mechanical Turk service is a simple way to make money on the side.

11. Complete projects on Upwork. Put the skills you learned in college to use on websites such as Upwork.

2016 Election and the Stock Market

People have been calling me and cornering me at social events asking:

“What will happen to the stock market after the election”? In the short run of a day or a week there may be a bit of an adjustment. The real issue is the next four years.

Avoiding any political statements I address this strictly from an economic stand point and as a business owner. Unfortunately, I find most Americans cannot connect the dots when economic policies are presented.

Let’s examine things in light of Economics 101. What moves stock prices? Answer: Earnings (or some call it profits). As a simple example lets say we want to buy a “pizza shop.” The present owner has been earning (making a profit) of $100,000 per year. Lets say the profit equates to “cash profit.” Assume there are 100,000 shares outstanding so the pizza shop’s earnings per share are $1 each ($100,000 profit divided by 100,000 shares). A general rule of thumb is that one would pay about 4 – 5 times earnings (or profits) for a small business like the pizza shop. This is known as the PE ratio or the price earnings ratio. In our case that would equate to a selling price of $400,000 – $500,000. Thus, without changing anything and earning the same $100,000 per year, we, as the next owners, could get a return on investment in 4 – 5 years, or, in other words we are demanding a 20% – 25% annual return (simply divide the selling price $400,000 – $500,000 by the $100,000 profit to get the return number). The present owner would be selling each of the 100,000 shares to us at $4 – $5 per share ($400,000 – $500,000 sale price divided by 100,000 shares).

Now let’s assume after we buy the pizza shop we institute some changes, i.e., getting discounts for buying in larger quantities, teaching employees to be more productive or adding technology so we are able to now earn $200,000 in profit after tax in the next year.

What are some of the outcomes of our changes and hard work: (1) With higher profits more in taxes now go to the government. We see the need to begin advertising since we can now handle more business so the advertising company hires more people (who pay income taxes) to handle our account. We also hire more people to handle the anticipated new business (and the new employees pay income taxes). We ask for more products from our vendors they do the same and so forth and so on. This is known as the multiplier effect. By the way I am not advocating a love of taxes but rather showing the outcome of a growing business and economy. So, with Adam Smith’s “Invisible Hand” principal more people are working, which means they are off the Government dole, more taxes are flowing into the Treasury and more of our new customers are happy.

As a side bar, since our business is now making $200,000 per year (or $2 per share on 100,000 shares) the next buyer would be willing to pay us between $800,000 and $1 million or $8 – $10 per share under the classic 4 – 5 times price earnings multiplier. If we decide to sell the business we would owe taxes on the difference between the selling price of $1 million and what we paid originally of $500,000. So, it is the INCREASE IN EARNINGS that push up the stock prices. By the way the P/E ratio for the S&P 500 has averaged around 12 – 13 times since large companies are more stable and you would demand lower rates of return. I am using a small business example to explain the concepts. Keep in mind the companies that make up the stock market act similarly in concept to this small pizza shop.

Here is a major input to help you understand companies and the stock market. If you took all the companies in the U.S. from the small pizza shops, to grocery stores to Apple computer and added up their profits, the average profit for all the companies in the U.S. comes out around 4.8% (before tax). Yes, it is not the gigantic number people think exists. Grocery stores work on 1% profit while the “sin” companies like alcohol, tobacco etc. have much higher profit margins.

As any business owner, just like any employee, I want to maintain my income (earnings) and lifestyle. Let’s say we are able to maintain the earnings or income of $200,000 per year (or $2 per share) as noted above.

Next, let’s say my expenses skyrocket overnight because the government imposes higher income taxes on our profits, imposes costly new regulations and forces me to buy expensive health care insurance for employees. So, without any change in sales, expenses have gone up and my profits drop back down to the original $100,000. Please keep in mind it is not just our pizza shop that is hit this way. The advertising agency and all of our vendors are hit the same way plus all the other companies in the U.S.

So to maintain our lifestyles we have 3 options: (1) Raise prices, which will make us uncompetitive and is purely inflationary. (2) Cut costs by laying off employees which will restore our profits and lifestyle and make our employees miserable, or, (3) shut down the business. In all 3 options the Government will lose tax revenue and many people lose their jobs who now become a burden on society again by going back on the Government dole. How about selling the business? Well at $100,000 in profits we might get our original money back of $400,000 to $500,000 but the new potential owner has looked at our books and seen profits dropping plus costs going up, so I doubt we can get our money back in a sale.

Who loses here: The Government, employees and entrepreneurs.

Remember small businesses produce 70% of all new jobs created in the U.S. In the past year, for the first time in U.S. history, more small business are shutting down each month than are opening. Tragic!!
Small businesses are just a reflection of large businesses that make up the stock market.

Are you connecting the dots yet?

I hope you have the answer after this long winded explanation of what will happen to your wealth in the stock market after the election.

One candidate wants to (1) lower taxes on business (we have the highest corporate tax rate in the world. That is why many companies are leaving the U.S. and we lose jobs). Every time the Government reduces tax rates more tax revenue is generated. (2) This same candidate wants to reduce costly regulations that stifle the ability to start and maintain a business. (3) This same candidate wants to revamp the out of control costs to business of Obamacare. If this candidate can do this, it will lead to an explosion upward in business growth, employment, tax revenue and the stock market going through the roof which means your wealth will skyrocket.

Who wins here: The Government, employees, entrepreneurs and society as a whole.

The other candidate wants to increase taxes, regulations and health care costs.

This simple article has only covered a few policies that are on the table that separate the candidates. My desire was to answer the question on what will happen to the stock market.

Well, I hope you now can calculate and understand where the stock market will be in the next 1 – 4 years based on who wins the election.

In the great words of Mayor Daly……

“Vote early and vote often.”