Changes to Roth IRAs – Obama’s Agenda

Many people enjoy the benefits of a Roth IRA (there are far better alternatives than a Roth, but, it is a good start).

One of the features of a Roth is that you are not subject to the required minimum distributions (RMD) at age 70 ½. Unfortunately, that feature may change. A proposal in President Obama’s budget would require Roth owners to start taking mandatory distributions at 70 ½, the same as IRAs, 401(k)s and other qualified plans. This would change the tax-free compounding on the withdrawals, and, wipe out any estate planning benefits of passing those assets tax free to your heirs.

A second proposal would prohibit non-spousal IRA beneficiaries from stretching out the distributions. Instead, inherited IRAs would have to be distributed within 5 years of the owner’s death (pity the poor child that inherits Dad’s IRA right when they are at their peak income years. Dad’s IRA income will be added to their current income pushing them into an even higher tax bracket). Without the stretch it won’t pay for an owner to convert to a Roth.

No one should be shocked by the Present’s proposals. If anyone REALLY listened to his campaign speeches he told you, in a round about way, that he was going to wallop everyone with more taxes. I stopped asking the 50% of American’s who did vote for him… “Now, tell me again why you voted for him?”

Remember, elections do have consequences. In his final 2 years in office the President said he will use his pens as a sword. Watch out below.

Mid Term Returns

Since World War II, the S&P 500 stock prices have cumulatively gained an average of 15.3%, in the 6 months from October 31 just before each mid term election year, through the following April 30. This has happened 94% of the time.

On a year over year basis, in the 17 mid terms since 1945 to 2010, the average bounce was higher and more consistent than during the normal 6 month periods.

From October 31 of the mid term year to October 31 of the following year, the S&P has gained an average of 17.5% – rising 100% of the time.

A Boost for Low Credit Scores

Millions of consumers with credit tarnished by medical debt could soon see their scores increase. FICO, the nation’s top credit score provider, is changing its scoring formula by the end of the year. Consumers with sterling credit history except for overdue medical expenses – either now or in the past – would likely get a 25-point boost. A recent study by the federal Consumer Financial Protection Bureau found medical debt unfairly hurt too many credit reports. Part of the problem with medical debt is that people find themselves in collections because of miscommunication over who is responsible for it – you or the insurance company.

Homebuyers may not see a benefit right away, however, because it’s not clear when lenders will adopt the new score model. An older couple had to pay a higher mortgage interest rate because a medical bill of less than $100 had slipped through the cracks and hurt their credit score. They weren’t even aware of it. It cost them over $120 a month more.

Why Debt Matters:

    About a third of your credit score is decided by the amount of debt you owe.

This is how it is scored:

    Accumulated Debt: 30%
    Payment History: 35%
    Other: 35%

The Dow may still rise

    Stock market history suggests the combination of a Republican-controlled U.S. House and a Democratic president is the most likely to see the largest annual gain in the Dow Jones Industrial Average. Interestingly, Democratic presidents outpace Republicans consistently, but Republican Houses beat their Democratic counterparts over time. In the table here, the quadrants show the Dow’s average annual growth in “dual-party” environments:

    Dow Avg Annual Gains, 1990-2014 In Four Political Environments

    Source: U.S. Election Commission; Bloomberg BMO Private Bank

    Source: U.S. Election Commission; Bloomberg BMO Private Bank

    Even though valuations are somewhat stretched, stock market returns from November through April have dominated May through October by a long shot since 1955. Add that seasonal effect to the political environment, and we could be setting up for a decent tail wind.

What the Rising Dollar Means to You

Over the past year the U.S. dollar has had a remarkable recovery.

A strong dollar does have some advantages:

    • When the dollar goes up things bought with it become cheaper – one reason that oil, gas and gasoline prices are plunging.

    • With oil and gas prices down the average person has more money to spend on clothes, boats and big screen TVs.

If the dollar rises too quickly it will create head winds for the U.S economy and corporations. True, the U.S. economy is just bumbling along but it is stronger than Europe that is still flat on its back.

The strong dollar does have disadvantages:

    • American exports are more expensive.

    • Companies in the S&P 500 get about 33% of their sales from overseas and those sales are worth less when converted back to dollars. Hence, profits will drop leading to a falling stock market.

    • U.S. priced products become more expensive against imports. Thus, Ford and GM products would be at a disadvantage to those made by Toyota.

    • U.S. companies may have to cut prices overseas to be competitive thus making profits lower and further hurting the stock market.

So many people complained about the weak dollar. They all wanted a super strong dollar but did not realize how it hurts competition and the stock market.