Tax changes could be in our future

We have a new President and our guess is that we will be in a new tax environment. Trump’s tax plan calls for reducing the current 7 tax brackets (10% to about 44%) to 3 brackets: 12%, 25%, & 33%. The estimate is that dividends and capital gains rates would top out at 20%. You can click here to see the whole plan in its entirety.

Under the Trump plan, itemized deductions would be capped at $200,000 and a taxpayer would still get the greater of actual itemized deductions or the standard deduction. Trump would increase the standard deduction from $12,600 to $30,000 and would eliminate personal exemptions. If you have fewer than 5 exemptions, you will do better with the standard deduction  under the Trump plan and if you have more than this, you would do better under the current system. If you claim actual itemized deductions and claim personal exemptions, then you would lose the benefit of the personal exemptions worth a deduction of about $4,000 for you, your spouse, and dependent children except that for many taxpayers the deduction is phased out many taxpayers. If you are currently not getting the personal exemption, then you lose nothing.

In the Trump plan families get much more generous treatment of child care costs by allowing the family to deduct the average cost of child care from their taxes.
Trump has also proposed cancelling the estate tax and taxing any appreciation of assets on a subsequent sale if the estate value exceeds $10 million. The tax on the appreciation would not occur at death, but when the asset is sold. This is a big shift also as we would go from a tax on transfer (Estate tax) to a regular capital gain on sale. If the estate is below $10 million, then your heirs would presumably still get a date of death step-up in value.

At present assets passing through an estate are stepped-up to date of death value such that an immediate sale would yield no taxable gain or loss. Under the Trump proposal if the estate is valued above $10 million, there would be no estate step up in value and a subsequent sale of those assets would be taxed at capital gains rate (max 20%) versus the current 40% beginning estate tax rate. If this passes, the next 4 years would be an opportune time to die and some Democrats appear to be considering this at present.

The biggest change would be in the business tax arena. Trump proposes to drop the current 35% corporate tax rate to 15% but eliminating many business deductions (not sure which). Asset purchases would be immediately expensed and there would be no depreciation to calculate.

The bolder change is that pass-through entities such as partnership and S corporations would also pay the 15% entity rate but no individual taxes. This means that the owner of an S Corporation would be taxed at 15% while a highly compensated employee of the S Corporation could pay tax at 33%. We’ll probably need some more detail here as well. It might be that partnerships would need to adopt a reasonable compensation for active employment similar to S Corporations. Under this scenario, reasonable compensation would be taxed at ordinary rates and excess business profits would be taxed at the lower rates.

The plan seems to be somewhat close to the Paul Ryan Plan, which you can find on-line. The Trump plan does not have as much detail as the Ryan plan but we are sure we will see more detail soon. Our guess is that we will begin to see some tax proposals in 2017, maybe taking effect in 2018.

Traditionally, Congress scores each tax law proposal to see what the revenue impact to the government will be over the next 10 years. Both Trump & Ryan indicate that economic growth may offset the loss of revenue. Many of the scores indicate that both the Trump & Ryan plans will add to the deficit. Hopefully, this will be addressed as well without the typical budget games that politicians use. While I feel certain that many of these proposals will change before passage, my guess will be that it will be a variation of Trump & Ryan concepts. I hope that they will reduce some spending at the same time to avoid adding to the deficit.

Stay Tuned!

It’s never too early to start planning for retirement

How old are you? If you’re in your 20s, it’s time to start thinking about retirement.

Retirement may seem a long way off, but unless you just want to work until moneyjaryou’re 80 it’s time to think about how to exit the workforce as soon as you enter the workforce.

Whether you’ve just graduated from college or are starting a new career, there are four very important advantages to begin planning and saving for retirement now.
1. Learn money management skills
It’s important to start taking responsibility for your finances. Part of developing financial responsibility is learning to balance future monetary needs with present expenses. Once you become used to balancing your priorities, it becomes easier to build a budget that takes into account both fixed and discretionary expenses. A budget can help you pursue your financial goals and develop strong money management skills. If you establish healthy money habits and stick with these practices as you grow older, you’ll have a major advantage as you edge closer to retirement.
2. Time on your side
Right now, you have the benefit of time on your side when saving for long-term goals (like retirement). You likely have 40-plus years ahead of you in the workforce. With that much time, why not put your money to work using the power of compounding? Let’s say you start putting $300 each month into your employer’s retirement savings plan when you’re 25 years old. If your account earns an average of 8% annually, you would accumulate just over $1 million by the time you reached age 65. But if you waited 10 years to start making contributions to your plan, you would have accumulated only $440,000 by age 65.
(Note: This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent any specific investment. Taxes and investment fees are not considered. Rates of return will vary over time, especially for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk. Actual results will vary.)
3. Workplace retirement benefits
If your employer offers a workplace retirement plan such as a 401(k) or 403(b), you may find that contributing a percentage of your salary (up to annual contribution limits) will make saving for retirement easier on your budget. Contributions are typically made on a pre-tax basis, which means you can lower your taxable income while building retirement funds for the future. You aren’t required to pay any taxes on the growth of your funds until you take withdrawals. Keep in mind that distributions from tax-deferred retirement
plans are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn before age 59½. Depending on the type of plan, your employer may offer to match a percentage of your retirement plan contributions, up to specific limits, which can potentially result in greater compounded growth and a larger sum available to you in retirement. If you don’t have access to a workplace retirement savings plan, consider opening an IRA and contribute as much as allowable each year. An IRA may offer more investment options and certain tax advantages to you. If you have both a workplace plan and an IRA, one strategy is to contribute sufficient funds to your workplace plan to take advantage of the full company match, and then invest additional funds in an IRA (up to annual contribution limits). Explore the options available to find out what works best for your financial situation.
4. Flexibility of youth
You probably have fewer financial responsibilities than someone who is older and/or married with children. This means you may have an easier time freeing up extra dollars to dedicate toward retirement.

Get into the retirement saving habit now and your future retired self will thank you.

Don’t be blown away by good news in the market

Last week, the Dow industrials, S&P 500 and Nasdaq Composite all reached new records on the same day for the first time since the dot-com boom was at its height. It’s being hailed as evidence of investors’ willingness to gamble in the market despite signs that they have risen too high. It’s 180-degree turnaround from the beginning of 2016 when markets tumbled amid concerns over a pending global recession.

stock marketThe last time all three indexes jointly closed at records was in 1999. but don’t get too carried away yet with this good news. Many commentators think the market is getting frothy with too much money chasing too few good investments. Think 2008.

This time, however, we don’t have the massive debt on the investments which caused the 2008 crunch. With interest rates hovering around all time lows (in the case of some European countries, even negative interest rates), money has plowed into equities. The low interest rates are a result of large scale interventions by many governments and this has its own set of risks.

Our advice is don’t get too enthusiastic and follow your plan. Always have a plan which considers the possibility of a downturn if events turn ugly.

Buying Bonds can be costly

Unlike stocks, there are no bond exchanges. Bonds are sold from one broker’s inventory into others before eventually making their way to the public. Along the way, the brokers mark-up the cost of the bonds and these costs are NOT required to be disclosed. If you know where to look, there is an obscure government database that tracks the prices of bonds bought and sold. But it’s hard to find and very people know where to find this needle in the haystack.

As an example, lebondst’s look at the mark-up of a Downtown Savannah, GA Authority Bond (see graphic). In our example, the broker made $3,360 for buying the bond for a customer and selling it to him. But the broker did not have to disclose the large mark up. That’s a 1.5% commission on a bond paying 2.641% or almost 60% of the first year interest earned by the customer. That’s a big number you never even knew it!

At Arkin Financial Advisors, we charge fixed fees and we never mark up bonds to our clients. We are also totally transparent on our charges, and you’re never charged a fee without your knowledge. That’s just one of the things that sets Arkin Financial Advisors apart.

Disciplined approach is critical to investing success

People who claim to know WHEN the market will go up or down are called Market Timers. Unfortunately, all evidence indicates that these so-called experts miss far more often than they are correct. A broken clock is correct twice per day and market timers are no more successful.

graphThe cost for mis-timing the market can be huge. Many people get scared when the market starts to drop and they miss the recovery. For instance, being out of the market during the 25 best days over a 45 year period (16,425 days) reduces your return from 10.3% to 6.9% if you invested in the S&P 500 (see illustration).

At Arkin Financial Advisors, we embrace a disciplined approach to management. That means staying in the market even if you think it may drop. We advise this approach because we are smart enough to know nobody can consistently time the market over time.

Overconfidence can be a portfolio killer

Numerous studies indicate that people in the U.S. are overconfident in their abilities. According to one Harvard study, 94% of College Professors believe their teaching abilities to be above average and 70% of high school students think that they are above average leaders. Really?

moronIt’s no different for do it yourself investors. According to Barber and Odean in a 2000 study, many investors bought stocks that trailed the market while these same investors sold stock which subsequently climbed. The study also concluded that investor confidence and performance were inversely related – the more confident investors make the worst investments. Finally, the Barber and Odean duo concluded that men trade 45% more than women, almost doubling the poor outcome for the men. Boys, that should hit where it hurts.

All of this information is why Arkin Financial Advisors takes an evidenced-based approach to investing. We take our egos out of the equation and listen to the data.

Why are you still buying annuities?

If you’re still investing in annuities, it’s time to accept that you got suckered into a bad investment. The good news is you don’t have to settle for advice that benefits your broker.

There is really only one case when an annuity is the right decision: if you have no ability to take risk and you have fixed expenses, an annuity may be the right call. But you have to realize the guarantee comes with a price – you are giving up 100% of your flexibility and you’re locked in for a long time or you face substantial penalties.

Annuities are a perfect example of why investors should be working with Registered Investment Advisors (RIA) rather than brokers. Why are so many investors putting their money into annuities with high commission rates, high annual fees and below average returns rather than investing in a well-constructed portfolio? The simple answer is the broker’s fees. While the annuity may not be in your bests interest; it’s in the broker’s interest.

Other than RIAs, most investment advisors are required to follow a “suitability standard,” meaning the broker or insurance agent can recommend a product regardless of the cost or commission as long as the investment is suitable for your situation. But an RIA has a fiduciary duty to put the client first, and that includes fee considerations.

So what does that really mean? Brokers are really just salespeople, but RIAs are true investment advisors. The US Department of Labor recently proposed a change in requirements for all investment advisors requiring a Fiduciary Standard be maintained for all retirement accounts including IRAs, which would represent a massive change change for most – if not all – brokers.

As the term “broker” became a taboo word sometime during the past few decades, brokers began referring to themselves as investment advisors. But the true measure of an investment advisor is whether he or she is a fiduciary or not. RIAs are fiduciaries but financial advisors at brokerage firms and insurance agents are not.

Annuities are a perfect example of the difference between RIAs and brokers. An annuity is usually a situation whereby the investor gives the annuity company (insurance company) a sum of money for a promise to pay the investor a monthly payment for life or for a guaranteed term. The most frequent form is a Variable Annuity, and brokers can earn a commission of between five and 10 percent on those investments.

Getting out of an annuity can be costly. Most annuities have a surrender charge that acts as a ransom paid to the annuity company and your broker to let you out of this bad investment. A quick review of annuity from a large insurance company revealed that a buyer would pay a surrender charge from 8.5% of the balance in the first year to three percent in the seventh year before the surrender charge expired. And if you had a guaranteed earnings rate, this is lost if you surrender the policy and you’re usually stuck with a loss.

More bad news. Depending on the length of time that an investor has owned the annuity contract, the surrender may come with a massive tax bill, even in the case where the annuity has not earned much

Ultimately, an annuity purchaser owns the most expensive bond fund in existence with some expensive life insurance tacked on to guarantee the contract amount that escalates the broker’s fees. Sorry to be the bearer of bad tidings if you are an annuities holder, but the truth hurts.