Tax
Law Changes
Destocking
Air
Cargo Traffic
Bad
Bank?
Money
Supply Growth
Outlook
IRA
Rollover Plan
We have a number of tax changes for estate and retirement plans for the
2009 tax year.
IRAs
The IRA is a great way to put away income for retirement and, for the Traditional IRA,
get a tax deduction. For 2009, the IRA and Roth IRA contribution limits stay
the same as they were in 2008 at $5000. If you are over 50 years old the limit
is $6,000 for both years with the “catch-up” provision. You can save
100% of your compensation up to the maximum. Remember that you have until April 15, 2009 to make your 2008 contributions for your IRA.
Roth IRAs
The Roth IRA is non-deductible
retirement account so any contributions are “after tax.” Therefore
any withdrawals at retirement are tax-free. For the non-deductible Roth IRA,
the income limits are as follows:
For single filers
- income up to $101,000 for 2008 and $105,000 for 2009 ($101,000-$116,000 in 2008 and $105,000-$120,000 for a partial contribution
in 2009)
For married
filers - income up to $159,000 for 2008 and $166,000 for 2009 ($159,000-$169,000 in 2008 and $166,000-$176,000 for a partial
contribution in 2009).
Required Minimum Distributions (RMD) Waived for 2009
For 2009, the required
minimum distributions out of an IRA and IRAB (Inherited IRA) will be waived to help people deal with the historic market declines. Therefore, you are not required to take that distribution this year for 2009. Many people have their distributions taken out automatically from their account every
year by the custodial firm. If you do not want to take the distributions for
2009, you need to make sure there are no standing instructions with your custodial firm (brokerage firm) to take it out. In many cases, the firms have been setting up automatic distribution of the RMDs to
simplify the process. If you find that there are standing RMD instructions, just
have them canceled.
Estate Tax Exemption Increase
For 2009, the Federal
estate tax exemption has increased to $3.5 million from $2.0 million. The $3.5
million exemption is per person and a big help for estate tax savings.
This really simplifies
estate planning because even if you are under it, the $3.5 million limit or $7.0 million per couple limit gives your estate
room to grow without having to worry about the very high estate taxes if you go over the estate tax exemption limit. The $2.0 million was too low because many people’s estates were going over the
limit and they were unprepared to deal with the taxes. This raises the bar for
the need for complex estate tax planning. It is about time the estate exemption
was raised to a reasonable number for many families.
Destocking
Over the last decade we heard talk that the United States has seen the end of severe recessions in the economic cycle. One of the reasons given was that with the new data management programs we had “just
in time” inventory management and, therefore, could not see a recession led by huge inventory liquidations. As the inventory was now highly managed, there would never be a need for large inventories because
we had constant restocking. The theory held up well over the last twenty years
as we saw no inventory reduction-led recessions in the consumer spending areas. We
saw slowdowns on 9/11/01 and during the tech
bubble of 2000-2001, but no severe recessions.
What we are seeing is a massive destocking of inventory as companies
worldwide scramble to reduce inventory in order to raise cash to liquefy their balance sheets, pay down debt, and anticipate
lower consumer spending. Many companies are forced to raise cash because of debt
and credit problems. It is this combination of reduced consumer spending and
a scramble to raise cash that has led to the worst slowdown in the real economy in 25 years; and it is getting worse. We are seeing this destocking manifest itself in everything from liquidation of oil
inventories to huge sales at department stores. Companies need cash because of
the credit crisis and they are selling everything cheaply, from dresses to steel, to get it.
The problem is when companies are liquidating inventory they are not buying anything for inventory. This is why we are seeing factory shutdowns and layoffs as companies are forced to shutdown because of
a lack of credit and new orders; a double whammy on profits. We have all seen
this in shopping recently with the great sales. If you are an average size person,
it is increasingly hard to find clothes that fit you because inventories are so low.
The positive of this is that companies will have to start buying to restock soon.
Take a look at the inventory at Best Buy for example. I was in one last
night and they were out of a standard HP 22 inch computer monitor. I was assured
that three more would arrive the next day! The million dollar question is how
much inventory is left in the pipeline? We will watch closely to see if we get
a restocking rally later this year.
Air Cargo Traffic
At MaxOut Savings Advisors, we are continuing to dig down to determine the
breadth and depth of the economic slowdown. We came across an interesting air
cargo statistic today in the Financial Times of London; the International Air Transport Association reported that December
2008 air cargo volume dropped 22.6% from December of 2007. Surprisingly,
air transport accounts for 35%, value wise, of the goods traded internationally. The
Director-General of IATA said, “There is no clearer description of the slowdown in world trade. Even in September 2001 when much of the global fleet was grounded, the decline was only 13.9%”. This huge drop in air cargo points to the idea that we are still in the midst of a
very steep, broad based worldwide economic decline. Looking at this and other
trade statistics leads us to believe that China’s growth is closer to zero than the 8% GDP figure claimed by China.
Bad Bank??????
The bad bank
concept was created in the 1980s when the FDIC took over a huge number of banks around the country, including those in Texas. The FDIC took over the bad assets, also known as non-performing loans, and created
a bank with the good loans and deposits known as the “good” bank. The
good bank was then sold off, recouping some of the government’s losses. The
Administration’s bad bank proposal so far looks like a program that takes bad non-performing loans off the bank’s
books and allows the banks to clean up their balance sheets at the taxpayer’s expense.
Under the Obama plan, we will not own the “good” bank that can later be resold to recoup taxpayer losses. They are doing this under the guise of “we do not want to nationalize the banks”. We don’t want to nationalize the banks either, but if it comes down to
that or a free bailout for Wall Street banks, we think we should take a look at how to reduce the cost of the bailout to the
taxpayers. Somehow we have to stop this free bailout of trillions of dollars
that the US taxpayers are being forced to pay for. If the taxpayers bailout the banks, then they should get collateral in one form or another. We believe that we will see a “bad” bank in some form in the near future to stabilize the banks.
Cancel Bank Tax Loss Carry Forwards
When a company has
large write-offs in excess of their income, they can often write that loss off over the next couple of years. Until the loss carry forward is exhausted, the company will pay no taxes.
We should come up with a program that cancels any income tax loss carry forwards the banks have if they receive a bailout. If we do not do this, then we will have the ridiculous situation of banks receiving
$100 billion in bailouts to save them from failure and them not paying any taxes to the American people for the next ten years
or more.
Money Supply Growth
The Federal Reserve
has moved very aggressively to supply liquidity to the financial system. During
this time, they have grown their balance sheet from $865 billion in mid 2008 to almost $2 trillion. The results of these huge liquidity injections can be seen in the sharp increase in the M1 money supply
over the last six months. Looking at the chart below, one can see that the money
supply (M1) has grown 20% in the last six months. We expect additional massive
monetary growth throughout 2009, the key question is how inflationary will this be to the economy over the next couple of
years.
