15% Tax Rate
NUA Tax Break
RMD 2010
Flash Crash Fiber Pipe
Mutual Funds vs. Traders
Another Bailout
Cult of Stocks
Investment Outlook
Election Outlook
MaxOut Savings Seminar

Last week I spent a couple of days in Chicago working with Ed Slott at his Elite IRA Advisors program going over the nuances of IRA rollovers, Roth IRAs and conversions.  Ed Slott is the nation’s leading IRA expert.  As an Elite IRA Advisor we are able to work with our clients to ensure their IRA rollover is correctly handled to prevent possible major tax or distribution problems.  We have Ed’s team of experts available to handle any complex problems that should arise with IRAs, Roth IRA or the inheritance of these accounts.  A mistake can cost hundreds of thousands of dollars.  If you have a problem or need some help, we will be able to assist you.

15% Low Rates
Normally at this time of year in Ed Slott’s program, we would be going over the changes in the tax laws and how it will affect our clients.  However, we still do not have the tax laws set for 2011 because of Congress’s ineptitude.  We do not even know if we will have an estate tax next year.  This makes our estate planning more difficult than normal.  In addition to the income taxes and estate taxes, we do not know what the capital gains tax and the tax on dividends will be.  At the present time, the tax on capital gains is 15% at the top rate.  We believe that the capital gains tax rate will be going up in 2011.  If you are thinking of selling a long term capital gain investment, all other things being equal, take a look at selling in 2010 at these very low 15% rates.  We believe that an increase in the capital gains rate could depress the stock market near year end.

NUA: Special Tax Treatment for Company Stock
One of the best, but least known tax breaks available to 401(k) holders at retirement is the net unrealized appreciation stock tax rule, also known as NUA. At retirement, in some cases people need to take a large distribution from the rollover of their 401(k) plan or they may just want their company stock moved out of their retirement plan.  The most efficient way to do that in some cases is to take advantage of the net unrealized appreciation (NUA) tax rules.  The NUA rules allow you to transfer your company’s stock from your 401(k) or company plan into a taxable account and pay only the ordinary income tax on the cost basis of the company stock.  Here is the key: when you eventually sell the company stock, you only pay capital gains tax as opposed to ordinary income tax, which is 15% at the present time.  This strategy works best with highly appreciated company stock.  With the highly appreciated stock, your ordinary income tax portion is low and the appreciated capital gains portion is much higher.  In some cases, the difference could be a 40% ordinary income tax vs. a 15% capital gains tax.

As an example, say an employee of Chevron (CVX) was retiring with a $1,500,000 plan that has $1,000,000 in mutual funds and $500,000 of CVX stock with a $25 per share cost basis.  At retirement, he would rollover the $1,000,000 in mutual funds into an IRA rollover.  He would then transfer the company stock in-kind to his regular taxable account in his name and pay ordinary income taxes on the $25 per share.  No additional taxes are owed until he sells the stock.  The stock would then be out of his plan at retirement.  When he sells the stock at today’s price of $79, the difference of  79 - 25 = $54 would only be taxed at the 15% capital gains tax rate instead of the higher ordinary income rate.  The stock could also be left to grow over the long term at the low long term capital gains tax rate.

The advantage of the plan is that it can reduce taxes, especially for large distributions near retirement.  One of the negatives is that you do not receive a step-up cost basis at death.  Overall, the NUA rules are beneficial when you want to move money out of a 401(k) plan/IRA rollover at retirement.  If you roll your company stock over to an IRA, rollover you lose the NUA special tax treatment.  The stock must come from the company plan.

RMD for 2010
One of the big changes for 2010 is that if you are over 70 ½ or if you have an inherited IRA (also known as a beneficiary IRA) you will be required to take a required minimum distribution for 2010.  This is a big change from 2009 when the RMD requirements were waived.  When calculating the RMD, always use the prior year’s December 31^st balance.  For this year, that would be the December 31, 2009 balance.  If you forget to take the RMD the tax is a 50% excess accumulation penalty!  The deadline to make the RMD is December 31^st unless you turn 70 ½ that year, in which case you have until April 1^st of the following year.

Flash Crash Fiber Pipe
Earlier this year the stock market fell over 1000 points intraday as the result of high frequency trading run amok.  It was the biggest one day drop in history and became known as the “flash crash”.  Not much has changed since then!  In the latest salvo launched by high frequency traders, a $300 million high speed fiber optic cable was secretly constructed between Chicago and New York to shave 3 milliseconds off the time between the Chicago Futures and Trading floors and the New York stock exchange.  When conducting high frequency trading programs, speed is everything.  Three milliseconds will get your order ahead of everyone else’s order.  The people at Jim Barksdale’s Spread Networks are able to charge up to ten times the going rate for fiber optic cables to high frequency traders.  The need for speed is paramount.  This is how the New York Stock Exchange is able to make millions of dollars per year leasing space right next to the NYSE floor to high frequency traders so their orders will get in ahead of individual investors and mutual funds.  That three hundred million would be spent on a special dedicated line gives us an idea of the tremendous amount of money being made by high frequency traders at investors’ expense.

Late Note: Today Hibernia Atlantic announced plans for a new trans-Atlantic ocean cable to connect New York and London for high-speed traders to cut execution time 8%!

Investors Battle Traders
In a recent Wall Street Journal article it was pointed out that the typical mutual fund order is roughly 185,000 shares and the average US stock exchange trade size is 100 to 300 shares.  This is partially because the stocks now trade in pennies instead of 1/8s, resulting in a narrower bid/ask spread size.  That creates a problem of how to execute 185,000 share orders when the average trade size is 100-300 shares.  This is the problem we face at MaxOut Savings Advisors when we buy or sell stock for our clients.  Executing block trades has been made more difficult by high frequency traders trying to find out who is handling block trading and take advantage of them and their clients. For this reason, institutions will break up orders to disguise the size of the order.  One method is to use computer algorithms to facilitate the trade.  At Fidelity Investments, our custodian partner, we use a number of their algorithm programs to help us execute large block trades.  Some of these programs (VWAP) will trade based on volume and percent of volume to get the best possible price.  The computers are very efficient at buying or selling stock without running the stock price up or down.  Another method is to place the order in what is known as a “dark pool” to see if it will execute or use liquidity seeking algorithms.  In the dark pool, the orders are hidden, anonymous and bigger in size.  All of this is done to prevent the high frequency/speed traders from finding the order and front running it through speed or going to other exchanges.  The high speed traders have become a problem and are costing individual investors’ money in the form of higher trade prices.  Even with the obvious conflict, high frequency traders often account for over 50% of the exchange’s volume and they have been able to fight off rules to prevent unfair advantages.  We believe that high frequency trading programs are giving investors a false sense of liquidity in stock markets that vanishes at the first sign of trouble and, therefore, should be curtailed.

Another Bailout
Over the weekend, the Obama Administration announced another bailout, this time credit unions!   Federal regulators announced a $30 billion bailout of the wholesale credit union system.  A wholesale credit union invests money for local retail credit unions and handles the back office check processing.  Federal rules require the wholesale credit unions to invest in safe, liquid assets only.  Even with that requirement, five of the nation’s twenty-seven credit unions have failed.  The failed firms made risky real estate loans and bought sub-prime mortgages from Wall Street firms.  In theory, the program backed by the National Credit Union Association will not cost taxpayers money because they will issue $30 billion in bonds to be paid back to the nations credit unions in the form of higher assessments.  We shall see; we will have to pay for it in one way or another.  The good news is that most local credit unions are in good shape.

To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com.