Year End Strategies

Year End Strategies
Roth Conversion Deadline
Billions for Foreign Banks
Irish Rescue
Ten Years After
Outlook
Pension Lump Sum Changes
Ed Slott’s Elite Advisor Group

Year End Strategies
At yearend, the first thing to consider is, are you saving enough for retirement? We generally recommend that you should be saving 10% plus the company match. If you are over fifty and in the “retirement home stretch” and behind in your retirement savings plan, then your savings rate should be closer to 15%. At MaxOut Savings Advisors, we see people come in all the time that are saving 15-20% of their income. In some plans, your savings rate can only be changed at yearend or at the start of the New Year. Yearend is the best time to plan your savings for 2011. Remember our motto, Save Aggressively….

Well here we are in December and we still do not know what the tax rates for 2011 will be. That does not mean we cannot still do some tax planning. One thing is for sure, tax rates will not be going down for most people! The first thing to do is to take a look at capital gains or losses for 2010 and try to even them out. If you have a realized capital gain for the year, now is the time to look at taking a capital loss to offset the gain and eliminate any capital gains taxes due. Remember, long term capital gains holding period is one year; anything held for less than one year is a short term capital gain and is taxable at ordinary income rates. Up to an additional $3000 in capital losses can be deducted from your taxes. Anything over $3000 in losses in excess of gains is a capital loss carry forward that can be deducted in future years. Now is the time to prune your portfolio to offset realized capital gains with losses before yearend.

Wash-Sale Rule
Another thing to consider is that the long-term capital gains tax is at a historic low of 15%. We could see a jump to 20% next year depending on what happens with the tax bill. If you have a long term gain in a stock that you are thinking of selling, this tax rate is about as good as you are going to get. If it looks like they will raise the capital gains rate next year as we get closer to yearend, it might be a good idea to sell it this year and pay the low 15% tax rate.

If you sell a stock for tax losses, you cannot buy it back for 30 days. Under the IRS wash-sale rules, your loss is disallowed if you purchase the stock back or a substantially similar security within 30 days. The thirty days applies before and after the stock sale.

Beware of Mutual Fund Capital Gain Distributions
If you are purchasing a large amount of a mutual fund in December, make sure you check for capital gains distributions by the fund at year end. If you purchase the mutual fund and the next week it makes a capital gain distribution for 2010, you are responsible for the taxes unless it is in a tax free account. You are still responsible for the taxes even if you reinvest the funds into the mutual fund. For 2010, the gifting limits are $13,000 that can be gifted tax free. If you are a married couple, two people can gift a total of $26,000. This is useful for estate planning and helping kids or grandkids with a home purchase or school.

For 2010, if you are over 70 ½ or have an inherited IRA, you need to make a RMD (required minimum distribution) from your IRA. Many people have them automatically taken out every year; however, in 2009 there was no RMD required and many of these programs were stopped. All RMDs must be taken by yearend or there is a very high tax penalty.

Roth Conversion Deadline
If you are considering converting your IRA to a Roth IRA in a Roth conversion, you have until the end of 2010 to make the conversion and spread out the income. For 2010, all income limits for Roth conversions have been waived. For now, they have also been waived for 2011. This year you can take advantage of the Roth conversion and claim 50% of the income for 2011 and 50% of the income for 2012. This Roth conversion deferral is only available up to the end of 2010.

A couple of things on the Roth conversions; you can do a partial conversion. You can do the partial conversion with cash or securities. We have seen less people doing a Roth conversion than we anticipated, generally because people cannot stand paying the taxes on a Roth conversion. We have found four areas that make the most sense for a Roth conversion.

Young savers with a small plan.
People with very large IRA rollovers and few assets outside that IRA rollover. In this case, a partial conversion gives you access to tax free money.
People 85 years or older that have large RMDs they do not need and use the conversion to reduce estate taxes.
IRAs that are in Trusts to reduce taxes.

Billions for Foreign Banks
This week, after being ordered to do so by the courts, the Federal Reserve released details of what companies received bailouts and how much they got during the 2008 economic crisis. Although we had a good idea of the size of the financial stabilization (bailout) programs, exactly who got the money was never revealed until now. The extent of the bailouts and who received them was somewhat shocking. Even Fed insiders such as former St. Louis Federal Reserve President William Poole were surprised at the extent of non-US bank borrowing, stating “I was under the impression that each country bore the responsibility for supervising the banks headquartered in their borders”. Foreign banks were among the biggest beneficiaries of $3.3 trillion in emergency credit. The following is a list of the biggest beneficiaries (cumulative dollar totals).

Barclays Bank (UK) Lehman $232 billion
Bank of America (US) Merrill Lynch $212 billion
Bank of Scotland (UK) $181 billion
Wells Fargo (US) $154 billion
Wachovia (US) $147 billion
SocGen (France) $124 billion
Dresdner Bank (Germany) $123 billion
RBS Citizens (UK) $117 billion
BayernLB (Germany) $108 billion
Dexia Credit (Belgium) $105 billion

The extent of the bailouts was truly breathtaking and confirms that the world’s financial system had essentially collapsed. The Federal Reserve moved in to keep money flowing and prevent a total freeze of the financial system. Looking at the bailout in that regard, they were successful in preventing a financial collapse. Although we question the extent of United States funds being used to bailout European and Asian companies. Seven of the top ten companies receiving bailout money were European.

Among other US companies saved from collapse, Goldman Sachs received over $25 billion, Morgan Stanley $60 billion, General Electric $16 billion and Harley Davidson got $2.3 billion. UBS, the Swiss company, received $75.4 billion in bailout money. This is just a partial list of the beneficiaries of the Federal Reserve bailouts.

Money for Nothing!
Another interesting bit of information released was that the Federal Reserve lent three private groups a total of over $130 billion under the CPFF program that was used to stabilize the commercial paper markets. New York based Hudson Capital received $53.3 billion, BSN holdings $42.8 billion and Liberty Hampshire Co., a unit of Guggenheim Partners LLC, drew $41.4 billion according to Bloomberg. There are few places in the world where private companies nobody has heard of are lent up to $50 billion to make speculative investments at the bottom of a crisis.

The lending by the Federal Reserve Bank to foreign banks and investment houses is sure to be investigated by Congress when the Republicans take over in 2011. It is our belief that if companies make poor decisions and take on too much debt, they should be allowed to fail in a capitalist system. The question going forward is whether the Federal Reserve will bail out Europe again given the ongoing European debt crisis. And how does the Federal Reserve ever reign in the excess liquidity they created?

Irish Rescue
Early this week the European Central Bank (ECB) mounted a $120 billion rescue plan for Ireland. Ireland does not need a rescue; it needs to restructure its debt, particularly the bank debt. The rescue is sweeping the problem under the rug and saddling the Irish people with a huge debt burden to rescue their banks whose debt should have been restructured. The Germans wanted the bank bond holders to take a loss but were pushed back by the UK and France that had a large amount of this debt on their bank’s books and could not take the losses.

We will now watch to see if the debt crisis spreads to Portugal and Spain or to other countries. Below is a chart of the Spanish 2016, 3 ¼% government bonds. We can see the sharp rise in rates from 3.6% to 4.9%. Over the last few days, rates have fallen to 4.4% as the European Union seeks to stabilize the crisis in Europe. In Portugal, the rate has gone from 5% to 7%, back to 6.2% as the rescue kicked in. This does nothing to hide huge loan losses from real estate in Portugal and, particularly, Spain. The EU will have a very hard time bailing out Spain as the economy is many times larger than Ireland.

A Spanish bailout could cost over $500 billion or more if it spreads to the banking system. We believe Portugal will need some type of bailout from the EU. We also believe that the Swiss could run into trouble with the Swiss franc in the future due to the size of the financial system in Switzerland relative to its GDP; it is very large. We expect the European economy to slow down over the next couple of quarters.

One of the interesting things about the Greek and Irish bailouts is that many experts believe that they will both need to restructure their government debt sometime in the next couple of years. What the bailouts have done is to allow the Greek and Irish governments to forgo borrowing new money for several years to give them time to make cutbacks and get their financial houses in order before the restructurings.

Ten Years After
This week the BLS reported 2010 November job gains of 39,000, materially weaker than the 150,000 jobs expected by economists. This is a disappointment and shows we are lagging in job growth. At the same time, they reported that the unemployment rate jumped up to 9.8%. As can be seen from the chart below from shadowstats.com, total nonfarm payroll is below what it was a decade ago. Shadowstats.com points out that this is the case even though the US population has grown 10%.

The debt bubble recession has cost almost 8 million jobs. We have had no job growth in ten years. During that time, China has seen huge job growth. This is one reason we believe that we are in a currency/job war that is in the early innings. We are now seeing most countries around the world depreciate their currencies to boost job growth as currency has replaced tariffs in the war for jobs.

In late August, the Federal Reserve began leaking details of their new quantitative easing program (QE2). Quantitative easing is a fancy way to say printing money. The program was put together to prevent deflation and keep the economy moving forward. It was also going to purchase longer term US government bonds to keep interest rates down. Looking at longer term treasury interest rates, the QE2 program appears to be failing. From late August to December, interest rates have risen across the treasury curve. As can be seen from the chart below of 10-year US Treasury Notes, the yield has moved from 2.55% to 3.0% during the start up of QE2. The 30-year bond has moved up from 3.65% to 4.31% and the 5-year yield has moved up from 1.4% to 1.65%.

On the positive side, QE2 has been successful in boosting stock prices 15%, oil 14% and gold 14.5%. The Federal Reserve appears to be attempting to manufacture inflation. The dollar is down 4.5%; however, this is after a big rally in the dollar after the run on the Irish bonds and subsequent bailout. We do not believe that QE2 was needed and think the Federal Reserve should scale back the program because it is an attempt to manipulate asset prices that could have negative long term consequences for inflation and the dollar. Over time, the dollar will fall because of this and there is a danger of a run on asset prices that the Fed is trying to support.

Outlook
For now, stocks are riding up on a flood of Federal Reserve liquidity from QE2. There has been an unexpected push back from many sectors on the Federal Reserve regarding QE2 and it could have to reign in the liquidity sooner than expected. If this were to occur, it would be negative for the equity markets. We expect the Fed to continue QE2, QE3, QE4, etc. until they are forced to scale it back by a decline in the dollar or pressure from Congress. The Irish financial crisis will cause European growth to slow going into the New Year. This will reduce corporate profits in Europe. The decline in the euro will further hurt European profits for US companies. This should cause a worldwide correction in stocks in the near future. In addition, we believe many emerging markets are fully priced. We are finding the best value worldwide in large cap multinational US companies with strong balance sheets and good dividends. The dividends, in many cases, are paying twice what CD rates are and, in some cases, more than the ten year bond. After a short rally, the US dollar will continue its decline and gold should continue its bull market.

First Bond Fund Selling
In the last two years, investors have poured over $500 billion in bond funds while taking money out of equity funds. For the first time in almost two years, investors have started to pull money out of bond funds. We believe we are at the end of the bull market in bonds and the recent selling could be the start of that as investors resist record low interest rates pushed by the Federal Reserve. With the declining dollar and inflation on the horizon, these low rates are becoming more problematic with investors. We will have to watch the bond fund selling to see if it is the start of a new trend. Over the long term, the returns for stocks should be much better than bonds given these historic low interest rates. We believe continued higher levels of cash on the sidelines are warranted.

Pension Lump Sum Changes
When you retire from a company you are often offered a lump sum option for your pension plan. The amount is calculated using interest rates; the lower the rates, the higher the lump sum as the lump sum amount goes up and down inversely to interest rates. In a low interest environment, it is often more suitable to take the lump sum and roll it over into an IRA rollover. Since 1994, most lump sum payments for IRA rollovers have been set using the 30-year Treasury bond. This has been a good thing because treasury rates have been at historic lows, resulting in larger lump sum payments. However, based on the 2006 Pension Protection Act, since 2008, companies can use the composite corporate bond rate instead of the 30-year treasury rate. Corporate bond yields are generally higher than US treasury yields. This change will result in lower lump sums going forward. The calculation change is being phased in over the next five years. So if you are retiring, take a look to see if it would be better to retire in 2010 instead of 2011 by comparing the lump sum amount for each retirement date.

This is a busy time of year for us at MaxOut Savings Advisors as we work on our year end strategies and get ready for the New Year. I often find great values at year end in the equities markets. We will be looking closely at the markets for opportunities over the holidays. At the same time, it is great to get together with family for the holidays! I hope all of you have a Merry Christmas!!!

Ed Slott’s Elite IRA Advisor Group
A large portion of the assets that we manage are brought in through IRA rollovers. Along those lines, we are a member of Ed Slott’s elite IRA program. Ed Slott is one of the foremost experts in the country on IRA and IRA rollovers. As an Elite IRA Advisor, we undergo quite a bit of training to understand IRAs and Rollovers and their many nuances. If you have a technical question about your IRA or IRA rollover, please let me know and I will be happy to help you out.

Retiring soon? Now is the time to set up an appointment with MaxOut Savings Advisors, LLC. At MaxOut Savings Advisors, LLC, we work every day managing investors’ IRA, Rollover, Brokerage, and Trust accounts. If you need help or would like MaxOut Savings Advisors, LLC to manage your accounts, I would be happy to meet with you. Email us at ted@maxoutsavings.com or call us at 713-627-0400.

Do you have an account at Fidelity?
Do you already have an account at Fidelity Investments? The MaxOut Savings Advisors Team can actively manage the assets for you at Fidelity. We will make the investment decisions for you and you can monitor your account from Fidelity’s website. We use the same value based investment strategies we talk about on the MaxOut Savings Show every weekend. In most cases, you can sign a simple form to add us as the advisor to your account and we can use your same Fidelity account number.

Considering an IRA Rollover?
If you are retiring soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle your IRA rollover. We can help you take advantage of the NUA tax break if you have low cost basis company stock in your plan. We will sit down with you and go over your financial situation and needs and come up with a plan. We will show you how we actively manage accounts using our value analysis strategy to grow your investments and reduce risk.

MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming. Is your advisor looking at risk and actively managing your retirement account? Hiring the MaxOut Savings Advisors Team to manage your money or IRA rollover is a great first step toward a successful retirement. MaxOut Savings Advisors, LLC is an SEC registered, fee-only investment advisor based in Houston, Texas. Ted Geoca has over twenty year’s of investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years. We look at risk as well as return to actively manage your investments through today’s changing markets. We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors, LLC to manage your retirement investments using our value methodology, I would be happy to meet with you. To schedule an appointment please give us a call at (713) 627-0400 or email me at ted@maxoutsavings.com.

Remember Save Aggressively and Invest Conservatively!