Retirement Wealth Advisors is pleased to support the Susan G. Komem for the Cure Foundation this week by sponsoring the Think Pink Golf Tournament at Spring Lake Country Club.  Along with dozens of other sponsors and over 100 golfers we’re hoping to raise over $20,000 for breast cancer research.

The basic metrics for this measurement is that 1 equals the best economic conditions the USA has ever seen and a 100 is the worst we’ve ever seen. We call this Recession Probability Analytics (RPA for short) because the measurement has been a very good predictor of when the US will fall into recession. When that happens the US stock market generally doesn’t perform too well and it’s not a bad idea to look for safer alternatives to the market for investment capital.

Without further ado, here’s this month’s reading of RPA:

34.27

In a nutshell this is pretty good. Anything above 50 is where we draw the line and history tells us to be cautious (ie, get out of the market). And, this is a slight improvement from last month.

While the market is certainly volatile today, it has little to do with the current economic state of the US and more to do with the fact the market has run up nearly 50% in past 2 years. In times like this I like to believe the best medicine for most investors is to be broadly diversified but not frightened. There will be some short term ups and downs – but nothing that should scare an investor away from their overall investment plan.

Until next time,
Jason Wenk

The basic metrics for this measurement is that 1 equals the best economic conditions the USA has ever seen and a 100 is the worst we’ve ever seen. We call this Recession Probability Analytics (RPA for short) because the measurement has been a very good predictor of when the US will fall into recession. When that happens the US stock market generally doesn’t perform too well and it’s not a bad idea to look for safer alternatives to the market for investment capital.

Without further ado, here’s this month’s reading of RPA:

31.29

In a nutshell this is pretty good. Anything above 50 is where we draw the line and history tells us to be cautious (ie, get out of the market). And, this is a slight improvement from last month.

While the market is certainly volatile today, it has little to do with the current economic state of the US and more to do with the fact the market has run up nearly 50% in past 2 years. In times like this I like to believe the best medicine for most investors is to be broadly diversified but not frightened. There will be some short term ups and downs – but nothing that should scare an investor away from their overall investment plan.

Until next time,
Jason Wenk

• Grant and scholarship opportunities
• Credit protection
• Exemption from state financial aid calculations

There are two types of 529 plans: prepaid and savings. Prepaid plans involve the purchasing of tuition credits for future use. Its growth is decided by the inflation of tuition fees. This type of 529 plan is given by states or higher education schools. On the other hand, savings accounts measure its worth through investments which usually take the form of mutual funds. These investments normally become more conservative when the holder of the account reaches college age. Savings accounts are only administered by the state but its record keeping is assigned to a financial service company.

Income Tax Deductions

Contributions made to 529 plans are not deducted to the federal income tax liability of the donor but there are certain states that offer deductions for a percentage or even for the entirety of the donation. The principal is also deferred from tax as well as distributions from the college costs of the student beneficiary of the 529 plans.

The designated beneficiary dies, and the distribution goes to another beneficiary or to the estate of the designated beneficiary. Here is a rundown of the provisions under the 529 plan:

• scholarship excludable from gross income
• educational assistance for veterans
• educational assistance from employer
• nontaxable payments not including gifts which are received for education costs

Control of the Account

The 529 plan enables the donor to retain the control of the account. The student beneficiary will have no rights over the funds except special circumstances. There are instances where you can reclaim the fund but the earnings of this “non-qualified” withdrawal will undergo the income tax rate plus the ten percent penalty tax.

Hands-off Savings

The 529 plan is also fairly easy to use. Just fill up an enrollment form and make a contribution. Afterwards, you don’t have to exert effort to maintain it because the plan will handle the continuing investment. The handlers will either be the office of the state treasurer or an external third-party investment company. No Form 1099 which will report taxable or non-taxable earnings will become the burden of the donor.

More importantly, there are no income limitations or restrictions for age. Normally, the initial requirements are minimal and the contributions are low. Most state plans feature over $300,000 in savings.

Exclusion from Tax Estate

More importantly, the generosity of donors is rewarded because the assets from a 529 plan are not marked as part of the estate tax of the donor. Thus it is an efficient investment planning tool to move assets while maintaining a sense of control for the money. Although tax savings are only experienced when the money is actually spent for education, another benefit is that unused amounts of the 529 plan can be transferred to other qualified members of the student beneficiary’s family.

A final rather unusual advantage of the assets in a 529 plan is that although they can be reclaimed by the donor (subject to income tax and the 10% additional penalty on any gains) the assets are not counted as part of the donor’s gross estate for estate tax purposes. Thus 529 plans can be used as an estate planning tool to move assets outside of one’s estate while still retaining some measure of control if the money is needed in the future. A beneficiary must be designated and the income tax savings are still only obtained if the money is eventually spent for education, though in some cases estate taxes can be reduced without spending the money on education. The IRS calls this move as a Rollover and can be studied more thoroughly in the Qualified Tuition Program.

The 529 Plan may only allow a single exchange reallocation of assets per year and the tax penalties may be immense if the savings are not used for education. But as a whole, the 529 plan is one of the best things to happen for education.

Tale of the Tape: Democrats versus Republicans

The political change is defined by the overwhelming of the Republican Party during the midterm elections last November 2, 2010. The Republican Party earned a majority of the 435 seats in the House of Representatives as well as most of the state governorships. This is seen as a gridlock because the White House is a Democratic turf with President Barack Obama as its number one asset.

For starters, the Republican Party is also called the Grand Old Party or GOP. It has a conservative stance and was established in 1854 during the height of activisms and protests against slavery expansion. On the other hand, the Democratic Party takes pride in its liberal approach to politics. In the political spectrum, their positions are normally marked by the center-left orientation.

Although difference in views and debates are crucial values of democracy in the United States, financial analysts are not too keen about a possible gridlock in government. With the memory of recession fresh in the minds of everyone and with the economy still struggling to get up, do we still need a fresh injection of political divisiveness?

Will the Economy Be Caught in the Crossfire?

Some business experts are saying that a divided government will only make it hard for help to arrive for segments of the nation needing immediate government action. Others say that a disjointed government will not inspire confidence among investors. Stability is key for investors and if they are unsure about the political climate of the country, the economy may just stall with a long wait-and-see approach.

An instance where the disagreement of the Republican-dominated House of Representatives and the Democrat-powered White House is observed is with the intention of President Obama to spend over fifty billion dollars to infrastructure will counter any additional moves for economic stimulation. Thus, the infrastructure plan may be dead in the water. If the proposal is to survive, it will be a watered down version bombarded with amendments and revisions.

The health care law proposal of President Obama, a key benchmark of his platforms while he was campaigning, will also be under fire. While the benefits espoused by the health care upgrade will surely be welcomed by the people, the Republican-dominated House of Representatives believe that the proposal has too many entitlements which will drive the budget to an even greater imbalance as it struggles to keep up with its massive deficit. Of course, any changes enacted by the House of Representatives will have no match against the powers of the presidential veto thus leaving the issue in a state of uncertainty.

Are Compromises Imminent?

There are indications however that both camps in the gridlock can work together towards a common goal. The free trade proposals of Obama in South Korea are welcomed by the Republicans with open arms. Both camps worked together to extend some of the 2010 tax cuts.

In an investment planning research conducted by Fidelity Investments, the stock market has seen a boost in stability each time the midterm elections finish successfully since 1950. So whether or not, the results of the midterm elections result in a gridlock between the Executive and the Legislative branch, it does not pose any difference for investors as long as the stability of democracy remains.

Besides, both the Republicans and the Democrats want nothing but the best for the nation. They may have a difference of opinion about how to solve the problems of the country but in the end patriotism will win out.

Pending Pocket Crunch

With the looming expiry of the tax cuts, President Barack Obama has indicated that the 2011 tax increase will mostly hit high-income taxpayers. This includes married couples with income over $250,000 and single people with income above $200,000 among other tax changes. Here is a rundown of the financial moves you should expect when the 2011 tax increases hit:

• Change of income threshold for a higher rate
• Return of the personal exemption phase-out
• Limitation of itemized deductions
• 20% tax rate for long-term capital gains and qualified dividends

Financial analysts are anticipating a five percent increase for all taxpayers with the high-income bracket being the most affected. They do not see a drastic discouragement for many investors even with this incoming changes. They see the impact of the increase of five percentage points as relatively modest. If anything, the hype or dread being generated by the tax increase will breed an artificial selling pressure for investors. Furthermore, this tax hike is seen as a result of President Obama’s numerous entitlement programs.

Return of the Death Tax

Perhaps the most significant tax change the nation will experience is the return of the death tax. People who rest in peace will not only leave behind their last will and testament and all of their properties, but also a tax receipt.

The death tax has already been removed before but when it comes to effect again, estates with values above a million dollars will be taxed at a whopping rate of 55 percent. Also making its return will be the “marriage penalty.” The capital gains tax is also scheduled to increase from fifteen to twenty percent. Here is a checklist of the financial changes you should expect when the calendar year flips a page:

• Increase of the lowest bracket for personal income tax from ten percent to fifteen percent.
• Increase of three percentage points for the next lowest bracket, 25% to 28%
• Tax on dividends to increase by almost a hundred percent, 15% to 39.6%
• Numerous taxes for the incoming “health care reform law” with an anticipated $409.2 billion by the year 2019.
• An estimated 2.6 trillion dollars in tax increases through the year 2020.

Impact of the Increased Capital Gains

For starters, the term ‘capital gains’ describes the profit earned by the sale of a non-inventory asset bought at a low price. These are normally posted from bonds, stocks and real estate.

The year 2011 will be marked by an increase of capital gains, highlighted by a 1/3 increase in the effective tax rate. This is already a valid reason to consider a sale for the end of 2010. The threat of the tax increase will create a more pressing need for buyers to make a purchase by the end of 2010.

Buyers will be in great supply and sellers will be in an optimum position to negotiate with terms. However, now that the year 2011 is fast approaching, buyers can use the approaching tax increase as leverage against sellers. Because buyers are aware that sellers are anxious to avoid the tax rate increase, they may impose harder demands and stricter terms to sellers. But whether you are a buyer or a seller, the year 2010 will prove to be a busy year for trading.

Foresight for 2011

Keep in mind that none of this is set in stone. Congress is trying to come up with compromises before January 1st to keep some of the Bush tax cuts in place. Tax increases will only happen if Congress fails to act.

Planning for the year ahead will go a long way to ensuring your financial stability especially with your tax situation. The economy has yet to recover from its recent bouts with recession and most people will see that there’s no other way but up over the long term.

However, stability for your pockets is best achieved with a hands-on approach at managing your finances as well as a clear understanding of the economy. Consulting a wealth management adviser can help guide your decision-making as well. With the market in flux, learn to get connected with the latest developments and trends in the economy so that you can act on your feet when a business decision needs to be made or when doing your investment planning.

Generosity seems to be in the air now with the holiday season coming up. But it seems even generosity has to be charged nowadays. If you are planning to give money as gifts for your children and grandchildren, there are limits and regulations which you must learn and consider. This is especially true if the gifts you give them will be used for savings.

Charge for Generosity

Cash, investments and properties can be freely given to children and grandparents—provided they don’t exceed the amount of $13,000 annually. This limit is for one person, thus two parents can combine $26,000 for their child (or potentially more if the child is married). If you go way off the mark of these monetary limits you will have to mandatorily file an IRS Gift Tax Form 706 and other payments for gift taxes.

The taxes come in the form of interest should the amount be deposited in savings account. This imposition will take effect if you are the child’s parent or step-parent. If your child is unmarried and under the age of eighteen, then the amount will also be taxed once the limit is reached. This limit may be adjusted for inflation in future years.

Tax Breaks

Thankfully, there are tax breaks enacted to help your wealth management moves. Based on the provisions of the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), you can manage tax-free gifts under the $13,000 limit per child. You can also use mutual funds which will allow small investments. The earnings of a child’s savings account powered by cash gifts are bound by tax but benefits can be applied varying on the child’s age and amount of earnings. Some adults use these provisions to manage their estate taxes well.

How do you file a UGMA or a UTMA account? First, you need to establish the investment or savings account in the name of your child, with you as the custodian. Note that if you were the one who gave the cash gift, it will still be charged in your estate and not to the child. You can open this account with an eye for the future. Your child may be able to use this fund for college tuition fees and other expenses once your child gets older.

You also have the option of opening a trust instead of custodial account but a consult with a wealth management advisor is recommended in order to maximize the advantages of this type of account.

Under the provisions of the UGMA/UTMA, the initial $950 per year of unearned income will be free of tax. If the child has yet to reach the legal age of eighteen, $951 to $1,900 of unearned income will be charged with tax but still under the rate for a child. If the amount goes beyond $1,900 for children below the age of eighteen, the tax rate for the income will be higher than the parent’s or child’s rate.

However, the limit of thirteen thousand dollars is already a lot for a year’s worth of cash gifts. This is why most custodial accounts even lower the requirements for initial investments of a thousand to 2,500 dollars.

Here is a list of the financial moves which you can use to manage these monetary gifts for children and grandchildren:

• Savings accounts
• Series EE U.S. Savings Bonds
• Stocks
• Treasury bills
• Zero-coupon bond
• Mutual funds
• Exchange traded funds

Gifts for Adults As Well

The key thing to remember is that with the thirteen thousand dollar limit in mind, you can even give gifts to adults as well. If you are an adult recipient and you choose to sell or redeem this gift, you will be responsible for the capital gains tax the amount will incur. Cars and other valuable collectibles are under this category and its value is determined on the day it was given. The fair market value of the gift will be noted at the time of transfer.

If you are having qualms about a direct gift, the IRS allows you more options using a check with a gift tax-exempt basis. You can use a qualified transfer without dollar limits. This method can be used for college tuitions and medical bills—although it is required that you write the check directly for the institution involved.

Even with these tax impositions, the spirit of generosity should still not be lost on you. Remember the limits carefully and you can proceed with the joys of giving.

A continued bright spot for the US Economy seems to be indicators that continue to show positive strength such as the ISM manufacturing and non-manufacturing. Some would argue that these two indicators should be monitored closely for any potential future economic strength or weakness. The ISM Manufacturing Index is released by the Institute of Supply Management which tracks the amount of manufacturing the prior month. The most recent reading was the strongest since 2004.

The big news no doubt came from Washington as Health Care reform passed making history. How this will translate to the economy know one at this point really knows. Providing health care for some 32 Million Americans currently going without has to be considered a huge relief. However, without question many pundits would argue the potential tax consequences could offset Health Care reform benefits. Considering the current federal deficit of over 1.4 trillion the argument of adding further burden could cripple the economic recovery…keep in mind much of the health care reform benefits do not take affect for several years.

Our own proprietary signal for the economy provided a normal reading for the month of April 2010 = 47.78

Recession Probability Analytics is a quantitative, completely mechanical and emotion free way of looking at the strength of the US Economy. When the reading is high, it warns of coming slow – downs and serves as a warning sign to investors. While its use is flexible, it is generally a good idea to use caution when investing in higher risk US assets, such as stocks and high yield bonds when the reading is in red. When the indicator reads “above 50″ we feel there is a high probability the US Economy will worsen in the following month, and therefore, stocks should be invested in with caution. Generally, when this occurs, we reduce stock exposure by 50% on our investment strategies. When the indicator reads “below 45″ we feel there is a high probability the US Economy is within its normal range and therefore should be able to sustain growth.

• Recession Probability Analytics Factors
• Case-Schiller Home Price Index
• Initial Jobless Claims
• Chain Store Sales
• TED Spread (difference between 3 mth. Labor and t-bill)
• Fed Funds Futures
• Core Capital Goods Orders
• Survey Of Business Confidence
• Consumer Comfort Index

You still have time to reduce your taxable income and boost your retirement savings. The IRS gives tax payers until April 15 of the following year to contribute for the previous year’s earnings (for example; 2009 IRA contributions can be made up until April 15, 2010). The contributions can be made into a Traditional IRA or a Roth IRA.

The IRA limits for tax year 2009 are as follows:

• Maximum Contribution Limits (If under age 50) $5,000.00
• Maximum Contribution Limits (If over age 50) $6,000.00

As we mention the above limits we have to remind you that there are employment and income restrictions that come along with IRA contributions (we would recommend talking with your advisors or accountant to determine qualifications based on employment and income).

Now that we have reminded you about 2009 IRA contributions we wanted to update our readers and let them know there are some changes with regards to Roth IRA conversions and the 2010 tax year. This year the government is allowing any individual (regardless of income) to convert their Traditional IRA to a Roth IRA. Before this year income limitations were imposed on Roth conversions for those tax payers whose incomes were over $100,000. However, the recent tax law changes allow anyone to convert their Traditional IRA’s to a Roth IRA. One thing to keep in mind is that this is still considered a taxable distribution; hence one has to pay taxes on the pre-tax contributions and earnings that are converted to the Roth IRA.

The other major change will help tax payers lessen the tax burden on their converted IRA money. The new law states tax payers that convert money from their Traditional IRA to a Roth IRA can realize half of the tax in 2011 and the other half in 2012, thus spreading out your tax burden over a couple of years instead of all at once (which may cause other income to be taxed at a higher rate than usual). Again, we would recommend talking with your tax professional or advisor to help determine if the 2010 changes would benefit your individual situation.

Many people question whether contributing to an IRA is beneficial or not. According to Fidelity over half of Americans are currently not taking advantage of the benefits of IRA’s. The IRA may not be the sole vehicle that allows us to retire, but it will enhance our current level of retirement savings and allow retirees to live a more comfortable lifestyle during their retirement years (employer sponsored retirement plans may not be enough to provide the lifestyle individuals have grown accustomed to during their working years).

What we are trying to inform you of is that saving for retirement is important. In the past Americans have relied on Pension Plans and Social Security for their retirement income; not any more. Pensions have basically gone away and Social Security is changing and will change even more within the coming years. We should rely upon ourselves to establish good saving habits and take full advantage of what the government is willing to give us in the form of tax benefits in regards to investing.

FACTOID for the week: According to AP (Associated Press) and the Employee Benefit Research Institute the percentage of workers that have saved for retirement is down to 69% in 2010, a drop from 75% in 2009. Of the 69% that stated they have saved for retirement more than 25% of them have less than $1,000 in total retirement savings. This is a scary realization that we have to be aware of.

How can a state that has ranked in the bottom of the nation’s employment rate the last couple years finish #3 in the country for new corporate development the last two years, according to Site Selection magazine?

The state of Michigan has been hard at work trying to attract new businesses to the area and shifting from the automotive industry into other areas of business. While it would be easy to take a negative stance regarding the state of Michigan’s economy, I believe we should take a look at the positive side. New businesses and corporations are building in Michigan, while it may take a while to completely turn around the economy and get unemployment levels back to where they were. Steps are being taken in the right direction.

New corporate projects for Michigan include energy storage and solar firms like the Wixom Renewable Energy Center; advanced battery development and manufacturing firms like LG Chem, who is building a new $303 million plant in Holland to compete with Johnson Controls Saft Advanced Power Solutions; and electric and hybrid vehicle production by GM and Ford; and then there is talk of wind farms on the shores of Lake Michigan.

New businesses, new buildings, and new technology are starting to show up in the area. Michigan is trying to make things easier for businesses to come in by offering tax breaks and renaissance zones, but what do you think? Is Michigan moving in the right direction? What further steps need to be taken?