chart courtesy of CNNMoney

The effects of the European debt crisis on the U.S. stock market are undeniable. The following article outlines what you need to know and what the outlook is for investors. 

Market’s biggest risk? Duh. It’s Europe.

by Hibah Yousuf
visit CNNMoney to view the article

NEW YORK (CNNMoney) — It’s been on and off the back burner for a year and a half, but the European debt crisis is finally nearing a boiling point.

In fact, more than 80% of the experts surveyed by CNNMoney agree that the money problems across the Atlantic are the most challenging hurdle for stocks, which have been struggling to claw back from the lows they hit earlier this month.

“Europe’s debt crisis is the No. 1 risk facing the market right now,” said Fred Dickson, chief market strategist at D.A. Davidson & Co. “Each step made toward solving the sovereign debt or bank reserve issues seem to raise new question, and the news suddenly changes from being very negative to very positive and vice versa.”

Investors first became troubled by the eurozone’s fiscal woes in early 2010, as worries about Greece defaulting on its debt spread to the other so-called PIIGS, including Portugal, Ireland, Italy, and Spain.

Policymakers were able to ease those concerns with bandages of bailouts and austerity measures, and events like the Arab Spring helped distract investors, at least temporarily. But the crisis continued to escalate and has gripped investors’ attention for months.

Europe’s debt crisis: 5 things you need to know

Lately, every time any incremental progress has been made toward solving Greece’s debt problems or the spreading European crisis, investors react with a surge of optimism and stocks rally.

But when political conflict or rating downgrades take over the headlines, it’s like splashing cold water on that optimism and stocks tumble.

Amid all the mood swinging, the S&P 500 has mostly been moving choppily sideways between 1100 and 1200.

“If we see some sort of plan or deal that settles Europe’s issues, that will relieve a lot of the uncertainty that markets hate [and] stocks will be able to break out of the range to the upside,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

But that may still be a ways off. Late Tuesday, Slovakian lawmakers rejected a plan to overhaul the European stability fund. Slovakia was the last of the 17 eurozone countries to vote on changes to the fund, and the only country to reject those changes.

Even a Greek default, which is now widely expected, would help ease tensions, he added.

“With all the negative priced into the market, a default by Greece wouldn’t be the end of the world,” Detrick said. “In fact, it could be a potential positive to get some uncertainty out of the way.”

CNNMoney survey: Where the markets are headed

Investors would breathe an even bigger sigh of relief if European leaders announce a plan to recapitalize the banks that have exposure to Greece and other debt-laden countries.

“What we want to see is essentially what would be a TARP fund to finance and isolate the bad assets at banks, like Belgium is doing with Dexia,” said D.A. Davidson’s Dickson.

Last weekend, the leaders of Germany and France, Europe’s two largest economies, said they’ve agreed on a “comprehensive package” of measures to address the eurozone sovereign debt and banking crisis, but were tight-lipped about the details. The plan is expected to unveil at the G20 meeting in Cannes Nov. 3 and 4.

Meanwhile, European Commission president Jose Manuel Barroso is expected to announce his own recapitalization plan Wednesday afternoon.

As long as the risks of a contagion are contained, Europe’s debt crisis should move out of the limelight, allowing investors to focus on the U.S. economy and earnings. But that doesn’t mean it won’t creep back in later.

“We’ll be talking about Europe for the next five years probably,” said Dickson. “For the situation to really abate, there need to be signs of better economic growth in southern Europe — Greece, Spain, Italy and Portugal.” 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Today’s market activity with early losses followed by a late rally, are evidence of what a volatile environment investors are faced with. While concerns about conditions in Europe and Greece are factors, there are many influences on stock prices. The following article outlines some of those influencing factors on the market.

Three Main Influences on Stock Prices

by Ken Little
visit About.com to view the complete article

There are three main areas of influence that move a stock’s price up or down. If you understand these influences, it will help you decide whether the price movement is a buy, sell or sit tight signal.

Fundamentals

Clearly, the most direct influence on a stock’s price is a change in the economic fundamentals of the business.

If revenues and profits are on a steep upward trend with no indication of leveling off, you can expect to see the stock price rise as investors bid up this attractive company.

On the other hand, if the profit picture is flat or, worse, declining with no change in sight, look for investors to abandon the stock and the price to fall.

These are simple examples of changes in fundamentals. Other, more complex and subtle changes can occur that may not dramatically affect the stock price immediately (increased debt, a poor acquisition and so on can also trigger price changes).

The point is that changes in the underlying business have a direct impact on the stock’s price. Smart investors spot the subtle changes before they become price-movers and take the appropriate action.

Sector Changes

Changes in the stock’s sector can have positive or negative affects on price too. Some sectors or industries are cyclical in nature and you should know that would affect price.

However, when whole sectors catch of fire (think dot.com stocks) or burn up (think dot.com stocks, again), even those companies that have solid fundamentals are pulled along with the rest of the sector.

You may hold a stock that is a victim of “guilt by association” when an industry falls out of favor. Likewise, stocks can see prices artificially inflated if they find themselves in the right industry at the right time.

Market Swings

The market goes up and the market goes down. That’s about all you can say with certainty concerning the stock market.

As the market moves up and down, your stock may move with or against it. Most large-cap stocks will follow the market to some degree, but smaller companies may not get the same push every time.

In general, a strong market move either up or down will carry more stocks with it than not, so your stock may be up or down for no other reason than the market was up or down.

Conclusion

How do you use this information? A change in fundamentals may be an opportunity to buy more shares of a growing company or it may signal the time to sell if the changes are for the worse.

A change in the sector is usually temporary so most long-term investors will ride out dips due to these factors. However, if something drastically changes in the stock’s industry due to regulation or a new technology, for example, you may want to reevaluate your position. Is the company capable of adapting or do you own a dinosaur?

Market swings that move your stock’s price can be opportunities to buy additional shares (assuming all the company’s fundamentals still checkout). If the rising market pushes up your stock’s price, it may be time to take a profit on part of your holdings and wait for the price to come back down to earth to reinvest.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

 

With the market continuing its record moves and volatility, and testing the recent lows, an investor may wonder what will happen next. In the short-term, the market is extremely oversold and sentiment is extremely negative. It can be very hazardous to sell into this condition. The following article provides pointers to protect your investments during the current market conditions.

How to React to Stock Market Panic

by Wojciech Kulicki on August 9, 2011

visit Fiscal Fizzle to view the original article

Unless you religiously avoid the news, you’ve no doubt heard that the stock market took an absolute beating in the last 2 weeks, and the road is shaky going forward.

The Dow Jones (a good measure of the market’s largest players) closed at 12,724 on July 21st, and finished at 10,813 as of Monday, representing a drop of more than 15% in a little less than 3 weeks.

In dollar terms, if you had $100,000 in your 401(k) and were fully invested in the general market, you could expect to have about $85,000 in the account today. That’s a painful reality to face for anyone, even long-term investors.

The reasons for the most recent drop are many:

• The fight in Washington, D.C. over raising the U.S. debt ceiling.
• S&P’s downgrade of U.S. debt for the first time in history.
• Traders taking profits.
• Fear.

I’ve broken my own rule (don’t pay attention to the markets) and have followed the story with some interest, though I have not executed any trades. I’m staying put because that’s the plan I’ve committed to. My advice for riding out this rough patch remains steady and simple:

Understand your portfolio. What kinds of instruments are you invested in? If you’re holding cash, money market, treasuries, bonds, and even some types of stocks, a market crash will affect you very differently than a person who owns only stocks. In fact, if the majority of your money is in “low-risk” investments, your panic is probably unnecessary.

Maintain perspective. This is a chart showing the Dow Jones from roughly 2005 through today (from Google Finance):

• 

Although this month’s drop is eerily reminiscent of the plummeting markets in 2008, it’s important to understand how far we’ve come since the lows of 2009. If you want a larger perspective, look at the Dow from 1980 to today.

Exit carefully. If you’re planning your escape from the markets, be wary-most of your losses may already be on paper, and getting out could spell missing out on a short-term recovery. Researchers have long understood that a down market is more painful to the investor than an up market is pleasurable, but working through the emotions is what will set you apart.

But do cut your losses. If you have a stop price you’ve pre-determined before the crash and that price is reached, don’t think twice about cutting investments loose. The important thing is to follow the strategy you’ve outlined for yourself and not get caught up in the moment.

Enter aggressively. If you have cash on the sidelines, downward spikes may be the best opportunity you’ll have to get into stocks at cheap price. If most of your portfolio is in liquid assets, seriously consider this as the time to buy, and use the rebound to give your portfolio a lift.

All of this should work, unless of course, it turns out that we’ve barely scratched the surface on this crash and the worst is yet to come. Let’s hope not…

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Photo from Wall Street Journal online

 The following article was taken from the Wall Street Journal online article on August 16, 2011. This article discusses some investing strategies that are used by one of the richest families in America: The Walton’s.

 Smart investing tips from Sam Walton

To view full article, please visit Wall Street Journal online.

After the stock market lost 20% of its value in October 1987, Sam Walton, then one of America’s richest men, was unfazed.

In less than a week, the value of his Wal-Mart stores stock had dropped almost $3 billion, reducing his wealth to a mere $4.8 billion. It’s paper anyway,” he told the Associated Press. “It was paper when we started and it’s paper afterward.”

Given the wrenching swings of the past two weeks, many of us may wish we could be so sanguine about our own losses. But even without a few extra billion dollars in the bank, there are useful lessons to be gleaned from the way the Waltons and other ultrarich families cope with investments and market volatility.

Just like us, the rich want to maintain their lifestyle, preserve wealth and hyave money for their heirs or philanthropy. And when it comes to investing, there are several ways the rest of us should take a cue from them:

The very wealthy have a plan. Sam Walton’s plan started in the early 1950s, when, on the advice of his father-in-law, he set up a family partnership, made up of him, his wife, Helen, and their four children, to own his two variety stores. By doing that, he began planning his estate and building family wealth years before he opened the first Wal-Mart in 1962.

Nowadays, most very wealthy people have a team of advisers and an investing strategy in place that should work even when the worst imaginary case becomes real. Small investors, too, should have a comfortable investment process that works in good times and bad.

A financial adviser can be invaluable in helping you with this, but so can a trusted family member or friend who will help you stick to your plan when you start to doubt it.

The very wealthy live below their means. Walton, who died in 1992, was famously frugal, driving an old pickup truck and flying coach. Many very wealthy people spend much more extravagantly, but even so, “most of our ultrawealthy clients have a lifestyle that is well below their means,” says Craig Rawlins, president of Harris myCFO Investment Advisory Services, which serves wealthy families.

When you don’t spend everything, he says, “you have a better opportunity to weather this volatility because you know there’s a cushion there.”

The very wealthy focus on risk, not return. Larry Palmer, managing director, private wealth management, at Morgan Stanley Smith Barney, said he has never had a client says, “My objective is to have my family wealth beat the S&P 500.” Rather, he says, clients focus on what kinds of risks they are taking with their portfolio.

The Walton family weatlh long has been tied to its Wal-Mart stock, now valued at $83.6 billion. But Sam also bought the tiny Bank of Bentonville in 1961, and it is now part of the family-owned Arvest Bank, an $11.5 billion banking company. Walton Enterprises also owns a chain of small newspapers that, along with other interests, offer diversification and push the family’s estimated combined wealth close to $100 billion.

Small investors need to similarly manage their portfolios, making sure that their holdings of stock and other volatile investments aren’t so great that they are putting more at risk than they intended to.

The very wealthy hang on. The super-rich don’t sell because they are fearful-though some may be selling right now for investment reasons, such as cutting the tax bite on holdings with big gains. The Walton family ownerships of Wal-Mart stock hasn’t changed since late 2002, when some shares were transferred to charitable funds.

In that sense, Sam was spot on. Though the Walton family’s Wal-Mart shares have dropped by more than $10 billion since mid-May, until the stock is actually sold, the losses really are nothing more than paper.

 Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Several of our clients at Paragon have been asking us how we got into the debt ceiling mess. This Wall Street Journal article gives a good summarty of what has brought us to this point.

A short history of the entitlement state.

Taken from the Wall Street Journal online

Even without a debt default, it looks increasingly possible that the world’s credit rating agencies will soon downgrade the U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn’t catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody’s and Standard & Poor’s. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back degades, and so this is a good time to review the policies that brought us to this sad chapter and 14.3 trillion of debt.

 FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of the GDP. That changed in the mid-1960s with LBJ’s Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ lauched other welfare programs- public housing, food stamps and many more- that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman, and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security’s fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program’s unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

 None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called “mandatory spending” because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend 2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now-with ObamaCare-liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush’s “two wars” for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on eduacation, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP’s blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years in higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren’t for Republicans, he’d want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.

Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.

Images:

1. Associated Press: With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.

2. The Obama-Pelosi Blowout: *2011 estimate. Source: Office of Management and Budget.

3. Entitlement Nation: Source- Office of Mangement and Budget.

Disclaimer

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has be obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

 

You’ll need to ‘early-bird special’ in these expensive places

The following article discusses the Top Ten worst tax places to live during your retirement

 To view full article, visit AdvisorOne

Some states offer attractive tax benefits for retirees, others don’t. Kiplinger runs through the worst (or “tax hells,” as the magazine bluntly states). Many are in the Northeast United States (wait, what?). If your clients are looking for a nice—cheap—place to “perform their second act,” they’d do well to avoid the following:

#1:  Vermont

The state continually re-elects the only socialist in Congress, so what did you think would happen? There are no exemptions for retirement income in the Green Mountain State, except for Railroad Retirement benefits (which are exempt in every state). The magazine reports out-of-state pensions are fully taxed. It imposes a 9% tax on prepared foods, restaurant meals and lodging, and levies a 10% sales tax on alcoholic beverages (for shame) served in restaurants.

#2: Minnesota

We were hoping to make fun of their accents, but alas, Kiplinger wisely sticks to weather. Minnesota offers retirees cold comfort on the tax front. Social Security income is taxed to the same extent it is taxed on your federal return. Pensions are taxable regardless of where your pension was earned. Income-tax rates are high, and sales taxes can reach 9.53% in some cities

# 3: Nebraska

After switching from the Big 12 to the Big 10 (those that matter will know what it means), we thought Nebraska could go no lower. We were wrong. The magazine reports there are no tax breaks for Social Security benefits and military pensions in the Cornhusker State. Real estate is assessed at 100% of fair market value. Nebraska imposes an inheritance tax on all transfers of property and annuities.

#4: Oregon

First, says Kiplinger, the upside: There’s no state sales tax in the Beaver State. But it shares the distinction with Hawaii of imposing the highest tax rate in the nation on taxable income of $250,000 or more. Oregon has an inheritance tax that applies even to intangible personal property located anywhere, such as investments and bank accounts.

#5: California

Honestly, is anyone surprised? If so, maybe dispensing financial advice isn’t the profession for you. The Golden State has lost its luster for many retirees (understatement). Although Social Security benefits are exempt from state income taxes, all other forms of retirement income are fully taxed. Californians pay some of the highest income taxes in the U.S., with the top rate of 9.55% kicking in at $46,767 of taxable.

#6: Maine

New Hampshire’s wacky libertarianism hasn’t crossed the border. Income in excess of $20,150 per year is taxed at a steep 8.5% rate. Residents of the Pine Tree State pay a 5% sales tax statewide on everything except food and prescription drugs.

#7: Iowa:

Kiplinger likes its puns. According to the mag, the Hawkeye State offers no feathered nest for retirees. Although it allows single retirees to exclude up to $6,000 of retirement-plan distributions from state income taxes, and married couples can exclude up to $12,000, the rest is taxed at rates as high as 8.98%. Iowa taxes a portion of residents’ Social Security benefits, too, although it is in the process of phasing out the Social Security tax, which is scheduled to disappear in 2014.

#8: Wisconsin

The Dairy State exempts Social Security benefits and military-related pensions from its state income taxes, but it taxes most other pension and annuity income the same way the federal government does. Out-of-state government pensions are fully taxed.

#9: New Jersey

Its nickname may be the Garden State, but New Jersey is no Eden for retirees (ugh—again, Kiplinger’s, not us). The Tax Foundation says New Jersey’s combined state and local tax burden is the highest in the nation, thanks in part to sky-high property taxes. We’re waiting on the results of the “Christie Effect.”

 #10: Connecticut

Although some residents of the Constitution State can exclude their Social Security benefits from state income taxes, the exclusion applies only if their adjusted gross income is $50,000 or less ($60,000 or less for married couples). All out-of-state government and civil-service retirement pensions are fully taxed.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

 

 

 

 

istock photo

If you are thinking about converting your traditional IRA to a Roth IRA in 2010, you may want to consider the pros and cons. Below is an informative article about this topic written by Darrell J. Canby.

 

FINANCIAL SENSE: Roth ‘n’ Roll in 2010

By Darrell J. Canby/Local columnist

November 23, 2009

Unless Congress passes legislation to alter the current law before the end of the calendar year, the potential for Roth IRA conversions in 2010 is vast.

Roth IRA conversions are not new. However, until now only taxpayers whose income was less than $100,000 were eligible to convert traditional IRAs to Roth IRAs. Effective in 2010, there will be no income limitation. As a result, many people should review their situation to determine if a conversion would be beneficial for them and would help them achieve their long-term financial goals.

To determine whether a conversion would benefit you, consider the differences between traditional IRAs and Roth IRAs. Contributions to traditional IRAs are tax-deductible, within certain limits, during the year the contribution is made. Income taxes are deferred on earnings. Income is taxable when funds are withdrawn from the traditional IRA.

For many people, Roth IRAs offer a better opportunity. Funds are contributed on an after-tax basis, but they can grow on a tax-free basis and taxes will never be due on Roth earnings, as long as the assets are held in the Roth IRA for at least five years and any withdrawal occurs after the individual reaches age 59 1/2.

Tax landscape
This advantage is especially important because taxes are scheduled to increase.

Earlier in this decade, tax legislation was enacted that, among other things, lowered individual income tax rates and raised the asset level at which an estate would be taxable. The law also provided that the estate tax would be zero in 2010. It then provided that, effective in 2011, individual income tax rates would revert back to pre-legislation levels, the exemption for estate taxes would decrease to $1,000,000 and estate tax rates would increase back to a maximum rate of 55 percent. The same legislation eliminated the income limitation for Roth IRA conversions.

Unless Congress changes the law, taxes will increase automatically. If you pay taxes at a 25 percent rate today, you will be paying at a rate of 28 percent in 2011; the next two brackets will increase by 3 percent as well, and if you pay at the current maximum 35 percent rate, your rate will increase to 39.6 percent.

In addition, further tax increases may be necessary. This year’s deficit alone is projected to be $1.4 trillion. Billions spent on the financial crisis, plus potential spending on healthcare reform, could result in a future tax increase. So your tax rate could be higher in years to come than it is today.

The amount of a Roth conversion creates taxable income. For conversions in 2010, the tax can be paid as part of your 2010 tax return at the rates in effect for 2010. You can also choose to report the 2010 conversion income 50 percent in 2011 and 50 percent in 2012 and pay tax at the prevailing rates at that time. Keep in mind that the rates in 2011 will automatically be higher unless Congress changes the provisions of the current law.

In order to enjoy the tax free benefits of a Roth IRA, there is a waiting period of five years and upon distribution, you must be at least age 59 1/2. So if you execute a conversion on Jan. 1, 2010, you need to wait until Jan. 2, 2015, before taking a distribution to insure the distribution will be tax free.

Advantages of Roth conversions
So what are the advantages of converting to Roth IRAs? Should you convert some or all of your IRA assets to Roth IRAs? Should you convert all in one year or over several years?

It would be wise to consult with your tax adviser to answer these questions, but the following factors are key:

Tax free build-up of converted assets. The major advantage is that all of the growth in value of the Roth IRA from the conversion date will be tax free forever, as long as you meet the five year rule and are at least age 59 1/2 when you take distributions.

Hedge against increasing tax rates. If tax rates increase, keeping your assets in a traditional IRA may mean you will pay higher taxes on the future distributions than the rate you may pay now on the conversion.

The performance of your portfolio. If your portfolio lost a lot of its value in the recent bear market and has not fully recovered, you can save on taxes by converting now, before your portfolio recovers, because taxes will be based on the value of your IRA at the time of conversion.

Allows for tax diversification in the future. You could take a portion of your income needs from a traditional IRA and some from the Roth IRA to avoid going into a higher tax bracket. You can also use this flexibility to keep the taxation of social security to a minimum and to potentially lower your costs for Medicare.

Increase in taxable income could absorb losses. Some people have experienced business losses in their S Corporation, partnership or LLC that could be used to offset the income associated with a Roth conversion. There also may be some people that have large charitable contributions that were limited due to their income. The income associated with a Roth conversion could be offset in part by these deductions.

Required minimum distribution eliminated. When you reach the age of 70 1/2, you are required to take a minimum distribution from your retirement assets in most cases. Required minimum distributions were relaxed in 2009 due to the financial crisis. Minimum distributions are not required for Roth IRAs. Some people do not wish to take distributions, because they want them to grow for the benefit of their heirs. Roth IRAs allow taxpayers to save for this objective.

Your age. If you’re young and have many years until retirement, Roth IRAs are especially attractive, because your investments should be able to grow tax-free for many years before you use them.

Legacy asset. If you leave your children a traditional IRA asset, they will be responsible for income taxes as they make withdrawals. If they inherit a Roth IRA, there will be no income taxes, so it will be less of a burden on their children.

Disadvantages of Roth conversions
While it is important to consider all of the potential advantages of Roth IRAs, you should also be aware of the disadvantages.

Immediate tax cost. There is an immediate tax cost that reduces your investment assets available for your retirement.

Tax at a higher rate. The conversion amount produces income that may cause the effective tax rate to be higher, due to phase outs of certain deductions.

Insufficient assets outside of retirement plans to pay the tax. The general rule is that you do not want to use retirement plan assets to pay the tax associated with a Roth conversion. So if you do not have assets outside of retirement assets, you probably should not consider a Roth conversion. As with any of this advice, you should consult a tax professional to be sure.

Tax rates will be lower in retirement. Your situation may suggest that your income tax rate may be lower in retirement. You would not want to pay tax now at a higher rate than you would otherwise be paying in retirement.

Need to have distributions prior to five-year waiting period. If you will need to make withdrawals from your IRA assets within five years, you will not want to have to use any converted assets. Keep enough assets outside of the Roth to avoid such a withdrawal need from that account.

Your age. If you have attained a level of maturity that would limit the amount of time for the tax-free benefits, you may not have a significant advantage from a conversion.

Your tolerance for risk. If your IRA money is invested in low-interest certificates of deposit or other investments that are expected to earn little, you’re likely better off keeping your money where it is and deferring taxes.

Recharacterization
An IRA that was converted to a Roth IRA can be recharacterized back to a traditional IRA before a timely filed tax return. For example, if you converted $10,000 of your traditional IRA to a Roth IRA on Jan. 15, 2010, you could convert that back to the traditional IRA by April 15, 2011, (or as late as Oct. 15, 2011, if you filed a proper extension of time to file your 2010 return). So if you did execute a conversion and decided it was a mistake, the opportunity to convert back is available. A timely recharacterization avoids paying the tax on the conversion.

Summary
This is a complex area with many implications. Therefore it is best to consult with your tax adviser before making any moves. Weigh the advantages and disadvantages to determine if a conversion is in your best interest.

It may be best to convert some, but not all, of your retirement assets to Roth IRAs. One reason is to start the five-year waiting period, because once it is completed you can alleviate that requirement on conversions in the future.

Another reason to have both a taxable IRA and a non-taxable IRA is that it allows you to combine the two as part of a tax strategy to lower your overall taxes. Taxes on 401(k) plans and traditional IRAs, for example, are deferred until income is distributed. You can take income from these tax-deferred retirement accounts up to the point where you would be entering a higher tax bracket, and then you can take additional distributions from your Roth IRAs without incurring additional taxes.

For many taxpayers, it will make sense to convert as much as possible to Roth IRAs in 2010. The younger you are when you convert your IRAs, the longer the timeline during which they will be able to grow tax-free.

Congress will be looking for new sources of revenue, thus rules for Roth IRAs could change, making them less attractive. Roth IRAs may be too good to last.

Darrell J. Canby, CPA, CFP^@, is president of Canby Financial Advisors, LLC, a registered investment adviser at 161 Worcester Road, Suite 408, Framingham. He offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. He can be reached at 508-598-1082 or dcanby@canbyfinancial.com.

This communication is strictly intended for individuals residing in the states of AZ, CA, CO, CT, DC, DE, FL, MA, ME, MI, NC, NH, NJ, NY, OH, OR, RI, TN, VA, VT, WA.  No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Due to regulatory requirements, I am unable to respond to any comments posted to this site.  If you would like to contact me, please e-mail me at my address above.

Visit http://www.metrowestdailynews.com/business/x1945263240/Roth-n-roll-in-2010 to see the original article.

photo by ucumari

As we recover from the worst bear market since The Depression, many investors wonder how they will ever be able to start or continue contributing to their investments. The following article, taken from the Simple Dollar blog, outlines simple and realistic steps anyone can take no matter their age or financial circumstances.

Investing Isn’t Just for Rich People: Five Ways Anyone Can Reap the Rewards of Investing

Written by Trent at The Simple Dollar

Quite a few readers simply tune out when I mention investments. They don’t believe the topic applies to them at all. “How can I possibly worry about investing when I can barely put food on the table?” they’ll ask.

The answer is simple: virtually every single person has the resources with which to begin investing. It may seem impossible for some to believe, but it’s true.

If you make purchasing decisions in your home, you have all you need to begin investing. Choose some generic items instead of the brands you usually buy and start your investing with the dollars you save.

If you ever spend money on entertainment, you have all you need to begin investing. Instead of renting a DVD at the Redbox, stop by your library, check out a movie for free, and put aside that dollar you save. There are countless other little ways to shave just a little bit here and there without changing your lifestyle.

If you use electricity, you have all you need to begin investing. Air seal your home or put in a programmable thermostat and you’ll see a significant drop in your energy bill, with which you can invest.

It all starts with the littlest of choices.

Here are five simple steps anyone can take with that savings

1. Participate in your employer’s retirement plan. More than 90% of the employers in the United States offer a retirement plan. Many of those plans offer matching funds, in which the employer will make contributions to the plan if the employee does as well. Plus, this money goes in before taxes, meaning for every dollar you put in, it reduces your paycheck by substantially less than a dollar - and it also reduces your income tax at the end of the year. If you have a retirement plan at work and are choosing not to even consider using it, you’re choosing poverty.

2. Start an automatic savings plan. If you’ve found a way to cut your spending by even a quarter a day, you have enough to start. Set up an automatic savings plan and transfer whatever you’ve saved to a savings account each week or each month. Even $10 a month - about $0.30 a day - is a great way to start, as it will add up to $121 or so over the course of a year and continue to earn interest beyond that.

3. “Snowflake” into a savings account. If you discover useful one-time ways to save or to earn a little bit more money, don’t spend it frivolously on something you want in the short term. Instead, take that little amount - the $10 you found in the parking lot, the $7 you saved buying toilet paper in bulk - and put it right into your savings account. Even better, just start a jar for it, throw that snowflake right into the jar, then take it down to the bank when the jar is full.

4. Save windfalls instead of spending them. What about when something bigger and unexpected comes along? A relative dies, leaving you an unexpected sum. You get a settlement. You win a large cash raffle. Sure, feel free to celebrate with a little of that windfall, but instead of blowing through the whole thing like a snowblower through powder, put most of it into your savings.

5. As your savings grows, buy a CD - and then grow from there. Once you hit your bank’s minimums for purchasing a certificate of deposit, do so. This will earn you quite a bit more interest than you were earning in your savings account, but it will “lock up” your money for a while. That’s a good thing - since you’re not intending to spend it anyway, locking it up is just fine.

Congratulations, you’re an investor. When that CD matures and you couple it with your additional savings, you may have enough to start branching into other investments. Hold onto that money - when opportunity comes your way, you’ll have exactly what you need to jump on board.

All this takes is a dollar a day.

Visit The Simple Dollar to read the entire article.

photo by Truthout.org

A broad U.S. stocks rally sent the Dow industrials to a 13-month high on Monday, after the Group of 20 pledged to keep aid flowing to the world economy, strengthening investors’ desire for risk.  The following article from the Deseret News discusses in more detail how the agreement boosted global stocks.

Dow hits highest level in a year
Associated Press

NEW YORK - The Dow Jones industrial average stormed to its highest level in more than a year Monday as a falling dollar boosted prices for commodities including gold and oil. Stocks also jumped as investors grew more confident that governments around the world will keep interest rates low to help the global economy.

Energy and materials stocks led the market higher. Major indexes rose 2 percent, including the Dow, which jumped 200 points for the second time in three days, to its highest level in 13 months.

News that the Group of 20 countries will keep their economic stimulus measures in place signaled to investors that rates will remain low. With U.S. rates near zero, the G-20 news lessened demand for the dollar.

Investors see the dollar as weaker than other currencies, and so they’re using it for what’s known as “carry trade,” to finance purchases of investments in other countries. That trend takes the dollar down further when those purchases are made.

But some analysts are questioning the markets’ moves, and warn that stocks and other investments could suffer big losses if the dollar were to turn higher.

Still, many investors like a weaker dollar because it helps U.S. exporters by making their goods cheaper to overseas buyers and giving the companies a boost when they convert profits from abroad to dollars.

The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, fell to its lowest level in 15 months. The dollar rose last year and early this year but the index has been sliding for the past eight months since major stock indicators bounced off 12-year lows. Investors, although they’ve been basing most of their buy or sell decisions on the economy, have also been following a pattern of funneling money into stocks when the dollar weakens and pulling it out when the currency rises.

Commodities prices, meanwhile, tend to rise when the dollar is down, so gold topped $1,100 an ounce. Crude oil rose $2 to settle at $79.43 per barrel on the New York Mercantile Exchange, helped in part by Tropical Storm Ida, which threatened the Gulf of Mexico.

Energy and materials stocks rose along with commodities prices, and investors’ enthusiasm for those stocks spilled over to other industries.

Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago, said the strength of the carry trade is giving an artificial lift to a range of assets, including stocks.

“There’s cheap money that’s going to be pumping its way into the system,” he said. “That money is finding is home in the currency and commodity markets.”

According to preliminary calculations, the Dow rose 203.52, or 2 percent, to 10,226.94, its highest finish since Oct. 3, 2008. The index rose as high as 10,228.23, topping its previous 12-month trading high of 10,119.46 set last month.

The broader Standard & Poor’s 500 index rose 23.78, or 2.2 percent, to 1,093.08, its sixth straight advance. The Nasdaq composite index rose 41.62, or 2 percent, to 2,154.06.

Five stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion Friday.

photo by Philip Klinger

Third Quarter 2009 will be remembered as one of the most eventful periods in stock market history. One year has passed since the weekend that shook the foundations of Wall Street and the global financial system. Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity, and AIG was taken over by the U.S. government. Almost two years have passed since the Dow Industrials hit its all time peak of 14,164.

Beyond the issues facing the global economy, there are many underlying positives that give cause for optimism looking forward.

The following article from The Simple Dollar discusses the stock market rebound and why we are optimistic.

Since mid-March, the S&P 500 is up almost 58% and the Dow Jones Industrial Average is up almost as much. If you opened your retirement savings at the end of the first quarter this year and looked at the numbers with a cringe, it’s likely that if you looked at the numbers right now, you’d feel significantly better.

Why the big rebound? To put it simply, the greater world finally realized that the only thing we had to fear was fear itself. The economy didn’t collapse. Instead, we just find ourselves in the middle of - and perhaps moving towards the later stages of - a rather strong recession.

Naturally, as the economy begins to slowly come out of a recession, the stock market goes gangbusters. Companies are beginning to reawaken and slowly increase production, a radically different picture than the massive cost cutting of the past year. Unemployment is somewhat stable - it might go up a little more, but it’s no longer on the rocket ship that it once was.

In short, we’re getting through this and we see sunlight at the end of the tunnel.

What does this mean for you and me, as small individual investors? Does this mean we should convert all of our investments into stocks and ride the rocket ship?

To put it simply, no, it doesn’t.

Hedging your long-term investments on what you think the stock market (or any investment market) is going to do in the short term is called market timing, and it’s never a good idea.

My philosophy is simple, and it’s one that was taught to me by many, many wise investment writers and investment books: unless you’re a day trader or spend a significant amount of time daily studying the stock market, you’re a long term investor, and long term investors have nothing to gain from trying to time the market.

Simply put, the vagaries and complexities and huge sums dealt with on the stock market each and every day, with so much insider information floating around and individuals playing all kinds of manipulative gains, plus the total uncertainty of day-to-day world events (if you recall, for example, 9/11 was wholly unexpected), makes it a very unsafe place for the typical person trying to save for retirement or for another long term goal. Instead, their reward is to simply look at the stock market as a long term place to put their money for a long term investment with a payoff date more than ten years down the road.

It’s all about your goals and your risk tolerance. It has nothing to do with what’s going on today, tomorrow, or next week.

Don’t let yourself be swayed by huge positive returns in the short term - or huge negative returns in the short term, either. Just stay the course with what you’re doing. If you find that the stress of such swings makes you nervous, redirect your future contributions to something with lower risk, like bonds.

Otherwise, just let things ride. Tomorrow might bring a huge unexpected event that we can’t see coming - or that some CEO is keeping under wraps for now. Given time, the stock market will correct itself from that, but over the short term, it’s basically little more than gambling unless you have the time and resources to devote yourself to truly careful study - or you’re investing with a small sliver of your portfolio that’s there solely to play around with.