Financial Insights by Stewart Welch

Financial Insights

Financial Insights

 

Shopping CD Rates can mean BIG Bucks

Shopping CD Rates Can Mean BIG Bucks

Question: According to information on www.BankRate.com, investors can earn higher interest rates on their savings and money markets by banking on-line than they can earn at local banks. For example, Synchrony Bank pays 1.25% on a one-year CD. Is there any risk in doing this? G.H.
Answer: No, just be certain your bank is a member of the FDIC and that your account does not exceed the FDIC insurance limits, currently $250,000. If you have more than $250,000, there are still ways to get full insurance coverage by splitting the funds into accounts with different titling. For example, you could have one account titled in your name, one in your husband’s name and one titled jointly under both of your names…allowing you to up to $1,000,000 fully insured in a single bank. How much difference can ‘shopping rates’ make? A $100,000 one-year CD at your Internet bank would pay $1,250 in interest while a large Birmingham, Alabama bank would pay only $100!

IRA Gains & Losses

Question: If stock is sold in an IRA and there is a loss, why can’t that loss be taken off your taxes just like you have to report a gain doing the same thing? C.J.
Answer: Federal laws for the Traditional IRA do not allow losses to be taken from your income taxes. Think of a Traditional IRA as a contract that has a beginning, a middle, and an end. In the beginning, when you contribute to your IRA, you receive an income tax deduction. At the end, when you withdraw money from your IRA, those withdrawals are taxable as ordinary income. In the middle, if you sell a security for a loss, there is no tax deduction. Likewise, if you sell a security for a gain, that gain is not taxable.

janeb13 / Pixabay

Avoiding the Obamacare Penalty

Question: I work part time and have no health insurance. In 2014 I made under the threshold for paying the penalty. For 2015 I made more ($12,560.) which is over the threshold ($11,880). My question is can I open a regular IRA now and put in $1000 to get me under the penalty limit? I already have a Roth IRA. I am 55 years old. J.W.
Answer: “The Obamacare penalty is specific to size of family and is based on Modified Adjusted Gross Income. There are also several potential exemptions that you may qualify for that would allow you to avoid the penalty. Your best bet is to complete your tax return for 2015 to determine your actual MAGI, then you can determine how much to invest in a Traditional (deductible) IRA in order to avoid the penalty”, says Kimberly Reynolds, CFP, a partner at The Welch Group. As a reminder, you have until April 18th, 2016 to make your IRA contribution for calendar year 2015.

Gift Tax Limits for 2016

Question: Regarding the statement: “In any calendar year, you are allowed to give away up to $14,000 per person to as many people as you desire without triggering any gift taxes.” Does this mean you can give 10 people $14,000 each or that you can only give a total of $14,000 divided among the 10 people? S.T.
Answer: For 2016, you can give as many people as you wish $14,000 each. If you are married, you can join in the gifts and together give up to $28,000 to as many people as you choose.

Banks: Too Big to Fail Again …

It reads like a 29,000 page conspiracy theorist novel and it took two years and the Freedom of Information Act to discover that the Federal Reserve, led by Ben Bernanke, secretly loaned the big banks more than $1.2 trillion in bail-out money on December 5, 2008.  This secret lending ballooned to as much as $7.7 trillion by March 2009.  The banks quietly accepted the loans while at the same time assuring their shareholders and customers that they were in fine financial condition.  They then used these near-zero interest loans to produce an estimated $13 billion of income.  Note that all of these funds were in addition to the much publicized $700 billion in ‘Troubled Asset Relief Program’ or TARP funds granted by Congress in 2008.  In fact, the Federal Reserve did not disclose to Congress that these loans took place.

Bloomberg LP, the parent of Bloomberg News had to file a lawsuit against the Federal Reserve and the Clearing House Association to force the disclosures.  Bloomberg won its case but the Fed and Clearing House Association appealed the decision all the way to the US Supreme Court, who refused to hear the case.  I’m certain that you’ve never heard of the Clearing House Association but it’s comprised of some of the largest banks in the world including Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, Bank of New York Mellon and US Bancorp.  Many of these banks were the significant beneficiaries of the Fed secret loans that they did not want disclosed to the American public.

What did the big banks do with this money and the revenue it generated?  Well, not a lot of lending for one thing.  A few CEO’s heads rolled as they were fired but exited with multimillion dollar severance packages while their replacements stepped into their shoes and began to reap multimillion dollar incentive packages.  Apparently, the incentive rewards aren’t tied to performance since banks have been among the worst performing sector over the past few years.  Worse, as Congress stepped in with proposed legislation to limit the size and restrict the activities of the big banks that caused the crisis, the banks increased their lobbying expenditures by an estimated 33%… a total of $29 billion.  This taxpayer money was well-spent as the legislation was defeated allowing the banks to grow even bigger and to continue much of the same activities that lead to the crisis in the first place. In fact, total assets held by the six largest banks have increased by 39%…definitely too big to fail.

In essence, the Fed positioned itself as judge, jury and executioner as it decided which banks got loans and which banks were allowed to fail…a number that exceeds 200 since the 2008 crisis began.

These loan activities crossed two administrations.  If Congress didn’t know about the secret loans, did Presidents Bush and Obama?  I can draw only two conclusions.  Both Presidents Bush and Obama knew of the details of the loans and determined that Congress was on a ‘need to know’ basis or they didn’t know…neither assumption is reassuring.

Least you consider this article nothing more than an opinion piece; these secret activities have real implications for investors.  Consider Bank of America shareholders who on November 26, 2008 when the stock price was $14.93 per share,  received written communication from then CEO Kenneth Lewis that stated BOA was “one of the strongest and most stable major banks in the world.”  What he failed to mention was that BOA owed the central bank $86 billion.  Today, the stock is trading at $5.20 per share.

As investors, our job is difficult enough as we sift through mounds of accurate data to make investment decisions.  To the extent that we lose confidence in the data produced directly from the corporations we research, it makes our job much more difficult. Situations like this make it easy to understand why Occupy Wall Street protesters are angry and Tea Party members are advocating for less government.

In summary, America’s largest banks remain too big to fail and are essentially continuing to operate much as they were before the crisis.  My prediction is that before this decade has ended, we’ll face another banking crisis.  The questions are, “what’s our government going to do the next time…and will they tell us or keep it a secret?”

My source for this article was “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress” by Bloomberg News.  To read the entire article, visit the Business Section ofwww.NewsTimes.com.

If you’d like to have your financial question answered in The Birmingham News, email me atstewart@GetRichOnPurpose.com and place Bhm News in the subject line.

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. Mr. Welch has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Visit his Web Sitewww.stewartwelch.com. Consult your financial advisor before acting on this advice.

The Good, The Bad and The Ugly about Obama’s America’s Jobs Program

President Obama unveiled his $447 billion jobs program about the same time Bank of America announced they would cut 30,000 jobs. It’s starting to feel like America is caught in a spaghetti western like The Good, the Bad and the Ugly where you can’t seem to catch a break. Likewise, President Obama’s plan contains a mixture of the good, bad and ugly with implications that will affect the pocketbooks of every American.
The Good
  • Focus on creating jobs. First, it’s great that Washington has decided that creating jobs is job number one. There have been way too many distractions since The Great Recession began back in 2008.
  • Spending on infrastructure and modernizing schools. What I like about this is that is speaks directly to job creation. When you spend money on roads and bridges, you immediately create a ripple effect of new jobs that goes way beyond just construction workers. These projects typically span multiple years creating a sustainability that will be vital for economic growth. And once you’re finished, you have permanent improvements that will last for decades.
The Bad
  • Payroll tax cuts. I’m definitely going to get some disagreement on this one. Over half of the $447 billion is in the form of reduced payroll taxes for both employees and employers thus putting more money in every worker’s pocket. This certainly sounds like a great and popular idea so why do I place it in the ‘Bad’ category? The problem is that this money will do little to create new jobs. Think about it. If you receive $1,000 more in your paycheck throughout the year, what are you going to do with it? You’ll either save it, pay down debt, or spend it. To the extent that you save it or pay down debt, you’ll do little to create new jobs. And right now, a lot of people are focused on debt reduction and savings. And employers aren’t going to hire someone they don’t need just because they received a tax cut.
The Ugly
  • Restrictions on tax-free muni bonds.   The plan includes limiting the tax break on muni bonds to 28% versus the current 35% for couples earning over $250,000. Limit this benefit and the effect will be immediate: borrowing costs for municipalities will go up at a time when many are laying off employees in order reduce deficit spending. If expenses go up, more layoffs are likely.
  • Higher taxes on high income earners. President Obama continues to press for higher taxes on high income earners. This fight could get ugly as he faces off with freshman house members who have pledged, “No new taxes!”
This is a good first step and both Republicans and Democrats must come together with a bipartisan plan where every dollar spent will create new jobs. Until then, uncertainty will rule and the stock market will remain skittish.
To quote Clint Eastwood from the movie The Good, the Bad and the Ugly, “Two hundred thousand dollars is a lot of money. We’re gonna have to earn it.” Here in America, we’re trying to jump-start a multitrillion dollar economy and we’re all going to have to pitch in to get the job done.

10 Tips for Traveling Abroad

I was recently visiting with a client who’s heading for a European dream vacation in a couple of weeks. It got me thinking about how to make certain the dream doesn’t turn into a nightmare. Here are my top 10 tips for a great trip overseas:

Leave your itinerary and copies of your passport with a trusted friend or family member. Be sure this is someone you can easily reach in case of an emergency. Likewise, make sure a neighbor knows how to reach you in case something arises at home that needs your attention.
Double check your passport. Make sure that you have signed your passport and that it has not expired. Complete the emergency information section of your passport. Keep a copy of your passport with you. If it were lost or stolen while on your trip this will help expedite getting a replacement.
Check your overseas medical coverage. Call your insurance company and ask if you’re covered while overseas. Does coverage include emergency medical evacuation? If not, consider supplemental coverage such as offered through www.medjetassist.com.
Carry multiple credit cards. Often, you’ll get the best currency exchange rate by using your credit card. You’ll find some establishments will accept one credit card but not another. Be sure to visit your bank before you leave to make sure your bank debit card is overseas ATM ready. Since ATMs access your checking account, make sure you have plenty of cash in your account or have an arrangement to have funds transferred at your request.
Let Big Brother help. Keep this number handy: 202 501-4444. It’s the number for the Office of Overseas Citizen Services in the State Department’s Bureau of Consular Affairs and is your best first stop in case of an emergency. There’s also the Smart Traveler’s Enrollment Program where you can privately post your itinerary on line (https://travelregistration.state.gov ) which allows the State Department to contact you if there is a family emergency at home or crisis where you are traveling. They’ll also provide you with real-time travel advisories.
Carry extra prescription medicines with you. If you’re on prescription medications, keep an extra supply on your person in case you get stranded or get separated from your luggage.
Leave the jewels at home. When traveling in a foreign country, it’s hard to not look like a tourist. Don’t add to your risk by wearing expensive jewelry or carrying lots of cash. I have a friend who was attacked in broad daylight in London because he wore a Rolex watch. Fortunately, all he lost was his watch!
Check your cell phone plan. Most cell services offer a short-term international plan that will significantly reduce your cell charges when you use your phone abroad. My wife and I signed up for a plan on a recent trip to Italy but the cell company didn’t ‘turn it on’. Within a few days our bill was over $700! We fixed it, but it was a hassle.
Familiarize yourself with the local laws and conditions. While in a foreign country, you’re subject to their laws which can be quite different from ours. Did you know that in some countries it’s illegal to chew gum? Visit http://travel.state.gov for country specific information.
Takes lots of photos and have FUN! Bon Voyage!