Articles tagged with: Michael Moffitt

Why It Might Be Time for the Fed to Raise Rates

In doing so, the central bank would cast a vote of confidence in the economy.

Provided by Mike Moffitt

Will the Federal Reserve make a move in December? As our central bank has avoided tightening U.S. monetary policy for nine years, an end-of-year interest rate hike might seem more possible than probable. Call it a strong possibility, if nothing else – after the November 18 release of the October Fed policy meeting minutes, trading in Fed funds futures indicated that investors saw a 68% chance of a December rate hike. In late October, they saw only a 38% chance of that happening.1

The October Fed meeting minutes sent a strong signal. They noted that “most” Federal Open Market Committee members thought that conditions for a rate increase “could well be met by the time of the next meeting,” with another passage stating that “it may well become appropriate to initiate the normalization process” at that time.2

Investors want some certainty when it comes to monetary policy. The S&P 500 advanced 1.6% on November 18, carried by gains in financial shares (banks would benefit greatly from higher interest rates). It was the biggest one-day rally U.S. equities had seen in a month. After the FOMC elected to refrain from raising rates in both September and October, the question became “when?” To many market observers, the October FOMC meeting minutes seem to provide an answer.1

The next jobs report could be a major influence. In October, the economy added 271,000 new jobs with 2.5% annualized wage growth and unemployment falling to 5.0%. If the next Labor Department employment report shows hiring well above the 200,000 level in November, the Fed could interpret that as a clear green light.2

The Fed would be going against the grain by raising rates in December. The People’s Bank of China has lowered its benchmark interest rate six times since October 2014. The European Central Bank, which has launched a major monetary stimulus, has reduced its key interest rate to 0.05%. Some analysts believe it could hit zero. The ECB’s deposit rate is currently at -0.2%.3,4

Even so, investors might appreciate a decisive Fed move. The markets need to have confidence in the Fed, and as CNBC Fast Money panelist Guy Adami recently noted, a hawkish move might be followed by a long dovish interval – the FOMC could raise the federal funds rate in December, then leave it alone until late 2016. That could amount to a best-case scenario for Wall Street.5

Besides placating the market, are there other notable reasons to raise rates? Adami’s Fast Money colleague, Euro Pacific Capital CEO Peter Schiff, begged to differ. On the same broadcast, he shared his opinion that the Fed is standing pat because it feels the economy is not yet strong enough to handle a rate hike. “This is a bubble … not a recovery,” he commented, adding that Wall Street remains in love with easing and “easy money.”5

These points of view aside, many analysts, journalists and market participants see a December rate move (and the tightening that would presumably follow it) as a net positive. As Cuttone & Co. senior vice president Keith Bliss told the Wall Street Journal, “I think it’s a relief for the market that in the opinion of the Fed policy makers the economy is not falling apart.”1  

One thing is certain – the federal funds rate will eventually rise from its current historic low, perhaps very soon, as what should be the first step a tightening cycle. In light of this eventuality, you might want to review your investments and your financial strategy.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/nexyes9 [11/18/15]

2 – foxbusiness.com/economy-policy/2015/11/18/federal-reserve-minutes/ [11/18/15]

3 – reuters.com/article/2015/10/23/us-china-economy-policy-idUSKCN0SH18W20151023 [10/23/15]

4 – usnews.com/news/business/articles/2015/11/18/as-us-prepares-to-hike-rates-europe-could-reap-benefits [11/18/15]

5 – thestreet.com/story/13301410/1/with-latest-fomc-statement-released-will-or-won-t-the-fed-raise-rates.html [11/19/15]

 

 

 

Are You Retiring Within the Next 5 Years?

What should you focus on as the transition approaches?

You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

Should you try to go Roth? Many pre-retirees have amassed substantial retirement savings in tax-deferred retirement accounts such as 401(k)s, 403(b)s and traditional IRAs. Distributions from these accounts are taxed as ordinary income. This reality makes some pre-retirees weigh the pros and cons of a Roth IRA or Roth 401(k) conversion for some or all of those assets. You may want to consider the “Roth tradeoff” – being taxed on the amount of retirement savings you convert today in exchange for the ability to take tax-free withdrawals from the Roth IRA or 401(k) tomorrow. (You must be 59½ and have owned that Roth account for at least five years to take tax-free distributions.)1

Should you downsize or relocate? Moving to another state may lessen your tax burden. Moving into a smaller home may reduce your monthly expenses. In a perfect world, you would retire without any mortgage debt. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so. You may want to investigate a refi, but consider that the cost of a refi can offset the potential savings down the line.

How conservative should your portfolio be? Even if your retirement savings are substantial, growth investing gives your portfolio the potential to keep pace with or keep ahead of rising consumer prices. Mere gradual inflation has the capability to erode your purchasing power over time. As an example, at 3% inflation what costs $10,000 today will cost more than $24,000 in 2045.2

In planning for retirement, the top priority is to build savings; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

Many retirees find that their expenses “out of the gate” are larger than they anticipated – more travel and leisure means more money spent. Even so, no business owner or professional wants to enter retirement pinching pennies. If you want to live it up a little yet are worried about drawing down your retirement savings too fast, consider slimming transportation costs (car and gasoline expenses; maybe you could even live car-free), landscaping costs, or other monthly costs that amount to discretionary spending better suited to youth or mid-life.

How will you take care of yourself? What kind of health insurance do you have right now? If your company sponsors a group health plan, you may as well get the most out of it (in terms of doctor, dentist and optometrist visits) before you leave the office.

If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Long term care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – turbotax.intuit.com/tax-tools/tax-tips/Retirement/The-Tax-Benefits-of-Your-401-k–Plan/INF22614.html [5/7/15]

2 – investopedia.com/articles/markets/042215/best-etfs-inflationary-worries.asp [4/22/15]

 

The Difference Between Good & Bad Debt

Some debts are worth assuming, but others exert a drag on retirement saving.

Who will retire with substantial debt? It seems many baby boomers will – too many. In a 2014 Employee Benefit Research Institute survey, 44% of boomers reported that they were concerned about the size of their household debt. While many are carrying mortgages, paying with plastic also exerts a drag on their finances. According to credit reporting agency Experian, boomers are the generation holding the most credit cards (an average of 2.66 per person) and the biggest average per-person credit card balance ($5,347).1,2

Indebtedness plagues all generations – and that is why the distinction between good debt and bad debt should be recognized.

What distinguishes a good debt from a bad one? A good debt is purposeful – the borrower assumes it in pursuit of an important life or financial objective, such as homeownership or a college degree. A good debt also gives a borrower long-term potential to make money exceeding the money borrowed. Good debts commonly have both of these characteristics.

In contrast, bad debts are taken on for comparatively trivial reasons, and are usually arranged through credit cards that may charge the borrower double-digit interest (not a small factor in the $5,347 average credit card balance cited above).

Some people break it down further. Thomas Anderson – an executive director of wealth management at Morgan Stanley and the author of the best-selling The Value of Debt in Retirement – identifies three kinds of indebtedness. Oppressive debt is debt at 10% or greater interest, a payday loan being a classic example. Working debt comes with much less interest and may be tax-deductible (think mortgage payments), so it may be worth carrying.3

Taking a page from corporate finance, Anderson also introduces the concept of enriching debt –strategic debt assumed with the certainty than it can be erased at any time. In the enriching debt model, an individual “captures the spread” – he or she borrows from an investment portfolio to pay off student loans, or pays little or nothing down on a home and invests the lump sum saved into equity investments whose rate of return may exceed the mortgage interest. This is not exactly a mainstream approach, but Anderson has argued that it is a wise one, telling the Washington Post that “the second you pay down your house, it’s a one-way liquidity trap, especially for retirees.”3,4

Mortgage debt is the largest debt for most new retirees. According to the American College, the average new retiree carries $100,000 in home loan debt. That certainly amounts to good debt for most people.3

Student loans usually amount to good debt, but not necessarily for the increasing numbers of retiring baby boomers who carry them. Education loans have become the second-largest debt for this demographic, and in some cases retirees are paying off loans taken out for their children or grandchildren.3

Credit card and auto loan debt also factor into the picture. Some contend that an auto loan is actually a good debt because borrower has purchased a durable good, but the interest rates and minimal odds of appreciation for cars and trucks suggest otherwise.

Some households lack budgets. In others, the budget is reliant on everything is going well. Either case opens a door for the accumulation of bad debts.

The fifties are crucial years for debt management. The years from 50-59 may represent the peak earning years for an individual, yet they may also bring peak indebtedness with money going out for everything from mortgage payments to eldercare to child support. As many baby boomers will retire with debt, the reality is that their retirement income will need to be large enough to cover those obligations.

How much debt are you carrying today? Whether you want to retire debt-free or live with some debt after you sell your business or end your career, you need to maintain the financial capacity to address it and/or eradicate it. Speak with a financial professional about your options.

Mike Moffitt may be reached at  ph# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  

Citations.

1 – foxbusiness.com/personal-finance/2015/03/26/strategic-debt-can-help-in-retirement/ [3/26/15]

2 – gobankingrates.com/personal-finance/19-easy-ways-baby-boomers-can-build-credit/ [4/23/15]

3 – usatoday.com/story/money/columnist/brooks/2015/04/22/retirement-401k-debt-mortgage/25837369/ [4/22/15]

4 – washingtonpost.com/news/get-there/wp/2015/03/26/the-case-for-not-paying-off-your-mortgage-by-retirement/ [3/26/15]

Moffitt Named AFG Senior Partner

Michael Moffitt of Cornerstone Financial Group was named Senior Partner with Advantage Financial Group (AFG) during the company’s Business Forum last month. AFG, based in Cedar Rapids, Iowa, provides independent financial advisors like Mr. Moffitt with access to financial products, intellectual capital and specialized resources to pursue their clients’ sophisticated financial needs.

AFG Senior Partner status does not automatically come with tenure; it is awarded to those who meet exacting standards. In order to be considered, a nominee must have a minimum of 15 years of industry experience, at least five years with AFG. AFG’s Partner Committee evaluates Senior Partner nominees and presents them to the Senior Partners for a vote. Those nominees who receive approval are presented to AFG’s Board of Directors for a final vote.

Senior Partner nominees are evaluated for the following qualities:

  • Demonstrated significant success within their individual practice
  • Operation exhibits a strong culture of Regulatory Compliance
  • A value-added skill set is brought to AFG with the ability to demonstrate thought leadership and technical competence
  • In-depth knowledge of AFG and the Financial Services industry
  • Willingness to participate in or lead an operating committee
  • Strong communication and interpersonal skills
  • Willingness to mentor and train

Joseph Russo, Chairman and CEO of AFG, noted the many years of devoted service to Mike’s clients and his partners. “Mike Moffitt makes the lives of his clients and his partners better as a result of his diligence and skill. We are pleased to recognize his senior ranking at AFG.”

Mike Moffitt of Cornerstone Financial Group may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com 

website:  www.cfgiowa.com

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Advantage Investment Management, a registered investment advisor. Advantage Investment Management, Advantage Financial Group and Cornerstone Financial Group are separate entities from LPL Financial.

 

Why Well Diversified Portfolios Have Lagged the S&P

Some investors have seen minimal returns compared to the benchmark.

Diversification is essential, yet it comes with trade-offs. Investors are repeatedly urged to allocate portfolio assets across a variety of investment classes. This is fundamental; market shocks and month-to-month volatility may bring big losses to portfolios weighted too heavily in one or two classes.

Just as there is a potential upside to diversification, there is also a potential downside. It can expose a percentage of the portfolio to underperforming sectors of the market. Last year, that kind of exposure affected the returns of some prudent investors.

Sometimes diversification hinders overall performance. The stock market has performed well of late, but very few portfolios have 100% allocation to stocks for sensible reasons. At times investors take a quick glance at stock index performance and forget that their return reflects the performance of multiple market segments. While the S&P 500 rose 11.39% in 2014 (13.69% with dividends), other asset classes saw minor returns or losses last year.1

As an example, Morningstar assessed fixed-income managers for 2014 and found a median return of just 2.35% for domestic high yield strategies. The Barclays U.S. Aggregate Bond Index advanced 5.97% in 2014 (that encompasses coupon payments and capital appreciation), while the Citigroup Non-U.S. World Government Bond index lost 2.68%.1,2

Turning to some very conservative options, the 10-year Treasury had a 2.17% yield on December 31, 2014; at the start of last year, it was yielding 3.00%. As March began, Bankrate found the annual percentage yield for a 1-year CD averaged 0.27% nationally, with the yields on 5-year CDs averaging 0.87%; last year’s average yields were similar.3,4  

Oil’s poor 2014 affected numerous portfolios. Light sweet crude ended 2014 at just $53.27 on the NYMEX, going -45.42% on the year. (In 2008, prices peaked at $147 a barrel). Correspondingly, the Thomson Reuters/CRB Commodities Index, which tracks the 19 most watched commodity futures, dropped 17.9% in 2014 after slips of 5.0% in 2013, 3.4% in 2012 and 8.3% in 2011. At the end of last year, it was at the same level it had been at the end of 2008.5,6

The longstanding MSCI EAFE Index (which measures the overall performance of 21 Morgan Stanley Capital International indices in Europe and the Asia Pacific region) lost 7.35% for 2014. At the end of last year, it had returned an average of 2.34% across 2010-2014. So on the whole, equity indices in the emerging markets and the eurozone have not performed exceptionally well last year or over the past few years.7

All this is worth considering for investors wondering why their highly diversified, cautiously allocated portfolios lagged the main U.S. benchmark. It may also present a decent argument for tactical asset allocation – the intentional, responsive shift of percentages of portfolio assets into the best-performing sectors of the market. Whether an investor favors that kind of dynamic strategy or a buy-and-hold approach with a far-off time horizon in mind, it is inevitable that some portion of portfolio assets will be held in currently lagging or underperforming investment classes. This is one of the trade-offs of diversification. In some years – such as 2014 – being ably diversified may result in less-than-desired returns.

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com 

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

*Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.

**There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – qz.com/320196/its-over-stocks-beat-bonds/ [1/2/15]

2 – tinyurl.com/oq6cb7w [2/23/15]

3 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2014 [3/3/15]

4 – bankrate.com/funnel/cd-investments/cd-investment-results.aspx?prods=15,19 [3/3/15]

5 – money.cnn.com/data/commodities/ [12/31/14]

6 – nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11387661 [1/17/15]

7 – mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [12/31/14]

Pension Plans & Derisking

Corporations are transferring pension liabilities to third parties.  Where does this leave retirees?

A new phrase has made its way into the contemporary financial jargon: derisking. Anyone with assets in an old-school pension plan should know what that phrase signifies.

The derisking trend began in 2012. In that year, Ford Motor Co. made a controversial offer to its retirees and ex-employees: it asked them if they wanted to take their pensions as lump sums rather than monthly payments. Basically, Ford realized it could someday owe these former workers more than its pension plan could pay out. The move was clearly motivated by the bottom line, and other corporations quickly imitated it.1

If you work for a major employer that sponsors a pension plan, you may soon face this choice if you haven’t already. By handing over longstanding pension liabilities to a third party (i.e., a major insurance company), the pension plan sponsor unloads a risky financial obligation.

In theory, retired employees tended this kind of offer gain added flexibility when it comes to their pension: a lot of money now, or monthly payments from the insurer for years to come. Does the lump sum constitute a sweet deal for the retiree? Not necessarily.

If you are offered a lump sum pension payment, should you accept it? Making this kind of pension decision is akin to deciding when to claim Social Security – you’ve got to look at many variables beforehand. Whatever choice you make will likely be irrevocable.2

What’s the case for rejecting a lump sum offer? You can express it in three words: lifetime income stream. Do you really want to forego decades of scheduled pension payments to take (potentially) less money now? You could possibly create an income stream off of the lump sum, of course – but why go through the rigmarole of that if you’re already getting monthly checks to begin with?

As American longevity is increasing, you may spend 20, 30, or even 40 years retired. If you are risk-averse and healthy, turning down decades of consistent income may have little appeal. Moreover, if you are female you have a decent chance of living into your nineties – and an income stream intended to last as long as you do sounds pretty nice, doesn’t it? If you are single or your spouse has very little in the way of assets, this too reinforces the argument for keeping the payment stream in place.

Also, maybe you just like the way things are going. If you don’t want the responsibility that goes with reinvesting a huge sum of money, you aren’t alone.

What’s the argument for taking a lump sum? Sometimes a salaried retiree is in poor health or facing a money problem. If this is your situation, then it may make sense to claim more of your pension dollars now.

On the other hand, you may elect to take the lump sum out of opportunity. You may base your choice on timing rather than time.

If you want to build more retirement savings, taking the lump sum might be instrumental. Pension payments are rarely inflation-adjusted; maybe you would like to invest your pension money so it can potentially grow and compound for more years before being withdrawn. Maybe your spouse gets significant pension income, or you are so affluent that the pension income you get is nice but not necessary; if so, perhaps you want to redirect that lump sum toward some other financial objective. Maybe you don’t want regular income payments this year or next because that money would put you into a higher tax bracket.3

The key is to avoid taking possession of the lump sum yourself. If you do that, your former employer has to withhold 20% of the lump sum (per IRS regulations) and you risk a taxable event. Instead, you may want to arrange a direct rollover, or trustee-to-trustee transfer, of the assets to avoid withholding and a huge tax bill. Through this move, the funds can be transferred to an IRA for reinvestment. In most cases, you need to leave your job (i.e., retire) before you can roll money out of a pension plan.4

Consult a financial professional about your options. If you do feel you should take the lump sum, talk to someone before you make your move. If the move makes sense, that professional may offer to help you invest the money in a way that makes sense for your near-term and long-term objectives, your risk tolerance, your estate and your income taxes. If you feel monthly payments from the usual joint-and-survivor pension might be the better choice, ask if some model scenarios might be might presented for you.

 Mike Moffitt may be reached at ph. 641-782-5577 or email:  mikem@cgfiowa.com 

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/nucxdss [11/23/14]

2 – forbes.com/sites/mikehelveston/2014/04/10/the-big-pension-decision-should-you-choose-a-lump-sum-or-monthly-annuity-payments/ [4/10/14]

3 – consumerreports.org/cro/2014/03/best-pension-payout-option/index.htm [3/14]

4 – nerdwallet.com/blog/investing/2014/rollover-ira/ [9/7/14]

 

Using CRUTs & CRATs to Sell Your Business Interest

These estate planning tools may also help in exit planning.

Discover a pair of underappreciated exit planning vehicles. Charitable remainder unit trusts (CRUTs) and charitable remainder annuity trusts (CRATs) are commonly seen as estate planning tools. What frequently goes unseen is their value in exit planning for business owners.

Does it look like you will sell your company to a third party? Do your “second act” or “third act” goals include financial independence, philanthropy and leaving significant wealth for your heirs? If you find yourself answering “yes” to these questions, a CRUT or CRAT may help you address those objectives and potentially enhance your outcome.

CRUTs & CRATs are variations of charitable remainder trusts (CRTs). A CRT is an irrevocable tax-exempt trust that you can fund with highly appreciated C corporation stock (or optionally, other types of highly appreciated assets). Since CRTs are irrevocable, they are difficult to undo.

How do you sell your ownership interest through a CRUT or CRAT? As the trust creator (or grantor), you donate said C corp stock to the CRUT or CRAT. Because the trust is tax-exempt, it can sell those highly appreciated C corp shares without triggering immediate capital gains tax.1

The CRUT or CRAT sells your ownership shares to the outside buyer of your company, and it becomes your tax-exempt retirement fund. It invests the cash realized from the sale of your ownership shares in either fixed-income or growth securities; it provides you with recurring payments out of the trust principal, which occur for X number of years or for the duration of your life (or even longer). Payout is mostly fixed – once determined, the percentage of the trust which the annuity is tied cannot be changed and you cannot access the principal. The payments can even go to people other than yourself – they can optionally go to your parents, they could go to your grandkids.1,2

You are offered another tax break as well. You can take a one-time charitable income tax deduction for the value of the donation used to fund the trust (i.e., a tax deduction applicable in the current tax year). This demands an appraisal of the highly appreciated assets being donated to the CRUT or CRAT, obviously. The deduction amount also depends on calculations using IRS life expectancy tables, the term of the trust, interest rates, and payout schedules and amounts.1,3

On one level, a CRUT or CRAT is an agreement you make with the IRS. In exchange for all these tax perks, you agree to give 10% or more of the initial value of the CRUT or CRAT to a qualified charity or non-profit organization. Many CRUT or CRAT grantors intend to leave no more than that to charity.2

When the grantor passes away, a last tax break occurs. While 100% of the trust assets now become part of his or her taxable estate, the estate may take a deduction for the remainder interest that goes to the qualified charity or non-profit.3

Some CRUT and CRAT grantors strategize to offset the eventual gifting of 10% (or more) of trust assets. They have the beneficiaries of the CRUT or CRAT fund an irrevocable life insurance trust (ILIT). When the grantor passes away, they receive insurance proceeds sufficient to replace the “lost” wealth. Since the ILIT owns the life insurance policy, the life insurance payout isn’t included in the taxable estate of the deceased and it isn’t subject to transfer taxes.3

What’s the fundamental difference between a CRUT & a CRAT? The difference concerns the recurring payments out of the trust to the grantor. In a CRUT, those payments represent a percentage of the fair market value of the principal of the trust (and that principal is revalued annually). There is investment risk involved in CRUTs. Should the value of the underlying investment go down significantly, your annuity income can go down as well. In a CRAT, they represent a fixed percentage of the initial value of the principal.1

Older business owners may find the CRAT is a more appealing choice, while younger business owners may be more attracted to the CRUT. Yearly distributions from a CRUT must amount to at least 5% and no more than 50% of the trust principal revalued annually. Yearly distributions from a CRAT must come to at least 5% but no more than 50% of the initial value of the donated assets.1,3

Can an owner fund a CRUT or CRAT with S corp shares? No. A charitable remainder trust can’t serve as a shareholder in an S corp, so if you donate S corp stock to a CRT, there goes your S corp status. It should also be noted that C corp stock subject to recourse debt can’t go into a CRT.1

Are you interested in learning more? Establishing a trust can be complicated. It is important to talk to a legal, financial, or tax professional about the potential of CRUTs and CRATs. What you learn may lead you toward a better outcome for your business.

Mike Moffitt may be reached at ph. 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – arne-co.com/selling-business-using-crt/ [11/18/14]

2 – forbes.com/sites/ashleaebeling/2013/08/14/charitable-shelter-how-cruts-cut-capital-gains-tax/ [8/14/13]

3 – bbt.com/bbtdotcom/wealth/retirement-and-planning/trusts-and-estates/charitable-remainder-trusts.page [11/18/14]

 

 

 

An Alert for People Who Use CDs for Their IRAs

A recent tax court ruling now limits the frequency of IRA rollovers.

Do you like to shop around online for the best CD rates? Do you have a habit of moving certificates of deposit from bank to bank in pursuit of better yields? If you do, you should be aware of an obscure but important IRS decision, one that could directly impact any IRA CDs you own.

Pay attention to the new, tighter restrictions on 60-day IRA rollovers. This is when you take possession of some or all of the assets from a traditional IRA you own and deposit them into another traditional IRA (or for that matter, the same traditional IRA) within 60 days. By making this tax-savvy move, you exclude the amount of the IRA distribution from your gross income.1

For decades, the IRS had a rule prohibiting multiple tax-free rollovers from the same traditional IRA within a 12-month period. For example, an individual couldn’t make an IRA-to-IRA rollover in November and then do another one in March of the following year using the same IRA.1

This didn’t present much of a dilemma for people who owned more than one IRA, of course. If they owned five traditional IRAs, they could potentially make five such tax-free rollovers in a 12-month period, one per each IRA. Internal Revenue Code Section 408(d)(3) allowed that.1,2

Those days are over. Thanks to a 2014 U.S. Tax Court ruling (Bobrow v. Commissioner, T.C. Memo. 2014-21), the once-a-year rollover restriction will apply to all IRAs owned by an individual starting January 1, 2015. This year, you’ll be able to make a maximum of one tax-free IRA-to-IRA rollover, regardless of how many IRAs you own.1

If you have multiple IRA CDs maturing, you could risk breaking the new IRS rule. When a CD matures, what happens? Your bank cuts you a check, and you reinvest or redeposit the money.

When this happens with an IRA CD, your goal is to make that tax-free IRA-to-IRA rollover within 60 days. In accepting the check from the bank, you touch those IRA assets. If you fail to roll them over by the 60-day deadline, those IRA assets in your possession constitute taxable income.3

So if the new rules say you can only make one tax-free IRA-to-IRA rollover every 12 months, what happens if you have three IRA CDs maturing in 2015? What happens with the two IRA CDs where you can’t make a tax-exempt rollover?

Here is how things could play out for you. You could end up with much more taxable income than you anticipate: the money leaving the two other IRA CDs would constitute IRA distributions and be included in your gross income. If you are not yet age 59½, you could also be hit with the 10% penalty on early IRA withdrawals.3,4

Is there a way out of this dilemma? Yes. This new IRS rule doesn’t apply to trustee-to-trustee transfers of IRA assets. A trustee-to-trustee transfer is when the financial company hosting your IRA arranges a payment directly from your IRA to either another IRA or another type of retirement plan. So as long as the bank (or brokerage) serving as the custodian of your IRA CD arranges such a transfer, no taxable event will occur.3

Speaking of things that won’t change in 2015, two very nice allowances will remain in place for IRA owners. You will still be able to make an unlimited amount of trustee-to-trustee transfers between IRAs in a year, as well as an unlimited number of Roth IRA conversions per year.1

Mike Moffitt may be reached at ph. 641-782-5577 or mikem@cfgiowa.com.

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion form a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.   

Citations.

1 – irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule [5/14/14]

2 – bna.com/announcement-clarifies-inconsistency-b17179889881/ [4/24/14]

3 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Rollovers-of-Retirement-Plan-and-IRA-Distributions [4/21/14]

4 – bankrate.com/financing/cd-rates/cd-ira-owners-beware-of-new-rule/ [9/2/14]