EXPLORING THE PAST FOR INSIGHT INTO THE FUTURE FOR STOCKS

Although we know that history does not necessarily repeat, we believe that insight can be derived by looking at stock market cycles from history. We found an appropriate one from the 1937-1938 BEAR market, with specific relevance to today’s stock market, as represented by the NASDAQ.

Just like the NASDAQ from 1993 to 2000, the Dow in the 1920’s rose more than six fold, from 63 to 381. From the high in 1929, it had dropped by almost 89% to 41 by 1932. Likewise, the NASDAQ dropped from 5000 in the year 2000 to a low of 1000 by 2003.

Recovering over the next four years, the Dow reached 194 by 1937 while the NASDAQ topped out at 2800 in 2007. What followed in 1938 was a decline of almost 50%, just as the NASDAQ did in 2008-2009. If you lay the current NASDAQ chart over the old Dow chart, there is an uncanny parallel. Our current recovery has taken the NASDAQ back to a level of 2000, below its previous peaks, just as the Dow in 1939 recovered by more than 50%.

What did the 1939 stock market do after this recovery? The next two years were mostly flat, and it took six years and a world war to get the market moving to a level above the recovery peak of 1939. Could it possibly take six years to move the NASDAQ higher now?

One school of thought claims that the efforts to rein in big business and to achieve more even income distribution will stunt growth and profits. This is well articulated by Jeremy Grantham on the GMO web site, who says that we should start getting used to lower growth and higher prices. As the economy sorts itself out from the recent financial turmoil, we are very likely to have lower growth rates for many years.

Another view is offered by Chris Martenson, PhD., MBA, on his web site and blog. He expects moments of relative calm and seeming recovery punctuated by rapid and unsettling market plunges and marked changes in social perspective. We’ll see food scarcity and shortages and price spikes (like last year’s gas prices), but even when relative calm returns, prices still not recovering to their previous levels.

The last view is that we will somehow again muddle through, with the Fed and Congress successfully fighting off recession, deflation and inflation, without major changes or significant adjustments. The problem with this is if indeed we muddle through without fixing the problems that brought us to the brink last fall, we are doomed to repeat the experience.

Only time will tell, but looking at history is instructive. – Richard K. May

NEW ROTH IRA CONVERSION RULES AND ISSUES

Starting January 1, 2010 the qualifying income limits that have prevented many individuals from converting a traditional IRA to a Roth will be eliminated. This change is one of the most important on the IRA landscape in years. The question most frequently asked is, “Should I convert my traditional IRA to a Roth IRA?”

There is no simple answer but here are several important considerations.

• When interest rates are going down the conversion likely makes no sense.
• When rates are going up the conversion is more likely to make sense.
• Conversions are better for the person who doesn’t need to live off the funds. There are no required distributions associated with a Roth IRA. With traditional IRAs, you must begin tapping your account after reaching age 70½. In doing so, you increase your taxable income starting in your 70’s.
• Conversions are generally better for a person that has other funds to pay the taxes. Paying taxes with IRA assets defeats the purpose.
• Conversions for a couple may make sense.
• Conversions for a person with estate tax issues will make more sense than for a person without. Your estate ends up with a higher percentage in tax-favorable retirement plans.
• Conversions to leave a Roth IRA to grandchildren often have merit. Because Roth IRA owners are not subject to required minimum distribution rules, the assets in the account continue to grow tax-free. And over a period of years this growth can be exponential. Although Roth beneficiaries are required to take distributions each year, the withdrawals are tax-free, making the Roth a great retirement asset for which to transfer the greatest amount of wealth.
• Conversions for a person with net operating losses or other loss carry-forwards can make sense. In order to realize this favorable tax attribute there is the option of using a Roth IRA conversion to “offset” the loss or carry-forward.
• Conversions can be costly. If sale of taxable assets are required to pay the resulting tax bill, effectively the benefit of the tax deferral that might otherwise normally occur is lost.
• Conversion to the tax free Roth IRA can provide flexibility to keep taxes low in retirement. Retirees who need funds will be in a position to withdraw less money overall. There won’t be tax liabilities generated by withdrawals from the tax free account.

WHO QUALIFIES?

For 2009 you can’t convert traditional IRA assets to a Roth if your household’s modified adjusted gross income exceeds $100,000. A married person who files as “married separate” is prohibited from converting—no matter what their income level. While the income limits for funding a Roth will remain, the rules for conversions are about to change.

As part of the Tax Increase Prevention and Reconciliation Act, the federal government is eliminating the $100,000 income limit for Roth conversions, as well as the restriction on spouses who file separate tax returns. These changes will allow more retirees—who rolled over their holdings from 401(k)’s and other workplace savings plans into IRAs—to convert to Roth IRA’s.

When you convert assets from a traditional IRA to a Roth, you have to pay income tax on all pretax contributions and earnings included in the amount you convert. However, there’s a special rule in place for 2010 only that will allow you to recognize 100% of the conversion income in 2010 or split it equally between the next two tax years (2011 and 2012). The two-year option is a one-time offer for 2010 conversions.

If you are age 70½ or older and taking required minimum distributions from a traditional IRA, you can convert remaining traditional IRA assets to a Roth.

If you hold traditional IRAs made up largely of pretax contributions, such as a 401(k) rollover, your tax bill could be steep. One way to mitigate the tax-bill pain is to get your tax advisor to help you determine how much you could convert within your current tax bracket each year without bumping yourself into a higher one. Interestingly, the new rules come at a time when many IRAs have significantly declined in value, meaning the taxes on such conversions will likely be lower. With taxes expected to rise in coming years, the idea of an account that’s safe from tax increases may appeal to you.

If you expect your income to be lower in retirement—and tax rates to stay about where they are—then a Roth conversion might not make sense. Whether you convert or not basically depends on what you expect to happen with your income in retirement, compared with your income while working, and whether you’re more comfortable paying taxes sooner at current rates or betting on lower taxes later.

THE NEXT STEPS

Organize paperwork for any nondeductible IRA contributions you’ve made in the past. By taking that step, you should be able to come up with an estimate of how much of your potential conversion would be taxable. If you expect your 2010 income to be similar to 2009 you can look up the tax brackets at www.irs.gov to get an idea of the taxes that will be due. Or contact us and we will run the numbers for you. Conversions to Roth IRA’s will be an appropriate investment, tax, and / or estate planning step for many, but not all. Be sure to access all the angles before you take that step.

- Chris Blakely

Sources: The Wall Street Journal, IRS.gov, rothconversion.com

On December 31, 2009, we will have completed thirty years in business. We now supervise nearly $200 million in assets, and complete over 300 tax returns each year.

Over the years, we have grown from tax and accounting to a firm that today offers comprehensive financial services, including non-discretionary supervision of investment accounts, retirement planning, college planning, tax planning and preparation, and financial advisory services. Looking forward, we will continue to offer these services, personalized on an individual basis, as well as expand our management of alternative assets for clients. Such non-traditional investments as managed timber, agribusiness, and commodities will become an increasingly important part of our service to clients.

WE ARE ALWAYS PLEASED TO ACCEPT NEW CLIENTS.

Investment and tax professionals rely primarily on referrals from existing clients to grow their businesses. At RKM, we have signed over 30 new advisory relationships since the start of the year. We consider a referral a high form of compliment, a validation of our mission, which has always been to provide the best tax and investment advisory services we can at a reasonable cost. This level of endorsement means that we have earned your respect, and it pleases us that you are comfortable giving the name of RKM Advisors to your friends and family. We have been in growth mode this year and are encouraged by our progress so far and are poised to accept your continued referrals. Thank you for your long standing support!

RKM ADVISORS PERSONNEL UPDATE

We are happy to announce that Vanessa Geiger is pregnant with her first child. Her maternity leave will come at a bad time for RKM Advisors, the months of February, March, and April. As many of you know these are our busiest months with tax season. She will do some work from home but we cannot expect her to work at the same full time capacity. We are looking for temporary tax season help. If you or someone you know has experience in preparing taxes and would like to work for a few months please have them contact us. We can use either two part time people or one full time person for the tax season months. We are planning to maintain our usual tax season efficiency despite her joyful “interruption”. However on the off-chance that Vanessa’s temporary replacement(s) can’t equal her tax preparation skills and talents, we may seek a few extension volunteers.

This entry was posted on Monday, September 28th, 2009 at 12:48 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.