Warren Wealth Article Archive

Make sure you pay attention to the rules.

provided by Jacob Warren
content provided by Peter Montoya, Inc.

What do you do when you inherit an IRA? Good question. Most people don’t know the rules and regulations pertaining to inherited IRA assets. You should. You, not the IRS, should benefit the most in this circumstance.

Will my income taxes soar this year as a result? Not necessarily. If you roll the assets into an inherited IRA, you have up to five years to either a) withdraw the money entirely or b) withdraw the money over your lifetime according to an IRS life expectancy formula.1 Many heirs would prefer b) because the tax scenario is better – but some IRA custodians require you to go by the five-year rule.2

What if you don’t roll the money into an inherited IRA? What if you just take the balance as a lump sum and spend it? Look out. All that money will be taxed at your regular income tax rate.3 After income and estate taxes eat away at the IRA balance, you may be left with a fraction of the original assets.

Let’s look at some options for those who inherit IRA assets. Keep in mind: this brief article discusses only some basic, common scenarios. Tax laws pertaining to inherited IRA assets are complex, with constant “new wrinkles” – so be sure to talk to a financial professional or tax advisor who is up to speed on IRS rule changes.

What if you inherit your spouse’s IRA? The IRS says a surviving spouse can elect to be treated as the owner of such IRA assets rather than the beneficiary.1 A surviving spouse can therefore roll this money into his or her own IRA. That makes a lot of sense, especially for younger spouses: distributions can be extended over your lifetime and the lifetime of your beneficiaries.

If you roll over your late spouse’s IRA assets into your IRA, they may be able to compound for a long time, as you don’t have to take a Required Minimum Distribution from your IRA until you reach age 70½. (If you have a Roth IRA, you don’t have to take them at all.) On the other hand, you must take a distribution from an inherited IRA a year after your spouse’s death.4

You also have other options. If you are younger than 59½ and need the IRA assets for living expenses, you could keep all or part of the money in your late spouse’s IRA, whereby you could take penalty-free distributions. Or you could disclaim some or all of the IRA assets if you don’t need them (this has to happen within nine months of the original IRA owner’s death). Disclaiming them will allow the IRA assets to go to the contingent beneficiaries named by the original IRA owner. This might result in a better estate tax picture for your kids.4

You inherit an IRA from someone other than a spouse. Okay, this is complicated. Was the original IRA owner younger than age 70½ at death? Did he or she turn 70½ last year and die before April 1 this year? If the answer is yes to either question, you have two choices. 1) You can liquidate the inherited IRA by no later than December 31 of the fifth year after the year the original IRA owner dies. This is mandatory for some IRAs. 2) You can take minimum withdrawals over your life expectancy, calculated per IRS tables.2

Did the original IRA owner pass away on or after April 1 of the year after he or she turned 70½? Then forget the five-year rule. You must start taking minimum withdrawals over your life expectancy. Your first such withdrawal has to happen by Dec. 31 of the year after the year the original IRA owner dies.2

The IRD deduction. The federal government offers certain IRA beneficiaries a break – the “income in respect of a decedent” (IRD) deduction. This deduction appears when an IRA beneficiary faces a “double tax”.

If you inherit an IRA as part of an estate whose assets exceed the current federal estate tax exemption ($3.5 million in 2009), you face the “double tax”: the possibility of paying estate taxes on the IRA assets (45%) plus income taxes on those assets (35%). Rather than lose 80% of the IRA to taxes, the IRA heir can claim the IRD and take an income tax deduction for federal estate taxes that were paid on the inherited IRA assets.5

How big is the deduction? It is equal to the marginal federal estate tax rate that applies to the estate being distributed. In other words, if the inherited IRA assets are subject to 45% estate taxes, the designated beneficiary can deduct $450 from every $1,000 distribution from the IRA. The deduction can be claimed with each plan distribution, until either the deduction is used up or the assets in the inherited IRA are depleted.5

The no-RMDs-in-2009 wrinkle. No one has to take a Required Minimum Distribution from an IRA in 2009. What does that mean for inherited IRAs? If the IRA owner died in 2008, you don't have to take a distribution in 2009 and you get six years rather than five to withdraw inherited IRA assets if you would ordinarily go by the five-year rule.

But watch out: if you inherited an IRA from a non-spouse and the original IRA owner named multiple beneficiaries, you still have to split up the IRA into separate inherited IRAs by the end of 2009 to permit minimum withdrawals over heirs’ life expectancies. If you don’t, each beneficiary will have to take withdrawals based on the age of the oldest beneficiary, which could be a tremendous blow to tax deferral.6

You can’t contribute to inherited IRAs. This applies to traditional and Roth IRAs.7,8 However, as mentioned above, surviving spouses can elect to treat an inherited IRA as their own – in IRS eyes, they do so by making any contribution to it.1

A Roth IRA wrinkle. It is possible to pay taxes on an inherited Roth IRA. Roth IRA earnings can be withdrawn tax-free starting on the first day of the fifth taxable year after the year the Roth IRA was established. So if an inherited Roth IRA was established less than five years ago, an heir may have to pay tax on earnings withdrawals if the original owner's death and the withdrawal both occur within five years of the creation of the account. However, a beneficiary can circumvent this penalty by leaving the earnings in the Roth IRA for the required time period, even if he or she withdraws everything besides the earnings.8

Jacob Warren
Warren Wealth Management
2300 Main Street, Suite 947
Kansas City, MO 64108
(816) 286-1810













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These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.



Citations.
1 irs.gov/publications/p590/ch01.html#en_US_publink10006321 [2009]
2 smartmoney.com/personal-finance/taxes/Inheriting-Uncle-Henrys-IRA-11874/ [1/21/09]
3 investorsinsight.com/blogs/retirement_watch/archive/2008/09/19/avoiding-ira-inheritance-disasters.aspx/ [9/19/08]
4 kiplinger.com/features/archives/2009/02/krr_leave_an_ira_that_is_heir_tight2.html?kipad_id=42 [3/3/09]
5 advisor.morningstar.com/articles/article.asp?docId=16516 [5/22/09]
6 forbes.com/forbes/2009/0302/045_heir_alert.html [3/2/09]
7 schwab.com/public/schwab/investment_products/retirement/inherited_iras/faq?cmsid=P-2008538&lvl1=investment_products&lvl2=retirement [5/22/09]
8 fairmark.com/rothira/inherit.htm [1/24/08]




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The federal stimulus aside, what can the average American do?

Presented by Jacob Warren
Content provided by Peter Montoya, Inc.

While President Obama’s stimulus plan may significantly aid the U.S. economy in future months, some economists are seeing notable potential in the private sector. There are little things we may do, in unison as Americans, that could help heal regional and local economies.

Start up a business. Nothing huge, perhaps, but a cottage industry outpost of your own: a way to make some extra money, or a new way to capitalize on a new opportunity. Where do you learn to start a business? From a mentor, friend or parent. From free or low-cost workshops held in your community. Don’t discount the relevant information you might find online or at the library. If you think you have a good idea in mind, why not act on it and do your part to stimulate the economy?

Spend your dollars locally. Frequent local stores, and remember that this goes beyond mere retail shopping. If you have a need – if you need a service provider, or a vendor – hire a local business that needs the work. Your Chamber of Commerce, your local newspaper and the local chapter of the Better Business Bureau can alert you to worthy local businesses you may not have known about.

Don’t cut back unnecessarily; just spend your dollars wisely. Set a budget and try to abide by it. Go out and do what you love to do, but keep moderation in mind – do it a little less frequently, or a little less expensively.

Buy American. This is the time to do it. Why turn away from the American worker and business owner now? Look at labels and look online for U.S.-based firms.

Invest. Some companies have held up well in the recession, and shares of many other companies are priced quite low right now – so why not take advantage of the opportunities?

Finally, stay positive. A recession is temporary by definition. At some point, perhaps sooner than we all think, the economy will take a turn for the better. If you need help coping with the recession, by all means ask for it – people want to help you. Churches and temples, local non-profits, the friends and loved ones you count on and even businesses are ready to give you an assist if you need it. Ask around, and look forward to a brighter day.


Jacob Warren
Warren Wealth Management
2300 Main Street, Suite 947
Kansas City, MO 64108
(816) 286-1810













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These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


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The President calls for more regulation – and a more powerful Federal Reserve.

provided by Jacob Warren
content provided by Peter Montoya, Inc.

Since September 2008, the federal government has committed $10.5 trillion to fixing the economy – bailing out Citigroup, Bank of America, AIG, Freddie Mac, Fannie Mae, Chrysler and General Motors in the process.1 To try to prevent further economic nightmares, President Obama is proposing a “sweeping overhaul” of the U.S. financial system on a level unseen since the 1930s.

An answer to “an absence of oversight.” If enacted, Obama’s plan would hand more power to the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation, fuse two federal agencies into a single regulator of the nation’s largest banks, create a new agency to regulate consumer financial products, police hedge funds and private equity funds, and rein in the use of mortgage-backed securities.

The Fed’s role. Under the plan, the Federal Reserve would become the top watchdog of the U.S. financial system. It would regulate the banks, brokerages, insurers and hedge funds deemed too big to fail, see that they are keeping enough capital in reserve, and respond quickly in a crisis. The goal is to avoid another Bear Stearns or Lehman Bros. debacle, and the system-wide shock that could follow.2

The Treasury could get veto power. Treasury Secretary Timothy Geithner would chair a regulatory council to work side-by-side with the Fed as it monitors the biggest financial firms. This council could potentially veto emergency loans made by the Fed to financial companies.3

The FDIC could expand its reach. It would gain the ability to seize and unwind not only banks, but other kinds of financial firms.3

The OTS dies. If Obama has his way, the much-criticized Office of Thrift Supervision would merge with the Office of the Comptroller of the Currency. This revamp would create a new entity, a National Bank Supervisor to monitor all deposit-taking thrifts. Under current rules, some banks may essentially select their regulator.2,3

The CFPA would be born. That’s the Consumer Financial Protection Agency. This new office would regulate credit cards, mortgages and other consumer-marketed financial products. It would set guidelines for banks and bank holding companies, and if they got out of line, it would punish them with penalties and fines.2

More scrutiny over hedge funds & private equity funds. Under the plan, all private equity and hedge funds would have to register with the Securities and Exchange Commission, and throw open their books when regulators demand.4

A tighter rein on securities and derivatives. Banks that package and sell mortgage-linked securities (and other debt-linked securities) would have to keep at least 5% of those securities on their books. In fact, all financial firms that originate a security would have to retain 5% of the “securitized exposure” and maintain an investment interest in that security even if it is resold. The idea here is to discourage the promotion of exotic home loans and other complex financial products that were half-understood by investors and borrowers.3,4

Will all this change really take place? It will likely take several months for any version of the Obama proposal to become law. The plan notes that the Fed has “the most experience to regulate systemically significant institutions.” But some Capitol Hill opinion leaders are especially concerned about expanding the Fed’s powers. Even Sen. Chris Dodd (D-CT) is unconvinced. “Giving the Fed more responsibility at this point … is like a parent giving his son a bigger … faster car right after he crashed the family station wagon,” he noted, referencing the testimony of former Federal Reserve examiner Mark Williams.5

“You cannot convene a committee to put out a fire,” Treasury Secretary Tim Geithner noted June 18, defending the idea of the Fed as the “first responder” to any future financial crisis. But Sen. Richard Shelby (R-AL) pointed out that the Fed could end up regulating “insurance companies, hedge funds, asset managers, mutual funds, and a variety of other financial institutions that it has never supervised before.” Rep. Jeb Hensarling (R-TX), a vocal critic of last fall’s Wall Street bailout, says the plan “disappointed” him: “They essentially leave all the old regulatory infrastructure in place, and then they simply add on to it.” When it comes to regulation of the financial industry, however, many consumers and individual investors may feel the same as Sen. Dodd, who called for “focused and empowered, aggressive watchdogs rather than passive enablers of reckless practices.”5

Jacob Warren
Warren Wealth Management
2300 Main Street, Suite 947
Kansas City, MO 64108
(816) 286-1810













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These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.



Citations.
1 money.cnn.com/news/storysupplement/economy/bailouttracker/ [6/15/09]
2 bloomberg.com/apps/news?pid=20601103&sid=aJTI_GE0pf8Y [6/17/09]
3 money.cnn.com/2009/06/17/news/economy/regulatory_reform/index.htm?postversion=2009061712&eref=rss_topstories [6/17/09]
4 topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html [6/17/09]
5 features.csmonitor.com/politics/2009/06/19/congress-%E2%80%93-including-democrats-%E2%80%93-in-no-hurry-to-approve-obamas-regulatory-reform/ [6/19/09]


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Diversification has the potential to help portfolios in rough times.

Presented by Jacob Warren
Content provided by Peter Montoya, Inc.

In any stock market climate, proper asset allocation matters. In a down market, you could argue that it matters more than anything else.

Did you have a well-diversified portfolio during the fall of 2008? That was a time when the importance of having a bond allocation and proper equity diversification really hit home. Nearly all investors were hit hard, but some were hit harder than others. What percentage of your portfolio was held in Treasuries (or cash) at that time?

Wise asset allocation may help you as the market recovers. Yes, even diversified portfolios lost money at the end of 2008 and the start of 2009. Yet with rebalancing, these same portfolios may be poised to take advantage of a rebounding market.

You might say there are two schools of thought when it comes to diversification and asset allocation – hands off, and hands on.

Modern Portfolio Theory. In 1952, a University of Chicago Ph.D. candidate named Harry Markowitz published a thesis - a brief, provocative paper that called for investors and money managers to see risk with new eyes. That was the start of Modern Portfolio Theory, which still has many advocates today.

Before MPT, money managers and investors tended to look at investments in isolation: if a stock had performed well in 1948, it was a good stock and it would probably perform well in 1949. They analyzed a stock almost like they would analyze a business.

In his paper, Markowitz basically said “You guys are going about this the wrong way.” He first assumed that all investors wanted to avoid risk (which he defined as standard deviation from expected portfolio returns). He then contended that you should measure the risk level of a whole portfolio instead of individual securities.1 (In other words, if you want to include a security in your portfolio, you should think about how that will alter the risk level of your entire portfolio, rather than simply consider the risk of the security.)

MPT asserts that for every portfolio, there exists an “efficient frontier” – an ideal asset allocation among diversified asset classes that should efficiently balance maximum return and minimum risk.2 Markowitz further developed the theory with economists Merton Miller and William Sharpe, and it eventually won a Nobel Prize in economics.

MPT has its fans – but also its critics. In the last 20 years or so, many investment advisors and money managers have practiced a buy-and-hold style of portfolio management using the diversification principles of MPT. But as the markets dropped in 2008-09, critics pointed out the danger of buying and holding - you can “hold” positions too long. In the crisis, some investment advisors took more of a hands-on approach to portfolio management – others had always done so.

How long is the long run? If history is any guide (and it may not be), the longer your investment horizon, the more sense buy-and-hold can make – at least when it comes to stocks. For example, $1 invested in stocks in 1929 would be worth $759 in 2009, whereas $1 invested in bonds in 1929 would only be worth $74 today. The critics counter that argument with the fact that the S&P 500 traded at the same level in mid-2009 as it did in summer 1997. Stretch or contract different windows of time and you can reach all kinds of conclusions.2

The bottom line. The buy-and-hold adherents and critics certainly agree on one thing: diversification is hugely important. If your assets are allocated across 10 or 12 “baskets” instead of one or two, for example, you are theoretically less affected by the whims of the financial markets.

So what is “proper” asset allocation for you? Your financial professional can help you determine that. Your time horizon, preferred investment style, accumulated assets, life goals and financial objectives – these all have to be taken into consideration. It’s worth a conversation, today.

Jacob Warren
Warren Wealth Management
2300 Main Street, Suite 947
Kansas City, MO 64108
(816) 286-1810










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These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.



Citations.
1 biz.yahoo.com/edu/bi/ir_bi5.ir.html [6/8/09]
2 financial-planning.com/fp_issues/2009_6/buy-and-hope-2662103-1.html [6/1/09]





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The Treasury market has recently put some pressure on the recovery.

presented by Jacob Warren
content provided by Peter Montoya, Inc.

Is inflation making a comeback? That concern has been on Wall Street’s mind lately. About six months ago, the yield on the benchmark 10-year note was around 2%. In the second week of June, it touched 4%. While still low historically, the rising yield could prove inconvenient for the recovery in the financial and housing sectors.1

The yield on the 10-year note has slowly risen since March. On June 10, a subpar U.S. Treasury auction took the yield to 3.95%.2 Friday, Treasury prices spiked higher, sending the yield to 3.79% at the end of a week in which the U.S. Treasury auctioned off more than $65 billion in debt.3

Action leads to reaction. Why the concerns here? Let’s review what has happened in the last several months. The federal government issued massive amounts of debt to fund its response to the recession and the financial crisis. The government has borrowed to a startling degree and flooded the banking system with money – conditions which can breed inflation.

Also, with so much debt being offered for sale, the fear was that supply would come to outweigh demand in the bond market. When bond prices fall, bond yields rise. When the yield rises on the 10-year Treasury, interest rates rise on mortgages and other types of loans (mortgage rates move in response to the 10-year note).

When interest rates rise, the cost of borrowing increases, mortgages become less attractive, and you have decreased homebuying demand and downward pressure on home prices. That could slow down the economy and negatively affect GDP. While higher Treasury yields and higher interest rates can aid the dollar, there is a considerable downside.

Wasn’t the Federal Reserve going to buy billions in Treasury notes? Yes – back in March, that was the plan. The Fed wanted to purchase $300 billion in long-term Treasury notes and another $750 billion in mortgage-linked securities.4
The idea was to lower mortgage rates and thaw credit markets. Temporarily, it worked – there was more demand in the Treasury market, rates on mortgages fell, and refinancing increased. But the short-term effect faded.

The Fed’s Open Market Committee will meet June 23-24, and some think the Treasury buyback effort will be renewed around or before that time.1 An interest rate hike would seem distant. Only 18% of economists polled in June by the Wall Street Journal think the Fed will hike rates this year.5

Jacob Warren
Warren Wealth Management
2300 Main Street, Suite 947
Kansas City, MO 64108
(816) 286-1810









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These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.



Citations.
1 money.cnn.com/2009/06/11/markets/bondcenter/credit/?postversion=2009061113 [6/11/09]
2 cnbc.com/id/31204061 [6/10/09]
3 money.cnn.com/2009/06/12/markets/bondcenter/bonds/?postversion=2009061214 [6/12/09]
4 money.cnn.com/2009/03/18/news/economy/fed_decision/index.htm?postversion=2009031815 [3/18/09]
5 online.wsj.com/article/SB124464007697702065.html [6/11/09]



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