IRS Retirement Plan Limits announced for 2015

On October 23, 2014, the IRS announced its annual cost of living adjustments. Below is a chart from www.401khelpcenter.com that does a nice job summarizing the changes in limits since 2012.

Chart of Select Limits
401k Plan Limits for Year	2015	2014	2013	2012
401k Elective Deferrals	$18,000	$17,500	$17,500	$17,000
Annual Defined Contribution Limit	$53,000	$52,000	$51,000	$50,000
Annual Compensation Limit	$265,000	$260,000	$255,000	$250,000
Catch-Up Contribution Limit	$6,000	$5,500	$5,500	$5,500
Highly Compensated Employees	$120,000	$115,000	$115,000	$115,000
Non-401k Related Limits
403(b)/457 Elective Deferrals	$18,000	$17,500	$17,500	$17,000
SIMPLE Employee Deferrals	$12,500	$12,000	$12,000	$11,500
SIMPLE Catch-Up Deferral	$3,000	$2,500	$2,500	$2,500
SEP Minimum Compensation	$600	$550	$550	$550
SEP Annual Compensation Limit	$265,000	$260,000	$255,000	$250,000
Social Security Wage Base	$118,500	$117,000	$113,700	$110,100

SPP Investment Update

Below is an email to our clients discussing our recent rebalancing of our Target Allocations.  We thought it would be helpful to share during this recent market volatility.

A phrase I always try to keep in mind during times of higher market volatility is “the markets tend to take the stairs up and the elevator down”.  For me, this helps keep the long term goals of our clients in perspective when the stock market gets choppy.

Our investment philosophy centers on the belief that the most effective way to achieve your goals is to determine the appropriate level of risk and to consistently rebalance your portfolios to that allocation.  Rebalancing involves buying or selling assets in your portfolio to maintain your original desired level of asset allocation.  Instead of simply rebalancing the portfolio on a given day each year, we try to choose times throughout the year when certain asset classes have drifted from the target allocation in a meaningful way (5-10%).  This helps us ensure that we are sticking to the age old method of “buy low and sell high”.    

The majority of our clients tend to describe themselves as more conservative, essentially, willing to give up some of the upside to protect more on the downside.  Because of this, we will from time to time position our portfolios in a slightly more conservative manner (as we did during the summer).  Our thought process at the time was that the market had been on a relatively straight upward path with very little volatility.  We felt there was an opportunity for some pullback in the markets that would allow us to rebalance the accounts to the appropriate long term allocation, this allowed us to sell a portion of the better performing assets in the accounts while they were up in value and be slightly more defensively positioned in your accounts for the past few months. 

Even with the recent slide in the stock market, Large Cap US Stocks are still up around 3% Year To Date, and 12% over the last 12 month.  Other asset classes have not performed as well, with the International Index down 6% YTD and Small Company Stocks down 7.5% YTD.  This recent market sell-off, combined with our already defensively positioned portfolios, has moved our actual allocation to a relatively significant underweight to risk assets.  For example, if your target allocation is 60% Risk (aka Equities or Stocks)/40% Stable (aka Fixed Income or Bonds) your current position is closer to 50/50.  We look at this as an appropriate time to buy back up to 60% Risk in those portfolios.

Another aspect we monitor is the performance of different sectors of the economy.  In our portfolios this year we have owned Technology (+7.5% YTD), Healthcare (+11.5% YTD) and Real Estate (+14.5% YTD) as over-weights to our Large Cap US Index position (+3% YTD).  This has certainly benefited our Large Cap US component of the portfolio.  We will use this opportunity to rebalance those positions, along with slightly reducing our exposure to Technology and International in our Targets.  We will add a small allocation to a new position in a sector that has been down 6% YTD, US Industrials (to give you a sense some of the top holdings in this index are GE, Union Pacific, UPS, Raytheon).

We will continue to implement most of these changes by using low-cost indexes of Exchange Traded Funds.  If you have self-directed accounts (401k plans, etc.) that may have drifted away from your target allocation you may want to take this opportunity to review them and rebalance as well.

We want to be clear, these moves are not a bullish stance on the markets.  They are in our minds simply sticking to our long term philosophy of rebalancing portfolios to their appropriate allocations.  We could certainly continue to see short term volatility in the stock market.  In general, we think trying to predict the short term movements of the markets is a losing game long term.  Knowing the appropriate level of risk based on your goals & time horizons, and remaining disciplined to our approach is the best way for us to help you achieve your long term objectives.

Chase Security Breach - What to do?

If you are a customer of Chase Bank you are probably wondering what steps you can be taking to protect yourself.

First, we would suggest not to panic and change banks based on this breach.  All banks and financial institutions are targets for these attacks.  Unfortunately, it is safe to say this won't be the last breach of a bank.

Online Access to Accounts:  We have read that usernames and passwords have not been breached and not to rush to change them.  We disagree with this thought process and think it cannot hurt to change the passwords you use to login to your accounts.

Communication from "The Bank":  Be very cautious with the information you share with those calling or writing you on behalf of the bank.  If someone reaches out to you, we feel it is better to call the bank back directly with the number on the back of the card to verify that the information being shared / requested is truly coming from them.

Pay Attention:  Spend a little more time than normal monitoring your account transactions.  In a few months. it will be a good idea to review your credit report to ensure no one has opened any accounts with your social security number that you are unaware of.  In a previous post on Identity Theft Protection, we review in detail the steps you should take to review your credit.  Click the link below to see that post.
http://singlepointpartners.blogspot.com/2014/05/single-point-of-view-may-2014.html

IRS Guidance on after tax 401k contributions and Roth conversions

The last quarter (or so), we tend to be very focused on tax planning. (Not to be confused with tax accounting in the first quarter or so). With that, it is very timely that last week the IRS issued guidance (Notice 2014-54) on rolling out after tax contributions from a 401k plan.

KEY POINT

In its guidance, the IRS stated that a retirement plan participant has the ability to convert their "after tax" account into a Roth IRA tax free. 

Here is a link to the referenced notice:
http://www.irs.gov/pub/irs-drop/n-14-54.pdf 

Background: 401k-Employee Contribution Types

To understand the significance of this, we must first understand the types of employee contributions that may go into a plan. 

For more information on contribution types, see the IRS link below.

Pretax
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Contributions

As a plan participant, you have the option of contributing to your plan on a pretax basis. This will allow you to take a deduction on your personal taxes.

Aftertax
You may also have the ability to contribute without taking a deduction (many plans do not allow). This is an after tax deferral, meaning you do not get a tax deduction. Eventually when you take a distribution of these funds, you will only be taxed on the earnings (remember you already paid taxes on the deferred contribution).

Roth
Finally, your plan may allow for you (not all plans do, but this is becoming more popular) to contribute to a designated Roth account. This contribution is after tax, and when it is eventually distributed (both the deferral and the earnings) to the participant, it is income tax free.

NOTE: Although the record-keeper of the retirement plan is hired to make sure that the funds in the account are categorized appropriately, the ownership is on the account holder.  If ever questioned by the IRS, it is the responsibility of the account holder to show proof of their position. The account funds are broken down by year, who is making the contribution, the tax status, etc. 

Donor Advised Funds - WSJ Article

Recently the WSJ published this article focusing on Donor Advised Funds that we wanted to share.

http://online.wsj.com/news/article_email/tax-smart-philanthropy-made-easy-1408728248-lMyQjAxMTA0MDIwMjEyNDIyWj?tesla=y

The article highlights the ways Donor Advised Funds (DAF) can help simplify & organize your family's charitable giving.  It also outlines how utilizing DAFs can help maximize the tax impact of the gifts you make.

We have seen this impact firsthand in helping clients establish and manage DAFs.  Companies like Vanguard, Fidelity and Schwab have made it easy to establish these funds and manage them online, while providing a great tool for tracking your giving over time.

By utilizing a DAF, it is very easy to give assets other than cash. Specifically, giving low-basis stock can increase the tax impact of your gift.

You don't need to be Bill Gates to take advantage of these tools, your DAF can be established with as little as $5,000, and you can spread the grants you make to charities over a number of years.

For more information on gifting strategies, see our post on Charitable Planning from May 2013.
http://singlepointpartners.blogspot.com/2014/05/single-point-of-view-may-2013-dear.html

2014 Retirement Plan Year End Deadlines

This post is for you if you are the owner of a business,  self-employed, or a decision maker on your company's retirement plan. Now that summer is behind us (according to the work/school calendar), end of the year deadlines are fast approaching. 

DEADLINES

October 1 

-This is the deadline to establish a new  Safe Harbor 401k plan for 2014. The plan must be in effect for 3 months in the first plan year. 

-If you currently have a SIMPLE IRA and want to start a 401k , you must give your employees notice of 60 days(see below). Therefore, you need to handle operational items prior to November 1.

November 1

-If you have SIMPLE IRA plan and you are ending this to start a 401k plan in 2015, you must notify your employees at least 60 days in advance of change.

December 1

-If you already have a 401k plan but want to add a Safe Harbor provision to the plan, proper notices must be delivered to plan participants at least 30 days prior to change

BENEFITS OF STARTING A 401K

-If you are starting a retirement plan for the first time, you may be eligible for a $500 tax credit (available for the first 3 plan years to cover administrative fees)

- 401k plans offer a number of design options to maximize the deferrals for business owners, key employees, or anyone else in the company. 

-In 2014 a participant can put away up to $52,000/year into the plan (plus $5,500 in "catch-up" contributions for those over age 50)

Family (Friend) Loans

Years after the great financial crisis we find ourselves in very interesting times. Many folks are holding more cash than they imagined they ever would. But when is a good time to put that money to work in the markets? Interest rates are at historic lows, and have been longer than most of us would have guessed. The market has rallied multiple times to all-time highs. And over the long term, we anticipate it will continue to go higher. But when is the pullback that we have all been waiting for going to arrive? The economy is getting stronger, but is still fragile at the same time. Bonds will lose value when rates rise, but when will that happen? How fast and how high will rates go? What other effective and (possibly equally as important) impactful places can you put your money to work? Enter, Family (Friend) Loans.

For some, this may be about getting more interest than in a bank account. For others, it may create an effective gifting mechanism for the kids to buy a home or consolidate debt. Wouldn’t it be nice to see your kid’s inheritance have an impact while you are still alive? (I will leave it up to you to insert your own reminders of mortality here).

Whether the topic of discussion is for loans to purchase a home, renovations, paying off student loans, wedding debt, etc., a Family (Friend) Loan may be a solution.  Family and friends often can provide a loan on their own terms. This could mean lower interest rates and underwriting requirements than banks.  And for those that want to commit substantial gifts to children, but want to hold the children accountable over time, this could be a solution. This year families can gift up to $14,000 without paying a gift tax (known as annual gift exclusion) in order to forgive some (or all) of the loans obligation over time. 

Benefits to Borrowers

-Borrowers can avoid additional fees charged by traditional lenders and keep the profit in the family. 

-The family member (friend) lending can offer better rates than banks

-Family members may offer more flexibility in paying back the loan.

-If properly documented, a mortgage on a home can still be tax deductible.

-The borrower can have the ability to negotiate the purchase price in terms of a cash offer vs. with mortgage contingency (a big plus in competitive housing markets like Boston).

Benefits to Lenders

-The loan can become a more conservative (or riskier, depending on the borrower) part of the investment portfolio for the family member.

-The borrower could offer a higher interest to lender than they are getting on some of the current investments (savings, CD’s, etc). 

-The loan repayment could generate a steady income stream for the lender.

-The lender could provide funds to the borrower with strings attached. In other words, they can decide to gift (forgive) a portion of the loan in some years, but not others.

Considerations and Risks

With the ability to have “loose” or minimal lending requirements and standards between family or friends, this can be both a positive and a risk. As we typically advise clients, although you may get into a business venture with the best intentions in mind, it is prudent to think through the risks and protect yourself (within reason) when you can. My point is, what if you lend money and the payments stop coming? Or they are late? Are you okay with this? If not, what is the recourse? As the lender, you are in a position to structure the expectations up front and make concessions down the road (if you choose to). Maybe you require collateral. Maybe you charge late payment penalties. Maybe you hire an independent third party (at the borrowers expense) to administer and collect on the loan so you can keep the peace at Thanksgiving.

 As the usual disclaimer goes, this strategy requires the collaboration of legal and tax counsel.

Resources These are not recommendations, but resources that we thought could be helpful.

To set the minimum interest rate for the loan, the AFR is published monthly by the IRS for federal income tax purposes at http://apps.irs.gov/app/picklist/list/federalRates.html.

Once the loan is agreed upon, it is good idea to draft and sign a loan agreement. Here is a Sample Loan agreement: (http://www.creditcards.com/credit-card-news/sample-promissory_note-friends-family-loans-1293.php)

Here is a company that handles all of the detail of the loan so that it is IRS compliant at a lower cost than a traditional mortgage loan.  They can set up automatic drafts of debt payment.

National Family Mortgage https://www.nationalfamilymortgage.com/for-financial-advisors/

Here is a company that connects borrows to lenders without the middleman if you don’t want to turn to friends or family.

Prosper https://www.prosper.com/