Presented by: Jeffrey A. Harrell, CFA Disclosure The - - PowerPoint PPT Presentation

Presented by: Jeffrey A. Harrell, CFA

Disclosure

• The presentations are provided for general information purposes only and should not be

considered an individualized recommendation or advice. While the information is deemed reliable, Select Consulting makes no representations or warranties with respect to the accuracy or completeness of the information provided..

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Presented by: Jeffrey A. Harrell, CFA

American Tax Payer Relief Act

American Tax Payer Relief Act

• The 10%, 15%, 25% and 28% personal income tax brackets

were permanently extended

• The 33% and 35% were permanently extended for taxable

income below $400,000 (single) and $450,000 (joint)

• Imposes a 39.6% tax rate on taxable income above $400,000

(single) and $450,000 (joint)

• Phases out personal exemptions for Adjusted Gross Income

(AGI) above $250,000 (single) and $300,000 (joint)

• 2% for each $2,500 of AGI above the specified income threshold
• Results in 100% phase out above AGI of $425,000 (joint)
• Limits itemized deductions for AGI above $250,000 (single)

and $300,000 (joint)

• 3% of AGI above the specified income threshold

(maximum of 80%)

American Tax Payer Relief Act (cont’d)

• Long term capital gains and dividends will be taxed at 20% for

taxpayers with taxable income over $400,000 (single) and $450,000 (joint)

• Investment income (non-business interest, dividends, capital

gains, etc.) will now be subject to 3.8% Medicare tax when taxable income exceeds $200,000 (single) and $250,000 (joint)

• Additional 0.9% tax on earned income exceeding $200,000

(single) and $250,000 (joint)

• Eliminates 2% payroll tax cut for all wage earners

Savings A Priority In 2013

Determine a “Safe Savings Rate”

• Variables That Must Be Considered
• Length of Accumulation Phase
• Length of Retirement Phase
• Replacement Rate
• Investment Strategy/Risk Tolerance
• Most Common Scenario Suggests a Minimum

Savings Rate of 16.6%

• NOTE: See article “Am I Saving Enough?”

April 2012

How Much Should I Be Saving?

Optimal Retirement Plan Design

SIMPLE IRAs

(Two Pay-Ins)

• Tax deductible salary deferrals (up to

$12,000 annually; $14,500 if 50 or

• lder)
• Practice matches up to 3% of pay

401(k) Profit-Sharing Plans

(3 Pay-Ins)

• Tax deductible salary deferrals into plan
• Under 50 $17,500
• Over 50 $23,000
• Practice matching contributions
• Practice profit-sharing contribution

2013 Maximum pay-in = $51,000 50/older $56,500

Spousal Employment Optimal Salary

• $13,000/$16,000 year - maximum SIMPLE
• $19,000/$25,000 year – maximum 401(K)

Cash Balance Defined Benefit Pension Plan

(Age 40 or Older With Younger Staff)

• Accumulate $2,200,000 at age 62/65

regardless of past D. C. contributions

• Annual tax-deductible contributions of

$100,000 - $250,000 (or more)

• Consider “Tiered” Cash Balance Plan
• A Cash Balance/401k Plan Combined

Tax Efficient Investment Allocation

Choosing the Right Location for Investments

Case Study – Apple

1984: $50,000 investment 2013: $9,103,872 value IRA Account: Taxable Account: 39.6% income tax = $3,605,134 23.8% capital gains tax = $2,154,215 Net = $5,498,738 Net = $6,949,050

• Investors can generate as much as 15% to 20% more after-tax wealth
• ver time by allocating their investments optimally between tax-deferred

and taxable accounts

• The reverse is also true as realized losses in tax-deferred accounts

cannot be written off

• General Rule: Stocks In Taxable Accounts, Bonds In Retirement Plans

Tax Loss Harvesting

• Sell Losing Stocks To Offset Gains
• Review In November/December
• Generate $3,000 Of Losses Annually
• Be Aware Of Wash Sale Rule

Charitable Gift Account

• Transfer Stock To Charity Instead Of

Cash

• Eliminates Capital Gain Tax
• Simplifies Charitable Giving
• Visit (www.schwabcharitable.org)

Alternative Investments

Alternative Investments (Not Recommended)

• Hedge Funds
• Excessive Fees
• Poor Liquidity
• Risky Strategies
• Managed Futures
• Low Correlation
• Zero Sum Game
• Non-Traded REITs
• High Commissions
• Poor Liquidity
• Pricing Issues

Alternative Investments (Recommended)

• Long/Short Mutual Funds
• Market Neutral Funds
• Asset Allocation Funds
• Real Estate Funds
• Commodities (Gold – GLD)

Non-Traditional Income Producing Investments

• Inflation Protected Securities (TIPS)
• Emerging Market Debt
• Non-Agency Mortgage Backed

Securities

• High Yield Corporate Bonds

Monitoring Performance

Importance of Rate of Return

Monthly

Amount 4% 6% 8% $2,500 1,740,907 2,523,844 3,750,738 $5,000 3,481,814 5,047,688 7,501,476 $7,500 5,222,722 7,571,532 11,252,214 $10,000 6,963,629 10,095,376 15,002,952

30 Years of Compound Growth

Investment Performance

• Managers Should Be Consistently In The Top Quartile,

Over Longer Term Time Periods

• Eliminate Below Average Managers From Your Portfolio
• Use Investment Screens To Review Your Managers

Performance (www.morningstar.com)

• The Goal - Minimize Lost Opportunities by Using Above

Average Managers

Calculating Your Investment Return

• There Are Two Ways To Calculate Your Investment Return
• Internal Rate of Return (IRR): Used To Determine Your Personal Rate Of Return,

Which Is Heavily Influenced By Cash Flows

• Time Weighted Return (TWR): Used To Determine The Rate Of Return On Your

Portfolio For Comparison Purposes, Negating The Effect Of Cash Flows

Example:

• $50,000 Investment On January 1st
• $100,000 Value on June 30th
• $900,000 Addition On July 1st (Total Of $1,000,000 On July 1st)
• $950,000 Value on December 31st
• Investment Performance: IRR=0% TWR=90%, WHY???????
• IRR = Personal Return Or Gain/Investment ($0/$950,000)
• TWR = Linked Period Return (Period 1:100% Period 2: -5%)

Calculation: (1+Period 1)*(1+Period 2)*(1+Period 3)…-1=TWR McGill Advisory Calculator

Benchmark Your Performance

• Large Caps (SPDR S&P 500) – SPY
• Mid Caps (iShares Russell Mid Cap) – IWR
• Small Caps (iShares Russell 2000) – IWM
• International (iShares MSCI EAFE) – EFA
• Investment Grade Bonds (iShares Core Total US Bond) – AGG
• High Yield Bonds (iShares High Yield Corporate) – HYG

Hypothetical 60/40 Benchmark (2012 Return) 30% SPY (+15.99%) 10% IWR (+17.08%) 10% IWM (+16.69%) 2012 Return: 12.35% 10% EFA (+18.82%) 30% AGG (+3.76%) 10% HYG (+11.66%)

Investor Returns Equity: 3.3% Fixed Income: 3.1%

Roth IRA Conversions

Tax-Free Conversion To Roth IRA

• Make Non-Deductible IRA Contributions
• Convert Non-Deductible Contributions Tax-Free
• Rollover Fully Taxable IRAs Into Existing Retirement Plan (May Require

Plan Amendment)

• Thereafter, Fund Non-Deductible IRA Contributions Each Year And

Immediately Convert The Contribution To The Roth IRA NOTE: See article “Update On Maximizing Roth IRA Tax Benefits” April 2011

2013 Forecast

Earnings Estimates Are Declining

2012 Earnings Forecasts

Questionable Earnings Quality

Dividend Yield Attractive

2013 Investment Strategy

• Equity Investments
• Large Cap Domestic Equities
• Financially Strong Balance Sheet
• Fixed Income Investments
• Spread Sectors (Foreign, Non-Agency MBS, High Yield, etc.)
• Alternative Investments
• Commodities, Long/Short & Asset Allocators
• Cash Investments
• Minimal Exposure

Thank You For Attending!! Jeffrey A. Harrell, CFA 866.727.6100 jharrell@sconsulting.net