Archive for July, 2016

Does Britain’s Gold Fever Prove its “Safe Haven” Value?

Thursday, July 28th, 2016

brit vs eu - square

A month ago this week, British citizens placed their ballots in a historic vote to exit the European Union. The extensive fallout has been detrimental in social, and economic terms, with xenophobic violence on the rise, the British pound hitting a 31-year low, and a call for a re-vote from British citizens that reached over 4 million signatures. Needless to say, it’s been the rockiest few weeks for our friends across the Atlantic in recent memory, and there doesn’t seem to be an end in sight.
After the turmoil and uncertainty in the UK stock market at the end of June, some investors have been opting in for gold, arguing that gold will provide the stability that the markets cannot.

Gold, a brief history

Gold and stock markets have always seemed at odds with one another. Some investors have looked to gold in times of economic unrest, as a safety net of sorts. It’s not the first time Brits have turned to gold, dealers saw a buying surge in the initial phases of the subprime crisis at the end of 2008 and during Europe’s debt crisis in 2012 and 2013.
In America during the recession, we saw a similar trend between 2008 and 2012. The value of gold increased dramatically ($1900 per ounce, to be exact), as is evidenced by the 101.1-percent surge in the Producer Price Index (PPI) for gold. The Federal Reserve Chairman Ben Bernanke once stated that gold prices can act as an indicator of the health of an economy, that the rise in the price of gold may be a signal that the economy is struggling. As a result, in times of either a crisis or inflation, many investors turn to gold to protect their principal. By contrast, in times of economic stability, investors are more likely to turn to more speculative investments, such as stocks, bonds, and real estate. During these times, the price for gold often declines.

PPI chart

What’s happening now

Government-owned bar and coin producer, the Royal Mint, saw a 7-fold increase in sales of 100-gram bars, around half the size of a credit card and costing around $4,400, in the two weeks following the June 23 vote. Around 4 million pounds ($5.5 million) of gold and silver were traded online on the platform of London-based Bullionvault.com on the June 25-26 weekend, seven times the average weekend of the previous 12 months.
The number of first-time UK buyers on the site rose by around 170 percent in June and the first week of July, compared to the previous 12-month daily average, it said. The surge in gold buying is in contrast with Brexit’s effect on the London property market, considered an ironclad bet for the past 20 years. More than 18 billion pounds of property funds aimed at retail investors was frozen in early July following a tide of redemption requests after the Brexit vote.

Does it deserve the “safe haven” status?

It’s important to remember that gold itself isn’t impervious to turmoil. At this moment, gold imports fell from 101 tons in May, to 68.7 in July in value in China, the world’s number 1 gold consumer. While there are still reasons for Chinese investors to purchase gold such as the slowing economy, a lackluster stock market and weakening currency, buyers paused on concern the advance in prices to the highest since 2014 may not hold.
In some investors eyes, it seems gold has worked less and less as a crisis insurance as time has gone on. In the stock market crash of 1987, it rose only 5%, and in the financial crisis of 1998, it rose 2%. Lastly, in the financial crisis of 2008, it failed once again as a safe haven, falling as much as 30% as desperate investors dumped everything, including bullion, to raise cash.

The main appeal of a “safe haven” is that it doesn’t depend on any outside factors, but the main drivers of the gold price seem to be retail demand, both here in America (through exchange traded funds such as the SPDR Gold Trust), and in emerging markets. And that, too, means it is more likely to be volatile than safe.

Where does that leave us?

For one, property developers in London say they’ve never seen panic over the UK financial system to match what has been witnessed in the aftermath of Brexit. For the time being, they’re being forsworn buying real estate, and instead have purchased £350,000 (almost $463,000) in gold.
The good news is that we still have gold, and for the moment, it’s on the rise. Gold coinage has been around since 800 B.C., and that’s one hell of a track record. If the dollar debases, or markets freak out, which, with Brexit aftershocks still unfolding, and an historic election season just getting in gear, it’s more than likely that gold will stand firm.
By making precious metal part of your investment strategy now, you’ll own a hard asset that’s still close to the beginning of its bull market run. We’ll let others ponder the economic implications of Brexit, but in the markets the nervousness is clear.

Should you Fund a Roth or Traditional IRA?

Monday, July 18th, 2016

Roth or traditional IRA

A few years ago, the government loosened the rules for converting a traditional IRA to a Roth IRA (If you aren’t familiar, a traditional IRA works like a 401K: you contribute pre-tax dollars but when you retire and make withdrawals those funds are taxed as income). A Roth IRA is different, you contribute post-tax dollars but withdrawals at retirement are tax-free.

Why do you care?
For one thing, in addition to providing tax-free retirement income, unlike a traditional IRA a Roth IRA has no minimum required distributions, so if you pass the account on to your heirs it can continue to grow tax-free. (Think of it as the inheritance gift that keeps on giving.) Plus, Roth distributions are not included in the income calculations used to determine whether your Social Security benefits are taxable.

So let’s look at two scenarios to determine whether you should convert a traditional IRA to a Roth IRA.

One is a no-brainer. Say you have money you wish to put away for retirement but your income is too high to qualify for contributing to a Roth IRA (if your Modified Adjusted Gross Income is over $131,000 for single filers and over $193,000 for joint filers). Then you can’t contribute to a Roth IRA. But you can contribute post-tax, non-deductible funds to a traditional IRA and then do a “back door” conversion to a Roth IRA. The income threshold does not apply to conversions… so no matter how high your income, you can still contribute to a Roth IRA.

Keep in mind the back door strategy is simple to use when you don’t already have a traditional IRA. That makes the process clean and ensures you won’t owe taxes on your contribution (aside from the tax you already paid on the original income). If you already have a traditional IRA that you funded with deductible contributions, though, the tax benefit might be reduced and figuring out your taxes could be more complicated. Make sure you talk to your tax advisor to ensure you make the right decision for your specific circumstances.

The other scenario is more complicated. Say you have funds in a traditional IRA and are considering converting them to a Roth IRA. When does that make sense?
Converting makes sense under the following basic condition: If the tax you pay today is lower than the tax you would otherwise pay to withdraw funds tomorrow. The challenges lie in 1) calculating how much you will actually pay today, and 2) predicting how much you might pay tomorrow.

The general rule of thumb is that if tomorrow’s tax savings justify today’s costs, then it makes sense to pay now for bigger savings tomorrow.

The first challenge – calculating how much the conversion costs today – is relatively straightforward. A Roth conversion affects your current-year income in several ways. Some are obvious, others are easy to overlook, but all are predictable. Possible results include:

  • Converting a regular IRA to a Roth increases regular taxable income, which can push you into higher tax brackets
  • Converting accelerates phase-outs for medical and dental expenses, miscellaneous itemized deductions, rental real estate loss allowance, child tax credits, college tax credits, and similar breaks
  • Converting can subject more of your Social Security benefits to tax and can cost you certain Medicare benefits as well
  • Converting may affect college financial aid decisions
  • Recognizing income from a Roth conversion can also subject you to Alternative Minimum Tax

The second challenge – predicting how much tax you will pay tomorrow if you don’t convert – is harder. In fact, if your time horizon is long enough, it’s almost impossible. Think about it this way: When Reagan first became president the top marginal tax rate was 70%, yet when he left office the top marginal rate had dropped to just 28%. If you had converted just before Reagan took office, with plans to take tax-free funds a decade later, you would definitely have regretted that decision.

So should you do?
The answer, of course, is it depends on your individual situation. Except in specific circumstances, choosing to fund a Roth IRA or a traditional IRA – much less deciding whether to make a Roth conversion – is rarely an obvious call.

But it is worth considering, because the difference in the taxes you might someday pay on your retirement income could make a huge difference in the quality of your retirement.

Warning Signs that Your Retirement Savings are off Track

Monday, July 4th, 2016

warning signs

You know that little voice in your head that’s been bothering you lately? It’s telling you that you may not have enough for retirement, right? Well, you’re not alone. Here in America, 75% of us that are over 40 actually are significantly behind on our retirement savings. So how can you tell that you’re off course? We’ve got you covered.

1. You’re only saving through a 401K

If you’re lucky enough to have an employer that offers a 401K, and even luckier to be able to make monthly contributions, then you’d think you’d be in the clear, right? Unfortunately, that’s not the case. A 401K is not meant to be your only means of retirement saving, it’s only meant to be one tool for savers. Opening an IRA may be the right option for you in order to be fully prepared for your retirement, it allows your money to grow tax-deferred if in a traditional IRA, and tax-free if in a Roth.

2. You aren’t matching contributions

Now, if you have a 401K, and your employer has a match program, but you’re not taking full advantage of it, you have to reevaluate your contributions. That’s free money that you’re missing out on. The average employer contribution is around 6%, up to a certain amount. Get in touch with your company’s HR team, and make sure that you’re contributing enough.

3. You’re unsure of how much to save

One reason this is such an issue is that the amount that one person will need at retirement is different from another person, and also depends on when you start saving. If you started saving in your 20’s, 10% of your gross income is standard, but if you’re 30+, 15%-25% is ideal. Calculate the end total of what you will need based on your income with the Social Security Quick Calculator.

The most important thing to remember when it comes to saving for retirement is just to save. Save. Save. And Save. And contact us today if you want to open an IRA.