While TCI doesn’t believe in watching the markets on a daily basis in order to decide how to invest, we certainly are aware of the historic highs that the market is currently dancing around. Here is the link to an article regarding that topic where our Scottsdale-based advisor, Mike Grosso, is quoted.
Our Fall 2012 newsletter has been posted online. Click here to access the newsletter page.
TCI Wealth Advisors, Inc. is very proud to be the 2012 recipient of the Copper Cactus Award in the category of Growth for businesses with 1 – 30 employees!
The Copper Cactus Awards presented by Wells Fargo celebrates the accomplishments of Southern Arizona’s small businesses in categories such as innovation, work environment, growth and community stewardship. The Copper Cactus Awards celebrates our region’s best small businesses – one of the most vital sectors of our community.
Click here to read the article from Inside Tucson Business.
|There was a time when 2010 was considered the year of perfect storm conditions for converting traditional IRAs (including SEP-IRAs and SIMPLE-IRAs) into Roth accounts. Previous income restrictions on Roth conversions were removed (even billionaires can convert under the current rules). On top of that, income triggered by conversions was taxed at relatively low rates that are still in effect for the rest of this year.
In 2012, the income restrictions are still removed and relatively low tax rates are still in effect. However, tax rates are scheduled to increase in 2013 unless Congress acts. So in 2012, we may once again be looking at perfect storm conditions for Roth conversions.
Here’s what you need to know to assess the idea of converting before the end of this year.
Roth Conversion Basics
A Roth conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a taxable payout from your traditional account with the money then going into your new Roth account. So a conversion before year end will trigger a bigger federal income tax bill for this year (and maybe a bigger state income tax bill too).
However, three positive factors may outweigh the extra 2012 tax hit:
Roth Conversion Details
If you have several traditional IRAs, converting doesn’t have to be an all-or-nothing proposition. You can convert some accounts and leave others alone. Similarly, you can convert only a proportion of the balances in one or more traditional IRAs.
If you’ve made some non-deductible traditional IRA contributions over the years, and then convert some of your traditional IRA balances to Roth status, the deemed distribution that takes place when you convert will be partly taxable and partly tax-free. The taxable and tax-free amounts will be based on the combined value of all your traditional IRAs (including any SEP-IRAs or SIMPLE-IRAs) on the conversion date and the combined amount of nondeductible contributions to all those accounts. So the taxable part and the nontaxable part of the deemed distribution will be the same regardless of which account you actually convert.
Example: You have two traditional IRAs worth $50,000 each. The $50,000 balance in IRA No. 1 is solely from deductible contributions and earnings. The $50,000 balance in IRA No. 2 consists of $15,000 of nondeductible contributions and $35,000 of deductible contributions and earnings. If you convert IRA No. 1 to Roth status, the resulting $50,000 deemed distribution will be 15 percent tax-free ($15,000/$100,000 equals .15) and 85 percent taxable ($85,000/$100,000 equals .85). If instead, you convert IRA No. 2, the results will be exactly the same.
Ill-Fated Conversions Can Be Reversed
Another nice thing about the Roth conversion strategy is you are allowed to change your mind well after the fact. Specifically, you have until October 15, 2013 to recharacterize (unwind) a 2012 conversion.
Example: You decide to convert a traditional IRA into Roth account this year. By the middle of 2013, the value of the converted account has plummeted due to poor investment performance. In this bleak scenario, you would have to pay 2012 income tax on value that later disappeared. Bad idea! Thankfully, you have until October 15, 2013 to recharacterize the converted account back to traditional IRA status. After the recharacterization, it’s as if the ill-fated conversion never happened. So you won’t owe any income tax from the 2012 conversion that you later reversed.
Consider Splitting Up Large Accounts Before Converting
If you have a large-balance traditional IRA that you intend to convert into a Roth account this year, consider splitting it up into several smaller traditional IRAs. Then convert them into separate Roth accounts and follow different investment strategies for each one. If one of the new Roth accounts plummets in value next year due to poor investment performance, you can avoid an inflated 2012 conversion tax hit by recharacterizing that account back to traditional IRA status by October 15, 2013 (as explained immediately above). You can leave the better-performing accounts in Roth IRA status.
Today’s Roth Equation
Relatively low current tax cost for converting plus the chance to avoid higher tax rates scheduled for 2013 and beyond on income that will accumulate in your Roth account equals another perfect storm for a Roth conversion strategy in 2012. Nevertheless, consult with your tax adviser before making a conversion move. With the complexity of taxes today, no-brainers are few and far between, and you want to make sure all the relevant variables are considered.
We wanted to share this article that appeared over the weekend in the Arizona Republic’s Business and Money section. It covers the topic of rebalancing and our advisor, Michael Grosso, is quoted in the article. We spend a lot of time talking about and educating the benefits of rebalancing, so it was great to have one of our team members comment broadly on our views regarding this very important investment topic.
Please click here to access the article.
The archive recording of the Spring 2012 Webinar that TCI held on May 31, 2012 is now available on the website. The presentation contains current market and economic updates as well as a section discussing the current issues going on in Europe. There is a question and answer session with TCI advisors at the end of the webinar. Please click on the following link to access the archive.
We have uploaded the archive of the Winter 2012 Webinar to the website. Please note there is a slight delay at the beginning so the actual presentation starts at about 15 seconds in to the file.
Please click the following link in order to view the presentation.
This article is written by Weston Wellington
Over the course of a lengthy and illustrious business career, Warren Buffett has offered thoughtful opinions on a wide variety of investment-related issues—executive compensation, accounting standards, high-yield bonds, derivatives, stock options, and so on.
In regard to gold and its investment merits, however, Buffett has had little to say—at least in the pages of his annual shareholder letter. We searched through 34 years’ worth of Berkshire Hathaway annual reports and were hard-pressed to find any mention of the subject whatsoever. The closest we came was a rueful acknowledgement from Buffett in early 1980 that Berkshire’s book value, when expressed in gold bullion terms, had shown no increase from year-end 1964 to year-end 1979.
Buffett appeared vexed that his diligent efforts to grow Berkshire’s business value over a fifteen-year period had been matched stride for stride by a lump of shiny metal requiring no business acumen at all. He promised his shareholders he would continue to do his best but warned, “You should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.”
As it turned out, the ink was barely dry on this gloomy assessment when gold began a lengthy period of decline that tested the conviction of even its most fervent devotees. Fifteen years later, gold prices were 25% lower, and even after thirty-one years (1980–2010), had failed to keep pace with rising consumer prices. By year-end 2011, gold’s appreciation over thirty-two years finally exceeded the rate of inflation (205% vs. 195%) but still trailed well behind the total return on one-month Treasury bills (398%).
Perhaps to compensate for his past reticence on the subject, Buffett has devoted a considerable portion of his forthcoming shareholder letter (usually released in mid-March) to the merits of gold.
With his customary gift for explaining complex issues in the simplest manner, Buffett deftly presents a two-pronged argument. Like a sympathetic talk show host, he quickly acknowledges the darkest fears among gold enthusiasts—the prospect of currency manipulation and persistent inflation. He points out that the US dollar has lost 86% of its value since he took control of Berkshire Hathaway in 1965 and states unequivocally, “I do not like currency-based investments.”
But where gold advocates see a safe harbor, Buffett sees just a different set of rocks to crash into. Since gold generates no return, the only source of appreciation for today’s anxious purchaser is the buyer of tomorrow who is even more fearful.
Buffett completes the argument by asking the reader to compare the long-run potential of two portfolios. The first holds all the gold in the world (worth roughly $9.6 trillion) while the second owns all the cropland in America plus the equivalent of sixteen ExxonMobils plus $1 trillion for “walking around money.” Brushing aside the squabbles over monetary theory, Buffett calmly points out that the first portfolio will produce absolutely nothing over the next century while the second will generate a river of corn, cotton, and petroleum products. People will exchange their labor for these goods regardless of whether the currency is “gold, seashells, or shark’s teeth.” (Nobel laureate Milton Friedman has pointed out that Yap Islanders got along very well with a currency consisting of enormous stone wheels that were rarely moved.)
When Buffett assumed control of Berkshire Hathaway in 1965, the book value was $19 per share, or roughly half an ounce of gold. Using the cash flow from existing businesses and reinvesting in new ones, Berkshire has grown into a substantial enterprise with a book value at year-end 2010 of $95,453 per share. The half-ounce of gold is still a half-ounce and has never generated a dime that could have been invested in more gold.
Few of us can hope to duplicate Buffett’s record of business success, but the underlying principles of reinvestment and compound interest require no special knowledge. Every financial professional can point to individuals who have accumulated substantial real wealth from investment in farms, businesses, or real estate, and sometimes the success stories turn up in unlikely places. (See “The Millionaire Next Door.”)
Where are the fortunes created from gold?