The Federal Reserve Board (the Fed) is holding one of its planned policy meetings as I am writing this. In June, the Fed stated that inflation is below its 2% target, and we are near full employment in the U.S. Despite this fact, it raised the federal funds rate (FFR) by 0.25% to between 1% and 1.25%. Its reasoning is that, even though inflation is below its target rate (and projected to stay below 2%), the Fed still wants to get back to more “normal” interest rates (3-4%). As we all remember so well, during the recession of ‘08-‘09, the Fed lowered the FFR from over 5% to effectively zero. Now that the economy has recovered, the goal is to unwind all of the measures that were enacted during the recession without starting another one, which is the tricky part.
Not only does the Fed want to try and get back to more normal interest rates, it also announced in its June meeting that it will begin to let some of its government bonds “roll-off” its balance sheet. So what does this mean? While the global economy was reeling from the financial crisis, the Fed took extreme measures never tried before by buying billions of dollars of treasury bonds and government bonds backed by mortgages (U.S. debt). As part of its normal operations, the Fed will own bonds to manage U.S. monetary policy. Prior to the financial crisis, this was in the $750 billion range. The Fed now owns approximately $4.5 trillion dollars of government debt. So how does it get back to a more “normal” level? The strategy it announced in June is to let bonds begin to mature in September and not to reinvest the proceeds back into new bonds. This effectively removes liquidity from the economy, which has the potential to slow economic growth. I’ll talk more on this in a minute.
When the Fed began its policy of buying government bonds (Quantitative Easing or QE) back in December 2008, we were at the height of the financial crisis. It had lowered interest rates and felt like it had to do more to stop the panic that was spreading around the world. Therefore, it also began a policy of selling U.S. debt to raise money so it could buy more U.S. debt. It sounds crazy, but the thought was that the policy would create more global liquidity which was so badly needed at that point. Now that we are no longer in crisis mode, it’s time to let these bonds mature and remove this liquidity from the global economy. This is where the Fed must tread very lightly. The global economy is still not experiencing robust growth, which is when the Fed would normally raise rates (tighten).
So what does all of this mean to you as an investor? Ultimately, I believe it is a positive for the global economy to begin to unwind these crisis policies. It will take several years and, more than likely, increase volatility in financial markets. This is to be expected as we go through a period of Fed tightening. The hope is that it will not move too fast and create another recession.
I hope you have found this helpful. As usual, please let us know if you would like to discuss this further.
Brett S. Carleton
Hello, I’m Brett Carleton. President here at Heritage Wealth Management. I wanted to take a minute today and talk to you about what a fiduciary is. This has become a topic of conversation in media this past year as the US Department of labor has passed a new law requiring all financial advisers to act as a fiduciary with your retirement accounts. What this will require them to do is it will require all financial advisers when dealing with your retirement assets to disclose all conflicts of interests they have right up front at the beginning of the relationship. They should also share with you how they are compensated as well as any other incentive they might receive for placing you in these investments. The second big change is this will require them to make sure that these investments are appropriate for you today as well as monitor them into the future as your situation changes. What I suggest do you is if you have a financial advisor ask them if they are a fiduciary on not just your retirement accounts but all of your investment accounts. This new law only applies to retirement accounts. I would ask them – how they’re being compensated? Are there lower cost investment options or alternatives for them to put you in? Do they receive any other investments or incentives for the investments that you’re making.
If you would like to see a list of questions to ask your financial advisor or if you’re interviewing financial advisers, you can email us at Prosper@HeritagePlanners.com and we will send you a list of questions to ask your financial advisor or financial advisers if you are interviewing them as well as what exactly a fiduciary is.
Brett S. Carleton
Don’t get taken by surprise when these expenses creep up on you.
Times are rough. We understand. It’s hard enough to find the money to cover your daily living expenses, so the idea that you should put away “extra” money for a rainy day seems preposterous.
But it is necessary, and it’s easier than you might think.
“The common plan is for people to set aside a percentage of their paycheck,” says tax attorney Howard Chernoff. “But in trying times, it’s very difficult to set anything aside. So what I’ve done in the past and what I tell people is sometimes don’t take all your exemptions, everything you’re entitled to, so that at the end of the year there’s a little bit of money left. You know that sometime in February, March, or April you’re going to get a little bump.” And that little “bump” can be extremely handy if you know what to do with it.
If you are a homeowner, you know that unexpected expenses come standard along with termites, roof damage, and plumbing originally installed during the Mesozoic Era. And yet people are consistently ambushed by these mini-emergencies, even when they don’t have to be. “I once had a guy who decided to put $200 extra withholding on his tax form per week — and his wife did the exact same thing –- and at the end of the year they had a $38,000 refund,” says Chernoff. “And they completely redid their kitchen. Because they knew if they just let it come through their paychecks, they wouldn’t have $38,000 — they’d be lucky if they had $3,800.”
“That’s the joke with this new healthcare plan,” explains Chernoff. “Everybody gets a $3,000 credit. What’s that going to cover? That’s not going to do anything.” As the future of coverage in this country gets murkier by the day, it’s all the more important to have a cushion to fall back on in times of need. People who are naturally averse to the word “budget” should also know that it doesn’t have to be a line-by-line breakdown of expenses. “It’s just a kitty,” says Chernoff. “And you put the money in the kitty and you hope that it’s there for when you have something that needs to be done.”
Unless your savings plan is “be a sociopath,” odds are you’re going to be invited to a birthday party or wedding at some point in your life and showing up empty handed just won’t be an option. Same thing with anniversaries, Valentine’s Day, and all the other holidays created by Big Greetings to get you to buy more cards and flowers. Being disciplined with the money is key, though. Putting aside safety money is only effective if, as Chernoff puts it, “you can leave it alone.”
The romantic fantasy of jetting off at a moment’s notice to parts unknown is great if you live in a movie where you’re still allowed to run to the boarding gate at the last minute. But real human beings need to plan and save well in advance. Putting an entire vacation on a credit card without the funds to cover it will only make the return trip home all the more depressing.
When an accident or sickness strikes a loyal and loveable pet, even the most common of ailments can get outrageously expensive. While some people might say “it’s just a dog” or “it’s only a cat,” it’s much different when it’s your cat or dog. Kudos to people who think ahead and shell out between $30-$50 a month for pet insurance, but those who don’t can spend thousands to make sure their furry friend is back on their paws.
A lot of people get some form of Life Insurance through their employer — which is great, but in these volatile times how long can you honestly expect to hold onto that coverage? It’s better to establish an insurance policy independent of your job, and that means extra costs. Again, Chernoff recommends using the federal government as a savings plan by tweaking your exemptions. “Some experts say you shouldn’t leave money with the government. Why not? The government actually pays a higher rate of interest than you can get anywhere,” he says. “You can get 4-5% from the Federal government on your refund — it’s a terrific savings plan.”
This article on finance is provided by Everplans — The web’s leading resource for planning and organizing your life. Create, store and share important documents that your loved ones might need.
1. General Rule
As a general rule, the account balance used for calculating required minimum distributions (RMDs) is the prior year-end account balance, with no adjustments.
For example, if you are calculating an RMD for 2017 you would use the 2016 year-end account balance. If you are calculating a missed RMD for 2014, you would use the 2013 year-end account balance. If you have your first RMD due for 2017 and you take that RMD in March of 2018, you still use the 2016 year-end account balance.
As usual with retirement distribution rules, there are some exceptions to the general rule.
2. Rollovers or Transfers
The first exception is for funds in transit on the last day of the year. This is the most common adjustment. If you take funds out of your IRA or employer plan at the end of the year and roll them over to an IRA or plan (within 60 days) in the following year, then the amount of the funds in transit must be added back in to the 12/31 account balance. You cannot get out of an RMD by withdrawing and redepositing funds. You must also add funds back in if you do a transfer from one retirement account to another and the funds are not included in either account on the last day of the year.
If you have done a Roth IRA conversion in one year and you recharacterize it in the following year, the amount of the recharacterization must be added to the year-end account balance of the receiving IRA. A recharacterization treats the funds as if they never left the IRA and if they never left the IRA then they must be part of the RMD calculation for the year. Makes sense, right?
4. Excess QLAC Contributions
This is a relatively new, and so far rare, adjustment. If a client’s qualifying longevity annuity contract (QLAC) is overfunded, the excess must be returned to the non-QLAC portion of the IRA. It must also be added back in to the prior year-end account balance for calculating the RMD.
5. Prior-Year RMDs
When you miss taking an RMD for one or more years and are now making up the distributions, there is no adjustment to the prior-year end IRA account balance for the missed IRA RMD amount. You can adjust employer plan year-end account balances for the missed RMD amount.
For example, you missed a $10,000 IRA RMD in 2016. You take that RMD in 2017. You cannot reduce your 2016 IRA year-end account balance by $10,000 when you calculate your 2017 IRA RMD. You miss a $15,000 403(b) RMD in 2016. You take out the $15,000 in 2017. You can reduce your 403(b)’s 2016 year-end account balance by $15,000 when calculating your 2017 RMD.
6. Still Working Exception to RMDs
A question we frequently get occurs when an individual is still working and has no RMDs from their employer plan. During the year they move some plan funds to an IRA where they do have an RMD for the year. What balance is used to calculate the RMD? You are going to use the IRA’s prior year-end account value. The plan funds have no RMD for the year. Moving them to an IRA does not change that. They are not part of the prior year-end account balance and is not one of the required adjustments to the IRA year-end account balance.
By Beverly DeVeny