529--How Do Grandparents Give to Grandchildren?

(This comes right from the www.SavingForCollege.com site)

For grandparents

Instead of opening my own 529 accounts, can I just make contributions to the 529 accounts my children have already established for my grandchildren?

If the 529 plan used by your children accepts “third-party” contributions, then you may simply make your contributions to their accounts and not have to worry about opening and maintaining your own accounts. Of course, you will no longer have access to these funds since you will not be the account owner, but for many grandparents that is an entirely acceptable consequence.

To make contributions to an account owned by someone else you will need to know the account number and indicate that number on your check. For most 529 plans you should also use the contribution form that is either pre-printed than sent to the account owner or perhaps can be downloaded from the 529 plan’s web site. It would be a good idea to call the plan’s toll-free number and make sure you are following the appropriate procedures in making your contribution.

A very small number of 529 plans may not accept third-party contributions. If the parents have their own accounts in these particular 529 plans, your options are to open your own accounts or give the parents cash with the request that they place your gifts into the 529 accounts for your grandchildren.

You should be sure to understand the gift-tax consequences of your contributions to the 529 plan. Whether you contribute to accounts owned by you, or to accounts owned by the parents or someone else, your contributions are a gift from you to the account beneficiary (and a generation-skipping transfer if the beneficiary is your grandchild). For large contributions (over $14,000) you may elect on a gift-tax form to treat up to $65,000 of the contribution as made over a five-year period. This election allows you to frontload more contributions into a 529 plan without exceeding the $14,000 annual gift exclusion.

Caution: The IRS has not yet indicated whether a contribution you make to a 529 account owned by someone else will be treated as two gifts, the first from you to the account owner, and the second from the account owner to the beneficiary. Most tax practitioners believe there is only a single gift—from you to the account beneficiary—but the answer remains a bit uncertain.

State tax deductibility of your contributions is another issue you should understand. Many states provide their residents with a deduction for at least some of their contributions to the in-state 529 plan, but in several of these states you must also be the account owner in order to claim the deduction. And just because you cannot claim the deduction, as a “third-party” contributor, it does not mean that the account owner can claim the deduction.

Fed To End Quantitivate Easing

Probably the biggest thing the U.S. government has been doing to stimulate our economy in the wake of the 2008 financial crisis and recession has been something called "quantitative easing".  It is pretty much the practice of the Fed buying bonds from the Treasury to stimulate the economy.

Those bonds are sold to give our government more operating cash, to either pay bills coming due or spend the money on necessary services and/or projects that our leaders believe will be stimulative to the economy.  Sometimes, like I understand is the case now, the Federal Reserve actually prints new paper money with which to make the purchases.  The risk is inflation in the future, but such risk is taken with the intention that the short-term stimulus effects are worth the risk.

Now the economy is growing.  Slowly and not necessarily surely, but measurably and postively.  The Fed is thus in the middle of tapering the Quantitative Easing, creating a glidepath to ending QE (it had been buying $85 billion worth of bonds every month).

But last week one normally hawkish Fed big shot was surprisingly outspoken--and dovish.  He said the Fed would not necessarily end QE as planned, impying that the Fed would help the securities markets if need be (we were in a market decline last week, and he is thought to have been speaking to that matter with intent of reassuring investors)...  Word is, though, that most of his peers (including those with a vote on the matter, which I believe this one fellow does not have) intend to end QE for sure.

In short, the nFed is said to be on track to end QE, even if one of its members may have spoken his opion of what should be done instead of saying what the Fed will do.

Bill O'Grady (not Bill Gross--I cite each pretty often and want to be clear:  O'Grady is the global investment strategist/thinker, Gross is the manager of bond portfolios and mutual funds) writes today about this.  See the second and third paragraphs in the item linked here:  http://confluenceinvestment.com/assets/docs/2014/daily_Oct_20_2014.pdf

Okay, I wanted you to know the basics in case it is not clear.  I hope it helps.  Please contact me with any questions.  Thank you.

--Gary

Gary Partoyan

Potomac Wealth Strategies, LLC

(703) 746-8195 direct

Visit us online for helpful ideas and information!

Subject: debt ceiling deal--Gary's thoughts re our portfolios

Subject: debt ceiling deal--Gary's thoughts re our portfolios (10/16/2013)

Good morning.  I write this to let you know how I am approaching our portfolios regarding the political conflicts in Washington, DC.

Big Picture:

·         Stay the course, invest more on market declines.

·         I predict we will not have a market crash like in 2008.

·         We might have a market correction like in Summer/Fall of 2011.

·         There is always SOMETHING causing anxiety for investors.

·         The best strategies for the long-term have been most effective when we just stay invested and continue to save and invest more.

·         I know, that is easier said than done given the political picture.

Political Update:

·         Word this morning is that the House will vote on the compromise worked out by the Senate.

·         There was talk of the House working its own deal (which I believe would have failed in the Senate), but one of my best contacts said yesterday that was a no-go and the Reid-McConnell negotiation is what will really be voted on soon, and reports today are indicating the same.

·         I expect Speaker Boehner will get enough of the Republicans to vote for it, joining most Democrats to approve it in the House.

·         Barring a filibuster or some procedural maneouver by some protesting Senator, the deal will then pass the Senate also, and the president will sign it.

Results of "deal":

·         debt ceiling lifted for a while (we pay all of our bills--albeit with ever-more borrowed money)

·         government re-opened soon

This does not "fix" "everything", of course.  It just means our credit cards will have not been cancelled and we will have found our checkbook and a pen, and government services and workers get back to speed.  It also means we probably are going to see more negotiations/battles like this in the near future.

What this means:

·         no "default"; our bills will be paid pretty much on-time

·         no "real" default; our bond interest obligations will be paid, and our bond principle will be paid-back upon maturity

o   I think this "default on our debt" issue was overblown and misunderstood, as the government cashflow is more than enough to cover our actual debt obligations

o   Secy of Treasury Lew has discretion to prioritize payments

o   So, Secretary Lew would have to deliberately choose to default on our bond interest/principle if no deal has passed in time, and that is almost impossible to imagine for reasons both economic and political

·         money market funds are likely to NOT "break the buck" (our cash, while never FDIC-guaranteed, is likely to remain quite safe)

·         no progress on long-term fiscal strategy (entitlement reform, tax code, other budgetary items)

·         no guarantee this won't happen again (debt ceiling debacle of August 2011 was followed by Fiscal Cliff anxiety a year ago…)

For our portfolios:

·         Flex and Strategic portfolios should stay invested if Senate deal passes House

·         If no deal passes, we have the option of going to cash/money market funds IF we think we're facing another 2008-size market slide

o   I strongly caution against going to cash, though.  Market reactions tend to be swift and strong during such times, and I don't want people missing out on a rally that comes after a sell-off

·         Uninvested cash will be invested in large chunks or entirely if the market drops more than ~5% in a week or so AFTER there is a political deal

·         Uninvested cash will be averaged-in over the next three months if the market volatility is normal after there is a political deal or series of deals

·         You can override my recommendations, of course--it is your money even after I provide my advice

Please contact me with any questions.  Thank you!

--Gary

Year-End Mutual Fund Distributions--Fear Not the Price Drop!

Good morning.  Most of my clients are in some mutual funds that appear to have dropped in value suddenly, but fear not.  The share prices have been reduced in exchange for cash (or more shares in the case of the cash being reinvested).  The value of our investments did not drop from this--it's all just fine.

This is a normal activity for many mutual funds at this time of year.  The cash is a distribution of "long-term capital gains", "short-term capital gains", and/or "dividends"--not the usual monthly or quarterly kind, but special annual distributions.  Such are made per regulations that require mutual funds to make some distributions directly to clients instead of incorporating them into the Net Asset Value (share price) of the mutual fund.  Yes, it is a little tricky to explain, but I am happy to provide more detail if you want.  But it is normal, expected, and does not represent an unusual reduction in value of our investments.

Example:  In one account I reveiwed, the First Eagle Overseas Fund dropped NAV from 22.83 at market close on 12/12 to 21.66 at close on 12/13.  That's a 5.1% drop in share price, BUT the value of the fund's investments did not drop by 5.1%.  How?  Well, on 12/12 the account received three chunks of cash (long-term cap gains, short-term cap gains, and some dividends) totalling $747, and that was reinvested into 32.7 shares at $22.83 (closing price on 12/12).  So, prior to the special distribution, there was $14,616 in that position and after the distribution/reinvestment it was $14,576…  the $40 decline (about 0.2% of the value) is attributable to the slight market decline that particular day.

Please contact me with any questions, of course.  Thank you, and make it a great Friday!

--Gary

NOTE:  I offer a special "Thank You" to a certain client for reminding me that this should be explained to everyone!

TSP now offers Roth TSP option

Good morning.  The federal government's popular defined contribution retirement plan, the Thrift Savings Plan (TSP), recently began to offer a "Roth TSP" option.  Federal employees should figure out whether or not to use it.

Current TSP participants should contact their tax advisor about whether or not the Roth TSP is a good choice (and I'll join the call with you, if you want).

I do not provide formal tax advice—taxes are not my area of professional expertise.  That said, I have some thoughts and info to share:

1. Roth TSP contributions are from already-taxed money, instead of being tax-deductible like normal TSP contributions.
2. Roth TSP withdrawals in retirement, however, are tax-free (with some exceptions), while normal TSP withdrawals in retirement are taxable.
3. Tax rates are now pretty low by historical standards.  They might increase in the coming decades.  If they do, it is likely that "the better deal" is to give up the tax-deduction now in favor of the tax-free withdrawals later.
4. Many tax professionals I have read or heard from favor Roth anyway, even if income tax rates do not change.
5. This article provides a good overview, as well as some helpful details:  http://www.fedsmith.com/article/3408/unraveling-mysteries-roth-tsp.html

I generally favor Roth TSP over TSP, but each federal employee should consult their own tax advisor on this matter.

FYI, and please contact me with any questions or if you want my list of recommended tax professionals.

--Gary


Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
(855) 347-9483 fax
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

How Much Do You Need To Be "Rich"?

What is "rich"? Well, that's pretty nebulous, but the bottom line is that you need to make about $250k per year from working, or you need about $9mm invested to produce that income.

Interest rates are very low right now. If they go back up to normal levels someday, that $9mm might only need to be $5mm.

$250k covers most families and individuals in the top-two US income tax brackets, and that's as good a way as any to put a number on this subjective term.

Why $9mm to be rich? Isn't $1mm a ton of money, too? Sure, most folks don't have anywhere near $1mm, nevermind $9mm, but $1mm invested safely for the long-term in US Treasury securities will generate only about $25-30k per year. Uhh, that's not exactly "rich", is it?

This is why it's so important to evaluate and plan your financial future--people too often underestimate how much they need in the bank to replace the income from their working-years.

Interest Rates and Bond Risk

The Federal Reserve is tasked with two primary objectives: maintain price stability, and maintain high employment.

Maintaining price stability means, simply, keeping inflation pretty low without pushing us into deflation.

Maintaining high employment... well, that means keeping unemployment low (not sure how else to explain that obvious objective).

In both cases, the most effective tool at the Fed's hand is raising or lowering the interest rates. Lower rates stimulate the economy because it makes it easier/more affordable for people and businesses to borrow money. Raising rates tames inflation by slowing down the economy.

But interest rates affect the value of bonds. Bonds, as I've posted here before, are thought to be the "safe" place to invest, but they do fluctuate in value. Rising interest rates force bond prices lower; falling rates lift bond prices.

Most folks buy bonds in order to get predictable income streams, not capital gains. Hold a bond to maturity, in fact, and you get your original money back. Your benefit was the income the bond paid while you owned it.

So, if interest rates are so low, aren't bonds scary now--won't they be likely to go down in value? Yes. If and when the Fed starts raising interest rates.

But that should only happen when the economy starts growing too fast again. We're just hoping it's really even starting to grow now. Some experts think it won't be for another year or two that the Fed will start raising rates.

So, this is potentially good for bond investors who need income or who seek relative safety compared to the volatile stock market. Alas, other forces could work against interest rate stability. If the USA's spending remains in deep deficit mode, we might need to offer higher rates on our more risky Treasury bonds when we sell more to fund our ongoing deficits.

The key is to know what you have and to have an exit plan. Most individuals should not tinker with individual bonds right now. It would be better to have a private portfolio manager run things, or to use a reputable and successful bond mutual fund.

The "Death Tax"

Americans who die in 2010 will pay no federal tax on their estate, thanks to the "sunset provision" of the "Bush Tax Cuts". For 2009, any amount over $3.5 million was taxed at over 40%. Prior to that, the threshold was even lower and the rate was even higher.

But starting in 2011, the federal estate tax (aka the "Death Tax", to those who lament the matter) returns--any amount of one's estate over $1 million will be taxed at 55%, unless the law is changed by Congress and signed by the president.

So, the heirs of someone with a net worth of $3 million will have to come up with $1.1mm cash to pay the federal government. That, after the "benefactor" has paid a lifetime of income, capital gains, dividend and interest taxes while building-up the $3mm net worth; and we should remember that the companies that paid-out the dividends did so after being taxed on their earnings already.

Food for thought.