Is Greece The Next Lehman?
By Teeka Tiwari
Wednesday, April 28, 2010
I've been a broken record for the last week on my morning GPS reports when it comes to the European markets.
Every morning I've said that the rally in Europe is the equivalent of those markets drinking and celebrating at their own funeral.
I just could not understand how European equity markets could rally so hard in the face of the imminent default by Greece. How could the systemic default risk that Greece represents be in any way shape or form good for European equities?
By now you must have read that S&P has down graded Greece's debt to junk status. This has far reaching implications within the European banking system. Any loans that were secured by Greek bonds will immediately be open to collateral calls. Greek banks could be starved of cash just when they need it the most.
Now you would hope that the bankers at risk have been hedging their bond exposure via the Credit Default Swap market. But that may be too big an assumption to make.
As I've gone through this process as an investor, watching first the accounting scandals of the dot com era, the book cooking of the financial sector, and now the book cooking of entire sovereign nations, it impresses upon me once more just how dishonest many big businesses and governments really are.
We truly cannot rely on published financial statements to drive our investment decisions. We must have a series of empirical rules that at the very least take a measure of price analysis into consideration. In plain speak that means that we must have a working knowledge of technical analysis.
From 1982 until 1999 it was easy for Wall Street to manage your money, because we were in a bull market. But when the rubber met the road in 2000 and then again in 2008 we saw exactly what Wall Street's strategy was: Buy and hope!
You've got to become a more tactically oriented investor if you want to survive the next 7-10 years. It's going to be at least that long before we have another 1982-1999 type of brainless bull market.
The fact is that things are going to become more volatile, not less volatile. You can either profit from that volatility or get consumed by it.
The events in Europe are just a taste of what's to come. If the broad global economy does not start roaring back soon, what's happening in Greece will seem like a walk in the park compared to what could happen over here.
We are making many of the same mistakes that Greece is. Our economy is large, diverse and complex, but no matter how strong we think our economy is, no economy can last long when its deficit spending outstrips its ability to repay.
Without a sharp and sudden swelling of national tax receipts, we are headed for many of the austerity measures that are now sweeping through Greece.
Ben Bernanke spoke yesterday to the National Commission on Fiscal Responsibility and Reform. The commission's mandate is to come up with strategies to cut our annual budget deficit by about $250bn. This is a commission created for the express purpose of giving both sides political cover. Some tough decisions are going to have to be made, and no one party wants to take the rap for it, which is why they've been told to hold off on any ideas until after the November mid-term elections.
The one line from Chairman Bernanke's speech that caught my attention was "No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies."
Think about that!
He is telling us in plain English (eat your heart out Mr. Greenspan!) that we are going to see either service cuts, massive tax hikes, or a combination of the two. This is an unavoidable future for all Americans who pay taxes and use government services.
You will have less money in your pay check this year, next year, and for many more years ahead.
The cumulative effect of these policy shifts have not yet been reflected in stock and bond prices.
I urge you to start thinking about these issues, and to start game planning your responses.
The last thing you want to do is be left standing there like a sheep waiting to be slaughtered.
Teeka Tiwari
Chief Investment Officer
ETF Master Trader
Wednesday, April 28, 2010
Wednesday, March 31, 2010
Health Care Costs Climb for Retiring Couples
Health Care Costs Climb for Retiring Couples
A 65-year-old couple retiring in 2010 without employer-provided retiree health insurance will need about $250,000 to pay future medical-related expenses, Fidelity Investments said in an analysis released Thursday, March 25.
This amount, up from $240,000 last year, includes expenses such as Medicare premiums, co-payments and deductibles. The higher tab for retiree health expenses comes as the number of employers offering such coverage shrinks, increasing the number of retirees who must pay a major portion of their health care expenses.
Significant drivers of increases in retiree health care costs include higher provider charges and increased expenses associated with new technology, Fidelity said in the analysis.
Of the $250,000 needed to cover a retired couple’s health care expenses, Fidelity estimates 30 percent will go toward paying Medicare Part B and Part D premiums; 40 percent will be consumed by expenses not covered by Medicare, such as co-insurance and deductibles imposed by Medicare; and 30 percent for out-of-pocket prescription drug expenses.
Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.
A 65-year-old couple retiring in 2010 without employer-provided retiree health insurance will need about $250,000 to pay future medical-related expenses, Fidelity Investments said in an analysis released Thursday, March 25.
This amount, up from $240,000 last year, includes expenses such as Medicare premiums, co-payments and deductibles. The higher tab for retiree health expenses comes as the number of employers offering such coverage shrinks, increasing the number of retirees who must pay a major portion of their health care expenses.
Significant drivers of increases in retiree health care costs include higher provider charges and increased expenses associated with new technology, Fidelity said in the analysis.
Of the $250,000 needed to cover a retired couple’s health care expenses, Fidelity estimates 30 percent will go toward paying Medicare Part B and Part D premiums; 40 percent will be consumed by expenses not covered by Medicare, such as co-insurance and deductibles imposed by Medicare; and 30 percent for out-of-pocket prescription drug expenses.
Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.
Monday, March 22, 2010
Medicare Fact Sheet Final
Paying for Health Care Reform $313 Billion in Additional Savings to Create a Deficit Neutral Plan
We have the most expensive health care system in the world, but do not get the best results. The rising costs of health care are a burden on our families and a drain on our long-term economic growth. If we continue on the course we are on, health care expenditures will reach 20 percent of GDP within a decade. Rapidly rising health care costs are leading our nation down a fiscally unsustainable path.
For the health of the American people and the health of our economy, we must act now to bring down health care costs and reform the health care system. It is central to the long-term prosperity of the United States. That is why the President is committed to passing health care reform this year. Guided by the principle that we should fix what’s broken and build on what already works, the President wants to pass health care reform that allows one to keep their health insurance and choose their health care providers, expands coverage to the millions without, and brings down the cost of coverage.
The President is committed to undertaking reform that is completely paid for and deficit neutral over the next decade. That is why he put forward in his FY 2010 Budget an historic $635 billion down payment on reform. Roughly half of this amount comes from revenue proposals, including limiting the value of itemized deductions for families making over a quarter-million dollars a year to the rates they were during the Reagan years, and about half comes from savings from Medicare and Medicaid.
Since making this proposal, the Administration has worked with Congress on other ways to offset fully the cost of health care reform through additional savings and revenues. To that end, the Administration is detailing today savings proposals that will contribute another $313 billion over 10 years to paying for health care reform, bringing the total scoreable offsets put forward by the Administration to nearly $950 billion over 10 years. Together, this would extend the solvency of Medicare’s Hospital Insurance Trust Fund by seven years to about 2024, and reduce beneficiary premiums for physician and outpatient services by about $43 billion over the next 10 years. The Administration hopes these suggestions will help Congress as it continues to draft legislation, and remains open to any other proposals to pay for reform that Congress may put forward.
Reforming the health care system does not end at expanding coverage and making sure that it is paid for; we also must address the underlying problems in our health care system that impede quality improvements and raise costs. The President therefore believes that in addition to scoreable offsets, we must take steps to transform the health care system, such as investing in health care information technology, patient-centered quality research, prevention and wellness, and in creating a system that pays providers for providing better care not just more care. Over time, these steps will help to produce a health care system that works better and costs less.
Paying for Health Care Reform: New Savings
As was emphasized when the President’s Budget was initially released, the reserve fund represents a substantial down payment but is not by itself sufficient to fully fund comprehensive reform. The President has insisted that reform must be deficit-neutral based on real savings and revenue estimates as determined by impartial scorers. Thus, in addition to the proposals included in the FY 2010 Budget, the Administration is putting forward policy options to further rein in federal health spending, make the system more efficient, and deliver better quality of care. When combined with the Budget proposals, these new options would extend the solvency of Medicare’s Hospital Insurance Trust Fund by seven years to about 2024. These new savings include:
•Incorporate productivity adjustments into Medicare payment updates. Productivity in the U.S. economy has been improving over time. However, most Medicare payments have not been systematically adjusted to reflect these system-wide improvements. We should permanently adjust most annual Medicare payment updates by half of the economy-wide productivity factor estimated by the Bureau of Labor Statistics. This adjustment will encourage greater efficiency in health care provision, while more accurately aligning Medicare payments with provider costs.
•Reduce subsidies to hospitals for treating the uninsured as coverage increases. Instead of paying hospitals to treat patients without health insurance, we should give people coverage so that they have insurance to begin with. As health reform phases in, the number of uninsured will go down, and we would be able to reduce payments to hospitals for treating those previously uncovered. This would be done by establishing a new mandatory mechanism to better target payments to hospitals for unreimbursed care remaining after coverage increases. Beginning in FY 2013, payments would be gradually phased down so that by 2019, funding would equal 25 percent of Medicare/Medicaid Disproportionate Share Hospitals (DSH) funding in 2013, and updated by inflation.
•Pay better prices for Medicare Part D drugs. In its meeting with the President and subsequent communication, the pharmaceutical industry has committed itself to helping to control the rate of growth in health care spending. There are a variety of ways to achieve this goal. For example, drug reimbursement could be reduced for beneficiaries dually eligible for Medicare and Medicaid. The Administration is working with the Congress to develop the most appropriate policy to achieve these savings.
Other Savings
•Adjust payment rates for physician imaging services to better reflect actual usage. To provide more accurate payment for physician imaging services, the Department of Health and Human Services would increase the equipment utilization factor for advanced imaging (such as magnetic resonance imaging (MRI) and computed tomography (CT) machines) from 50 percent to 95 percent. This proposal – which is closely aligned with a Medicare Payment Advisory Commission (MedPAC) recommendation – would better reflect how these technologies are actually used.
•Adopt MedPAC’s recommendations for 2010 payments to skilled nursing facilities, inpatient rehabilitation facilities, and long-term care hospitals. To bring down costs and maintain quality, we shouldupdate payments based on MedPAC’s consideration of multiple variables, such as quality, access to care, and adequacy of payment. Doing so would implement MedPAC’s 2010 payment recommendations for skilled nursing facilities, inpatient rehabilitation facilities, and long-term care hospitals.
•Cut waste, fraud, and abuse. It is important that patients get the best care, not just more care. Unnecessary treatments are not only expensive, but also can harm the health of the patient. To discourage physicians from ordering unnecessary or excessive treatment, we should increase the scrutiny of physicians in high-risk areas or those that order a high volume of high-risk services (such as home health, durable medical equipment, and certain infusion drugs) through additional pre-payment review.
Paying for Health Care Reform: 2010 Budget Proposals
The above savings would be in addition to the down payment for comprehensive health care reform of $635 billion over 10 years detailed in the FY 2010 Budget. The reserve fund is financed roughly half through proposals to generate more revenue, and half through efficiencies and savings from Medicare and Medicaid. Based on our projections, the Medicare proposals contained in the reserve fund would extend the solvency date of the Hospital Insurance (HI) Trust Fund by two years and reduce beneficiary premiums for physician and outpatient services by about $33 billion over the next 10 years. As a result of these proposals, Medicare beneficiaries will also see an improvement in the quality of their services. The reserve fund includes a broad array of savings proposals including:
•Reducing Medicare overpayments to private insurers. The establishment of a competitive system where payments are based upon an average of plans’ bids submitted to Medicare would save taxpayers close to $177 billion over 10 years, as well as reduce Part B premiums.
•Improving Medicare and Medicaid payment accuracy. By strengthening program integrity efforts, the Centers for Medicare and Medicaid Services (CMS) will address vulnerabilities that have led to billions of dollars in overpayments and fraud each year.
•Improving care after hospitalizations and reducing readmission rates. A combination of incentive payments and penalties should lead to better care and result in fewer readmissions – saving roughly $25 billion over 10 years.
Expanding the Hospital Quality Improvement Program
: By linking a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures, quality of care for beneficiaries will improve, and Medicare will save approximately $12 billion over 10 years.
*** This fact sheet has been corrected.
Source: http://www.whitehouse.gov/medicarefactsheetfinal/
We have the most expensive health care system in the world, but do not get the best results. The rising costs of health care are a burden on our families and a drain on our long-term economic growth. If we continue on the course we are on, health care expenditures will reach 20 percent of GDP within a decade. Rapidly rising health care costs are leading our nation down a fiscally unsustainable path.
For the health of the American people and the health of our economy, we must act now to bring down health care costs and reform the health care system. It is central to the long-term prosperity of the United States. That is why the President is committed to passing health care reform this year. Guided by the principle that we should fix what’s broken and build on what already works, the President wants to pass health care reform that allows one to keep their health insurance and choose their health care providers, expands coverage to the millions without, and brings down the cost of coverage.
The President is committed to undertaking reform that is completely paid for and deficit neutral over the next decade. That is why he put forward in his FY 2010 Budget an historic $635 billion down payment on reform. Roughly half of this amount comes from revenue proposals, including limiting the value of itemized deductions for families making over a quarter-million dollars a year to the rates they were during the Reagan years, and about half comes from savings from Medicare and Medicaid.
Since making this proposal, the Administration has worked with Congress on other ways to offset fully the cost of health care reform through additional savings and revenues. To that end, the Administration is detailing today savings proposals that will contribute another $313 billion over 10 years to paying for health care reform, bringing the total scoreable offsets put forward by the Administration to nearly $950 billion over 10 years. Together, this would extend the solvency of Medicare’s Hospital Insurance Trust Fund by seven years to about 2024, and reduce beneficiary premiums for physician and outpatient services by about $43 billion over the next 10 years. The Administration hopes these suggestions will help Congress as it continues to draft legislation, and remains open to any other proposals to pay for reform that Congress may put forward.
Reforming the health care system does not end at expanding coverage and making sure that it is paid for; we also must address the underlying problems in our health care system that impede quality improvements and raise costs. The President therefore believes that in addition to scoreable offsets, we must take steps to transform the health care system, such as investing in health care information technology, patient-centered quality research, prevention and wellness, and in creating a system that pays providers for providing better care not just more care. Over time, these steps will help to produce a health care system that works better and costs less.
Paying for Health Care Reform: New Savings
As was emphasized when the President’s Budget was initially released, the reserve fund represents a substantial down payment but is not by itself sufficient to fully fund comprehensive reform. The President has insisted that reform must be deficit-neutral based on real savings and revenue estimates as determined by impartial scorers. Thus, in addition to the proposals included in the FY 2010 Budget, the Administration is putting forward policy options to further rein in federal health spending, make the system more efficient, and deliver better quality of care. When combined with the Budget proposals, these new options would extend the solvency of Medicare’s Hospital Insurance Trust Fund by seven years to about 2024. These new savings include:
•Incorporate productivity adjustments into Medicare payment updates. Productivity in the U.S. economy has been improving over time. However, most Medicare payments have not been systematically adjusted to reflect these system-wide improvements. We should permanently adjust most annual Medicare payment updates by half of the economy-wide productivity factor estimated by the Bureau of Labor Statistics. This adjustment will encourage greater efficiency in health care provision, while more accurately aligning Medicare payments with provider costs.
•Reduce subsidies to hospitals for treating the uninsured as coverage increases. Instead of paying hospitals to treat patients without health insurance, we should give people coverage so that they have insurance to begin with. As health reform phases in, the number of uninsured will go down, and we would be able to reduce payments to hospitals for treating those previously uncovered. This would be done by establishing a new mandatory mechanism to better target payments to hospitals for unreimbursed care remaining after coverage increases. Beginning in FY 2013, payments would be gradually phased down so that by 2019, funding would equal 25 percent of Medicare/Medicaid Disproportionate Share Hospitals (DSH) funding in 2013, and updated by inflation.
•Pay better prices for Medicare Part D drugs. In its meeting with the President and subsequent communication, the pharmaceutical industry has committed itself to helping to control the rate of growth in health care spending. There are a variety of ways to achieve this goal. For example, drug reimbursement could be reduced for beneficiaries dually eligible for Medicare and Medicaid. The Administration is working with the Congress to develop the most appropriate policy to achieve these savings.
Other Savings
•Adjust payment rates for physician imaging services to better reflect actual usage. To provide more accurate payment for physician imaging services, the Department of Health and Human Services would increase the equipment utilization factor for advanced imaging (such as magnetic resonance imaging (MRI) and computed tomography (CT) machines) from 50 percent to 95 percent. This proposal – which is closely aligned with a Medicare Payment Advisory Commission (MedPAC) recommendation – would better reflect how these technologies are actually used.
•Adopt MedPAC’s recommendations for 2010 payments to skilled nursing facilities, inpatient rehabilitation facilities, and long-term care hospitals. To bring down costs and maintain quality, we shouldupdate payments based on MedPAC’s consideration of multiple variables, such as quality, access to care, and adequacy of payment. Doing so would implement MedPAC’s 2010 payment recommendations for skilled nursing facilities, inpatient rehabilitation facilities, and long-term care hospitals.
•Cut waste, fraud, and abuse. It is important that patients get the best care, not just more care. Unnecessary treatments are not only expensive, but also can harm the health of the patient. To discourage physicians from ordering unnecessary or excessive treatment, we should increase the scrutiny of physicians in high-risk areas or those that order a high volume of high-risk services (such as home health, durable medical equipment, and certain infusion drugs) through additional pre-payment review.
Paying for Health Care Reform: 2010 Budget Proposals
The above savings would be in addition to the down payment for comprehensive health care reform of $635 billion over 10 years detailed in the FY 2010 Budget. The reserve fund is financed roughly half through proposals to generate more revenue, and half through efficiencies and savings from Medicare and Medicaid. Based on our projections, the Medicare proposals contained in the reserve fund would extend the solvency date of the Hospital Insurance (HI) Trust Fund by two years and reduce beneficiary premiums for physician and outpatient services by about $33 billion over the next 10 years. As a result of these proposals, Medicare beneficiaries will also see an improvement in the quality of their services. The reserve fund includes a broad array of savings proposals including:
•Reducing Medicare overpayments to private insurers. The establishment of a competitive system where payments are based upon an average of plans’ bids submitted to Medicare would save taxpayers close to $177 billion over 10 years, as well as reduce Part B premiums.
•Improving Medicare and Medicaid payment accuracy. By strengthening program integrity efforts, the Centers for Medicare and Medicaid Services (CMS) will address vulnerabilities that have led to billions of dollars in overpayments and fraud each year.
•Improving care after hospitalizations and reducing readmission rates. A combination of incentive payments and penalties should lead to better care and result in fewer readmissions – saving roughly $25 billion over 10 years.
Expanding the Hospital Quality Improvement Program
: By linking a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures, quality of care for beneficiaries will improve, and Medicare will save approximately $12 billion over 10 years.
*** This fact sheet has been corrected.
Source: http://www.whitehouse.gov/medicarefactsheetfinal/
What the health-care bill means for you?
Mar 22 2010, 9:14 AM ET
Last night the House of Representatives passed the Senate health care bill, and the Democrats' year of living flirtatiously with failure ended with what I would call the greatest progressive achievement of the last two generations. We -- that is you, me, and everyone we know -- have spent months wrangling over the implications of health care on the deficit and the cost curve and the tenor of DC politics. But now that the bill has become a law, the most useful approach to health care is to servicey rather than debatey: so what does it mean for you, anyway?
Ultimately health care reform is about expanding insurance coverage to 32 million new Americans by growing Medicaid, mandating that all Americans buy health care and offering subsidies to those living under 400% of the poverty line. For the tens of millions of Americans who already get health care through their employer, this law does not change very much. For Americans without insurance, it changes quite a bit. Starting at the end of the year, new college graduates can stay on their parents' insurance until age 26. For less fortunate Americans without coverage, the law will offer tax credits to help them buy insurance through new regulated "exchanges." For Americans enrolled in Medicare, the law should not dramatically change coverage even though it calls for billions in cuts, primarily in the Advantage program. It will, however, close the prescription drug "doughnut hole" to help seniors buy medicine below the catastrophic coverage threshold.
On the revenue side, the bill delays its taxes until at least 2013. For richer families, the law will add additional Medicare payroll and investment taxes in three years. In eight years, it will add an excise tax on high-cost insurance plans that is indexed to creep into more insurance plans in the second decade of the law. On regulatory reform, the law bars insurers from rescinding coverage to the sick; discriminating based on pre-existing conditions; and capping lifetime coverage.
Now let's make this personal. The Washington Post has put together this useful interactive tool that asks users to enter their source of health care (employer, Medicare, etc), household members, marital status and income, which it uses to calculate how the new health care law will affect you. For example:
-- An entry-level 22-year old employee making between $30,000 and $40,000 a year will get to stay on his employer's plan with the option to switch insurance to the exchange market with the help of government subsidies.
-- A married, employed breadwinner with one child making $100,000 will see no change to his or her coverage through the law.
-- A family making more than $250,000 with two children will see Medicare payroll taxes increase by 0.9% to 2.35% and they will have to pay a 3.8% tax on investment income.
Derek Thompson is a staff editor at Atlantic Business, where he writes about economics, business and technology. Derek has also written for BusinessWeek and Slate.
Last night the House of Representatives passed the Senate health care bill, and the Democrats' year of living flirtatiously with failure ended with what I would call the greatest progressive achievement of the last two generations. We -- that is you, me, and everyone we know -- have spent months wrangling over the implications of health care on the deficit and the cost curve and the tenor of DC politics. But now that the bill has become a law, the most useful approach to health care is to servicey rather than debatey: so what does it mean for you, anyway?
Ultimately health care reform is about expanding insurance coverage to 32 million new Americans by growing Medicaid, mandating that all Americans buy health care and offering subsidies to those living under 400% of the poverty line. For the tens of millions of Americans who already get health care through their employer, this law does not change very much. For Americans without insurance, it changes quite a bit. Starting at the end of the year, new college graduates can stay on their parents' insurance until age 26. For less fortunate Americans without coverage, the law will offer tax credits to help them buy insurance through new regulated "exchanges." For Americans enrolled in Medicare, the law should not dramatically change coverage even though it calls for billions in cuts, primarily in the Advantage program. It will, however, close the prescription drug "doughnut hole" to help seniors buy medicine below the catastrophic coverage threshold.
On the revenue side, the bill delays its taxes until at least 2013. For richer families, the law will add additional Medicare payroll and investment taxes in three years. In eight years, it will add an excise tax on high-cost insurance plans that is indexed to creep into more insurance plans in the second decade of the law. On regulatory reform, the law bars insurers from rescinding coverage to the sick; discriminating based on pre-existing conditions; and capping lifetime coverage.
Now let's make this personal. The Washington Post has put together this useful interactive tool that asks users to enter their source of health care (employer, Medicare, etc), household members, marital status and income, which it uses to calculate how the new health care law will affect you. For example:
-- An entry-level 22-year old employee making between $30,000 and $40,000 a year will get to stay on his employer's plan with the option to switch insurance to the exchange market with the help of government subsidies.
-- A married, employed breadwinner with one child making $100,000 will see no change to his or her coverage through the law.
-- A family making more than $250,000 with two children will see Medicare payroll taxes increase by 0.9% to 2.35% and they will have to pay a 3.8% tax on investment income.
Derek Thompson is a staff editor at Atlantic Business, where he writes about economics, business and technology. Derek has also written for BusinessWeek and Slate.
Monday, March 15, 2010
Five reasons to roll a 401(k) to an IRA
Why would a 401(k) participant want to move his money out of a 401(k) and roll it into an IRA?
Here are reasons why:
Most 401(k) s and other company plans have limited investment options.
They may offer 50 different mutual funds and other investments options, but most of the options are subject to market fluctuations. If we learned anything in 2008 and early 2009, it’s that what the market gives can be taken away with little to no warning. Many of these accounts lost as much as 40 percent in 2008 alone. Those who chose to play it safe and moved their 401(k) money into bond funds or funds invested in CDs and other short-term investments were rewarded with little or no growth while inflation and management fees ate away at their principal. IRAs have almost unlimited investment options including annuities that guarantee the principal and offer a competitive rate of return.
Plan guidelines can restrict the owner’s access to his money.
The plan document is essentially the 401(k) rulebook. If it’s not in the book, you can’t do it! With savings down and unemployment up, you never know when you may need access to your retirement accounts. IRAs offer greater flexibility, allowing the owners to make their own rules if they are willing to pay the tax on the distributions.
Direct rollovers avoid the 20 percent mandatory withholding.
It’s critical that the funds are moved as a trustee-to-trustee transfer. If a check is written to the 401(k) owner, you can count on the custodian withholding 20 percent for the IRS. I have worked with several advisors who have encountered this problem, and they are still battling with the IRS to get the 20 percent withholding back where it belongs.
401(k) s have limited distribution flexibility for the children and grandchildren who are likely to inherit when both the owner and spouse are gone.
In 2002 when the multi-generational/“stretch” IRA was born, the children and grandchildren were given new valuable distribution options. They now have the right to spread the inherited IRA distributions over their individual life expectancies, according to Appendix C, Table 1 of IRS Publication 590. This means they are no longer forced into rapid distribution, causing rapid taxation. The 401(k) plan administrators didn’t get on board with this valuable income planning tool and are, in many cases, forcing these non-spousal beneficiaries to take full taxable distribution in just five years. Under the “Worker, Retiree and Employer Recovery Act” of 2008 (HR 7327), all employer plans will be required to allow non-spousal beneficiaries to do direct rollovers to properly titled inherited IRAs beginning Jan. 1, 2010. IRAs allow these beneficiaries to take control and choose between cashing out and receiving a lifetime of income.
Most 401(k) plans do not allow the Roth IRA conversion.
Beginning this year IRA owners with adjusted gross incomes over $100,000 can for the first time convert their traditional IRAs to Roth IRAs. After the conversion tax is paid, the new Roth will grow tax-free and distributions after the five-year holding will also be income tax free. The Pension Protection Act simplified Roth conversions from 401(k) s and other company sponsored plans. Beginning in 2008, owners can convert company sponsored plan funds directly to a Roth IRA. They no longer need to convert to a traditional IRA first then convert the traditional IRA to a Roth IRA.
BY David F. Royer
Published 3/15/2010
Here are reasons why:
Most 401(k) s and other company plans have limited investment options.
They may offer 50 different mutual funds and other investments options, but most of the options are subject to market fluctuations. If we learned anything in 2008 and early 2009, it’s that what the market gives can be taken away with little to no warning. Many of these accounts lost as much as 40 percent in 2008 alone. Those who chose to play it safe and moved their 401(k) money into bond funds or funds invested in CDs and other short-term investments were rewarded with little or no growth while inflation and management fees ate away at their principal. IRAs have almost unlimited investment options including annuities that guarantee the principal and offer a competitive rate of return.
Plan guidelines can restrict the owner’s access to his money.
The plan document is essentially the 401(k) rulebook. If it’s not in the book, you can’t do it! With savings down and unemployment up, you never know when you may need access to your retirement accounts. IRAs offer greater flexibility, allowing the owners to make their own rules if they are willing to pay the tax on the distributions.
Direct rollovers avoid the 20 percent mandatory withholding.
It’s critical that the funds are moved as a trustee-to-trustee transfer. If a check is written to the 401(k) owner, you can count on the custodian withholding 20 percent for the IRS. I have worked with several advisors who have encountered this problem, and they are still battling with the IRS to get the 20 percent withholding back where it belongs.
401(k) s have limited distribution flexibility for the children and grandchildren who are likely to inherit when both the owner and spouse are gone.
In 2002 when the multi-generational/“stretch” IRA was born, the children and grandchildren were given new valuable distribution options. They now have the right to spread the inherited IRA distributions over their individual life expectancies, according to Appendix C, Table 1 of IRS Publication 590. This means they are no longer forced into rapid distribution, causing rapid taxation. The 401(k) plan administrators didn’t get on board with this valuable income planning tool and are, in many cases, forcing these non-spousal beneficiaries to take full taxable distribution in just five years. Under the “Worker, Retiree and Employer Recovery Act” of 2008 (HR 7327), all employer plans will be required to allow non-spousal beneficiaries to do direct rollovers to properly titled inherited IRAs beginning Jan. 1, 2010. IRAs allow these beneficiaries to take control and choose between cashing out and receiving a lifetime of income.
Most 401(k) plans do not allow the Roth IRA conversion.
Beginning this year IRA owners with adjusted gross incomes over $100,000 can for the first time convert their traditional IRAs to Roth IRAs. After the conversion tax is paid, the new Roth will grow tax-free and distributions after the five-year holding will also be income tax free. The Pension Protection Act simplified Roth conversions from 401(k) s and other company sponsored plans. Beginning in 2008, owners can convert company sponsored plan funds directly to a Roth IRA. They no longer need to convert to a traditional IRA first then convert the traditional IRA to a Roth IRA.
BY David F. Royer
Published 3/15/2010
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