At a meeting today one of my clients wanted me to address what they could do in these difficult economic time. It's a great question and here are my thoughts:
1) Tighten Company Procedures: When times are going well it's easy to let things slip through the cracks. The things that slip through the cracks are often the things that can lead to more business or improve the bottom line. You need to be focused on the business every day and doing the little things.
2) Marketing: One of the first expenses to be cut when the economy weakens is marketing expense. I believe this is the exact opposite of what needs to be done. You will need to refine your marketing plan and make sure that you are targeting the right customers. You will also be able to get your message out more clearly as many companies will cut their marketing budgets.
3) Focus on the Customer: Think of what you do through the eyes of your customer. Make sure that they are having a good experience every time you deal with them. This will ensure that you retain these customers.
Friday, October 31, 2008
Thursday, October 30, 2008
Brewers Hire Ken Macha
The Brewers announced the hiring of Ken Macha as their new manager today.
Macha proved to be a good manager in his 4 years with the Oakland A's leading them to two playoff appearances and two near misses. He clashed with GM Billy Beane in Oakland and that was a big reason for his ouster there.
So one would think that I might be excited about this hire. I can't say that I am though because of a few of the details surrounding the deal.
The first issue is the Brewers will be retaining most of their coaching staff from last year, Nothing against these guys, but you'd think Macha would be allowed to assemble his own staff. To compound this problem the Brewers intend on bringing back Dale Sveum who was their interim manager and passed over for the job. Sveum made it no secret that he was crushed by not getting the job.
The other issue is Macha was only given a two year deal. This means that if the Brewers falter early on Macha could be on the hot seat as the Brewers wouldn't have to eat too much of a contract to dismiss him.
I think these factors cast Macha as a weak manager and I can envision a divided clubhouse if a player has an issue with Macha as he will appear weak in their eyes.
This could all work out well, but it's not hard to see trouble spots from the outset.
Wednesday, October 29, 2008
Gift Exclusion to rise to $13,000
The Gift exclusion will rise to $13,000 for 2009.
The exclusion is the amount you can give to any other person without having to file a gift tax return. If gift splitting is employed a married couple can give any person up to $26,000 without filing a gift tax return.
The exclusion is the amount you can give to any other person without having to file a gift tax return. If gift splitting is employed a married couple can give any person up to $26,000 without filing a gift tax return.
Tuesday, October 28, 2008
Wall Street Journal Series on Election Issues
Over the last week the Wall Street Journal's editorial page has been running articles on the various economic issues in the presidential race and laying out each candidates proposals. The series can be seen at www.opinionjournal.com.
While the wall Street Journal has a conservative editorial page they have done a good job of not allowing their bias to come across in this series. They also provide enough depth to these issues that you should come away knowing where each of the candidates stand on these issues and you can make an informed decision.
While the wall Street Journal has a conservative editorial page they have done a good job of not allowing their bias to come across in this series. They also provide enough depth to these issues that you should come away knowing where each of the candidates stand on these issues and you can make an informed decision.
Monday, October 27, 2008
Consider Making a Part of Your Business Debt Variable
When a business goes out and borrows money for equipment and expansion the most common form of borrowing I see is fixing the interest rate on the loan for 5 years. The benefit to the business in this scenario is that they know exactly what their interest rate will be for the next five years and the banks benefit because they can go out and borrow 5 year funds and make their profit.
I would suggest that in given the economic issues of today to tie a portion of any borrowing to the prime interest rate. The prime rate as of today is 4.5% and unless things drastically turn around I cannot imagine the rates jumping back up. In fact, I think it's reasonable to think that the rates may even drop. Contrast this to the rates on 5 year money right now. If you lock a rate today for five years you will get a rate of 6.25% to 7% depending on your credit worthiness.
Tying a portion of the debt to the prime interest rate may allow you to take advantage of the lower interest rates while tying the bulk of the borrowing to a 5 year rate offers protection on rate increases.
Let's say you are going to borrow $500,000. If I were in that position I would likely borrow $100,000 of the debt with the prime interest rate and the rest tied to a 5 year note. My belief would be that I could aggressively pay down the $100,000 debt as there is very little interest on it while paying the remainder over the 5 years.
I would suggest that in given the economic issues of today to tie a portion of any borrowing to the prime interest rate. The prime rate as of today is 4.5% and unless things drastically turn around I cannot imagine the rates jumping back up. In fact, I think it's reasonable to think that the rates may even drop. Contrast this to the rates on 5 year money right now. If you lock a rate today for five years you will get a rate of 6.25% to 7% depending on your credit worthiness.
Tying a portion of the debt to the prime interest rate may allow you to take advantage of the lower interest rates while tying the bulk of the borrowing to a 5 year rate offers protection on rate increases.
Let's say you are going to borrow $500,000. If I were in that position I would likely borrow $100,000 of the debt with the prime interest rate and the rest tied to a 5 year note. My belief would be that I could aggressively pay down the $100,000 debt as there is very little interest on it while paying the remainder over the 5 years.
Sunday, October 26, 2008
Has Oprah Dealt a Serious Blow to Bookstores?
It can be argued that there exists no greater marketing force in our country than Oprah Winfrey. For better (getting people interested in reading) or worse (foisting Dr. Phil on us) the Oprah seal of approval has a dramatic impact. Put it this way, she made William Faulkner a best selling author again.
I just read that Oprah has endorsed the Amazon Kindle as her new favorite thing. For those of you who don't know the Kindle is essentially an iPod for books. It is roughly the size of a book and allows the user to digitally download an entire book. Unlike the iPod, the Kindle has yet to gain any real traction in the marketplace and book stores have breathed a sigh of relief as it appeared they were going to avoid going the way of the record store.
Does all of that now change? Will Oprah's endorsement be the tipping point to make the Kindle the next iPod? If the Kindle can gain that kind of popularity it will not be good news for the book stores out there.
I just read that Oprah has endorsed the Amazon Kindle as her new favorite thing. For those of you who don't know the Kindle is essentially an iPod for books. It is roughly the size of a book and allows the user to digitally download an entire book. Unlike the iPod, the Kindle has yet to gain any real traction in the marketplace and book stores have breathed a sigh of relief as it appeared they were going to avoid going the way of the record store.
Does all of that now change? Will Oprah's endorsement be the tipping point to make the Kindle the next iPod? If the Kindle can gain that kind of popularity it will not be good news for the book stores out there.
Saturday, October 25, 2008
Section 179
If you own a business that buys equipment you have no doubt been told by your equipment salesperson that you need to take advantage of Section 179. There is quite a bit of misinformation out there regarding the deduction so this will hopefully set everything straight.
Section 179 allows a business to expense purchases of capital equipment instead of depreciating it over the useful life. Most equipment businesses buy are paid with current dollars but are depreciated over 5 or 7 years on an accelerated basis as prescribed by the IRS.
The current Section 179 rules state that a business can expense up to $250,000 of equipment purchases provided that their total capital expenditures are less than $800,000. The $800,000 limitation was put into place to keep this deduction limited to small businesses.
So at the end of the day a business can immediately expense an asset instead of expensing it over 5 or 7 years. The rule speeds up WHEN YOU CAN TAKE THE DEDUCTION AND IS NOT A SPECIAL DEDUCTION ON TOP. This distinction seems to have missed most salespeople. Another thing that is often not included in this conversation is the the State of Wisconsin has not followed the changes in Federal law and has a Section 179 limitation of $25,000.
So is Section 179 a good thing and should you use it? In tax planning we try to either defer taxes or avoid them. Section 179 helps a taxpayer defer taxes and that is a good thing. However, if you are in a low tax bracket it may make sense to spread the depreciation over 5 to 7 years especially if you expect to be more profitable in the future. In that case it would be wise to save your deductions for higher tax years when they can provide you more tax relief.
Section 179 allows a business to expense purchases of capital equipment instead of depreciating it over the useful life. Most equipment businesses buy are paid with current dollars but are depreciated over 5 or 7 years on an accelerated basis as prescribed by the IRS.
The current Section 179 rules state that a business can expense up to $250,000 of equipment purchases provided that their total capital expenditures are less than $800,000. The $800,000 limitation was put into place to keep this deduction limited to small businesses.
So at the end of the day a business can immediately expense an asset instead of expensing it over 5 or 7 years. The rule speeds up WHEN YOU CAN TAKE THE DEDUCTION AND IS NOT A SPECIAL DEDUCTION ON TOP. This distinction seems to have missed most salespeople. Another thing that is often not included in this conversation is the the State of Wisconsin has not followed the changes in Federal law and has a Section 179 limitation of $25,000.
So is Section 179 a good thing and should you use it? In tax planning we try to either defer taxes or avoid them. Section 179 helps a taxpayer defer taxes and that is a good thing. However, if you are in a low tax bracket it may make sense to spread the depreciation over 5 to 7 years especially if you expect to be more profitable in the future. In that case it would be wise to save your deductions for higher tax years when they can provide you more tax relief.
Candidates Tax Plans in Detail
With the election nearing and more details on the candidates tax plans are now known we can look at them side by side.
Income Taxes
McCain's plan essentially keeps the current tax rates in tact. The only real change he has proposed is to is to raise the individual exemption amount from $3,500 to $6,000.
Obama's plan is to repeal the changes in the tax rates that were passed during the Bush administration. In that vein the 33% rate would jump to 35% and the 35% bracket would go to 39.6%.
Obama is not proposing any income tax cuts per se, rather his intention is to use a system of "refundable" credits to reduce taxes. A refundable credit is a tax credit that you receive regardless of if you pay any income taxes. The centerpiece of his refundable credit plan would be a $500 credit for Social Security taxes paid. There would also be a provision to convert the Child Care Credit to a refundable credit and make 50% of those costs eligible for the credit rather than the current 20%.
There is also talk of increasing the Social Security Tax on those making over $250,000. Currently, once an individual earns over $102,000 they are no longer subject to the FICA tax. This limitation has been increased on an inflation basis in past years. Specifics of this idea have not been released. The most concrete idea has been Charles Rangle's idea of a 4% tax surcharge on those making over $250,000.
Both candidates propose fixing the Alternative Minimum Tax by indexing the standard deduction to inflation.
Capital Taxes
McCain is proposing keeping the rate at its current 15%. He has also proposed temporarily allowing all companies to expense their capital purchases rather than depreciate them. Think of this as Section 179 expanded to all businesses.
Obama has proposed raising the Capital Gains Tax to 20%. There has been no talk of making any changes to Section 179.
Estate Taxes
McCain proposed to raise the current exclusion to $5,000,000 and then tax the excess at a flat 15% tax rate.
Obama has proposed raising the exclusion to $3,500,000 and then tax the excess of 45%.
Current law on estate taxes is a bit confusing as it completely goes away in 2010 and then returns in 2011 with a $1,000,000 exclusion and a 55% tax rate if nothing is done.
Corporate Taxes
McCain has proposed lowering the top rate from 35% to 25%.
Obama would make no changes to the rates, but has proposed taxing a company's worldwide income. Currently, companies only pay income taxes on their United States earnings. He has also proposed a "windfall" profits tax on the oil companies.
Income Taxes
McCain's plan essentially keeps the current tax rates in tact. The only real change he has proposed is to is to raise the individual exemption amount from $3,500 to $6,000.
Obama's plan is to repeal the changes in the tax rates that were passed during the Bush administration. In that vein the 33% rate would jump to 35% and the 35% bracket would go to 39.6%.
Obama is not proposing any income tax cuts per se, rather his intention is to use a system of "refundable" credits to reduce taxes. A refundable credit is a tax credit that you receive regardless of if you pay any income taxes. The centerpiece of his refundable credit plan would be a $500 credit for Social Security taxes paid. There would also be a provision to convert the Child Care Credit to a refundable credit and make 50% of those costs eligible for the credit rather than the current 20%.
There is also talk of increasing the Social Security Tax on those making over $250,000. Currently, once an individual earns over $102,000 they are no longer subject to the FICA tax. This limitation has been increased on an inflation basis in past years. Specifics of this idea have not been released. The most concrete idea has been Charles Rangle's idea of a 4% tax surcharge on those making over $250,000.
Both candidates propose fixing the Alternative Minimum Tax by indexing the standard deduction to inflation.
Capital Taxes
McCain is proposing keeping the rate at its current 15%. He has also proposed temporarily allowing all companies to expense their capital purchases rather than depreciate them. Think of this as Section 179 expanded to all businesses.
Obama has proposed raising the Capital Gains Tax to 20%. There has been no talk of making any changes to Section 179.
Estate Taxes
McCain proposed to raise the current exclusion to $5,000,000 and then tax the excess at a flat 15% tax rate.
Obama has proposed raising the exclusion to $3,500,000 and then tax the excess of 45%.
Current law on estate taxes is a bit confusing as it completely goes away in 2010 and then returns in 2011 with a $1,000,000 exclusion and a 55% tax rate if nothing is done.
Corporate Taxes
McCain has proposed lowering the top rate from 35% to 25%.
Obama would make no changes to the rates, but has proposed taxing a company's worldwide income. Currently, companies only pay income taxes on their United States earnings. He has also proposed a "windfall" profits tax on the oil companies.
Friday, October 24, 2008
Why Does Health Care Cost So Much
In any presidential campaign we hear quite a bit about health care and its high cost. So why does it cost so much and why is it that neither proposal on the table will fix the problem?
I believe their are a few fundamental problems with our current system.
The first problem is insurance companies themselves. They serve as a middleman between you and your care. Anytime a middleman is involved in a transaction you can rest assured that the cost of that transaction will be higher. Why? It's because you are now paying two entities that need to make a profit in order to survive. While doctors will complain that the insurance companies have hurt their business you do not see many doctors out there looking at alternative ways to do business nor do you see many doctors in the soup line so to speak. So we know that the doctors are getting their profit. That is fine in the ordinary course of business but we also have a system that requires the insurance company who is in the middle be profitable.
The next problem is how we use insurance. The system has been designed that those who have insurance use it for every one of their health care transactions. We use it for a simple office visit to a low cost prescription. This all comes with a cost. Since we have already paid our premium and the insurance company will then cover the costs we have no idea how much our care costs and if a doctor suggests additional testing or services it's no skin off of our backs. The insurance company in our mind is footing the bill.
So what can be done?
I think the perfect system would offer health insurance for big events such as cancer treatment, surgeries and other dramatic care. We would then pay for our general health care services out of pocket which would force the providers of these services to truly compete for our services. This will give us more choice in our care and should lower prices. Our insurance costs would be lowered as we would not use it except in the event of a serious health issue. We could then look at making changes to the tax code to allow people to fund health savings accounts en masse and make the out of pocket costs more affordable.
There is already an example of how the lack of insurance has helped healthcare. One needs to look at the LASIK surgery industry. Very few insurance companies will pay for this service so if you want the procedure done it will come out of your pocket. In the 5 years since I've had my procedure done I have watched prices come down and the technology improve. Why is this? I believe it's because the doctors can make their profits without having to pay the middle man insurance company. It's also because the doctor truly has to compete for your business and needs to have the latest technology and competitive prices because you as the patient will not simply go where your insurance tells you to.
I believe their are a few fundamental problems with our current system.
The first problem is insurance companies themselves. They serve as a middleman between you and your care. Anytime a middleman is involved in a transaction you can rest assured that the cost of that transaction will be higher. Why? It's because you are now paying two entities that need to make a profit in order to survive. While doctors will complain that the insurance companies have hurt their business you do not see many doctors out there looking at alternative ways to do business nor do you see many doctors in the soup line so to speak. So we know that the doctors are getting their profit. That is fine in the ordinary course of business but we also have a system that requires the insurance company who is in the middle be profitable.
The next problem is how we use insurance. The system has been designed that those who have insurance use it for every one of their health care transactions. We use it for a simple office visit to a low cost prescription. This all comes with a cost. Since we have already paid our premium and the insurance company will then cover the costs we have no idea how much our care costs and if a doctor suggests additional testing or services it's no skin off of our backs. The insurance company in our mind is footing the bill.
So what can be done?
I think the perfect system would offer health insurance for big events such as cancer treatment, surgeries and other dramatic care. We would then pay for our general health care services out of pocket which would force the providers of these services to truly compete for our services. This will give us more choice in our care and should lower prices. Our insurance costs would be lowered as we would not use it except in the event of a serious health issue. We could then look at making changes to the tax code to allow people to fund health savings accounts en masse and make the out of pocket costs more affordable.
There is already an example of how the lack of insurance has helped healthcare. One needs to look at the LASIK surgery industry. Very few insurance companies will pay for this service so if you want the procedure done it will come out of your pocket. In the 5 years since I've had my procedure done I have watched prices come down and the technology improve. Why is this? I believe it's because the doctors can make their profits without having to pay the middle man insurance company. It's also because the doctor truly has to compete for your business and needs to have the latest technology and competitive prices because you as the patient will not simply go where your insurance tells you to.
Wednesday, October 22, 2008
Keeping Good Records
Most clients I have are deathly afraid of an Internal Revenue Service audit. They have heard the horror stories and fear an audit could be the death knell of their business.
While going through an audit is not a barrel of laughs, there are things you can do to make it as easy as possible.
The best thing you can do is keep all of your receipts and more importantly keep them in some sort of logical order. For my business I have an accordion file and I simply file the receipts by the month they were incurred in. So if an auditor were to come in I could easily find a receipt if needed.
Another easy way to do this is to file your receipts by vendor by having a file for each letter of the alphabet or a file for each vendor. Again, this will make it easy to find a receipt if its needed.
You have to keep in mind that if you are audited you are essentially guilty until proven innocent. Having your receipts organized and easy to find will make it much easier to prove your innocence.
While going through an audit is not a barrel of laughs, there are things you can do to make it as easy as possible.
The best thing you can do is keep all of your receipts and more importantly keep them in some sort of logical order. For my business I have an accordion file and I simply file the receipts by the month they were incurred in. So if an auditor were to come in I could easily find a receipt if needed.
Another easy way to do this is to file your receipts by vendor by having a file for each letter of the alphabet or a file for each vendor. Again, this will make it easy to find a receipt if its needed.
You have to keep in mind that if you are audited you are essentially guilty until proven innocent. Having your receipts organized and easy to find will make it much easier to prove your innocence.
Monday, October 20, 2008
Will a New Brewers manager be the difference?
The Brewers announced that they will not bring back Dale Svuem next year. My opinion is the decision to make a change is motivated by going out to get a "name" coach to give fans something to feel excited about should the Brewers lose CC Sabathia and Ben Sheets to free agency.
The question is will the change make a difference?
My feeling is that the team has some shortcomings. They are a talented group of hitters with good power and that has propelled them into the playoffs. The trouble is they do not have players who are good at drawing walks and too many of their hitters run very hot or very cold. Will a new manager turn Mike Cameron into a contact hitter? I doubt it as Cameron has played for several managers and has the same flaws. can a new manager make Bill Hall a productive player? Can he stop Corey Hart from swinging at too many first pitches?
I'm not sure that a new manager can do any of this.
The key to next year will be Doug Melvin's ability to craft a better balanced lineup that will be able to grind out runs when the balls are not flying out of the park.
The question is will the change make a difference?
My feeling is that the team has some shortcomings. They are a talented group of hitters with good power and that has propelled them into the playoffs. The trouble is they do not have players who are good at drawing walks and too many of their hitters run very hot or very cold. Will a new manager turn Mike Cameron into a contact hitter? I doubt it as Cameron has played for several managers and has the same flaws. can a new manager make Bill Hall a productive player? Can he stop Corey Hart from swinging at too many first pitches?
I'm not sure that a new manager can do any of this.
The key to next year will be Doug Melvin's ability to craft a better balanced lineup that will be able to grind out runs when the balls are not flying out of the park.
Paid Sick Leave in Milwaukee
On election day voters in the City of Milwaukee will be asked if private businesses should be mandated to pay sick leave to its employees. The proposal grants up to 9 days of sick leave to full time employees and also grants sick leave to part time and seasonal employees. I live in Oak Creek so I will not have a vote on this matter.
My business is based in the City of Milwaukee and I will be employing seasonal employees through tax season and also employ part time help. I have a vested interest in this topic.
I don't see this law as something that will be a real difference maker in my business because it is not labor intensive at this point but it's not hard to see who a requirement like this may hurt.
I see this provision as being a killer to a business that is starting out that is labor intensive. As anyone who has started a business knows the cash flow in the first few years of the business can be extraordinarily tight. These businesses must scratch by until they can mature into a business that has some breathing room and can offer more fringe benefits to their employees such as paid vacation, healthcare and sick pay. Many will do this in due course because they will have the means to do so and they will need to compete to retain their employees and grow their business.
That said, adding a cost like this could be very detrimental to many businesses who are in their infancy. I don't know that it's enough to put them out of business, but I believe it's an added stress that they do not need. For a full time employee the law would have the impact of adding 3.8% to their benefits. It doesn't sound like much, but many new businesses need every dollar they can get.
It is important that we grow the job base in Milwaukee and I can't see mandating sick pay as being a positive step in this direction when many businesses are portable and can choose to locate just outside of the City.
My business is based in the City of Milwaukee and I will be employing seasonal employees through tax season and also employ part time help. I have a vested interest in this topic.
I don't see this law as something that will be a real difference maker in my business because it is not labor intensive at this point but it's not hard to see who a requirement like this may hurt.
I see this provision as being a killer to a business that is starting out that is labor intensive. As anyone who has started a business knows the cash flow in the first few years of the business can be extraordinarily tight. These businesses must scratch by until they can mature into a business that has some breathing room and can offer more fringe benefits to their employees such as paid vacation, healthcare and sick pay. Many will do this in due course because they will have the means to do so and they will need to compete to retain their employees and grow their business.
That said, adding a cost like this could be very detrimental to many businesses who are in their infancy. I don't know that it's enough to put them out of business, but I believe it's an added stress that they do not need. For a full time employee the law would have the impact of adding 3.8% to their benefits. It doesn't sound like much, but many new businesses need every dollar they can get.
It is important that we grow the job base in Milwaukee and I can't see mandating sick pay as being a positive step in this direction when many businesses are portable and can choose to locate just outside of the City.
Thursday, October 16, 2008
Even if Law Changes, Keep money in Retirement Plans
Both candidates for president are proposing allowing people to withdraw funds from their 401(k) without penalty due to the economic problems we are having. They are also discussing taxing these withdrawls at a lower rate than what the taxpayer's normal rate might be.
Under current law if you withdraw money from a retirement plan before age 59 1/2 you not only pay taxes on the amount you withdraw at your ordinary rate, but you pay an additional 10% penalty on the amount withdrawn assuming you do not meet one of the few exceptions that are available to withdraw from the account.
The reason a penalty exists in current law is to discourage people from dipping into funds that should be for retirement. If you pull money out it makes it difficult to catch up to the earnings you have lost and you lose out on the interest you could have earned on the money.
The problem I have with waiving the penalty is this. If we make it painless to withdraw money from retirement it could have a terrible impact in two areas. The first issue is that people will have made the mistake of withdrawing funds that they will need later. We could have a lot more people who are not ready for retirement because of this. The second impact is that if a substantive amount of people withdraw from the market it could make the drops we've had in the market seem like nothing.
It needs to be remembered that you have options in how your assets are allocated within a retirement plan. All of your funds need not be in the stock market. You can use cash funds or bond funds to limit your risk. By all means people should review their asset allocation, but letting people easily withdraw their retirement funds would be a disaster.
Under current law if you withdraw money from a retirement plan before age 59 1/2 you not only pay taxes on the amount you withdraw at your ordinary rate, but you pay an additional 10% penalty on the amount withdrawn assuming you do not meet one of the few exceptions that are available to withdraw from the account.
The reason a penalty exists in current law is to discourage people from dipping into funds that should be for retirement. If you pull money out it makes it difficult to catch up to the earnings you have lost and you lose out on the interest you could have earned on the money.
The problem I have with waiving the penalty is this. If we make it painless to withdraw money from retirement it could have a terrible impact in two areas. The first issue is that people will have made the mistake of withdrawing funds that they will need later. We could have a lot more people who are not ready for retirement because of this. The second impact is that if a substantive amount of people withdraw from the market it could make the drops we've had in the market seem like nothing.
It needs to be remembered that you have options in how your assets are allocated within a retirement plan. All of your funds need not be in the stock market. You can use cash funds or bond funds to limit your risk. By all means people should review their asset allocation, but letting people easily withdraw their retirement funds would be a disaster.
Monday, October 13, 2008
What to do with your investments
Now that many of you have picked yourself off of the floor after reviewing your third quarter retirement plan statement it's useful to consider what you may want to do in the immediate future with your nest egg.
I'm not a financial planner by any stretch and would never suggest a certain stock to buy, but I think as a CPA I view things through a different prism than a financial planner or perhaps you do.
If you are within 10 years of retirement right now I don't think it's unreasonable to get most of your money out of stocks right now. Some may say that you are panicking but if the market continues to bottom out it's very possible that you will never have a chance to earn that money back.
If you have more than 10 years until retirement I think you should continue doing what you are doing. If one looks at the historic performance of the Dow Jones it's useful to note that over a 10 stretch in any period that the market is up. You will have enough time to make your money back and I wouldn't want to lose out on buying shares of stocks that may be undervalued right now.
Obviously you should talk to your planner and make the best decision for you, but if you have several years until retirement I don't think you need to panic. The economy bounces back. It did after 1987 and it did after the depression and it will this time.
I'm not a financial planner by any stretch and would never suggest a certain stock to buy, but I think as a CPA I view things through a different prism than a financial planner or perhaps you do.
If you are within 10 years of retirement right now I don't think it's unreasonable to get most of your money out of stocks right now. Some may say that you are panicking but if the market continues to bottom out it's very possible that you will never have a chance to earn that money back.
If you have more than 10 years until retirement I think you should continue doing what you are doing. If one looks at the historic performance of the Dow Jones it's useful to note that over a 10 stretch in any period that the market is up. You will have enough time to make your money back and I wouldn't want to lose out on buying shares of stocks that may be undervalued right now.
Obviously you should talk to your planner and make the best decision for you, but if you have several years until retirement I don't think you need to panic. The economy bounces back. It did after 1987 and it did after the depression and it will this time.
Roth vs. Traditional IRA
In recent days I've heard many commercials on the radio that discuss the differences between the Roth IRA and the Traditional IRA. These commercials are spot on regarding the facts, but the question most people have is which IRA is best for them.
In making a decision it is best to know something about how each IRA works.
A traditional IRA allows most taxpayers to contribute up to $4,000 each year. If you are not a part of an employer plan such as a 401(k) you are generally allowed to take a tax deduction for the amount that you contribute. The money placed in the account will not be subject to tax until the taxpayer begins to withdraw money at some point in the future. If you pull the money out after age 59 1/2 you will include the distribution in your ordinary income and pay taxes on it. If the money is withdrawn before age 59 1/2 and you meet none of the exceptions you pay not only the ordinary tax on the amount taken, but a 10% penalty on top of that.
A Roth IRA is different in that you do not receive a deduction for the amount that is placed into the plan, however the amounts placed in the plan grow tax free and you do not have to pay any tax on amounts taken out after 59 1/2. The Roth does allow a person an opportunity to get the money before 59 1/2 tax free if the funds are used for the first time purchase of a home, education expenses and a few other exceptions.
Either IRA is includible in Estate Tax calculations, however the person who receives the proceeds of a Traditional IRA will pay ordinary taxes on that amount whereas they would receive a Roth IRA without that burden.
So which one works best?
A good rule of thumb is to consider the tax bracket you are in. If you are in the 15% or less tax bracket it makes sense to go with the Roth IRA. Why? If you contribute $4,000 to the plan you would save $600 in taxes right now based on your tax bracket. That's a nice savings, but I'd rather have the money grow tax free over several years and have the money taken out tax free under the Roth plan. You may also consider that it might be likely that you would be in a higher tax bracket in the future and therefore not paying any taxes on your Roth IRA provides more tax savings for you.
The next thing I would look at is age. In my opinion, the younger you are the more likely I think it will be that you should use a Roth IRA. I believe this because the more years your money grows tax free the more tax savings you have. If you are under 40 years old a Roth IRA is probably your best option because you will have 20+ years of tax free growth before you need to access the money.
A traditional IRA is best used if you are in a higher tax bracket because the amount saved with the contribution is greater at the outset. A person in the 35% bracket who makes a $4,000 contribution immediately saves $1,400 in taxes. This translates to a 35% return on investment in year one.
The other issue is that if one makes over $110,000 it is unlikely they can contribute to a Roth IRA and the Traditional IRA becomes the best option by default.
In any event you should speak to your CPA to determine which one is right for you.
In making a decision it is best to know something about how each IRA works.
A traditional IRA allows most taxpayers to contribute up to $4,000 each year. If you are not a part of an employer plan such as a 401(k) you are generally allowed to take a tax deduction for the amount that you contribute. The money placed in the account will not be subject to tax until the taxpayer begins to withdraw money at some point in the future. If you pull the money out after age 59 1/2 you will include the distribution in your ordinary income and pay taxes on it. If the money is withdrawn before age 59 1/2 and you meet none of the exceptions you pay not only the ordinary tax on the amount taken, but a 10% penalty on top of that.
A Roth IRA is different in that you do not receive a deduction for the amount that is placed into the plan, however the amounts placed in the plan grow tax free and you do not have to pay any tax on amounts taken out after 59 1/2. The Roth does allow a person an opportunity to get the money before 59 1/2 tax free if the funds are used for the first time purchase of a home, education expenses and a few other exceptions.
Either IRA is includible in Estate Tax calculations, however the person who receives the proceeds of a Traditional IRA will pay ordinary taxes on that amount whereas they would receive a Roth IRA without that burden.
So which one works best?
A good rule of thumb is to consider the tax bracket you are in. If you are in the 15% or less tax bracket it makes sense to go with the Roth IRA. Why? If you contribute $4,000 to the plan you would save $600 in taxes right now based on your tax bracket. That's a nice savings, but I'd rather have the money grow tax free over several years and have the money taken out tax free under the Roth plan. You may also consider that it might be likely that you would be in a higher tax bracket in the future and therefore not paying any taxes on your Roth IRA provides more tax savings for you.
The next thing I would look at is age. In my opinion, the younger you are the more likely I think it will be that you should use a Roth IRA. I believe this because the more years your money grows tax free the more tax savings you have. If you are under 40 years old a Roth IRA is probably your best option because you will have 20+ years of tax free growth before you need to access the money.
A traditional IRA is best used if you are in a higher tax bracket because the amount saved with the contribution is greater at the outset. A person in the 35% bracket who makes a $4,000 contribution immediately saves $1,400 in taxes. This translates to a 35% return on investment in year one.
The other issue is that if one makes over $110,000 it is unlikely they can contribute to a Roth IRA and the Traditional IRA becomes the best option by default.
In any event you should speak to your CPA to determine which one is right for you.
Monday, October 6, 2008
Supporting Local Business : Tyranena Brewery
I had the opportunity to take part in Tyranena Brewery's annual Oktoberfest Bike ride this week in Lake Mills, Wisconsin. Lake Mills is approximately 1 hour away from Milwaukee and is near the Madison area off of Exit 259 on I-94.
I've always known Tyranena to make outstanding beers that are on par with the Sprecher Brewery and Lakefront Brewery in our own backyard. Both of those are outstanding breweries as well. They have many traditional beers, but their Brewers Gone Wild series is what sets them apart. The series features unique twists on classic beer styles such as their Scurvy IPA whicg introduced orange peel to a traditional IPA.
The reason I wanted to highlight these guys is they have done a great job of giving back to their community. They host three large scale charitable events each year and make their space available to charitable groups through out the year. The bike event was flawless in its execution and a pleasure to be at.
You can find their bee at Three Cellars in Oak Creek who we've spotlighted before in our blog. I've also seen their beer at Thief Wine Company and Sheridan's Wine in the Milwaukee Public market. Their Rocky's Revenge beer has also been available at Brewers games.
You can visit them at www.tyranena.com
I've always known Tyranena to make outstanding beers that are on par with the Sprecher Brewery and Lakefront Brewery in our own backyard. Both of those are outstanding breweries as well. They have many traditional beers, but their Brewers Gone Wild series is what sets them apart. The series features unique twists on classic beer styles such as their Scurvy IPA whicg introduced orange peel to a traditional IPA.
The reason I wanted to highlight these guys is they have done a great job of giving back to their community. They host three large scale charitable events each year and make their space available to charitable groups through out the year. The bike event was flawless in its execution and a pleasure to be at.
You can find their bee at Three Cellars in Oak Creek who we've spotlighted before in our blog. I've also seen their beer at Thief Wine Company and Sheridan's Wine in the Milwaukee Public market. Their Rocky's Revenge beer has also been available at Brewers games.
You can visit them at www.tyranena.com
Why the economy could be in real trouble
As everyone no doubt knows right now we are having a few financial difficulties in this country. It started with higher energy prices and a plunging dollar. Depending on your economic views neither of these issues were a big problem.
Now we are being hit over the head with the current banking crises and it's a huge deal. The stock exchange has been plunging and it's hard to blame anyone who is close to retirement selling much of their stock right now which will lead to the market going down further.
The real issue right now is bank liquidity. Banks are strapped for cash right now and borrowing is becoming difficult. If Banks overcorrect and make lending too difficult it will make it harder for business to expand. If business does not expand it falls behind and people are laid off and costs are cut. If business cannot expand new opportunities for constructions and other services becomes limited.
In short the economy stops growing and we end up in a recession.
Now we are being hit over the head with the current banking crises and it's a huge deal. The stock exchange has been plunging and it's hard to blame anyone who is close to retirement selling much of their stock right now which will lead to the market going down further.
The real issue right now is bank liquidity. Banks are strapped for cash right now and borrowing is becoming difficult. If Banks overcorrect and make lending too difficult it will make it harder for business to expand. If business does not expand it falls behind and people are laid off and costs are cut. If business cannot expand new opportunities for constructions and other services becomes limited.
In short the economy stops growing and we end up in a recession.
Health Care Plans Part 2 - Obama
The biggest difference in the Obama and McCain plan comes down to who the onus is on to choose their insurance. Obama proposes to create a system where employers would either offer health insurance to their employees OR be subject to a payroll tax that would be used to offer health insurance to those not covered. Rather than the individuals making the choice on what they do with insurance the businesses would have the choice to either continue their current plans or pay the tax. To an employee this plan would be very similar to the system they are used to having now.
This might be a better plan for large businesses depending on how much the payroll tax is going to be. If the tax is less than the premiums there is no doubt that an employer would choose to not offer healthcare and put the burden on government to provide the health insurance.
Small businesses should be protected in this plan. The Obama plan offers exemptions for small business and allows them to take advantage of tax credits in order to offer health insurance if they choose to. This step of the plan is a smart one because an additional payroll tax on small business who currently do not offer health insurance would be very difficult for them to bear.
If you do not have any health insurance the Obama plan would offer a subsidy in order for someone to obtain insurance.
The strength of this plan is that it offers to cover anyone and does exempt smaller businesses from the plan.
The one weakness I see in it is that it could lead us to Nationalized Health Insurance as I could see large companies simply paying the tax and getting themselves out of the health insurance business. These people would then be part of a National system.
Can this plan pass? If Obama wins and has a majority in both houses it will be hard to stop.
In any event both plans are a drastic departure from our current system.
This might be a better plan for large businesses depending on how much the payroll tax is going to be. If the tax is less than the premiums there is no doubt that an employer would choose to not offer healthcare and put the burden on government to provide the health insurance.
Small businesses should be protected in this plan. The Obama plan offers exemptions for small business and allows them to take advantage of tax credits in order to offer health insurance if they choose to. This step of the plan is a smart one because an additional payroll tax on small business who currently do not offer health insurance would be very difficult for them to bear.
If you do not have any health insurance the Obama plan would offer a subsidy in order for someone to obtain insurance.
The strength of this plan is that it offers to cover anyone and does exempt smaller businesses from the plan.
The one weakness I see in it is that it could lead us to Nationalized Health Insurance as I could see large companies simply paying the tax and getting themselves out of the health insurance business. These people would then be part of a National system.
Can this plan pass? If Obama wins and has a majority in both houses it will be hard to stop.
In any event both plans are a drastic departure from our current system.
Health Care Plans Part 1 - McCain
One of the bigger issues in any presidential election is health insurance. We've heard talk of nationalizing health care like Canada to continuing the status quo. Both candidates for President have ambitious plans and hopefully this will help you understand what it is actually being proposed.
As a starting point it is helpful to understand the current law. Under current law if you receive health insurance from your employer you do not have to count this as income and your employer gets to deduct the amount paid in premiums. Employers are not compelled to offer health insurance and employees are not compelled to take health insurance.
McCain's plan changes that approach drastically. If you receive health insurance from your employer it would now be considered taxable income. So if you are part of a family that has a $12,000 policy and were in the 25% tax bracket your taxes would go up by $3,000. Employers would still be able to deduct the costs of premiums.
The tax deduction lost would be replaced with a tax credit. A tax credit is a dollar for dollar reduction in taxes whereas a deduction only reduces taxes by the amount of your deduction multiplied by your marginal tax bracket. A single person would receive a credit of $2,500 and a family would receive a credit of $5,000. So using my example above (which is a pretty normal example) the family would be $2,000 ahead.
The strength of this plan is it puts the insurance decision largely in the hands of the individual as in the vast majority of the cases the credit received by the individual would be more then the deduction they currently receive. The only people who would lose out on this from a tax perspective would be families who are in the 33% or higher tax bracket. It also addresses a discrimination issue in the tax code today. If you have employer insurance you pay no tax on that benefit, however if you insure yourself you get no deduction or benefit. So the tax credit certainly will help those who get no assistance with their current healthcare.
The weakness of the plan is the potential that employers will use this to stop offering health insurance. That is a real possibility and the $5,000 credit is not enough to go out and purchase a reasonable plan for a family. That said, when an employer makes a decision on how much you will be paid it's not unrealistic to think that they offer a lower wage in exchange for health benefits. In other words, I would expect wages to rise if a Company were to cut health insurance assuming they want to be competitive in attracting employees.
The plan is certainly focused on creating more of a free market for insurance whereby you can customize your insurance based on your specific needs.
Could McCain pass something like this? I think it is more passable than Obama's plan simply because it comes at very little cost to the government and it does not mandate insurance.
As a starting point it is helpful to understand the current law. Under current law if you receive health insurance from your employer you do not have to count this as income and your employer gets to deduct the amount paid in premiums. Employers are not compelled to offer health insurance and employees are not compelled to take health insurance.
McCain's plan changes that approach drastically. If you receive health insurance from your employer it would now be considered taxable income. So if you are part of a family that has a $12,000 policy and were in the 25% tax bracket your taxes would go up by $3,000. Employers would still be able to deduct the costs of premiums.
The tax deduction lost would be replaced with a tax credit. A tax credit is a dollar for dollar reduction in taxes whereas a deduction only reduces taxes by the amount of your deduction multiplied by your marginal tax bracket. A single person would receive a credit of $2,500 and a family would receive a credit of $5,000. So using my example above (which is a pretty normal example) the family would be $2,000 ahead.
The strength of this plan is it puts the insurance decision largely in the hands of the individual as in the vast majority of the cases the credit received by the individual would be more then the deduction they currently receive. The only people who would lose out on this from a tax perspective would be families who are in the 33% or higher tax bracket. It also addresses a discrimination issue in the tax code today. If you have employer insurance you pay no tax on that benefit, however if you insure yourself you get no deduction or benefit. So the tax credit certainly will help those who get no assistance with their current healthcare.
The weakness of the plan is the potential that employers will use this to stop offering health insurance. That is a real possibility and the $5,000 credit is not enough to go out and purchase a reasonable plan for a family. That said, when an employer makes a decision on how much you will be paid it's not unrealistic to think that they offer a lower wage in exchange for health benefits. In other words, I would expect wages to rise if a Company were to cut health insurance assuming they want to be competitive in attracting employees.
The plan is certainly focused on creating more of a free market for insurance whereby you can customize your insurance based on your specific needs.
Could McCain pass something like this? I think it is more passable than Obama's plan simply because it comes at very little cost to the government and it does not mandate insurance.
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