The Recovery...Maybe

It looks like is going to be an early Spring and considering we've had such a mild winter it comes as no surprise. I was in North Myrtle Beach this week visiting clients and on my way down it was nice to see some of the pear trees already in bloom.

We seem to be somewhat on the recovery trail for the "Great Recession" with employment figures showing some positive signs. As I stated last month, it's still mysterious that the actual GAO figures differ from what the media touts. Nonetheless, it looks like our economical growth rate is going to be about 2%. That's not exactly setting a record pace, but considering where we've been for the past 4 years, we are moving in the right direction. The market seems to have steadied somewhat from the big highs and lows and that is certainly encouraging. I've written so many negative comments about our economy, employment, etc. that feels weird have a positive point of view this month. Frankly, I welcome the opportunity. I think we still have a long way to go, but Rome was not built in a day.

As I was writing this, the Fed reported that the latest bank stress tests have been completed. The stress tests are based on a scenario whereby the market would decline by 50%, housing would decline by 21% and unemployment would increase to 13%. (I'm not going to argue the unemployment rate, see last months newsletter) 15 out of 19 of the nations largest financial institutions successfully passed the test with Citigroup, Ally Financial and Suntrust indicating they would need more capital. Strangely, the nations largest Variable Annuity provider, Metlife, did not pass the test. Metlife is an insurance company and would typically not be subject to this scrutiny at the federal level. Most insurance companies are managed and regulated at the State level. No matter, Metlife shows that it would need an influx of capital to sustain some of the lifetime guarantees that its Variable Annuity portfolio has promised and is contractually obligated to provide its customers. Metlife of course responded vehemently that is was in the scrutiny of this process. Many many people are relying on those guaranteed payouts to sustain their lives and it would be devastating if they were unable to perform.

Oil prices are still over $105 a barrel and prices at the pump are averaging $3.82, up again this week by another .07. I noted in February we could be looking at $5.00 gasoline and with the Fed's required "blending" that happens each summer, $5.00 gas could be a very real possibility. California has already seen $4.45 per gallon. Many of us have seen prices of food going up and the underlying problem is certainly the cost to deliver goods via gas and diesel prices.

I noted a very disturbing piece of legislation last week in D.C. Max Baucus, Chairman of the Senate Finance Committee, proposed a law that would require inherited IRA's and qualified retirement accounts, like 401(k), 403(b), SEP's, etc., be completely distributed to heirs within 5 years. For those of you with large IRA or other qualified accounts, this would be devastating from a tax point of view. IRA's and other qualified accounts are considered 100% taxable as income when they are received by your heirs. When a spouse receives an inherited IRA, it is typically titled to the spouse and in turn the spouse takes the Required Minimum Distribution, (RMD) based on their age and beginning at age 70 1/2. As you get older, the RMD increases annually as it relates to both age and value to the account. When children or other heirs receive IRA proceeds they have a couple of options; First, they
can distribute the IRA out to themselves, keeping in mind that 100% of that distribution would be taxable as income to the recipient in the year it's distributed. Second, and more common, the recipient takes what is called a "stretch" IRA. What that essentially means is that the IRA is distributed to the recipient and they are only required to take the RMD, but it's based on the age of the recipient, which is usually much younger and as a result a much smaller distribution. The strategy here is very simple; delay the complete distribution of the funds and continue to defer the taxes on earnings by taking only a small portion of the IRA each year, RMD. Under the proposed law, that process would be eliminated and 100% of the IRA would be distributed in 5 years. If you have a 1m IRA the effects of that law would be devastating taxes consequences to the IRA recipient/beneficiary as they would have to take 200k per year for 5 years and pay ordinary income taxes on that amount. The tax consequences could exceed 40%. I can only imagine the reasoning behind this proposal is the need to generate taxable revenue, something our country desperately needs. The problem with that strategy is that it's beneficial for the tax man, but it's at the expense of IRA beneficiaries who are also the taxpayers. My plan is to keep a watchful eye on this proposal and if it's passed, anyone with an IRA account will need to revisit other strategies to account for the change. As you can tell from my tone, I sure hope this does not get any traction as I believe it would be detrimental to anyone who holds and IRA account. Statistically speaking, there is about 1.7 Trillion in Qualified Accounts in this country so if you do the math on even 50% of those as inherited IRA's, in a 25% tax bracket, that's a windfall of about 212 Billion Dollars of tax revenue....Wow...