Comments on health insurance, tax changes and asset allocation (not even having all investments in cash is safe)

Investing
Starting with my reoccurring theme of asset allocation, I post below two comments on investing.

The first short comment from Morningstar reaffirms that you need to diversify by class, as well as in each class, of investment.

The second comment from Merrill Lynch provides a year to date summary of returns, showing that the people who tried to market time, by going to cash last year, missed out on substantial returns by being out of the stock markets in 2009.

Finally, as another example on diversifying, we had some clients invest in Euro bonds. They made over 20% in the last two years, which is much having gone to cash.

So, again, I urge anyone who has not reviewed their allocation to do so now …..

Tax impact of Health Care Reform
On the health care reform and its impact on your taxes, I reprint a section from the Kiplinger’s Tax Letter below.

As with many other sources, they believe a bill will pass and that it will have an impact on taxes.

The impact is likely to be predominately on people with income in excess of $250,000, but not beginning until 2011. When we know more on this, we will give you an update.

Estate Taxes
Kiplinger’s expects Congress to keep the estate tax much like it is today, rushing to avert the year of no estate tax and the year after or a $1 million credit (we now have a $3.5 million credit)…

Kiplinger’s also has comments on the “cash for clunkers” and changes likely in 401(k) plans…..

Let me know if any of this raises questions or comments please. Thanks,

Steven

From Morningstar:
Theoretical and empirical research, as well as long-term data from financial markets, confirms that risk is minimized significantly and performance can be enhanced when a portfolio holds, for long periods of time, different asset classes with dissimilar price movements. This approach, which fulfills the fundamental underlying objective of modern portfolio theory, is also in accord with the standards of modern prudent fiduciary investing.

From Merrill Lynch:
…. In the meantime the S&P 500 Index had its best quarterly return since 1998, rising almost 16%. Most US equities rose sharply in the second quarter as investors regained their appetite for risk; investors bid up stocks beginning in March after it appeared that the financial sector had stabilized and this momentum continued through the second quarter. Investors seized upon indicators such as retail sales, industrial production and ISM survey data that suggested economic growth, although weak, was showing improvement. Indeed, retail sales and durable goods orders were higher than expected and employment figures showed a moderation in worsening trends. After the strong end to the first quarter, analyst estimates for company earnings were on average revised higher as the depression scenario faded into memory. During the quarter, the riskiest assets were bid up the most, with the Russell 2000 Small Cap Index returning more than 20%.
Outside the US, the story was similar: markets improved sharply on the turn in economic data. The MSCI Emerging Markets Index had its best quarter in U.S. dollar terms since it was launched in 1988 – rising almost 35% in the second quarter…..

The Kiplinger Tax Letter (ISSN 0023-1762)
Health care reform may seem stalled for now, with both the House and Senate missing the deadline that Obama set for action on a bill…early August.
But work still goes on behind the scenes, so Democratic leaders can make a final push this fall.
Readers are asking what’s going to happen to the legislation and what it will mean for taxes.
We’ll share our answers to those questions.
What are the chances that no bill will pass?
Very unlikely, given all the political capital that the president has spent on this issue. He’s sure to insist Congress keep at it.
But if gridlock continues, Obama may have to accept a scaled down bill… a lesser expansion of the government’s role in providing coverage to the uninsured.
A smaller bill would lower the price tag, reducing the need for tax hikes. The odds of a big-ticket tax increase such as an income surtax would go way down. It wouldn’t be needed to offset higher federal spending from revamping health care.
Does a smaller bill mean no employer mandate? No, although the number of small businesses that would be covered by the mandate and the tax penalties for failing to provide coverage to employees would be smaller than originally thought. The tax would be somewhat less than the $750 per worker proposed in the Senate, and would be phased in for those businesses with payrolls that exceed $500,000. As first proposed, the tax would have covered firms with payrolls over $250,000.
Would a mandate apply beyond the private sector? Yes. The coverage rule and tax penalty are sure to cover nonprofit groups and state and local governments.
Could employers avoid the mandate by classifying workers as contractors?
Theoretically. However, it’s a risky move. Tax pros predict that a mandate would spur many firms to consider reclassifying employees to avoid covering them, forcing them to buy their own coverage. But you can expect that angry workers will squawk to the IRS, giving the agency lots of leads for employment tax exams.
Are middle incomers likely to see higher taxes to fund the overhaul?
Don’t rule it out. Lawmakers are considering, for example, a new tax on gold plated insurance plans. Those policies aren’t owned just by upper incomers. They are included in the contracts of many union members…police, firefighters, etc.
Would Congress consider making tax hikes start in 2010? Definitely not. Figure that 2011 would still be the earliest year that hikes would become effective.
Will continuing delays on health care push estate tax changes into 2010?
Not very likely. Lawmakers still intend to act before the end of the year to prevent the estate tax rate from dropping to zero in 2010. The exemption amount for 2010 will be kept at $3.5 million and the rate will stay at 45% for another year. The estate tax bill is sure to include extensions beyond 2009 of popular tax breaks, such as tax free IRA payouts to charity and the deductions for tuition and sales tax.

The “cash for clunkers” program has tax angles for people and businesses. Vouchers are tax free for individuals. Therefore, if you trade in a vehicle for a more fuel efficient one and get a $3,500 or $4,500 dealer credit on the trade-in, you owe no tax, even if the amount of the credit far exceeds the trade-in’s value. And if you purchase a qualifying hybrid or a lean diesel vehicle as a replacement, you still can claim the hybrid or diesel credit, even though the voucher isn’t taxed.
But car dealerships don’t benefit from the tax break, IRS officials say. The voucher amount is included in the gross receipts from the sale of the vehicle.

Many 401(k) plans will have a different look a couple of years from now. The economic downturn is prompting changes that firms will implement to reduce plan expenses and to prompt their employees to save more for retirement.
More employer payins will be discretionary. Although most plan sponsors that suspended matching contributions during the downturn will reinstate them, those payins won’t return before 2011, and they’ll probably be in a different form. Fewer firms will automatically match a set percentage of pay. More contributions will be tied to company performance. And many firms will stop obligating themselves to a contribution level at the start of the year but will wait until year-end to decide.
Companies will try to get more 401(k) accounts on autopilot to help workers boost savings. One idea: Having employee payins increase automatically each year until reaching a preset level…around 10% of pay…if the employee selects this option. The number of companies adopting automatic enrollment will continue to grow, though some will limit it to employees with at least two years of service. That way, firms can avoid incurring the administrative hassle and expense for short-timers.

Another subject:
Bad news from IRS for exchange-traded funds that invest in metals: Those funds do not qualify for the 15% rate on long–term capital gains. Instead, their top tax rate is 28%. It applies if the fund owned the metal for more than one year and the investor owned fund shares for over a year, IRS says privately.
The fund’s investors are deemed to own a share of the metal, such as gold, silver or platinum. The gain is treated as coming from the sale of a collectible.
The Service takes a different stance for IRAs investing in these funds. If the metal is held by an independent trustee, the Service will not treat the IRA as owning a share of the fund’s underlying metal. This favorable interpretation keeps the IRA from running afoul of the rule barring direct investments in bullion.