Financial and investment planning: annuities in your 401(k)?

Will the requirement that some portion of your pension or profit-sharing plan be invested in annuities be a good result? This is diametrically opposed to the notion of fully privatizing Social Security floated by the prior administration. The former intends to protect investors from high risk and the latter would have allowed them to take any risk.

The recent market meltdown lead to the idea that annuities were appropriate. However, as Judith A. Hasenauer said in Will Annuities Be Mandatory in Qualified Plans?, “The recent problems of the financial markets notwithstanding, equity investments remain perhaps the best and maybe even the only types of investments that provide working people with some hope of achieving and maintaining their financial goals for retirement.”

At a finer level, would the annuities be fixed annuities, acting more like bonds or even Social Security, or variable annuities, where asset allocation strategies would be involved? In the former case, the potential returns are much lower and more assets would be needed. It the latter case, the upside is greater but so is the risk.

Perhaps the best mix will be to treat Social Security as the annuity/bond component and leave qualified plan investing as is, with some crucial exceptions. For example, no participant should be allowed or required to invest heavily in his or her own company (witness the Enron example).

If the President or Congress impose an annuity requirement, you will need to review your retirement plan in great detail, from both an investment and a financial independence perspective.

Let us know if you have questions or comments. Thanks,


Investment planning: health care reform and opportunities

Any change will hurt some and benefit others. For investing, selecting the former to sell and the latter to buy will be crucial as the health care reform become implemented.

It is not typical for me to reference self-serving statements from managers, but the following links are well written and make you consider options for investing (in or outside of the Artio fund):

Artio Sector, Spotlight-Healthcare And see also Forbes on healthcare, personal finance, investing ideas and small-caps

The white paper published by Artio Smallcap Fund concludes with this summary:

All four of these investment themes have particular relevance in the smallcap arena. We believe each represents compelling investment potential over the long-term, given the growing need for cost reduction in the healthcare sector. We continue to explore these and other investment ideas related to healthcare trends in the Artio US Smallcap Fund.

What do you think? Let me know.

Let us know if you have questions or comments. Thanks,


Possible tax law changes and tax planning opportunities

From the predictions we see, Congress will be reviewing and in most cases renewing certain tax cuts. They will also pass some additional tax changes.

Here is a summary of what is expected to become law (let me know if you need more detail):

The following expired provisions are expected to be renewed: The tax free status of distributions made directly from IRAs to charity; the add-on to the standard deduction for state and local property taxes; tax breaks for state sales tax, college tuition and teachers’ school supplies; 15-year write-offs for restaurant renovations and leasehold improvements; and the R&D tax credit. The will also be a small business tax cut for hiring (let me know if you need details).

2010 is the year for Roth IRA conversion strategies, where the taxes can be paid over two years. Because of market volatility, you may want to have separate IRAs by asset classes so if one goes down, you can “un-convert”. (See prior posts on this) Note, however, that Roth conversion income can affect Medicaid premiums and taxation of Social Security benefits.

Also expected is an increase of tax rates for income and capital gains taxes for high income tax filers, where one possibility is raising the top tax rate to 39.6% on singles with taxable income above $196,000 and on married couples for taxable income over $231,000. With this could be a top capital gains rate of 20% for this group, up from 15% now. Itemized deductions could be affected as well – perhaps by capping at 28% the rate at which itemizations reduce a filer’s tax liability.

Future changes to tax rates will affect planning for 2010 – taking more income and possibly selling assets then later buying them back to up the basis for future sales.

The item still missing from the list is the fix for the estate tax (see prior posts on this). The expected change will be reviving the estate tax retroactive to January 1. However, Democrats support a $3.5-million exemption amount and a 45% rate while Republicans want $5 million and 35%. If no action is taken, 2010 will continue to have no estate tax and 2011 will have a $1 million exemption with a 60% top rate.

If you want to consider how this all applies to you, for income taxes or estate planning, let us know.

Let us know if you have questions or comments. Thanks,