Uncertainty: The root of a slow economy?

Why? There is no clear path to answer the question “What are my costs going to be?” What are Congress and the President going to do with regard to the Bush Tax Cuts quickly approaching their sunset expiration dates? Speculation is that there is some behind the scenes negotiating occurring. More and more economists are saying we need at least 2 more years at the current tax rates to climb nudge the economy forward at a faster pace of recovery.

We are also hearing more and more businesses coming out with projected increases in the cost of healthcare based on the federal legislation and mandates handed down to the states. Companies by the dozens are beginning to request exemptions from the requirements of the legislation. Many are contemplating cutting health insurance from their benefits packages, thereby, pushing their employees to the exchanges. Small business makes up a significant majority of employers. Many don’t have the resources to research the 1,000 plus page health care bill to determine what the impact is to them.

Uncertainty impacts consumers as well. They too are “holding” cash. None of us know what our tax rates are going to be come 2011. Many may not know exactly how much their tax bill is going to be until they receive their first pay check in January. If you’re attempting to do a budget for personal cash flow statement for 2011, how do you fill in that blank?

Do you know what your employer is going to do with your employer provided health benefit yet? The cost of company provided employee health insurance is likely going to go up if it hasn’t already. If it has, there is no guarantee it won’t continue to rise as the mandates continue to be implemented and companies begin to understand their true costs associated with this benefit. Companies are likely going to ask employees to at least share in the increased costs. That will reduce your discretionary spending.

Uncertainty impacts both business and consumers. Business aren’t investing in capital projects or hiring new employees to grow. Consumers are holding more of their discretionary funds and not “investing” in the economy. This seems to have created stagnation in the economy. Consumer confidence and spending will truly be tested in a few weeks as Black Friday quickly approaches.

Posted on December 1, 2010 Read More

What Happens if the Bush Tax Cuts Expire?

These legislative initiatives created six tax brackets and cut taxes across the board for earned income, long-term capital gains and dividends. They also increased the child tax credit, eliminated the “marriage penalty” as well as many other changes, exemptions and adjustments to the tax code.

How soon could you see the impact if Congress does nothing? You could see it as early as January when your employer starts withholding more taxes from your paycheck. Any taxable income earned in which you are having federal taxes withheld prior to distribution, could be impacted.

Congress could address the tax cuts when they come back to Washington following the mid-term elections. But it is difficult to predict what the political environment will be in the Capital following this highly contested mid-term. It is unlikely that nothing will be done. Democrats and Republicans agree that the expiration of the current tax policy needs to be addressed. The question is whether or not they can come to a consensus on how to address it and for whom.

Most in Congress believe that increasing taxes during a recession will harm our chances for a continued recovery. However, there is still debate on how tax cuts across the board will impact the already stifling $1 trillion plus budget deficit.

Posted on November 1, 2010 Read More

Borrowing from Your 401(k)

While every 401(k) plan is different, most will let you borrow as much as 50% of your vested balance up to $50,000. The loan is paid back through your paycheck, with interest. Most plans have competitive interest rates and the loans can be carried for up to 5 years. If you use the proceeds of the loan to purchase a primary residence, that pay-off term may be extended.

When you are making payments back into the loan, you are paying yourself interest on the money you borrowed. This is where it gets a bit foggy. First, when you draw your paycheck, you pay taxes on the earnings. Then you pay the interest on the loan out of what remains. At a later date, say retirement, you begin drawing from the plan. Those distributions are taxable income, therefore taxed again. You are paying income taxes twice on the funds you use to pay interest on the loans. (Special tax rules apply to Roth 401(k) contributions).

There is an opportunity cost with taking a loan from your 401(k) as well. If those funds are not invested, they are not continuing to grow tax deferred. So, what is the opportunity cost? Well, you need to compare the interest you are paying yourself and the future tax implications previously discussed with the lost opportunities of tax deferred investment returns.

There are other considerations as well. For instance, if there is a separation from employment, the plan may require that the loan be immediately repaid. If you don’t have the funds to repay the loan, it is treated as a taxable distribution. If you are not age 59 ½ or more, a 10% early withdrawal penalty may also apply to the taxable balance.

Whether or not you can afford to pay back the loan and still make contributions to the plan should be carefully considered. Would the circumstances that have lead you to look at borrowing the funds as an option impair your ability to repay the loan? If so, this might not be considered a viable option.

The interest you pay on alternative financing options may be tax deductible. For example, the interest on a home mortgage often qualifies for a tax deduction. However, the interest on a plan loan repayment often is not. Be sure to weigh the comparisons of tax deductibility for both alternatives before making a decision.

Every plan is different and will have various restrictions. Consult with your plan administrator before deciding to borrow from your 401(k).

Posted on October 1, 2010 Read More

News Archive

Call Us: (775) 674-2222