Outside Economics

Strengthen Your Retirement Plan By Knowing Your Limits

Posted by Wendell Brock, MBA, ChFC on Wed, Jan 27, 2016

Here we are at the start of the New Year when folks get to review their contribution limits to their retirement plans. Below are the limits, however depending on the type of plans available and whether or not you are using a qualified or non-qualified plan determines your limits (certain non-qualified plans have no limits).

Often times non-qualified plans may yield more after tax income during retirement than qualified plans will, so it depends on if you want to pay taxes now or in the future. Perhaps, there is a balance between the two? That analysis should be performed.Retirement_plan_limits.jpgmaxw1000q90cci_ts20121025131619.jpeg

If you think taxes are going to go up in the future, consider using more non-qualified plans now. You can think about it this way: would you prefer pay taxes on the seeds you plant or all the vegetables you harvest? Both plans take time for money to grow!

For 2016, the elective contribution limit for employees who participate in 401(k)s will remain the same at $18,000 for the year. That is the amount that a saver can contribute annually on a tax-deferred basis, and it also applies to many plans offered by nonprofit and government employers. The catch-up contribution for employees age 50 and over will remain the same at $6,000, so someone in that age group could contribute a total of $24,000. (Matching contributions from employers do not count against this figure.)

IRA annual limits remain unchanged at $5,500, with the catch-up contribution for those 50 and over also flat at $1,000. Of IRA holders who contributed to their plan, 53.5% contributed the maximum annual amount, according to data from the Employee Benefit Research Institute (EBRI).

A change to Roth IRAs is the ability for workers to earn more and still be able to contribute to a Roth. Individuals making contributions to Roth IRAs have a new AGI phase out range, which is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000 in 2015. 

For small business owners (and their employees) you may consider a SEP. Contribution limits for 2016 is $53,000 or 25% of total compensation, whichever is less. Employers must contribute the same percentage for all employees; often in a one person business the maximum is contributed.

If you are changing jobs, rolling over a 401(k) into a self-directed IRA is most often the best choice. The typical 401(k) plan may have anywhere from 12 to 25 investment options and often many over-lap in asset classes. For example: a large cap growth fund, an S&P 500 index fund and a large cap value fund.

There can be enough of an overlap in those three funds that there is little distinction between them. So really, you do not have three choices you have one, when trying to diversify based on asset class. Achieving a well balanced portfolio in a 401 (k) plan can be tricky as the fund offerings are not always clear.  As a suggestion you may want to look at this article for a basic format on how you might rebalance your 401(k) plan.

A self-directed IRA can allow you to invest, quite literally, A-Z type of investments. From precious metals, rental real estate, stocks, bonds, mutual funds, ETF’s, Annuities, commodities, alternative investments, REITS, and the list goes on. Many of these options have additional risks associated with the investments, but often time’s practical knowledge can help minimize those risks.

Work with your investment advisor to help make the right decisions for you and your current situation, doing the best you can to plan for your future. Examine the use of both qualified and non-qualified retirement plans and their complete income tax effects on income as well as your Social Security Benefits. Additionally, you should be familiar with the three legs of retirement planning: investments, estate planning, and long-term care. If you do not have an investment advisor I would be happy to answer your questions and help you understand which strategy is best for you, your business, and family – give me a call or click on the link below. In everything you do, I wish you the best of success.

Sources: IRS, Employee Benefit Research Institute

 Plan Analysis


"When you cannot do what you do what you have always done, then you only do what maters most" Robert D. Hales

Topics: retirement plan, Retirement plan limits

Get the Truth About Oil Exports Without Getting Greasy!

Posted by Wendell Brock, MBA, ChFC on Wed, Jan 20, 2016

A 40-year ban on U.S. oil exports was lifted as the House of Representatives and Senate passed a spending bill that included the dismantling of the decades-old rule.

In response to the Arab oil embargo, the U.S. imposed regulations in 1975 that restricted the exportation of crude oil. For years, oil companies and industry leaders have sought a relaxation of the export restrictions in order to compete in the global oil markets.OIl_Tanker.jpg

As oil production has risen, so have the inventories and stockpiles of crude oil. With a growing supply of crude oil reserves, oil companies are eager to export crude to satisfy demand from foreign countries. Net crude oil imports have dropped nearly 25% over the past five years, as U.S. production has steadily increased.

The growth of the oil industry in the U.S. has been a significant help our economic growth these past several years since the Great Recession in 2008. It has helped provide jobs in many sectors as companies have scrambled to ramp up to serve the oil industry. While global oil prices are down now, many of the more established companies are still profitable, many are looking for a merger opportunity to keep going.

According to the Energy Information Administration (EIA), U.S. oil production averaged about 9.45 million barrels a day in 2015, marking the highest production levels since the mid 1980’s. At 487 million barrels at the end of December, U.S. crude oil inventories remain near levels not seen for this time of year for the last 80 years.

As the U.S. has increased crude oil production, demand for U.S. oil has also risen worldwide. In the international oil markets, there are two primary types of crude oil: West Texas Intermediate (WTI) and Brent Crude. Both are used as benchmarks in pricing oil worldwide, with varying prices depending on existing supplies.

WTI is also known as Texas light sweet (Texas Tea) because of its relatively low density, light characteristics and sweet because of its low sulfur content. Conversely, Brent Crude is a bit heavier and not as sweet, thus making WTI a higher quality oil and more desirable worldwide. The lighter and sweeter WTI is easier and less expensive to refine and distill into gasoline, diesel, jet fuel, and other fuel products.

For the past few years crude oil production in the United States has surged tremendously because of the technology behind horizontal drilling and hydraulic fracturing, primarily in the states of North Dakota and Texas.

The United States is becoming one of the world’s leading oil producers and refiners, it is considered good for economic and job growth nationwide. Inexpensive crude along with an abundance of supply in the United States has allowed refiners to become extremely profitable and capable of efficient refining.

The International Energy Agency (IEA) estimates that any exports of U.S. crude oil will be quickly consumed by the international markets and help stabilize any supply inefficiencies caused by political uncertainty in the OPEC countries.   

Divergence of WTI and Brent Oil Prices

West Texas Intermediate (WTI) represents the price that U.S. oil producers receive and Brent represents the prices received internationally. The two prices have been diverting due to a recent surge in production in the United States that has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is stored and priced. Before this increase in U.S. oil production, the two crudes had historically traded in line with each other. 

Brent-WTI-Prices.jpgRealization of an oversupply issue put pressure on oil prices throughout 2014 & 2015. Crude oil production in the U.S. has surged because of the technology behind horizontal drilling and hydraulic fracturing, primarily in the states of North Dakota and Texas. Fracking makes it possible to extract oil and natural gas in places where conventional technologies are not effective. Fracking involves the use of high water pressure combined with sand and chemicals to create cracks in rock that allow the oil and natural gas it contains to escape and flow out of a well.

Both oil benchmarks have fallen substantially over the past two years. Brent lost 48% in 2014, followed by a 35% loss in 2015. WTI lost 46% in 2014, followed by a 30% loss in 2015.

Sources: IEA, EIA, Commerce Department


"Truth will rise above falsehood as oil above water." - Meguel de Cervantes

Topics: Oil, oil exports

Savvy People Know What Raising the Fed Funds Rate Really Means

Posted by Wendell Brock, MBA, ChFC on Fri, Jan 15, 2016

What does it really mean when the Board of Governors of the Federal Reserve System, (“the Fed”, “the Federal Reserve Bank”) raises the Federal Funds Rate? Mortgage companies begin advertising that “rates are going up come see us now”! Well the Fed Funds Rate and Mortgage rates are not the same and really don’t have anything to do with each other – so what does happen when this rate goes up?

The actual rate that the Fed increased was the Federal Funds rate, from a range of 0.0% to .25% to a range of .25% to .50%. This the rate the Federal Reserve will pay banks that place “extra” or “idle” money on deposit at the Fed. The rate indirectly affects other borrowing rates set by large money center banks, such as the prime rate. Banks will deposit or loan money to the Fed if they don’t have places in the general public to lend money.Federal_Reserve_Bank_The_sea.jpg

Minutes following the Fed’s announcement, a major U.S. bank announced that it was raising its prime rate from 3.25% to 3.50%. Consequently, the Fed discount rate was also increased. This is the interest rate that the Fed charges banks as a direct loan, which increased to 1% from 0.75%.

In later disclosures by the Fed, the FOMC also voted to set a target for the Federal Funds rate of 1.375% at the end of 2016, implying four quarter point increases throughout 2016.

Should Fed officials continue on with their targets, economists and analysts expect a gradual rise in short-term rates over the course of the year. The Fed did state that loans linked to longer-term interest rates are unlikely to move very much during the same period.

The high-yield corporate bond market saw considerable turmoil throughout 2015 as energy sector debt weighed on the entire high-yield market. Even though only 15% of the high-yield market is made up of the dreaded energy sector, all other industry sectors were affected as well. Analysts believe that the sell off in high-yield debt now implies an expected default rate of 10%. That would be a sharp rise in defaults from the current 3% level should it come to fruition. Many believe that the odds of defaults rising to 10% are unrealistic and that the markets have already priced in worst case scenarios.

Some fixed income analysts have upbeat assessments for the bond markets in 2016. Assuming the U.S. economy continues to grow at a modest but steady pace, it will allow companies to expand and make it easier to repay bond debt. Improving consumer confidence and a low unemployment rate will help foster a healthy bond market.

Are you starting to see interest rates rise in your accounts? Perhaps the first rates to rise are of course the prime rate, then CD rates, and credit card rates, and maybe passbook savings accounts. Mortgage rates are based on long term bond rates that are sold on the secondary market, but that is a story for another day.

Onto a different topic: I want to thank you my readers, I am grateful for you following my blog and allowing me to be a part of your busy lives. I am truly grateful for your interest in financial topics – I really enjoy putting these articles together. So, Thank You and please feel free to subscribe your friends and family.

Sources: Bloomberg, Fed, Reuters

Remember: In honor of this weeks powerball. Classic response on establishing a lottery: they are "a tax on imbeciles." - Count Camillo Benso De Cavour, Italian Statesman, Diplomat 1810-1861


New Tax Rule Changes for 2016 – Plan NOW

Posted by Wendell Brock, MBA, ChFC on Thu, Jan 07, 2016

The New year is upon us now and there is much to do to get things rolling. One thing to consider is how you plan your taxes for this year. What you did in 2015 is over! Don't make the same mistakes. Here are the new numbers/limits issued by the IRS for 2016 they may affect your current situation. Plan this year to pay less!1040-tax-Form-Image-copy.jpg

Tax Day Is April 18th:

Emancipation Day is the day that Washington decided that taxes are due which traditionally has been April 15th. However under federal law, the tax deadline gets extended when it falls on a holiday or weekend, so the tax deadline for this year will be the following Monday, April 18th. States in New England that celebrate Patriots’ Day will have even a later filing deadline of April 19th.

Because this year is leap-year (29 days in February) and three extra days in April, taxes this year will be due a total of four days later than normal. WeeHa!

Most Tax Brackets Are Rising Slightly:

Based on an adjustment for inflation, 2016 will see most tax brackets rise by roughly 0.4%.

Head of Household Filers Will Get A Bigger Standard Deduction:

Taxpayers qualifying as head of household, will see their standard deduction rise $50 to $9,300.

Rise In the Earned Income Credits:

Families with three or more qualifying children will see their maximum earned income credit rise to $6269. Families with two children will be getting a maximum earned income credit of $5572, while families with one child will be able to get up to $3373 in earned income credit. Taxpayers with no children will be able to claim up to $506 in 2016.

HSA Contribution Limits Going Up:

Health savings accounts (HSAs) allow individuals with high deductible health plans to set aside money on a pretax basis in order to cover anticipated healthcare costs. For 2016 the contribution limits for individual policies will remain at $3350, however, the maximum contribution for family policies will rise to $6750. A catch up contribution of $1000 for those 55 or older will continue to apply.

Higher AMT Exemption Offers Some Reprieve:

Ever since its inception in 1969, AMT has been a fairly unpopular tax. It was initially intended to tax higher income individuals who may have been paying too little in taxes. However, since AMT was never properly adjusted for inflation, it now affects middle income taxpayers as well. A reprieve in 2016 with an increase in the exemption up to $53,900 for single tax payers, and a jump to $83,800 for joint filers.

Estate Tax Exemption Edges Up:

Since the lifetime exemption amount for the gift and state tax is tied to inflation, it is slated to rise slightly this next year for 2016, increasing the exemption amount to $5.45 million, applicable to those that pass in tax year 2016.

Affordable Care Act (ACA) Penalties On The Rise:

The affordable care act imposes penalties for those not having qualified healthcare coverage. For 2016, a penalty of $695 or 2.5% (whichever is higher) of income will apply to individuals not having any healthcare coverage. Families with no healthcare coverage will see a significant increase from a $975 maximum penalty to $2,085 maximum household penalty or 2.5% of household income (whichever is higher).

Dont get caught trying to plan your taxes in the month of December to maximize deductions and lower your taxes. Now is the time to start the plan and work the strategies throughout the year. Make it a successful 2016!

Sources: Tax Foundation, IRSClick to edit your new post...



"How does what we know get in the way of what we don't know?" - Liz Wiseman

Topics: IRS, Income Taxes


Wendell W. Brock, MBA, ChFC

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