Category Archives: March

Growth, Value, or Both? Here’s how to identify a stock or mutual fund as a growth or value investment.

When examining a list of mutual funds, you might find the word “growth” or “value” in some of the titles. Have you wondered what these labels mean? Shouldn’t all funds pursue these objectives?

The terms growth and value reflect different investing styles. Generally, when a mutual fund has one of these words in the fund’s name, the fund manager utilizes that strategy to choose specific stocks for the fund’s portfolio. You might use growth and value strategies when selecting investments for your portfolio, but analyzing specific stock data can take time and requires experience and expertise.

Two Approaches

As the name suggests, growth stocks are associated with companies that appear to have above-average growth potential. These companies might be on the verge of a market breakthrough or acquisition, or they may occupy a strong position in a growing industry.

Growth companies typically do not pay dividends and are more likely to reinvest profits. Investors hope to benefit from future capital appreciation of growth stocks, which tend to be considered higher risk than value stocks. However, it’s equally important for growth and value stocks to have strong fundamentals.

Value stocks are associated with companies that appear to be undervalued by the market or are in an industry that is currently out of favor. Unlike growth stocks, which might seem expensive and overvalued, value stocks may be priced lower in relation to their earnings, assets, or growth potential.

Established companies are more likely than younger companies to be considered value stocks, and these firms usually pay dividends rather than reinvest their profits. An investor who purchases a value stock typically expects that the broader market will eventually recognize the company’s full potential, which may result in rising share prices. One risk with this approach is that a stock considered to be undervalued because of legal or management difficulties or tough competition might not be able to recover from the setback.

A Way to Diversify

Holding growth and value stocks and/or mutual funds is one of many ways to diversify your portfolio. Over the past 20 years, the average annual return for value stocks was 1.59% higher than that of growth stocks (10.45% versus 8.86%). Yet growth stocks outperformed value stocks in eight of those 20 years, and in some years the performance difference was wide (see chart). This suggests that growth and value stocks may respond differently to varying market conditions. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

The return and principal value of all stocks and mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Know Your Rights, But File with Care It’s important to note that the “kinder, gentler” IRS remains vigilant in auditing returns for accuracy.

In June 2014, as part of its ongoing effort to improve communication and service, the Internal Revenue Service issued a formal Taxpayer Bill of Rights. These rights are not new, but they were scattered throughout the tax code, and surveys have found that most taxpayers did not even know they had rights when dealing with the IRS.1

Although you might be more comfortable understanding your rights, it’s important to remember that the “gentler, kinder” IRS remains vigilant in auditing returns for accuracy. Here are some tips that might help you stay out of the 1% of individual returns that are audited annually.2

Check your math and personal information. Although a math error may not lead to an audit, it can call attention to your return. The same is true for entering incorrect personal information such as the wrong Social Security number or forgetting to sign your return.

File forms on time. Missing a filing deadline often leads to a response from the IRS (although not necessarily an audit). Even if you file an extension, you must pay all taxes due by the regular filing deadline.

Report all income. You may have income not reported on your W-2 form. These sources might include investment income, interest, royalties, rent, compensation as an independent contractor, forgiven debt, alimony, tips, gambling winnings, health insurance reimbursements (for expenses deducted in a previous year), and proceeds from sales on online sites such as eBay. Many types of income may be reported by the payer to the IRS; but even if income is not reported by the payer, it would be wise to include it on your tax return.

Use good judgment when taking deductions. Utilize all deductions allowable, but keep in mind that certain deductions tend to raise a red flag. Among the most common are home-office deductions, vehicle-expense deductions, and high-value charitable contributions. Follow all legal requirements and keep all necessary records.

Before taking any specific action regarding your taxes, you should consult a qualified tax professional.

1–2) Internal Revenue Service, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

New Opportunity for Generating Lifetime Income A survey of adults aged 44 to 75 found that 61% fear running out of money in retirement.

A survey of people aged 44 to 75 found that 61% fear running out of money in retirement.1 There may be various personal reasons behind this concern, but the decline of traditional pensions, combined with longer life spans and rising medical expenses, has created an uncertain future for many Americans, including those who have put away a solid nest egg for retirement.

A recent IRS decision opened a new opportunity for retirement plan owners to turn a portion of their retirement savings into a guaranteed future income stream using a qualified longevity annuity contract (QLAC). Although longevity annuities (sometimes called longevity insurance) are not new, the IRS decision makes it more effective to purchase and hold an annuity in a qualified retirement plan such as a traditional IRA or a 401(k). Here’s how it works.

Deferred Payouts

A longevity annuity is a deferred fixed annuity that delays lifelong income payments until a future date — often when the contract owner reaches age 80 or 85. Because the annuity income is deferred, the payouts are typically higher in relation to the premiums than they would be if the annuity income had been paid immediately. Purchasing the annuity at a younger age with a longer deferral period would generally give you a better premium-to-income ratio.

In the past, it would have been counter-productive to purchase a longevity annuity in a qualified retirement plan, because the amount used to purchase the annuity would have been included in the account balance to determine required minimum distributions (RMDs). The new IRS ruling allows retirement plan participants to use the lesser of $125,000 (inflation adjusted) or 25% of their account balances to buy a QLAC, with the annuity’s value excluded from the account balance used to determine RMDs.

Having a QLAC might allow you to take larger retirement plan distributions earlier in retirement, knowing that you will have a guaranteed future income from the annuity. Income payments must begin no later than the first day of the month following the participant’s 85th birthday.

Options and Limitations

The rules also allow for the continuation of income payments throughout the lifetime of a beneficiary (such as a surviving spouse) and/or the return of premiums (minus payouts) as a death benefit. However, these options will either raise the purchase price or reduce income payments later in life. Without the optional death benefit, insurers will generally keep the premiums paid if the annuity owner dies, even if payouts have not yet begun.

Cash-out provisions are not allowed in QLACs, so any money invested in the annuity is no longer a liquid asset, and you may sacrifice the opportunity for higher investment returns that might be available in the financial markets. (By contrast, nonqualified annuities may offer a cash-out option that permits withdrawals during the deferral phase, but surrender charges typically would apply.) Like other distributions from tax-deferred retirement plans, income payments from QLACs are fully taxable. (With nonqualified annuities purchased outside a retirement plan, only the earnings portion is taxed.)

Like most annuities, a QLAC typically would be purchased with a lump sum. However, if your employer chooses to offer a QLAC option in your retirement plan, you may be able to invest through regular salary deferrals.

Annuities are insurance-based contracts that have exclusions, contract limitations, fees, expenses, termination provisions, and terms for keeping them in force. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

1) money.usnews.com, February 21, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Is College Around the Corner? Personal financial decisions can affect the amount of aid a student might receive from the government and/or a college.

The average costs paid by families with students who attended private four-year colleges during the 2013–2014 academic year actually fell by 11.6% — from $39,434 to $34,855. This trend suggests that more families are making cost-conscious college decisions and taking advantage of scholarships offered to attract top students.1

The amount of need- and merit-based financial aid offered to students has increased with published tuition prices in recent years. Overall, scholarships and grants covered 40% of the average total cost for a student at a four-year private college.2

Financial need is assessed based on family income and assets relative to college costs, so a student who doesn’t receive any money from a $10,000-per-year school could qualify for need-based aid at a school that costs $50,000 per year. And it’s possible for families with six-figure incomes and typical assets to receive at least some grant aid from high-cost universities, especially if they have more than one child in college at a time.

In fact, what parents don’t know about the financial aid process could cost them thousands of dollars.

File the FAFSA

Families must fill out the Department of Education’s Free Application for Federal Student Aid (FAFSA), which is used to determine eligibility for financial aid from federal and state sources and/or for institutional funds granted by colleges nationwide. An expected family contribution (EFC) is calculated based on the information provided. The federal formula is heavily weighted toward income, and the EFC is divided by the number of children enrolled in college.

The FAFSA may be filed online beginning January 1 of the year the student will attend college. Families who don’t expect to qualify for grants may want to complete the FAFSA anyway, in case it’s needed for federal loans or merit-based scholarships.

Schools may be stricter than the federal government in assessing a family’s ability to pay. Private colleges often require applicants to fill out the lengthier CSS/Financial Aid Profile®, which unlike the FAFSA takes home and business equity into account.

Max Out Eligibility

Financial decisions made before and during college can affect the amount of aid a student might receive from the government and/or the university.

The base income year, which begins January 1 of a child’s junior year in high school, will have the most influence on a family’s eligibility. If they can, parents should postpone income to help lower their EFC, and they should avoid selling securities or a residence that would produce capital gains or result in a temporary income or asset spike.

Assets in retirement plans are not counted in the federal calculation. Thus, contributing as much as possible over time could reduce your asset base and lower your EFC. On the other hand, taking retirement account distributions to pay for college expenses typically adds to your taxable income and may increase the EFC for the following year.

Student and parent assets are treated differently: 20% of the student’s assets must be contributed each year, compared with only 5.6% of the parents’ assets. That’s why it is generally better to keep college savings accounts in the parents’ names and spend down any student assets first.

Families with substantial household savings might consider accelerating necessary expenses (such as a car purchase and home improvements) or retiring debt to reduce assets before filing their first FAFSA.

Some institutions and states grant funds on a first-come, first-served basis. Therefore, you may want to file your tax returns, complete the FAFSA, and apply for aid according to the college’s instructions as early as possible.

1–2) Sallie Mae, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Time to Cash Out? Common valuation methods and how small-business owners can get the best price when selling their businesses.

After a long period of malaise, the small-business market heated up over the last couple of years. In fact, during the second quarter of 2014, the number of closed sales returned to pre-recession levels.1

This is good news for business owners who have been waiting and hoping for a healthier market to sell their businesses, especially those who have a large chunk of their personal wealth at stake.

One survey found that two-thirds of small-business owners intend to retire in the next 10 years.2 If you are one of them, you might keep a close eye on the value of your business.

How Much Is It Worth?

Lenders generally require a professional valuation before extending credit to interested buyers. An accountant or business appraiser may employ one or more of the following methods, depending on the nature of the business and other relevant factors.

Asset-based approach. (Also known as cost approach.) Considers the fair market value of fixed assets and equipment and the wholesale value of current inventory, minus any liabilities.

Market approach. Compares the business to similar enterprises that have sold recently, adjusting for differences in size, risk, market position, and other characteristics.

Income approach. Calculates a value based on the company’s ability to earn income. Basically, the average earnings over a certain period of time are divided by a capitalization rate that typically applies to the specific industry. The value is often expressed as a multiple of net income or revenue.

An element of subjectivity means a seller and a potential buyer could draw very different conclusions when assessing a firm’s value, so competing figures might become the starting point for negotiations. To help sell your business at a better price, spend some time cleaning up the books and the facilities.

Because it could take many months to find a qualified buyer and finalize the transaction, it might be wise to begin researching the market and planning for a potential sale long before you intend to retire from your business.

1) BizBuySell Insight Report, 2014
2) LifeHealthPro, September 12, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.