Category Archives: May

Blame It on the Weather: The Economic Effects of Unusual Events The effects extreme weather events can have on businesses, regional economies, and overall U.S. GDP growth.

Many parts of the United States experienced a particularly harsh winter. The Midwest and Northeast suffered the toughest blows from a stream of heavy storms. Boston’s record seasonal snowfall topped 110 inches.1

As winter was settling in, U.S. economic growth fell to a seasonally adjusted 2.2% annual rate in the fourth quarter of 2014.2 Disappointing data on retail sales, manufacturing production and orders, housing starts, and payrolls suggests that gross domestic product (GDP) growth cooled further in the first quarter of 2015.3

Meanwhile, on the opposite coast, the weather was warmer and drier than normal. California is coping with possibly the most severe drought in its history.4 Here’s a closer look at some potential short- and long-term effects of these two extreme weather events.

Good-bye Winter

Many economic reports are seasonally adjusted, because even normal winters could skew the data and create a distraction from more serious economic problems. Still, when severe weather falls outside of historical norms, it can be difficult for economists and policymakers to gauge current economic conditions and produce accurate forecasts.

There’s no doubt that a number of powerful winter storms put a damper on economic activity in early 2015, but the jury is still out on how much of the weakness can be attributed to the weather. One early projection was that winter storms might have reduced first-quarter GDP growth by less than one percentage point, to an annual rate of 1.2%. However, in April, the government reported that GDP increased at an annual rate of only 0.2% in the first quarter.5

Hope for a Bounce

When weather takes a toll on GDP growth, it’s generally considered to be a temporary factor. In fact, weather-related periods of weakness are often followed by a significant rebound. That’s because some business activity that is delayed, such as construction, can be made up in the next quarter. Some losses, like those from canceled flights or restaurant meals, are never recovered.

In 2014, for example, U.S. GDP contracted 2.1% in the first quarter before expanding 4.6% in the second quarter and 5.0% in the third.6 Overall, the disruption from winter storms was more severe and widespread in 2014 than it was this year.

Dealing with Drought

California experienced its warmest winter ever, with temperatures averaging 4.4 degrees above the state’s 20th-century average.7 Most of California’s water supply comes from annual snowmelt from the Sierra Nevada mountains, but the record-low snowpack was just 5% of the March historical average.8 California reservoirs have only about one year’s worth of water left.9

A $1 billion emergency relief bill will aid drought-affected communities and fund water recycling and flood protection infrastructure.10 The governor also ordered the state’s first mandated water restrictions. Cities and towns must cut their water usage by 25%.11 Communities will decide how to accomplish this goal, but in many cases customers (including golf courses, campuses, and other large landscapes) will be forced to limit watering, heavy users will pay higher rates, and water wasters could be fined. Already, restaurants may serve drinking water only on request.12

Costs and Consequences

It’s estimated that California suffered $2 billion in economic losses in 2014, and the drought could cost another $3 billion — and 20,000 jobs — in 2015. California’s agriculture and food-processing industries are taking most of the hit.13 Without the normal allocations from the California Department of Water Resources, many farms must leave fields unplanted, buy more expensive water from private sources, or pay higher electricity bills to pump well water.14

Some farms survive by tapping into deeper wells. But research shows that land is sinking in some places, and the ground water supply is being depleted at an unsustainable pace. It could take a decade or more of normal precipitation for the state’s underground aquifers to recover.15

California produces nearly half of U.S.-grown fruits, vegetables, and nuts, but surprisingly, many economists do not expect higher-than-normal food inflation for 2015.16 Food supplies are national and even global. Some production could shift to other regions, while local farmers prioritize high-value crops that are not grown elsewhere. Still, each year that the drought continues to impact supplies increases the odds that food prices will rise.

A recent legislative report concluded that the drought will have a limited effect on the state’s economy in 2015. California’s $2.2 trillion economy is diverse; farming and related businesses account for only about 3% of state GDP.17

Many residents and businesses are installing drought-tolerant landscapes with more efficient irrigation systems, and are trying to break other wasteful water habits. Although current conditions may be difficult, California might benefit in the long run from the public’s heightened awareness and focus on conservation.

1) Weather.com, April 21, 2015
2, 6) U.S. Bureau of Economic Analysis, 2015
3) The Wall Street Journal, April 6, 2015
4, 8, 10–11) CNN.com, April 2, 2015
5) St. Louis Post-Dispatch, April 7 & 29, 2015
7, 9) The Atlantic, March 2015
12) California Environmental Protection Agency, 2015
13–14) CNBC.com, March 30, 2015
15) The Washington Post, August 17, 2014
16) MarketWatch, April 2, 2015
17) California Legislative Analyst’s Office, 2015

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.

Are You an Investor or a Speculator? Investor or speculator? The importance of committing to a long-term strategy based on sound investment principles.

Legendary investor and teacher Benjamin Graham — considered the “father of value investing” — once said, “The individual investor should act consistently as an investor and not as a speculator.”1 This simple quote captures a fundamental concept that could help you establish and maintain a sound financial strategy.

Big Risks

A dictionary of investment terms offers these definitions: “Speculators are typically sophisticated, risk-taking investors with expertise in the market(s) in which they are trading…. Speculators take large risks, especially with respect to anticipating future price movements, in the hopes of making large quick gains.”2

The danger of this approach for individual investors should be obvious. Few people have the expertise, time, and available resources to take large risks for quick gains. And even those who think they have the expertise often fail. As another legendary investor, Bernard Baruch, put it: “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”3

A Long-Term Approach

Investors also take risks, of course, and they certainly pursue gains. But unlike speculators, investors are generally committed to a long-term strategy based on sound investment principles. A smart investor buys assets that appear to be good investments and then builds them into a balanced portfolio that is appropriate for the investor’s goals, time frame, risk tolerance, and resources.

Of course, having a balanced portfolio — using strategies such as asset allocation and diversification — does not guarantee a profit or protect against investment loss. However, this approach is an established method to help manage investment risk. It may enable you to take advantage of market upswings while helping to control losses during downswings.

Cool Your Jets

Along with managing risk, an investor should manage his or her own emotions and expectations. That can be difficult in any market situation. When the market is rising, for example, it may be tempting to rush into the current “hot” investment and buy at a high price. And when the market is declining, it can be tempting to sell near the bottom. Even when the market is flat, you might feel that you have to do “something” just to keep your investments in motion.

If you have a well-constructed portfolio, one action you might take in almost any market situation is to make additional purchases in your investment account(s) — although the market could influence how you allocate your investments. Other than that, the most appropriate strategy may be to do nothing and let your investments pursue growth through long-term market trends.

Paul Samuelson, who won the 1970 Nobel Prize in Economic Sciences, described this approach in humorous terms: “Investing should be more like watching paint dry or watching grass grow.”4 A patient investment strategy, often called “buy and hold,” may not be as exciting as speculating, but it will probably serve you better in the long run.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.

1) Thinkexist.com, 2015
2) Investopedia, 2015
3–4) BrainyQuote.com, 2015

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.

Highly Appreciated Giving A charitable remainder trust may enable donors to give appreciated assets to a favorite charity on a tax-free basis.

The stock market has been strong over the last few years, with the S&P 500 gaining about 200% from its bottom in March 2009 through the end of 2014.1 The housing market has also turned upward, and national home prices have bounced back to 2005 levels.2 In this improving economic environment, many people may have assets that have appreciated significantly in value since they were purchased.

That’s good news, but selling highly appreciated assets could generate a steep federal tax bill — as high as 23.8%, depending on your tax bracket (20% maximum long-term capital gains tax and 3.8% net investment tax). And state taxes could make the total liability higher. If you own such assets and also want to leave a legacy to a favorite charity, you might consider a charitable remainder trust (CRT).

Full Asset Value

When you transfer assets to a qualified charity using a CRT, the charity receives the full value of the assets without any tax liability. The charity can then invest the assets and make income payments to you or anyone else you choose.

The income payments must be made at least once a year and could last for a fixed term (not exceeding 20 years), for your lifetime, or for the lifetime of your surviving spouse or other designated beneficiary. Income payments might be fixed or variable, depending on the trust. The trust income is generally taxable.

At the end of the specified term — whether it’s a period of years or upon your death (or the death of your spouse or designated beneficiary) — the remaining assets in the trust go to the charity.

Along with the income stream from the trust, you may qualify for an income tax deduction in the year that you place the assets in the trust, based on the estimated present value of the remainder interest that will eventually go to the charity.

While a CRT could be a win-win situation for you and your favorite charity, keep in mind that all trusts incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.

1) Yahoo! Finance, 2015, S&P 500 for the period 3/9/2009 to 12/31/2014. The S&P 500 is an unmanaged group of securities considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
2) S&P/Case-Shiller U.S. National Home Price Index, 2015

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.

Studying the Earnings Test The retirement earnings test reduces Social Security benefits for younger beneficiaries whose earnings exceed annual levels.

More than 2.7 million jobs were created in 2014, providing new opportunities for people of all ages.1 This is good news, but what happens if you find a good job after you’ve already filed for Social Security?

You may have heard that the retirement earnings test (RET) could reduce your benefits. This shouldn’t stop you from taking the right job, but it’s important to understand
this provision before you receive your first paycheck. Here are the basics:

The RET applies only if you are working and receiving Social Security benefits before reaching full retirement age (66 to 67, depending on birth year).

If you are under full retirement age for the entire year in which you work, $1 in benefits will be deducted for every $2 in gross wages or net self-employment income earned above the annual limit ($15,720 in 2015). Special rules, using a monthly limit, apply during the year you file for benefits.

In the year you reach full retirement age, the reduction in benefits is $1 for every $3 earned above a higher annual limit ($41,880 in 2015). Starting in the month you reach full retirement age, there is no limit on earnings or reduction in benefits.

The Social Security Administration (SSA) may begin to withhold benefits as soon as it determines that your earnings are on track to surpass the annual limit.

Even though the RET may seem like a stiff penalty, the deducted benefits are not really lost. Your Social Security benefit amount is recalculated after you reach full retirement age. For example, if you claimed benefits at age 62 and forfeited the equivalent of 12 months’ worth of benefits by the time you reached your full retirement age (66), your benefit would be recalculated as if you had retired at 63 instead of 62. In this case, the benefit reduction would be 20% instead of 25%, and you would receive this higher benefit for the rest of your life.

The RET applies only to wages and self-employment income, not to income from investments, pensions, or withdrawals from retirement accounts. Regardless of your age, keep in mind that you must pay Social Security and Medicare payroll taxes on your earnings.

1) U.S. Bureau of Labor Statistics, 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.

The Roundabout Way to a Roth IRA A 2014 IRS ruling makes it easier for taxpayers to move after-tax 401(k) contributions directly to a Roth IRA.

A 2014 IRS ruling makes it easier for taxpayers to move after-tax 401(k) contributions directly to a Roth IRA. Prior to the notice, it was possible to achieve a tax-free Roth conversion of after-tax dollars in an employer plan, but it was a complicated process using 60-day (indirect) rollovers rather than trustee-to-trustee transfers.

Not only did this involve several steps but it required taxpayers to have sufficient funds outside the plan to make up the 20% mandatory withholding that applied to the taxable portion of the distribution. Plus, when a 60-day rollover is not executed correctly, it could be deemed a taxable distribution, which is also subject to a 10% early-withdrawal penalty for participants under age 59½.

The prospect of a hassle-free Roth conversion may inspire some people to contribute additional after-tax money to their employer plans. Unlike the case with a Roth IRA, there are no income restrictions for contributions to a 401(k), so higher-income individuals may jump at this chance to build a tax-free income source for their retirement. Participants who already have a mix of pre-tax and after-tax funds in their 401(k)s could also benefit from the new rules.

A Larger Shelter

The ability to make after-tax contributions to a 401(k) plan is not available to everyone; it depends on the individual plan. Generally, plan participants must maximize salary deferrals to traditional and/or Roth 401(k) accounts before they can add after-tax money to the mix.

The annual employee contribution limit to a 401(k) plan in 2015 is $18,000, or $24,000 for those 50 and older. Yet the law actually allows an “overall limit” of $53,000 or 100% of compensation, whichever is less, to be put into a 401(k) on a worker’s behalf. This overall amount includes employer matches and employee after-tax contributions, if allowed.

Highly compensated workers (salary above $120,000 in 2015) are subject to additional rules based on the employer plan’s overall participation rate.

The Roth Advantage

Pre-tax contributions to a traditional 401(k) reduce a worker’s current tax bill, but withdrawals are taxed as ordinary income. A Roth 401(k) is funded with after-tax money just like a Roth IRA, and qualified withdrawals are tax-free after age 59½ as long as the five-year holding requirement has been met (under current law). By contrast, only the earnings on after-tax contributions to a traditional IRA are taxable when they are withdrawn.

You must take required minimum distributions (RMDs) from most tax-deferred retirement plans starting at age 70½. But a Roth IRA allows you to avoid RMDs during your lifetime. The money continues to accumulate tax-free until you need it, or you can leave this income-tax-free asset to your heirs.

Ready to Roll

When you leave your employer, any after-tax 401(k) contributions can be transferred directly to a Roth IRA at the same time that pre-tax contributions are directed to a traditional IRA.

For example, let’s say your 401(k) account balance is $100,000: $80,000 of pre-tax dollars and $20,000 of after-tax dollars. You can request a single $100,000 distribution, with instructions for the trustee-to-trustee transfer of $80,000 to a traditional IRA and $20,000 to a Roth IRA.

Some plans may accommodate only one direct transfer per distribution. In this case, if you wish to separate pre-tax and after-tax money, you should directly transfer pre-tax funds to a traditional IRA and request a 60-day rollover of after-tax funds to a Roth IRA.

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.

Cyber Crime on the Rise Data breaches at large retailers have dominated the news, but cyber crimes also threaten small businesses.

When hackers gain access to consumers’ personal information, it opens the door for identity theft and other financial crimes. Data breaches resulting from attacks on large retailers have dominated the news, but sophisticated cyber crimes also threaten small businesses, many of which don’t have the funds needed for cutting-edge security strategies.

Ransomware, for example, is a menacing virus that locks businesses out of their computer files and demands payment of a ransom in exchange for the return of company systems and data. A trojan attack can compromise a small business’s website and access the databases of larger companies with which it conducts business.

In 2013, 30% of all hacking attacks were aimed at small businesses with up to 250 employees, compared with 18% in 2011.1 Given the risk, it might be safe to assume that your business could be targeted and prepare accordingly.

Liability Shift Coming

To fight fraud, retailers and banks are rolling out a more secure payment standard known as EMV, which requires that new credit and debit cards be embedded with computer chips. Each transaction uses a unique authentication code instead of a static card number, so if a store is hacked the information can’t be used again.

Beginning in October 2015, U.S. merchants without EMV-compatible readers will become responsible for fraudulent charges when chip-based cards have been provided. Business owners may want to start exploring new options and weighing the potential costs and benefits of updating their payment technology.

Serious About Security?

The Federal Communications Commission offers the following cybersecurity tips for small businesses.

Install and update antivirus and antispyware software on every computer, and maintain firewalls between the internal network and the Internet.

If you have a Wi-Fi network, set it up so the network name is hidden and a secure password is required for access. Require all passwords to be changed on a regular basis.

Train employees in security practices and set up a separate account for each user.

Lock up computers, laptops, and tablets to prevent them from falling into the wrong hands.

A company may be held liable if customers’ private information is disclosed. Fortunately, Internet liability insurance may offer some protection (up to policy limits) from the financial risks associated with computer hacking, spam, viruses, and other online perils.

1) CNBC, September 25, 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.