Category Archives: November

Using Life Insurance to Retain MVPs An executive bonus plan funded with cash-value life insurance could be used to attract, reward, and retain valuable employees.

Employee turnover is increasing as the economy and job market continue to improve. As a result, 63% of companies now say that employee retention is a top concern, and about half of all employers report a lack of skilled applicants for their open positions.1

Thus, it may be difficult and expensive for businesses to replace experienced employees who decide to leave. It’s estimated that turnover costs are about 21% of an employee’s annual salary, but the cost to replace top performers and fill critical management positions could run even higher.2

An executive bonus plan funded with cash-value life insurance could be a cost-effective way to reward and help retain your most valuable employees.

Motivation to Stay

An executive bonus plan is typically easier to adopt and more flexible than some other types of employee benefits. The business pays the premiums with bonuses that are tax deductible to the employer but taxable to the employees. The company determines the amount of each bonus and when to pay it, so the timing of the expense can be controlled.

A bonus plan may also be designed with certain restrictions and vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.

The employee owns the policy and also bears the responsibility for keeping it in force. He or she can borrow against, and sometimes withdraw from, the cash value if needed for emergencies, to pay college tuition, to help fund retirement, or for any purpose. If the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans, free of income tax.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individuals for whom you are purchasing the policies are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

1) PayScale 2015 Compensation Best Practices Report
2) The Wall Street Journal, March 13, 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.

Trans-Pacific Partnership Seeks to Expand World Trade Potential pros and cons of the Trans-Pacific Partnership trade agreement and how it might affect the U.S. economy.

After five years and 19 formal rounds of negotiations, the Trans-Pacific Partnership (TPP) was finalized in October 2015 by representatives of the United States and 11 other nations. The comprehensive, 30-chapter document aims to lower trade barriers and create a rules-based trading system for TPP nations, which represent about 40% of the world’s total gross domestic product.1

In addition to the United States and its neighbors, Canada and Mexico, other TPP countries are Australia, Brunei, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, and Vietnam. The TPP is the largest trade deal in history, and the most significant since the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994.2

The TPP must still be ratified by lawmakers in all 12 countries, and is likely to face plenty of opposition in the U.S. Congress. The president has already gained congressional approval for trade promotion authority, which allows the White House to present the TPP to Congress for an up-or-down vote, without amendments. Many details of the trade package are still hazy, however, and it could be many months before Congress votes on whether to approve the deal.3

A Template for Trade

U.S. trade officials say the ambitious accord will open new markets for American products and set higher standards for worker and environmental protections, intellectual property, investment, and competition (including requirements for state-owned enterprises). The TPP also addresses new 21st-century issues such as e-commerce and cross-border Internet communications.4

The TPP is written so that other Asian countries, such as South Korea or even China, could join the pact later. China was not involved because leaders have not been willing to open up their economy to outside competition or meet other requirements, such as financial sector reform.5–6

The United States is already a fairly open market, with 80% of goods from TPP countries entering duty-free and tariffs averaging only 1.4%. Thus, the TPP strives to level the playing field for U.S. manufacturers, farmers, and ranchers by making 18,000 tax cuts on a wide range of U.S. exports.7

The Peterson Institute for International Economics estimates that if the TPP is implemented, China stands to lose an estimated $100 billion a year in exports as TPP countries trade more among themselves and less with China, and that U.S. income (adjusted for inflation) could rise by around $77 billion per year starting in 2025.8–9

Sticking Points

The following issues in three major industries complicated negotiations between TPP parties but were ultimately resolved.

Automobiles. Under NAFTA rules, 62.5% of a vehicle’s content must be produced in the region to avoid import tariffs. Some countries wanted the TPP requirement to be at least 60%, but Japan was demanding 40%. Negotiators ultimately settled on a level of 45% per vehicle.10

Biologic drugs. The final agreement protects brand-name drugs from generic competition for five to eight years, which is less than the 12-year exclusivity period the biotech industry enjoys in the United States, but more than the time frame currently observed by many TPP countries.11

Agriculture. The deal expands market access for U.S. livestock producers, simplifies inspections for fruits and vegetables, and lowers taxes for many types of farm goods. Canada also agreed to open access to a small portion of its highly protected dairy and egg market.12

Labor organizations and others who oppose TPP say it paves the way for employers to move more U.S. jobs and factories to low-wage nations, while others argue that lost jobs will be replaced by higher-paying positions in more competitive U.S. industries. In some TPP countries, there are still concerns that the patent protections could lead to higher prices on medicine.13

Economic Power Play

Why has the United States taken such a strong leadership role in crafting the TPP? The president and U.S. trade officials contend that the TPP offers critical strategic benefits. If ratified, the pact could have a far-reaching impact on global trade and future trade agreements.

Closer ties with key trading partners could help the United States compete with China and counter its growing economic influence in the region. As China pursues separate agreements around the world, the TPP also provides an opportunity to shape the future of global commerce in ways that are consistent with U.S. interests and values. TPP rules and standards could even push China toward reforms that help it transition to a market-driven economy.14

1–2) Bloomberg Businessweek, October 8, 2015
3, 5) The New York Times, August 1, 2015
4, 7) Office of the United States Trade Representative, 2015
6, 11, 13–14) The Wall Street Journal, October 5, 2015
8) The Wall Street Journal, November 2, 2014
9) Peterson Institute for International Economics, 2015
10, 12) Bloomberg News, October 5, 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.

Dividends as a Growth Strategy A study by S&P found that dividend income represented 34% of the monthly total return of the S&P 500 index from 1927 through 2012.

Dividends can be a source of current income for retirees and others who want an income stream without selling their underlying investments. For long-term investors, reinvested dividends can be a powerful growth engine. A 2013 study by Standard & Poor’s found that dividend income represented 34% of the monthly total return of the S&P 500 index from 1927 through 2012.1 (Total return includes capital gains, dividends, interest, and distributions.)

In the strong growth environment of 2013 and 2014, when rising stock prices took center stage, dividends played a smaller role in total returns: 8.60% and 16.78%, respectively. By contrast, in 2011, when the S&P 500 was flat, dividends represented 100% of the 2.11% total return.2

Good Things in Small Packages

Annual dividend payments are typically a small percentage of a given stock’s value; among companies in the S&P 500 index that paid dividends, the average dividend yield was 2.3% in 2014.3 The key to a dividend strategy is that this small percentage increases returns in good years and helps mitigate losses when the market turns downward. The S&P study found that the dividend component of the S&P 500 index total return has been far more stable than price changes.4 And when reinvested dividends are compounded over time, the effect can be dramatic (see graph).

Although stocks that pay regular dividends may help boost total returns, all investing involves risk, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful. Investing in dividends is a long-term commitment. Investors should be prepared for periods when dividend payers drag down, not boost, an equity portfolio. A company’s dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.

1–4) S&P Dow Jones Indices, 2013, 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.

Controlling Health Insurance Costs An HDHP paired with a health savings account may offer tax advantages and could help save money on medical costs.

If your employer offers health insurance benefits, one of your options may be a high-deductible health plan (HDHP) with eligibility to participate in a health savings account (HSA). These plans offer potential savings by giving you more responsibility over your medical spending. If you do not have employer-sponsored health coverage, you can choose from a variety of HDHP individual plans, including a bronze plan through state or federal health insurance exchanges.

Lower Premiums, Higher Deductibles

Premiums for HDHP coverage are generally lower than for traditional PPO or HMO coverage. In exchange, you pay a larger annual deductible (at least $1,300 for an individual; $2,600 for a family in 2016) before the plan begins to cover a percentage of expenses; some plans have higher deductibles. Regardless of the deductible, the costs for medical services may be reduced through the insurer’s negotiated rate, and certain types of preventive care, such as annual physicals and health screenings, may be provided at no cost.

To protect consumers from “catastrophic expenses,” most health insurance plans have out-of-pocket annual and lifetime maximums above which the insurer pays all medical expenses. HDHP maximums may be similar to that of traditional plans. If you have high expenses and reach the annual out-of-pocket maximum, your total cost for that year would typically be lower for an HDHP when you consider the up-front savings on premiums. If you have low medical costs, the lower premiums will generally make an HDHP more cost-effective. Of course, the cost-effectiveness of an HDHP may vary with your situation.

Triple Tax Advantage

Individuals who are enrolled in a high-deductible health plan are eligible to establish and contribute to an HSA, a tax-advantaged savings account that can be used to pay future medical expenses. HSA contributions are typically made through payroll deductions, but they can also be made directly to the HSA provider. In 2016, contribution limits are $3,350 for an individual or $6,750 for a family (a $1,000 catch-up contribution can be made if the account holder is 55 or older; $2,000 for a family if both spouses are 55 or older). Although 2015 payroll contributions to an HSA must be made by December 31, direct contributions for the 2015 tax year can be made up to the April 15, 2016, tax filing deadline.

HSA funds, including any earnings if the account has an investment option, can be withdrawn free of federal income tax and penalties as long as the money is spent on qualified health-care expenses. Thus, HSAs offer tax advantages on contributions, earnings, and distributions. However, some states do not follow federal rules on HSA tax treatment.

Assets in an HSA belong to the contributor, so they can be retained in the account or rolled over to a new HSA if you change employers or retire. Unspent HSA balances can be used to help meet medical needs in future years, whether you are enrolled in an HDHP or not; however, you must be enrolled in an HDHP to contribute to an HSA. HSA funds cannot be used to pay regular health insurance premiums, but they can be used to help pay Medicare premiums and long-term-care expenses.

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.

Understanding RMDs The rules for taking required minimum distributions are explained. Plus: an illustration of how RMDs work.

Tax-deferred plans can be a great way to save money for retirement, but you can’t defer your tax liability forever. Once you reach age 70½, you must begin taking required minimum distributions (RMDs) from these plans each year or face a 50% penalty on the amount that should have been withdrawn. If you are still employed, you may be able to delay minimum distributions from your current employer’s plan until after you retire, but you still must take RMDs from other tax-deferred accounts (except Roth IRAs). The RMD is the smallest amount you must withdraw each year, but you can always take more than the minimum amount.

Basic Rules

Even though you must take an RMD for the tax year in which you turn 70½, you have a one-time opportunity to wait until April 1 (not April 15) of the following year to take your first distribution. For example:

If your 70th birthday is in November 2015, you will turn 70½ in May 2016 and must take an RMD for 2016 no later than April 1, 2017.

You must take your 2017 distribution by December 31, 2017, your 2018 distribution by December 31, 2018, and so on.

Life Expectancy

Annual RMDs are based on the account balances of all your traditional IRAs and employer plans as of December 31 of the previous year, your age in the current tax year, and your life expectancy as defined in IRS tables.

Most people use the IRS Uniform Lifetime Table (Table III). If your spouse is more than 10 years younger than you and the sole beneficiary of your IRA, you must use the Joint Life and Last Survivor Expectancy Table (Table II). Table I is for account beneficiaries, who have different RMD requirements than original account owners. To calculate your RMD, simply divide the value of each retirement account balance (as of December 31 of the previous year) by the distribution period in the IRS table.

If you have multiple tax-deferred accounts, calculating RMDs can be complex. That’s one reason why people consolidate their retirement accounts as they approach retirement or retire. The administrator of your retirement plan may provide information regarding your RMD for a specific account, but you might also consult with your tax professional.

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.

Going Solo Strategies to help freelancers in covering health-care costs, meeting tax requirements, and saving for retirement.

It’s estimated that more than 53 million Americans are now part of the nation’s growing freelance workforce; this figure includes small-business owners, contract workers, consultants, and others who work on a project basis.1 Self-employed workers may enjoy the flexibility and control, but without help from an employer they often must take extra steps to strengthen their financial positions.

For starters, the typical emergency fund (three to six months worth of expenses) may be sufficient for a person with a stable salary, but a self-employed worker’s income can fluctuate. Freelancers might need to keep more funds in reserve to cover any earnings gaps. They are also on their own when it comes to shouldering health-care costs, meeting tax requirements, and saving money for retirement.

Health Insurance

Self-employed individuals without access to workplace plans can buy coverage through the Health Insurance Marketplace. The premiums for high-deductible plans tend to be more affordable and may also be a deductible expense. Setting aside funds in a health savings account each month may help meet medical expenses and reduce taxable income at the same time.

Americans who don’t meet the individual health-care mandate face an annual penalty that is rising to the greater of $695 per adult or 2.5% of household income in 2016 (minors under age 18 trigger only 50% of the penalty). The maximum household dollar penalty in 2016 is capped at $2,085. Starting in 2017, the penalty will be indexed annually for inflation.

Quarterly Taxes

Sole proprietors and self-employed individuals who expect to owe $1,000 or more in federal taxes when filing their returns generally must make estimated tax payments. Calculations are typically based on the previous year’s tax liability.

Estimated tax payments for a given tax year are typically due in four equal installments: April 15, June 15, and September 15 of the current year, and January 15 of the following year. Unfortunately, penalties could begin accruing as soon as one quarterly payment is missed. The IRS charges interest daily until taxes are paid up. The annual rate is currently 3%, but subject to change each quarter.

Savings Incentive

Freelancers without access to employer-sponsored retirement plans may be able to contribute a larger portion of their incomes to their own tax-advantaged plans. Even better, retirement plan contributions are generally tax deductible as a business expense (including those made for employees).

A solo 401(k) is a one-participant plan that allows the owner of a business with no employees to make elective salary deferrals up to $18,000 in 2015 (plus a $6,000 catch-up if age 50 or older). As employer, the business can also contribute an additional 20% of the owner’s compensation (25% if the business is incorporated). Total elective deferrals and employer contributions (not counting catch-up contributions) are capped at $53,000 in 2015.

A SEP IRA (simplified employee pension) may be a good option for self-employed individuals, business owners who want to maximize contributions, and small businesses with mostly lower-paid employees. A uniform percentage of salary must be contributed to each eligible employee’s SEP IRA (including the owner), although the business is not required to make contributions every year. In 2015, contributions cannot exceed up to the lesser of 25% of compensation or $53,000. For self-employed individuals, the contribution limit is up to the lesser of $53,000 or 20% of net earnings from self-employment.

Employer-sponsored retirement plan distributions are generally taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

1) Freelancers Union, 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.