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| PARAGON Perspectives:
1st Quarter 2010 |
| Greetings!
Happy New Year! We hope that the holiday season was peaceful and blessed for each of you.
PARAGON is pleased to share with you our 2010 first quarter newsletter. We hope you'll enjoy our featured articles this month.
In our lead article, Jon Castle discusses "Looking Forward to 2010" and discusses the many reasons he finds to be excited about times to come.
Back by popular demand, our Client Inspirations article features client, Cathy Graham, who has turned recession layoff lemons into lemonade through her business, Graham Design International.
Finally, Mike Carignan discusses tax changes in 2010, some of which might leave you with a polar plunge chill. Ultimately, however, we hope by knowing about the potential tax bites you can avoid their chill!
We wish you happiness and prosperity as you begin the New Year!
~ Michelle Ash, CFP, CDFA
Managing Partner |
Looking Forward to 2010
by Jon Castle, CFP, ChFC
It is with a tremendous amount of optimism, hope, energy, and commitment that we at PARAGON feel as we look forward to 2010!
Those who know me well would not say that I am a rose-colored-glasses wearing optimist - but more of a pragmatic, "let's move on with what we need to do" type of optimist. No doubt, we as a society and as a nation have a good bit of work to do - but from a historical perspective, things have never been better. I believe 2010 and the years beyond will be great, great years!
Despite the "Great Recession, as a human race, we are still undergoing the greatest creation of global wealth of all time. New and previously unimaginable inventions are being made almost on a daily basis. On a global scale, our collective knowledge is estimated to double every 11 hours within the next few years.1 And as Americans, whatever your political leanings or frustrations with our government or our health care system may be - you have to admit - things are even better here than in most other places in the world.
As far as the economy goes - Capitalism is still functioning. The creation of wealth through innovation, invention and distribution of goods and services continues. As 2010 unfolds, new inventions, products and services will be unveiled - as will the jobs and benefits that accompany them. Economists who are down in the mouth about our future are looking rearward and crunching old numbers - but our world continues to march forward, and in most cases, the old math simply doesn't apply.
Just to put this in perspective, I thought I'd take a little trip down history lane. While I'm not a historian per se, I do enjoy drawing comparisons and parallels to what has happened in the past with what is happening now, or may be likely to happen in the future. So, let's have a look, shall we?
Today - most Americans enjoy luxuries beyond the imaginings of even the most powerful kings who ruled 500 years ago. Indoor plumbing. Heated living quarters. A car instead of a carriage. Medicine and scientific health care, versus wizardry and leeches. A life expectancy of 80 years instead of 45. Great kings of yesteryear would sell their kingdoms in a heartbeat to live as an average family lives in America today! Yet many people think we are "on the wrong track..."
Today - we hear and worry about the H1N1 Virus - the "Swine Flu." Yes, we should be concerned - so far, the CDC has reported 13,915 deaths from the Swine Flu (data as of 12/09/2009, CDC.gov). But consider this: In the summer of 1918 - only 92 years ago, the "Spanish Lady" flu swept through the world, killing 22 Million people across the globe. 22 Million people! From the flu! One half of all of Philadelphia died! One half of a US major metropolitan city wiped out from an illness! The Spanish Lady killed 6 million more people than all of World War I!
Today - we text, e-mail, and call each other using cell phones anywhere around the globe. We are frustrated whenever our e-mail doesn't work, someone doesn't return our text immediately, or we have to leave a "voice mail." Yet only 20 years ago - no one had cell phones, e-mail was brand new - and it was customary to handwrite letters which may (or may not) even reach our pen pal within weeks of sending them. In 2010 the number one source of internet access will be... you guessed it... a cell phone which has ten thousand times more computing power than the entire world had in 1960!
Today - We can order a pizza online and have it delivered to our home in 30 minutes or less. We shop online and are frustrated when it takes longer than 3 days to get our package or we have to pay for shipping. Yet only 20 years ago, it was commonplace to order from the fall or spring Sears catalog, add money for shipping and handling, and wait up to 6 weeks for delivery - which was in the store and you had to go and pick it up anyway. Which I remember vividly from my childhood, by the way.
Here are some interesting bullet facts:
· It took 38 years for radio to reach 50 Million people. It took TV 13 years. Facebook, however, added 100 Million users in 9 months! If it were a country, Facebook would be the 4th largest country in the world! For more info on that, check out this link: http://www.youtube.com/watch?v=sIFYPQjYhv8
· Cars are being developed now that, once on the highway, will drive themselves in convoys with other cars. Time to take a nap... on a long road trip!
· Thought controlled robotics have been invented, and initial uses are now under development. Think of the applications for the handicapped!
· In June of 2007, a patient successfully received a whole organ transplant - grown using her own stem cells and without the need for anti-rejection drugs. Can you IMAGINE the medical implications of this in 20 years?!?
· Nerve controlled bionic arms and legs are now in prototype stage. Remember the $6 Million Dollar man? From the looks of it, it appears that he's about 10 years away! http://www.youtube.com/watch?v=T6R5bm6qx2E
· More video was uploaded to YouTube in the last 2 months - than NBC, ABC, and CBS have aired - since 1948! Collectively, the networks have been around over 200 years. YouTube didn't even exist 6 years ago. The world is changing with incredible speed.
And finally - take a look at this video. It truly is an example of the speed with which the world is changing. http://www.youtube.com/watch?v=6ILQrUrEWe8
Now what does this have to do with Wealth Management? Global wealth is primarily created through capitalism - where new ideas and products are capitalized by investors. Many innovations come out of necessity - after recessions, when people turn to themselves for support, create new businesses and generate new ideas because their old paradigms failed to provide them what they needed. Historically, the periods after recessions have been tremendously profitable ones. Remember the 80's boom after the recession of the 70's? Remember the 90's boom after the recessions of '91 - '93? We are now finishing up one of the worst recessions in a long, long time. As the "Great Recession" winds down, I can only imagine the wonders that await us!
Happy New Year, everyone! Hang on - I believe it will be a wild, wild ride!!
1 IBM Global Technology Services. "The Toxic Terabyte - How data-dumping threatens business efficiency." July 2006
This newsletter is intended for informational purposes only. ALL investing involves the potential of loss - including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. Past performance is not a guarantee of future performance. This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security. |
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Client Inspirations: PARAGON is pleased to present our "Client Inspirations" column, which highlights PARAGON clients endeavoring and succeeding at lifelong dreams and new retirement passions. We hope you'll enjoy a little slice of the life experiences we interact with each day.
Cathy Graham - Making Recession Layoff Lemons into Lemonade
 Cathy Graham, as a seasoned IT professional, was not really surprised when she got laid off in June of 2009. In fact, she'd been expecting it for months. As a Project Manager, once the project she was heading up was put on hold by the contracting company, she knew it was only a matter of time. Fortunately, she had always made it a priority to be financially prepared for this possibility, so financially, the layoff came as no concern. But like anyone facing job change, what to do next loomed on the horizon.
Instead of the typical job search for another position, however, Cathy, and her sister, Jane Graham Cobb, decided to join forces and launch the business they'd dreamed of for years. Now, six months later, Cathy and Jane are finding that Graham Design International, their kitchen and bath design firm specializing in custom work and turn-key projects, is doing even better than expected.
Cathy serves as the company's President, and puts her invaluable experience in project management to work, streamlining projects and getting the work done - on time and on budget - something difficult to accomplish in home renovations. Cathy's sister, Jane, a degreed designer, is Design Consultant and has been in the custom kitchen and bath design business for 10 years. She heads up the creative work and installation of the projects, some of which can be seen here. In only few short months, the business has already felt the need for expansion. The economy helped them in this endeavor also. A project coordinator with over 15 years experience in cabinet installation management was laid off, and Cathy and Jane jumped on the opportunity to bring her on board to help handle the work.
Graham Design International specializes in kitchens and baths, but also can assist clients with other projects involving custom cabinetry, to include closets and pantries. Jane is also available as a Design Consultant for non-cabinetry design and has helped clients transform existing spaces into showcases. Design goals often include maximizing space and creating the most unique and beautiful settings possible. Cathy and Jane work with their clients to ensure design inspiration comes ultimately from their client's needs and wants. And the company isn't just limited to the local area for clientele- a large portion of their business comes from overseas.
Cathy is excited about the future and the opportunities it holds. Cathy is a firm believer in making lemonade out of lemons. And in this case, it appears she's found the perfect recipe for a delicious cup! To learn more about Graham Design International or to see some of their work, please visit their website at www.grahamdesigninc.com.
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The Polar Plunge of Taxes in 2010 by Mike Carignan, CRPC
 Living in Florida it seems odd to think of voluntarily jumping into the ocean when the water is frigid and the outside temperature is in the low 40's. I was reading recently about an annual event called, "The Polar Plunge," at Jacksonville Beach, where hundreds of people jump into freezing cold water in their skivvies! I don't quite understand it, but a friend of mine who participates in the event every year sees the plunge as a cleansing of the failings from the year past, and a reinvigoration of his goals for 2010. Following the theme of looking ahead, and hoping not to endure frigid waters for it, I present the tax changes for 2010 and how they may affect you.
Let me start off with one of the biggest changes for 2010: The repeal of the federal estate tax. For the first time since it's inception in 1916, the federal estate tax is repealed for 2010 only. Many experts have speculated on what this actually means for the public. A recent research study by the Brookings Institution indicates that only about 5,500 families were required to pay estate taxes in 2009, which corresponds to about 1/4 of 1% of all estates transferred that year. Unfortunately, with the repeal also comes a change to how capital gains taxes are calculated on assets inherited in 2010. [1]
How will this affect you? If you are the beneficiary of an estate during 2010, let's hope that there is plenty of documentation on the cost basis (purchase value) of the assets you receive. While there is no estate tax due, you will now have to pay capital gains taxes on many estate assets over the first $1.3 Million (or $3 Million for spouses). Previously, there has been a cost basis "step-up" on the date of death - meaning that for tax purposes, original cost of the property when it was first bought, way back when - "steps up" to its present value, and if you sell the inherited asset, then no capital gains tax is due. In 2010, however, this step-up goes away, and if you sell an inherited asset, then you owe the government capital gains tax on all appreciation since its original purchase.
Keeping track of this original value has not been important in past years, but that will change in 2010 only (the rule will revert back to a step-up in cost basis in 2011). Here's the real catch: if you don't know the original cost basis, then a cost basis of zero must be assumed, meaning the full value of the sale is taxable as capital gains. So as an example - if you inherit an estate worth $2 Million, but don't know the cost basis of the assets - then you could potentially owe capital gains tax on $700,000. Maybe I need to reconsider whether we are avoiding the frigid waters after all; it seems pretty cold to repeal a tax on 5,500 families and add a new one that will affect ~70,000 more. [2]
Only slightly less publicized, is the elimination of the ROTH IRA conversion limit. Through 2009, individuals were not allowed to convert any amount from a traditional IRA to a ROTH IRA if he or she made over $100,000 per year AGI. Effective January 1st the conversion limitation was repealed.
To explain this, let's address three common misconceptions. First, this is a permanent change (based on current tax law), not an opportunity for a single year. Second, this is not an elimination of the tax due on conversion amount, only on the income limit to determine whether or not you are allowed to convert. Third, taxpayers have the option to defer the taxes due on a conversion performed in 2010 and split the tax obligation - and payments - onto their 2011 and 2012 tax returns. You may also choose to pay the taxes due on the conversion as normal in 2010.
How does it work? If you convert funds from a traditional IRA to a ROTH IRA in 2010, you will have the option to defer and pay the taxes due on the conversion in 2011 and 2012 at your applicable tax rates in those years. Individuals need to be very careful of the anticipated 2011 change in tax rates, however. If no further legislation is written, the current rates will sunset and we will revert to the pre 2001 tax rates. See the example below for how this might have a negative impact on a ROTH conversion:
John Smith is married, has an AGI of $150,000 per year and wants to convert $100,000 from a traditional IRA to a ROTH IRA in 2010.
If he does the conversion and pays the tax in 2010:
Conversion Amount 2010 Tax Rate Tax
$100,000 28% $28,000
If he does the conversion and opts to defer the taxes:
Conversion Amount 2011 Rate 2012 Rate Tax
$100,000 31% (1st half) 31% (2d half) $31,000
So, in this case - John saves himself some time to pay the tax, but it costs him about $3000 more to split the tax as a result of his higher tax brackets in 2011 and 2012.
What does it mean for you? If you are still working and make over $100,000 per year, and you expect to make significantly less in retirement, it is probably not going to be a major concern - you can convert later. If you are still working, and make over $100,000 per year and expect to make more in retirement, then it definitely makes sense to consider converting at least some of your assets to ROTH assets. If you are not planning on using any of the funds in your traditional IRA, but plan to leave the assets to your heirs, there could be some significant benefits to converting assets - as they are inherited income tax-free. If you believe that you could benefit from a ROTH conversion this year, give us a call and we can discuss your situation to see if a ROTH conversion plan makes sense.
Some of the other changes that you will see taking affect are:
- an increase in the deductibles for Medicare Part A (~3%) and Part B (~ 15%)
- the educator's deduction ends (the deduction for educators purchasing classroom supplies)
- elimination of a deduction for direct IRA donations to charity
- income exemptions for AMT fall from $69,950 to $45,000 for married filers and from $46,200 to $33,750 for single filers
- the maximum gift tax rate in 2010 will drop from 45% to 35% (the Maximum individual income tax rate) but the lifetime exclusion remains at $1,000,000 and the annual exclusion remains at $13,000
- There are no changes to the retirement plan contribution limits for 2010
For many, the beginning of a new year is an exciting time to reflect on the past year and plan for the next. Make sure to avoid the chill of uncertainty. If you find yourself looking forward to the next year and are planning to retire, have a new grandchild or a new child coming, now is a great time to begin planning. As always, PARAGON is here to help you review the personal financial impact of the big events of your life.
[1] Tax Facts from the Tax Policy Center, "Where, Oh Where, Has the Estate Tax Gone?" 12/21/2009
[2] Reuters, "Estate tax repeal seen bringing chaos", 12/18/2009
Individuals should seek advice from their tax professional and/or financial advisor regarding their particular circumstances; our office is pleased to recommend local CPA professionals or work with your existing tax planning team in order to coordinate strategies and implementation.
All information contained herein is obtained from sources deemed reliable but not guaranteed. No specific tax or legal advice is given nor intended. |
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PARAGON is still accepting clients who care deeply about their financial futures and desire comprehensive Wealth Management or Retirement, Income, or Estate Planning.
Please feel free to introduce us to those who might be a match!
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Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements. |
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