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Featured Article
A Look Under th Hood of Roth TSP
Curt's Quick Comment
Tactical Asset Allocation
From the Financial Presses
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Are you a disabled veteran that is wondering what the VA Offset to your retired pay should be?  It may not be the easiest information to find, but by dowloading my VA Offset Estimator, you can get a good idea of what the VA offset will be or should have been.  Download the esimator by clicking here
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Financial Strategies

Planning Techniques, Procedures and Guidance for

Military Professionals

Greetings!   

 

Welcome to the May edition of Financial Strategies.  And a special welcome to those of you who signed up for this eNewsletter after my ETAP presentations at Air Force Special Operations Command and the National Capital Region.

 

This edition kicks off with a look "under the hood" of the new Roth TSP.  Roth TSP is a brand new option for Government Employees and Uniformed Service Members to save for retirement.  Roth TSP is similar to a Roth IRA, but they are not identical.

 

The next article covers Tactical Asset Allocation.  While C.L. Sheldon generally is strategic in our focus to asset allocation, at certain times a more tactical outlook may be appropriate.  The article talks about that.

 

Like previous editions, this eNewsletter wraps up with two articles I found interesting.  The first article talks about Modern Portfolio Theory which is a guiding principal I use when making asset allocation recommendations.  The second article covers cost basis of assets and how selecting different "lots" of an asset can affect your tax bill.

 

For those of you who are veterans and are waiting and waiting (or waited a long time) for your disability rating, you can download a proprietary product I developed that will help you estimate the VA offset that should have been taken (or will be taken) from your retirement pay.  You can use this information to determine if you should file an amended tax return once you get your rating (for more information of retroactive disability compensation and your taxes see the March edition or go to my blog).  Just click the link in the Featured Article to the left to download the estimator.

 

I've added a new section to the eNewsletter.  It is called Curt's Quick Comment and includes a quick thought to help you with your financial life.

 

Thanks again for subscribing to our newsletter.  Have a great May.   I know I don't need to remind this crowd, but don't forget this Memorial Day to remember those who made the ultimate sacrifice for our great nation.

 

Regards,

 

Curt

A Look Under the Hood of Roth TSP 

If you've been paying attention, you've probably heard that Federal Employees will be eligible for the Roth TSP soon.  Roth TSP is similar to Roth 401k and in certain respects similar to Roth IRAs.  Roth TSP contributions are made with after tax earnings (no tax deduction), but the biggest benefit to any Roth account is that distributions are tax-free if certain requirements are met.  Beyond that how does the Roth TSP stack up?

 

Who is eligible?
 

All Federal employees eligible to participate in the Traditional TSP are eligible to participate in Roth TSP.
 

When can I participate?


Roth TSP will become available at most Federal Agencies on 7 May.  However for the uniformed services this will not be the case.  Roth TSP will become available to Marine Corps members in June, Defense and Veterans Affairs Department Civilians in July and Army, Navy and Air Force service members in October.
 

What about retirees?


The only thing Retirees can do with Roth TSP is roll-over amounts from Roth 401k or Roth 403b accounts into Roth TSP (Roll-overs from Roth IRAs to Roth TSP is not allowed).  It is unclear when Roth TSP will be available to retirees.
 

What are the good points?

  1. The contribution limits to Roth TSP are much higher than to a Roth IRA.  The maximum amount you can contribute to a Roth IRA is $5,000 ($6,000 if 50 or older) versus $17,000 ($22,500 if 50 or older) for Roth TSP.  So, if you have additional cash flow you want to contribute to a tax free account, Roth TSP gives you options.
  2. There are no income limits to contribute to Roth TSP.  To contribute the full amount to a Roth IRA your Adjusted Gross Income (AGI) must be less than $183,000 if you are married filing jointly or $125,000 if you file single, head of household or married filing separately (under certain circumstances).  This could be important for retired military members who become GS employees or to married couples on active duty where both have income.
  3. Roth TSP has all the benefits of the Traditional TSP.
    • Low Operating Expenses
    • The Unique Goverment Bond Fund (For more information see the April edition of Financial Strategies)
  4. You can use Combat Zone Exclusion Income (Tax Exempt) to Fund the "Catch-up" contributions (for those 50 and older) in a Roth TSP.  You can't do that with Traditional TSP.

What are the bad points?

  1. The Roth TSP and Traditional TSP combination is not well suited to tax efficient investing.  Specific fund holdings within TSP are allocated proportionally based on the distribution of Roth versus Traditional balances.  For example if your TSP account balance is 10% Roth and 90% Traditional and you own some amount of the "C" Fund then 10% of the C Fund will be in the Roth TSP and 90% will be in the Traditional TSP.  You cannot designate that a specific fund be inside one or the other account (Roth or Traditional).  This makes it difficult to efficiently invest in regards to minimizing your tax bill.
  2. You cannot convert Traditional TSP balances (including tax exempt balances) to Roth TSP balances.
  3. If you leave your funds in TSP your Required Minimum Distributions (RMD) will consist of both Roth and Traditional balances.  Roth IRAs do not have RMDs and as such can be very valuable estate planning tools.
  4. You have the option to transfer your Roth TSP balance to a Roth IRA, but if you do you must then leave the funds in the Roth IRA for five years to avoid early withdrawal penalties
  5. Roth TSPs have potentially higher taxes (and penalties) for non-qualified distributions than a Roth IRA.  Non-qualified distributions generally are those taken before 59 years old and with a Roth IRA that has been open less than 5 years.

I'm sure some of this will change as the program is implemented and as Congress tinkers with it.  So what should you do?  Well, you will have to consider the tax ramifications and you'll have to weigh the plusses and minuses to determine what is best for you.  If you think you might like some help with that decision or any other related to your financial life, give us a call or take a look at our website and see if we're the right match to help you out.

Curt's Quick Comment
Did you register your cars in your name only instead of jointly with your spoused while you were on active duty to avoid state taxes and fees?  That made sense while you were on active duty, but will require that the vehicle pass through probate if you don't title it jointly with your spouse before you die.
Tactical Asset Allocation:
Fine Tuning a Longer-Term Strategy

Strategic asset allocation, the practice of maintaining a strategic mix of stocks, bonds, and cash, has guided many investors in creating portfolios that suit their risk profile and long-term investing goals.(1) This widely used strategy is a long-term, relatively static tool and is not intended to take advantage of short-term market opportunities.

 
Proponents of tactical asset allocation (TAA), in contrast, take a shorter-term view. TAA is the practice of shifting an asset allocation by relatively small amounts (typically 5% or 10%) to capitalize on economic or market conditions that may offer near-term opportunities. TAA differs from rebalancing, which involves periodic adjustments to your strategic allocation as a result of portfolio drift or a change in personal circumstances. With tactical asset allocation, you maintain a strategic allocation target, but fine tune the exact mix based on expectations of what you believe will happen in the financial markets.     
  

 

Assessing Risk and Return

 

 

For example, suppose an investor started with an initial target mix of 60% stocks and 40% bonds on October 1, 2011. Believing that the stock market was undervalued and a recovery was in sight, the investor switched the allocation to 70% stocks and 30% bonds on that date. Between the date of the allocation change and March 23, 2012, the revised 70/30 allocation would have generated a return of 15.1% compared with the 60/40 allocation, which would have returned 13.2%.(2)

  

Tactical asset allocation also can work on the downside. For example, suppose a hypothetical investor, sensing trouble in the financial markets in light of the credit crisis, reduced an initial allocation of 60% stocks/40% bonds to 50% stocks/50% bonds on October 1, 2007. Between the date of the allocation change and May 1, 2008, the 50/50 allocation would have generated a return of -1.6%, compared with a return of -2.9% for the original 60/40 mix.(2)

 

 

 Within an Asset Class

 
TAA also can involve shifting allocations within an asset class. For example, an equity portion of a portfolio may be shifted to include more small-cap stocks, more large-cap stocks, or other areas where an investor perceives a short-term opportunity.(3) Note that mutual funds that invest in these areas may impose restrictions on short-term trading, and it is important to understand these restrictions before making an investment. 

 

 

A tactical approach involves making a judgment call on where you think the economy and the financial markets may be headed. Accordingly, a tactical allocation strategy can increase portfolio risk, especially if tactical allocations emphasize riskier asset classes. This is why it may be a good idea to set percentage limits on allocation shifts and time limits on how long you want to keep these shifts in place.

 

In addition, when evaluating investment gains that are short-term in nature, such as those on investments held for one year or less, it is important to understand taxes on short-term capital gains. Currently, short-term capital gains are taxed as ordinary income, where the highest marginal tax rate is 35%. In contrast, long-term capital gains on investments held for more than one year are taxed at 15%.

 

Source/Disclaimer: 

  

 

 

1 Asset allocation does not assure a profit or protect against a loss in a declining market.
 
2 Source: McGraw-Hill Financial Communications. Stocks are represented by the total return of the S&P 500, bonds by the return of the Barclays U.S. Aggregate Bond Index. Investing in stocks involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values are subject to availability and change in price. It is not possible to invest directly in an index. Past performance does not guarantee future results.

 

3 Securities of smaller companies may be more volatile than those of larger companies. The illiquidity of the small-cap market may adversely affect the value of these investments.

 

 

 

 

Required Attribution
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
2012 S&P Capital IQ Financial Communications. All rights reserved.
April 2012 - This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by C.L. Sheldon & Company, LLC, a member of FPA. 

From the Financial Presses 

 

 

What Is Modern Portfolio Theory And Is It Still Effective?

Modern portfolio theory (MPT), introduced more than half a century ago by Nobel-laureate Harry Markowitz, is all about diversification. It's based on the notion that over the long term, a properly balanced group of investments will perform better than any single holding would do on its own. MPT looks at the historical returns and volatility of stocks, bonds, and other assets to create a portfolio mix that can maximize expected returns based on how much risk an investor is willing to take. The riskier a portfolio is, the higher its potential return may be ...(To read more click  here)

  

Cost Basis Methods: Which Is Right For You?
It's hard enough deciding when to sell securities, but now there's an additional choice to be made-which accounting method you want to be used in calculating shares' "cost basis," which is used to determine how much tax you'll owe if you made a profit. Under new rules, unless you specify otherwise, the financial institution handling the sale will use a default method that may leave you at a disadvantage. So it's important that you fully understand your options...(To read more click here)

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.

 

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Military Professionals have unique financial benefits and unique financial needs.  Take a look at our website at www.CLSheldon.com to see if we can help you reach your financial 
and lifetime goals.