February 16, 2023

It’s not easy for a financial professional to avoid feeling at least mild annoyance at the politics of raising (or not) the debt ceiling, because the whole discussion seems to take place in an absence of understanding or facts.  What most people know is that the U.S. has reached its debt limit again (roughly $31 trillion), which means that the Treasury Department has borrowed as much as is allowed by the last debt ceiling measure by Congress — an amount that is entirely arbitrary, and which has been raised almost 80 times since 1960. 

What is not always understood is that Congress authorized every penny of the amount that the government has committed to spend over the next year, so the debate is really about whether it will actually meet those obligations.  Put another way, to show how senseless this is, the government is authorized by Congress to spend a certain amount of money on operations, interest payments, the military and a thousand other things; but periodically, it also has to get permission from Congress to obtain the money to pay for the amount that was authorized.  Got that?

And what, exactly, is the debt?  The government raises its money from taxes, supplemented by debt in the form of government bonds—Treasury bonds and bills.  By incurring debt, the government is actually creating investment opportunities for individuals, companies and other governments. 

In addition, one of the burdens borne by the country that issues the world’s reserve currency is that it has to maintain a constant budget deficit—and issue those bonds—because that ultimately provides the global marketplace with the currency that is used for billions of transactions between entities (individuals and companies) that use different currencies.  For example, nearly all the oil that is purchased around the world is bought with dollars.  If there is a shortage of those dollars, it would throw sand in the gears of the world economy and people would eventually look for another reserve currency.

Finally, the debt ceiling is not a hard barrier, where one day the government is in default.  As you read this, the U.S. Treasury Department is slowing down payments that it is obligated to make in what it deems to be inessential areas, like contributions to government employee retirement plans.  If the showdown in Congress continues, it will add more visible items to the list, like interest and principal payments to government bondholders, Social Security benefits, Medicare reimbursements, payments to federal contractors and the salaries of federal employees.  We probably won’t reach that point until sometime in the late spring, because the government also collects tax revenues which help fund some of those obligations.

How dangerous is this brinkmanship?  Aside from closing national parks and potentially airports (air traffic controllers are government employees) and some rail transportation, the biggest problem would come when the government is eventually forced to stop making interest payments on government bonds.  That would be considered a default on our sovereign debt, and when the issuer of the world’s reserve currency defaults, it would (potentially catastrophically) undermine confidence in the world’s total financial system.  And incidentally, it would also cut off the yields for everybody who holds Treasury bonds or bond mutual funds (or ETFs) in their retirement portfolios.  There could even be a selloff of government bonds, if the standoff lasts into the summer, it could also trigger a dramatic surge in interest rates.  The stock market could plunge—probably temporarily—until the debt ceiling is finally raised and the government is allowed to spend the money that Congress allocated in the first place.

So the question becomes: why are we seeing anything other than a routine ratification of the rise in the debt ceiling?  Why isn’t Congress, instead, focused on the actual budget, trying to balance tax receipts with expenditures?

It’s never easy to read the minds of the people involved, but the reasoning seems to go something like this: if we threaten to create a crisis, then other members of Congress (the ones who worry about the impact of a government default) will want to avoid that crisis, and concede some of the things we’re proposing—a list that includes a reduction or potential elimination of Social Security benefits.  If they won’t go along with any of our demands, then we’ll create a real crisis, a huge painful global crisis, and maybe that will bring the other side to the table.

But what, exactly, ARE those proposals?   In a hostage negotiation, the hostage takers ask for a specific ransom payment.  But so far we’ve seen only vague concerns about government spending being out of control and maybe Social Security is the problem.  Decrying government spending is easy, but telling voters what, exactly, you would take away from them is much harder.  Currently, for every dollar the government spends, 25 cents goes to Medicare and other popular health care programs, 21 cents goes to Social Security, 13 cents for defense and the military, 7 cents for veterans and retirees and another 7 cents for debt service.  Who is going to wade into that thicket and decide how many fewer cents should go to which programs and services that voters care about?

Of course, a default would make America’s long-term fiscal situation worse, not better.  The situation is being covered as a political argument, but it more resembles a circus.  The elected officials who worry about the consequences of simply walking away from the government’s obligations are being told to cave in to demands that have not even been articulated—and you have to wonder who will get the blame if this wholly-manufactured crisis is allowed to play out.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.brookings.edu/podcast-episode/whats-happening-with-the-debt-ceiling-again/

https://www.npr.org/2023/01/25/1151474931/the-politics-and-economics-of-a-potentially-costly-showdown-over-the-debt-ceilin

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 1, 2023

You might wonder what all the hoopla is over the proposal, in Congress, to impose a national sales tax on everything we purchase.  After all, 45 of our 50 states collect sales taxes.  And 170 different countries collect something similar: a value-added tax, which is assessed on different purchases across the supply chain for manufactured articles and digital services, which is ultimately passed on to the consumer.

The proposal, codified in something called the Fair Tax Act that was introduced in the House of Representatives on January 10, would eliminate all income taxes, payroll taxes and corporate taxes, and incidentally also eliminate the Internal Revenue Service.  It would replace those lost revenues with a tax on every item sold in the U.S., which has variably been reported to be 23% or 30%.  The plan was actually created by the Church of Scientology during the Reagan presidency, and has been floating on the margins of political respectability ever since.

There are several challenges to implementing a national sales tax.  One of them is the practical aspects of it.  The bill would have each state make the actual collections on sales within their boundaries (including, of course, the five states that don’t administer a sales tax), but only provides one quarter of one percent of the collected revenue for the trouble.  Instead of an IRS, you would have 50 states with their own underfunded collection bureaucracies.

The political challenge is probably more problematic.  The headlines today are talking about the high cost of goods and services and the overall inflation rate.  Making things more costly for consumers in a highly-visible way—right there on the price tags—might not be a popular idea at this time.  Moreover, the 23% rate that the sponsors are pushing is not entirely accurate.  The proposal would impose a $30 national sales tax on every $100 that you spend, which, if you don’t have a calculator handy, comes to a 30% price increase, and should probably be referred to as a 30% tax.  The 23% figure comes when someone says that $30 is just 23 percent of the $130 amount that the consumer is paying, which seems to be a sly mathematical sleight of hand.

Then, there’s the fairness angle.  The sales tax would fall most heavily on people who spend most of their income on goods and services—things like food, transportation, clothing and the roof over their heads.  People with more space between what they earn and what they have to spend on essentials would escape taxation on that ‘discretionary’ income.  The ‘fair tax’ would be a Godsend to wealthier individuals, who could simply stash away a big chunk of their earnings untouched by government hands.  Meanwhile, corporations would escape taxation altogether.

Finally, would the proposed sales tax replace the revenues generated by the various taxes we have on the books today?  Probably not.  A 2004 study from the Tax Policy Center estimated that we would need a national sales tax rate of 60% to generate the current level of tax income collected by the federal government.  So if the proposal passed, it would lead to tax increases in the future.

The ‘fair tax’ stands very little chance of passing the House of Representative, never mind the Senate, never mind getting signed into law by a Democratic president.  But you will see something like this proposal come up again and again in the future, and who knows?  Perhaps one day the political winds will blow it into law.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

https://www.avalara.com/vatlive/en/vat-news/6-differences-between-vat-and-us-sales-tax.html#:~:text=VAT%20is%20imposed%20in%20around,to%20stay%20compliant%20across%20both.

https://www.yahoo.com/finance/news/democrats-revel-in-the-gops-doozy-of-an-idea-for-a-national-sales-tax-210400152.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

January 17, 2023

In the final days of 2022, Congress passed a new set of retirement rules designed to facilitate contribution to retirement plans and access to those funds earmarked for retirement.

The law is called SECURE 2.0, and it is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019.

The sweeping legislation has dozens of significant provisions; here are the major provisions of the new law.

New Distribution Rules

Required minimum distribution (RMD) age will rise to 73 years in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking RMDs. Further, starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. However, if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.¹

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, 2024 onward, an employee can take up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.²

Reduced penalty. Starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25 percent from 50 percent. If you promptly fix the mistake, the penalty may drop to 10 percent.³

New Accumulation Rules

Catch-up contributions. From January 1, 2025, investors aged 60 through 63 years can make annual catch-up contributions of up to $10,000 to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals with annual earnings more than $145,000.⁴

Automatic enrollment. In 2025, the Act requires employers to automatically enroll employees into workplace plans. However, employees can choose to opt-out.⁵

Student loan matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.⁶

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, employers can roll a 529 education savings plan into a Roth individual retirement account (IRA). Therefore, if your child receives a scholarship, goes to a less expensive school, or does not go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are also allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.⁷

SIMPLE and SEP. 2023 onward, employers can make Roth contributions to savings incentive match plans for employees (SIMPLE) or simplified employee pension (SEP).⁸

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth IRA rules. From 2024, the legislation no longer requires minimum distributions from Roth accounts in employer retirement plans.⁹

More Highlights

Support for small businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100 percent from 50 percent for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.¹⁰

Qualified charitable donations (QCDs). 2023 onward, QCDs will adjust for inflation. The limit applies on an individual basis; therefore, for a married couple, each person who is 70½ years and older can make a QCD as long as it remains under the limit.¹¹

The change in retirement rules does not mean adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changes to another.

Moreover, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for real-life advice. If changes are appropriate, we as your financial professionals can outline an approach and work with your tax and legal professionals, if applicable.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

1. Fidelity.com, December 23, 2022
2. CNBC.com, December 22, 2022
3. Fidelity.com, December 22, 2022
4. Fidelity.com, December 22, 2022
5. Paychex.com, December 30, 2022
6. PlanSponsor.com, December 27, 2022
7. CNBC.com, December 23, 2022
8. Forbes.com, January 5, 2023
9. Forbes.com, January 5, 2023
10. Paychex.com, December 30, 2022
11. FidelityCharitable.org, December 29, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

September 28, 2022

My goodness; stocks are taking a terrible beating these days.  From the way the market is behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable.  Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy?

If this is sending you to anxiously scan the headlines, don’t bother; none of that is happening.  Stock prices have never been a precise indicator of what companies are worth.  They are a very good indicator of what people are willing to pay for their shares, and right now there seems to be more sellers than buyers.

Why?  The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.  What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine.  The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economic life.  Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.

The cure, which any child will tell you can sometimes be more unpleasant than the illness itself, is the U.S. Federal Reserve raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy.  Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers.  Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels. 

We can already see how this works in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices.  As mortgage rates have risen, the frenzy has completely dissipated.  The process takes longer in the consumer marketplace at large, but you can bet it’s working behind the scenes.

Doesn’t less spending mean less economic activity?  Doesn’t that lead to a recession?  The answers, of course, are yes and maybe.  But at this point, a recession might not be all bad for the economy.  Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency, ultimately creating a healthier economy when we come out the other end.

So right now we’re taking our medicine, and boy does it taste awful.  We are also, collectively, suffering an economic illness.  Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Source:

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 16, 2022

With two consecutive quarters of negative GDP growth, high inflation and markets that have persistently delivered bearish returns, the hope was that the U.S. Federal Reserve was busily looking for a way to execute a ‘soft landing’—meaning, basically, a return to modest economic growth, higher market returns and lower inflation.  It now seems clear that that is not the Fed’s plan.

In a recent speech in Jackson Hole, WY, Fed Chair Jerome Powell announced that he will do whatever it takes, pretty much to the exclusion of economic growth and better market returns, to drive inflation down to the 1.8% annual goal that has been recent Fed policy.  He said, bluntly, that “reducing inflation is likely to require a sustained period of below-trend growth.”  Translated, that means higher short-term bond rates and an indifferent attitude toward more economic pain.

The speech even seemed to be attacking the nation’s historically low 3.5% unemployment rate, the lone bright spot among a lot of otherwise grim economic statistics.  Powell surprised many economists by asserting that, in his view, the labor market was “clearly out of balance” because the demand for workers exceeds supply. 

Overall, the speech seemed to hint at another jumbo 75 basis point increase in the Fed Funds Rate later this month.  If (when) that happens, it will grab headlines, but it might not be the most significant growth-slowing measure the Fed will be taking.  The U.S. central bank is also accelerating the process of selling off the Treasury and mortgage bonds on its balance sheet, doubling the monthly sales from $47.5 billion to $95 billion.  It’s important to note that when the Fed was buying these bonds, the so-called QE (quantitative easing) buoyed the stock market.  The opposite, called quantitative tightening (QT to some), might have the opposite effect.

Most of us know that the economy will eventually recover from its current doldrums, and the Fed’s current policy will ease up as inflation declines.  What we’re seeing now is the inevitable ‘pay the piper’ moment where the bill comes due from the enormous (and, of course, unsustainable) stimulus that the Fed injected into the economy to end the Great Recession and, not so long afterwards, to pull the country out of the Covid-driven downturn.  The hope now is that it won’t be long before the Fed decides that the piper is paid off, and once again prioritizes growth and profitability in the economy.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.advisorperspectives.com/articles/2022/08/31/powell-abandons-soft-landing-goal-as-he-seeks-growth-recession

https://www.advisorperspectives.com/articles/2022/08/31/the-fed-is-about-to-go-full-throttle-on-qt-fear-not

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.