YOUR FINANCIAL FUTURE March 2014 In This Issue Independent Investor March 2014 April 15 -- the deadline to fund an IRA -- is just around the corner. So act now to shore up your existing IRA strategy or to open a new account. We hope this educational resource proves helpful. We believe an educated investor is a better investor. Please call us if you have questions. Robert Vettorel Washington Financial Wealth Management Division Senior Vice-President 77 South Main Street Washington, PA 15301 724.206.1290 Fax: 724.222.2722 robert.vettorel@lpl.com http://www.mywashingtonf inancial.com In Volatile Markets, Investors May Find Comfort in Dividends Dividend-paying stocks offer an attractive mix of features and can help cushion the effects of market volatility. Five Cash Management Tips for Small Businesses Learn about a number of simple yet effective ways to help you manage and improve the cash flow of your business. Tips for Improving Your Credit Scores While consumers' knowledge about credit scores and what they can mean to their overall financial outlook has improved significantly, there is still much room for improvement. Retirement and Health Plan s for 2014 The IRS has released the cost-of-living adjustments affecting dollar limitations for retirement and health insurance plans.
2 Independent Investor March 2014 Up With Your IRA: Tax Season Tips If you're one of the millions of Americans who owns either a traditional individual retirement account (IRA) or a Roth IRA, then the approach of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It's also a good time to open an IRA if you don't already have one. The deadline for funding an IRA for tax-year 2013 is April 15. The following checklist should provide you with food for thought as you plan your IRA moves in the coming weeks. Which Account: Roth IRA or Traditional IRA? The primary difference between a traditional IRA and a Roth IRA is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free. 1 In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement. If you need the immediate deduction--and you qualify for it--then you may wish to opt for a traditional IRA. If you don't qualify for the deduction, then it is almost certainly a better idea to fund a Roth IRA. Deductibility Guidelines Your ability to deduct contributions to a traditional IRA is affected by whether you are covered by a workplace retirement plan and your income level. If you are covered by a retirement plan at work, your deduction for contributions made to a traditional IRA in 2013 will be reduced (phased out) if your modified adjusted gross income (MAGI) in 2013 was: Between $95,000 and $115,000 for a married couple filing a joint return. Between $59,000 and $69,000 for a single individual or head of household. If your MAGI was higher than the phase-out ceilings listed above for your filing status, then you cannot claim the deduction. Note that the deductibility phase-out ranges for the 2014 tax year are: Between $96,000 and $116,000 for a married couple filing a joint return. Between $60,000 and $70,000 for a single individual or head of household. Should You Convert to a Roth? The IRS allows you to "convert"--or change the designation of--a traditional IRA to a Roth IRA regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in--and on the amount of any deductible contributions previously made to--the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% penalty normally imposed on early withdrawals. The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert. Maximize Contributions If possible, try to contribute the maximum amount allowed by the IRS: $5,500 per individual, plus an additional $1,000 in catch-up contributions for those aged 50 and older. These amounts pertain to tax-year 2013 as well as tax-year 2014. Of course, not everyone can afford to contribute the maximum to an IRA, especially if they are also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer's matching contribution, then that "free" money may be more valuable than the amount of any deduction you may be able to claim. As a result, it might make sense to maximize plan contributions first, and then try to maximize IRA contributions.
3 Review Distribution Strategies If you are ready to start making withdrawals from an IRA, you will need to choose which distribution strategy to use: a lump-sum distribution, required minimum distribution or periodic distribution. Keep in mind that your distribution strategy may have significant tax time implications if you own a traditional IRA, because taxes will be due at the time of withdrawal. Be sure to consult with your financial and/or tax advisor about the tax ramifications of the various distribution methods before selecting a distribution strategy. April 15 is never that far away--so don't hesitate to use the remaining time between now and then to shore up the IRA strategies you will rely on to help support you in retirement. 1 Early withdrawals (before age 59½) from a traditional IRA may be subject to an additional 10% penalty tax. Early and other nonqualified withdrawals from a Roth IRA may be subject to taxation as well as the 10% penalty. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. This article was prepared by Wealth Management Systems Inc., and is not intended to provide specific investment advice or recommendations for any individual. Please consult me if you have any questions. Because of the possibility of human or mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth Management Systems Inc., 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 Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers' or others' use of the content. 1-249896
4 In Volatile Markets, Investors May Find Comfort in Dividends As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find dividend-paying stocks offer an attractive mix of features and warrant a place in their equity portfolios. Dividend payouts are often seen as a sign of a company's financial health and management's confidence in future cash flow. The appeal is simple: Dividend-paying stocks can provide investors with tangible returns on a regular basis regardless of market conditions. The Benefits of Dividend-Paying Stocks If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the long-term benefits of dividends and their reinvestment. A sign of corporate financial health. Dividend payouts are often seen as a sign of a company's financial health and management's confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength. A key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return. Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats -- those stocks within the S&P 500 that have increased their dividends each year for the past 25 years -- produced annualized returns of 11.29% vs. 8.55% for the S&P 500 overall, with less volatility (13.91% vs. 15.04%, respectively). 1 The Growth of Dividend-Paying Stocks, 1950-2012 2 If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind. Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios.
5 Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market. Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill that passed in early 2013 made the 15% top tax rate on qualifying dividends and other forms of investment income permanent for most investors, though it did raise the top rate to 20% for certain high-income investors. However, this is still lower than the 39.6% top rate on ordinary income. Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice. 1 Volatility is measured by standard deviation. Past performance is no guarantee of future results. 2 Source: Standard & Poor's. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad U.S. stock market. For the period January 1, 1950, through December 31, 2012. Past performance is not indicative of future results. Investors cannot invest directly in any index. 2014 Wealth Management Systems Inc. All rights reserved. 1-044954
6 Five Cash Management Tips for Small Businesses Small businesses face the same cash flow issues that large businesses do, and many of the cash management practices employed by big companies also work for small businesses. There are a number of strategies and procedures that can help you smooth out cash flow and grow your business. Below are some tactics and cash management policies to help you better manage your company's cash flow. Establishing and using a line of credit is a wise move if you want to grow your business. Tip 1: Understand Your Cash Flows Before taking steps to better manage your cash flow, you first need to understand it. What are your inflows and outflows? How flexible is the timing of each? As simple as this step sounds, surprisingly few small businesses take the time to map out a cash flow strategy. When putting together your annual budget, make sure to prepare a cash flow projection, which provides a month-by-month estimate of the amount of cash you are likely to need, any borrowing requirements you may have, or alternatively, the amount of excess cash that may be available for investment. When preparing your cash flow projection, remember to factor in payment delays, tax payments, and planned capital outlays. Tip 2: Bill Promptly One easy way to improve cash flow is to bill frequently. Rather than billing all accounts at the end of the month, send out bills as soon as they become payable. Over time this practice can produce significant savings in the form of reduced "float." Using payment incentives is another way to reduce collection time. Offering a 1% or 2% discount for payment within 10 days, for example, can provide sufficient incentive for many clients to pay quickly. If your average collection time is several months, an incentive plan can make a noticeable difference and more than pay for itself over time. Tip 3: Follow Up on Receivables Following up on unpaid receivables is just as important as following up on sales leads. If your default rate is 5% or more, you probably need to improve your bill follow-up procedures. A general rule of thumb is to rebill if unpaid after 30 days and send a late notice after 60 days. It's also a good idea to call the delinquent customer at this time. Persistence is critical in collecting unpaid bills. For problem accounts, consider using a collection agency. Collection agencies will usually charge a significant percentage of collected amounts, but they are more than willing to do the dirty work and often manage to collect on bills you might have written off as uncollectible. Tip 4: Actively Manage Your Inventory If your business involves maintaining an inventory, you are probably already aware of how much money goes into creating that inventory, but you may not realize how much money it's costing you to maintain. Money tied up in inventory is money that could be used for other reasons. Inventory management can be a complex affair, depending upon the nature of the product, customers, and distribution process. For a small business, it is important to monitor inventories on an ongoing basis and avoid maintaining inventories that exceed anticipated sales. Tip 5: Take Advantage of Short-Term Financing Many smaller businesses may be reluctant to use financing, preferring to rely on internal sources to fund temporary shortages in cash flow. But as your business grows bigger, this practice can put a stranglehold on growth and you may find yourself making excuses not to purchase that much-needed piece of equipment just for the sake of meeting day-to-day cash needs. In fact, establishing and using a line of credit is a wise move if you want to grow your business. It's a good idea to establish a line of credit early on, even if your business is small. Over time, you'll build up a relationship with your lender that may later accommodate more significant financing. And at today's low interest rates, short-term financing can be very affordable. 2014 Wealth Management Systems Inc. All rights reserved. 1-228763
7 Tips for Improving Your Credit Scores Americans have become more informed about certain aspects of their credit scores, but many still don't know enough about the risks associated with low scores and alleged "credit repair" services. 1 A score of 680 or lower will make it more difficult for you to get approved for credit and will probably increase the interest rate you are offered. While a majority of consumers know some of the basics about credit scores, many are still unclear about some of the most important facts. For example, a majority of respondents knew that mortgage lenders and credit card issuers use credit scores. However, less than 40% knew that many other service providers also use these scores, including landlords, home insurers, utility companies, and cell phone companies. A sizable minority also falsely believe that credit scores are influenced by their age (43%) and marital status (40%). What You Can Do A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your score, the lower the perceived risk to the lender, and the more attractive the interest rate you will be offered. A score of 680 or lower will make it more difficult for you to get approved for credit and will probably increase the interest rate you are offered. Here are some tips for raising or maintaining a higher credit score: Pay your accounts on time. Lenders are looking for a proven track record of making timely payments. Payment history determines about 35% of your credit score. Keep your balances low. About 30% of your score is determined by what the industry refers to as your "credit utilization ratio," which is the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower. Open a credit card account. While many Americans are turning to prepaid credit cards or debit cards to help them better manage their finances, this can work against your credit score. Without any credit history, you could be considered "unscoreable" and may have difficulty in obtaining credit. Don't open too many credit lines in a short period of time. Each time you apply for a loan or credit card, the lender will make an inquiry into your credit score, which typically knocks points off of your score. Hold on to older, unused accounts. The longer an account has been open and managed successfully, the higher your score will be. Don't default on your payments. If you default on a loan -- such as when you file for bankruptcy or a bank forecloses on your home -- it can knock up to 100 points or more off of your credit score. Maintain a diversified credit mix. If you hold an auto loan, a home mortgage, and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of finance companies. Beware of credit repair companies. The Consumer Federation of America warns consumers away from these companies, saying that they overpromise, charge high prices, and perform services, such as correcting credit report inaccuracies, that consumers could do themselves by simply contacting the lender and the credit bureaus. 1Source: The Consumer Federation of America, Credit Score Knowledge 2013, May 2013. 2014 Wealth Management Systems Inc. All rights reserved. 1-199482
8 Retirement and Health Plan s for 2014 The IRS has released the cost-of-living adjustments affecting dollar limitations for defined contribution and defined benefit retirement plans. The table below compares both the retirement plan and health insurance plan limits for 2012 through 2014. Further guidance can be found on the IRS website. The maximum contribution limits for 401(k), 403(b), and 457 plans remains at $17,500. Retirement Plans 2012 2013 2014 401(k), 403(b), 457(b)(2) elective deferrals $17,000 $17,500 $17,500 401(k), 403(b) "catch up" contributions for ages 50+ $5,500 $5,500 $5,500 SIMPLE plan elective deferral $11,500 $12,000 $12,000 SIMPLE "catch up" contributions for ages 50+ $2,500 $2,500 $2,500 Defined contribution plan maximum $50,000 $51,000 $52,000 Defined benefit plan maximum $200,000 $205,000 $210,000 Maximum includible compensation $250,000 $255,000 $260,000 Highly compensated employee $115,000 $115,000 $115,000 FICA taxable wage base $110,100 $113,700 $117,000 Health Insurance Plans 2012 2013 2014 Health Savings Account (HSA) contribution limit -- individual $3,100 $3,250 $3,300 HSA contribution limit -- family $6,250 $6,450 $6,550 HSA "catch up" contributions for ages 55+ $1,000 $1,000 $1,000 Minimum deductible for high-deductible health plan (HDHP) -- individual $1,200 $1,250 $1,250 Minimum deductible for HDHP -- family $2,400 $2,500 $2,500 Maximum out-of-pocket for HDHP -- individual $6,050 $6,250 $6,350 Maximum out-of-pocket for HDHP -- family $12,100 $12,500 $12,700 Flexible Spending Account (FSA) contribution limit No limit* $2,500 $2,500 *While there was no limit for contributions, most plans capped them at $5,000 or less. 2014 Wealth Management Systems Inc. All rights reserved. 1-228772
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Robert Vettorel is a Registered Representative with and Securities are offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Washington Financial Wealth Management Division is not a registered Broker/Dealer and is not affiliated with LPL Financial Not Bank/Credit Union Not FDIC/NCUA Insured Guaranteed Not Insured by any Federal Government Agency May Lose Value Not a Bank Deposit This newsletter was created using Newsletter OnDemand, powered by Wealth Management Systems Inc.