Monthly Archives: December 2011

Wealth Advice: Can High Income Earners Fund A Roth IRA?

Tues, DEC 20th, 2011

Evaluating your investment options is critical to financial success. Below, Albion Wealth Advisor Devin Pope explores a strategy that could prove beneficial; a strategy that many may not even know exists.   Jason Ware Market Strategist, Analyst (801) 487-3700; (877) 487-6200

============   Wealth Advice: Can High Income Earners Fund Roth IRAs?

The Roth IRA is a powerful investment tool for investors. The assets in the Roth IRA grow tax deferred and qualified distributions are free of tax. Having a bucket of Roth IRA funds makes sense for almost any investor. The issue is there are restrictions to be able to fund the Roth IRA. For instance, individuals that earn over $125,000 and couples that make more the $183,000 in 2012 cannot fund the Roth IRA. Also, prior to 2010 investors could only convert IRA assets to a Roth IRA if their modified adjusted gross income [MAGI]was below $100,000. In 2010, the $100,000 modified adjusted gross income [MAGI] limit was eliminated opening the door for all income earners to convert IRA assets to a Roth IRA.

Determining whether it makes financial sense to convert IRA assets to a Roth IRA is specific to each individual or family.  But, the option to move funds into a Roth IRA for those investors who earn above the aforementioned income thresholds is available. If [and this is an important if] the investor doesn’t currently have any IRA assets they could make a non-deductible IRA contribution and then convert that contribution into a Roth IRA in the very same day. With this strategy you do not get a deduction for the IRA contribution but you also do not have to pay any taxes on the Roth conversion. This strategy allows high income earners to build up their Roth IRA financial bucket.

One caveat, if you currently have IRA assets this strategy may not be effective because the IRS uses a pro rata rule in determining non-deductible IRA assets and deductible IRA assets when completing a conversion. In other words, you can’t cherry pick the assets you want to convert to your Roth IRA.

For more information about this Roth IRA strategy please contact Albion Financial Group. Further, we recommend that you consult your tax advisor to determine if this is the best way to build your Roth IRA financial bucket.   Devin B. Pope, CFP®, MBA

The Submariner – Deep Data Dive: November Jobs Report and the Economy

Fri, DEC 2nd, 2011

The economy continued along its modest recovery path with the BLS’s November Employment Situation report. Out in front was the headline 8.6% unemployment statistic boasting a 0.4% drop from October. More important is its psychological significance – the rate fell under the 9% line for the first time in 26 months [March 2009]. While that may sound like a whiz-bang report, not everything contained in it was so strong.

As with most things, the devil is often in the details.

Underneath the report’s hood there is a lot going on. Average income and hours worked were flattish; the private sector added 140k jobs; governments shed 20k; factory jobs were flat; retail hires jumped due to seasonal factors; October was revised up [as we forecasted]; and 315k people left the labor force. It’s worth taking a moment to explore this last metric.

In October, the unemployment rate dipped 0.1% on what I referred to as “clean” move down. That is, unemployment dropped while the labor force increased. Indeed, we become truly constructive on labor activity when employment and labor participation increase as unemployment falls. This type of action exhibits a healthy tightening of the job market. This morning, the team at Citigroup calculated the effect those who left the labor force had on the unemployment rate. By their math, nearly 50% of the drop can be attributed to this decrease in labor force participation. In other words, had the labor participation rate remained flat unemployment would have clocked in at 8.8%. Still – a nice number, but not as impressive as headlines suggest. This augurs the headline rate to potentially tick back up a bit over the next couple of months as those marginally attached re-enter the pool. This will be especially true if sentiment improves.

There are still structural problems in labor. Over thirteen-million people are without work of which nearly 47% have been unemployed over six months, with an average duration of almost forty-one weeks. Much of these structural labor pains are a direct result of housing, which pre-bust supplied 30-35% of new jobs to the market. As housing remains depressed, and with new home construction sitting at a run-rate around 25% of pre-bust levels, there are indisputable skills mismatches rendering it difficult to achieve meaningful strides in employment. Additionally, the past decade’s aggregate demand levels were powered by housing wealth and abundant credit, both unlikely to drive consumption in the near-term. This more normalized demand profile reasons business cautious to ramp up production beyond current levels, especially after years making lean their operations. If demand doesn’t rise above its current plane, hiring will struggle to break out.

Effects on production.

Applying Okun’s coefficient we can quantify the current output gap, or lost economic potential, caused by the high levels of joblessness. Assuming a “natural rate” of unemployment around 5% and a median 2011 rate of 9.1%, the output gap as a result is around 8%. Or simply put, if unemployment fell back toward the natural rate the economy’s production frontier would greatly expand. The 0.4% drop for November theoretically equates to almost 1% of increased economic activity. Indeed, hiring must pick up to propel the economy to above trend growth.

But we are moving in the right direction.

Since the recession ended almost three-million jobs have been created, with roughly 140k net adds per month this year alone. That is enough new positions per month to absorb natural labor force population growth plus a small surplus. It’s a trajectory supportive of sluggish yet positive GDP growth of around 1.5-2%. However, in order to kick-start the economy beyond that 2% bogey the jobs engine must get out of second gear. Either demand has to surge or nascent industries and technologies must trail-blaze new job creation. The achievability of both rest in the hands of policymakers.

In broad terms, we are optimistic that employment continues to improve going forward. Many of the leading indicators we consider most reliable – labor productivity, hours worked, jobless claims, household employment surveys, new orders – are signaling hiring must eventually begin to bend before it breaks. If the global economy holds the line, at some point demand will swell to a point where companies simply cannot fulfill orders at current staff levels. Admittedly, this is likely a few turns down the road. But, like any engine it needs continuous small doses of fuel to successfully arrive at its destination.

Jason Ware, MBA Market Strategist, Analyst (801) 487-3700; (877) 487-6200

Wealth Advice: Taxation of Corporate Premium Bonds

Thurs, DEC 1st, 2011

The below entry was penned by Devin Pope, a financial advisor here at Albion. I found the information concise and insightful speaking on a topic that is often anything but – bond taxation.

Jason Ware Market Strategist, Analyst (801) 487-3700; (877) 487-6200


A bond is considered a “premium bond” when the purchase price is greater than its face value. Investors typically see more premium bonds in the market when interest rates are decreasing – as they have over the past several years – because bond prices and interest rates have an inverse relationship. When interest rates fall investors are more willing to pay a premium, or a higher price for that same bond, because the coupon [i.e. interest payment] is superior relative to what you would receive buying a new issue.

Indeed, given the decline in interest rates over the past several years many high quality or investment grade bonds on the secondary market are now selling at premiums. This is known by market participants and bond holders alike. What most investors may not know is that they have an option in dealing with the taxation of these premium bonds. According to publication 550 of the IRS tax code, if a bond yields taxable interest you can choose to amortize that premium or show it as a capital loss. By amortizing the premium you diminish the amount of taxable interest included in your income and reduce your basis in the bond so that when it matures your cost basis is the same as the face value. For instance if you paid $105,000 for a corporate bond with a face value of $100,000 and 5 years until maturity, you could reduce that bond’s income by $1,000 a year while amortizing the value of the bond by the same amount. The second option is to show a $5,000 capital loss when the bond matures in year 5.

Most custodians will either show the amortization method or the capital loss method on the 1099 tax form. An investor can change to the amortization method but they will need written approval from the IRS. Once the change is made it will be binding for all current taxable bonds owned and all future bonds purchased. Of course, it is prudent to discuss with your tax advisor to determine which method is best suited for your individual situation.

Devin Pope, MBA, CFP®