Tuesday, September 11, 2012
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Save These Dates
Get your calendar out folks, there are a few dates you'll want to make note of. They're important for anyone who has an IRA, and that's just about everybody.
Did you inherit an IRA from someone who died in 2011? September 30, 2012 is "cash out" date. This is the last day to pay off an account beneficiary so they're not considered when determining your required minimum distribution (RMD).
Inheritance rules are tricky if there are multiple beneficiaries. The life-expectancy of the oldest beneficiary is used to calculate your RMD amounts. This can result in higher income tax and fewer tax planning opportunities for the younger beneficiary.
If one of the beneficiaries is a "nonperson," like a charity or trust, the amount may have to be distributed over an even shorter period of time.
To avoid this problem, the older person or nonperson should be removed by September 30th. They can do this by taking their full distribution or properly disclaiming their portion.
An older person has until December 31st to segregate their share into a separate account without impacting the younger beneficiary as long as no nonperson beneficiary remains after September 30th.
SIMPLE IRAs must be opened by October 1st. Employer deferral notifications must be sent by that same date. Other types of employer-sponsored plans can be set up anytime during the year.
Businesses that aren't established until after October 1st must establish their SIMPLE IRA plan as soon as feasible.
Are you regretting your Roth IRA conversion? You have until October 15th to reverse or recharacterize a 2011 Roth conversion.
If your account value dropped, this might be a good move since you paid taxes on a higher value. File an amended return to get back the taxes you already paid.
October 15th is also the deadline to remove excess 2011 IRA contributions. An excise tax of six percent is applied to excess amounts unless corrected by your 2011 tax filing deadline. As with Roth reversals, filers who met the April 15th tax deadline or filed for an extension by that date automatically receive a six-month extension to correct IRA excess contributions.
How much is too much? If you're not covered by an employer-sponsored retirement plan, your IRA contributions are unlimited. You're in the clear. Limits only apply to those who are plan participants. Learn more here.
The most important date to remember of all is December 31st. Several deadlines fall at year end.
Those over age 70-1/2 must take their RMD by the end of the year, along with IRA beneficiaries of deceased holders. If you reach this magic age in 2012, you must start taking distributions by April 1, 2013.
The last date for making a Roth conversion for inclusion in 2012 taxable income is December 31st if the Bush-era tax cuts expire.
Employers must establish solo 401(k)s or individual(k)s no later than the last business day of 2012 tax year to be eligible to make deductible contributions for 2012. To be safe, make sure the provider has the plan by that date rather than merely signing the documents. Policy differs by provider.
Contact your tax professional to learn how these deadlines impact your personal situation.
Certain points in history remain embedded in our hearts forever. Even though I was a young child at the time, I can still remember my teacher tearfully breaking the news that President Kennedy had been killed.
You're probably doing the same today recalling the tragic events of September 11, 2001. You remember the scenes that the media thought too horrifying to replay: bodies freefalling from the Twin Towers, shock-glazed eyes and ash-covered faces of those scrambling to escape the rubble, first responders racing against the flow to enter the burning, crumbling buildings.
Our hearts ached for loved ones lost. We stared blankly in disbelief that anyone could commit such a horrendous act.
We were united in spirit and conviction that we would do whatever it takes to see that justice was served. And that nothing of this nature would ever again take place on American soil.
We stood side-by-side with both neighbors and strangers, pledging allegiance to this great land we call home. Patriotic pride bound us in brotherhood.
The rich guy shared the same values as those less fortunate. White collar workers had the same goals as their blue collar brethren.
There was no black, white, Hispanic, Asian, Catholic, Jewish, Baptist, heterosexual or gay differentiation. We were Americans. One and all.
So here we are 11 years later in the midst of a presidential election where divide and conquer is campaign strategy. What a huge leap we've taken - backward.
Liberals vs. conservatives. Each party trying to convince voter groups that the other is out to get them. Both sides skewing facts to their advantage. Both losing credibility among their own ranks as well as alienating the opposition.
It's class warfare and agendas. Every economic, ethnic, cultural or special interest group wants their position supported above all else. And the politicians pat themselves on the back, making promises to both sides that they never intend to keep.
While we do not want to relive the horrors of September 11, 2001, we may be wise to relive the unified spirit felt in its wake. The terrorists did not destroy America that tragic day. We've since done it to ourselves.
A couple of weeks ago, I presented the concept of a "Balance of Payments" system of government. I hope you considered it.
In that article, I also made the comment that renowned economist John Maynard Keynes believed that natural disasters, such as hurricanes and floods, actually caused an increase in GDP. And thus prosperity. He thought the same thing about wars.
Before we discuss the merits of this argument, a few words about John Maynard Keynes (June 5, 1883 - April 21, 1946). Keynes, one of the most influential economists in history, is correctly attributed with advocating active government intervention into the private economy. Many on the right have blamed Keynes for what has been an increasingly intrusive Federal Government in economic affairs. Those on the left applaud "Keynesianism," as the only way to tame laissez-faire capitalism.
Neither side has it quite right. Contrary to popular belief, Keynes was a fan of Capitalism and believed it was the best system for allocating precious resources and creating wealth. However, he also believed Capitalism had one fundamental flaw: a portion of gross national income was inevitably saved and not invested. Keynes called this "income leakage" and believed that, left uncorrected, Capitalism would fail to create enough "aggregate demand," leading to high unemployment.
This was contrary to Say's law espoused by French economist Jean-Baptiste Say (January 5, 1767 - November 15, 1832) who argued that rational economic beings would never hoard money, "for the value of money is also perishable." Say's point was that income is either spent or invested, but seldom simply taken out of a productive use. Others have since developed Say's law into a simpler, "supply creates its own demand" concept.
Keynes disputed Say's law, and felt the government had a role of intervention in the economy to offset the leakage. By "intervention," Keynes did not believe in heavy regulations on business nor meddling in private markets. He simply believed that a capitalist economy would need periodic "stimulation" - each time the business cycle failed to create adequate demand. He thought the only way to accomplish this was to cut taxes or increase government spending, even if either action created deficits. Keynes did not much care about the nature of the stimulation as he once described:
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
Keynes is telling here and one can almost picture his tongue in cheek. Clearly building productive things is preferable. However, even ridiculous spending is better than nothing. Modern disciples of Keynes have latched onto the latter and rarely mention Keynes' tax cutting tendencies, choosing instead to focus almost exclusively on his deficit spending advocacy. Thus Keynes is also often incorrectly associated with Socialism.
On the contrary, Keynes was quite fearful of Socialism, and instead believed that Capitalism had to be assisted with periodic "stimulations" in order to preserve and tame it. By modern standards, Keynes would have been a conservative.
So was Keynes correct? One must keep in mind the context of Keynes studies. Most of his work occurred during the Great Depression, where there was certainly a lack of aggregate demand.
Yet did increases in government spending and thus aggregate demand end the Great Depression? Or even more importantly, did lack of aggregate demand cause the Great Depression in the first place?
Obviously there are differences of opinion. However, those who have studied the Great Depression since Keynes' time point to a lack of monetary accommodation as the real culprit.
The belief that monetary policy is the real culprit in controlling the economy has become known as "Monetarism," and is most closely associated with economist Milton Friedman (July 31, 1912 - November 16, 2006). Friedman did not blame Keynes for his omission on monetary policy, as Keynes simply did not have the tools available during his time to accurately measure the money supply. Therefore, Keynes resorted to the only thing that seemed available to stimulate aggregate demand: taxes and spending.
Much empirical evidence supports the monetarist's conclusion. And while Keynes pointed to the huge government spending associated with WWII as having ended the Great Depression, Friedman and many other economists who have since studied this period actually point to the rapid expansion of the money supply to finance the war as the actual remedy.
So who is correct? Both points of view have some merit, however, the money supply argument has the preponderance of evidence. Keynes' argument that saved income is a leakage incorrectly fails to identify that virtually all savings is invested in something, and thus available to the private economy (Say's Law has actually since been proven mathematically).
Monetarists acknowledge that government spending can indeed increase aggregate demand in the short run, but probably cause more harm than good in the long run. Regarding economic "short term" and "long term" arguments, Keynes once famously quipped "in the long run we are all dead." Keynes did not necessarily dispute monetarism, he simply had not studied it.
I hope this was worth the journey. Next week: Disasters and their effect on GDP....
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