October 21, 2016
US In Weakest Recovery Since 1949
Declining business investment is hobbling an already sluggish U.S. expansion, raising concerns about the economy’s durability as the presidential campaign heads into its final stretch. Gross domestic product (GDP), the broadest measure of goods and services produced across the U.S., grew at a seasonal and inflation adjusted annual rate of 1.2% in the second quarter, according to the U.S. Commerce Department. Economic growth is now tracking at a 1% rate for 2016. This together with an annual rate of 2.1% growth since the end of the recession in 2008 makes this the weakest pace of any expansion since 1949.
This low growth results in few jobs being created as well as fewer good paying jobs being created. Low growth also might translate into a continued period of low interest rates from the Federal Reserve. Wall Street Journal 7/30-31 2016 p. A1.
Considering Leaving the U.S. If Your Candidate Does Not Win?
A growing number of people claim they will move outside the U.S. if either presidential candidate wins. If you move but keep your citizenship, the U.S. will continue to tax you. The U.S. taxes its citizens on their worldwide income, no matter where they reside. You also will not be able to escape the rules on reporting foreign bank accounts.
Those who decide to give up their U.S. citizenship could owe an EXIT tax if their average annual tax for the five years before expatriating exceeds $161,000 OR if they have at least $2,000,000 of net worth. They will be treated as selling their assets for fair market value. Kiplinger Tax Letter 6/17/16.
Investment Caution
In mid August the national election polls started to turn and Hillary Clinton started to lose ground and the momentum turned towards Donald Trump. Consequently, we determined that the stock market would become more volatile in that the market does not like uncertainty, and Donald Trump represents change from the current economic orthodoxy. Our investments have been made taking the safe view of a Hillary win. Now that it is possible that Trump could win, we started to accumulate cash and not invest the funds. The closer we get to Election Day, I believe the market will become more volatile, even selling off a bit.
Managing Finances Through Unemployment
Then comes December, when there should be tax selling after remorse over whoever wins sets in. We believe in January, the market should turn upward as people contribute to their IRAs. This is when we expect to resume our investment strategy as possibly modified based upon the election outcome as to who will be President and who controls Congress.
Given the continued weakness in the economy and the actual unemployment rate is still above historic norms, it is a good time to review the planning issues you may have when you leave a job or are laid off. No Political Experience
Maintain Liquidity - Once you are aware of an impending job change or separation, think of your cash needs and sources. File for unemployment insurance as soon as possible given the lengthy processing time. Opening a home equity line of credit can help with large, one-time expenses, and it may be advantageous to consolidate higher interest credit card debt. Since rates are low, explore whether refinancing a mortgage makes sense as well, assuming you can find a bank that will issue a loan. You should consider these two options while still employed or it may be difficult qualifying for a new loan.
Qualified Retirement Plans - Before leaving the company, review the plan for any outstanding loan balance and the plan’s options regarding the loan. Frequently, 401(k) plan loans must be paid off upon termination of employment. If liquidity is a concern, talk with your employer to see if it is possible to leave the loan in place and pay it back over time.
If money is needed from a 401(k) after leaving the company permanently, normally a 10% early withdrawal penalty exists. There are two options to avoid this penalty. If you are over 55, a separation from service exception exists as well as the “substantially equal periodic payments” method. It is important to consult a tax adviser if contemplating this option.
You may also consider a rollover of a qualified plan to an IRA or a Roth IRA. A direct trustee-to-trustee transfer should avert withholding requirements. One non-tax consideration against a rollover is the reduced creditor protection under the Employee Retirement Income Security Act (ERISA) does not apply to IRAs.
Before rolling over or transferring a 401(k) to an IRA, you should consider whether the net unrealized appreciation (NUA) rules apply. If you own company stock in a 401(k), employee stock option (ESOP), or other qualified plan, you are eligible for NUA treatment. If applicable, consult a tax adviser for the arcane rules in this area.
Restricted Stock - If you made a Sec 83(b) election on restricted stock you have already paid income taxes on stock you then forfeited upon leaving the employer that granted the stock. Those with enough influence at a job with a new company will negotiate a make-whole payment for any restricted stock they forfeited upon leaving their previous employment. However, most taxpayers are without such recourse. The 83(b) election is irrevocable.
Deferred Compensation - Review the plan details paying special attention to the distribution schedule. The key is timing. Deferred compensation plans that allow the employee to select a distribution schedule after employment ends usually require doing so within 30 or 60 days after leaving. Otherwise, the distribution will revert to a default schedule. You will need to balance your liquidity needs against the credit risk associated with the plans.
Health Insurance - COBRA - The most important coverage that one can maintain is health insurance. COBRA is an obvious choice for maintaining continuous coverage during a period of unemployment but not always the right choice. Private plans can offer more flexibility in plan design and may even save you money.
Health Savings Accounts - An HSA is portable. If a new employer offers an HSA, you can consolidate the old account into the new plan, unless you are retiring, which then involve special rules.
Flexible Spending Accounts - Unlike HSAs, flexible-spending accounts (FSAs) do not allow distributions for health insurance premiums. Equally important, FSAs have a “use it or lose it” rule meaning balance may not be carried forward from one year to the next.
If Donald Trump wins the Presidency, he will become the 5th President in history to be elected to the highest office without any prior political experience. The other four – Andrew Jackson, Zachary Taylor, Ulysses S. Grant and Dwight D. Eisenhower all had high-level military experience.
As always, if you have any questions about these or any other matters, do not hesitate to call us.
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