FIRST QUARTER 2014
VOLUME 3 NUMBER 1
STRATEGY FIRST
®
Financial insights for today’s investor.
IN THIS ISSUE
Market Commentary:
February 2014
Ask The
Braintrust
The Frugal Habits of
Millionaires
Business Owners: Don’t
Neglect Your Retirement Plan
Strategy First ®
Market Commentary
February 2014
The Markets
Equities recovered from January’s losses in fine style.
The Nasdaq continued to lead the pack year-to-date,
but by the end of the month the S&P 500 had set
a fresh all-time closing high. The small caps of the
Russell 2000 also had a strong month, leaving the
Dow industrials the only one of these four domestic
indices down for the year despite its February gains.
Unlike its domestic counterpart, the Global Dow
barely managed to squeak into positive territory for
2014.
The second month of cuts in the Fed’s bond
purchases seemed to have little impact on the
benchmark 10-year Treasury yield. Meanwhile, gold
saw a rebound from its recent losses, gaining almost
$100 an ounce and hitting its highest level so far
this year before settling back a bit to end at roughly
$1,320.
labor force participation rate rose slightly to 63%,
and the number of long-term unemployed fell by
232,000 during the month.
Congress agreed to avoid renewed conflict over an
increase in the debt ceiling by passing legislation
that resolves the issue until March 2015.
Tokyo-based Mt. Gox, at one time the largest
Bitcoin exchange, filed for bankruptcy after days
of suspense after its website went dark. The
company said hackers may have made off with
roughly 750,000 bitcoins owned by customers
and 100,000 of its own--the equivalent of nearly
half a billion dollars’ worth of the virtual currency.
Meanwhile, Federal Reserve Chair Janet Yellen
told a congressional committee that the Fed has
no authority to regulate Bitcoin but suggested that
Congress could look into doing so.
The U.S. economy grew a bit more slowly in Q4 2013
than previously thought (2.4%). According to the
Bureau of Economic Analysis, that put growth for all
of 2013 at 1.9%.
Manufacturing showed signs of slowing in the United
States, where durable goods orders were down for
the third of the last four months thanks to a decline
in transportation-related orders and the Institute
for Supply Management’s gauge fell more than
5%. Meanwhile, Markit/HSBC’s survey of Chinese
purchasing managers showed contraction there,
though seasonal distortion may have played a role.
The 113,000 new jobs added to the U.S. economy
nudged the unemployment rate down 0.1% to 6.5%.
Meanwhile, the Bureau of Labor Statistics said the
Housing suffered from frigid weather throughout
much of the country. Housing starts, building
permits, and sales of existing homes all saw
The Month in Review
2 | www.rjlwm.com
Volume 3 Issue 1
declines, though new-home sales were up slightly for
the month and construction spending also rose.
Eye on the Month Ahead
Inflation remained well within the Fed’s comfort level.
The biggest monthly increase in the cost of electricity
since March 2010 pushed up consumer prices by
0.1% for the month, putting the annual rate for the
last 12 months at 1.6%. Meanwhile, the Bureau of
Labor Statistics said the wholesale inflation rate was
up 0.2% in January, but the annual rate was only
1.2% over the last year.
The Fed will meet again in March and may have to
decide whether weaker economic reports in the last
month or so were a function of bad weather or signs
of something more significant. Also, the situation in
Ukraine could affect the psychology of the markets.
Market/Index
„„ Content provided by Broadridge Investor Communications, Inc.
2013 Close
Prior Month
As of 2/28
Month Change
YTD Change
16,576.66
15,698.85
16,321.71
3.97%
-1.54%
NASDAQ
4,176.59
4,103.88
4,308.12
4.98%
3.15%
S&P 500
1,848.36
1,782.59
1,859.45
4.31%
0.60%
Russell 2000
1,163.64
1,130.88
1,183.03
4.61%
1.67%
Global Dow
2,484.10
2,389.81
2,484.68
3.97%
0.02%
Fed. Funds
0.25%
0.25%
0.25%
0.00%
0.00%
10-year Treasuries
3.04%
2.67%
2.66%
-0.01%
-0.38%
DJIA
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark
performance of specific investments.
Data Source: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce
(GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management
(manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S.
Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver);
Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made
as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or
sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P
500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell
2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of
150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
Market Commentary | 3
Strategy First ®
Ask The Braintrust
I have a full-time job making $120,000. I have started a consulting business on the side and should
make $20,000 to $30,000. Should I incorporate to save taxes? Maybe in Nevada?
You probably do not want to
incorporate, because it will likely
cost you more in taxes than it will
save you. The reason for this is
FICA/self-employment taxes due.
FICA/self-employment taxes are
made up of two parts: Medicare
and Social Security. An individual
is only required to pay the Social
Security part on the first $117,000
that they earn (2014 amount) but
must pay the Medicare tax on all
earnings regardless of the number
of employers or amount of earned
income. At 12.4%, the Social Security
portion of the tax is the larger part
(Medicare is 2.9% of earnings). As
an employee ,you get to pay half of
these taxes and the company you
work for pays the other half. If you
have multiple employers and make
over $117,000 from all sources, you
as an employee can apply for a refund
of excess Social Security taxes paid
on any income over the $117,000,
but the employer still pays their part
even if the cumulative amounts from
the different employers exceeds the
threshold. A self-employed person will
only pay the Medicare tax once their
total earned income from all sources
is over the $117,000 threshold.
Because you have already maxed
out the OASDI part of the tax through
your other employment, you will only
be responsible for the Medicare
portion of the self-employment tax.
However, if you incorporate, the new
corporation will have to withhold and
pay its portion of the Social Security
taxes. This is 6.2% higher than
you would pay as a sole proprietor.
Therefore, unless there is some other
reason to incorporate, it probably
doesn’t make sense.
If you do decide to incorporate, it
doesn’t matter where you incorporate;
if you are working or residing in a
state with a state income tax, that
state will require you pay taxes on
that income. Having a corporation
in a different state does not save
you on state income taxes that you
would otherwise owe. I know that if
I have a company or rental property
in California and I create an LLC or
corporation—or whatever the case
may be—it doesn’t matter where the
LLC or corporation is created. I’m still
going to be taxed here in California.
The work is being done in California,
and I’m a California resident. And the
same goes for any state that taxes
their residents—it’s going to work the
same way. The Nevada LLC does not
get you out of state taxes in the state
of residency or the state where the
work is being done. If you want to
do a Nevada corporation, fine—but
it’s not going to do much from a tax
standpoint.
Why are my taxes going up when I include a long-term capital gain on my tax return? Our total
income for 2013 was only about $55,000, and the gain is only $12,000. That should be a 0% tax,
right? Since it’s tax free, do I have to show it on my tax return?
Any long-term capital gain that hits
us while we’re in the 15% ordinary
income tax bracket is in the 0% tax
bracket itself. So if you and your wife
make $55,000 and there’s a $12,000
gain, the total of that is well within
the 15% bracket and there shouldn’t
4 | www.rjlwm.com
be any tax. But it sounds like you’re
doing your tax return right now, and
when you put the gain in it’s showing
an additional tax. The only way that’s
happening is if the $55,000 you are
receiving is in some part coming from
Social Security. While the tax rate on
that gain itself is 0%, it is still counted
as part of the overall household
income. And the overall household
income is used to determine how
much, if any, of the Social Security
one receives is taxable. So the
inclusion of that income on your tax
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return is creating taxable Social Security income that
otherwise wasn’t taxable, and you’re paying tax on your
Social Security income, not the gain. And that’s exactly
why you have to show it on your tax return.
Should my mom sell us her house now (she is 89) or gift it to us at her death? It’s worth maybe
$420,000 now and she has lived there since my sister and I were born. I am currently 64.
I guess the answer will depend on why you want to sell the
house or put it into your names. If your mom just wants
to sell it—if she’s looking to sell it to anybody because she
just wants the cash and you guys want to keep it in the
family, then that’s a reason to sell (and I’ll discuss that in
more detail in a moment). But if she’s doing it just to try
to clean up her estate or to make things easier for you
and your sister when she ultimately passes on so that the
house is already in your name, that’s probably not the best
use of the transfer. If she gives it to you now, her basis
(or what she has paid for it over the years) becomes your
basis, and I’m assuming that over the last 64 years there
has been some appreciation in that property (especially
since it’s worth $420,000, or thereabout). So if she gives
it to you, unless you keep it until you die you’re going
to have to pay capital gains on that entire gain. If the
purpose to sell the house is to get it out of her name
when she dies, and she’s just trying to make it easier, it
would be much better to have it pass through her estate
(specifically, I would pass it through a living trust to avoid
probate). But that way you get a step up in basis. So if the
intent is not to keep the house, then she passes away, you
and your sister inherit the house, you sell it, and you don’t
have to pay any capital gains. It just works a lot better.
But let’s go back to the original intent of why you are trying
to move the house from her name to your names anyway.
If it’s just to get it out of her name, and she wants to go
on one last whirlwind cruise and spend $420,000, then
selling it could make some sense. But another problem
with selling the house is, depending upon what her basis
is, she may have to pay taxes upon the sale. It sounds
like she’s a single individual, and if dad passed away a
long time ago or they are divorced and there’s more than
$250,000 in appreciation above her basis, then mom
would actually pay taxes on any additional gain from the
property. So it’s probably better to inherit the house than
to buy it out.
Ask The Braintrust | 5
Strategy First ®
The Frugal Habits of Millionaires
The word “millionaire” typically conjures up images of a lavish, jet-setting
lifestyle, but behind the scenes, that may not always be the case. Like Warren Buffett, who famously still lives in the relatively modest house in Omaha,
Nebraska, that he bought in 1958 for $31,500, many millionaires (and billionaires) live a modest, if not downright frugal lifestyle--a lifestyle that may have
helped them become millionaires in the first place.
We’ve all heard the saying “It takes money to make
money.” So how can you find extra dollars to save
and invest? If you’re looking to improve your financial
position, consider putting some of these habits into
practice.
Cultivate a frugal mindset
Many people equate being frugal with being cheap,
but that’s not really correct. Being frugal means
carefully watching your dollars and not spending
more than you need to--a trait many millionaires
employ. To help cultivate a frugal mindset, get in the
habit of asking yourself this question: “With a little
extra effort and/or sacrifice on my part, is there any
way I can save money here?” Having a frugal mindset
can really help when it comes time to playing the
role of American consumer, where temptation is
everywhere.
be completely sufficient for your needs. According
to the book The Millionaire Next Door, the top car
brand among millionaires is Toyota, not Mercedes or
BMW. Even Mark Zuckerberg, the billionaire founder
of Facebook, has been spotted driving an Acura TSX,
an entry-level luxury car whose base price is about
$30,000. The bottom line?
As you move up the net worth ladder, avoid the
temptation to elevate your “status” by overspending
on luxury goods.
You can be smart about everyday consumer
purchases, too. You might be surprised to learn that
many millionaires clip coupons, buy in bulk, wait
for sales, scour eBay and Craigslist for deals, limit
clothing purchases, fly coach, avoid credit cards, and
save half their restaurant meal for lunch the next
day--habits that can free up cash for the occasional
splurge.
Buy wisely and sparingly
Shun debt
We all need “stuff” now and then; the key is not
overdoing it or overpaying for it. Try to buy mostly
what you really need, not what you really want.
Money you save can then be used to build your
savings and investment accounts.
Debt is bad. Well, mostly. At times taking on debt
is necessary, for example when buying a home or
attending college, because without it, many people
won’t have saved enough money But generally
speaking, you should be leery of taking on debt for
things that cause you to live beyond your means.
Remember, every dollar you borrow today is a dollar
you’ll have to pay back tomorrow, with interest.
Don’t let the price tag of your car, home, or designer
suit define your character. For example, a reliable
car that safely gets you from Point A to Point B may
6 | www.rjlwm.com
People who turn a modest financial base into
Volume 3 Issue 1
wealth often do so by living frugally, saving regularly,
investing wisely, and avoiding debt.
By contrast, people who end up in a perpetual cycle
of debt are often those who spend and borrow
excessively to support an unsustainable lifestyle.
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Take action
What do CEOs Tim Cook (Apple), Ursula Burns
(Xerox), Robert Iger (Disney), and Indra Nooyi
(PepsiCo) have in common? They’re all up by 5:00
a.m., hitting the gym, reading, working. As Benjamin
Franklin famously quipped: “Early to bed and early to
rise makes a man healthy, wealthy, and wise.” And
indeed, many millionaires and leaders aren’t couch
potatoes.
They don’t sit around waiting for things to happen;
they make things happen--by getting up early,
working hard, looking for opportunities, constantly
educating themselves, taking calculated risks,
networking, staying active, and generally trying to
improve themselves day in and day out. And with the
explosion of information online 24/7, learning new
things has never been easier.
The right plan for you and your business will depend
on a number of factors.
Consider reviewing IRS Publication 560, “Retirement
Plans for Small Business,” and consulting a qualified
financial professional before making any decisions.
Distributions from pretax accounts and nonqualified
distributions from Roth accounts will be taxed at
then-current income tax rates. In addition, taxable
withdrawals before age 59½ (in some cases age
55) will be subject to a 10% penalty tax unless an
exception applies.
All investing involves risk, including the possible loss
of principal.
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than just one financial advisor; you have access to the
collective experience of our team of credentialed advisors
including CERTIFIED FINANCIAL PLANNER™ professionals
and Chartered Financial Consultants
Raymond J. Lucia Jr., CPA
Joe P. Lucia
Chief Executive Officer
President
Rick Plum, CFP®
Matt Hansen, CFP®
Chief Financial
Planning Officer
Executive Vice President
Terry Keyes, ChFC®
Senior Vice President
Vice President,
Wealth Manager
Janean Stripe, CFP®, MBA
Jonathan Savaona, CFP®
Wealth Manager
Wealth Manager
John Ellis, CFP®
Tim Shea, CFP®
John Prokos, RFP®, RFC®
Wealth Manager
Wealth Manager
Catherine Ford, CFP®
Chris Lloyd, ChFC®, MBA
Wealth Manager
Wealth Manager
Tom Wycoff, CFP®
Brandon Hibdon, CFP®
Wealth Manager
Wealth Manager
Cernan Bernardo, CFP®
Scot Fairchild, CFP®
Wealth Manager
Rob Bradford
Wealth Manager
Scott Karl
Wealth Manager
Brenda Swenson
Wealth Manager
Ronnie Sanchez
Wealth Manager
Wealth Manager
Robert Binkowski
Wealth Manager
Rashard Cook
Wealth Manager
Ara Freedman
Wealth Manager
Kyle Uthe
Wealth Manager
Individuals identified above are registered representatives
of and offer securities through Lucia Securities, LLC, an
affiliated broker/dealer.
The Frugal Habits of Millionaires | 7
Strategy First ®
Business Owners: Don’t Neglect Your
Own Retirement Plan
If you’re like many small
business owners, you pour
your heart, soul, and nearly all
your money into your business.
When it comes to retirement
planning, your strategy might
be crossing your fingers and
hoping your business will provide
the nest egg you’ll need to live
comfortably. But relying on a
business to fund retirement can
be a very risky proposition. What
if you become ill and have to sell
it early? Or what if your business
experiences setbacks just before
your planned retirement date?
Rather than counting on
your business to define your
retirement lifestyle, consider
managing your risk now by
investing in a tax-advantaged
retirement account.
Employer-sponsored retirement
8 | www.rjlwm.com
plans offer a number of potential
benefits, including current tax
deductions for the business and
tax-deferred growth and/or taxfree retirement income for its
employees. Following are several
options to consider.
IRA-type plans
Unlike “qualified” plans that
must comply with specific
regulations governed by the
Internal Revenue Code and the
Employee Retirement Income
Security Act of 1974 (ERISA),
SEP and SIMPLE IRAs are less
complicated and typically less
costly.
SEP-IRA: A SEP allows you to
set up an IRA for yourself and
each of your eligible employees.
Although you contribute the
same percentage of pay for
every employee, you’re not
required to make contributions
every year. Therefore, you
can time your contributions
according to what makes sense
for the business. For 2014, total
contributions (both employer
and employee) are limited to
25% of pay up to a maximum
of $52,000 for each employee
(including yourself).
SIMPLE IRA: The SIMPLE IRA
allows employees to contribute
up to $12,000 in 2014 on a
pretax basis. Employees age
50 and older may contribute
an additional $2,500. As the
employer, you must either match
your employees’ contributions
dollar for dollar up to 3% of
compensation, or make a
fixed contribution of 2% of
compensation for every eligible
Volume 3 Issue 1
employee. (The 3% contribution
can be reduced to 1% in any two
of five years.)
Qualified plans
Although these types of plans
have more stringent regulatory
requirements, they offer more
control and flexibility. (Note that
special rules may apply to selfemployed individuals.)
Profit-sharing plan: Typically only
the business contributes to a
profit-sharing plan.
Contributions are discretionary
(although they must be
“substantial and recurring”)
and are placed into separate
accounts for each employee
according to an established
allocation formula. There’s no
fixed amount requirement, and
in years when profitability is
particularly tight, you generally
need not contribute at all.
401(k) plan: Perhaps the most
popular type of retirement
plan offered by employers, a
401(k) plan allows employees
to make both pre- and aftertax (Roth) contributions. Pretax
contributions grow on a taxdeferred basis, while qualified
withdrawals from a Roth
account are tax free. Employee
contributions cannot exceed
$17,500 in 2014 ($23,000 for
those 50 and older) or 100% of
compensation, and employers
can choose to match a portion
of employee contributions.
These plans must pass
tests to ensure they are
nondiscriminatory; however,
employers can avoid the testing
requirements by adopting
a “safe harbor” provision
that requires a set matching
contribution based on one of two
formulas. Another way to avoid
testing is by adopting a SIMPLE
401(k) plan. However, because
they are more complicated than
SIMPLE IRAs and are still subject
to certain regulations, SIMPLE
401(k)s are not widely utilized.
Defined benefit (DB) plan:
Commonly known as a
traditional pension plan, DB
plans are becoming increasingly
scarce and are uncommon
among small businesses due
to costs and complexities. They
promise to pay employees a
set level of benefits during
retirement, based on a formula
typically expressed as a
percentage of income. DB plans
generally require an actuary’s
expertise.
Total contributions to profitsharing and 401(k) plans cannot
exceed $52,000 or 100% of
compensation in 2014. With
both profit-sharing and 401(k)
plans (except safe harbor 401(k)
plans), you can impose a vesting
schedule that permits your
employees to become entitled
to employer contributions over a
period of time.
For the self-employed
In addition to the options noted
above, sole entrepreneurs
may consider an individual
or “solo” 401(k) plan. These
types of plans are very similar
to a standard 401(k) plan, but
because they apply only to
the business owner and his
or her spouse, the regulatory
requirements are not as
stringent. They can also have
a profit-sharing feature, which
can help you maximize your taxadvantaged savings potential.
The right plan for you and your
business will depend on a
number of factors.
Consider reviewing IRS
Publication 560, “Retirement
Plans for Small Business,” and
consulting a qualified financial
professional before making any
decisions.
Distributions from pretax
accounts and nonqualified
distributions from Roth accounts
will be taxed at then-current
income tax rates. In addition,
taxable withdrawals before age
59½ (in some cases age 55) will
be subject to a 10% penalty tax
unless an exception applies.
All investing involves risk,
including the possible loss of
principal.
„„ Content provided by Broadridge
Investor Communications, Inc.
Business Owners: Don’t Neglect Your Own Retirement Plan | 9
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