because wealth management is
more than managing money
T H E C O M PA S S
WINTER 2015
THIS ISSUE
Supersize Your Roth IRA
2
Seeking Wisdom
3
Behind the Scenes
4
67 Experts Can’t Be Wrong…Or Can They?
b y D a n To l o m a y, C FA
hile visiting family over the holidays, I was posed
the question – as those in our field often are –
“So, what’s the market going to do in 2015?”. After
sharing my thoughts on some positive trends and some
potential threats, I stated that the questioner’s guess was as
good as mine. My response was met with an incredulous
look. How could I not know what was going to happen
and not have a big idea ready to share?
A survey by Bloomberg in April 2014 offers a solid
example of the dangers of predictions and making drastic
portfolio moves based upon them. Sixty-seven economists
were asked where they saw the 10-year Treasury yield in six
months. Every single one of them predicted the yield
would rise.
On the date of the survey, the 10-year Treasury was at
2.73% (down from 3.04% at the beginning of the year). Six
months later, at the end of the forecast period, the yield
had fallen further to 2.25%. What if you had made a major
portfolio change based on this forecast that 100% of
experts agreed on?
A common move to avoid the damage caused by rising
rates is to move to short-term bonds, which are less
sensitive to rate increases. The U.S. bond market returned
3.26% over the six months that rates were sure to rise. If
you’d moved to the short-term (1-3 year) bonds, your
W
return would’ve been only 0.74%. Worse still, if you’d made
a move contrary to what these gurus had predicted and
moved to long-term (10+ year) bonds, your return would
have been 7.81%.
Perhaps their timing was off. Surely, rates would rise
before year end! Ultimately, the rate ended the year at
2.17%. From the end of their forecast period to December
31, 2014, the bond market gained 0.38%, short-term bonds
fell 0.26%, and long-term bonds rose another 2.37%.
4/22–10/22
10/22–12/31
4/22–12/31
-0.48%
-0.08%
-0.56%
U.S. Bond Market
3.26%
0.38%
3.65%
Short-Term Bonds
0.74%
-0.26%
0.47%
Long-Term Bonds
7.81%
2.37%
10.37%
Change in
10 Year Treasury
In the spirit of full disclosure, Trust Company of the
South does make occasional tactical moves based on
economic conditions – including a slight shortening of our
bond portfolios in anticipation of rising rates. We
recommend making such moves sparingly and at the
margins, though. This is but one example of how easy it is
for experts to be wrong about an outcome and the cost of
making frequent, drastic moves in one’s portfolio.
NOTABLE QUOTE: “THE FUTURE IS NEVER CLEAR; YOU PAY A VERY HIGH PRICE IN THE STOCK MARKET FOR A CHEERY CONSENSUS.
UNCERTAINTY ACTUALLY IS THE FRIEND OF THE BUYER OF LONG TERM VALUES…..” WARREN BUFFETT”
because wealth management is more than managing money
Supersize Your Roth IRA
b y J o n a t h a n H e n r y, C PA , C F P ®
hanks to an IRS ruling issued in September of 2014, high
income earners can now supersize their Roth IRA accounts
with after-tax contributions to a traditional 401(k). A Roth
IRA is an individual retirement plan that is similar to a
traditional IRA in that both accounts allow assets to grow in a
tax-deferred manner; however, contributions to a Roth IRA are
not tax deductible and distributions are generally tax free.
Additionally, Roth IRAs are not subject to required minimum
distributions (RMDs). The tax-free nature of Roth IRA
distributions and the avoidance of RMDs is what makes these
accounts so attractive. However, married filers with adjusted
gross incomes (AGI) above $193,000 in 2015 and single filers
with AGIs above $131,000 are precluded from making
contributions to a Roth IRA.
The Roth IRA supersize strategy is an approach whereby
after-tax contributions are made to a traditional 401(k) and then
the after-tax amounts are rolled into a Roth IRA upon
separation from your employer. Segregating the after-tax money
was possible before September 2014, but required a set of
complex steps. With their ruling last September, the IRS has
given us new, simpler guidance for rolling the after-tax money
to a Roth IRA. Employees with after-tax money in a 401(k) can
take a complete distribution and direct the plan administrator to
send the pretax dollars tax-free to a regular IRA (or another
401(k) plan) and then roll the after-tax contributions into a
Roth IRA tax-free. Note that this is not the same concept as
contributing to a Roth 401(k). The earnings from contributions
to a Roth 401(k) can be rolled tax-free to a Roth IRA but the
earnings from after-tax deductions to a traditional 401(k) must
stay in the pretax bucket upon distribution.
T
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THE COMPASS Winter 2015
After-tax contributions to a 401(k) generally make sense
after the annual 401(k) maximum contribution has been met. In
2015 this is $18,000 or $24,000 if age 50 or older. There is also
an annual limit on the total amount of employee and employer
contributions made to a retirement plan on a worker’s behalf.
This amount is $53,000 in 2015 or $59,000 if age 50 or older. If
an employee under age 50 contributes $18,000 to their 401(k)
plan and their employer contributes a $6,000 match, the
employee can contribute another $29,000 to the plan with aftertax dollars. Over time, the amount of after-tax contributions
that can accumulate in the 401(k) and subsequently be rolled
tax-free into a Roth IRA may amount to a large sum of money.
This strategy does not apply to after-tax funds (nondeductible
contributions) in a regular IRA. IRS rules don’t allow traditional
IRAs the ability to segregate nondeductible contributions and
convert just that portion into a Roth IRA. In this scenario, only a
portion of the amount converted to the Roth IRA will be taxfree, based on the ratio of your nondeductible contributions to
the total value of all of your IRAs. Here’s an example to illustrate
the difference between the two:
Assume you have a $100,000 regular IRA that
includes $10,000 of nondeductible after-tax
contributions. If you were to convert $10,000 of that
account to a Roth IRA, only 10% of the transaction
would be tax-free (the ratio is 10%). On the other hand
let’s assume you have a $100,000 401(k) with $10,000 of
after-tax contributions. If you were to rollover $10,000
to a Roth IRA (and the remainder to a regular IRA) the
entire transaction would be tax-free.
For those high income earning taxpayers who are ineligible
to contribute to a Roth IRA, consider supersizing your Roth
IRA with after-tax contributions to your traditional 401(k).
The information contained in the Compass is not intended as investment, legal, or tax advice. Please consult with your professional advisor to determine the appropriateness of any
strategies to your specific circumstance. Copying this publication without permission of The Trust Company of the South is prohibited. © Copyright 2015 The Trust Company of the South.
Seeking Wisdom
By Chris Sutherland, CPA
was not much of a reader growing up. I’m not sure I should
admit it (and my kids will not be reading this!), but I
generally used every short cut available to avoid reading
novels for school. My short cuts generally worked as I made
good grades, but I certainly didn’t gain any wisdom.
My desire for wisdom has increased along with my age and
one of the best ways to expand wisdom is by reading. I read
24 books in 2014, from a variety of genres, and took something
away from all. Below are eight favorites of the year and one
bonus book that I read a few years ago.
I
The Road to Serfdom by F. A. Hayek – A cultural, economic
classic written over 60 years ago, but just as relevant today as it
was then. A commentary on the relationship between
individual liberty and government authority, it’s worth reading
as it illustrates how well-meaning people act in ways that result
in unintended outcomes.
The Reason for God by Timothy Keller – A book just as much
for believers in God as non-believers. One of Keller’s central
themes: believer or not, we all have a set of beliefs that guide
our lives.
Ike’s Spies by Stephen Ambrose – An inside look at how
Dwight Eisenhower led America’s secret operations during
World War II and beyond, both as a general and President.
The book provides a behind-the-scenes look at espionage
successes and failures.
How Will You Measure Your Life by Clayton Christensen, James
Allworth & Karen Dillon – Originally a speech to the Harvard
Business School’s graduating class about finding meaning and
happiness in life. This is a self-help book for just about anyone
- parents, students, or professionals - that will give you tools to
build stronger relationships and lead a more satisfying life.
Blind Spots by Max Bazerman & Ann Tenbrunsel – Why we
fail to do what’s right and what to do about it. We all have
“Blind Spots” or unconscious biases that affect how we act.
Recognizing those biases is very difficult, but knowing they
exist at least provides a starting point for improving our
decision making.
Continued on back cover
THE COMPASS Winter 2015
3
Seeking Wisdom Continued from page 3
The Road to Freedom by Arthur Brooks – How to win the fight
for free enterprise by doing what is morally right. Brooks not
only presents problems with America’s current policies; he
offers solutions. It is a moral defense for change that not only
protects free enterprise, but provides all with equality of
opportunity and the possibility to earn success.
To Kill a Mockingbird by Harper Lee – A masterpiece of
American literature. The vast majority of you know the story,
but have you read it since high school (or perhaps, you didn’t
read it in high school)? In light of behavior in America today,
this book makes me wonder if we truly are better off. We need
more people with the hearts of Atticus and Calpurnia.
Prodigal God by Timothy Keller – Recovering the heart of the
Christian faith. In the parable of the Prodigal Son, most people
focus on the waywardness of the younger son. Keller shows us
how the elder son is equally (if not more) lost and separated
from God.
Bonus book: Unbroken by Laura Hillenbrand – Skip the movie
and read the book. This is a true story that reads like fiction
about Louis Zamperini, an American hero from World War II.
For a full review, see our Summer 2011 Compass on our
website.
If you have read something you feel is special, I’d love to hear about it and add it to my list. Contact me at [email protected].
To hear more about interesting books, articles and blogs I’ve come across, follow me on Twitter @CSutherland94.
BEHIND THE SCENES
• Chief Investment Officer Dan Tolomay and his wife Kim
are proud to announce the birth of their son Andrew Joseph
on October 7, 2014.
• Director of Financial Planning Jonathan Henry and his wife
Katie are proud to announce the birth of their daughter
Elizabeth Patricia on January 10, 2015.
• Operations Officer Brandon Cook recently celebrated his
10th year of employment at Trust Company of the South.
Thanks for all you do Brandon!
• Client Relations Officer Susan Fitch and her husband Mike
are proud to announce the wedding of their daughter
Hannah C. Fitch to the Honorable Bradley Reid Allen,
Chief District Court Judge of Alamance County. The
ceremony was held on December 13, 2014 at the Marquesa
in Key West, Florida.
• Principal Bill Noble and his wife Terry are pleased to
announce that their oldest son Will graduated from
North Carolina State University this past December with
a degree in Sports Management.
BURLINGTON OFFICE
THE COMPASS Winter 2015
CHARLOTTE OFFICE
®
William H. Smith, CFP
CEO, President
336.538.1000
[email protected]
Mitchell H. Paul, CPA
Principal
336.538.1000
[email protected]
William H. Noble
Principal
919.781.8287
[email protected]
Jay D. Eich, CFP , CPA
Principal
704.936.4302
[email protected]
Bradley V. Sutton
Principal
336.538.1000
[email protected]
Wallace M. Williams, CPA
Principal
336.538.1000
[email protected]
Jonathan S. Henry,
CPA, CFP®
Director of
Financial Planning
919.781.8287
[email protected]
Christopher N.
Sutherland, CPA
Principal
704.936.4303
[email protected]
®
44
RALEIGH OFFICE
THE TRUST COMPANY OF THE SOU TH
800.800.9440
www.tcts.com