Welcome to February!
As of January 31st, the IRS is now accepting tax returns. Aren’t you excited?
One of my “mentors” Jim Rohn tells the story of The Goose That Lays the Golden Eggs. His story starts off by saying “taxation may seem like a strange place to begin the discussion of creating wealth.” And from the outside it may seem strange, but legally controlling your taxes is a vital wealth building principle to know.
It took some time for Mr. Rohn to become a happy taxpayer, but if you begin to understand the function of taxes and the incentives to legally avoid them then you too can become a happy taxpayer as well.
You see, the government gives you incentives (aka tax breaks) to direct money into areas that they believe help the economy (investment, business and real estate). So it’s up to you to know about it and take advantage of them. We are here to help you on your wealth building journey and cover the following in February as tax season begins:
· The Market Scoreboard for January 2014.
· Illuminating Insights: The Biggest Expense Standing In Your Way to Wealth…
· Readings of Illumination: Curated Articles for Your Enlightenment
Here is the market scoreboard for January 31, 2014:
Data as of December 2013
Standard & Poor’s 500 (Domestic Stocks)
MSCI World Index ex US (Foreign Stocks)
10-year Treasury Note (Yield Only)
Gold (per ounce)
Reuters/Jefferies Commodity Index (CRB)
Dow Jones REIT Index
Notes: S&P 500, MSCI World Index ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: www.stockcharts.com. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
January was the worst month for the U.S. stock market since May 2012 as the S&P 500 fell over 3.5%. International stocks did not fare any better with foreign develop markets falling 3.5% as well and emerging markets shares tumbling over 8% in January alone.
There were numerous culprits in January for the decline:
First there have been concerns of weakness in the Chinese economy and fears of an eventual debt crisis. Emerging markets account for almost 40% of the world’s economic output so any challenges there (China included) can have a much large effect on the global economy than in decades past.
Second, there has been major volatility in global currencies include the Turkish Lira and South African Rand.
Third, it’s earnings season for U.S. companies and the trend has been very disappointing. Despite recent 3.2% rise in G.D.P. companies from Amazon.com to Walmart to Mattel have let investors down with sales and profits below estimates.
Fourth, deflation fears have re-awoken in Europe. Inflation unexpectedly fell in January. Stocks typically rise in inflationary environments. 2013 was not inflationary yet stocks rose significantly. Perhaps stocks are now awakening to the deflation ogre that is lingering in the economic backdrop.
The fifth thorn in the market’s side came from another $10 billion per month reduction in money printing from the Fed. An article from Bloomberg noted this was “the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers concerned the Fed’s record $4.1 trillion balance sheet risks causing asset price bubbles.” The Fed’s reduction strategy has created more uncertainty and the market place doesn’t like uncertainty.
The more you study market history, the more clear it becomes that bear markets and stock market declines are deflationary events. With “deflation” creeping in to new stories, it’s no wonder stocks have begun to wobble. Conversely, deflationary periods create demands for bonds. In January this has proven to be the case as yields declined over 11%. Bonds are now outperforming stocks in a manner that did not happen throughout all of 2013.
Will all of the 2013 year end excitement over the stock market prove to be a costly celebration? No matter which way the market bounces, it’s imperative that you have a plan to match your underlying investment strategy with your personal goals. Whether you do it yourself or work with an advisor, a path needs to be taken that respects your goals, values and risk tolerance.
Illumination’s Insights: The Biggest Expense Standing In Your Way To Wealth
“Collecting more taxes than is absolutely necessary is legalized robbery.”–Calvin Coolidge
Can you now guess what the biggest expense is that stands is your way to wealth? Yup, Taxes.
Think about all of the taxes you pay. Federal and state income taxes. Social security and medicare taxes. Property taxes. Corporate taxes. Capital gains taxes. Sales taxes on practically everything you consume. Add them all up and it’s pretty clear that taxes are a major impediment to you keeping more of what you have.
Those that build wealth find ways to keep more of what they have made. You have to as well. This means that legally minimizing your taxes should be a focal point of your wealth planning. It may not be the number one item on the agenda (that would be actually having a plan to create wealth in the first place) but since it’s tax time, it will pay to spend some time learning more about tax minimization.
Our government legally provides incentives through tax breaks for certain financial activities. All three of the main paths to wealth’s have certain rewards for directing your capital towards them. The three paths to wealth include the traditional route by saving and investing in traditional assets such as stocks and bonds; the second path is business ownership and the third path to wealth is through real estate.
The traditional path lacks some of the major tax breaks that business ownership and real estate investment offers however it is still vital to take advantage of them. These include maximizing your tax-deferred retirement plans such as your 401(k)’s at work or traditional IRA’s as well as your tax-free accounts like the Roth IRA. Depending on your age you can also make catch up contributions that allow you to boost your tax advantaged savings even further if you are over the age of 50. Depending on your health plan, one could also find ways to save through a Health Savings Account (HSA) which has it’s limits on contribution amounts but could rank as the best retirement account there is due to its triple tax advantages. Utilizing these tools provide an immediate tax benefit to you and your money then gets to compound on a tax-deferred basis until you being to take it out at often a lower tax rate than when you first contributed to the money.
Even saving into a taxable account has it’s advantages. One can benefit from a reduced dividend tax rate and long-term capital gains tax rate. If you are in a high tax bracket, dividends and long-term capital gains are taxed at rates lower than your marginal income tax rate. Furthermore, tax efficient investments are available. From passive index funds to stocks that don’t pay dividends but grow in book value and provide yield in alternative ways. One could also buy municipal bonds or “munis” and the interest income you generate isn’t taxed by the federal government or state where they are issued. U.S. government bonds too have a tax break in that you don’t have to pay state income tax on the account.
The moral of the story is that , there are tools at your disposable to accelerate your wealth building by saving and investing properly. Think about that the next time you go to make a big purchase or lease a new car. If you aren’t maxing out your accounts you are then getting taxed on the money you spend and missing out on valuable tax savings right now.
Business and real estate ownership have even great tax advantages than the traditional route. A business owners has retirement plan contribution limits that dwarf those of the w-2 wage earner. In 2014, a business owner can put away up to $52,000 in their 401(k) or SEP IRA. The w-2 wage earner can only put $17,500 max into their employer 401(k) plan (if their employer even offers one). Beyond that, there are business expenses that are partially paid by the government and can be deducted which allow you to keep more of what you make.
And think about making an investment in an income producing property. If done correctly, you may generate positive income from renting out your property but due to tax laws you may be allowed to reduce your taxes through deprecation. So in essence your are both increasing your income and reducing your taxes at the same time. This can’t be done through traditional savings & investment or income from your employment with legal ramifications.
This is just a high level overview of the many different tax-code enabling wealth building strategies. The key thing we are trying to illustrate is that by utilizing legal tax advantages you can really accelerate your way to wealth – saving you valuable time and keeping more money in your pocket. Going forward, it would be a wise investment for you to learn more about the strategies so you too can use the appropriate ones in your own wealth plan. This is not tax advice and we suggest you consult with your tax adviser or tax professional before making any financial decisions.
Readings of Illumination
Here’s our monthly compilation of interesting articles and videos designed to keep you informed and engaged in the areas of personal finance, the economy and life. We hope you enjoy this month’s edition. Please send us your thoughts on this month’s articles and suggestions for future posts.
Economy & Business
Meb Faber Research: Market Outlook 2014
Darren Hardy: Why You Fail
Success: What’s Your Higher Purpose
Great TED Talks & Videos
Building real wealth is about living a fulfilling life. Many people spend their life pursuing money based on the false belief that more is better and money equals happiness. We are huge proponents of pursing personal financial freedom in a way that allows you to live financially congruent with your values. So as you go on your real wealth journey, we suggest you first decide what kind of life you want for your family and then determine what decisions (financial and otherwise) you need to make to get there. If you need help designing your road map, please do not hesitate to contact us. Drive safely and enjoy the ride.
All the Best,
Matt & The Illumination Wealth Team
Feel free to forward this newsletter to any of your family, friends or colleagues; if this was forwarded to you, you may subscribe here.
The opinions and forecasts expressed are those of Matt Rinkey, President of Illumination Wealth Management (IWM) and may not actually come to pass. Mr. Rinkey’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Illumination Wealth services. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of IWM’s services. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Rinkey or Illumination Wealth nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Entities including, but not limited to IWM, its officers, directors, employees, customers and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. The analysis contained is based on both technical and fundamental research. Although the information contain is derived from sources which are believed to be reliable, they cannot be guaranteed. Past performance is never a guarantee of future results