403b Limits for 2013

• Elective Deferral (Contribution) limit – $17,500
• Catch-up Contribution limit (for those above age 50) – $5,500

Seeking other contribution limits?  Here is an overall comparison of Contribution Limits for 2013.

Traditional IRA Contribution Limits for 2013

• Under Age 50 – Contribution Limit – $5,500
• Above Age 50 – Contribution Limit (plus Catch-up Contribution) – $6,500

ROTH IRA Contribution Limits for 2013

• Under Age 50 – Contribution Limit – $5,500
• Above Age 50 – Contribution Limit (plus Catch-up Contribution) – $6,500

• For the most up-to-date limits, please refer to the IRS website at www.irs.gov.   Refer to Publication 590.
• IRAs are subject to income considerations.  Please consult your CPA.

Seeking other contribution limits?  Here is an overall comparison of Contribution Limits for 2013.

401k Limits for 2013

• Elective Deferral (Contribution) limit – $17,500
• Catch-up Contribution limit (for those above age 50) – $5,500

403b Limits for 2013

• Elective Deferral (Contribution) limit – $17,500
• Catch-up Contribution limit (for those above age 50) – $5,500

Traditional IRA Contribution Limits for 2013

• Under Age 50 – Contribution Limit – $5,500
• Above Age 50 – Contribution Limit (plus Catch-up Contribution) – $6,500

ROTH IRA Contribution Limits for 2013

• Under Age 50 – Contribution Limit – $5,500
• Above Age 50 – Contribution Limit (plus Catch-up Contribution) – $6,500

• For the most up-to-date limits, please refer to the IRS website at www.irs.gov.   Refer to Publication 590.
• IRAs are subject to income considerations.  Please consult your CPA.
• The amounts posted under each IRA are the maximum amounts you can contribute to all of your IRAs combined (for example, if you are under age 50, your total ROTH and Traditional contribution must be $5,500 max)

Seeking other contribution limits?  Here is an overall comparison of Contribution Limits for 2013.

401k Limits for 2013

• Elective Deferral (Contribution) limit – $17,500
• Catch-up Contribution limit (for those above age 50) – $5,500

Seeking other contribution limits?  Here is an overall comparison of Contribution Limits for 2013.

Click here to read the full article.

Many investors dutifully save a portion of their hard-earned money every year in a traditional IRA.  Then, they get to a point in their life when they want to use the accumulated IRA savings.

But how do you get out what you saved?  What are the IRA withdrawal rules?  How do you calculate and determine your IRA required minimum distributions?  What happens if you need to make an early withdrawal from an IRA?

The IRS Has Specific IRA Withdrawal Rules

• Rule #1: You can start taking money out of your IRA at age 59 ½ without penalty.
• Rule #2: You must start taking required minimum distributions by age 70 ½, or by April 1st of the following year. All subsequent IRA required minimum distributions must be taken by December 31st of each year.
• Rule #3: Early withdrawal from an IRA before age 59 ½ means you will pay a 10% penalty, no exceptions.

Calculating your Required Minimum Distribution

Required Minimum Distributions (RMD) are actually not that complicated to figure out.  Take the Fair Market Value (FMV) of your IRA on December 31 of the previous year and divide it by the IRS Minimum distribution incidental benefit (MDIB) factor. The MDIB factor is based on the age you will obtain on December 31st of the current calendar year.

Most financial institutions, brokerage firms and registered investments advisors do this calculation for their clients every year.  And, the IRS even has created a handy worksheet to help you which is available on their website at:  IRA Required Minimum Distribution Worksheet

Although you must take at least your required minimum distribution each year, you can take more. However, if you take more one year, it has no impact on your IRA distribution requirements for later years.

What if you have more than one IRA or an active 401(k)?

Your required minimum distribution (RMD) withdrawals need to be based on the total value of all of your IRA accounts.  However, you can withdraw the funds from one source (ie. one of your IRAs).

If you are still actively employed at the company that administers your 401(k), you may not need to make withdrawals until you retire (or if you are a 5% owner in the company).  With 401(k)s, your required minimum distribution is based solely on the individual value of each account. So, if you have more than one 401(k) account, you’ll have to take a separate withdrawal from each.

Penalties and Taxes on your RMD

The IRS penalty for not taking your required minimum distribution is severe – a 50% penalty on the withdrawal you failed to take. If you miscalculated, there is a form you may file to ask forgiveness (and a refund of the fine).  It is, of course, up to the IRS to accept your remedy.

Normal IRA distributions (taken above age 59 1/2) are taxed at the account owner’s income tax rate although there may be exceptions that you can discuss with your accountant or CPA.  (NOTE:  Roth IRAs are very different. Because the money paid in is after-tax dollars, you are not required to make required minimum distributions, and withdrawals are not taxed.)

Do Other Accounts Have Required Minimum Distributions?

Many of the rules for required minimum distributions for IRAs also apply to your 401(k), 403(b) and 457(b) plans as well. Remember, these are pre-tax dollars that have been saved and invested so you pay taxes when you withdraw money from these accounts. However, because the withdrawals are treated as ordinary income, you do not have to keep track of gains or losses from the investments themselves.

The Department of Labor (DOL) has finally published its new fee disclosure ruling for 401k plans, generally called 408(b)2. The ruling’s requirements went into effect on July 1, 2012, and while you could argue that the goal of the new ruling is sound, some employers are struggling to understand its features.  Unfortunately, this regulation may add further confusion and extra work for plan sponsors.

About the New DOL 408(b)2 Regulation

The new DOL regulation requires service providers to give information to plan sponsors to determine the reasonableness of compensation paid to the service providers.  It also requires the service providers to disclose any conflicts of interest that may impact a service provider’s performance under the current arrangement and any direct or indirect compensation received in connection with the services they offer.

How the New Regulation Will Affect Your Company

These new 401(k) regulations mandated by the DOL will likely impact anyone who administers a company-sponsored retirement plan. Some things to consider as you work through the new rules include:

• No standardized reporting form. The disclosure information required under this new set of rules has no set reporting format. That will likely make comparing different plans and products offered by different companies more challenging. In addition, the new reporting forms used by financial companies may run dozens of pages or more.
• Sponsors are required to verify receipt of new disclosure information. Another requirement of the new ruling states that plan sponsors must receive the new disclosure documentation within 90 days of requesting it or sever their relationship with that vendor. Sponsors, especially those with multiple plans in place, will need to put a workable tracking procedure in place to avoid having necessary documentation fall through the cracks.
• Auditing is on the plan sponsor. The goal of 408(b)2 is for individual plan participants to be aware of fees, compensation and conflicts of interests that apply to their retirement plan. However, making sense of the raw data sent by the vendor, auditing it and presenting it to plan participants will be the responsibility of plan sponsors. Fees are often necessary to create a good return for the participants. It will be up to the plan sponsors to decide whether those fees are reasonable and communicate their value to plan participants.

While this may sound complicated, complying with and making sense of the new DOL regulations should not be difficult for plan sponsors who expect this influx of information and put rules in place for handling it in advance. Why not take a few minutes today to familiarize yourself with the new 401(k) regulations, just to make sure you’re ready?

Answer:  Let’s start with the easy part of this question:  ”What is an IRA Account?”

The Employee Retirement Income Security Act of 1974 (ERISA) amended the US tax code to allow for the creation of an individual retirement arrangement (or IRA) account. IRA accounts were created as an incentive to increase personal savings.

Now, to the more complicated part:  ”How does it work?”

Not all IRAs are the same, nor do they offer the same benefits.  However, ultimately, they all have a single goal – to help you save and invest for your retirement years.  All IRAs carry tax benefits for saving, but they also carry penalties for taking early withdrawals. In order to get the tax benefits available through IRA accounts, you must keep your money in the account until normal retirement age, which is usually 59 1/2. Otherwise, you could be subject to hefty penalties, fees and federal income taxes on withdrawals.

There are several types of IRAs.  We’ll briefly cover the two that are most popular among savers – Traditional IRAs and Roth IRAs.

Traditional IRAs allow you to defer some of your current income – before it’s taxed – into an account.  Within that account, you can usually make investments with your money.  The money in your IRA account grows tax-deferred until you are ready to take a withdrawal.  With a traditional IRA, you will only pay federal income taxes when you take money out of your account.  Keep in mind though, as we mentioned above, that if you make a withdrawal before you attain age 59 1/2 you could face a penalty and income taxes on your withdrawal.

Roth IRAs, however, work in a slightly different way. You deposit money – after it’s been taxed – into a special IRA account.  Just like the traditional IRA, you may choose to invest the funds in your Roth IRA.  Your investment is allowed to grow tax-deferred and the income is tax-free; you never pay taxes on interest and earnings so long as you wait until age 59 1/2 before making withdrawals.  If you take your money out too early, you may still face a penalty and income taxes on your withdrawal.

Answer:  Opening an IRA account is a relatively simple and straightforward process. You can open an IRA at most financial institutions, including many banks, brokerage firms, mutual fund companies, insurance companies, and even credit unions.  Most of these institutions will allow you to open an IRA without an initial investment, although you may pay for it with extra fees.

Many people choose to open an IRA account at a low-cost, online brokerage such as Fidelity (fidelity.com) or Schwab (schwab.com).

You can decide where to open your IRA based on your savings goals, how much you have on-hand to fund the account and the transaction fees charged on your account.  Before opening an IRA, consider researching:

• the type of investments the institution will allow;
• the fees you’ll pay for the account and for the investment;
• the costs you’ll incur for closing or transferring your account; and
• the rules about withdrawals

You can also hire a Registered Investment Advisor (RIA) firm (such as Gold Medal Waters) to open an IRA account on your behalf at a brokerage firm (our company does this for its clients).  It is important to note that most RIAs do require a minimum deposit or a minimum fee.

But does the evidence build a case for holding gold as a separate asset class? Let’s look at historical returns for the answers.

Gold’s Long-Term Performance

Investors who think of gold as having strong long-term returns base their belief on two strong performance periods in the past four decades—the most recent decade and the 1970s. These periods account for most of gold’s price appreciation.

Figure 1 documents gold’s strong performance since 2000. After hitting a twenty-year low in 1999, gold began a steady climb in the wake of the dotcom bust, stock market downturn in 2001, and the 9/11 attacks. As the decade wore on, there were Wall Street scandals, natural disasters around the world, and record oil prices. Gold’s strongest performance period has come since 2008—and investors can still recall the emotional and financial stress that came with the mortgage meltdown, volatile financial markets, and worldwide recession.

From 2000 through 2011, gold outperformed major equity asset classes around the world. In terms of real (inflation adjusted) growth, gold turned a dollar investment into $4.05, and US small cap stocks (as represented by the CRSP 6-10 Index) turned a dollar into $1.58, while the S&P 500 Index and MSCI World ex US Index lost value. Gold had a 12.3% annualized real return, versus -1.88% for the S&P 500 Index, -1.4% for the MSCI World ex US Index, and 3.9% for the CRSP 6-10 Index.

Figure 1:

Now let’s step back in time to the other strong decade for gold—the 1970s. Figure 2 documents gold’s performance relative to equities after the US dropped the gold standard in 1971. A dollar of gold in 1971 appreciated to $8.91 in real terms by January 1980, when it peaked at $850 per ounce, returning over 27% a year and far surpassing the performance of other asset groups.

Figure 2:

However, much of this rapid appreciation occurred under special circumstances in which US investors could not benefit directly.

Here’s why: In August 1971, President Nixon took the US off the gold standard, and the price was reset to $38 an ounce. In 1973, the US government decoupled the dollar’s value from gold, and the price was allowed to float freely. During 1974, the price of gold quickly shot up to $120 per ounce in the free market. Beginning in 1975, the government removed ownership restrictions and US citizens were free to directly own gold for the first time since 1933.

So, US investors could not take part in gold’s price appreciation during the first half of the 1970s, and if you disregard those early performance years, gold loses much of its glitter. From 1975 through 1980, a dollar invested in gold grew to only $2.37 (versus $8.91), reflecting an 18.4% annualized real rate of return—considerably less than the 27% return for the entire decade. Compare this performance with a 28.9% real annualized return for US small cap stocks (CRSP 6-10 Index), 6.9% for the S&P 500, and 9.4% for non-US stocks ( MSCI World ex US Index) for the shorter period.

Some investors who are old enough to remember the 1970s associate the higher demand for gold with turbulent times. The decade was marked by political unrest, war, the 1973–74 bear market, two worldwide oil shocks (1973 and 1979), stagflation, Middle East conflict, and Cold War tensions. In some ways, the 1970s resembled the first decade of this century.

Viewed in isolation, the periods suggest that gold offers a reliable source of returns during economic and market distress. But the details show that rising demand for gold in the US was due not only to economic uncertainty, but also to changing monetary policy and federal legislation on individual ownership of bullion.

Fortunately, times eventually improved—and from a broader historical perspective gold has not delivered the long-term performance that some investors imagine, especially during more stable economic periods. Figure 3 documents the real growth of a dollar invested in gold and equities over the entire period—from 1971 through 2011. Gold has provided lower inflation-adjusted growth than other assets ($7.33 per dollar invested) and a lower average return—4.9% per year versus 5.3% for the S&P 500, 5.0% for non-US stocks, and 7.3% for US small cap stocks.

Figure 3:

If one disregards the 1971–1974 period when US investors could not own it directly, gold’s long-term performance drops substantially. From 1975 through 2011, gold produced a real annualized return of only 1.82% and grew an invested dollar to only $1.95 (versus the $7.33 shown above). US small cap stocks returned 10.6% ($41.73), the S&P 500 returned 7.1% ($13.07), and non-US stocks returned 5.5% ($7.49).

Now let’s consider the twenty years between gold’s two high-performance periods in the 1970s and 2000s. Figure 4 shows growth of a dollar for the same asset groups from 1980 through 1999, during gold’s period of extreme underperformance. Those decades are generally known for global economic expansion and positive stock market returns. Yet, gold delivered a -6.5% annualized return, compared with 10.7% for US small cap stocks, 13.3% for the S&P 500, and 9.2% for non-US stocks (MSCI World ex US Index).

A dollar invested in gold dropped to 26 cents in real terms, while the other assets grew substantially.

Figure 4:

So, from a long-term perspective, gold has not experienced a reliable or sustained rise in value. In fact, its price appreciation has been limited to unpredictable, isolated episodes of high demand. Investors who attempted to time these episodes exposed their wealth to potentially higher risk and to the opportunity cost of missing out on stock market growth.

Gold as an Inflation Hedge

Some investors perceive gold as a good hedge against inflation and point to its recent record prices as evidence. Figure 5 below shows gold’s performance in nominal and inflation-adjusted terms from its price peak in 1980 through 2011. Gold’s price has climbed substantially in nominal terms. But when adjusted for inflation, a dollar of gold in 1980 was worth $1.04 at the end of 2011.

Figure 5:

Of course, gold’s performance relative to inflation has varied according to the time frame measured. In some periods, gold has outperformed inflation, while in other periods gold has failed to match it. For example, from 1970 through 2005, consumer prices more than doubled while gold lost 20% of its value.1 Gold’s unreliable performance relative to inflation also comes with much higher volatility. Since 1970, its standard deviation has been over 19%, compared with 1.2% for the Consumer Price Index (CPI).2 By this measure, gold is over fifteen times more volatile than the CPI.

Gold as a Portfolio Diversifier

Proponents also claim that gold offers a portfolio diversification benefit due to its low historical correlation with stocks. (Correlation measures how closely two securities or asset groups perform relative to each other over a given time period. 3) This may be true when gold is held as an incremental part of a broader diversified commodity strategy within a portfolio. But correlation is not the only factor to consider in diversification. Volatility also matters, and history shows that, while gold has a long-term return similar to the S&P 500 Index, its volatility approaches that of US small value stocks, an asset class that historically has demonstrated a higher average return for the higher risk. So, holding gold as an asset class can make a portfolio considerably more volatile, which may offset the potential benefit of low correlation.

Also, according to modern financial principles, the components of a portfolio should have an expected return. As a material input, however, gold does not offer the potential for generating income or earnings. Its only source of return is price appreciation caused by shifting supply and demand. As shown in historical performance, price appreciation is not a certainty.

These characteristics make gold a speculative asset, like currency or collectibles. If you put gold in a vault and wait a few decades, it will not produce anything, and its value will reflect the current spot market price. In fact, holding physical bullion may incur negative cash flows due to storage, insurance, and other costs. In contrast, a stock reflects ownership in a business enterprise that seeks to generate profits and produce more wealth. Investors who put their capital to work in the economy expect a potential return from cash flows and appreciation.

Summary

The evidence raises doubt about gold as an essential part of a portfolio. Over time, gold has not delivered significant growth relative to equities. While in real terms gold has preserved its value, it may not closely track inflation over shorter time periods. Moreover, gold’s early and recent performance should not obscure the two decades in which it depreciated considerably. Finally, gold is more volatile than other asset groups and does not generate positive cash flows, reducing its potential benefit as a portfolio stabilizer.

Famed investor Warren Buffett aptly summarized gold’s speculative nature, non-productive quality, and high opportunity cost in a Fortune article in February:

Today, the world’s gold stock is about 170,000 metric tons. If it were all melded together, it would form a cube of about 68 feet per side (fitting within a baseball infield). At $1,750 per ounce, it would be worth $9.6 trillion.

With the same amount of money, you could buy all US cropland (400 million acres with output of $200 billion annually) plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually), and still have about $1 trillion in cash.4

Some investors may prefer to hold a modest measure of gold in their portfolio, if only to feel better about uncertain times, or to include gold as one of several components in a broader commodity strategy. But they should think hard before concentrating a large part of their wealth in it.

_______________________________________________________________

Notes

1. Francesco Guerrera, “A Golden Age for Gold Loses Some of Its Luster,” Wall Street Journal, October 4, 2011.
2. Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.
3. Correlation is computed into what is known as the correlation coefficient, which ranges between ‒1.0 and +1.0. Assets that have negative correlation tend to move in opposite directions, while assets with positive correlation have more similar performance. A zero correlation indicates no relation in performance. From 1971 to 2011, gold had a slightly negative long-term correlation with the US large cap stocks (‒0.001) and one-month US T-bills (‒0.07), and low correlation with US small cap stocks (+0.022). Correlation with non-US stocks was moderately positive (+0.21).
4. Warren Buffett, “Why Stocks Beat Gold and Bonds,” Fortune, February 9, 2012.