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Investors Edge


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Investors Edge

  1. 1. a n e x c l u s i v e n e w s l e t t e r f o r r b c w e a lt h m a n a g e m e n t i n v e s t o r s ISSUE 1, 2012 WHAT DOES EUROPE’S DEBT CRISIS MEAN FOR INVESTORS? A s you know, Europe has U.S. financial crisis, and now they been in the news — and the are unable to support this debt. For coverage has not focused example, Greece may default on itson sightseeing tips. Instead, eyes are loans, with other countries, includingon the European debt crisis. And as an Italy, Spain, Portugal and Ireland, alsoindividual investor, you may well be facing considerable financial stress.wondering if — and how — the ripples As a result of these debt problems,from across the Atlantic will affect you. several eurozone governments are beingSome Background forced to push up the interest rates onThe troubles in Europe are actually their bonds to attract investors — androoted in the eurozone, the economic higher interest rates on governmentand monetary union consisting of 17 debt means higher borrowing costs forof the 27 European Union member companies and businesses. Furthermore,states. Certain eurozone countries it has become difficult for eurozoneran up sizable debts before the 2008 banks to borrow dollars, due to a variety Continues on page 3 WHAT CAN INVESTORS DO? No one can predict the extent to which especially important in the months fixed annuities and some types of the actions of governments and central ahead if we continue to experience permanent life insurance, both of banks can ease Europe’s debt crisis and the ups and downs we’ve seen which offer a level of guaranteed the accompanying market volatility. over the past year. Using time- returns (based on the claims-paying tested strategies such as dollar cost ability of the insurer). Plus, annuities Despite these uncertainties, you are not averaging allows you to invest a and permanent life insurance powerless to control the fate of your predetermined amount of money at a offer the potential for tax-deferred investment portfolio. In fact, you can regular interval, regardless of market growth — and annuities can be make a number of timely moves that can conditions. The amount you invest structured to provide you with an help you defend against the possibility is constant, so you buy more shares income stream you can’t outlive. of increased market fluctuations, thereby when the price is low, and fewer allowing you to continue making n Stay Diversified. Diversification is when the price is high. When you do progress toward your long-term financial still key to successful investing. In this, the average cost of your shares goals. Here are a few suggestions: addition to owning a broad range is typically lower than the average of stocks, bonds, mutual funds and n Look for Buying Opportunities. market price per share during the government securities, you’ll also The eurozone debt crisis is not period in which you are investing. want to look beyond the United a signal for you to head to the n Consider Income-Producing States for international investment investment “sidelines.” During Investments. Generally speaking, opportunities. While Europe’s debt periods of heightened uncertainty, the more volatile the markets, the crisis may cause problems for that some investors sell assets at any bigger the effect on aggressive region, and may even spread beyond price to exit the market. When growth investments. So, you Europe’s borders, it will not, by this happens, these assets become may want to take a closer look at itself, derail the growth potential cheap, as was seen at the end of income-producing vehicles, such in emerging markets — countries the third quarter of 2011, when as dividend-paying stocks, mutual such as China, Brazil and Mexico. stocks were trading at about 12 funds, high-quality municipal bonds times earnings, compared with n Review and Rebalance. During this and investment-grade corporate the long-run average, which is period of eurozone uncertainty, you bonds. These investments are closer to 15. So, focus on quality may need to review your portfolio not without their own risks, but investments that are attractively more frequently than you’ve they may be good choices in an priced, and depending on your previously done, and “rebalance” it unsettled financial environment. objectives, consider the opportunity. more often to make sure it’s still n Seek “Downside Protection.” appropriate for your risk tolerance n Think Long Term. While it’s always You can help “dampen” downside and time horizon. a good idea to maintain a long-term portfolio volatility by investing in investment perspective, it may be RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
  2. 2. i n v e s t o r s ’ e d g e , i s s u e 1, 2012 DEFICIT REDUCTION, INVESTMENT TAXES ... AND YOU I n the past year, there’s held at least one year — is scheduled to been no deficit of attempts move to 20 percent for investors above to reach a consensus on the 15% tax bracket. Also starting inreducing the U.S. budget deficit. 2013, Medicare taxes of 3.8% will beFirst, there was a report issued by a assessed on your capital gains if yourbipartisan deficit commission. Then, adjusted gross income is in excessPresident Obama and Speaker of of $250,000 (if you’re married) orthe House John Boehner engaged in $200,000 (if you’re single). So, if you’reintensive negotiations. And, most at that income level, you could endrecently, a special Congressional deficit up paying 23.8% on capital gains.committee — the so-called “Super While this rate is certainly well aboveCommittee” — also tackled the deficit the 15% rate of the past several years,problem. All three efforts, however, there are two important considerations.proved unsuccessful, which could lead First, the new rate is still below the 28%to a variety of ramifications — not capital gains rate that most high earners make some decisions on the role ofleast of which is the tax rate you may paid during the 1980s. And second, dividends in your portfolio. On onehave to pay on your investments. the long-term rate will still likely be hand, if you typically reinvest most ofThe issues involving deficit reduction significantly lower than your personal your dividends into investments thatare complex and stretch beyond pure tax rate, which applies to short-term fund tax-deferred vehicles, such as aeconomics into the realm of political capital gains (on sales of appreciated traditional IRA or your 401(k), youphilosophy and the long-term vision assets held less than one year). may not need to radically change yourof this country. So, as a citizen, you strategy, especially if you think you You’ll want to keep an eye on whatmay well have considerable interest might be in a lower tax bracket during comes out of Washington with regard toin how the deficit issue is resolved — your retirement years. And the same is capital gains taxes for 2013. If it seemsbut, as an investor, you might have a true if you reinvest dividends into a Roth likely that the rates will increase asmore narrow focus. Specifically, you IRA, where your earnings grow tax- scheduled, should you consider takingmight be wondering how a resolution, free, provided you’ve had your account capital gains in 2012 to take advantageor a lack of it, will affect your overall at least five years and don’t start of the lower rate? Maybe — but keepinvestment strategy, especially in regard taking withdrawals until you’re 59½. in mind that, when you’re makingto the taxes you pay on capital gains, investment decisions, you need to On the other hand, if you are in one ofinterest payments and dividends. consider other factors aside from taxes. the higher tax brackets, and you relyBe Prepared for Big Changes So, if you own an investment that has on dividends for part of your income,The Bush-era tax cuts reduced the top appreciated significantly, but it’s still you may well have to re-think yourtax rate on long-term capital gains an important part of your diversified approach. For example, if you invest inand qualified dividends to 15% and portfolio, you may well decide to keep municipal bonds, your interest paymentslowered marginal tax rates. These it, even in an environment of higher are exempt from federal taxes — andtax cuts were originally scheduled to capital gains rates. In any case, you’ll they may be exempt from state and localexpire at the end of 2010, but they want to continue holding investments taxes, too, if you purchase “munis”were extended for two additional years long enough to earn the more favorable issued in your home state. (Keep inby the Tax Relief, Unemployment long-term rate when you sell. mind, though, that interest from someInsurance Reauthorization and types of municipal bonds may be Taxes on DividendsJob Creation Act of 2010, signed subject to the alternative minimum As noted above, qualified dividendsinto law by President Obama. tax.) Of course, many municipalities have been taxed at 15% for the past across the country are under financialSince then, the question of whether to several years. But in the absence of stress, but the default rate on “munis”continue, end or modify the tax cuts new legislation, these dividends will be is historically low, and many high-has been debated in all the deficit- taxed at your marginal tax rate, starting quality offerings are available.reduction talks and studies. But in in 2013. And these rates are scheduled2013, tax rates will revert to what to revert to the pre-Bush levels, which While taxes are certainly an importantthey were before the Bush era, unless means the 25% rate will become 28%; part of the dividend equation, theynew laws are passed this year. the 28% rate will become 31%; the 33% aren’t the only factor. Don’t forget that rate will become 36%; and the 35% rate those companies that pay dividendsAt this point, however, it’s impossible will become 39.6%. Furthermore, the are usually solid businesses that seekto predict the final outcome. Therefore, 3.8% Medicare taxes will be assessed to reward their investors — and asyou may want to spend at least part on your dividends if you meet the such, they are often good investmentof 2012 preparing yourself for the income guidelines mentioned above. choices. Furthermore, dividend-tax changes that may be coming in paying stocks may also provide2013, along with some suggestions As is the case with capital gains long-term growth opportunities.on how you might respond to them: taxes, you’ll need to closely follow the legislation affecting dividends. And if To learn more about investmentCapital Gains Taxes the dividend tax rates were indeed to strategies related to rising capital gainsThe long-term capital gains rate — return to earlier levels, you’d have to and dividend taxes, please call. napplied to sales of appreciated assets
  3. 3. a n e x c l u s i v e n e w s l e t t e r f o r r b c w e a lt h m a n a g e m e n t i n v e s t o r s WHAT DOES EUROPE’S DEBT CRISIS MEAN FOR INVESTORS? SHOULD YOU CONTINUED“DO-OVER” A ROTH of factors: a decline in the value of the banks to borrow dollars, the central IRA CONVERSION? euro, relative to the dollar; the burden banks hope to increase liquidity and of loans that eurozone banks have thereby stimulate business activity.M any people are attracted made to eurozone governments; and the n In early December, European to the potential of the tax- withdrawal of U.S. investment funds, leaders held a summit to address free earnings of a Roth IRA which had been the eurozone banks’ the crisis, and, among otherversus the tax-deferred growth of a main source for borrowing dollars. This steps, agreed to the following:traditional IRA. That’s why so many increased inability to borrow dollars is apeople “convert” their traditional — Provide another 200 billion major concern for banks, because dollarsIRAs to Roths. But what if you do this euros (about $267 billion) from are the currency in which a large part ofconversion and something happens to their own central banks to the global financial transactions occur. Bankscause you to change your plans? Can International Monetary Fund; need these dollars to finance existingyou go back to a traditional IRA? obligations and to make new loans. — Leverage about half of the EFSF to give it more impact;Yes, you can. If you converted your Many government officials andtraditional IRA to a Roth IRA in 2011, economists fear that the debt crisis, — Speed up the start date ofyou can “recharacterize” the Roth IRA, and the consequent credit squeeze, a permanent fund — theas long as you act by Oct. 17, 2012. For will lead to a recession in Europe — $500-billion-euro Europeanexample, you might want to undo a Roth and possibly other parts of the world, Stability Mechanism —conversion for any of these reasons: too. Given this, it’s not surprising to July 2012; andn Your Account Has Lost Value. that the financial markets, including — Enable the European Union When you convert a traditional IRA those in the U.S., were unusually to exert greater control to a Roth IRA, you must pay taxes volatile throughout much of 2011. over the national budgets on the previously untaxed parts of of eurozone countries. Confronting the Problem the traditional IRA. But these taxes Governments and central banks are n In late December, European central are based on the amount that’s in attempting to deal with the problems banks agreed to pump nearly $640 your traditional IRA at the time stemming from the eurozone debt billion into Europe’s banking system. of the conversion. If your account crisis. Here’s a brief chronology: The money will be provided through loses value after the conversion, loans at interest rates much lower n In October, eurozone officials you’ll end up paying taxes on than European commercial banks recapitalized some of Europe’s the previously higher amount — could get from the financial markets. banks, strengthened the European which is not a good deal for you. Financial Stability Facility (EFSF), In the United States, the Obaman Your Tax Bracket in Retirement the region’s bailout program, and administration urged banks to reduce Will Be Lower Than Expected. If recommended a 50% “writedown” their exposure to Europe. And the you’ve determined that your taxable of Greek sovereign debt (which Federal Reserve has ordered the income in retirement is going to means that private investors would biggest American banks to perform be lower than you once thought, take a 50% loss on Greek bonds). “stress tests” of their portfolios to you might be better off by sticking n In November, six central banks, ensure they have enough capital to with a tax-deferred traditional including the Federal Reserve and cover losses in case of a significant IRA, which also allows you to the European Central Bank, cut the economic deterioration. make tax-deductible contributions, cost for banks to borrow dollars, and To learn more about possible actions depending on your income level. lengthened the time for which these to take in response to the eurozonen You Don’t Have Enough Cash loans would be available. By making debt situation, please call. n on Hand to Pay the Taxes. If you it cheaper for European commercial have a sizable traditional IRA, you may face a sizable tax bill when you convert to a Roth IRA. If taking the money from other sources to pay the tax bill will weaken your financial position more than you The information contained herein is based on sources believed to be reliable, but its accuracy cannot thought, you might be better off be guaranteed. Professional Trustee services are offered to RBC Wealth Management clients by different entities who may serve as trustee. RBC Wealth Management will receive compensation in connection by reversing the conversion. with offering these services. Neither RBC Wealth Management nor its Financial Advisors are able to serve as trustee. RBC Wealth Management does not provide tax or legal advice. All decisions regarding theBefore you decide to reverse your Roth tax or legal implications of your investments should be made in connection with your independent tax or legal advisor. The articles and opinions in this advertisement are for general information only andIRA conversion, see your tax advisor. are not intended to provide specific advice or recommendations for any individual. All information asYou do get one chance for a do-over — of 12/17/2011. © 2012 RBC Capital Markets, LLC. All rights reserved.but you’ll want to do it right. n 11-01-3620 (12/11)