The Bush-era tax cuts could expire for the rich. As envisioned, the top tax rate would reset to 39.6% for individuals earning more than $200,000 a year and couples earning more than $250,000 a year. The EGTRRA/JGTRRA cuts would be extended for the vast majority of taxpayers.

A new kind of AMT could emerge. President Obama would like to see a “Buffett rule”, basically a simplified take on the Alternative Minimum Tax. This new rule (inspired by Warren Buffett’s now-famous New York Times editorial) would impose a 30% income tax floor for anyone earning more than $1 million a year. Yet while President Obama has mentioned this idea in speeches, the proposed 2013 budget contains no details of it. The White House says that the President would prefer to get to the details after broader revisions to the tax code. Even then, a “Buffett rule” might be hard to implement in practice.

Tax rates on capital gains & dividends would rise. Long-term capital gains would be taxed at 20% instead of 15%. Dividends amassed by businesses and taxpayers in the highest income tax bracket would be taxed as ordinary income, at 39.6%.

Investment income could be reduced by a healthcare surtax. As a condition of the Health Care & Education Reconciliation Act of 2010, the highest-earning U.S. households would be hit with a new 3.8% Medicare tax on unearned income in 2013.

This levy would only affect taxpayers who realize huge amounts of investment income; gains exceeding $250,000 for an individual or $500,000 for a married couple. (The Tax Foundation estimates it would affect 2% of U.S. households.) For these taxpayers, dividends would effectively be taxed at 43.4%. The tax would also apply to income derived from real estate investment.

Deductions would be decreased. The President’s 2013 budget would cap deductions of qualified expenses at 28% for those in the top two income brackets. Right now, these taxpayers can deduct 33% and 35% of qualified expenses. Non-profits, the real estate industry and state and local governments seem likely to disfavor the cap.

Estate taxes would rise. In 2012, we have a 35% federal estate tax with a $5.12 million individual exemption. The proposed 2013 federal budget would put the estate tax at 45% with a $3.5 million individual exemption.

Other tax proposals. The envisioned 2013 federal budget would also:

• Make the $2,500 American Opportunity Tax Credit permanent
• Make the R&E credit for businesses permanent
• Authorize gradual increases in estate and gift taxes and revise rules for taxing different forms of trusts
• Offer a tax credit to employers expanding payrolls in 2012 (of up to 10% of the increase in wages subject to payroll taxes)
• Carry the bonus depreciation extension (on new equipment) for businesses through 2012
• Hike taxes on global corporations headquartered in the U.S. across the next ten years through less lenient foreign tax credits and restrictions on opportunities to defer taxes on foreign profits
• Recoup costs from the 2008 Wall Street bailout through fees charged to financial institutions holding more than $50 billion in assets
• Cut assorted tax breaks for energy companies

How much of this budget draft will make it through Congress? Good question. Much of what the President is proposing may not be realized, but with the federal government badly needing to reduce its deficit, many of these changes could end up taking effect. Taxpayers and their advisors will want to keep their eyes on Washington.

While you never have to make withdrawals from a Roth IRA, you must take annual RMDs from traditional, SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past a certain age. If you dont, severe financial penalties await.

If you are still working as an employee at age 70, you dont have to take RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan. Your initial RMDs from these accounts will only be required after you retire. However, you must take RMDs from these types of accounts if you own 5% or more of a business sponsoring such a retirement plan.

You must take RMDs from IRAs after you turn 70 regardless of whether you are still working or not.

The annual deadline is December 31, right? Yes, with one notable exception. The IRS gives you 15 months instead of 12 to take your first RMD. Your first one must be taken in the calendar year after you turn 70. So if you turned 70 in 2011, you can take your initial RMD any time before April 1, 2013. However, if you put off your first RMD until next year you will still need to take your second RMD by December 31, 2013.

Calculating RMDs can be complicated. You probably have more than one retirement savings account. You may have several. So this gets rather intricate.

Multiple IRAs. Should you have more than one traditional, SEP or SIMPLE IRA, the annual RMDs for these accounts must be calculated separately. However, the IRS gives you some leeway about how to withdraw the money. You can withdraw 100% of your total yearly RMD amounts from just one IRA, or you can withdraw equal or unequal portions from each of the IRAs you own.

401(k)s and other qualified retirement plans. A separate RMD must be calculated for each qualified retirement plan to which you have contributed. These RMD amounts must be paid out separately from the RMD(s) for your IRA(s).

Inherited IRAs. The same applies; a separate RMD must be calculated for each inherited IRA you have, and these RMD amounts must be paid out separately from RMD(s) for your other IRA(s).

This is why you should talk to your financial or tax advisor about your RMDs. It is really important to have your advisor review all of your retirement accounts to make sure you fulfill your RMD obligation. If you skip an RMD or withdraw less than what you should have, the IRS will find out and hit you with a stiff penalty: you will have to pay 50% of the amount not withdrawn.

Are RMDs taxable? Yes, the withdrawn amounts are characterized as taxable income under the Internal Revenue Code. Should you be wondering, RMD amounts cant be rolled over into other tax-deferred accounts and excess RMD amounts cant be forwarded to apply toward next years RMDs.

What if you dont need the money? If you are wealthy, you may come to see RMDs as an annual financial nuisance, but the withdrawal amounts may be redirected toward opportunities. While putting the money into a savings account or a CD is the usual route, there are other options with potentially better yields or objectives. That RMD amount could be used to:

Start a grandchild’s education fund.

Fund a long term care insurance policy.

Leverage your estate using life insurance.

Diversify your portfolio through investment into stock market alternatives.

There are all kinds of things you could do with the money. The withdrawn funds could be linked to a new purpose.

So to recap, be vigilant and timely when it comes to calculating and making your RMD. Have a tax or financial professional help you, and have a conversation about the destiny of that money.

Are you held to a suitability standard or a fiduciary standard?

This distinction is very important. You should be aware of the difference.

What is a suitability standard? Investment brokers are frequently asked to abide by suitability standards: when they recommend a financial product to a client, they are ethically bound to recommend a product which is suitable for that client.

As laid out in the manual of FINRA (the Financial Industry Regulatory Authority, formerly known as the NASD or National Association of Securities Dealers), the suitability standard has long demanded that a broker make reasonable efforts to obtain information on four aspects of a clients financial life:

• Financial status
• Tax status
• Investment objectives
• Other information used or considered to be reasonable

These factors (and others) have a hand in determining whether a financial product or securities transaction is deemed “suitable” for a client.

Suitability standards emerged in response to an age-old Wall Street problem. Decades ago, stock brokers garnered all sorts of bad publicity for calling their clients up and recommending hot stocks or funds that were utterly inappropriate for them. The investors may have gotten burned, but the brokers got their sales commissions.

Suitability standards are good, make no mistake. The problem is that they could be even better.

Even with a suitability standard, a broker has no specified duty to act in a clients best interest. So while that broker may recommend a suitable fund, stock or other financial product to you, he is not prohibited from recommending an investment that will result in a bigger commission for him or higher costs for you.

If a broker has a proprietary security that seems suitable for you, the broker may promote it ardently to you even though better-performing securities might be available.

In 2005, the SEC determined that broker-dealers will not be deemed to be investment advisers and therefore are not subject to the same fiduciary standards as Registered Investment Advisors (RIAs) when recommending investments to clients.

In 2011, FINRA Rules 2090 and 2111 expanded the existing suitability obligations while creating new ones. Any recommendations of investment strategies and any recommendations to hold securities within an investment strategy must now be suitable for the particular client, and the investor profile compiled by the broker to judge suitability must consider additional factors.

What is a fiduciary standard? This is the standard that Registered Investment Advisors must uphold. An RIA may be an individual or a financial firm. The Registered adjective refers to being registered with either the Securities & Exchange Commission (SEC) or a state securities agency.

RIAs have a fiduciary duty (a legal requirement) to act in the clients best interest regardless of the level of compensation the advisor may receive as a result of recommendations or actions. Fundamentally, this comes down to two points as stated by the SEC:

The advisor must avoid conflicts of interest.

The advisor is prohibited from overreaching or taking unfair advantage of a clients trust.

A Registered Investment Advisor is not supposed to pitch products, strategies or securities transactions with the idea that this will be a win-win for both of us. The clients best interest comes first and it is the only interest that matters.

Seek strong standards. When you enter an advisory arrangement with a financial professional or financial consulting firm, the agreement you sign should tell you whether the advisor is held to a suitability standard or a fiduciary standard. In the opinion of many investors and financial professionals, a fiduciary standard clearly amounts to a higher standard.

If it wasnt the debt crisis in the European Union, it was legislators on Capitol Hill. If it wasnt the housing market, it was the job market (and in truth, the two were inescapably linked). Investors were jittery, and as emotions affect stocks as much as earnings and fundamental indicators, the great broad index of the American stock market wound up generating a less than thrilling return.

However, there was also an upside. Is the glass half-empty or half-full at this point? Thats a good question. Bulls were heartened by the way U.S. stocks held up in 2011. Comparatively speaking, the rest of the world may be marveling at how well we did:

DJIA: +5.53%

S&P 500: -0.003% (+2.11% with dividends)

NASDAQ: -1.80%

Russell 2000: -5.45%

Now look at how these foreign indices fared in 2011, according to performance data from the Wall Street Journals website:

DAX (Germany): -14.7%

CAC 40 (France): -17.0%

Bovespa (Brazil): -18.1%

All Ordinaries (Australia): -15.2%

Shanghai Composite (China): -21.7%

Hang Seng (Hong Kong): -20.0%

Nikkei 225: -17.3%

The DJIA was a member of the fortunate five, one of just five consequential benchmarks around the world that managed a 2011 advance. The others? Indonesias Jakarta Composite (+3.2%), Malaysias Kuala Lumpur Composite (+0.8%), the Manila Composite in the Philippines (+4.1%) and Venezuelas Caracas General (+79.1% in a nation where inflation is running at 26%).

So the evidence points to a degree of decoupling taking place last year. Stateside, investors may have been distracted and troubled by news about EU debt and a slowdown in manufacturing in the Asia-Pacific region, but there was still some residual confidence, which was bolstered in the fourth quarter by some positive news about consumer spending and retail sales, a declining jobless rate, a bit of life in what had seemed a moribund real estate market, and banks being more open to commercial loans.

Will our relative good fortune continue? In 2012, will Wall Street pay more attention to domestic indicators and earnings than the headaches plaguing other economies?

We are all interconnected, of course; financially, the world is a small place. It is very possible that the big market swings characteristic of 2011 will repeat in 2012; currently, few things move the market up or down like news from the EU. However, with many of the EU economies veering toward recession and emerging markets cooling down, a U.S. economy that might realize but a small percentage of growth may start to look very strong indeed to the rest of the world, and that offers hope that our financial markets may perform better next year than some analysts expect.

Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.

The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you can potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.

While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, through reducing your investment fees, and getting your phone, internet and TV services from one provider.

If you have just retired or are about to, you will enter 2012 with some financial breaks. Social Security benefits will increase by 3.6% next year, Medicare Part B premiums will only rise $3.50 instead of the $10 that Medicare projected, and the Part B deductible will be $22 cheaper in 2012 ($140).

Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You cant do much about some of them (sudden health crises, for example), but you can try to mitigate others.

Supporting your kids, grandkids or relatives with gifts or loans.

Withdrawing more than your portfolio can easily return.

Dragging big debts into retirement that will nibble at your savings.

Budget well & live wisely. These are times of low interest rates and modest Wall Street gains. Given those factors, creating a retirement budget makes a lot of sense. A budget and the discipline to stick with it may make a financial difference.

If your pessimism increased this year, you aren’t alone. This is a very challenging environment, even for fund managers. A recent Wall Street Journal piece referenced that some traders are reluctant to make a decisive move for fear of triggering a big price swing on a particular stock. Liquidity has also been reduced in this market.

While this sounds gloomy, a little perspective is helpful. When it comes to stocks, it is really about the long term.

This year hasn’t been a disaster, just a struggle. The market has seen far worse stretches than this. Looking at CNNMoney’s handy 5-year chart, the S&P 500 lost 24.06% across the years of 2008-09; yet even with all the drama of 2011, the index is still +3.91% since the start of 2010.

On January 14, 2000, the Dow closed at a new all-time high of 11,722.98. On October 9, 2002, it was 37.85% lower after a bear market memorable for a 77.93% decline in the NASDAQ. Yet even in the wake of the dot-com bust and 9/11, the Dow was not crippled. It rose 61% over the next four years to hit a new all-time high of 11,727 on October 3, 2006.

The blue chips have risen and fallen since then, and so have small caps and tech stocks. Yet investors can still made money in bad Wall Street years; no one invests directly in an index, so the potential to beat the market remains.

Comparatively speaking, were holding up pretty well. As we bid goodbye to Thanksgiving weekend, we can be thankful that our stock market is performing better than many others. At the closing bell on November 25, the DJIA was at -2.99% YTD; nearly all the worlds other important stock indices were posting double-digit YTD losses.

How well-diversified is your portfolio? From 1990-2009, the S&P 500 returned an average of 8.2% annually, yet the typical investor averaged a 3% yearly return. Why? Investors chased performance. They got emotional, responded to headlines, and ignored fundamentals of diversification and patience. They bought at market peaks and bailed out at market lows, and then they waited for that rare perfect moment to get back into equities.

Instead of fleeing the market when stocks hit headwinds, the seasoned advisor takes a moment to consult his or her financial professional of choice and adjusts the sails in response while still investing consistently with quality as a key criterion. That approach may help you ride through this year and next and give you a chance to outperform the emotionally-driven investor in the long term.

Do you have concerns about your investments right now? I’m happy to help you address them. Lets talk about where you are at right now with your portfolio and the level of progress you are making toward your financial objectives. The more you understand about the long-term behavior and potential of the market, the more you realize the need (and value) of patience and perseverance.

Some key dates to remember. This fall and winter, there are three periods in which Medicare beneficiaries can either enroll or disenroll in forms of coverage:

• Now through December 7: Open enrollment period. This is when you can elect to leave Original Medicare (Parts A and B) for a Medicare Advantage Plan (Part C) and change your prescription drug coverage (Part D). You can also elect to get out of a Part C plan and go back to Parts A and B during this period.
• December 8: Annual enrollment period begins for 5-star plans. This is new: As you probably know, Part C and Part D plans are assigned ratings. Beginning December 8, a 365-day window opens for you to enroll in a 5-star Part C or Part D plan. You can do this once per 365 days. How do you find the 5-star plans? Visit www.medicare.gov/find-a-plan.
• January 1-February 12: Disenrollment. If you joined a Part C plan in late 2011 and want to reverse that decision, you can disenroll from that Medicare Advantage plan in this window of time and go back to Original Medicare with a stand-alone Prescription Drug Plan (Part D). Your Original Medicare coverage resumes on the first day of the month after the plan receives your enrollment form (either February 1 or March 1, 2012).

What should you look for in a Part C or Part D plan? Be sure to take a look at a few key factors.

• While premiums matter, overall plan expenses ultimately matter most; scrutinize the copays, the co-insurance and the yearly deductibles as well. Attractively low premiums might not tell you the whole story about the value of a Medicare Advantage plan.
• How inclusive is the plan network? Assuming the plan has one, does it include the hospitals you would choose and the physicians that now treat you?
• Regarding Part D, how wide-ranging is the prescription drug coverage? Look at the list of approved drugs (the formulary). If the drugs you want or need aren’t listed, you are probably going to have to open your wallet to pay for them. The frustrating thing about formularies is how they change; drugs on this year’s list may not always be on next year’s list.
• One nice thing to note about Part D coverage for 2012: Medicare beneficiaries who enter the coverage gap for prescription drugs next year (sometimes referred to as “the doughnut hole”) will end up paying just 50% of the price of name-brand drugs and just 86% of generics. Some Part D plans may help you realize greater savings via discounts.

Part B premiums are rising, but not drastically. They were expected to increase given the 2012 cost-of-living adjustment for Social Security benefits, but the hike isn’t as dramatic as some seniors feared it would be. Monthly Part B premiums are going up by $3.50 a month next year to $99.90, well under the $106.60 estimate projected earlier in 2011 by Medicare trustees.

Medicare Advantage premiums may fall. The Department of Health and Human Services estimates that Part C premiums will be 4% cheaper in 2012 than in 2011. It also projects that Part D premiums will stay about the same in 2012.

Bond yields above 7% have served as a kind of litmus test for the European Union. When 10-year yields topped 7% in Portugal and Ireland, those countries got bailouts, but a bailout for Italy is unlikely. Quite simply, Italy is too big to be rescued; it appears the nation will just have to save itself.

“Financial assistance is not in the cards.” So said one Eurozone official (who preferred to remain anonymous) to Reuters; that official said that Italy would not even get a preventive credit line from the EU.

Italy dwarfs Greece in economic magnitude. The Dallas-Fort Worth metroplex contributes about as much to the world economy as Greece does. In contrast, Italy is the third-largest economy in the Eurozone and the eighth-largest economy in the world. It is now carrying somewhere between $2.2-2.6 trillion in debt, making its debt ratio 110-130% of its 2010 GDP.

Here’s why a bailout seems off the table. Italy’s sovereign debt is about €1.7 trillion; three times that of Spain, and almost six times that of Greece. Across the next three years, it will have to come up with roughly €650-700 billion to avoid default (so estimates a forecast from Capital Economics). Even with its future increase, the European Financial Stability Fund would be drawn down alarmingly by a bailout of that size. Since Italy is hardly the only EU nation still in trouble, the EFSF would probably be loath to commit to such a mammoth rescue. The three major players funding the EFSF are Germany, France and Italy.

Guess what EU nation is one of the world’s key government bond markets. That’s right: Italy. Its 10-year note rates rose above 7% on fear that it won’t be able to repay what it owes on government debt. Are the higher yields going to be attractive to foreign investors? Hardly, given that Moody’s and other credit rating agencies have given Italy downgrades.

Name the EU member economy to which U.S. banks are most exposed. Again, the answer is Italy. According to Barclays Capital, that exposure amounted to about $269 billion in total claims as of July. European banks are six times as exposed to Italy ($998.7 billion) as they are to Greece ($162.4 billion).

A call for a core Eurozone. Not surprisingly, French president Nicolas Sarkozy and German chancellor Angela Merkel have visions of an altered EU. On November 8, Sarkozy spoke of a two-tier Europe. It would feature a smaller and more financially integrated core Eurozone comprised of the most economically influential nations on the continent, with the bulk of the EU as a confederation of less economically influential countries with less say in policymaking.

The weeks ahead are crucial. With the debt issues in Italy escalating, the European (and global) economy is looking at another major challenge. Can the European Central Bank buy up a whole bunch of Italian paper? If so, what concessions will Italy have to make? How contagious will this crisis prove, and how will it impact America?

Pronounced volatility may be the norm for the next few weeks or months on Wall Street. It is a good time to take a look at where and how you are invested, and a time to review your diversification and your outlook.

401(k) & IRA yearly contribution limits. In 2012, these are the annual contribution limits for some popular retirement savings vehicles:

• 401(k)s, 403(b)s, most 457 plans, Thrift Savings Plan (TSP) – $17,000 with an additional $5,500 catch-up contribution allowed for those 50 or older. (2012 COLA: $500.)
• Traditional & Roth IRAs – $5,000 with an additional $1,000 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• Simple IRAs – $11,500 with an additional $2,500 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• SEP IRAs – $50,000 or 25% of an employee’s compensation, whichever is lesser. (2012 COLA: $1,000.)
• 415(b) defined benefit plans – the limitation on annual benefits under a defined benefit plan is increased to $200,000. (2012 COLA: $5,000.)

Traditional IRA phase-outs. The new MAGI limits affecting deductions for traditional IRA contributions are:

• Singles & heads of household covered by a workplace retirement plan: $58,000-68,000. (2012 COLA: $2,000.)
• Married filing jointly, with spouse making the IRA contribution covered by a workplace retirement plan: $92,000-112,000. (2012 COLA: $2,000.)
• Married filing jointly, IRA contributor not covered by a workplace retirement plan but married to someone who is: $173,000-183,000. That MAGI range is for a couple rather than an individual. (2012 COLA: $4,000.)

Roth IRA phase-outs. The MAGI limits affecting deductions for Roth IRA contributions are set as follows for 2012:

• Singles & heads of household covered by a workplace retirement plan: $110,000-125,000. (2012 COLA: $3,000.)
• Married filing jointly: $173,000-183,000. (2012 COLA: $4,000.)
• Married filing separately, with the Roth IRA contributor covered by a workplace retirement plan: $0-10,000. (No 2012 COLA.)

Lastly, a couple of notes for employers. When it comes to defining “key employees” in a top-heavy plan, the determination limit goes up $5,000 to $165,000 in 2012. The maximum taxable earnings amount for Social Security increases to $110,100 from $106,800 next year.

There are two things to note in the fine print.

• A COLA increase in Social Security means that Medicare premiums can also increase. Much of the 2012 COLA adjustment could effectively be eaten up this way, as Medicare premiums are automatically deducted from Social Security checks. (2012 Medicare Part B premiums should be announced before the end of October.)
• Businesses should note that the Social Security wage base will rise to $110,100 for 2012. Currently, the federal government levies payroll tax on the first $106,800 of income; next year, that ceiling rises by $3,300. This means about 10 million more high-earning Americans will be subject to the payroll tax, which could vary anywhere from 3.1% to 6.2% in 2012 depending on legislative action (or inaction).

Will the “super committee” of 12 make cuts to the program? It’s uncertain; the deadline for the long-term budget reform plan from Congress falls on November 23, and the bipartisan and Joint Select Committee on Deficit Reduction (a.k.a. the “supercommittee”) has been meeting more or less in secret, with AARP and other lobbyists pressuring them not to cut Social Security and Medicare.

How might Social Security address its long-term shortfall? Proposals abound, from simple fixes to radical reforms.

• President Obama’s fiscal commission has suggested raising the FICA cap. In this proposal, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.
• Rep. Paul Ryan (R-WI), Chair of the House Budget Committee, has authored the GOP’s “Path to Prosperity” plan, the so-called “Ryan roadmap” that would encourage workers under age 55 to direct some of their payroll taxes into personal retirement accounts. Rep. Ryan’s proposal would also index initial Social Security benefits for most retirees to price growth instead of average wage growth and set the age for Social Security eligibility at 67.
• The conservative Heritage Foundation suggests a 5-year strategy in its Saving the American Dream proposal, which calls a reduction in Social Security benefits for the richest 9% of retirees, a $10,000 tax exemption for all who work past the federal retirement age, and the near-term elimination of taxation of Social Security income.
• Republican presidential candidate Herman Cain has proposed replacing Social Security with the “Chilean model”. In the early 1980s, Chile’s government ended its retirement entitlement program and put retirement planning solely in the hands of individuals, who maintain personal retirement investment accounts and set their own contribution levels and retirement dates. Investor’s Business Daily notes that on average, the program has yielded better than 9.2% compounded annual returns over 30 years.
• Twelve fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, among them:
• A 3% cut in benefits
• Taking the payroll tax to 7.3%
• Hiking the full retirement age to 68 or older
• Increasing the Social Security averaging period that determines SSI
• Reducing the typical yearly COLA by 1% or .5%
• Reducing spousal benefits
• Investing some of Social Security’s trust funds in equities
• Directing some estate tax revenues into Social Security’s trust fund

Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.

How much retirement income do you have these days? With Social Security’s future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may be worthwhile before 2012 arrives.

Part of the anger of the Occupy Wall Street movement comes from the perception that nothing has changed. While the Dodd-Frank Act (designed to make the financial system more accountable and transparent) is now taking effect, the Volcker Rule (intended to stop banks from trading for their own accounts) may be watered down or put off. Beyond that, the U.S. economic recovery from the Great Recession has sputtered and made people question the recent bullish sentiment.

Stocks have rebounded strongly since 2009, but there are still many factors to worry about; this may lead to a little contrarian thinking.

This bull market may be a diversion from a secular bear market. For most of 2011, the S&P 500 has been above 1,200 (a great rebound from the March 2009 low of 676). What was behind that? The short answer: a weak dollar. We haven’t exactly had a boom economy in that timeframe.

Some analysts look at Wall Street right now and see a rerun of the 1970s, when you had momentous rallies masking a bear market that went from 1967-82. In addition, researchers at the Federal Reserve Bank of San Francisco are concerned about the possibility of a generational sell off; a potential market “headwind” for 10 or 20 years stemming from greying Baby Boomers getting out of stocks as they get closer to retirement, countered only partly by overseas investment.

What has changed on Wall Street since 2008? Perhaps not much. The general perception that the CEOs of the big investment banks and mortgage companies whose thoughtlessness contributed to the Great Recession met with no real consequence seems to be taking hold, as evidenced by the Occupy Wall Street movement.

By the way, remember the furor directed at risky derivatives trading? In September 2011, the Comptroller of the Currency had recorded an 11% year-over-year increase in derivatives investment in the banking industry. Banks now hold almost $250 trillion of the contracts.

A truly severe punishment of Wall Street would come at a dear price for Washington. Some of the biggest names from Wall Street (and the real estate sector) have also been major lobbyists and campaign contributors. According to the nonpartisan Center for Responsive Politics, the National Association of Realtors has contributed more than $40 million to federal-level political campaigns since 1989; Goldman Sachs has contributed almost $36 million since then, and Citigroup nearly $29 million. The financial, insurance and real estate industries have collectively spent over $4.6 billion in lobbying efforts since 1998.

What is happening with the recovery? Not much. While unemployment is above 9%, underemployment is the real story – in September, 16.5% of Americans worked less than 40 hours a week. No wonder homes sit on the market and consumer spending increases mostly in response to rising food and energy prices. Wages even retreated 0.2% in September and incomes fell 0.1% – the first monthly decrease in income since October 2009. Assorted 2012 forecasts see slow or slowing growth in various European and Asian nations.

Is there a bright side for Wall Street? Actually, there could be. The European Union is making decisive moves to address its debt crisis. Indicators still show that our economy is growing, not contracting; September was the best month for U.S. retail sales since March. Many analysts think that the Dodd-Frank regulations will discernibly impact the Wall Street mindset. Lastly, the strength and duration of seemingly every major bull market has been questioned by the bears; history may record that a secular bull market began in 2009, after all.

Only time will tell. Over time, the stock market has faced some great challenges – and risen to meet them again and again. This time around, the hope is that Wall Street’s behavior (and behavioral assumptions) won’t sabotage the rally.

How much of your SSI is potentially taxable? As much as 85% of it, under certain conditions. Four factors determine how much of your SSI will be taxed:

• The total amount of income that you earn.
• Where it comes from.
• Your taxpayer filing status.
• Your provisional income – a MAGI calculation which you can figure out by using Worksheet 34-1 in IRS Publication 915 or the Social Security Benefits Worksheet in the instruction booklets for IRS Form 1040 and Form 1040A.

How is provisional income determined? In simple terms, this is calculated using your AGI, minus one-half of your Social Security benefits. (Tax-free interest from investments such as muni bonds also becomes provisional income.)

How much income can you earn before your SSI is taxed? The 2011 limits are pretty straightforward:

• Single person: up to 50% of your SSI can be taxed if your provisional income is greater than $25,000, and up to 85% of your SSI can be taxed if your provisional income exceeds $34,000.
• Married/head of household: up to 50% of your SSI can be taxed if your provisional income is greater than $32,000, and up to 85% of your SSI can be taxed if your provisional income exceeds $44,000.

Who doesn’t have to worry about this? If your only source of income is Social Security or equivalent retirement railroad benefits, it is unlikely that your SSI will be taxed and you may not even need to file a federal return. In 2011, Social Security benefits are tax-exempt for single taxpayers with provisional incomes under $25,000 and married/head of household taxpayers with provisional incomes under $32,000.

What can be done to reduce (or avoid) the tax? If you are close to hitting either the 50% or 85% tax levels, you may want to think twice about moves that could take your provisional income over the threshold – for example, receiving a sizable chunk of profit from selling a stock, or converting a traditional IRA to a Roth IRA. Here are some common moves people make with the input of a qualified tax or financial professional:

• Delaying some investment income, rental income or pension income until the following tax year
• Shifting assets from accounts or investments producing reportable income (like CDs) into tax-deferred alternatives
• Working less
• Ramping up pre-tax contributions to an IRA, 401(k) or 403(b)
• Lowering interest income (such as income from CDs)
• Lowering tax-exempt interest income (from muni bonds, federal tax refunds, veteran’s benefits, gifts and other sources).

Before April rolls around, it might be wise to consider the different ways to manage taxes on your Social Security benefits. Some new SSI recipients may be taken aback by the tax they end up paying; alternatively, you can plan to reduce it.

Trusting a reckless spouse with your finances. When you love someone who is cavalier with money, look out. Beware of ceding financial control or your financial say in such a situation. If you marry someone with severe debt problems, don’t think that you will be financially immune from the effects of those problems. If your spouse is a wastrel or has a terrible credit rating, do not “hand over the keys” to the household finances. Watch what goes on with the bank accounts, investment accounts and credit cards among you– keep communication open and encourage transparency.

Forfeiting some or all of your financial identity. You may have taken your spouse’s name, but that does not mean you need to give up your own credit card for a shared one, merge your personal checking account into a joint one, and so forth. If you don’t use a credit card for several months or years, you won’t have to pay a fee but it could show up as “inactive” on your credit report. The credit card issuer may move to close the account, and losing the credit history of that card could hurt your credit score. Retain individual savings and investment accounts and individual credit cards.

Divorcing with an “equal” rather than equitable financial settlement. If a divorce happens, the impulse may be to amicably split things “50/50” … or, the focus may be on keeping custody of your kids or keeping your home with your financial potential a distant second. However, you must keep your financial future in mind.

Quite often, a woman will be instrumental in building a business or professional practice with her spouse – but she may not be a part of that successful company or professional entity after a divorce. If you divorce and have helped your spouse build a business to greater or lesser degree, you may not only find yourself out of work but taking a job that pays less or having to learn new skills to compete in the job market. Your earnings potential and retirement savings potential may be affected. If you should divorce, seek an equitable settlement that considers your future financial potential; this is even more important than retaining material wealth or real property from the marriage.

Losing touch with your career path. If you have happily put a career aside to raise kids, keep in mind that you might find yourself returning to work sooner rather than later. Life events, economic necessity, personal desire and growing children may all be factors. Yet a long, total absence from the workplace can make it difficult to step back in – the technology or outlook of any given field can change radically across a few short years. Try to keep a foot (or at least a toe) in your career via consulting or networking efforts.

The takeaway: look out for your financial well-being. It is okay to emphasize (and plan for) your own financial destiny when you are married. In fact, it is both wise and appropriate to do so.  Let me know how I can help you.

You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.

Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.

If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.

Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.

If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.

How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.

Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.

However, the Consumer Price Index rose 0.5% in July – the biggest increase since March – with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.

Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.

Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.

Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.

Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.

Investors endured a shock like this last year. In spring 2010, the S&P 500 pulled back 16% from a peak. At the close on August 8, the index was down 16.8% from its spring 2011 high.

In 2010, the market healed within a few months. What happened after the 2010 correction? We had a sustained rally from September to New Year’s Eve. The DJIA finished 2010 up 11.0%, the S&P 500 up 12.8% and the NASDAQ up 16.9%.

When will we see capitulation? Yes, when will this mood lift? When will investors see merit in buying? Several factors might encourage a relief rally or something greater.

• The European Central Bank plans to buy up debt from Italy and Spain.
• The Federal Reserve could decide to buy up 10-year Treasury bonds and other long-term notes, echoing a move it made during the early 1960s. Economists and bond market analysts are beginning to think we could see this kind of QE3.
• Amid the heavy volume, bargain hunters will inevitably start shopping. As Suze Orman told CNBC August 8, “This is a gift from the stock-market heavens … in 2008 we had far grander problems than we do today. But by March of 2009, the stock market was rising again. What makes you think that won’t happen again?” In this correction, dollar-cost averaging could potentially snag great values.
• Some positive signals can be found in the turmoil: falling oil prices imply lower retail gasoline prices for consumers, the manufacturing and service sectors are still growing, interest rates are quite low and corporate profits have nicely improved. As to the chance of a double-dip recession, the U.S. economy is projected to grow 2-3% in 2012, which is about double the growth forecasts for the European Union, Great Britain or Japan.
• Nobody’s running away from Treasuries. In fact, Treasury yields sank 0.18% August 8, making it cheaper for the U.S. to finance its debt.

How might the downgrade of Fannie & Freddie affect the housing market? It might impact consumer confidence more than anything else. S&P’s August 8 downgrade of Fannie Mae and Freddie Mac to AA+ from AAA didn’t immediately shake up the mortgage market, as 10-year Treasury yields were down to 2.40% Monday.

Moody’s affirms America’s AAA rating. “Despite the outlook for some further deterioration in the government’s debt metrics over the coming few years, we believe that the U.S. continues to exhibit the characteristics compatible with an AAA rating,” Moody’s Investors Service senior credit officer Steven Hess wrote in an August 8 note. Moody’s also noted America’s longstanding track record of economic growth as a big reason for confidence. Fitch Ratings also refrained from a U.S. credit downgrade, and both Moody’s and Fitch stated that the possibility of sovereign default was remote.

Relatively speaking, stocks still look cheap next to bonds & cash. As the dust settles from these big market drops, Wall Street will have to weigh its collective direction. On the one hand, you have rampant anxiety; on the other hand, you have attractive valuations. Patience may prove to be a virtue as the saga plays out and we eventually return to market fundamentals.

Developments overseas generated anxiety on Wall Street. Citing “renewed tensions in some financial markets in the euro area”, the European Central Bank abruptly announced a bond-buying program Thursday, a distinct reaction to fears that Italy or Spain might need a bailout from the European Union. ECB president Jean-Claude Trichet stated that “downside risks may have intensified.” The ECB didn’t detail what debt securities it would buy or the amount of the purchases. Early indications hinted that the campaign would be modest. The ECB broadened the scope of its lending to Eurozone institutions at its benchmark interest rate this week in a move to aid feebler banks; the Bank of England kept its key interest rate at 1.5% and the ECB held its key rate at 0.5%. These firefighting moves did little: the FTSE 100, CAC 40 and DAX all dropped between 3.4%-3.9% on the day.

Japan’s central bank sold 1 trillion yen Thursday in an effort to weaken the currency while also announcing an increase in asset purchases. This move followed the Swiss National Bank’s Wednesday decision to reduce interest rates to near zero to try and weaken the Swiss franc, which had climbed 10% versus the euro in July. The dollar went 2.3% higher against the yen on the day.

Gold & oil posted losses on the firmer dollar. Gold futures slipped 0.43% Thursday to $1,656.20 per ounce; oil pulled back 5.77% to fall to $86.63 a barrel.

Treasury prices rallied. The yield of the 10-year note went down 15 basis points to 2.48%, the biggest descent since June 2010; 2-year note yields fell to a new low of 0.26% on Thursday.

Stateside headlines aided the market descent. JPMorgan scaled back its Q3 2011 U.S. growth forecast by 1% Thursday, and Bank of NY Mellon said it would begin to collect fees from “large depositors” which had affected its capital ratio. The Labor Department announced weekly jobless claims had slightly decreased to a seasonally adjusted 400,000, basically unchanged from last week; Wall Street also had Friday’s unemployment report on its mind. General Motors said its earnings had almost doubled, and Kraft Foods announced a split as well as results that topped estimates –  but these positives mattered little Thursday.

Of course, other recent news items were still on investors’ minds: the disappointing U.S. GDP from the first and second quarters, the underwhelming July PMI readings from the Institute for Supply Management, the about-face in consumer spending in June, and the particularly poor showing of July’s final Reuters/University of Michigan consumer sentiment survey.

Could we see a strong rally out of this position? Some market analysts thought a correction would take place this summer, with the major indices subsequently recovering in fall. Regardless of market reaction to Friday’s jobs report, stocks could rebound, even before the holiday season.

At a time when bullish sentiment is being severely strained, it is worth accentuating the positive. Bloomberg data indicates that 77% of S&P 500 firms have surpassed average profit forecasts of analysts in this earnings period. The S&P 500 was trading for 13.8x reported earnings on the day before the correction – the cheapest level in 13 months. Birinyi Associates data notes that the average bull market since 1962 has lasted about 49 months (the current one is about half as old). In the past 39 years, 25 corrections have occurred in bull markets, and just 9 have led to bear markets; on average, these corrections have lasted 118 days. That is history, not the near future. Yet while the future is ultimately unknown, we can recall that last year’s correction did not send Wall Street into a bear market.

The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade … although it isn’t yet clear where the bulk of the cuts will be made.

• More than $900 billion will be saved through the first wave of cuts.
  • Discretionary spending on defense and non-defense programs will be reduced by $741 billion over a 10-year period. This includes a $350 billion cutback in defense spending at the Pentagon (a Democrat goal in the negotiations).
  • Another $156 billion in savings will emerge as a result of shrinking interest costs on the national debt.
  • Another $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.)

A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.

• This committee will likely propose cuts to Social Security, Medicare and Medicaid and perhaps further reductions to the defense budget. Its membership will be handpicked. House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) each get to select three Democrats; House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) each get to pick three Republicans.
• Congress has to vote on their recommendations by December 23. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 – at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.)
• In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. (This was a key victory for Tea Party Republicans.)

The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:

• The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Once the Budget Control Act of 2011 is made law, President Obama may immediately raise the debt limit by $400 billion.
• The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.
• The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:
• If Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit – a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.
• If Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.
• Alternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.

Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes – it would be “impossible” under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.

December isn’t that far away. Expect more drama on Capitol Hill as 2011 ends, with a chance of added volatility in our financial markets.

Those income distributions will be taxed. As federal and state governments are hungry for revenue, you may see higher marginal tax rates in the near future.

Poor retirees with meager savings may rely on Social Security as their prime income source. They may end up paying less income tax in retirement, as up to half of their Social Security benefits won’t be counted as taxable income. On the other hand, those who have saved and invested well may retire to their current tax bracket or even a higher one.
Given this possibility, affluent investors would do well to study the tax efficiency of their portfolios. (Some investments are not particularly tax-efficient – REITs and small-cap funds, for example.) Both pre-tax and after-tax investments have potential advantages.

What’s a pre-tax investment? Traditional IRAs and 401(k)s are classic examples of pre-tax investments. You can put off paying taxes on the contributions you make to these accounts and the earnings these accounts generate. When you take money out of these accounts come retirement, you will pay taxes on the withdrawal.

Pre-tax investments are also called tax-deferred investments, as the invested assets can benefit from tax-deferred growth.

What’s an after-tax investment? A Roth IRA is a prime example. When you put money into a Roth IRA during the accumulation phase, contributions aren’t tax-deductible. As a trade-off, you don’t pay taxes on the withdrawals from that Roth IRA (providing you have followed the IRS rules for the arrangement). These tax-free withdrawals lower your total taxable retirement income.

As everyone would like to pay less income tax in retirement, the tax-free withdrawals from Roth IRAs are very attractive. As federal tax rates look poised to climb for obvious reasons, after-tax investments are starting to look even more attractive.

As anyone can now convert a traditional IRA to a Roth IRA, many affluent investors are considering making the move and paying taxes on the conversion today in order to get tax-free growth tomorrow.

Certain tax years can prove optimal for a Roth conversion. If a high-income taxpayer is laid off for most of a year, closes down a business or suffers net operating losses, sells rental property at a loss or claims major deductions and exemptions associated with charitable contributions, casualty losses or medical costs … he or she might end up in the lowest bracket, or even with a negative taxable income. In circumstances like these, a Roth conversion may be a good idea.

Should you have both a traditional IRA and a Roth IRA? It may seem redundant or superfluous, but it could actually help you manage your marginal tax rate. If you have both kinds of IRAs, you have the option to vary the amount and source of your IRA distributions in light of whether income tax rates have increased or decreased.  This is called tax allocation!

Your marginal tax rate might be higher than you think. Consider that about 25 different federal tax deductions and credits are phased out as your income increases. Quite a few of these have to do with education. If your children (or grandchildren) are out of school when you retire, good luck claiming those deductions.

Smart moves can help you lower your taxable income & taxable estate. An emphasis on long-term capital gains may help, as they aren’t taxed as severely as short-term gains or ordinary income. Tax loss harvesting – selling the “losers” in your portfolio to offset the “winners” – can bring immediate tax savings and possibly help to position you for better long-term after-tax returns.

If you’re making a charitable gift, giving appreciated stock or mutual funds you have held for at least a year may be better than giving cash. In addition to a potential tax deduction for the fair market value of the asset, the charity can sell the stock later without triggering capital gains. If you’re reluctant to donate shares of your portfolio’s biggest winner, consider this: you could give the shares away, then buy more shares of that stock and get a step-up in cost basis for free.

The annual gift tax exemption gives you a way to remove assets from your taxable estate. In 2011, you can gift up to $13,000 to as many individuals as you wish without paying federal gift tax. If you have 11 grandkids, you could give them $13,000 each – that’s $143,000 out of your estate. All appreciation on that amount is also out of your estate.

Are you striving for greater tax efficiency? In retirement, it is especially important – and worth a discussion. A few financial adjustments could help you lessen your tax liabilities.

A trillion-dollar divide. On July 14, CNBC.com reported that both parties had tentatively agreed on nearly $1.4 trillion worth of reductions to the federal budget. That’s not too surprising: $1.4 trillion is the projected size of the budget gap for the fiscal year ending in September. Republicans have called for $2.4 trillion in cuts.

This federal belt-tightening is going to lead politicians, economists and consumers into the second part of the debt cap conversation. Two very important questions demand our attention.

If we cut trillions from the federal budget, how will that affect GDP? In fiscal year 2009, federal spending represented 24.7% of U.S. gross domestic product. The Office of Management and Budget projected this figure to grow to 25.4% in FY 2010 and stay at 25.1% in FY 2011. The percentages haven’t been this high since 1946.

The OMB thinks that federal spending will average about 23% of GDP between here and 2020; the Congressional Budget Office thinks the percentage will be slightly greater. It is worth noting that the federal government has only gathered (on average) 18.5% of GDP in tax revenues annually across the past 30 years. A decline in GDP means less tax revenue coming in, and less tax revenue may increase pressure to trim Medicare and Social Security. That’s a scenario that implies a quick sunset for the EGTRRA/JGTRRA tax breaks that Congress has extended.

Will consumer spending continue to grow with less federal spending? The 2008 stimulus either propped up consumer spending or at least encouraged consumers to think more positively about it. There has been talk of a $196 billion haircut to federal nondefense discretionary spending across the next two fiscal years; one liberal think tank, the Economic Policy Institute, thinks this could remove 900,000 jobs from the economy next year and 1.3 million jobs in 2013, which would not bode well for housing, discretionary spending, retail sales, durable goods orders, consumer credit –the list is long. Conservatives counter with the belief that the economy has recovered to the degree that it doesn’t need such massive federal spending, and that the economy will strengthen further over the next couple of years.

If the economy wanes, what happens to stocks? The mood on Wall Street doesn’t always correspond to the mood on Main Street, but this much is certain: pre-retirees can’t stomach another stock market downturn. Investors who are a decade or less from their envisioned retirement dates cannot imagine pushing back retirements even further. Recently, the mood on Wall Street has been cautiously bullish – but if the bulls bolt thinking that the economy is stagnating or sliding back into recession, the near future may call for some active or tactical portfolio management.

Let’s hope the “what if” stays hypothetical. The brinkmanship will probably give way to an accord at the tenth or eleventh hour, and we may see small short-term cuts as a prelude to bigger long-term cuts and reforms to entitlement programs.

What if no deal is reached by the August 2 deadline set by the Treasury Department? The Bipartisan Policy Center forecasts that the federal government would have to spend $134 billion less than planned during the rest of the month. So $134 billion would be removed from the U.S. economy in 29 days. This is more than 10% of America’s monthly GDP. Imagine that happening for a start, and then factor in a 9% jobless rate and the possibility of a stock market swoon and higher interest rates.

It is not a pretty scenario, and it is one the U.S. will hopefully avoid. If a new Reuters poll is any indication, most economists think disaster will be averted – 38 of 40 economists recently surveyed by the news agency believe legislators will reach a deal before August 2 rolls around.  We’ll find out sooner (hopefully) rather than later.

Thinking that a will or a trust can facilitate the transfer of IRA assets. Most IRAs don’t pass to heirs through wills or trusts (a few rare exceptions aside). The beneficiary form takes precedence – the form the IRA owner filled out and signed when opening the account. Problems arise when

• The IRA owner dies without designating a beneficiary
• The designated beneficiary has also passed away
• No one can find the beneficiary form (not even the IRA custodian, i.e., the financial institution that hosts the IRA)

In these circumstances, IRA heirs commonly end up playing by the IRA custodian’s rules. The resulting beneficiary may be the IRA owner’s estate – a very undesirable tax consequence. It might be a contingent beneficiary – perhaps a very undesirable emotional consequence. The lesson here is to keep the beneficiary form handy and to let your heirs know where it is.

Taking lump-sum distributions. Too often, non-spousal IRA heirs see the inherited assets as money to spend. They withdraw the entire IRA balance in one fell swoop. Bad idea: all that money will be subject to federal income tax. Due to this move, they may lose a third of the IRA assets (or more).

The alternatives? Non-spousal beneficiaries can open an inherited Roth or traditional IRA and simply take Required Minimum Distributions (RMDs) from that inherited IRA under the appropriate schedule:

• Traditional IRA: within five years of the account holder’s death if the account holder was under age 70½, or over your projected lifespan according to IRS tables if the account holder was over age 70½.
• Roth IRA: within five years of the account holder’s death.

This decision can allow the invested IRA assets to keep compounding with the added benefit of tax deferral.

Not realizing your four options when you inherit your spouse’s IRA. If a spouse dies, the surviving spouse that inherits an IRA has some choices. He or she can:

• Roll over the assets into a beneficiary IRA
• Convert the inherited IRA into your own IRA
• Take a lump sum distribution
• “Disclaim” up to 100% of the deceased spouse’s IRA assets

There are compelling reasons to go with the rollover. The widowed spouse can set up an RMD schedule based on his or her life expectancy. This second point is really important, because the rollover allows the surviving spouse to put off the RMDs that would otherwise soon need to happen. In fact, the surviving spouse can wait until the year in which the original IRA owner would have turned 70½ to start taking required withdrawals from the IRA.

But there is also a compelling tax reason not to make a rollover if the widowed spouse wants to take distributions from the inherited IRA before age 59½. If that is the desire, those withdrawals will be slapped with the nagging 10% early withdrawal penalty plus the requisite income taxes.

If the spouse converts the IRA into his or her own IRA, the surviving spouse can name a beneficiary for the inherited assets, keep contributing to the IRA, and potentially avoid RMDs until he or she turns 70½.

Alternately, a surviving spouse who doesn’t really need inherited IRA assets can “disclaim” them, meaning that they will go to a contingent beneficiary. Sometimes this can be a wise move for tax purposes.

Non-spousal heirs fail to retitle an inherited IRA. If this isn’t done in the year following the year in which the original IRA owner passed, then there can be no direct rollover of the inherited IRA assets and no “stretch” for those assets.

What happens if a non-spouse beneficiary just rolls the inherited IRA assets into an IRA they own, one that isn’t retitled? Then it is not a direct rollover. The IRS treats those inherited IRA assets like a fully taxable cash distribution – 100% of it is subject to income tax.

Ask for help, and don’t be afraid to ask questions. Many families and couples have only a hazy understanding of the rules governing IRAs, and few really know all the options. Make sure your IRA beneficiary form is up to date, and speak with the financial professional you know and trust about how to handle the transfer of IRA assets when the time comes.

Traditional IRA.
(Contribution limit of $5,000, $6,000 if you are 50 or older)
A traditional IRA (or deductible IRA) is an individual savings plan for anyone who receives taxable compensation. IRA assets may be invested in any number of vehicles, and contributions may be tax-deductible. Earnings in a traditional IRA grow tax-deferred until withdrawal, but they will be taxed when withdrawal begins – and withdrawals must begin by the time the IRA owner reaches age 70½. If these Required Minimum Distributions (RMDs) are not taken at that age, a 50% penalty will be assessed on the amount not distributed. You cannot contribute to a traditional IRA after age 70½. The IRS considers all IRAs other than Roth and SIMPLE IRAs as traditional IRAs.

Roth IRA.
(Contribution limit of $5,000, $6,000 if you are 50 or older)
A Roth IRA offers you a) tax-free compounding, b) tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, c) the potential to make contributions to your IRA after age 70½ without having to take RMDs. While contributions to a Roth IRA are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals.

Today, anyone with a traditional IRA may convert it to a Roth IRA. However, your ability to contribute to a Roth IRA may be restricted: in 2011, phase-outs kick in for joint filers whose modified adjusted gross income (MAGI) exceeds $169,000 and single filers whose MAGI exceeds $107,000.

SIMPLE IRA.
(Contribution limit of $11,500, $2,500 catch-up contribution allowed if you are 50 or older)
SIMPLE IRAs are qualified retirement plans for businesses with 100 or fewer employees. They are much easier (and more affordable) to administrate than 401(k) or 403(b) plans. They are funded by “elective deferrals” (salary reduction contributions from employees), and generally the employer has to match employee contributions on a dollar-for-dollar basis up to 3% of an employee’s compensation.

SEP.
(Contributions cannot exceed $49,000 or a maximum of 25% of employee compensation)
SEP stands for Simplified Employee Pension. These traditional IRAs are set up by an employer for employees, and like a pension plan, funded by employer contributions only. Contributions are tax-deductible, but qualified withdrawals taken after age 59½ are taxed at standard income tax rates. If an employer implements an SEP plan, allocations to all employees’ SEP-IRAs must be proportional to their salary/wages.

Individual Retirement Annuity.
(Maximum contribution set at traditional or Roth IRA contribution limits)
Some annuity contracts allow you to set up a traditional or Roth IRA with a life insurance company. Payments to the annuity may be made by the annuity owner or another party. The annuity owner’s entire interest must be fully vested, and the owner cannot transfer any of the balance to someone else.

Spousal IRA.
(Contribution limit of $5,000, $6,000 if you are 50 or older)
This is actually a rule that lets a working spouse make traditional or Roth IRA contributions on behalf of a non-working or retired spouse. The working spouse’s income is the determining factor as to whether or not a “Spousal IRA” contribution can be made. Contribution limits and eligibility requirements are the same as those for a regular IRA.

Inherited IRA.
(No contributions allowed in some cases)
A Roth or traditional IRA inherited by a non-spousal beneficiary. You cannot treat this IRA as your own. (If you inherit your spouse’s IRA, you can name yourself as the new owner and sole beneficiary and make contributions and withdrawals from it.) Distributions from inherited IRAs are subject to the minimum distribution rules; they must be taken over your lifetime, and the inherited IRA assets cannot be rolled over into an IRA you own. Inherited traditional IRAs may not be converted into Roth IRAs, but thanks to IRS Notice 2008-30, non-spouse beneficiaries of company retirement plan assets may now convert those inherited assets into Roth IRAs.

Group IRA.
(Contribution limit of $5,000, $6,000 if you are 50 or older)
A “Group IRA” is simply a traditional IRA offered by employers, unions, and other employee associations to their employees, administered through a retirement trust.

Rollover IRA.
(Contribution limit of $5,000, $6,000 if you are 50 or older)
Assets distributed from a qualified retirement plan may be rolled over into a traditional IRA, which may be converted later to a Roth IRA. Assets can be commingled within the IRA and rolled into another employer plan in the future.

Education IRA (Coverdell ESA).
(Contribution limit of $2,000)
The Coverdell ESA provides a vehicle to help middle-class investors save for a child’s education. Parents, guardians, and even corporations or partnerships can currently make nondeductible contributions totaling up to $2,000 annually into a Coverdell ESA on behalf of a minor. Starting in 2013, only individuals will be able to make contributions of $2,000 maximum per Coverdell ESA beneficiary. You get tax-free growth and tax-free withdrawals, provided the money is used for education expenses. Starting in 2013, any distributions that you use to pay elementary or secondary school expenses will be taxed. Contributions to a Coverdell ESA are not deductible.

The bottom line. You should consult a qualified financial advisor regarding your IRA options. There are many choices available, and it is vital that you understand how your choice could affect your financial situation. No one IRA is the “right” IRA for everyone, so do your homework and seek advice before you proceed.

It may be the right thing to do. When this suggestion comes up, it isn’t because the financial advisor wants to retreat from responsibility. It is actually made in the best interest of the investor. The portfolio management capability and resources of a single financial professional or small financial consulting group can pale in comparison to what an outside money manager might provide.

It can be a value-added service. Most financial advisors devote their time to helping their clients address retirement and legacy planning issues. A third-party money manager allows them to spend more time focusing on these issues instead of which fund family and/or funds to be buying or selling.

A financial professional or financial advisory firm does not make such decisions lightly. It evaluates the risks and goals associated with the investor prior to committing client capital, to ensure that the proposed move is appropriate for the client. It also looks at the third-party manager’s approach – its performance, how it hedges and why, what kinds of investments are being added and subtracted, how timely any changes in strategy have been deployed, and how often it communicates. The asset management firm that is hired is regularly monitored.

This is simply part of fiduciary responsibility. Before you can suggest a third-party asset manager to a client, you must study the makeup of the organization, its fund managers and its team plus the product offerings.

A potential “step up” for the investor. Bringing in a third-party portfolio manager may help an individual investor access more sophisticated institutional investment strategies. Many of these management firms favor “open architecture” – an investor’s portfolio can include a wider variety of mutual funds, ETFs and separately managed accounts. Some allow the client and the financial professional the opportunity to monitor the portfolio in “real time” (or something approximating it). So “hiring out” the management of a portfolio could prove to be a wise choice.

• Only 11% of boomers think they will retire to a comfortable lifestyle.
• 24% of boomers say they have no retirement savings.
• 64% feel that Social Security will be their main source of retirement income.
• 25% of boomers in the work force say they will never retire.
• 66% of working boomers intend to work part-time or full-time after they end their careers. Yet the most recent Social Security Administration figures (2008) show that less than 50% of Americans age 65-74 earned income from a job.

Hopefully, you have reason for optimism. The poll found that about 1 in 10 respondents had more than $500,000 in dedicated retirement savings. Additionally, about half of those surveyed had retirement savings of more than $100,000.

If you don’t, what can you do to save your dream? Retiring later may help – it will give you added years of earned income and group health coverage. You can also apply for Social Security later, which can result in substantially greater benefits.

Don’t want to retire later? Then you may want to pour as much as you can into your 401(k) or IRA. If you are 50 and have a Roth IRA balance of about $80,000, you could potentially wind up with more than $450,000 in that IRA at age 65 if you contribute $5,000 per year and realize a 9% annual return. A 50-year-old with a $250,000 401(k) balance could potentially end up with more than $1 million in that 401(k) by age 65 if he or she contributes $16,500 a year and gets an 8% annual return. (That’s not even factoring in employer matches and “catch-up” contributions after age 50.)

Start now, because procrastination is your greatest enemy. Meet with a financial professional – one with significant experience in retirement planning. You may have more options than you realize. Fight for your retirement dream!

There’s no doubt that in recent history, the performance of gold is startling. Across the 2000s, gold gained 278.52% on the COMEX while the S&P 500 lost 24.10%. In 2010, the S&P 500 advanced 12.78% and gold notched a 29.76% gain.

So given these numbers, why doesn’t everyone put every dollar they have into gold?

Recent price returns don’t tell the whole story. Investing big in gold may seem like a no-brainer – until you take history and inflation into account. In 1980, gold prices were up around $850 an ounce – adjusted for inflation, that’s the equivalent of about $2,300 an ounce today. Yet when 2008 ended, gold prices were at just $870 an ounce. When 2003 started, gold futures were trading at $343 per ounce.

Gold is often seen as a hedge against inflation – but from 1980-2002, annualized inflation averaged 3.55% and gold didn’t exactly keep pace. So if you lengthen the window of historical performance, gold hasn’t always trumped stocks.

Remember, gold is a commodity. Since it tends to have little correlation with stocks and bonds, it can play a significant role in a diversification strategy. On the other hand, gold has no intrinsic value. It doesn’t give you any cash flow. It doesn’t pay you a dividend or earn interest. Gold is only worth what people are willing to pay for it.

Right now, people are willing to pay more than $1,500 an ounce for gold. Three big factors have driven this gold rush – a consistent global demand, an assumption that the dollar will stay weak and a whole lot of speculation.

Bubbles can happen; bubbles have happened. Investors who bought gold at $560 an ounce at the start of 1980 had to wait until 4Q 2010 to break even in inflation-adjusted terms. Those who bought gold at $850 an ounce in 1980 won’t effectively break even until gold prices top $2,300. Gold has performed astonishingly well in recent years – but past performance is no guarantee of future success.  Remember that the next time your hear a late night commercial.

While the U.S. still has the preferred AAA credit rating from Standard & Poor’s, S&P credit analyst Nikola G. Swann put the possibility of an actual rating downgrade at 33% by 2013.

S&P more or less gave politicians a deadline. Swann’s statement on behalf of Standard & Poor’s put it this way: “In our macroeconomic forecast’s optimistic scenario (assuming near 4% annual real growth), the [U.S.] fiscal deficit would fall to 4.6% of GDP by 2013, but the U.S.’s net general government debt would still rise to almost 80% of GDP by 2013. In our pessimistic scenario (a mild, one-year double-dip recession in 2012), the deficit would be 9.1%, while net debt would surpass 90% by 2013. Even in our optimistic scenario, we believe the U.S.’s fiscal profile would be less robust than those of other ‘AAA’ rated sovereigns by 2013. Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years.”

Translation: let’s see some significant action, or we’ll have no choice but to cut America’s credit rating.

Moody’s sees a “turning point” in the budget battle. An April 18 report from Moody’s Investors Service sounded more optimistic. Moody’s senior credit officer Steven Hess wrote in a note that considering the most recent budget proposals from the White House and the Republican leadership, the agency sees “the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.”

Moody’s currently ranks the U.S. credit rating at Aaa with a “stable” outlook, and Hess noted that “either the president’s revised proposal or the Republican proposal would improve the U.S. government’s creditworthiness.”

Geithner counters the S&P opinion. Shortly after the S&P report hit the streets, Treasury Secretary Timothy Geithner appeared on Bloomberg Television, remarking that he had “absolutely not” had to reassure any buyers of Treasuries about the creditworthiness of America. Of course, the real reassurance would be bona fide action – some compromise that will pare between the $4 trillion the White House wants cut over the next decade and the $6.2 trillion Republican leaders want cut in the coming ten years. Raising the federal borrowing limit in the near future seems a given, as without that move the federal government could default on its debt in early July.

What would happen if the U.S. credit rating was cut? In a nutshell, the cause-and-effect would go like this. Global investors would regard Treasuries as riskier investments than they do now, and this would mean that the Treasury would be left paying higher interest rates on any freshly issued debt. That would imply higher interest costs for U.S. businesses and consumers – and food and energy prices are already strenuous enough as we speak.

Incidentally, along with its gloomy April 18 opinion on U.S. credit, S&P also revised its outlook from “stable” to “negative” for five insurers: New York Life, USAA, the Knights of Columbus, Northwestern Mutual and the Teachers Insurance & Annuity Association of America. The reason? These insurers are “are constrained by the sovereign rating on the U.S.”

Can a deal be brokered before 2012? Good question. After all, John Chambers, chairman of the sovereign ratings committee at Standard & Poor’s Ratings Services, cited “political gridlock” as a core reason for S&P’s change of outlook. Symbolically, it would be nice to have one before fiscal year 2012, which begins in October.

This has happened before. Major nations have faced warnings about credit rating downgrades in the past. We have: Moody’s cut its outlook for the U.S. in 1996, reversed its opinion once the federal debt ceiling was raised.

In the last 22 years, S&P has changed its outlook to “negative” for five AAA-rated nations, including the United Kingdom in 2009. S&P’s outlook on the U.K. returned to “stable” after an austerity plan was approved, and if we arrive at a plan to cut the deficit (a painful one, but a necessary one), our credit outlook may similarly improve.