by Vitaliy Katsenelson, CFA
I was recently going through a new client’s portfolio and found it full of the likes of Coca-Cola, Kimberly-Clark and Campbell Soup — what I call (pseudo) bond substitutes. Each one is a stable and mature company. Your mother-in-law would be proud if you worked for any one of them. They have had a fabulous past; they’ve grown revenues and earnings for decades. They were in their glory days when most baby boomers were coming of age. But the days of growth are in the rearview mirror for these companies — their markets are mature, and the market share of competitors is high. They can innovate all day long, but consumers will not be drinking more fizzy liquids, wearing more diapers or eating more canned soup.
If you were to look at these companies’ financial statements, you’d be seriously under impressed. They paint a stereotypical picture of corporate old age. Their revenues haven’t grown in years and in many cases have declined. Some of them were able to squeeze slightly higher earnings from stagnating revenue through cost-cutting, but that strategy has its limits — you can only squeeze so much water out of rocks (unless someone like 3G Capital takes the company, sells its fleet of corporate jets and starts mercilessly slashing expenses like the private equity firm did at Budweiser and Heinz). These businesses will be around ten years from now, but their profitability probably won’t be very different from its current level (not much higher, but probably not much lower either).
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A one-time, penalty-free IRA distribution exception
You’ve worked hard to put money in an IRA preparing for retirement. For many people, your IRA savings may be your largest asset. If you’re looking to purchase a home, you may need to access your IRA funds to assist with the costs. There is an IRA distribution exception in the tax code that can help you.
The First-Time Home Buyers Exception
If you take a distribution from your IRA and have not reached the age of 59 1/2, you will not only have to pay the taxes on the funds, but also pay a 10% early distribution penalty. However, there is an exception for first-time home buyers. If you’re looking to buy or build a principal residence and you are a first-time home buyer, the 10% penalty does not apply to your IR distribution. The funds can also be used to pay for the settlement fees, closing costs, and financing fees.
Are Americans Ready?
The long second half of the retirement game
- 69% believe there is at least some chance that they will outlive their savings.
- 14% think they definitely will!
How to fix this? Save as much as you can as soon as you can – and if it’s getting late in your career, take advantage of the $1,000 IRA catch-up contribution. In 2016, individuals age 50+ can contribute $6,500 to their IRA. Try to move as much money as possible to tax-free territory like Roth IRAs and leverage life insurance.
Exceptions to the IRA penalty fall into 2 categories
Just for IRAs
First-Time Home Purchase
The 10% early IRA distribution penalty does not apply if you use the distribution to acquire a first home. Acquire means purchasing an existing home or constructing a new one for a primary residence. Closing costs also qualify. The definition of first-time home buyer is someone who has not owned a home for the past two years.
The 10% IRA distribution penalty does not apply if you take an IRA distribution and use it for qualified higher education expenses. Such expenses include post-secondary tuition, fees, books, supplies and required equipment. Computers, computer equipment and internet access are qualified education expenses if used by the students during the years which they are in school.
Ask these 10 questions to avoid the 50% RMD penalty
• Do I have an accurate inventory of all my retirement accounts? – This may seem rather simple, but it’s absolutely crucial to maintain a record of all your retirement accounts. And that may be easier said than done. According to a 2012 Department of Labor study, Baby Boomers born between 1957 and 1964 held, on average, a staggering 11.3 jobs between the ages of 18 and 46. So it’s entirely possible you have more than one 401(k) or similar plan. Oftentimes, when people leave an old employer, they forget about their plan money, especially if it was only a small amount.