March 2012: ACap ReCap
1. When can I take money out of my Roth IRA?
This is a great question and one I receive often. You can withdraw your Roth IRA contributions at anytime without tax or penalty. The key word here is contributions. Assume you deposit $5,000 each year into your Roth IRA for 5 years and the account is now worth $40,000, you can withdraw your $25,000 total contributions anytime without tax or penalty. Despite its accessibility, I generally do not recommend investors withdraw money from their Roth IRAs unless it is a true emergency because any amount taken out cannot be re-deposited into the account. Continuing with the same example, if you withdraw the $25,000, you cannot re-deposit that amount back into your Roth IRA and must start over again adhering to the annual contribution limits. For more detailed information on IRAs in general, including Roth IRAs, refer to IRS Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf).
2. Help! My student loan payments are due, but my payments are too high as compared to my income. Do I have any options?
Yes. The government has recognized the growing number of graduates with large student loan balances but with insufficient incomes to support debt repayment. As a result, Congress has created several programs to help minimize the debt burden of student loans, especially those who work in public service. For example, the Income-Based Repayment program (IBR) caps your monthly loan payment to an amount commensurate with your income and family size; the Public Service Loan Forgiveness Program (PSLF) forgives a portion of an individual’s federal loans as long as they work in a public service job. There are many types of loans and assistance programs to match the loan type, I encourage you to visit the U.S. Department of Education website section which addresses all the programs and what types of loans qualify (http://studentaid.ed.gov). Lastly, stay tuned for a more in-depth article I will post about these programs and their differences.
3. Is the Great Recession over?
Yes and no. It really depends on who you talk to and which economic indicators you place a greater importance on. Unemployment, while slowly declining, remains historically high at 8.3 percent according to the Bureau of Labor Statistics; access to credit is still reserved for those individuals with stellar credit scores and stable incomes; and the Federal government has yet to address its huge budgetary problems, including a much needed tax reform. However, consumers are deleveraging, and corporate profits and margins are at all time highs. Corporations and individuals with strong balance sheets are able to take advantage of historically low interest rates to refinance higher price debt, thereby improving their cash flow. Each of these economic indicators either supports a recovery or continued recession.
4. What are the biggest risks to the market in 2012?
The biggest risks to the U.S. markets at this point are Eurocentric and macro in nature. The Eurozone has taken positive steps to strengthen the viability of the euro currency and instill investor confidence in member nations, but the most difficult part is uniting 17 fragmented countries whose only shared interest is their common currency. On a macro level, Federal and State governments are still struggling and looking for additional tax revenues to offset tighter budgets and rising pension costs. On a micro level, U.S. consumers are reducing their debts and increasing savings, albeit by force, due a severe decline in available credit. In addition, corporations are more productive, have access to ample human resources, and sit on mountains of cash.
5. Should I only buy stocks that pay dividends?
No. If you are living on a fixed income and need your portfolio to generate yield, the more appropriate approach would be to create a portfolio not only of dividend paying stocks, but also a portfolio consisting of municipal, government, corporate, and high yield bonds. Under current tax laws, qualified dividends are taxed more favorably than interest and non-qualified dividends. Also recognize that companies that pay dividends tend to be more stable and have slower growth prospects. Basically, when a company pays a dividend, it is sending a message to its shareholders that it can no longer reinvest its profits into the company to earn high returns. Conversely, fast growing companies such as Netflix and Amazon do not pay dividends because they can reinvest their profits for higher enterprise value and capital appreciation. If you prefer the growth of your portfolio to come from income, then invest in dividend paying stocks, but if you prefer capital appreciation, then invest in growth stocks.