Stewart Welch Videos


Tuesday, February 23, 2010

The Million Dollar Roth Child

With a Roth IRA, you do not receive an income tax deduction for contributions, but your money grows tax deferred and qualified withdrawals are income tax free…forever! This creates an incredible opportunity to amass a small fortune for children. For example if a 10-year old made annual contributions of $1,000 to a Roth IRA until his age 22, by age 60 his $12,000 investment would be worth $268,000 based on 7% earnings. Compare this to a child who makes contributions beginning at age 22 and continuing those contributions until age 60. In this case, total contributions are $38,000 and his accumulated balance is $198,000. Through the power of time and compounding, our younger investor creates more wealth with less than a third of the money. If our young investor continued to invest $1,000 per year all the way to age 60, he’d have $466,000. And if we could figure out how to increase the investment to $5,000 per year, he’d accumulate an eye-popping $2.3 million by age 60!

Whether it’s a relatively small Roth IRA contribution or a maximum contribution, these are impressive numbers. In order to be eligible to make contributions to a Roth IRA, your child must have earned income. The rules allow a contribution of 100% of earned income up to $5,000. So how do we go about getting our ten-year-old earned income? Here are several possibilities:

1. Self employment income. Your child could have a job such as baby sitting or mowing the neighbor’s lawn. When I was twelve, I remember my father dropping me off in the neighborhood with a box of aerosol can fire extinguishers that I sold door-to-door. I bought the cans for $1 (with dad’s money!) and sold them for $3. That’s earned income that would qualify for a Roth IRA contribution.

2. Employment income. Typically, this would include after school or summer jobs such as working at a grocery store, golf club or restaurant. Here the child is drawing a paycheck from an employer. If the parents are self employed or sole proprietors, then they might hire their children to work in the business. The compensation must be ‘reasonable’ for the work performed and keeping excellent records is a must.

3. Household work. Children can qualify as household employees if they follow certain IRS guidelines (see IRS Publication 926 at Here, excellent record-keeping is vital.

Knowing that when children earn money they’re not likely to be very enthusiastic about investing in a Roth IRA, consider this strategy. You (or a grandparent) agree to gift them one dollar for every dollar they contribute to their Roth IRA. As a result, your children will learn the value of work, saving and investing for the long term and just maybe…become a millionaire in the process!

Correction: In last week’s column on estate planning, I indicated that under current law, the first $1.3 million of estate assets received a ‘stepped-up cost basis’ plus an additional $3 million for certain spousal transfers. The law actually allows an exemption for the first $1.3 of appreciation of estate assets plus a similar exemption of an additional $3 million for certain spousal transfers. My thanks to attorney Leonard Wertheimer for pointing this out.

Monday, February 15, 2010

Stewart Welch - Estate Tax Ouija Board Game

In a late 2009 article in The Birmingham News, I predicted that Congress would extend the 2009 estate tax rules rather than allow the scheduled repeal of all estate taxes to take effect. I was wrong…maybe. It’s true that Congress failed to take any action which means that currently there are no estate taxes no matter what size your estate. This means that if Donald Trump and his wife died this year instead of receiving potentially hundreds of millions of dollars in estate taxes, the federal government would receive nothing and his heirs would receive the entire estate tax free! Maybe…maybe not. There is discussion on Capital Hill suggesting Congress will change the law later this year and make it retroactive to January 1, 2010. If this were to occur, you can bet someone will challenge it on constitutional grounds. Resolution would likely take years and eventually be settled by the Supreme Court.

To put the current law in perspective, the estate tax laws for 2009 exempted up to $3.5 million from estate taxes for individuals and with proper planning, a married couple could exclude up to $7 million. In addition, estate beneficiaries received a ‘stepped-up’ tax basis on inherited assets, meaning the market value of all estate assets was re-set based on the date of death, eliminating capital gains taxes on immediate sales and eliminating the need for record-keeping on tax basis. Under the 2010 law, up to $1.3 million of assets receive a stepped-up basis’ while the excess amount is subject to capital gains taxes at the time of sale. Certain spousal transfers receive an additional $3 million of stepped-up basis.

Should Congress fail to take action this year, the current estate tax law is automatically repealed and on January 1, 2011 the estate tax exemption would revert to $1 million causing millions of middle-class Americans to be subject to taxes they never anticipated.

If you feel like you’re locked in a dark room seeking answers from a Ouija board, you’re in good company. Congressional inaction has made it almost impossible to make effective plans and doing nothing could create disastrous results for your family. For example, many wills use a ‘formula’ stating the maximum exemption amount goes to a by-pass trust (that often has children as the beneficiaries) with the balance going outright to the spouse. For this year that means that all of the money would go to the family trust, potentially leaving the spouse out entirely!

With all of this uncertainty, what exactly should you do? Your best choice is to contact your attorney or financial advisor and review your current estate plan to determine if you could potentially be adversely affected. Second, consider writing your congressional representative and demand that he or she bring permanent resolution to this matter. This is what we pay them to do and it’s time they did their job. For a sample letter, visit the Resource Center at; click on ‘Links’; then click on Estate Tax Letter to Congress. There’s also a link to the email address of your congressional representative.

Monday, February 8, 2010

ETFs - A Top Investment Tool

After more than a decade of extensive use by professional money managers, Exchange Traded Funds, or ETFs, are still not being heavily used by the general public. This is an education problem since ETFs offer a number of advantages over both managed mutual funds (called ‘active’ funds) and index mutual funds (called ‘passive’ funds). With actively managed mutual funds, the fund company hires a manager who actively buys and sells stocks and bonds in an attempt to outperform a certain benchmark such as the S&P 500 Index. With passively managed mutual funds, the fund company hires a computer programmer who ‘matches’ the exact same securities held in a particular index such as the S&P 500 Index. Let’s look at some of the comparative benefits of owning ETFs:

Like index mutual funds, an ETF represents a specific index such as the S&P 500 (U.S. large companies) or the Wilshire 5000 (the entire U.S. stock market) or the Russell 2000 (U.S. small companies). For example, by buying the ETF version (symbol SPY) of the S&P 500 Index, with one security purchase you own shares in 500 companies.
Like index mutual funds, ETF expenses are very low. Where Vanguard Total Stock Market Index (VTSMX) mutual fund charges 0.18% annually, their own ETF version (VTI) charges a meager 0.09% annually. Compare this to the management fee of the typical actively managed mutual fund, which averages 1.4% annually.
ETFs are highly tax efficient. By law, mutual funds are required to distribute at least 95% of all net realized capital gains each year to their investors as of a certain date, called the 'record date'. While this has been less of a problem with index mutual funds, it has been a significant problem with many managed mutual funds. ETFs minimize this problem as you only recognize gains when you sell an ETF in which you have made money. With a mutual fund, it is possible to actually have losses for the year, yet get hit with taxable gains on fund distributions.
ETFs trade like stocks…on an intra-day basis whereas mutual funds settle at the close of the day's prices. Under the new paradigm we find ourselves today where dramatic market changes can happen in the course of a single day, this can be an important benefit.
Many mutual funds, even no-load funds, charge a redemption fee when you sell your fund within a certain period of time from purchase (typically 90-days). ETFs do not have such restrictions, allowing investors to remain mobile and responsive to rapidly changing events. While I believe in having a long-term investment strategy, it’s important to maintain the flexibility to make changes should extraordinary circumstances arise.
You now have access to over 700 different types of ETFs, allowing you to be very strategic in your investing while still maintaining significant security diversification. We use ETFs extensively in managing our client's portfolios and have found them to be an excellent cost efficient management tool.

Monday, February 1, 2010

7 Habits of Highly Successful Businesses

Historically, only about thirty percent of new businesses survive during the first ten years of operation. Throw in the worst economic disaster since the Great Depression, and if you are a business owner, you want to model the habits of the most successful businesses.

Write a business plan. The purpose of a written business plan is to provide clarity of the business purpose for you and your employees, as well as potential future business partners. It should include detailed financial projections for the current year plus one to five years into the future. Key financial documents include a balance sheet, profit and loss statement and statement of cash flow.
Write a marketing plan. No business plan would be complete without a detailed marketing plan that describes how you plan to acquire and keep customers. Most marketing plans focus only on acquiring customers. Realize that it can easily cost you five times more to get a new customer than it does to keep one you already have. Be sure you have an excellent written customer retention plan.
Build multiple banking relationships. To support start-up costs and to continue to grow a business usually requires a good working relationship with a bank. As we have seen over the past twenty-four months, things can change rapidly in the world of banking, potentially leaving you in a financial crunch as bankers change lending practices with little or no notice. To protect yourself, build a relationship with at least two banks.
Build cash reserves. Many business owners run their business like an extension of their personal checking account, raiding it whenever personal cash runs short. Best business practices include a complete separation of business accounts and a reasonable cash reserve account. Consider contributing a specific percent of gross monthly receipts to a segregated money market account until you build up to a target balance for reserves. This will differ based on the type of business.
Build a great team. A fatal flaw for many entrepreneurs is to add people as they are ‘busting at the seams’; hiring pretty much whoever is available. The most successful entrepreneurs start by building an organization chart based on expected growth three to five years into the future and identifying the ideal qualities and qualifications for each of those future key employee slots. Be willing to ‘always be interviewing’ and be willing to hire before you need someone if they uniquely fit one of your slots.
Have a formal employee retention plan. Once you hire great people, it’s imperative that you have a plan for keeping them with an employee retention program. The key is a communication system whereby you let employees know what is expected of them; give them responsibility for their job activities; provide feedback; and create an opportunity to take on additional responsibilities to stretch their capabilities.
Create a succession plan. Plan to build a business that will outlive you. The best way to start is to standardize and memorialize, in writing, all recurring processes. Your long-term goal is to create an organization that can run without your day-to-day input. You’ll know you’ve achieved this when you can take a three-month vacation without having to check in daily.