Safer investments for retirees suffer under new tax law | KHON2 Hawaii’s News Channel

Assume you’re a retiree who needs steady, dependable investment income, or you’re a younger person who wants some traditional “fixed-income” holdings such as bonds.

How should you place your bets to benefit most from the new tax law approved late last month?

Put simply, you’ll have to rethink your priorities – and probably take on more risk.

Retirees, for instance, won’t be able to get the biggest bang out of the new rules unless they move money out of bonds and into stocks. And if they are to get the highest possible income in retirement, they may have to give up the widely held belief they should never spend principal.

Life on a fixed income seems to get scarier and scarier.

How can this be?

Because the rules boil down to this: Any investment that pays interest becomes less desirable, while those that pay dividends or enjoy long-term capital gains become more desirable.

Hence, stocks become more attractive. Bonds, certificates of deposit and money market funds – the traditional safe havens for older investors – are less appealing.

Under the old rules, interest and dividend income were taxed at income-tax rates as high as 38.6 percent. With the new rules, already in effect, interest is still taxed as income, though the top rate has fallen to 35 percent. Most investors will pay even less – 25, 28 or 33 percent.

But dividends are no longer taxed at income-tax rates. Instead, they are taxed at the same rate as long-term capital gains – the rate on investments owned longer than a year. Moreover, that rate was cut to 15 percent from 20 percent.

Bottom line for income-oriented investors: The tax bill on a dividend paid on a stock may be just half what it is on interest from a bond, bank CD or money market fund.

The problem, of course, is that stocks are generally riskier. The price of the stock might fall, while a government-insured CD or a money market fund is very safe. Government bonds, and many corporate bonds, can be very safe as well, especially if you intend to hold them to maturity. (If you sell before maturity, any profit will be taxed at the capital gains rate.)

Fixed-income investors face a double whammy. They’re lucky if they make more than 2 or 3 percent on their bonds, CDs and money market funds. Second, the tax on that paltry earning will be substantially higher than on other investments.

Make it a triple whammy, since some investments that would seem to benefit from the dividend tax cut actually do not:

– Preferred stocks: These often pay larger dividends than ordinary stocks do, making them especially attractive to fixed-income investors. They are “preferred” because their promised dividends must be paid before dividends can be paid on ordinary, “common” shares.

I won’t get into all the complex ins and outs of preferreds here. The important point is that dividends paid by most preferreds will continue to be taxed as income, at those 25-35 percent rates. That’s because, in most cases, preferred dividends are really interest payments, so they won’t enjoy the 15 percent rate for ordinary dividends.

– Real Estate Investment Trusts: REITS are like mutual funds that invest in commercial and residential properties. Fixed-income investors like them because they must pass on to shareholders at least 90 percent of the annual income they derive from such sources as rent. And many are quite generous, paying 7, 8 or 9 percent – though share prices move up and down like stocks.

Unfortunately, REIT income will continue to be taxed at income-tax rates rather than dividend rates. This is because REIT income is tax-exempt at the corporate level. Dividends from ordinary corporations are getting a tax reduction because the corporation must pay tax on that money as well.

– Municipal bonds: There’s no change in the tax treatment of munis – their interest payments continue to be exempt from federal tax. This has long made munis attractive to fixed-income investors, especially those in high tax brackets. However, the relative benefits of munis are reduced slightly because tax rates on competing investments have been cut. Investors will have to figure which investments will leave them with the most after all taxes have been taken into account.

For young investors, the new tax rules are a great deal. These folks have long been advised to emphasize stocks. Since they have time to weather stock-market downturns, they can enjoy the larger returns stocks average over long periods. Now these investors also can benefit from lower tax rates on dividends and capital gains.

Older investors who need to emphasize short-term safety aren’t as fortunate. With fixed-income investments paying so little, and with the relatively high tax rates on this kind of income, many people will have no choice but to shift money to riskier stocks or stock funds in hopes of earning higher after-tax returns.

For many, the first impulse will be to look for safe dividend-paying stocks such as utilities. But they shouldn’t overlook stocks that don’t pay dividends. There’s really nothing wrong with selling shares – that is, your principal – to generate income.

After all, if you invested $100,000 in stocks that grew to $105,000 in a year, you could sell $5,000 worth of shares and still have $100,000 in shares. If you had $100,000 in bonds paying 5 percent, you’d have $5,000 in income and $100,000 in bonds after a year. Either way, it’s the same.

Of course, you can’t get 5 percent on a bond these days. Even if you did, the tax on your bond income under the new law might be twice what you’d pay on the same income if it came from stocks.

Maui News — WASHINGTON (AP) — Mortgage rates have sunk to the lowest level in more than five decades, but consumers aren’t rushing to refinance their loans or buy homes.

Mortgage company Freddie Mac said Thursday the average rate for 30-year fixed loans sank to 4.58 percent this week.

That’s down from the previous record of 4.69 percent set last week and the lowest since the mortgage company began keeping records in 1971. The last time they were cheaper was the 1950s, when most long-term home loans lasted just 20 or 25 years.

Rates have fallen over the past two months. Investors wary of the European debt crisis and the stock market have shifted money into the safety of Treasury bonds, driving down yields. Mortgage rates tend to track the yields on long-term Treasurys.

On Wednesday, the yield on the benchmark 10-year Treasury note dropped to 2.95 percent. That was the first time it has fallen below 3 percent since April 2009, when the markets were beginning to recover from the financial crisis.

But tighter lending standards and declining home equity have made it difficult for many borrowers to refinance. Many who do qualify have already done so over the past 18 months.

Applications for mortgages rose nearly 9 percent last week from a week earlier, the Mortgage Bankers Association said Wednesday. But they remain at only about half the level of early 2009 and a far cry from the refinancing boom of 2003 through 2005, when home prices were soaring and borrowers were able to pull equity out of their homes to pay for home renovations, boats and vacation homes.

Many Americans owe more on their mortgages than their homes are worth and can’t refinance through the usual channels. The Obama administration has launched programs to help borrowers refinance if they owe up to 25 percent more than their home’s value and have their loans guaranteed by mortgage giants Freddie Mac or Fannie Mae.

About 291,000 homeowners have participated as of March — a small fraction of the estimated 15 million homeowners who are “underwater” on their mortgages.

“I expect to see pockets of re-fi activity versus an overall wave,” said Scott Buchta, chief mortgage strategist with Braver Stern Securities. “The problem is, for many borrowers, they don’t have the equity in their homes.” If rates drop below 4.5 percent, Buchta said, that might spark a burst of refinancing activity. But it would be limited to people who refinanced or bought homes over the past year and have rates of 5 percent or higher.

To calculate the national average, Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

Rates on 15-year fixed-rate mortgages fell to an average of 4.04 percent, the lowest on records dating to September 1991 and down from 4.13 percent a week earlier.

Rates on five-year adjustable-rate mortgages averaged 3.79 percent, down from 3.84 percent a week earlier. That was also the lowest on Freddie Mac’s records, which date back only to January 2005.

Average rates on one-year adjustable-rate mortgages rose to 3.8 percent from 3.77 percent.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount. The nationwide fee for all types of loans in Freddie Mac’s survey averaged 0.7 a point.

Refinancing is generally considered worthwhile for homeowners who can shave at least three-quarters of a percentage point off the rates they pay now and plan to stay in their homes for a long time.

Besides the fees for the mortgage broker or lender, there are fees for title insurance, a new appraisal, document processing and other charges. In “no fee” mortgages, costs are often added to the loan amount, or the interest rate is higher.

Koreans are now going to be doing a lot more travel and spending in Hawaii due to the new direct flight Hawaiian Airlines has begun from Honolulu to South Korea.

And through May of this year the number of Korean visitors has increased 85% from the year before.

“For Hawaii it means that every visitor Korea spends an average of $238 a day, and their average stay is about six days,” said Hawaii Tourism Authority President and CEO Mike McCartney.

“It’s going to bring about $100 million in economic activity to the state, which at a time like this is especially valuable,” said Dunkerley.

KHON2 News

At the Malcolm Center today, located at the High Tech Maui Institute, was a lecture on “Social Media and How to Improve your Business”.

With the population being 50% around the age of 30, the media choices are going to shift. The email usage will fase out and the more personal medias like messaging and blog commenting will be more utilized.

The “old” marketing has been a commercial or email telling you something, but mainly speaking ‘AT’ you.

The “new” marketing is all about engaging in ‘CONVERSATIONS’.

Doing business today means nurturing relationships and participating in conversations like blogs and instant messaging.

Marketing your business instead of getting your name out there and being “branded” visually is changing to a personal level. Consumers are wanting to do business with the vendors that are involved. The vendors that they see commenting on blogs and posting pictures and videos.

The relationships are to be nutured and to optimise your consumer feedback is to use topic angles that are funny, entertaining, or use tips n recipies. Dont try to sell, instead try being personal.

Below are some media facts to make you think;

-55 million tweets a day are happening.

-1 out of 8 couples meet online

-80% of companies use social media sites for recruitment or background checks

-YouTube is the second largest search engine next to Google

-25% of Newspapers have gone under due to internet media

For more information on lectures or courses like this see http://www.hightechmaui.com