Protecting your retirement from ‘fiscal cliff’ risk

Updated 01 December 2012
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Protecting your retirement from ‘fiscal cliff’ risk

CHICAGO: The US "fiscal cliff" is bad news for retirement security - whether we fall off it or not.
If the White House and Congress don't steer clear of the cliff, taxes on income and investments will jump, beginning Jan. 1. And if a deal is reached in Congress, it could herald entitlement benefit cuts, higher Medicare premiums for the rich and even caps on pre-tax 401(k) contributions.
How can retirement savers protect themselves? Here is a distillation of the smartest advice, from a dozen financial planning experts, on sensible defense moves.

TAXES
The Bush tax cuts play the starring role in the fiscal cliff drama. They impact a large part of our tax code, and if they expire as scheduled on Dec. 31, various rates will jump.
For retirement savers, the worries center on possible hikes in tax rates on income, capital gains and dividends.
Still, experts caution against upending investment strategies in reaction to Washington's eventual decision on the cliff. Even if tax rates rise, the bite could be minor compared with the impact of changing your long-term portfolio strategy.
"Don't let the tax tail wag the investment dog, and keep your long-term goals in perspective," says John Sweeney, executive vice president of portfolio and advisory services at Fidelity Investments.
With those caveats in mind, here are points to consider:
• Pay now, not later. Marginal tax rates for most Americans would jump by three percentage points if all the Bush income tax rates expire; more likely, the highest-income bracket alone will see their rate rise, from 35 percent to 39.6 percent.
• Roth IRAs and Roth(k) accounts offer a smart way to get income taxes out of the way before changes kick in. Roth contributions are made with post-tax dollars; converted amounts and future returns grow tax-free forever (so long as you don't make withdrawals before age 59).
In the case of a Roth conversion, you'll pay income taxes this year on converted amounts. You'll get the biggest bang for your buck by funding the tax liability from another source, such as a taxable investment account, rather than using the IRA's assets.
Some experts think Roth conversions makes sense only for wealthier households, where tax brackets are less likely to be lower in retirement.
Others are more bullish.
"It doesn't even matter what happens next year," says IRA expert and author Ed Slott. "Your time horizon might be 10 or 20 years down the road, and it's always better to compound and accumulate tax-free."
• Accelerate gains. Capital gains rates for most investors are set to jump to 20 percent from 15 percent; the tax on qualified dividends will revert from 15 percent to being taxed as ordinary income. That could be a reason to sell highly-appreciated securities this year, taking the tax hit before rates rise.
"But do this in the context of your overall allocations, and perhaps rebalancing," cautions Sweeney.
• If you have losers in your portfolio, consider carrying them into next year.
"When you have gains in the future, you can sell the losers and use the deductions to offset higher future capital gains rates," says Gregory Ostrowski, chief operating officer of Scarborough Capital Management.
A bipartisan grand bargain to avert the fiscal cliff could well include higher retirement healthcare costs via a higher eligibility age for Medicare, or stiffer Medicare premiums for affluent seniors, who already pay income-related surcharges.
Changes to Social Security appear less likely, but could include a long-range benefit cut via a gradual increase in the normal retirement age (already on its way from 65 to 67). Or, lawmakers could change the formula used to calculate annual cost-of-living adjustments in a way that would cut benefit increases more immediately.
Lawmakers could also lift the cap on income subject to payroll taxes to boost Social Security's long-range solvency.
Any of these changes would likely be phased in gradually, leaving time for planning.
"It's a good time to look at your long-range plan, understand any changes and how they impact your budget plans," says Cheryl Krueger, an actuary and founder of planning firm Growing Fortunes Financial Partners.
Congress could cut budget deficits by trimming any number of "tax expenditures" - foregone revenue on tax deductions for items such as home mortgages and 401(k) contributions.
The Simpson-Bowles deficit commission report recommended capping the pre-tax amount that employees and employers can contribute to 401(k)s at the lower of two options: $20,000, or 20 percent of income.
Few retirement savers come close to maxing out their 401(k) contributions, and the financial services lobby will be fighting this one tooth and nail.
But tighter limits on pre-tax 401(k) contributions would give retirement savers more reason to look beyond workplace accounts, giving a boost to choices like IRAs, Roths, taxable accounts - and perhaps even variable annuities, says Krueger.
"Many people think that their 401(k) plan is the whole retirement plan — that's the limit. But most people need to do much more."
— Mark Miller is a Reuters columnist. The opinions expressed are his own.


Iran sanctions shadow falls on smaller German banks

Updated 27 May 2018
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Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.

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