Friday Financial Five–October 11th, 2013

Friday, October 11, 2013

Dan Forbes, GoLocalWorcester Financial Expert

The debt ceiling explained

The debt ceiling has received plenty of attention over the last two years, so let’s define its importance. The ceiling is the maximum amount Congress allows the government to borrow, and currently stands at $16.7 trillion. Almost half of the outstanding debt has been issued in T-Notes, and the average interest rate of all debt stands at 2.43 percent as of September. If the ceiling isn’t raised, the government will default on payments come November. Even with a last minute agreement, the 2011 stand-off resulted in an S&P downgrade. Default will come with much more dire consequences, including the possibility of another worldwide financial crisis.

Yellen gets the nod

As expected, Janet Yellen was nominated by President Obama this week to be the first woman to head the Federal Reserve. Her philosophy may not diverge greatly from the current chairman, Ben Bernanke, but Mr. Bernanke had clearly lost favor. Yellen will be expected to oversee a pivotal year in 2014. The economy continues strengthening slowly, but the key is for employment numbers to begin trending below 7 percent. If this happens, the Fed will then need to deftly navigate an exit to quantitative easing without sabotaging investment markets.

Roth conversion considerations

A possibly overlooked aspect of converting traditional IRAs to Roth IRAs is consequence of moving into a higher tax bracket. The primary reason for conversion is battling a rising tax environment and delaying distributions, so it might make sense for those trying to accomplish those goals. However, it must be done while forecasting total income for the conversion year, and accounting for the possibility of moving into a higher bracket. For a rudimentary example, joint filers with taxable income of $70,000 in 2013 that convert a $30,000 IRA to a Roth have jumped from the 15 percent tax bracket to the 25 percent bracket.

401k contribution limits may remain unchanged

The upcoming week would normally see the IRS release 2014’s retirement plan contribution limits. However, with the federal government shutdown, this information is going to be delayed. Given continued low inflation, there is speculation that 401k election deferrals will remain maximized at $17,500 (without catch-up provisions), SIMPLE IRA deferrals will remain at a maximum of $12,000, while defined contribution limits may see a small increase to $52,000.

Scary report on the Social Security disability fund

This recent 60 Minutes piece presents a horrifying account of abuses possible if government programs don’t have proper oversight. The federal disability program is in danger of running out of money, and a major part of the problem boils down to citizens, attorneys, and physicians willing to defraud the system. Hopefully, the government shutdown won’t slow the progress in weeding out fraud so that funds remain for those that really deserve and depend on these payments.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].

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