Invest in China – My Top 5 Selections

ChinaAs the US economy goes into a slow growth mode I’ve been increasing my exposure to China. Currently my direct China investments only hold a 4% allocation in my portfolio. My goal is to increase this to 6-7% by mid-summer. I’d like to have 15% allocation to the combination of Europe and China. My actual exposure to China is more than 4% because some of my other holdings have substantial China exposure, like Apple (APPL) my largest single holding alone representing 5% of my investments. In the most recent quarter, Apple sold more iPhone’s in China than in the US.

My strategy in China is to go with the sector winners where possible. Here are my picks; all have provided double-digit returns in the last 12 months.

Baidu (BIDU): Baidu is the “Google” of China, it services including maps, news, video and encyclopedia searches. Baidu completely dominates China just as Google does the Western world. Google has only 3% of the China search traffic and 90% of the rest of the world. I’ve held Baidu for a number of years.

Ctrip International (CTRP): Ctrip is the “Expedia” of China. As a matter of fact Ctrip just acquired a 38% equity stake in eLong, a Chinese competitor, some of this stake came from Expedia another investor in eLong. This stock just hit its 52 week high on Friday, up over 100% in the last 12 months. Ctrip’s mobile app has over 800 million downloads and in Q1 about 70% of all of the company’s online transactions were mobile.

iShares China Large Cap ETF  (FXI): This is my catch-all for all the large corporations in China that trade on the Hong Kong Exchange. FXI track the FTSE China 50 Index which includes the 50 largest companies in the Chinese equity market that are available to international investors. It currently is trading close to its 52 week high, yet only has a P/E of 13. It has returned over 70% in the last year. If you are going to only own one Chinese stock, this is the one to own.

NetEase (NTES): NetEase, operates an interactive online community across multiple areas, including Online Game, Advertising, E-mail and E-commerce.  Similar to Yahoo in the US, it offers news, information, community and communication services, such as photo albums, instant messaging, online personal ads, and online video. Their e-mail services are used by a lot of large corporations. It too is now trading close to its 52 week high and has gone up more than 100% in the last 12 months.

Vipshop Holdings (VIPS): Vipshops has a unique on-line “flash sales” business that really doesn’t have an equivalent in the US. I’ve held VIPS for many years and it’s gone through a recent stock split. This is a controversial stock and can be volatile. They are also a regular discount retailer with many of their own brands, maybe like a smaller version of Amazon or WalMart.com. This is probably the riskiest China stock that I own, and my cost is so low that I really don’t want to sell it and pay a substantial capital gains. This stock can easily return 10-15% or more a year and is a great “trading stock” if you have a short-term outlook.

The Problem with Beneficiaries in Your Will

willYou think that you have your love ones protected, you have a Will. Well maybe not! Many people who have a Will believe that their assets will be passed say to a spouse or other family members. And while this is true there are some things that you should be concerned about.

  1. Beware that your beneficiaries listed on your life insurance, 401K, IRA and even your brokerage account ARE AHEAD of your beneficiaries shown in your will. These assets will pass to the beneficiaries BEFORE the Will even goes to probate.
  2. In general, all Wills go through the probate process and distributions can take months or even years. In addition you’ll need an attorney. Suggestion – check to see if a revocable trust better meets your needs, the trustee can directly distribute your assets without probate.
  3. Beware of naming an “Estate” as a beneficiary in your life insurance, 401K, IRA and brokerage account. This may have unintended consequences and should only be done with the help of an estate planning attorney.

Do not delay whatsoever in clarifying your beneficiaries. You may find that the beneficiaries that you set up years ago in your employer 401K plan no longer represent your wishes.

Beware of High Dividend Foreign Stocks or Funds in Your IRA/401K

Foreign TaxDo you know how the Foreign Tax Credit works, you should, it can cost you a lot of money.

Here is another tax tip for those investors who are looking for dividends and have foreign dividend paying investments in a tax deferred account. When you own a stock in a company based in a foreign country you may have to pay a foreign tax on a dividend or capital gain. These tax rates are all based on US treaties.  Whether you know it or not these foreign taxes are automatically deducted from your dividend payment before you even receive it in your account.

The good news is that the IRS will give you a tax credit for all Foreign Tax paid, it actually goes on 1040 Line 48. However, this ONLY works if you hold these investments in a taxable account. if you have these investments in a tax deferred account, you will still pay the foreign tax, but not get the Foreign Tax Credit. 

Here are some examples of foreign withholdings on Dividends:

Australia – 30%

Brazil – 15%

Canada – 15%

Chile – 35%

Chine – 10%

France – 25%

Germany – 26%

Ireland – 20%

Japan – 10%

South Korea – 27.5%

UK – REITS only – 20%

Keep in mind that this is a Tax Credit, it reduces your actual taxes not just reduces your income.

Be careful under what account you invest in foreign company’s that pay dividends.

Get a Free 12 Month Government Loan at 0% Interest for $15-$25,000 – Really!

SS

If you are over 66 (and under 70) and not yet getting Social Security you can easily get a $15 – $25,000 loan from Social Security. It’s actually very easy to do and there is no penalty whatsoever. You just have to completely pay it back within exactly 12 months and no longer. It is best done at the very start of the year so that your 1099-SA (Social Security tax form) will show a full repayment in the same year. Just file form SSA-521.  

I actually did this in 2014. I filed and received my Social Security benefits effective January 2014 and stopped my benefits, repaying it all in December 2014. Each month I received my $2,600 benefit (the maximum payment allowed in 2014). Separately I paid my $104/mo Medicare payment and did not have any Federal Tax withheld. The net effect was that this money was invested in the market, I didn’t calculate exactly how much I made off of this loan but my overall investments were up double digits for the year. This was probably the easiest $2,000 or so I ever made.  

Unfortunately you can only do this one time!  

As you probably know from reading my other articles, I have no intentions of taking my Social Security benefits until I’m 70 years old since they grow tax free at 8%/year plus a cost of living increase compounded.

 

The Tax Shock for Widowhood (or Widowerhood)

1040

Summary

The lost of a spouse in retirement can result in the following tax shock:

  1. No longer able to file as Married Filing Jointly, may have to file as Single, the highest tax bracket.
  2. Loose 50% of the Personal Exemptions.
  3. Loose 50% of the Standard Deduction.
  4. Loose 33% of dual Social Security benefits.
  5. Possible loss of spouse’s private pension, depending on plan.
  6. Higher tax bracket may raise the marginal tax rate.

As you get older and are either retired or are planning your retirement you will undoubtly work out a retirement plan that should also include a tax plan. Bad tax planning is almost as bad a bad retirement planning. There are major tax filing issues for those who become a widow(er), the loss of both a personal exemption and a 50% less standard deduction. After a death, you can bet that the survivors’ marginal tax rate will increase and you need to plan for this in your calculations.

First let’s look at what happens in the tax years after a spouse passes away;

  • In the tax year of the passing, if you did not remarry by December 31st, you can claim Married Filing Jointly, and your normal 2 exemptions. You may only do this one time.
  • After the initial tax year, if you have a dependent child living in your house and your spouse died in one of the past two years you may qualify as a Qualified Widow(er).
  • With the above dependent child or any qualified other dependant, after the 2nd year , may qualify to file as Head of Household.
  • With no dependent child, you immediately become Single status for tax purposes, the most expensive tax bracket there is.

Here is how it affects the Standard Deductions in 2014:

Filing Status

Single $6,200

Married Filing Jointly $12,400

Married Filing Separately $6,200

Head of Household $9,100

In addition for tax year 2014, the personal exemption amount is $3,950 per person, losing a spouse provides ½ the former exemption. Let’s also assume that both husband and wife were collecting Social Security, the passing of a spouse typically reduces the total annual Social Security amount by 33%.

When you do your retirement planning make sure you also look at tax planning for a surviving spouse and leave instructions behind on how best to deal with this issue.

 

How Not to Invest in the Oil Market – And My Suggestions

Oil StocksMany of you may want to invest in the oil market, betting that the price of oil will either go up or down. It would seem that the most logical thing to do is either buy the United States Oil Fund (USO)  ETF (buy to go long or short the ETF to bet oil goes down). This ETF tracks West Texas Intermediate oil (WTI), and is down about 16% year-to-date after falling about 45.5% last year.

One problem with this strategy is that you may think that the USO, or the similar OIL ETF’s actually owns the oil in the ETF. For example, most stock ETF’s like the SPY actually own the stocks in the ETF. USO doesn’t actually own any oil as such. Furthermore there are fundamental issues with holding these types of ETF’s for long term investors.

Let me explain. The USO ETF buys “near month” crude oil futures contracts on the NYMEX. Today the near month is the May 15 WTI contract, for which they own 61,041 contracts.

Chart

The problem, as any Futures Trader will tell you, is that every month you need to settle up (sell) your position and in the case of USO “roll” into a new position (buy new contract). A monthly futures contract expires at the end of that month. Each time they do this there are both fees involved along with the fact that they are buying high and selling low during the cycle. This is not a great situation for a “buy and hold” type of investor. This USO ETF is a great short-term “trading” stock with plenty of liquidity (daily volume). Their  ETF expense ratios are well above other equity-based energy ETF’s. For example, USO charges 0.45% per year while OIL charges 0.75%.

“Those costs accrue with each passing month. The United States Oil fund saw comparable demand from investors in February 2009, the last time oil prices imploded. From there, spot crude more than tripled from $34 a barrel in about two years. Yet, investors holding the fund captured only about a third of that,” according to Barron’s.  To further complicate the situation, USO has added over $2 billion in new money this year and most of it “shorting” the fund, rather than going “long” in an inverse oil ETF. These huge short positions make the ETF even more volatile. 

As Barron’s also reports, “As more people get into oil ETFs, new investors should understand the potential risks of trading futures-backed funds. Specifically, oil traders should be aware that USO tracks front-month WTI future contracts and the underlying oil market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract.”

My suggestion is that you invest in the energy sector ETF’s that hold real stocks, like the SPYDR  XLE or the Market Vectors Oil Services  OIH ETF’s. The XLE holds mostly large cap energy companies like Exxon, Chevron, ConocoPhillips, etc. The OIL ETF holds oil service companies like Schlumberger, Halliburton, National Oilwell and Baker Hughes.

I have no idea whether the price of oil is going up or down in the next few months, but I do believe that this time next year both XLE and OIL will be much higher and their lower prices have already enhanced their now respectable dividends (as compared to bonds and US Treasuries.)

Disclosure, I am long XLE,and KMI.

A Tip on How to Not Over Pay Tax on Social Security

SS   First read my post on the April 1st deadline for taking your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s.

Here is the tip for reducing a potential tax bite from your Social Security benefits.

First of all, a portion of your Social Security benefits may be taxable if your Adjusted Gross Income (the very last line on your 1040) excluding your Social Security benefits for the year plus

  • Any tax-exempt interest you earned, plus
  • 50% of your Social Security benefits.

Combine these and it becomes your “combined income”, if it is below $32,000 (married filing jointly), none of your Social Security benefits will be taxed.

However:

  • For every dollar of “combined income” above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $44,000 of combined income (married filing jointly).
  • For every dollar of combined income above $44,000 (married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.

So what is the tip and what does it have to do with your RMD? Simple, if you have a medium to larger amount of tax deferred investments in IRA’s and 401K’s don’t delay your first RMD to the following year. For example if you have $500,000 in tax deferred accounts your annual RMD might be $17,000, and if you have $50,000/yr Social Security benefits you’ll already be in the 50% bracket of Social Security being taxable. However if you take your first RMD in the following year you just moved some of your Social Security to the 85% bracket.

The best thing to do for many people is take your first RMD in the year you turn 70 ½, don’t wait till April 1st of the following year.

Don’t Be a Retirement Fool on April 1st

April 1st

If you miss the April 1st date you will be taxed at a 50% penalty rate!

April 1st might be a good day to play a trick on a friend or family member, but if you turned 70 ½ during 2014, April 1st is a very serious date.

For those that crossed the 70 ½ mark, April 1st is the deadline to take your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s. Roth IRA do not require a RMD and therefore there is a planning strategy to convert tax deferred accounts into Roth’s. Keep in mind that the annual requirement for the RMD is December 31st of the same year and only in the first distribution can you delay it till April 1st. Therefore if you wait till April 1st this year, you’ll have to take another distribution for 2015 before December. This in total could amount to a 7% withdrawal from April-December 2015 which for some people is both a lot of money and a potentially large tax bill. Keep in mind that all distributions from a tax deferred account are taxed as “ordinary income”, no special breaks for dividends or LT capital gains. Fidelity Investments reports that over 40% of the people needing to take their first distribution have not done so as of a few weeks ago. The IRS says, “If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.”

This can get a little complicated, but if you have multiple IRAs, you should calculate the RMD separately for each account – but you can withdraw the total amount from a single IRA. In addition,, if you have different types of tax deferred plans – such as an IRA and 401(k) the RMDs must be taken separately from each kind of plan.

Is your 2014 Social Security Benefits Taxable – Maybe, and it’s Complicated

Many people believe the old adage that Social Security is not taxed. Years ago these benefits were not taxed, but today they can be depending on other factors.

Here are the rules for 2014 tax on Social Security, based on your filing status:

Single

  • Your combined income* is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  •  If your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.

Married Filing Jointly

  • If you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
  • If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable.

Married Filing Separately

  • You are out of luck, all of your benefits are usually taxable.
  • Keep in mind that Married Filing Separately is a really bad classification and has a lot of tax penalties.

Strategy Calculation

For every dollar of extra income you earn above the lower threshold, $0.50 of your Social Security benefits will be subject to tax. Above the upper threshold, each extra dollar of income adds $0.85 to the total benefits that the IRS will tax.

How to Calculate Combined Income

Your adjusted gross income

 + Nontaxable interest (like tax-exempt income from municipal bond interest)

+ ½ of your Social Security benefits

 = Your “Combined Income

This Stock has been flat for 3 years – You’ll just love it!

First look at this chart, this stock hasn’t moved more than $1.00 in the last 3 years. Why would you possibly want to own it in your portfolio? Because it is a “money machine”!!!!

 Barclays Pre

 

 

 

 

 

This is an excellent example of a “preferred stock” that is a money machine. It pays a current 7.70% quarterly dividend that is a “qualified dividend” for tax purposes. The dividend is fixed at $2.03/year. It trades under the symbol BCSPRD (Fidelity) you can look it up on Yahoo Finance under BCS-PD.  Barclays Bank is a UK based and worldwide financial powerhouse. It carries a S&P BB rating (not bad at all). At this current yield, you will double your investment every 9 years by just re-investing your dividends each quarter.  This preferred was originally issued at $25/share and 8.13% yield. As it rose in price to $26.xx the yield dropped to the current 7.7%. If you bought it at the initial $25 price you would still be getting the 8.13% yield.

For those of us who need a well balanced portfolio and are always looking for non-volatile stocks that are also tax friendly, preferred stocks are a great choice. I have allocated a portion of my core portfolio to quality preferred stocks with high-yields.  In general, they don’t go up or down in price but they sure crank out their nice steady dividends.

Preferred stocks act almost like a bond. They have coupon values, fixed dividends, call or expiration dates and so forth.

You can learn more about Preferred Stocks by checking out these sites.

https://www.preferredstockchannel.com/

http://www.investopedia.com/terms/p/preferredstock.asp