2015 QUALIFIED

PLAN CONVERSION
& TAX STRATEGIES

BILL GASTL, CLU

2015 QUALIFIED PLAN CONVERSION & TAX STRATEGIES

As we begin to plan and manage our assets for

a new year, this might be the right time to consider a
pragmatic approach to managing certain assets in
our portfolio or our clients portfolio. Many of us or
our clients have qualified plan assets or assets
residing in variable annuities. Most of these assets
are allocated to some type of equity mutual fund,
which over the past five years have increased in
value due to the current bull market. In analyzing
this bull market to others bull markets in the past;
this bull market is already one of the longest since
the Great Depression. Since 1932, there have only
been four bull markets which have had a longer
growth period than the current bull market, which is
the purpose of this article.

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Since mutual funds do not allow any downside

protection in the event of a down turn in stocks, this
might be the time to considering redirecting all or a
portion of your portfolio to an index type insurance
product. Index products allow assets to be deposited
into a contract that has solid upside growth, while
eliminating the downside risks involved with market
based investments, like a mutual fund or the sub-
accounts of a variable annuity product. Furthermore,
since historically the current top marginal tax rate is
low compared to historical standards, any taxes due
to distributions today or over the next couple of
years might be beneficial since it is very likely taxes
will increased in the future due to current debt of
the federal government and the interest due as a
result of the debt. Late last year, federal debt
reached $18 trillion dollars and according to the
Congressional Budget Office now represents
approximately 78% of our gross domestic product or

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2015 QUALIFIED PLAN CONVERSION & TAX STRATEGIES

GDP. Qualified plan distributions or distributions up

to basis from non-qualified annuities are taxed as
ordinary income. Considering this, the question
becomes what are the chances my individual tax
bracket will be lower, stay the same or increase in
the future, as a result of federal debt and the
interest payments associated with this debt. If your
answer is increase, then paying taxes sooner
rather than later on these types of plans is a
pragmatic approach to managing the taxes which
will be due once distributions are distributed from
these type of plans.
Moving forward in 2015, most of us hope the
current bull market will continue, but there is data
which should be considered, which is why protecting
the downside risk of our qualified plans or variable
annuities is important. Many financial experts
agreed financial markets have been inflated due to
the cheap money from our central bank through
their quantitative easing strategies.
If we look at the correlation between market
downward movements to the domestic markets in
recent years to the Federal Reserves unprecedented
bond-buying program from 2008 and forward, stocks
tended to rise when the central bank was in the
market supporting assets prices. Conversely, sell-offs
coincided with periods when the Federal Reserve
was pulling back on its stimulus programs.

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Since November 2008 through October 2014,

the Federal Reserve had been stimulating the

economy and propping up our stock market by
accumulating massive amount of government bonds.
Before the recession, the Federal Reserve had less

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2015 QUALIFIED PLAN CONVERSION & TAX STRATEGIES

than $1.54 trillion of government bonds or mortgage

backed securities on its balance sheet. As of
November, 2014 the Federal had $4.18 trillion as
listed on their quarterly report of November, 2014.
This is an increase of approximately 169%. You might
ask why is this important.
As I mentioned earlier, only one developed
country has tried a stimulus plan similar to the one
the Federal Reserve implemented with its
quantitative easing strategies, and that was Japan.
The Japanese government implemented a similar
stimulus strategy between 2001 and 2006. After this
program ended, Japanese stocks fell by 50% over the
next two years. Is this an indication stocks will follow
a similar course in this country. Nobody knows the
answer to that question, but there are several
financial experts or firms who are concerned. For
example, according to the respected Shiller P/E ratio,
stocks are overvalued by 56%. This market-
measuring tool was popularized by Yales Robert
Shiller, who shared the Nobel Prize in economics in
October 2013 for showing the predictability of stock
prices over long periods of time. The Shiller P/E is at
its highest levels since the dot-com era, even higher
than Black Monday in 1987, which might indicate a
major correction in the market is near. There are
several other financial experts who are also
concerned and can be easily found by searching the
internet and visiting the websites or blogs.

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Considering
the
information
herein,
implementing
a financial strategy which protects the

downside market risk associated with mutual funds
and variable annuities sub-accounts, paying the
taxes at todays low rates might be a pragmatic and

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2015 QUALIFIED PLAN CONVERSION & TAX STRATEGIES

pro-active approach of locking in some impressive

gains, allowing your portfolio to grow in the future,
while eliminating the downside risks associated with
mutual funds or variable annuity contracts.

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2015 QUALIFIED PLAN CONVERSION & TAX STRATEGIES

Fidelity Financial
215 S. 88th Street
Omaha, NE 68114
Mark T. Houston
(402) 880-7008
mark@fidfin.co

WWW.FIDFIN.CO

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