SAN FRANCISCO (Reuters) – Seattle’s election authority said on Monday that Facebook Inc is in violation of a city law that requires disclosure of who buys election ads, the first attempt of its kind to regulate U.S. political ads on the internet.
Facebook must disclose details about spending in last year’s Seattle city elections or face penalties, Wayne Barnett, executive director of the Seattle Ethics and Elections Commission, said in a statement.
The penalties could be up to $5,000 per advertising buy, Barnett said, adding that he would discuss next steps this week with Seattle’s city attorney.
It was not immediately clear how Facebook would respond if penalized. Facebook said in a statement it had sent the commission some data.
“Facebook is a strong supporter of transparency in political advertising. In response to a request from the Seattle Ethics and Elections Commission we were able to provide relevant information,” said Will Castleberry, a Facebook vice president.
Barnett said Facebook’s response “doesn’t come close to meeting their public obligation.” The company provided partial spending numbers, but not copies of ads or data about whom they targeted.
The unregulated nature of U.S. online political ads drew attention last year after Facebook said Russians using fake names bought ads on the social network to try to sway voters ahead of the 2016 presidential election. Moscow denies trying to meddle in the election.
Buying online election ads requires little more than a credit card. Federal law does not currently force online ad sellers such as Facebook or Alphabet Inc’s Google and YouTube to disclose the identity of the buyers.
Legislation is pending to extend federal rules governing political advertising on television and radio to also cover internet ads, and tech firms have announced plans to voluntarily disclose some data.
Facebook Chief Executive Mark Zuckerberg said in September that his company would “create a new standard for transparency in online political ads.”
At the center of the Seattle dispute is a 1977 law that requires companies that sell election advertising, such as radio stations, to maintain public books showing the names of who bought ads, the payments and the “exact nature and extent of the advertising services rendered.”
The law went unenforced against tech companies until a local newspaper, The Stranger, published a story in December in the wake of the Russia allegations asking why.
Seattle sent letters to Facebook and Google asking them to provide data. The sides have been in talks, and last month Facebook employees met in person with commission staff.
“We gave Facebook ample time to comply with the law,” Barnett said.
Google has asked for more time to comply, and that request is pending, Barnett said.
Legal experts said they were unaware of any similar regulation attempts by other U.S. localities or states.
“Given the negative publicity around Facebook’s failure to provide adequate transparency in the 2016 elections, I would be surprised if they tried to challenge this law,” said Brendan Fischer of the Campaign Legal Center, a nonprofit that favors campaign finance regulation.
Reporting by David Ingram; Editing by Leslie Adler and James Dalgleish
(Reuters) – Broadcom Ltd (AVGO.O) plans to unveil a new approximately $120 billion offer for Qualcomm Inc (QCOM.O) on Monday, aiming to ratchet up pressure on its U.S. semiconductor peer to engage in negotiations, people familiar with the matter said on Sunday.
The move comes ahead of a Qualcomm shareholder meeting scheduled for March 6, when Broadcom is seeking to replace Qualcomm’s board of directors by nominating its own slate for election.
Broadcom is scheduled to meet with its advisers later on Sunday to finalize an offer that values Qualcomm between $80 and $82 per share, two of the sources said. Broadcom’s previous $70 per share offer consisted of $60 per share in cash and $10 per share in stock.
Broadcom also plans to offer Qualcomm a higher-than-usual breakup fee in the event regulators thwart the deal, according to the sources. Typically, such break-up fees equate to approximately 3 percent to 4 percent of a deal’s size.
The sources cautioned that Broadcom Chief Executive Officer Hock Tan may decide to significantly change the terms at the last minute.
The sources asked not to be identified because the deliberations are confidential. Broadcom and Qualcomm did not immediately respond to requests for comment.
FILE PHOTO: A sign on the Qualcomm campus is seen, as chip maker Broadcom Ltd announced an unsolicited bid to buy peer Qualcomm Inc for $103 billion, in San Diego, California, U.S. November 6, 2017. REUTERS/Mike Blake/File Photo
Broadcom has said it is very confident a deal can be completed within 12 months of signing an agreement. Qualcomm counters that the regulatory review processes required around the world would take more than 18 months and be fraught with risks.
Qualcomm provides chips to mobile carrier networks to deliver broadband and data, making it an attractive acquisition target for Broadcom, which hopes to expand its offerings in so-called 5G wireless technology.
Qualcomm has argued to its shareholders that Broadcom’s hostile bid is aimed at acquiring the company on the cheap.
Qualcomm reported quarterly profit and revenues last week that beat analysts’ expectations as demand surged for its chips used in smartphones and cars. However, its forecast was below estimates due to tepid mobile phone sales in China.
Qualcomm is engaged in a patent infringement dispute with Apple Inc (AAPL.O). Qualcomm has said the litigation is necessary in order to defend is licensing programs.
Qualcomm is also trying to clinch an acquisition of its own, proposing to buy NXP Semiconductors NV (NXPI.O) for $38 billion. The deal was approved by European Union antitrust regulators last month, and only China has yet to approve it. Qualcomm expects the government’s blessing later this month.
The NXP deal still faces an uncertain future as some of its shareholders, including activist hedge fund Elliott Management Corp, have asked Qualcomm to raise its offer. Qualcomm is expected to make a decision later this month.
Reporting by Greg Roumeliotis in New York; Additional reporting by Liana B. Baker in San Francisco; Editing by Jeffrey Benkoe
If there’s anything that can be said of Apple, it’s that it knows how to make money—even if things don’t appear to be going well.
Apple this week posted a record quarterly profit of $20 billion, thanks in no small part to iPhone revenue jumping 13%. However, Apple’s iPhone unit sales fell year-over-year due to what some analysts have said was sluggish demand for the iPhone X.
Profit aside, that hasn’t stopped people from finding things to complain about. This week, there were reports about why the iPhone X was a mistake for Apple and others about internal Apple meetings about delaying work on new iOS features to improve its mobile operating system’s security and stability. Even Apple co-founder Steve Wozniak couldn’t resistant taking a jab at the company.
Apple on Thursday announced that it had $88.3 billion in revenue during the holiday quarter and a $20 billion profit, or $3.89 per share. Both were records. But Apple also worried Wall Street by issuing revenue guidance for the current quarter of $60 billion and $62 billion—far below an average analyst consensus of $65.4 billion. Many analysts believe Apple’s sales forecast is a reflection of slumping demand for the iPhone; shipments for the device dropped 1% year-over-year during the holiday quarter. The earnings also prompted Bernstein Research analyst Toni Sacconaghi to downgrade Apple from “outperform” to “market perform.”
Apple may have changed its plans for this year’s iOS release. According to a report, Apple software chief Craig Federighi last week shelved plans to add new features to this year’s iOS 12 update and instead focused his team on improving the security and reliability of the mobile operating system. The new updates aside from the security and stability updates will likely come to iOS in 2019.
The U.S. Department of Justice and the Securities and Exchange Commission have launched an investigation into a software update Apple released last year that throttled iPhone performance. The agencies are investigating whether Apple violated securities laws in its initial disclosure about the update, which slows the processing performance of iPhones when their batteries start to malfunction.
Apple quickly responded to the investigations this week, saying that it has “never—and would never” introduce software updates that would artificially degrade the iPhone user experience. Apple said that the update was not designed to “shorten the life of any Apple product” and get customers to upgrade to a new handset. Instead, the feature is intended to protect iPhones and keep them working when the battery starts to malfunction.
Apple co-founder Steve Wozniak said recently that he’s generally pleased with Apple’s iPhone X. But his biggest complaint about it centers on the device’s power button and all the functions that can be handled from it, including toggling the device on and off, taking screen shots, or making mobile payments via Apple Pay.
One more thing…There’s been some iPhone X hate making the rounds online lately. In a commentary this week, I discussed why the iPhone X is not only a great smartphone, but also the best iPhone Apple has ever released. Check it out.
The cryptocurrency market is in a meltdown. Bitcoin prices are down nearly 60% from their December highs, and major banks are cutting off credit card access to crypto exchanges—no surprise in the wake of a mania that saw everyone and their dog sharing hot crypto tips.
Meanwhile, the cyber-security industry is experiencing its own bubble bursting, albeit in much less dramatic fashion. As Reuters reported last month, investors are at last acknowledging the obvious: There are too many VC-bloated start-ups chasing too few clients, while unicorns are morphing into zombies struggling to find an IPO or other exit.
This situation may explain a recent flurry of press releases from cyber firms like Tenable, Cylance and Duo. The releases tout revenue growth and appear intended to assure anyone who will listen that “hey, we’re surviving the cyber shake-out just fine thank you very much.”
It’s hard to say for now which firms will be left standing at the end of 2018 but, for now, it’s clear the peak of the cyber-boom, when VCs would shower money on any company with blinky lights, is over. The investor uncertainty, though, is just one part of the cyber story. There’s also the more important question of whether all these companies have helped harden the country against hacking, and the answer appears to be yes.
Based on recent conversations with ordinary executives, I’ve found cyber-literary has shot up. While hackers are still getting through (they always will), managers and general counsels are finally attuned to the threat and doing something about it.
This change is also trickling down to more humble enterprises. I met a company this week called CyberSight, which offers free and low-cost ransomware protection to the likes of small businesses and county governments, and many of them are actually implementing it. This is a welcome change from a year ago when too many companies blew off cyber defense as an exotic affair they didn’t need.
So let’s celebrate cyber victories where we can find them. Finally, returning to crypto, don’t forget it’s tax time—if you bought or sold, here’s a plain English Q&A to get you through. Have a great weekend.
Welcome to the Cyber Saturday edition of Data Sheet, Fortune’sdaily tech newsletter.You may reach Robert Hackett via Twitter, Cryptocat, Jabber (see OTR fingerprint on my about.me), PGP encrypted email (see public key on my Keybase.io), Wickr, Signal, or however you (securely) prefer.Feedback welcome.
Bye-bye little bots: Twitter users are losing tens of thousands of followers in the wake of a searing report about a “follower factory” that let people inflate their social media popularity with the help of bots, many of which were crafted by means of identity theft. A Twitter board member was among those who lost followers in the purge.
Apple and the FBI, it’s complicated: In the wake of a 2016 terrorist attack, media outlets (including Fortune) reported on bad blood between Apple and law enforcement over the iPhone maker’s encryption polices. Today, the two sides still don’t see eye-to-eye but are in many ways more friendly than you think.
Looming specter of Spectre: Sure enough, those scary Spectre and Meltdown viruses may be coming to a chip near you. Researchers have already found 130 malware samples that appear to have been built in order to exploit the worldwide chip vulnerabilities disclosed in January.
Netflix and Phish: When you have 118 million subscribers, many of them addicted to binge-watching, your service will be a popular target for scammers. A fake Netflix subscription email is making the rounds (again), threatening to cancel Netflix customers’ accounts if they don’t supply their credit card number. One guess what happens if you click.
Hey Hawaii, good call on canning that button pusher who kept confusing drills with real life.
— If you’re going to rob someone at gunpoint for their crypto-currency, for heaven’s sake, don’t transfer the funds to a popular exchange in your own name. Fortune obtained exclusive details about a crazy crypto heist in New York.
ONE MORE THING
Obligatory SuperBowl tidbit: Jeopardy host Alex Trebek chided his contestants over their complete and utter ignorance of football, a topic that regularly pops up in the weeks before the gig game. The show then trolled the players with a tweet, saying “Our contestants answered as many clues in this category as the @Browns had wins this season.”
Not everyone remembers that before Brady was the superstar he is today, the sixth-round draft pick who was in a battle to even make the team. From there he was coached and developed. He learned to seize opportunities as they presented themselves. As they say, leaders are made, not born. The same can be said for superstars, too.
Instead of throwing your resources into hiring a superstar for your business, here’s a better way to build a winning team.
1. Develop the right people
The development trap that many leaders fall into is looking for whoever has the best results in the company and then plugging them into a leadership position or development track.
When a very successful SVP of Sales left a Fortune 500 organization, who do you think they tabbed to replace him? That’s right, the person with the highest sales numbers the year before.
You can guess what happened next. The former sales superstar who was excellent at selling and working with clients, struggled in his new SVP role working internally and overseeing the sales team. Within six months he was out the door and the leader was again looking for a new SVP.
Top producers do not always translate into our top leaders. When deciding who the right person is to develop as a leader in your organization, consider the whole person instead of just focusing on numbers and results.
2. Develop the right plan
Many organizations only put a plan in place to develop their people when they find out a leader is headed out the door. Unfortunately, that is too late.
Succession planning and leadership development should be a constant, thriving, evolving part of your organization at all times, not just when a leader is leaving. It is important to put systems and processes in place to identify, develop, and build bench strength.
Jim Skinner, former CEO of McDonald’s, was known to tell managers: “Give me the names of two people who could succeed you.” This was one way he worked to manage succession planning.
3. Develop the right skills
In a survey conducted by Partners In Leadership, which involved more than 40,000 people from small start-ups to Fortune 50 organizations, over half of those surveyed said that their stated 2020 goal was either an aggressive stretch or a crazy stretch.
But stretch goals are attainable: the Seattle Seahawks won the Super Bowl in 2014 even though they were only two years removed from going 7-9.
What is key is that your team has the skills necessary to achieve a stretch goal. If your current players don’t have what it takes to win, set them up for success by identifying what skills they need. Then provide the right learning opportunities to develop their talent for sustainable results.
True, it is much less expensive to develop your good people than to go out and try to hire the already-established superstars. But there are more benefits to developing employees than upfront cost-savings.
Employee research consistently shows that career development opportunities are a leading indicator of employee engagement. In a recent study on employee retention, the most important aspect of a company’s reward and recognition program was employee development opportunities.
Having worked with thousands of employees in high-potential programs over the years, we have seen the impact engaged employees have on their companies–both immediately and long after their development, as they move on to significant leadership roles in their organizations.
Don’t fall into the trap of thinking that you need to hire the next ‘Tom Brady.’ Instead, look for the current ‘Tom Brady(s)’ on your team and develop them. Who knows, they might turn out to be your next superstars!
LONDON (Reuters) – Nextdoor, a social network that acts as an alternative to industry giant Facebook by linking up neighbors rather than friends or colleagues, will launch in France on Thursday.
Members can use the San Francisco-based company’s mobile app and website to ask their neighbors for advice on everything from babysitters to organizing local sports clubs or how to contend with household rodent invasions.
Founded in 2011, Nextdoor drew in 12 million unique monthly visitors in the United States last month, according to app measurement firm SimilarWeb, and France will be its fourth European market.
It began testing in 200 neighborhoods in Paris early in January ahead of Thursday’s official launch across France, where it calculates 40,000 distinct neighborhoods exist.
Nextdoor has taken off in the Netherlands where it launched in 2016, followed by Britain later that year.
In the Netherlands, Nextdoor attracted 240,000 unique visitors to Nextdoor.nl in December, SimilarWeb data shows. It ranked among the top 10 social networks, according to data from AppAnnie, which measures mobile downloads.
In Britain there were 655,000 unique visitors to Nextdoor in December 2017 according to SimilarWeb.
It also launched in Germany in mid 2017 (reut.rs/2rTIDs5), but has yet to draw in many members, independent data sources show. The company does not publish its own membership data and declined to comment on user figures by country.
The Nextdoor service is free for users in European markets, with no sponsored advertising. It began testing sponsored advertising in the United States last year.
The firm has raised more than $285 million in funding from major venture investors including Benchmark, Greylock Partners, Tiger Global Management, Kleiner Perkins Caufield and Byers, according to Crunchbase data.
Reporting by Eric Auchard; Editing by Susan Fenton
HONG KONG (Reuters) – Tencent Holdings Ltd is leading a deal to invest 10 billion yuan ($1.59 billion) in Chinese menswear group Heilan Home Co Ltd, upping a retail rivalry with fellow internet giant Alibaba Group Holding Ltd, sources with knowledge of the matter said.
China’s second-largest e-commerce company JD.com Inc and online clothing platform Vipshop Holdings Ltd will also be among the group that plans to acquire less than 10 percent of the company for 5 billion yuan, one source said.
Another 5 billion yuan would help set up an industrial investment fund to focus on deals that fit with Heilan’s business, the person said, requesting anonymity because they were not authorized to speak to the media.
Heilan had a market value of about $8.13 billion as of Monday, when it halted shares from trading, pending deal announcements.
Tencent, JD.com and Vipshop declined to comment. A Heilan spokesman was not immediately available to comment.
The proposed deal, which could be announced as early as Friday, extends a recent push by Tencent, China’s biggest social network and gaming company, into bricks-and-mortar retail to further compete with Alibaba.
Heilan which has clothing brands such as HLA and SANCANAL, has been a long-time partner of Alibaba’s online marketplace Tmall.
But last month Tencent, which has a market capitalization of $563 billion, said it would invest 4.2 billion yuan for a stake in Yonghui Superstores. It is also looking to take a stake in the China business of French supermarket retailer Carrefour.
The recent moves reflect a wider, long-running stand-off between Tencent and Alibaba, which have made competing investments in areas as diverse as bike-sharing apps, food delivery and gaming.
JD.com, in which Tencent is a top-10 investor, traditionally leads against Alibaba in online retail sales of electronics and home appliance products, but lags behind in the fashion business.
Tencent and JD.com last month jointly made an $863 million investment in Vipshop, in a bid to tap the country’s young female shoppers and gain access to consumer and transaction data to help them compete with Alibaba’s online payment platform Alipay.
Jiangsu-based Heilan was set up by Zhou Jianping, one of the richest people in China’s fashion industry, in 1997. It runs more than 5,000 stores, mostly in China, and recorded 12.5 billion yuan in operating income in the first three quarters last year, its website showed.
Bulls Make Money, Bears Make Money, Pigs Get Slaughtered”
Nothing is truer than the above when people start to believe they gain an advantage by converting their IRA losers into Roth winners. If you read my previous article on the Myths of Roth IRAs, which you can find here, you may already know the answer. In the light of the new tax laws that have done away with the Roth recharacterization there may be a new emphasis on trying to gain more spendable money in retirement by being concerned with tax-free growth in the Roth. Once again I will show, through demonstration why it doesn’t matter where the growth occurs. What matters is the tax rate you pay on the front end versus the tax rate you pay in retirement when you spend the money.
My wish is not to try and make you an IRS or tax expert but to at least give you enough information for you to understand some of the challenges in trying to navigate the environment of what are called tax-advantaged retirement accounts. In doing so I hope to dispel some myths or at least provoke you to investigate on your own some of the math surrounding these tax-advantaged accounts.
First, some definitions and abbreviations are in order:
I will use the term Roth to indicate any number of what are typically tax-advantaged retirement accounts funded with after-tax dollars for which you can withdraw all contributions and earnings tax-free later. These come in many different forms such as the Roth IRA, Roth 401k, Roth 403b, and others. I will use the term IRA to indicate any number of tax-advantaged retirement accounts funded with pre-tax dollars for which you withdraw all contributions and earnings paying ordinary income tax on them at the time of withdrawal. You could find many types of these such as Traditional IRA, Traditional 401k, 403b, SEP-IRA, 457b, SIMPLE IRA, and others. It should be noted that it is possible to have a mix of after-tax and pre-tax dollars in most of these accounts, but when I use the term IRA from now on, I will only be considering these accounts will all pre-tax dollars in them.
Let’s review what I call the 3 most common levels of tax advantage that you can receive when investing. With the new tax code, it is slightly different now so I will restate it here.
Level one-half: This typically comes out of what is called a taxable account from the generation of long-term capital gains or qualified dividends. Our current progressive tax code gives these gains a reduced tax rate that results in a reduction in the taxes paid. For instance, if your income is otherwise in the 10-12% tax bracket, dividends and long-term capital gains will fall to the 0% tax bracket, until they fill up that bracket. If your qualified dividends and other income are high enough to move you into the 22-35% bracket, the dividends and capital gains will be taxed at 15% for those brackets. I call it level one-half because there is no reduction on taxes for the deposits put in the account to start. The reductions for even the qualified earnings, while some can be essentially tax-free, this only occurs if you keep your total income and earnings below the 22% bracket point.
Level one: This level is occupied by both the IRA and Roth accounts which get either a tax break when you put the money in the account or a tax break when you take the money out. As I explained in my previous article these accounts are on equal footing for equal tax rates in and out.
Level two: This is occupied by the Health Savings Account which is known as the HSA. This account when used properly for medical expenses and accompanied by a high deductible health insurance plan will result in two levels of tax savings, one on the money contributed and a second on the tax-free withdrawals when the money is used for IRS approved medical expenses.
This article is only concerned with the level one retirement accounts and how the IRA and Roth can be thought of in most cases as equals. It is true that the Roth and IRA each have unique characteristics that may be appropriate or at least appealing to different investors. The short list of some of these is described below.
Tax deferral on all earnings inside the Roth if you follow IRS guidelines. Tax-free withdrawal of all contributions and earnings (subject to 5-year holding period plus age restriction of 59½). Tax-free withdrawal of your contributions at any time or age from a Roth IRA. A note on this as it applies to employer sponsored plans is that you should check with your plan administrator as each plan has their own set of rules as to when withdrawals are allowed. Tax planning flexibility – Since there are no forced withdrawals by age 70½, you have more tax-planning flexibility during retirement. If a Roth IRA owner dies, certain of the minimum distribution rules that apply to traditional IRAs will apply to the Roth.
Tax deferral on contributions during working years will lower your taxable income while working and can increase some tax credits. Increasing some tax credits could actually allow you to save more. The required minimum withdrawals must begin prior to April 1st of the year after you turn 70½. The RMD for any year after the year you turn 70½ must be made by December 31st of that later year. If these are not made you can incur a 50% penalty on any amount not taken that was due. Inherited IRAs have a complete set of RMD tables and rules which will not be discussed here.
There are many other nuances to the above two types of accounts and even within different types of Roth or IRA accounts, most of which can be found in the IRS publication 590, which has now been split into two parts – pub 590-A (contributions) and pub 590-B (distributions).
Assumptions for Roth Conversion
In order to make what is commonly called an apples-to-apples comparison of these Roth and IRA accounts we must use the following assumptions:
Because we can never know what future tax rates will be, each evaluation must be done at the same tax rate for each account, both at the start of the test period and the end of the test period. Each evaluation must be done from the aspect of how much money did the investor need to earn to fill the account to begin with. For all evaluations I will assume that the investor earned an extra $10,000 to put towards retirement savings. The tax rate was always 22% now and in the future. That the taxpayer is greater than 59.5 years old so that a penalty-free conversion is possible. See my previous article for how to do this conversion if you are less than 59.5, but why it is exactly equal to what I am illustrating here in an apples-to-apples comparison.
Let’s now continue on to see if we can bust up the notion of why it doesn’t matter how much tax you pay on the conversion, other than the obvious fact that it limits the size of conversion you do.
I lost 40% on my Netflix (NFLX) why not convert it to a Roth and then hope for the best in my Roth.”
Let’s compare some Netflix stock, which lost almost 40% a few years ago and was converted from an IRA to a Roth at that point in time, to what might have happened if no conversion was done. Below are the results.
While you might think that paying lower taxes is an advantage, the math shows that the tax rate in and tax rate out are what is important. Even though by doing the Roth conversion the investor paid $1320 less in lifetime taxes from this investment there was no more spendable income in retirement because of it.
The Roth Revolution
Why do I say Roth conversions are good for the national debt?”
This is easy, according to the Investment Company Institute; there is over $15 trillion in IRAs [including Roths] and other Defined Contribution Plans at this point in time. I don’t know the exact Roth / IRA split of this number, but I am pretty sure it will be leaning towards the IRA side of the equation. With the new lower tax brackets most people can do a Roth conversion for less so they may be considering it, without realizing that how much tax they pay now is not the whole story. However, as in my opening bullet point, this is very good for the national debt. In fact the faster millionaires buy into this strategy the better I believe it will be for all of us. With less debt there is less reason to raise taxes in the future. A Roth conversion is a great way to instantly increase government income. If you have read my many articles and comments on this subject you may know that I am not sure it is best for the average investor. It does have its place and I certainly have always maintained that everyone should have some Roth money to diversify their tax situation in retirement. I just don’t think it should be overdone.
Finally, I will explore what I have seen in some publications as a Fear Of Missing Out of tax-free income in retirement. This FOMO of tax-free income has blinded the investing public to what I have recently called in a comment stream the upside and downside risk of getting your future tax rate wrong. In other words, when we make any investing decision based on future events or tax rates that are unknown it is important to know both your possibility for gains to your spendable retirement income or the losses to your spendable income.
I will illustrate this with a few simple examples that a retiree may see during their lifetime. Let’s start out with case number 1, which is for the high-income earner who wishes to convert a large portion of her sizable IRA into a Roth to pass down to her children. Let’s consider she is doing Roth conversions in the 35% bracket because that is where she has been for most of recent history. Let’s shoot for a tax-free Roth benefit to each child of $1M and compare that to the options of a taxable IRA distribution. The equivalent size of the IRA at a 35% taxable income level is just $1M divided by the decimal created from the subtraction of 1 minus the tax-rate. This math results in $1M / .65 or $1.538 million.
Below is a table indicating the results from case 1 showing both upside and downside risk to their spendable income at different withdrawal tax rates. Assumption is that the beneficiary is married and spouse is not working and there are no investment returns in the life of the inherited account. Positive investment returns would certainly make the dollars larger in the examples but not on a relative or percentage basis. Also there are no state taxes.
As can be seen from the above, the upside risk if you stay with the IRA is about $400,000 (40%) more spending money for someone without a job inheriting the IRA. There is relatively no downside risk at all to staying with the IRA since the original owner converted the Roth in almost the highest marginal bracket. Even if the beneficiary draws the total IRA amount out in one year, the extra $1.538 million only caused the child to pay an effective tax rate of 32.8%.
The above highlights one of the reasons that make the Roth conversion or Roth contribution in higher tax brackets so problematic. Conversion taxes are paid on the marginal income in your highest tax bracket at the time. While the money is also spent in your marginal brackets as well, the starting point of this marginal bracket is usually much lower and can actually start out at zero if your other income is less than the standard deduction. Let’s look at another case in a lower tax bracket while working.
In case #2 the worker wants to end up with the same $1 million in the Roth account but through most of his career his working tax rate averaged 25%. This means to convert to his desired Roth he needs to have $1.333 million in the IRA to convert. Let’s compare the child that inherits the $1 million Roth to the one with the $1.333 million IRA at various spending rates. Below is a table indicating the results from case 2 showing both upside and downside risk to their spendable income at different withdrawal tax rates.
In this case what you see is that the upside to downside risk has changed from a spread of 40% (40% upside to 0% downside) to a spread of 21% upside [gain] to almost 10% downside [loss]. This is still a two to one advantage to the upside.
I will do one final example in which the worker keeps all Roth contributions or conversions in the 15% tax bracket. This case 3 is shown below.
In this final case the upside risk [gain] in staying with the IRA is about 7% for the inherited IRA owner that keeps her AGI within the $101,000 income limit. In the worst case, if the whole IRA is withdrawn in one year while working with an addition $100k taxable income the downside risk [loss] is almost 20% extra in taxes. However, it is highly unlikely that the taxpayer would need to withdraw the whole amount in one year. If the taxpayer keeps her total AGI at the $190k level there is no downside or upside risk and she can draw down the IRA over a number of years.
While RMDs can raise your taxable income and your tax rate in retirement they should not be something that is feared to extremes. In an article I wrote entitled Surviving the Tax Bite of Retirement, I pointed out that over the previous number of years the personal exemption, standard deduction, and the top of each of the tax rate bracket have grown by around 2% per year. With completely revised lower tax brackets for 2018 and the foreseeable future this has only improved the odds of you having a lower tax bracket in retirement, compared to while you were working. Hopefully, you have learned that this favors the IRA owner and the results are not insignificant. Who would not want 10-20% extra money in retirement or for their beneficiaries? I do understand that on the other end you do not want to be seen as the one who increased someone’s taxes with an inheritance. I personally think it is up to you to educate your heirs and make them see that a little bit of tax on a larger sum of many can in many cases be better than no tax on a smaller pool of money.
In my volunteer work helping people with their taxes each season there are always cases where having some of their retirement in a tax-deferred IRA could have resulted in some tax-free withdrawals from that IRA, due to their low income level. The converse is also often true – that with a Roth account it would have been possible to lower how much of their retirement savings goes to the taxman. It is never a bad idea, in my opinion, to have both Roth and IRA funds going into retirement.
For more detailed information on these subjects covered I suggest reading at least a couple of times the two IRS publications mentioned at the outset. Understanding the rules can avoid costly mistakes on the road to retirement as well as later when you are in retirement. I have also written an Instablog article titled Roth Vs. Non Roth (401k, 403b, 457, Etc) & The Time Value Of Money which adds a casino example to the mix that you may find interesting.
I also want to shout out a special thanks to Bruce Miller, who made my job much easier by providing a tax calculator for the new tax law going forward in 2018. He also wrote a good article on the subject which you can find here.
All tax calculations were done using the new 2018 law as best we know at this time.
This study is only as good as the data presented from the sources mentioned in the article, my own calculations, and my ability to apply them. While I have checked results multiple times, I make no further claims and apologize to all if I have misrepresented any of the facts or made any calculation errors.
The information provided here is for educational purposes only. It is not intended to replace your own due diligence or professional financial or tax advice.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Apple’s (AAPL) long awaited fiscal 1Q18 is now just around the corner.
The company will report the results of the quarter on February 1st, after the closing bell. The Street is anticipating revenues of $86.75 billion, a YOY increase of about 11% that would nearly match last quarter’s top line growth rate. EPS estimates of $3.81 would represent Apple’s largest earnings number on record, although it is unclear to me if any of the estimated $38 billion in tax payments from cash repatriation would impact the bottom line already this quarter (Apple reports earnings results in GAAP terms only).
As I have argued recently, “performance of the iPhone X may help to set the course for the rest of the year in terms of financial results expectations and stock sentiment.” This being the first full quarter following the model’s introduction in early November 2017, I believe all eyes will be on smartphone sales this week. If the iPhone X sputters, as a few sell-side analysts have been predicting, the stock could face headwinds in the near term.
The graphs below might help to support these short-term concerns. Activation of new smartphone models introduced in calendar years 2016 (iPhone 7 and 7 Plus) and 2017 (iPhone 8, 8 Plus and X) accounted for roughly 16% and 14% of all iPhones activated by the end of each respective holiday quarter.
But because the iPhone X was not released until November 2017, the adoption of newly-introduced devices, including models 8 and 8 Plus, happened much more slowly this past year. Most iPhone sales, at least in the first half of fiscal 1Q18, seem to have come from older models – understanding that activation does not equal sales, yet the data seems very telling to me.
Source: DM Martins Research, using data from Mixpanel
Exiting the quarter, the iPhone X appears to be performing well in terms of activation, surpassing the iPhone 8 and 8 Plus in popularity. So if softness in smartphone sales is confirmed in fiscal 1Q18, I find it more likely to be reflective of product launch timing than indicative of a weak super cycle.
But it’s not all about phones
Although the iPhone super-cycle is a key pillar of many Apple bulls’ investment theses, the story does not end there. I see Apple well positioned to benefit from increasing consumer sentiment (see graph below) and discretionary spending activity across its product and service portfolio.
Back in November, I discussed how “Apple has been one of the few winners coming out of the undergoing (laptop and desktop) consolidation.” Last quarter, Mac revenue growth shot up to about 25% YOY. Fiscal 1Q17 saw an improvement (see graph below), suggesting fiscal 1Q18 will face slightly stronger comps this time. Still, I anticipate both units sold and ASP to come in on the healthy side this quarter, particularly as Apple expands its product offering across multiple price points from the low-end Mac Mini ($499) to the recently-released iMac Pro ($5,000).
Source: DM Martins Research, using data from company reports
Elsewhere, I have no reason to believe that Apple’s Services segment will see a dip in its growth pace. The company continues to be well on track to double the division’s revenues between 2016 and 2020. Helping to support this mission is what appears to be a recovering Chinese market, which finally showed signs of having a pulse last quarter. As the installed base in the country returns to growth, the lagging effect on Services revenues is likely to follow.
Possible short-term risks, bullishness intact
All factors taken into account, I continue to believe AAPL will perform very well in the long term. The company is riding the tailwinds of an increasingly robust global economy, and a pickup in consumer discretionary purchases is likely to benefit the tech company. It does not hurt that (1) cash repatriation should further support the stock through increased investments, a potential bump in dividend payments and share repurchases, and (2) the stock still seems de-risked enough to me, trading at a forward P/E of only 14.9x and PEG of 1.7x (see graph below).
For now, I remain an AAPL holder, and find it unlikely that I will dispose of my shares any time soon. If short-term weakness related to iPhones in fact materializes, I believe a potential hit that the stock might take would be an opportunity for investors to accumulate shares on the dip.
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Disclosure:I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I won’t hold you in suspense. Here’s my recommendation:
Firs, the easy part. If you own Intel (INTC) then HOLD. I would not buy and I would not sell. You’re in a good place right now. I’m going to explain all of that very soon.
Next, if you’re thinking about buying, you can see that Intel’s been moving up, and it spiked up today, which I also talk about later.
So, if you’re “into” the momentum and the growth story, then you’re probably looking at something like a 12% rate of return through 2020, assuming Intel’s P/E moves to up around 15. Although, after the spike today, I’d have to revise that down to probably 10-11% per year.
If you believe that Intel is more likely to float around the 10 year average P/E that’s between 12 and 13, then your annual rate of return drops to around 6%. And really, considering the spike today, it’s more like 5%.
Let’s combine things together to come up with a worst case to best case range. You’re probably looking at something like 5% to 12% annual gains. And if I had to dial this in, it’s probably 9-10% per year through 2020. If that’s acceptable, then this becomes a BUY for you.
Is this simple? You bet! However, to help guide your thinking and to go much deeper, I put together my story for you. There’s way more to the Intel investment thesis that you need to know.
Let’s get started!
Circle of Competence
I’m not a fan of most technology stocks. However, I remember when I broke my rules back in September 2012. That’s when I first bought Intel (INTC). It hasn’t been smooth sailing, that’s for sure. I’ll come back to this point.
I’ve got a bunch of education, including some time formally learning about information systems, internet technology, programming, databases and that sort of thing. Most of that formal training was rooted in management principles and business operations.
I’ve also got real world experience, like being a webmaster, business analyst, software engineer, software manager, and human-computer interaction consultant. I won’t bother you with more details on this. You’ve just suffered enough puffery.
The key point is that despite the education and experience I still have a strong aversion to investing in technology. It moves too fast. Empires rise and fall. I’m keen on stability and predictability. I think that most investments in technology are doomed because the uncertainty is too high.
While we all think we can tolerate change and disruption, the human mind hates this chaos and willpower isn’t enough to prevent buying high and selling low. The rational mind has a difficult time preventing the subconscious mind and brain chemicals from screwing over your wealth. Greed, envy, fear are alive and well. Don’t blame me, that’s the human condition. It’s baseline.
To emphasize, despite my education and experience I still don’t like to invest in technology. However, I don’t completely hate world class industrial companies and manufacturers.
Intel Beer Goggles
I was having a conversation with a guy over a beer. He wouldn’t stop talking about so many different technologies. He was a geek, no doubt, but also an investor and business owner. He was flying from one company to the next. I started to tune out. Then he brought up Intel, and I paid attention.
He was talking about the size of Intel. He explained more details about the famous tick-tock schedule. He brought up Andy Grove. Many tumblers started to line up and unlock Intel in my brain.
Here’s a feel for that vibe:
There is much more. What you should notice is that technology was NOT my #1 consideration. In fact, I repeatedly tried to kill this investment idea. But, the size, scope and strength of INTC greatly impressed me.
Intel As A Dirty Smokestack Company
What really worked to shape my mind was this: I ignored INTC as a technology company and instead viewed it as an industrial and manufacturing company. I felt this was justified given what I knew about the company. Throw in some savvy marketing and great leadership, and you’ve got a totally different type of company. Innovation with a steady hand was obvious to me.
I don’t love industrial or manufacturing companies. They are cyclical and there’s a lot of volatility. But, the best of them are easy for me to understand and I also tolerate lumpy earnings. Two examples are Deere & Company (DE) and Cummins (CMI). I looked at INTC much like I looked at DE and CMI, looking past price volatility and earnings swings.
One thing that was especially important with INTC was how it handled cash and debt. INTC’s got an S&P Credit Rating of A+ and does a fine job with capital. It impressed me, tremendously. If you’ve got cash and the tide goes out, you’re probably going to be fine.
So, that’s a lot of the “soft” thinking that I remember. It’s what I could pull out of my old notes and a couple of emails that I sent to myself. I’m going to shift into what numbers I was looking at, and when exactly I was buying.
The Dot Com Horror
I almost decided against INTC because of this:
And, although it was a complete overreaction, I looked at how an investment in INTC in August of 2000 through September of 2012 generated a loss of over 63%, or as you can see below, a lovely (8%) annualized loss. Spooky!
Remember, that’s what I was literally looking at and thinking about. So, the charts alone included an extreme price. Plus, look at the earnings from 2000 through 2009. That’s about a decade of painful stagnation!
And, in 2012, we were really just starting to feel a little better about the economy. And, not by much, I might add.
The Truth About Dividends And Buybacks
One bright spot was that dividends were generally going up:
Of course, you already know how this was accomplished.
Since INTC’s earnings weren’t growing, this “growth” was somewhat artificial. The payout ratio in 2000 was about 5%, then 15% in 2001, then 23% in 2005, then 48% in 2009 and then around 40% in 12.
The “first order” thinking here quite obvious. INTC decided to reward shareholders with dividends.
What about share buybacks? Here’s what I was looking at, roughly speaking. You can see a lot of money pouring in; cannibals.
Again, the “first order” thinking here is that INTC decided to reward shareholders. I mean, that is actually true here. While we can debate the effectiveness of the buybacks, the intention and the actions seem pretty clear to me.
But, I strongly believe that something else happened between 2000 and 2012:
I was seeing a transformation at INTC: From an internet hot stock company to a mature, “smokestack”, technology blue chip.
At the time, no one was really giving INTC credit for this maturity. It was damn slow and to an impatient eye. It was easy to miss. To be very blunt, this is when any why I started to get excited.
I felt like I found some alpha! My strong desire for stability, consistency, loyalty and tenacity my investments was showing up in INTC.
It was a very pleasant surprise…
And That’s When I Started Buying
I started buying on 15-Sept-2012. Then, here’s what came next:
Added on 28-Sept-2012 (price unknown)
Added on 09-Oct-2012 (price unknown)
Added on 20-Nov-2012 ($19.66)
My average cost was $21.80 and I was satisfied.
Other than collecting my dividends, I didn’t do anything special with INTC. I just sat there. I kept watching and learning.
I Got An Itch
Here’s what I was looking at, from the buys I made in late 2012:
I started selling off some blocks of INTC, capturing 25-30%.
Sold on 23-Dec-2013 ($25.22)
Sold on 11-Feb-2014 ($24.48)
Sold on 17-Mar-2014 ($24.68)
That said, I stopped selling. I decided to hold.
You can see that from that point forward by a year or two that INTC was creeping up and up. I felt pretty good about pulling some “quick gains” off the table, and I felt pretty good about seeing INTC move steadily upward.
Where We’re at Today
Roughly speaking I’m sitting on overall gains of around 125-130% in about 5 and 1/2 years. Annualized that somewhere around 16-18% per year.
Not from genius. I created a little bit of luck. Opportunity met preparation. And look, this isn’t a 10-bagger or anything spectacular. However, it does give me confidence that:
buying low and holding is quite rational
taking some profits is not the end of the world
dividends are important and smooth things over
research and due diligence are required
price doesn’t always reflect value
long-term thinking can provide some “alpha”
any single chart in isolation is a liar
Today (26-Jan-2018), INTC is spiking in price in a big way:
data center growth
The value was there before this spike but now we see how facts intersect with the emotions of the general market.
Right now, Mr. Market is thrilled and offering up shares at higher and higher prices. When Mr. Market is so excited, I slump, grumble, and moan a little. Mostly, I walk away and ignore the cheers and celebration.
I read the news coming directly from INTC, and sip on my coffee, scrolling my way through the comments. So many cheerleaders!
Well that looks nice.
…the growth story is catching on.
Looks amazing to me. I knew altera purchase was just the beginning.
This thing is similar to MSFT 2 years ago. It can easily double in 3 years
Yeah baby. Love the bump in divvy and the outlook. Long INTC
Intel huge moat …
Love INTEL! Long time!!
Of course, you get the point.
It all smells so good, right?
Up, up, and away…
What I Am Doing With INTC Today!
No buying, no selling.
Oh, sorry, I’ve got to go. My wife is yelling at me. Time to walk the dog.
Disclosure:I am/we are long INTC,CMI,DE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.