1. a n e x c l u s i v e n e w s l e t t e r f o r r b c w e a lt h m a n a g e m e n t i n v e s t o r s
ISSUE 1, 2012
WHAT DOES EUROPE’S DEBT CRISIS MEAN FOR INVESTORS?
A
s you know, Europe has U.S. financial crisis, and now they
been in the news — and the are unable to support this debt. For
coverage has not focused example, Greece may default on its
on sightseeing tips. Instead, eyes are loans, with other countries, including
on the European debt crisis. And as an Italy, Spain, Portugal and Ireland, also
individual investor, you may well be facing considerable financial stress.
wondering if — and how — the ripples
As a result of these debt problems,
from across the Atlantic will affect you.
several eurozone governments are being
Some Background forced to push up the interest rates on
The troubles in Europe are actually their bonds to attract investors — and
rooted in the eurozone, the economic higher interest rates on government
and monetary union consisting of 17 debt means higher borrowing costs for
of the 27 European Union member companies and businesses. Furthermore,
states. Certain eurozone countries it has become difficult for eurozone
ran up sizable debts before the 2008 banks to borrow dollars, due to a variety Continues on page 3
WHAT CAN INVESTORS DO?
No one can predict the extent to which especially important in the months fixed annuities and some types of
the actions of governments and central ahead if we continue to experience permanent life insurance, both of
banks can ease Europe’s debt crisis and the ups and downs we’ve seen which offer a level of guaranteed
the accompanying market volatility. over the past year. Using time- returns (based on the claims-paying
tested strategies such as dollar cost ability of the insurer). Plus, annuities
Despite these uncertainties, you are not
averaging allows you to invest a and permanent life insurance
powerless to control the fate of your
predetermined amount of money at a offer the potential for tax-deferred
investment portfolio. In fact, you can
regular interval, regardless of market growth — and annuities can be
make a number of timely moves that can
conditions. The amount you invest structured to provide you with an
help you defend against the possibility
is constant, so you buy more shares income stream you can’t outlive.
of increased market fluctuations, thereby
when the price is low, and fewer
allowing you to continue making n Stay Diversified. Diversification is
when the price is high. When you do
progress toward your long-term financial still key to successful investing. In
this, the average cost of your shares
goals. Here are a few suggestions: addition to owning a broad range
is typically lower than the average
of stocks, bonds, mutual funds and
n Look for Buying Opportunities. market price per share during the
government securities, you’ll also
The eurozone debt crisis is not period in which you are investing.
want to look beyond the United
a signal for you to head to the
n Consider Income-Producing States for international investment
investment “sidelines.” During
Investments. Generally speaking, opportunities. While Europe’s debt
periods of heightened uncertainty,
the more volatile the markets, the crisis may cause problems for that
some investors sell assets at any
bigger the effect on aggressive region, and may even spread beyond
price to exit the market. When
growth investments. So, you Europe’s borders, it will not, by
this happens, these assets become
may want to take a closer look at itself, derail the growth potential
cheap, as was seen at the end of
income-producing vehicles, such in emerging markets — countries
the third quarter of 2011, when
as dividend-paying stocks, mutual such as China, Brazil and Mexico.
stocks were trading at about 12
funds, high-quality municipal bonds
times earnings, compared with n Review and Rebalance. During this
and investment-grade corporate
the long-run average, which is period of eurozone uncertainty, you
bonds. These investments are
closer to 15. So, focus on quality may need to review your portfolio
not without their own risks, but
investments that are attractively more frequently than you’ve
they may be good choices in an
priced, and depending on your previously done, and “rebalance” it
unsettled financial environment.
objectives, consider the opportunity. more often to make sure it’s still
n Seek “Downside Protection.” appropriate for your risk tolerance
n Think Long Term. While it’s always
You can help “dampen” downside and time horizon.
a good idea to maintain a long-term
portfolio volatility by investing in
investment perspective, it may be
RBC Wealth Management, a division of
RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

2. i n v e s t o r s ’ e d g e , i s s u e 1, 2012
DEFICIT REDUCTION, INVESTMENT TAXES ... AND YOU
I
n the past year, there’s held at least one year — is scheduled to
been no deficit of attempts move to 20 percent for investors above
to reach a consensus on the 15% tax bracket. Also starting in
reducing the U.S. budget deficit. 2013, Medicare taxes of 3.8% will be
First, there was a report issued by a assessed on your capital gains if your
bipartisan deficit commission. Then, adjusted gross income is in excess
President Obama and Speaker of of $250,000 (if you’re married) or
the House John Boehner engaged in $200,000 (if you’re single). So, if you’re
intensive negotiations. And, most at that income level, you could end
recently, a special Congressional deficit up paying 23.8% on capital gains.
committee — the so-called “Super
While this rate is certainly well above
Committee” — also tackled the deficit
the 15% rate of the past several years,
problem. All three efforts, however,
there are two important considerations.
proved unsuccessful, which could lead
First, the new rate is still below the 28%
to a variety of ramifications — not
capital gains rate that most high earners make some decisions on the role of
least of which is the tax rate you may
paid during the 1980s. And second, dividends in your portfolio. On one
have to pay on your investments.
the long-term rate will still likely be hand, if you typically reinvest most of
The issues involving deficit reduction significantly lower than your personal your dividends into investments that
are complex and stretch beyond pure tax rate, which applies to short-term fund tax-deferred vehicles, such as a
economics into the realm of political capital gains (on sales of appreciated traditional IRA or your 401(k), you
philosophy and the long-term vision assets held less than one year). may not need to radically change your
of this country. So, as a citizen, you strategy, especially if you think you
You’ll want to keep an eye on what
may well have considerable interest might be in a lower tax bracket during
comes out of Washington with regard to
in how the deficit issue is resolved — your retirement years. And the same is
capital gains taxes for 2013. If it seems
but, as an investor, you might have a true if you reinvest dividends into a Roth
likely that the rates will increase as
more narrow focus. Specifically, you IRA, where your earnings grow tax-
scheduled, should you consider taking
might be wondering how a resolution, free, provided you’ve had your account
capital gains in 2012 to take advantage
or a lack of it, will affect your overall at least five years and don’t start
of the lower rate? Maybe — but keep
investment strategy, especially in regard taking withdrawals until you’re 59½.
in mind that, when you’re making
to the taxes you pay on capital gains,
investment decisions, you need to On the other hand, if you are in one of
interest payments and dividends.
consider other factors aside from taxes. the higher tax brackets, and you rely
Be Prepared for Big Changes So, if you own an investment that has on dividends for part of your income,
The Bush-era tax cuts reduced the top appreciated significantly, but it’s still you may well have to re-think your
tax rate on long-term capital gains an important part of your diversified approach. For example, if you invest in
and qualified dividends to 15% and portfolio, you may well decide to keep municipal bonds, your interest payments
lowered marginal tax rates. These it, even in an environment of higher are exempt from federal taxes — and
tax cuts were originally scheduled to capital gains rates. In any case, you’ll they may be exempt from state and local
expire at the end of 2010, but they want to continue holding investments taxes, too, if you purchase “munis”
were extended for two additional years long enough to earn the more favorable issued in your home state. (Keep in
by the Tax Relief, Unemployment long-term rate when you sell. mind, though, that interest from some
Insurance Reauthorization and types of municipal bonds may be
Taxes on Dividends
Job Creation Act of 2010, signed subject to the alternative minimum
As noted above, qualified dividends
into law by President Obama. tax.) Of course, many municipalities
have been taxed at 15% for the past
across the country are under financial
Since then, the question of whether to several years. But in the absence of
stress, but the default rate on “munis”
continue, end or modify the tax cuts new legislation, these dividends will be
is historically low, and many high-
has been debated in all the deficit- taxed at your marginal tax rate, starting
quality offerings are available.
reduction talks and studies. But in in 2013. And these rates are scheduled
2013, tax rates will revert to what to revert to the pre-Bush levels, which While taxes are certainly an important
they were before the Bush era, unless means the 25% rate will become 28%; part of the dividend equation, they
new laws are passed this year. the 28% rate will become 31%; the 33% aren’t the only factor. Don’t forget that
rate will become 36%; and the 35% rate those companies that pay dividends
At this point, however, it’s impossible
will become 39.6%. Furthermore, the are usually solid businesses that seek
to predict the final outcome. Therefore,
3.8% Medicare taxes will be assessed to reward their investors — and as
you may want to spend at least part
on your dividends if you meet the such, they are often good investment
of 2012 preparing yourself for the
income guidelines mentioned above. choices. Furthermore, dividend-
tax changes that may be coming in
paying stocks may also provide
2013, along with some suggestions As is the case with capital gains
long-term growth opportunities.
on how you might respond to them: taxes, you’ll need to closely follow the
legislation affecting dividends. And if To learn more about investment
Capital Gains Taxes
the dividend tax rates were indeed to strategies related to rising capital gains
The long-term capital gains rate —
return to earlier levels, you’d have to and dividend taxes, please call. n
applied to sales of appreciated assets

3. a n e x c l u s i v e n e w s l e t t e r f o r r b c w e a lt h m a n a g e m e n t i n v e s t o r s
WHAT DOES EUROPE’S DEBT CRISIS MEAN FOR INVESTORS?
SHOULD YOU CONTINUED
“DO-OVER” A ROTH of factors: a decline in the value of the banks to borrow dollars, the central
IRA CONVERSION? euro, relative to the dollar; the burden banks hope to increase liquidity and
of loans that eurozone banks have thereby stimulate business activity.
M
any people are attracted made to eurozone governments; and the n In early December, European
to the potential of the tax- withdrawal of U.S. investment funds, leaders held a summit to address
free earnings of a Roth IRA which had been the eurozone banks’ the crisis, and, among other
versus the tax-deferred growth of a main source for borrowing dollars. This steps, agreed to the following:
traditional IRA. That’s why so many increased inability to borrow dollars is a
people “convert” their traditional — Provide another 200 billion
major concern for banks, because dollars
IRAs to Roths. But what if you do this euros (about $267 billion) from
are the currency in which a large part of
conversion and something happens to their own central banks to the
global financial transactions occur. Banks
cause you to change your plans? Can International Monetary Fund;
need these dollars to finance existing
you go back to a traditional IRA? obligations and to make new loans. — Leverage about half of the
EFSF to give it more impact;
Yes, you can. If you converted your Many government officials and
traditional IRA to a Roth IRA in 2011, economists fear that the debt crisis, — Speed up the start date of
you can “recharacterize” the Roth IRA, and the consequent credit squeeze, a permanent fund — the
as long as you act by Oct. 17, 2012. For will lead to a recession in Europe — $500-billion-euro European
example, you might want to undo a Roth and possibly other parts of the world, Stability Mechanism —
conversion for any of these reasons: too. Given this, it’s not surprising to July 2012; and
n Your Account Has Lost Value. that the financial markets, including — Enable the European Union
When you convert a traditional IRA those in the U.S., were unusually to exert greater control
to a Roth IRA, you must pay taxes volatile throughout much of 2011. over the national budgets
on the previously untaxed parts of of eurozone countries.
Confronting the Problem
the traditional IRA. But these taxes Governments and central banks are n In late December, European central
are based on the amount that’s in attempting to deal with the problems banks agreed to pump nearly $640
your traditional IRA at the time stemming from the eurozone debt billion into Europe’s banking system.
of the conversion. If your account crisis. Here’s a brief chronology: The money will be provided through
loses value after the conversion, loans at interest rates much lower
n In October, eurozone officials
you’ll end up paying taxes on than European commercial banks
recapitalized some of Europe’s
the previously higher amount — could get from the financial markets.
banks, strengthened the European
which is not a good deal for you.
Financial Stability Facility (EFSF), In the United States, the Obama
n Your Tax Bracket in Retirement the region’s bailout program, and administration urged banks to reduce
Will Be Lower Than Expected. If recommended a 50% “writedown” their exposure to Europe. And the
you’ve determined that your taxable of Greek sovereign debt (which Federal Reserve has ordered the
income in retirement is going to means that private investors would biggest American banks to perform
be lower than you once thought, take a 50% loss on Greek bonds). “stress tests” of their portfolios to
you might be better off by sticking
n In November, six central banks, ensure they have enough capital to
with a tax-deferred traditional
including the Federal Reserve and cover losses in case of a significant
IRA, which also allows you to
the European Central Bank, cut the economic deterioration.
make tax-deductible contributions,
cost for banks to borrow dollars, and To learn more about possible actions
depending on your income level.
lengthened the time for which these to take in response to the eurozone
n You Don’t Have Enough Cash loans would be available. By making debt situation, please call. n
on Hand to Pay the Taxes. If you it cheaper for European commercial
have a sizable traditional IRA, you
may face a sizable tax bill when
you convert to a Roth IRA. If taking
the money from other sources to
pay the tax bill will weaken your
financial position more than you The information contained herein is based on sources believed to be reliable, but its accuracy cannot
thought, you might be better off be guaranteed. Professional Trustee services are offered to RBC Wealth Management clients by different
entities who may serve as trustee. RBC Wealth Management will receive compensation in connection
by reversing the conversion. with offering these services. Neither RBC Wealth Management nor its Financial Advisors are able to serve
as trustee. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the
Before you decide to reverse your Roth tax or legal implications of your investments should be made in connection with your independent tax
or legal advisor. The articles and opinions in this advertisement are for general information only and
IRA conversion, see your tax advisor.
are not intended to provide specific advice or recommendations for any individual. All information as
You do get one chance for a do-over — of 12/17/2011. © 2012 RBC Capital Markets, LLC. All rights reserved.
but you’ll want to do it right. n 11-01-3620 (12/11)