Skip to content

Interns’ Day in Manhattan

June 22, 2017

IMG_4960Tuesday I went with five interns from our New Brunswick office into Manhattan for a day of exploring some of the business and cultural aspects that are available to all of us, yet lots do not get to experience. Joining us was Karen Koch a CPA and supervisor in our office.

A few weeks ago a friend told me of his inspiring visit to the Louvre when he was in Paris on a vacation. He also showed me many photos he took each accompanied by an animated story. When I asked him if he had been to the Metropolitan Museum of Art in NY he sheepishly said he didn’t remember if he had been there. That got me wondering why people go to every museum they can when they travel but neglect some of the best museums in the world not more than an hour from where they live. That led to our “field trip.”

I spoke to Joe Picone who schedules the interns and we mapped out a day that we felt the interns would enjoy and take with them a favorable impression of Withum. I asked Karen to join us so that they could also speak to someone closer in age to them. We started out on Wall Street visiting the exact spot where George Washington was inaugurated as our first president. Federal Hall is diagonally across from the New York Stock Exchange so we also had some feelings about our financial history. Next we went to Trinity Church at the beginning of Wall Street. Then a quick stop at a Fidelity office to pick up applications to open a brokerage account. I suggested they consider buying one share of Berkshire Hathaway “B” shares [ticker: BRK-B] for about $180 including brokerage commissions. This will establish a stock account, will not unduly empty their bank accounts and will qualify them as stockholders to receive the BRK annual report each year. That report is pure financial literature which includes Warren Buffett’s letter to shareholders and is a must read for anyone interested in investing in any manner.

We then tried to get a photo with the Bull statue but it was just too crowded. In the words of Yogi Berra “Nobody goes there anymore, it is too crowded.” But we came back later and got our picture taken there. We also got a shot of the two women in our group with the young girl statue. We walked down to Battery Park and had lunch at historic Fraunces Tavern where Washington bid farewell to his troops before going to Annapolis to resign his commission so he could return to private life. We got our photo with the bull and took the subway uptown to get to The Met. While downtown I ran into a friend’s son and he took our first group photo.

I set up a brisk route of The Met that took us through all the major galleries on both floors. Interests were many and varied and we had “unscheduled” stops when some of our group wanted to see more of something. We also tried to locate the exact spot where Holden Caufield sought sanctuary in the Egyptian section. I did indicate that since they now knew about The Met they could return anytime they wanted to revisit sections they would like to explore more thoroughly.

I pointed out four accounting related items: 1) A cuneiform clay table from ±3000 BCE with accounting information which placed accounting at the beginning of recorded history. 2) An account book cover from ±1350. 3) A painting by Vincent Van Gogh of L’Arlesienne: Madame Joseph-Michel Ginoux looking over her account books. And 4) Rembrandt’s Aristotle Contemplating the Bust of Homer which was acquired in 1961 by The Met for the highest price ever paid for a painting at that time, $2.3 million. The relationship to accounting was the valuation and how it provided tremendous ancillary benefits and value to The Met. I also gave them a reproduction of the NY Times front page reporting that purchase.

In all, we had an enjoyable day, fine camaraderie and an easy way to get to know each other better. The weather helped by being perfect.

There are many other museums that can easily be visited and not to do so causes an injustice to yourself and prohibits you from being able to enjoy some of the finer things in life. In addition to The Met, some of my favorite NY museums are the Museum of Modern Art, the New York Historical Society, the Frick Collection and The Morgan Library. In NJ the Princeton University Art Museum is a must see.

In all, we had an enjoyable relaxed educational and cultural day and somehow, all our work still got done on time, just not on Tuesday.

Shown in the photo at The Met left to right: Ed Mendlowitz, Anthony Mongelluzzo, Karen Koch, Annie Pennington, Kevin Surace, Michael Decker, Matthew Giddon.

Why you should do what Warren Buffett says and not what he does

June 20, 2017

Last week I presented a speech to 500 CPAs at the AICPA ENGAGE Mega Conference in Las Vegas on how Warren Buffett did it. I have been giving this program for over three years, it is one of my favorites and always gets many questions from those attending. Today I want to share why you should do what he says and not what he does.

The “what he says” part is easy. Long term investors should invest in the stock market and specifically an S&P 500 index fund. My comments about this: The S&P 500 index fund is a diversified portfolio of stocks in the largest United States companies. It is low cost, has international exposure through the foreign operations of its components, pays a proven consistently growing dividend of about 2% and has upside potential as the United States and World economy grows. As long as the “price” of the index fund is not overstated it is a relatively prudent investment. The “price” is indicated by the P/E ratio which right now is a 24 trailing P/E [which I think is high] and a forward P/E of about 19 [which I think is a little high but not unreasonable in today’s economy].

The “what he does” is not easy, is impossible to emulate and represents a completely undiversified portfolio. Periodic news stories refer to Buffett’s Berkshire Hathaway [BRK| beating the S&P 500 stock index by an over 10% (20.8% vs. 9.7%) annual average over the past 52 years. That’s so, but this performance includes cash flow from investments in 89 private companies employing over 367,000 people which are continually reinvested with no dividends being paid to BRK stockholders. The S&P 500 companies pay approximately 40% of their earnings as dividends so these amounts are not available for future growth within the companies. On some level the stockholders invest this money separately but those earnings are not figured into the cumulative returns [and should be to truly compare performance].

Its public portfolio is comprised of 46 stocks with 6 making up over 70% of its portfolio. Also its allocation is skewed to 3 sectors making up 80% of the portfolio – Financials, Consumer Staples and Technology. Totally not diversified and in my opinion it would be irresponsible for anyone to try to match what BRK has done.

Another part of that 52 year return includes higher than market rate dividends on convertible preferred stock BRK received in exchange for its investments when a company was desperate for cash including Heinz, Coca-Cola, Bank of America and Goldman Sachs. These are not opportunities available to anyone else.

Touting the 20.8% vs. 9.7% “outperformance” is accurate but a totally misleading result. It might make an interesting read, propagates the legend and “sells” newspapers or gets clicks and supports investment advisors that tell you that you can invest like Warren Buffett. Not so! Further, Warren Buffett tells you not to try to duplicate his strategy – he says to buy the S&P 500 index fund.

If you want to catch on to his coattails, you can buy BRK today and hope for it to outperform the S&P 500, but certainly should not expect the 52 year trailing return.

Do what he says, not what he does!

Using a Trust as a Beneficiary of an IRA

June 15, 2017

A good feature of an IRA is that a non-spouse beneficiary, after the death of the IRA owner, can “stretch” out the time period for taking distributions over their life expectancy. The compounding effect can create phenomenal tax deferred growth.

After the owner’s death but before taking any distributions the IRA beneficiary or beneficiaries can make a decision whether to “stretch” distributions or to take a lump sum withdrawal. This can be a concern of the IRA owner if the beneficiary is a minor, disabled, incompetent or unsophisticated in financial matters. Further a lump sum withdrawal can subject the money to creditor or marital risk or improper management or careless spending.

In these cases and similar others the IRA owner can remove the decision from the beneficiary by establishing a trust to be the beneficiary of the IRA. The trustee then becomes the decision maker.

The owner can further restrict the beneficiary’s access to the funds by limiting distributions from the trust to the discretion of the trustee. This is a method allowing the IRA owner to exercise “post mortem control” over the beneficiary’s access to funds.

While the trust limits control, there might be some adverse income tax results. If the trustee, using their discretionary power, decides to keep the IRA distribution in the trust instead of making a distribution to the trust beneficiary, the IRA distribution would be taxed at the trust level instead of the beneficiary’s level possibly creating a much larger tax. A trust reaches the highest tax rate of 39.6% when the trust’s income exceeds $12,500 while a single person bears the highest rate only when their income exceeds $418,400 using 2017 rates.

Accordingly, the IRA owner needs to determine which is more important – protection and control of the funds for the beneficiary or mitigating taxes.

There are some ways to reduce the trust’s taxes such as the IRA owner converting the IRA to a Roth IRA in a taxable transaction. This decision would also depend upon the IRA owner’s tax bracket and other assets potentially subject to estate tax. However, if the conversion is done, then after the IRA owner’s death the discretionary trustee would be able to retain or distribute funds from the Roth IRA without incurring income tax and the trust would not be penalized by the higher tax rates.

Using a discretionary trust as the IRA beneficiary is an important strategy and in the right situation can be very effective. If you are concerned about how a beneficiary would handle their inheritance then it is suggested that you meet with your tax advisor or attorney to discuss setting up a discretionary trust as the IRA beneficiary.

Robert Demmett, CPA, MS, a tax partner in our New York office, assisted in the preparation of this blog. Bob can be reached at

Investment Tweaks

June 13, 2017

There are many easy tweaks that can be made to your investments to increase cash flow. Shown are some of them. Note that each step involves greater risks but in many cases remaining steadfast can also create risks such as erosion of buying power because of inflation, having a short fall in spending or not reaching your goals by the time period you planned on.

If you have money market funds consider 1 to 1 ½ year bank CDs.
If you have 1 to 1 ½ year bank CDs consider longer term CDs or fixed annuities up to 5 years.
If you have CDs up to 5 years consider 6-to 10 year fixed annuities, or 10 to 20 year bonds.
If you have inadequate or eroding cash flow and risk falling short of your spending needs consider using 15% to 20% of your funds to buy an immediate annuity with much higher guaranteed cash flow but loss of principal; or if own a house, consider a reverse mortgage (with also a resulting loss of the home equity).

If you are not invested in stock market at all consider investing future excess interest in a major stock index fund.
If you own a large number of individual stocks consider not increasing ownership in individual stocks and investing excess dividends in a major stock index fund or funds.
If you own mutual funds measure their previous 5 year performance against their benchmarks and if they underperformed, consider investing in the benchmark index funds. Also compare your yields with that of benchmark index funds.
If you have a disproportionately large portion of your investments in stocks, consider reviewing your future cash flow needs and goals and reduce exposure if it appears you are assuming a risk greater than needed to achieve your goals.

If you are spending all your income consider reducing expenses. Evaluate future cash flow needs based on expected income and expenses and the effect of what you believe inflation will be.

If you have funds in a 401k or IRA consider investing completely in large index and stock mutual funds. I would not suggest bond funds. If you do not want to put all the funds in the stock market and can select individual bonds, consider a basket of bonds with maturities of at least 20 years. Dividends and interest should be reinvested similarly as received.

If you care or are concerned about your future financial security prepare a plan to achieve your goals. While at it, consider some tweaks to provide greater cash flow and asset growth to help you get where you want to go.

Investing should depend on your situation

June 8, 2017

How you invest should depend on your situation. For instance, there would be different ways to invest and things to do if you are still working, phasing toward retirement, or retired.

If still working, consider saving through a 401k plan or contributing to an IRA. Develop a long range plan and work toward its achievement with a pattern of regular methodic savings.

If you have young children your plan could be to get them through college. Figure out what might be needed as well as funding sources [including student loans] and have a plan based on that.

If you just became an empty nester, your plan could be to now save what you were spending on your children’s schooling. Try accelerating your mortgage payments and pay it off. Ten years of banking these amounts could mount up quite nicely.

If you have 401k or IRA investments you should pay attention to how they are invested keeping in mind that these are very long term investments – they should be able to grow so that they could provide cash flow at a much later point in time, and then last for the rest of your and your spouse’s life. Asset accumulation should be the primary concern, not cash flow, and there should be regular and prompt investment of any dividends and interest.

If you have investments in your own name, i.e. not in a retirement account, these should be invested taking into account your short term as well as long term goals. Taxes should also be a consideration – perhaps not a major concern, but something that should be still looked at. If there is a need for the principal within seven years, I do not suggest investing those amounts in the stock market. Stick to bank CDs and or other short term fixed income alternatives. Also keep some funds separate in a rainy day fund – somewhere from 6 to 18 months of expenditures.

If you are spending all of your income, is it what you are earning and taking home or also all of your investment income? Most people that are still working do not consider their investment income including retirement plan income as spendable income so that accumulates and is reinvested.

For someone that is retired, spending all their income means just that – all interest and dividends are being used to live on. Any growth in cash flow would need to come from a finite source of funds. Investing should provide not only for safety of principal but also for growth.

A choice no matter what your situation is to always to try to spend less, but that gets harder and harder to do when you are already spending as little as you can.

Each person is different, with different needs, goals, feelings of security and what type of risks they want to endure. There is no one investment or plan for everyone. When considering an investment look at it from your situation, not from “what everyone else is doing.”

Michelle and Barack Obama’s New House

June 6, 2017

It was reported last week that President and Mrs. Obama have purchased the Washington DC house they were renting for $8.1 million because it is likely they will be there for at least 2½ years. Is this a smart or foolish move?

Actually, I do not care much about what the Obama’s did, but I want to address why I do not recommend similar moves for most people. The Obama’s are in a stratosphere of wealth so that a costly move is not that significant for them. But for most people a loss can be cause an alteration of their plans.

Buying a house for an expected 2½ year period rather than renting does not appear to be a perspicacious financial maneuver. Houses are a long term endeavor and even then they are not necessarily a good investment. Rather, owning a house is a life style choice with long term benefits being the location of where you live with the concomitant schooling, neighborhood, types of neighbors, security, cleanliness, access to services and many other factors.

Realistically the day you close on your house you will lose 10% of your cost. Figure it out. All your closing costs buying and then selling and the brokers fee selling will cost you about 10%. This is hard to make up when there is a short term horizon. Also, the house has to appreciate 11% to recover this since the broker’s fee is also paid on the “10%” increase. Inflation is running below that. Some houses or areas might have extenuating factors causing sharp appreciation such as being owned by a former president or celebrity or a new or growing development in the area, but most houses like all real estate are subject to mundane inflation which right now is pretty low by historic standards.

Further owning a house causes money to be tied up and/or added costs of a mortgage with interest rates certainly greater than expected inflation rates. And time looking for the house, and inspection and legal fees all reduce the short term advantages of owning. While living in the house repairs and all sorts of maintenance and gardening usually crop up. Also, once settled in a house, relocation choices can become deferred beyond the point of comfort because you are “already there” or you need the “right market” conditions to sell.

Many prefer to own, thinking it is better than renting in the long run. It might be, but usually not. Work out the numbers.

The Obama’s reason was to “save the rent” and unless their ownership status enhances the value when they sell, I suggest they would not have made a good 2½ year investment. When you have enough money, it doesn’t matter. However, if you do not have that much money…..

Ten tips for medical self-defense

June 1, 2017
  1. Keep a log of your medical visits and compare against the bills you receive. Even though you might not be paying that bill, incorrect billing will accumulate and impact your deductible or other types of coverage.
  2. Make sure you understand everything on your bill.
  3. Get complete copies of all your medical records from all your physicians and provide them to every doctor you receive care from.
  4. Make sure every doctor you meet with has authorization to receive your records from other physicians you have met with or are being treated by.
  5. Find out what preventative care you should engage in…and do it! Exercise, drinking water, not eating added sugar or salt, eating smaller portions and not smoking are all no brainers. Find out what else you can do.
  6. Try to get as much done with every doctor visit to eliminate multiple visits. Find out before the appointment what the purpose of the visit is, what the follow up treatments or visits will be, and what tests and procedures are necessary and whether they can be, or should be, done before the visit.
  7. Have each physician look at your tests and procedure history and results and make sure there is no duplication – which can be a bother, costly and time consuming.
  8. Ask every insurance provider for a reason why payment was denied for a particular service and then ask the physician why it was ordered and whether they were aware that it wasn’t covered. Some tests that are only permitted once a year, or every five years can be routinely denied by the provider without ascertaining that these were the “one time” in that cycle. The next time these are scheduled have the physician indicate the cycle on their order or bill.
  9. Be an advocate for your care. Make sure you understand everything being done on your behalf and on and to you.
  10. Use one pharmacist and ask them to look at all your medications and make sure they do not negatively interact with or negate each other, whether they can be taken in other ways and if the dosage is appropriate. If necessary have them contact your physician.