Is 2007 the Year for U.S. IPOs?

Initial public offerings, or IPOs, raised a record $214 billion worldwide last year, with 1,000 companies going public. This may come as little surprise, given the strength of corporate earnings and the stock market during 2006.

But here's something you probably didn't know: IPOs listed in the United States accounted for only about 20 percent of the dollar volume. China was the year's big winner; it was home to 155 IPOs that raised almost $54 billion during the year, including the largest one in history.

Experts are expecting 2007 to be another big year for IPOs. But don't look for the U.S. market to be the same as in years past.

Indeed, in the past, the ultimate goal of many start-up companies was to go public. But it is becoming increasingly common for start-ups to seek to be acquired by large corporations. There is some debate about the cause of this trend, but one common theory is that the cost of complying with the Sarbanes-Oxley Act of 2002, currently estimated at $3.5 million per year for a public corporation, makes it difficult for smaller companies to compete.

But not all IPOs are launched by start-ups. The largest U.S. offering in 2006 raised $2.4 billion for a well-established company; IPOs of established firms could become even more common in the near future.

Leveraged buyouts by private-equity firms have become extremely popular. These firms often take public corporations private, and then attempt to cash out with an IPO or an outright sale within a few years to generate returns for their investors. Because of the recent popularity of private buyouts, many market watchers expect some of these large IPOs to start coming to market in 2007.

As if to underscore this year's potential, there were more than 60 companies waiting to go public in U.S. markets at the beginning of 2007, more than the number that went public during the first three quarters of 2006. The increased risk associated with unproven companies means that investing in initial public offerings would not be appropriate for every individual.

However, it is widely believed that a thriving IPO market may be good news for investors in general because companies that want to go public usually wait for a strong economy and relatively stable stock prices.

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The Pension Protection Act of 2006 created incentives for people to increase their use of employer-sponsored retirement plans, but it also made it easier for heirs who inherit assets in these plans to stretch the tax deferral over their lifetimes.

It's not unusual for employer-sponsored retirement plans to require any assets that remain in the plan after the owner's death to be withdrawn by the beneficiaries within five years, even though tax laws don't require it. However, this rule can prevent the heirs from reaping the potential benefits of years of tax-deferred compounding.

Because withdrawals from these types of plans are taxed as ordinary income, the heirs may have to pay a large tax bill and a hefty opportunity cost. Fortunately, flexibility granted by the new pension law may help avoid this scenario.

Assume that a worker dies and left $1 million in an employer-sponsored retirement plan to a nonspouse — his son. Because of the plan's rules, the worker's 33-year-old son withdrew the balance in a lump sum. After paying taxes at a 35 percent federal income-tax rate, the beneficiary received $650,000. If he invested this amount in a taxable account earning a hypothetical 8 percent annual return and withdrew only enough to pay the income taxes each year, the account could grow to almost $3.3 million by the time he reached age 65.

Now assume that instead, the nonspouse beneficiary transferred the $1 million into a properly titled-inherited IRA under the provisions of the Pension Protection Act. If he took only the required minimum distributions starting at age 34 (using the IRS Single Life Expectancy Table), he would receive $20,000 the first year and slightly more each additional year (the distribution would reach more than $222,000 by age 65).

If the IRA earned a hypothetical 8 percent annual return, the account balance plus cumulative value of all the RMDs could be more than $7 million before taxes by the time he was 65 years old.

Remember that distributions from employer-sponsored retirement plans and traditional IRAs are taxed as ordinary income. The 10 percent federal income-tax penalty on distributions prior to age 591/2 does not apply to retirement-plan beneficiaries, who must begin taking minimum distributions starting the year after the original account owner's death.

It's not every day that the government passes a law that makes it easier for heirs to defer income taxes. An understanding of the latest tax laws may help you avoid costly mistakes.

Craig G. Langweiler is president of the Langweiler Financial Group, in Newtown. He can be reached at 215-860-8066 or at: [email protected]



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