Due Diligence

It is extremely important that we all take our retirement into our own hands. The concept of not preparing and relying on a government-sponsored retirement might not be the best plan. Financial woes combined with the fact that the U.S. population is continuing to age, means that there are fewer working-aged people remaining to contribute to our Social Security systems. On a positive note, strong retirement savings can not only help you, but it could potentially help your family and loved ones. With today’s retirement challenges, more people are using retirement vehicles as a healthy way to help family members. As advisors, we get great satisfaction helping parents and grandparents contribute to their loved ones lives by properly gifting funds to a retirement account (if the loved one has earned income and qualifies). Most financial professionals can agree that consistently funding your retirement plans is a healthy activity. Funding retirement accounts at younger ages can increase your chances of a better funded and more comfortable financial situation at your retirement.

You can contribute to your 2020 IRAs, but thanks to the CARES Act, you can still make 2019 IRA contributions until July 15, 2020. In 2019 and 2020, the limit for contributing to an IRA is $6,000. Now is also a good time to consider making your 2020 retirement contributions.

For complete rules on IRA’s (including who qualifies), please visit www.irs.gov Publication 590a or consult with a qualified professional. Here is some timely information that may be helpful. To discuss your overall retirement strategy please call us and schedule an appointment.

Traditional IRAs

A traditional IRA (Individual Retirement Account) is a way in which individuals can save for retirement and receive tax advantages. Traditional IRAs come in two varieties: deductible and nondeductible. The contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances (i.e. taxpayer’s income, tax-filing status and other factors) and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until they are distributed.

A clear advantage of traditional IRA accounts is that you can benefit from deferring taxes on all dividends, interest and capital gains earned inside the IRA account and they can potentially compound each year without being reduced by taxes. This may allow an IRA to have faster growth potential than a taxable account.

Roth IRA

A Roth IRA is an IRA that is subject to many of the same rules that apply to a traditional IRA with some major exceptions. Unlike traditional IRAs which for some taxpayers can be tax deducted, you cannot deduct contributions to a Roth IRA. Some Roth IRA advantages include:

• If you satisfy the requirements, qualified distributions are tax-free.
• You can leave funds in your Roth IRA for your entire lifetime.
• Beneficiaries inherit your Roth IRAs tax-free, if account requirements have been satisfied.

Many investors know and understand that the largest benefit of the Roth IRA is its tax-free withdrawal of contributions, interest and earnings in retirement, but Roth IRAs can also help you leave a legacy to your heirs with proper estate planning.

Are you interested in funding an IRA for you or a family member? If so, please call us and we would be happy to assist you.

Spousal IRA

If your spouse doesn’t work, they can still have a spousal traditional or Roth IRA. This allows non-wage-earning spouses to contribute to their own traditional or Roth IRA, provided the other spouse is working and the couple files a joint federal income tax return. If the working spouse is covered by a retirement plan at work, deductibility of contributions to a spousal traditional IRA would be phased out at higher incomes. Eligible married spouses can each contribute up to the contribution limit each year to their respective IRAs (spousal IRAs are also eligible for a $1,000 catch-up contribution for those 50 and older). To discuss spousal IRA strategies, call us.

Custodial Roth IRA

Starting retirement savings early can allow you the potential advantage of growing money in a tax efficient account over a long period of time. Many children work before they reach age 18. The income they earn makes them eligible to contribute to a Roth IRA, which can be an extremely smart move for teenagers. This can also provide an excellent opportunity for you to teach or reinforce with your children the importance of saving money.

Some of the rules regarding custodial Roth IRAs are:

• To be eligible to open a custodial Roth IRA, the child must meet all the same requirements as an adult. The minor must have earned income and contributions are limited to the lesser of total earned income for the year and the current maximum set by law, which for 2019 and 2020 is $6,000.

• Adjusted gross income for the child must be below the thresholds above which Roth IRAs aren’t allowed.

• Even though the custodian is the legal owner of the account, the Roth IRA must be managed for the benefit of the minor child.

• As the custodian, you make the decisions on investment choices—as well as decisions on if, why, and when the money might be withdrawn—until your child reaches “adulthood,” defined by age (usually between 18 and 21, depending on your state of residence). Once they reach that age, the account will then need to be re-registered in their name and it becomes an ordinary Roth IRA. 

If you’re the parent of a child who has earned income, a Custodial IRA can be a great way to teach the value of saving and investing. Besides getting a head start on saving, your child may be able to use the funds for college expenses—or even to buy a first home.

There are several ways to fund a Custodial Roth. For example, you can potentially use your annual ability to gift to children or grandchildren to make this happen. If your child or grandchild is earning money, call us to discuss options for setting up a Custodial Roth.

“Back-door” Roth IRA

The traditional contribution (“front door”) for Roth IRAs is currently not available for higher income earners. Married couples earning $206,000 or more and singles earning $139,000 or more in 2020 are still fully excluded from contributing directly to Roth IRAs.

In 2010, Congress changed the rules and since then anyone can convert a traditional IRA to a Roth IRA. However, higher income earners are still ineligible to contribute to a Roth IRA. A Backdoor Roth IRA is a strategy for some higher income earners to participate in Roth IRAs. It is a way for higher income earners to put money into a traditional IRA and then roll that into a Roth IRA, getting all the benefits. While this strategy sounds simple, there are several rules that you must know and follow to make sure you do not incur unintended tax consequences. This is where working with a knowledgeable financial or tax professional can provide guidance and value.

How Does the Backdoor Roth IRA Conversion Work?

The Backdoor Roth conversion can consist of two simple steps:

1)You make a nondeductible contribution to your traditional IRA.
2)Then, after consulting with your financial advisor or tax professional, you convert this IRA into a Roth IRA.

There’s one big caveat: This strategy may work best tax-wise for people who don’t already have money in traditional IRAs. That’s because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren’t converting. (Please read the section on the Pro Rata Rule.)

For an investor who doesn’t already hold any traditional IRAs, creating one and then quickly converting it into a Roth IRA may incur little or no tax, because after a short holding period there’s likely to be little or no appreciation or interest earned in the account. However, if you already have money in traditional deductible IRAs, you could face a far higher tax bill on the conversion (again, this is covered later in the section on the Pro Rata Rule).

If you choose to attempt a backdoor Roth IRA conversion, please consult a knowledgeable tax planner prior to doing so because the rules for Roth conversions can be complicated.

Example of a Backdoor Roth IRA

Bob, a high-income earner, decides on January 2nd to put $6,000 into a traditional IRA.  Bob’s income is too high to be able to deduct these contributions from his taxes. After consulting with his financial advisor or tax advisor, he then converts the traditional IRAs to Roth IRAs completely tax-free. His income is too high for him to make a direct contribution into a Roth IRA, but there’s no income limit on conversions. Since Bob couldn’t deduct the contribution anyway, he might as well get the advantage of never paying taxes on that money again available through the Roth IRA.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Beware of the Pro Rata Rule for Roth Conversions

The Pro Rata rule for Roth conversions states that if you have any other deductible IRAs (i.e. a previous 401k that you’ve rolled over), the conversion of any contributions becomes a taxable event that you’ll need to pay taxes on upfront.

The Pro Rata rule for Roth conversions determines whether your conversion will be taxable. For taxation purposes, the IRS will look at your entire IRA holdings (even if they are in different accounts), not just the traditional IRA you are converting to a Roth IRA and will determine what your tax bill will be based upon a ratio of IRA assets that have already been taxed to those IRA assets in total.

The IRS determines the tax on this conversion based on the value of all your IRA assets. For example, Peggy, a high-income earner, already has $94,000 in an IRA account, all of which has never been taxed. She decides on January 2nd to put $6,000 into a new traditional IRA. The next day she converts the new traditional non-deductible IRA to a Roth IRA.  Peggy’s income is too high for her to make a direct contribution into a Roth IRA, but there’s no income limit on conversions. She has $94,000 in other IRAs (previously non-taxed), so her total IRA assets are now $100,000. When she converts $6,000 to a Roth IRA, the IRS pro-rates her tax basis on the previous taxation of her total IRA assets, therefore making this conversion 94% taxable ($94,000/100,000 = 94%).

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

If you plan on using this backdoor IRA strategy, you want to be clear as to whether or not you have any other IRAs. As you can see, this can be a confusing area, and this is where we can help. If you are a high-income-earner we would be happy to review your situation to determine if this strategy is in your best interest.

Also, please remember that your spouse’s IRA is separate from yours.

Am I a Candidate for a Backdoor Roth IRA?

Backdoor Roth IRAs can be appropriate for investors who:

• Only have retirement accounts through their jobs (i.e. 401k’s) and want to increase their retirement savings in tax-advantaged accounts, but whose income is too high to qualify for standard Roth IRA contributions; and
• Have the time and ability to wait for five years or until they are 59 ½, whichever is later, to avoid the 10% penalty on early withdrawals.

A Backdoor Roth IRA is probably not recommended if you:

• Don’t want to contribute more than the maximum retirement limit through your workplace retirement account.
• Already have money in a traditional IRA and because of the Pro Rata rule may end up in a non-tax advantageous position when converting to a Backdoor Roth IRA.
• Plan or expect to withdraw the funds in the Roth IRA within the first five years of opening it. A Backdoor Roth is considered a conversion and not a contribution. Therefore, the funds may incur a 10% penalty if withdrawn within five years no matter your age.
• Are in a high tax bracket now and expect to be in a lower tax bracket in the future.
• Plan to relocate to a lower or no income tax state.

Note: While Backdoor Roth IRAs can be beneficial to many investors, they aren’t for everyone. They come with their limitations and complications. There are precautions that need to be taken to reap the full benefits of any financial decision. Please consult and review your situation with a qualified professional prior to choosing to use this strategy.

Conclusion

If you have an interest in further discussing funding your retirement plans, please call us. This is an area where a highly informed financial advisor can help you make an educated and calculated decision. As with all tax sensitive decisions, you should always consult with your financial advisor and tax professional to help avoid tax ramifications.

As always, we are here to help and can look at your specific financial situation and chart the right path for you. We enjoy the opportunity to assist clients in addressing all financial matters.

No one expected the longest bull market in history to see its demise brought on by a virus. While U.S. equity markets were able to withstand a trade war with China, a presidential impeachment, the potential for a global recession and global uncertainty including Brexit and civil wars in the Middle East, the U.S. economy was ambushed by a silent and highly contagious virus.

The first three months of 2020 were filled with Covid-19 fears and economic responses. The world is experiencing a pandemic and a financial crisis that caused many investors to feel a level of anxiety that they have not had for over a decade. It’s almost impossible to remember that in Mid-February, equity markets were experiencing all-time, record highs. Now, we are in an unprecedented, event-driven bear market.

In the first quarter of 2020, more specifically, on March 12, the longest bull market in the history of the S&P 500 ended. This was the worst quarter for the Dow Jones Industrial Average (DJIA) since 1987 and its poorest first three-month start to the year ever.

The Dow Jones Industrial Average’s decline of 23.2% for the quarter was its biggest since the 25.3% drop seen during the fourth quarter of 1987. The S&P 500 posted a 20% decline. Prior to this waterfall downturn, the stock market seemed unstoppable, with both the 122-year-old DJIA and the S&P 500 quadrupling earlier this year from their March 2009 lows. Many investors who remained vigilant and held their positions during that time were generously rewarded. In just a few weeks, the stock market experienced several firsts in its history including:

• In less than three weeks, the S&P 500 fell from a 52-week high to a 52-week low.
• The Bloomberg Barclays U.S. Corporate Bond Index lost more than 7% in a week.
• The New York Stock Exchange (NYSE) experienced its worst set of down days where 90% or more of NYSE-traded stocks closed lower for the day.
• The S&P 500 hit the circuit breaker and triggered a trading halt four times.
• The Nasdaq Composite Index suffered its largest one-day percentage decline ever.
• The Dow Jones Industrial Average posted its biggest weekly gain since 1938.

An 11-year bull market has changed into one of the quickest bear markets of all-times. Not only is the world trying to stop the spread of a highly contagious virus, but it is also scrambling to fix the disruption of global supply chains and the decline of consumer demand.

Interest Rates Are Still in the Spotlight

After lowering the federal funds rate by a half-point to a range of 1.0% to 1.25% in between its regularly scheduled meetings, as a response to the risks the COVID-19 coronavirus outbreak was creating, the Federal Reserve cut its benchmark interest rate in mid-March by a full 1% to 0%-0.25%. When the Fed first started reducing interest rates, many experts noted that the central bank was “catching up” to where markets had headed. Now, it seems as if they are responding to both the economy and the fact that the 10-year Treasury had fallen to all-time lows.

The all-time low for the Fed Funds Rate is effectively zero. The Fed has only lowered their rate to a range of 0% to 0.25% twice: once during the financial crisis of 2008 and now in March of range of 0.75% to 1.0% in 2003. (Source: The Balance, 3/30/20)

CNBC reported on April 1st that the, “10-year Treasury yield falls to 0.6% as the coronavirus crisis deepens.” With interest rates at or near all-time lows, many investors cannot generate income or meet their long-term goals with a full portfolio of cash and bonds. (Source: CNBC, 4/1/20)

Oil Prices

Oil prices suffered an extremely rough stretch this quarter. As if things were not bad enough, the oil price war between Saudi Arabia and Russia, which emerged suddenly and dramatically on March 7, compounded the already ultra-bearish demand backdrop. The Saudi Arabia and Russia oil price war resulted in a massive price drop on March 8, 2020, when U.S. oil prices fell by 34% and crude oil fell by 26%. (Source: CNN.com; 3/8/2020)

The Coronavirus’ impact on oil consumption is unlike anything in modern history. Governments continue to impose flight restrictions and other travel bans, enforce lockdowns, and require non-essential businesses to close doors. Numerous school closures also mean many fewer buses and cars will be on the roads. As the quarter closed, there was pressure on the president to step in and assist in resolving the price war. Oil prices saw the worst month and quarter in oil price history down over 50%. With energy companies and oil still being a contributing factor to the overall economy, oil prices are a topic we are keeping a watchful eye on. (Source: Washington Post, 4/2/20)

The CARES Act

The government is trying to help businesses and prevent the threat of a recession through the $2.2 trillion-dollar Coronavirus Aid, Relief, and Economic Security (CARES) Act. This emergency relief package, the largest economic-relief package in U.S. history, included: Extensions of unemployment benefits, $150B for state and local governments, $500B in general corporate aid, $350B in small-business loans that will be facilitated by community banks, $100B for the healthcare system and Direct payments to individuals: Individuals can receive up to a maximum of $1,200 per person ($2,400 per couple) depending upon their income.

The estimates for the total monetary and fiscal output to manage this crisis is $4 trillion, according to Jurrien Timmer, Director of Global Macro for Fidelity Management and Research Company. So far there is a strong response from the U.S. Government, which will need time to see if it produces results. (Source: fidelity.com, 3/23/20)

A Brief Lesson in Some Market Terms

Oftentimes, we hear the wrong words used in the wrong context. For educational purposes, we feel it is important to clarify some stock market words and their definitions.

“Dip” –  a short-lived downturn from a sustained longer-term uptrend.

“Correction” –  a 10% drop in the market from recent highs. Historically corrections occur an average of about every eight to 12 months and last about 54 days. (Source:thebalance.com 3/9/20)

“Bear Market” – a long, sustained decline in the stock market. If the market declines 20% from the its recent high, this is considered the start of a bear market.

“Crash” –  a sudden and dramatic drop in stock prices, often on a single day or week. Crashes are rare, but typically happen after a long-term uptrend in the market.

Bear Market Basics

Bear Market’s Most Basic Principle: Bear markets are a part of the investing experience. Many people believe that a bull market means a steady growth in equities. This is not the case. During this most recent, long-standing bull market, there were 13 corrections and the market moved down intraday into bear market territory (down at least 20%) three times. (Source: www.fidelity.com)

We have now entered into a bear market territory (a close of 20% down) so it might be helpful to review some information about bear markets.

Bear markets can be classified into one of three categories: structural; cyclical; and event-driven.
Goldman Sachs analyzed bear markets back to 1835. They defined these three markets as follows:

1. Structural: bear markets created by imbalances and financial bubbles, very often followed by a price shock such as deflation. The markets have an average drop of 57%.

2. Cyclical: bear markets that are typically a function of the economic cycle, marked by rising interest rates, impending recessions and falls in profits. These markets have an average drop of 31%.

3. Event-driven: bear markets created by events such as war, an oil price shock, an emerging-market crisis, or like most recently, a sudden viral pandemic (Covid-19).

We are currently in an “event-driven” bear market. These are the bear markets that are hardest if not impossible to forecast or navigate. Covid-19 created a first of its kind bear market, one that was caused by a virus. We have had event-driven bear markets, but none were created by a viral pandemic. According to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer, “event-driven ” bear markets, on average, result in lower declines than the other two types, and historically have lasted shorter. This unusual downturn is one that offers no easy outcomes. (Source: marketwatch.com 3/11/20)

How should investors think about this downturn and what should they do?

Investors generally hope that equity markets will go up. The volatility and turbulence of this current economic and political environment has caused even some of the most seasoned investors to become skittish. In March, legendary investor Warren Buffett said that he hadn’t seen anything like the coronavirus pandemic. “If you stick around long enough, you’ll see everything in markets,” he told Yahoo Finance. “And it may have taken me to 89 years of age to throw this one into the experience.”

Since that statement, it’s become even more confusing as infections mount around the world and the stock market continues to spin out of control in both directions. Many investors are trying to compare their portfolio’s performance during this difficult period. So how did the Berkshire Hathaway leader perform?

“While Buffett is well known for weathering the worst market downturns and coming out stronger, the last several weeks have been just as painful on his portfolio as it has on the broader market,” Bespoke explained in a post noting that the average stocks in his top holdings on March 24th were down 37% from their February highs. Perhaps the most important thing to think about is that like everybody else, his portfolio obviously hasn’t been immune to all this volatility. (Source: MarketWatch.com, 3/27/20)

The chart in this report shares that the six biggest point declines and the six biggest point increases in the Dow Jones Industrial Average (DJIA) all came in the last five weeks of this quarter. On March 12th, the DJIA fell 2,352 points which was over 9%. Had you sold that day you missed the next day’s (March 13th) rise of 1,985, also a move of over 9%. This level of volatility is unprecedented and therefore even the savviest of investors needs to PROCEED WITH CAUTION!

Helpful Strategies for Investors

Revisit Your Personal Objectives – First and foremost, we continue to urge you to ask yourself four questions:

1. Have my financial timelines changed?
2. Have my financial goals changed?
3. Has my risk tolerance changed?
4. Are there any changes my advisor needs to know about my situation?

Think Long-Term – Investing involves uncertainty and therefore investors should consider using long time horizons.

Look into Rebalancing – Maintaining a properly designed and well-diversified portfolio is important. Now is a good time to take a look at your portfolio and consider any rebalancing that may need to be performed.

Suspend Distributions – If you are comfortable with suspending distributions and looking for a potentially better time to take them, please call us at we can see if this strategy works for your personal situation.

Consider Roth IRA Conversions – There are many reasons to consider Roth IRA conversions. For many retirement accounts with equities, account values are down. This can create opportunities, especially for those investors currently in the 12%, 22% and 24% tax brackets. Add in the new SECURE Act’s changes to inherited IRAs and it becomes even more prudent to consider the pros and cons of a Roth IRA conversion. Roth Conversions have some complicated rules and guidelines, therefore, as always, first discuss this option with us and your tax preparer to see if they are a good fit for your financial goals.

Think Rationally, Not Emotionally – One of Sir John Templeton’s “Rule’s for Investment Success” is, “Do not be fearful or negative too often.” Market turbulence should remind us that it is a good idea to re-evaluate instead of panic.

Tune Out Media Magnification and Seek the Help of a Professional – One of our primary goals is to make sure you are comfortable with your investments. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations.

We pride ourselves in offering:

• consistent and strong communication,
• a schedule of regular client meetings, and
• continuing education for every member of our team on the issues that affect our clients.

A skilled financial professional can help make your journey easier. We care about our clients and we are here for you. Our goal is to be prepared, not scared! If you feel we need to talk, please call. We are honored that you have chosen us to help with your financial needs.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC

Note: The views stated in this letter are not necessarily the opinion of LPL Financial, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

Diversification is used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Sources: Barron’s, marketwatch.com; washingtonpost.com; goldmansachs.com; politio.com; fidelity.com; cnn.com; forbes.com. Contents provided by the Academy of Preferred Financial Advisors, Inc.

The last few days of February created confusing and turbulent times for investors. The rough stock market fluctuations created a rollercoaster-type of ride that has attracted almost every media outlet. During this time period, the S&P 500 had its worst day since 2011, as it presented a historic streak of negative moves. Let’s briefly recap some key points from the last few months. After strong equity returns in 2019, equity markets moved up another 5% by mid-February to reach all-time highs. Then, with news that the spread of the Coronavirus outside of China was growing, equity assets started to sell off.

On Monday, February 24th, we saw the S&P 500 decline over 3%. On Tuesday, February 25th the S&P 500 shed another 3%. Consecutive down days of this magnitude are rare. Then after a mild down day on Wednesday, on Thursday February 28th, markets were again shaken with a -4.4% return for the S&P 500, making this now “correction” (a downward movement of 10% or more) even more notable and potentially historic given the rapidity of the sell-off. 

Investors should always be aware of market swings and movements, remembering that equity market pullbacks and corrections are a part of investing. While downward drops are typically unwelcome and unexpected, they are not unprecedented. Historically, a market correction, or a 10% decline, happens approximately once a year. A 5% pullback happens about 3 times a year, however in the last few years that has not been the case. The last major correction was in December of 2018 and 2019 was a year of limited and low volatility, so many investors were not ready for these large declines. Also, typically these pullbacks happen over a longer period than a few days. While this may not be the end of the equity markets fall, it might be helpful to put these media grabbing events into perspective.

In a dataset dating back to 1928, returns of -4% or worse for the S&P 500 have only occurred 146 times. Days where equity markets decline 4% or more are rare, and they tend to cluster in economic recessions.

When you add together the collective weak days investors experienced on Monday the 24th, Tuesday the 25th, and Thursday the 27th, you find that investors experienced a historic ride. The S&P 500 shed 10.7% over four trading sessions. While this was very uncomfortable and unpredictable, it was not unprecedented. Knowledge is helpful when analyzing your situation so let’s review some facts. There were six historical periods dating back to World War II that were worse than the four days we just experienced. They include:

• Investors have not had a four-day sell-off this bad since the financial crisis in 2008 (a total of over 17% drop in four days ending October 9th, 2008).

• Prior to that, investors had not experienced as alarming of a 4-day stretch since July 2002, when the announcement of accounting regularities at Worldcom spooked a market already grappling with the tech bubble deflation and post-9/11 uncertainty. (-11.96% in four days ending July 23, 2002).

• Continuing the list, in August of 1998, global assets were frightened by the prospect of a Russian debt default (a decline of -12.41% ending August 31, 1998).

• Prior to 1998, we experienced the historic 1987 market sell-off (a drop of -28.5% ending October 19th, 1987).

• Before 1987, there was the Kennedy Slide of 1962 (a drop of -10.97% ending May 28, 1962).

• Prior to that sell-off, you have to go back to May of 1940, which included a German blitzkrieg into France (a drop of -15.1% through May 14, 1940).

Any way you look at it, the “Coronavirus 2020 Decline” will be remembered as a historic market drawdown. (Source: SeekingAlpha 2/28/20)

Equity Markets and the Coronavirus

While the severity of the Coronavirus is still unknown, history shows that equity markets regained their strength quickly after other health crises occurred. For example, 6 months after the Avian Flu in June 2006, the S&P 500 was up 11.66% and after 12 months, was up 18.36%.

According to Seema Shah, chief strategist at Principal Global Investors, “Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons.” (Source: MarketWatch 2/24/20)

These three reasons are:
1.Social media-driven news cycle;
2.Interconnectedness of global supply chains;
3.Pricey stock market.

We cannot stress enough: don’t let the media cause you to make irrational or rash decisions. It is very hard to take all the information the media outlets push at its viewers with a grain of salt. With thousands of media outlets all thirsty for viewers, some outlets resort to scare and fear tactics to attract an audience.

KEY POINTS

• Volatility can be uncomfortable, but it is part of the investment experience.
• Beware of media magnification.
• Avoid making emotion-based decision.
• Focus on your personal goals and discuss changes with us before you make them!

In a special news conference held on February 26th with officials from the Centers for Disease Control and Prevention (CDC), President Trump shamed the media for igniting panic about the financial markets.

Volatility is a part of the investment experience. Remember, it can be difficult to make rational investment decisions when the markets are fluctuating. During these times, it is prudent to resist the temptation of watching news reports and obsessively watching your portfolio performance.

Too often emotion, not logic, can overshadow investing habits, so the first step in declaring mental independence is realizing how these influences, known as biases, affect us. Sometimes, the closer you put a short-term lens to your investments, the more likely you consider decisions that deviate from your long-term strategy. While it is wise to remain vigilant, a strong plan is to adhere to the long-term investment plan you have created.

In Addition to the Coronavirus…

10-year Treasury Yield: The 10-year Treasury yield hit an all-time record low on March 2nd , reaching down to under 1.10%. (CNBC 3/2/2020)

Interest Rates: As investors worry about the potential economic dangers of the Coronavirus, the Federal Reserve is telling financial markets they are paying attention. Fed Chairman Jerome Powell released a statement Friday, February 29th, promising to, “act as appropriate,” should the Coronavirus situation escalate. The Bank of Japan issued  its own statement Monday March 2nd saying that it too will, “closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.” (Source: CNBC 3/2/20)

Fed officials believe that monetary policy changes would not make a difference in the current scenario’s primary need of slowing the spread of the disease and opening global supply chains.

“No amount of rate cuts is going to be able to do that,” said Michael Reynolds, Investment Strategy Officer at Glenmede Trust. “What they can do is hasten the recovery after all this blows away with rate cuts. That is something that’s an option for sure. But the idea that they’re going to play offense on rate cuts to soften the blow on the Coronavirus may be a bit premature.” (cnbc.com)

Political Arena: With 2020 being an election year, this makes some investors cautious of potential changes in political parties, policy changes, including tax law changes, and financial environment uncertainty. While historically, only four of the last 23 election years saw the S&P 500 with a negative, as always, remember that past results do not guarantee future performance! (Source:thebalance.com 11/7/19)

What should an investor do in a volatile market?

First, make sure you know what not to do: and that is panic. In times of market volatility, investors tend to become unnerved and anxious. Most often, this is not the best mindset to make rational decisions.

No one knows for sure how far the Coronavirus will spread and when it will be contained. We also do not know when equity prices will stop retreating, but we do understand that equity investors need to incorporate patience into strategies. Equity markets can bring more downward movements and volatility could continue. When equity markets experience unsettling fluctuations, we suggest you ask yourself three questions:

1.Have my financial timelines changed?
2.Have my financial goals changed?
3.Has my risk tolerance changed?

If you can answer “YES” to any of these questions, we highly suggest that you discuss these changes with us. As an investor, you need a plan that includes risk awareness. One of our primary responsibilities as your financial advisor is to help you create a plan with risk awareness. We know that an integral part of this is to consistently keep in touch with you and monitor your situation.

If you have concerns, some questions to ask us include:

• Can we review my financial plan?
• Can we revisit my risk tolerance?
• Are my investments diversified?
• What are my fixed income investments?
• Has the recent volatility presented any good opportunities?

Note: The views stated in this letter are not necessarily the opinion of LPL Financial and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Sources: Wall Street Journal, Seekingalpha.com, CNBC, MarketWatch, Yahoofinance.com, TheBalance.com; Contents provided by the Academy of Preferred Financial Advisors, Inc. ©

Income tax is a large revenue source for the United States government. While tax rates have changed many times, since the 1860’s, the United States has used a “progressive” tax code. A progressive tax code means that people who make more money are taxed at a higher rate than those who make less money. Our progressive tax system works by placing earners through different brackets according to how much money they make. The dollar amounts define your tax brackets and there are differing tables depending on your filing status (single, married, etc.). This matters in determining your marginal tax rate.

Understanding Marginal Tax Rates

Determining your tax bracket is not as simple as just adding up your total income and checking a tax table. Taxpayers need to calculate their taxable income (which can be sometimes referred to as their “adjusted gross income”) and then adjust their income for any deductions, adjustments and exemptions they are allowed to find their final taxable amount.

Once you determine your final taxable income amount, it’s critical to know that not all of your income was taxed at the same rate. So, for example if you are married filing jointly, your first $19,400 is taxed at 10%. If these same tax filers have a final taxable income of $95,000, then these taxpayers are in a “marginal tax bracket” of 22%. The key thing to note is that in this example, the last dollar earned is taxed at that 22% tax rate.

2019 Tax Law Updates

For 2019, Form 1040 has been slightly redesigned. There is time to look into tax planning ideas for your 2020 taxes, but here are some things that 2019 tax filers should review. They include:

• Tax brackets have been slightly adjusted.
• The standard deductions have risen from 2018.
• There are still caps to state and local tax (SALT) deductions.
• There are new deduction rates for medical expenses.
• Capital gains will still impact your income.
• There is still a 3.8% Medicare Investment Tax.
• Charitable donations are still deductible.
• You might still be able to contribute to retirement plans (or take an RMD) if appropriate.

2019 Tax Tables and Tax Rates

There are still seven federal income tax brackets for 2019. The lowest of the seven tax rates is 10% and the top tax rate is still 37%. The income that falls into each is scheduled to be adjusted in 2020 for inflation. For 2019, use the chart in this report to see what bracket your final income falls into.

TAX TIP: If you are not sure how best to file, ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2019 Standard Deduction Amounts

Most taxpayers claim the standard deduction. For 2019, the standard deduction has slightly increased. The amounts are now $12,200 for single filers and $24,400 for those filing jointly ($18,350 for head of household filers). If you are filing as a married couple, an additional $1,300 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,650 can be made.

Increased Child Tax Credit

For 2019, the maximum child tax credit is $2,000 per qualifying child. Up to $1,400 of the Child Tax Credit is refundable; that is, it can reduce your tax bill to zero and you might be able to get a refund on anything left over. There is also a non-refundable credit of $500 for dependents other than children. The modified adjusted gross income threshold at which the credit begins to phase out is $200,000 and $400,000 if married filing jointly.

State and Local Tax (SALT) Deduction

2019 also continues the changes to state and local tax deductions that cap a taxpayer’s state and local tax (SALT) deduction at $10,000. This includes both state income and property taxes. This change affected a large number of taxpayers who live in states with high property taxes and those who pay larger state income tax bills.

Medical Expense Deduction

In late December 2019, legislation retroactively made the 7.5% threshold available to taxpayers in 2019 and 2020. The 10% threshold amount was postponed until 2021.

Investment Income

Long-term capital gains are taxed at more favorable rates compared to ordinary income. For qualified dividends, investors will continue to be taxed at 0, 15 or 20%.

One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce long-term capital gains. You do not have to wait 30 days before you buy back this investment—the 30-day rule only applies to losses, not gains.

Note: This non-taxable capital gain for federal income taxes might not apply to your state.

TAX TIP: Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for single filers with income from $200,000 to $434,550 and 23.8% for single filers with income above $434,550. It can raise the effective rate to 18.8% for married taxpayers filing jointly with income from $250,000 to $488,850 and to 23.8% for married taxpayers filing jointly with income above $488,850.

Calculating Capital Gains and Losses

With all of these different tax rates for different types of gains and losses in your marketable securities portfolio, it’s probably a good idea to familiarize yourself with some of the rules:

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used to offset net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
• Any remaining unused capital losses can be carried forward and used in the same manner as described above.

TAX TIP: Please remember to look at your 2018 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2019. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2019, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2019 is the seventh year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

A helpful strategy has been to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages

If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, plan for this tax when you calculate your estimated taxes.

If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help—they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Charitable Gifts and Donations

When preparing your list of charitable gifts, remember to review your checkbook register so you don’t leave any out.

Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count noncash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. Remember that you’ll have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.

You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2019, the IRS will let you deduct that travel at .14 cents per mile.

Child and Dependent Care Credit

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school daycare while working. Some parents overlook claiming the tax credit for childcare costs during the summer. This tax break can also apply to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp. So, If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35% of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.

Contribute to Retirement Accounts

If you haven’t already funded your retirement account for 2019, consider doing so by April 15, 2020. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2020, you can wait until then to put 2019 contributions into those accounts. To start tax-advantaged growth potential as quickly as possible, however, try not to delay in making contributions. If eligible, a deductible contribution will help you lower your tax bill for 2019 and your contributions can grow tax deferred.

To qualify for the full annual IRA deduction in 2019, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phase-out from $64,000 to $74,000 for singles and from $103,000 to $123,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible as long as your combined gross income does not exceed $193,000. For 2019, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2019 is $56,000.

Although contributing to a Roth IRA instead of a traditional IRA will not reduce your 2019 tax bill (Roth contributions are not deductible), it could be the better choice because all qualified withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2019) to a Roth IRA, you must earn $122,000 or less a year if you are single or $193,000 if you’re married and file a joint return.

If you have any questions on retirement contributions, please call us.

Roth IRA Conversions

A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and qualified withdrawals are tax-free in the future, a time when tax rates might be higher.

Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Required Minimum Distributions (RMD)

If you turned age 70½ during 2019, you still have until April 1, 2020, to take out your first RMD. This is a one-time opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31 of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out. Starting in 2020 the SECURE Act changed the starting RMD age to 72. If you have any questions on your Required Minimum Distributions please call us.

Other Overlooked Tax Items and Deductions

Reinvested Dividends – This isn’t a tax deduction, but itis an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will, in turn, reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

If you’re not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.

Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Charitable Gift Directly made from IRA – Individuals at least 70½ years of age can still exclude from gross income qualified charitable distributions (QCD) from IRAs of up to $100,000 per year. Please remember to double check on what counts as a qualified charity and distribution before using this tax strategy.

Click here to download a PDF of this report.

One of our main goals as holistic financial advisors is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component necessary to help our clients benefit from potential tax reduction strategies.

This report focuses on what individual taxpayers can potentially do to save money on their 2019 taxes. The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent, but the individual tax changes are mostly set to expire after the 2025 tax year. Unless indicated otherwise, TCJA provisions discussed here took effect in 2018 and are currently set to expire after 2025.

The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2019

For 2019 there are seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Under current laws this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2019

Last year ushered in many new tax laws and new tax forms stemming from the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients optimize their tax positions. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique, but it is wise for every taxpayer to begin their final year-end planning now!

Choosing the appropriate strategies will depend on your income as well as a number of other personal circumstances. As you read through this report you it could be helpful to note those strategies that you feel may apply to your situation, so you can discuss them with your tax preparer.

Some items to consider include:

— Evaluate the use of itemized deductions versus the standard deduction

For 2019, the standard deductions are $12,200 for singles and $24,400 for married filing jointly. This is up $200 and $400 respectively from 2018.

As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease many taxpayers bills in 2018 who typically claim this standard deduction. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take standard deductions. Depending on your results, you may even need to adjust your estimated quarterly tax payments or think about turning in a new Form W-4 to your employer.

The TCJA also eliminated or limited many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Additionally, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2% floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.

— Consider bunching charitable contributions or using a donor-advised fund

For many taxpayers, the doubling of the standard deduction and changes to key itemized deductions resulted in them not itemizing in 2018. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. (wsj.com 2/15/2019)

One way to still be able to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation.

— Review your home equity debt interest

Homeowners can deduct mortgage-related interest on up to $750,000 worth of qualified loans (married filing jointly) or $375,000 (single filers) on homes purchased after December 15, 2017.

The changes under the TCJA law apply to all tax years between 2018 and 2025. Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible, even if the payoff occurred prior to 2019.

— Revisit the use of qualified tuition plans

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying for college. Earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.  If you are paying tuition for children or grandchildren to attend elementary or secondary schools, it might be advantageous to set up or revisit a 529 plan. This is also a strategy that can reduce your estate. If you want to explore setting up a 529 plan, call us.

— Maximize your qualified business income deduction (if applicable)

One of the most talked about changes from the Tax Cuts and Jobs Act was the new qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful, because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2019

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2019 and start thinking about your strategy for 2020. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000, up from $18,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at an additional $6,000 ($24,500 total). As a reminder, these contributions must be made in 2019.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) is $6,000, up from $5,500. This is the first adjustment to IRA contribution limits since 2013. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2019 can be made all the way up to the April 15, 2020 filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $64,000 and $74,000 for 2019.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $103,000 to $123,000 for 2019.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2019 as the couple’s income reaches $193,000 and completely at $203,000 for 2019. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 – $203,000 for married couples filing jointly (up from $189,000 to $199,000 in 2018). For singles and heads of household, the income phase-out range is $122,000 – $137,000 (up from $120,000 to $135,000 in 2018).  For a married individual filing a separate return, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly in 2019, $48,000 for heads of household and $32,000 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any one-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on this, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Sell worthless investments. If you own an investment that you believe is worthless, ask your tax preparer if you can sell it to someone other than a related party for a minimal amount, say $1, to show that it is, in fact, worthless. The IRS often disallows a loss of 100% because they will usually argue that the investment has to have at least some value.

Always double-check brokerage firm reports. If you sold a security in 2019, the brokerage firm reports the basis on an IRS Form 1099-B in early 2020. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Zero Percent Tax on Long-term Capital Gains

You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2019. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

NOTE: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and is taxed at ordinary income tax rates.

Some Notable Tax Changes for 2019

Some itemized deductions are affected in 2019 under the new tax laws. They include:

The floor for deductible medical expenses is increased to 10%. The Tax Cuts and Jobs Act lowered the threshold for medical expense deductions to 7.5% of Adjusted Gross Income AGI from the prior threshold of 10%, however, this change only was made for the 2017 and 2018 tax years. As of October 2019, the threshold is set to increase to 10% again unless Congress acts to extend it. The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

No more Obamacare penalties, starting in 2019. While Congress have thus far been unsuccessful in repealing the Affordable Care Act, the Tax Cuts and Jobs Act did eliminate the individual insurance mandate — aka the “Obamacare penalty.” This is the penalty you pay for not having health insurance. This penalty was repealed starting in tax years 2019 and beyond.

Some Notable Tax Changes That Continue in 2019

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

Although existing mortgages are grandfathered in subject to the prior $1 million cap, interest expense on acquisition indebtedness for up to two homes is capped at $750,000 total for loans incurred after December 15, 2017 through 2025. Interest on home equity loans is not deductible after 2017 through 2025.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Miscellaneous itemized deductions disallowed after 2017 include:  tax preparation fees, investment expenses, and unreimbursed employee expenses. Individuals with significant unreimbursed employee expenses, including mileage, internet/phone charges, and education costs should consider setting up an excludable working condition fringe benefit arrangement or accountable plan from their employers.

Alimony deduction changes. Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse. These changes will profoundly affect the structure of divorce settlements.

Alternative Minimum Tax (AMT) Changes

The AMT exemption amount for 2019 is $71,700 for singles and $111,700 for married couples filing jointly. The 28% AMT rate applies to excess Alternative Minimum Taxable Income (AMTI) of $194,800 for all taxpayers ($97,400 for married couples filing separate returns).

The AMT calculation can be complicated and you should discuss your situation with your tax professional, but here are some basic facts. AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. For 2019, the exemption will start phasing out at $510,300 in AMTI for single filers and $1,020,600 for married taxpayers filing jointly.

Other Family and Education Planning Changes

Child and family credit. The Child Tax Credit is $2,000 per qualifying child, with $1,400 of this amount being refundable. The TCJA of 2018 also adds a $500 nonrefundable credit for qualifying dependents other than children. More importantly, the act increases the phaseout for the child tax credit to $400,000 from $110,000 for married taxpayers filing a joint return and to $200,000 from $75,000 for other taxpayers.

Education benefits.  The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit remain the same in 2019.

ABLE accounts. Contributions to ABLE accounts are now eligible for the retirement saver’s credit and a child’s 529 account can be rolled over to an ABLE account for the child.

Charitable Giving

This is a great time of year to clean out your garage and give your items to charity. Please remember that you can only write off these donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill at https://goodwillnne.org/donate/donation-value-guide/

Send cash donations to your favorite charity by December 31, 2019 and be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a qualified charitable distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, satisfying all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by your RMD deadline (i.e. December 31, 2019).

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2019. These “annual exclusion gifts” do not reduce your $11,400,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly-held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 at www.irs.gov.

Contribute to a Qualified Tuition Plan (529 Plan) on behalf of a beneficiary. The effective annual contribution limit to 529 Plans for 2019 is $15,000. Transfers to 529 Plans count as annual exclusion gifts. Withdrawals (including earnings) used for qualified education expenses (tuition, fees, books and other related expenses) are income tax free. The tax law even allows you to give the equivalent of five years’ worth of contributions up front ($15,000 x 5 = $75,000) with no gift tax consequences. Earnings on non-qualifying distributions are subject to income tax and a 10% penalty. Overall contribution limits vary by state. Many states also provide contribution incentives such as tax deductions, tax credits or matching grants. If you’d like to learn more about what your state’s parameters are for 529 plans, please call us and we can assist you.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($15,000 in 2019) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

RMDs for those over 70½. One thing to watch closely by year-end is the RMD requirement. Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70½. While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year. If you have questions about your RMD, please call us.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes for 2019 is $11.4 million, up from $11.18 million in 2018 ($22.8 million for couples), and the income tax basis step up/down to fair market value at death continues. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, the exemption amounts will revert in 2026 to 2017 levels (although the exemption amount has never decreased before), claiming the portable exemption will remain an important discussion topic for decedents with more than $3 million in assets.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. Also, there are some pending legislative proposals like the SECURE ACT which could change your tax planning direction. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Note: The views stated in this letter are not necessarily the opinion of LPL Financial and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2019.

During volatile times, many investors get agitated and begin to question their fundamental investment decisions and choices. This is especially true for those investors who monitor their portfolios daily and can be tempted to pull out of the market and wait on the sidelines until it seems safe to dive back in. One thing that can be helpful is to understand that equity market volatility is part of the investment experience and is therefore inevitable. Equity markets can always move up and down, especially over the short-term. Some suggest that the only certainties in life are death, taxes and market volatility.

Trying to time the market can be extremely difficult. One solution is to always understand your personal situation. Try to plan for your equity investments to maintain a long-term horizon and ignore the short-term fluctuations. To help make your investment decisions less emotional and more focused it is helpful to understand volatility. If the daily swings in the stock market seem too chaotic, remember these movements are near impossible to fully predict. For many investors there is no reason to even subject themselves to daily market headlines. If you have a long-term investment horizon for your equity holdings of at least five years, chances are the current volatility will pass – possibly in a couple of weeks, months or in at least a couple of years.

Try to keep things in perspective. Market pullbacks (defined typically as a drop between 5 and 10%), corrections (defined as 10 to 20%) and even bear markets (defined as 20% or more) are a normal part of the stock market cycle. According to Guggenheim, since 1945, the S&P 500 has declined between 5% and 10% 78 different times. The average time it took to recover to its previous highs was only about one month.
(Source: US News and Money Report 6/7/2018)

Volatility and risk are not the same thing. When a stock is volatile, it means that it tends to make big moves (up or down). When a stock is risky, it means that it can lose money (go down). In financial terms, risk is the potential permanent loss of money whereas volatility is how rapidly an investment tends to change in price. Volatility does not just imply risk of loss. Volatility simply refers to the price action. Some investments may be more volatile than others. Equity investments as a category are much more volatile than a bank deposit, but that does not mean an investor should avoid investments in equities. Just because an investment is more “volatile” does not necessarily mean it is “riskier” in the long term. Investors should always discuss with their financial advisors the potential of short-term volatility affecting the daily value of their investments and plan their investments accordingly.

Short-term movements of the market are unpredictable and do not abide by any average.

Equity markets are never going to produce straight line returns for investors. For example, in 2017, the stock market had an unusual year in which it did not even deliver a pullback of 5%. Meanwhile, 2018 brought investors the steepest correction in a decade during the fourth quarter and that year included a greater than 10% decline in the first quarter. 

At any time, the equity markets could see a retreat of 10% or more which is referred to as a market correction. Here are four facts that can help investors understand market corrections.

1. Corrections are a part of the investing experience.

Since 1950, the S&P 500 has undergone 37 separate stock market corrections of at least 10%, not including rounding (i.e., declines of 9.5% to 9.9%). Considering that there have been over 69 years since the beginning of 1950, this works out to a correction, on average, every 1.87 years. (Source: The Motley Fool 5/2019)

2. The average length of those corrections was about 6 months.

According to data from stock market analytics firm Yardeni Research, the S&P 500 has spent 7,135 calendar days in correction since the beginning of 1950. Since then, there have been 37 corrections (of at least 10%). This works out to an average resolution time of 192 days, or slightly more than six months. Of these 37 drops in the market, 23 of them have resolved in 104 or fewer days, with only seven lasting longer than 288 days. 11 of the 14 instances that lasted longer than 104 days occurred between 1950 and 1984. (Source: The Motley Fool 5/2019)

3. “Rally” days outnumber correction days 2.55-to-1 since 1950.

Since the beginning of 1950 until May 13, 2019, there have been a total of 25,335 calendar days and over 69 years of data. During this time span, the S&P 500 has spent 7,135 of those calendar days tumbling from a peak to a trough. This means that for the other 18,200 calendar days, the S&P 500 has spent its time rallying from these correction lows. This ratio of upward momentum (18,200) to correction (7,135) is a healthy 2.55-to-1. (Source: The Motley Fool 5/2019)

4. Big up days occur within two weeks of big down days 60% of the time.

J.P. Morgan Asset Management releases an annual report titled, “Staying Invested During Volatile Markets.” This report looks at the S&P 500 over the trailing 20-year period and calculates what an investor would have made had they stayed invested, rather than trying to time the market by jumping in and out when they saw the first signs of trouble. Oftentimes, missing the S&P 500’s 10 best days means losing more than half of your would-be 20-year returns, missing around 30 of the best single-session gains, resulting in a loss over the 20-year period. (Source: The Motley Fool 5/2019)

An interesting observation in this annual report is the timing of when these worst days and best days occur. Although it has varied slightly from report to report, since the trailing 20-year dates being analyzed are changing, roughly 60% of the S&P 500’s top single-session gains occur within two weeks of its 10 largest single-session losses. This means that selling equity positions during big down days may cause you to miss out on the market’s biggest single-day rallies, which are impossible to time.

Beware of Media Magnification

One of the biggest challenges investors face is how to tune out the magnification of financial issues by the media.  With thousands of media outlets all thirsty for viewers, some outlets resort to scare and fear tactics to attract an audience. Know that volatility is a part of the investment experience, however, it can still become difficult to make rational investment decisions when the markets are fluctuating. During these times, it is prudent to resist the temptation of watching news reports and obsessively watching your portfolio performance. Adhering to a long-term investment plan often requires taking the news with a grain of salt and putting spur-of-the-moment advice of others on the back burner.

Too often emotion, not logic, can overshadow investing habits, so the first step in declaring this mental independence is realizing how these influences, known as biases, affect us. Sometimes, the closer you put a short-term lens to your investments, the more likely you consider decisions that deviate from your long-term strategy.

What should an investor do in a volatile market?

In times of crisis, many people tend to overreact and sometimes do not make the best decisions. During volatile markets, it might be best to revisit your plan. Remember panic is not a plan.

When equity markets experience unnerving fluctuations, we suggest you ask yourself three questions:

1.Have my financial timelines changed?
2.Have my financial goals changed?
3.Has my risk tolerance changed?

If you answered “YES” to any of these questions, then it is wise to discuss these changes with us. An investor needs to be prepared to build a plan that includes risk awareness. One of our primary responsibilities as your financial advisor is to consistently keep in touch with you and monitor your situation. If you have concerns, some questions to ask us include:

• Can we review my financial plan?
• Can we revisit my risk tolerance?
• Are my investments diversified?
• What are my fixed income investments?
• Has the volatility presented any good opportunities?

While equities have risen, the continuing backdrop of a weakening economy, trade war fears and interest rate concerns always offer the opportunity to recheck your plan. Today’s traditional fixed rates might not help many investors to achieve their desired goals, so most investors may still need to include a strong mix of equities. Markets can continue to rise but they also could head lower. At the end of the day, investors should always put their primary focus on their own personal goals and objectives. If anything has changed for you please let us know.

Let’s focus on YOUR personal goals and strategy.

Our primary objective remains to continually understand our client’s goals and to match those goals with the best possible solutions.

Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance please call our office or discuss this at our next scheduled meeting.

We pride ourselves in offering:

• consistent and strong communication
• a schedule of regular client meetings, and
• continuing education for every member of our team on the issues that affect our clients.

A skilled financial advisor can help make your journey easier. Our goal is to understand each of our client’s needs and then try to create a plan to address those needs. Should you need to discuss your investments, please call our office.

The House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on May 23. The next step is to pass through the Senate and be signed by the President. With strong bipartisan support and the Senate already considering changes for retirement plans, industry expert Bob Keebler, CPA, MST of Keebler & Associates agrees with many reporters who are sharing that this is likely to happen. The act’s goal is to make it easier for small businesses to provide a retirement plan and increase the number of Americans with access to a plan.

Some of the provisions of the SECURE Act that could help Americans better save for retirement include:

• Significantly increasing the tax credit for new company-wide retirement plans from the current cap of $500 to $5,000
• Allowing small employers that implement an automatic enrollment feature in their retirement plan design to become eligible for an additional $500 credit
• Allowing two or more unrelated employers to join a pooled employer plan, creating an economy of scale that lowers both employer and plan participant cost.

While making retirement plans more available was the driving force behind the SECURE Act, hidden in this bill are some significant changes that all retirement savers should know for planning purposes. Here are some items that are currently part of this bill.

Increasing the RMD age from 70½ to 72

This new legislation calls for an Increase in Age for Required Beginning Date for Mandatory Distributions. Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70½. The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The age 70½ was first applied for retirement plans in the early 1960s and has never been adjusted to consider increases in today’s life expectancy. The bill increases the required minimum distribution age from 70½ to 72.

Allowing someone over 70 with earned income to still contribute to an IRA

One key change that the SECURE Act calls for is a Repeal of Maximum Age for Traditional IRA Contributions. Specifically, this legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. As Americans live longer, an increasing number continue employment beyond traditional retirement age and this allows Americans with earned income to keep contributing to retirement plans after age 70.

A new provision in the SECURE Act could remove most non-spousal beneficiary’s ability to maximize tax-savings through a strategy known as the “Stretch IRA.” The Stretch IRA allows younger beneficiaries like children or grandchildren to take required minimum distributions from the inherited account based on their own much longer life expectancy. This new bill would force a distribution of the account’s value within 10 years of the original owner’s death.

Proactive Tax Planning

Keebler is suggesting that IRA owners talk with their financial professional about proactive tax planning. He feels that it will help tax deferred IRA holders to examine the values of alternative strategies. He encourages these IRA owners to consider proactively planning to minimize taxes when passing on the account to a non-spouse heir, especially if the bill eventually becomes law.

Keebler shares that, “Charitable remainder trusts allow investors to leave assets to a charitable organization and to a beneficiary. In that scenario, your beneficiary would collect a stream of income from the assets for a specified time span. At the end of that period, the charity collects whatever is left.”

Some Reasons Why you might convert a traditional IRA to a Roth IRA

For the right client, Keebler likes the benefits of a Roth conversion. “A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA. This is a strategy we think about when the IRA owner is in a lower bracket than their beneficiary”.

Some reasons why you might convert a traditional IRA to a Roth IRA

Enjoy tax-free withdrawals in retirement. When taking withdrawals from a traditional IRA, you’d have to pay taxes on the money your investments earned—and on any contributions you originally deducted on your taxes. With a Roth IRA, as long as you meet certain requirements, all of your withdrawals are tax-free.

Watch your money grow tax-free for longer. Traditional IRAs force you to take required minimum distributions (RMDs) every year after you reach the RMD required age, regardless of whether you actually need the money. ROTH IRA’s have no RMD requirement, so your money can stay in the account and keep growing tax-free.

Leave a tax-free inheritance to your heirs. The non-spouses who eventually inherit your Roth IRA will have to eventually take the money out of a tax-free growth situation (if the SECURE Act passes, this could be within 10 years of your passing) but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.

Deciding whether to convert to a Roth IRA hinges on a variety of issues including what your tax rate is now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate. Also remember, the conversion will be permanent. Once you convert to a ROTH IRA you can’t revert the money back to a traditional IRA.

Some considerations before deciding include:

• Will you need the money in the first five years? ROTH IRA conversions have penalties if used in the first five years.
• Will you end up in a higher or lower bracket in the future?
• Where will you take the money from to pay the taxes?

This is where a financial professional can offer some help suggestions and strategies. We enjoy talking with clients about the pros and cons of both partial or full ROTH conversions.

Qualified Charitable Distributions (QCDs)

While they are not new to this law, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCD) are a proactive strategy for tax planning for anyone taking a Required Minimum Distribution (RMD). A QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity. It is only available to IRAs and individuals who have reached RMD age (Currently 70½ but may change to 72). Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of seeing if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while saving money on taxes both today and into the future.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you don’t let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

Once again, this is a specific area where a professional can offer some help, suggestions and strategies. We enjoy talking with clients about looking into QCDs for anyone over the age of 70.

Final Thoughts on Proactive Retirement Planning

Over your life you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. You may also have Roth accounts that compound without tax consequences. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other more complex part is withdrawing those assets while making use of the most available tax advantages. The goal is to try to proactively plan the withdrawals from retirement accounts to minimize your tax liability. 

The Act would provide some slight flexibility on the timing of some of your RMD strategies since the proposed RMD age will be lengthened to age 72. This could provide another 18 months of time before a mandatory distribution is required.

If the SECURE Act becomes law, in whatever version it becomes, one of our primary goals is to review it for opportunities and then share our observations with clients. We want to always try to provide proactive tax planning ideas when possible.

Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. Our primary objective is to take the emotions out of decisions for our clients. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Rebalancing your portfolio can be a good way to help keep your investment strategy on track towards meeting your goals. Doing it on a consistent basis can help maintain the soundness of your portfolio during market fluctuations, interest rates adjustments and life situation changes.

For the early part of 2019, equity markets headed higher. This upward movement came following a sharp decline to end 2018. Volatile markets remind us why investors should always consider adjusting or rebalancing their holdings. For example, you can move money from stocks into other asset classes, such as bond and money market funds. Another reason to consider rebalancing is to invest more in underrepresented asset classes until you achieve the overall allocations you want. With the most recent market movements, now may be a great time to conduct a full review of your portfolio.

What Is Rebalancing?

The term “rebalance” makes investing sound as simple as having your tires rotated or your car’s alignment checked. The basic concept behind this exercise is mostly straightforward.

According to Investopedia.com, rebalancing is defined as the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an individual’s investment strategy or tolerance for risk has changed, he or she can use rebalancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset allocation.

Rebalancing your investment portfolio is a strategy that makes sense to use at regular intervals to ensure your investments are closely aligned with your long-term financial plan. This generally means setting up periodic reviews of your portfolio’s mix of investments. After a market rise, many investors lighten the upside (and downside) potential of equities with hopefully lower volatile returns of fixed income. While rebalancing does not assure superior performance, it helps keep portfolios updated on targeted asset allocations.

Traditional Rebalancing: Two Basic Actions

Traditional rebalancing usually has two simple actions.

Action One: When you design your investment plan, you decide on your ideal mix of equity and income allocations. You start by reviewing your personal situation which includes your long-term goals and risk tolerance. You then create a mix of investments that can best accommodate your risk tolerance and timelines.

Action Two: As your investment portfolio’s value changes, you need to periodically review your holdings to see how your personal mix of investments has moved with market changes. Then, consider adjusting your holdings to reflect your particular situation. For many investors, an investment review session provides the ideal opportunity to reexamine your goals, age and risk appropriateness

When you complete a portfolio rebalance, your goal should be to sell what has increased and could potentially be high and buy what has not reached a greater value and is possibly low. Traditional rebalancing is a strategy that attempts to hold investors to a disciplined strategy.

In keeping a balanced portfolio, bonds or interest rate sensitive securities have nearly always been considered a natural hedge to equities. Traditionally, bonds have usually gained or been more stable in value when stocks went down. This can be helpful if equity markets take a steep decline. Rebalancing is used to provide a continuous readjustment and it can keep people from letting emotions affect investments.

A traditional rule of thumb for investors has been “100 minus your age.” This formula was a way of calculating roughly how much equity you should have. Applying that math, at age 40, your equity should be 60 percent and the rest should be fixed income. At 60, those numbers are reversed, with 60 percent in fixed income and 40 percent in stocks. When you have a mix of stocks and bonds in your portfolio, when stocks generate a higher return, they will become a larger percentage of your holdings. Conversely, when bonds do better than stocks, your portfolio balance will shift toward bonds. The specific allocation you choose should depend on your individual risk tolerance and investment goals.

In March of 2019, the Federal Reserve said it was pausing their raising of short-term interest rates. Trading Economics reported that, “Fed officials do not expect to make any changes to interest rate policy this year amid concerns about ongoing trade talks”. In the minutes of their March meeting, the Fed cited Brexit negotiations and the possibility of a greater than expected economic slowdown in Europe and China as contributors to this stance. Policymakers also noted that “their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments.” 
Source: TradingEconomics.com

On a historical basis, interest rates are still low. For fixed income vehicles, when interest rates rise, bond prices fall. Based on that scenario, rebalancing portfolios, which is typically a healthy practice, is now also an exercise in risk management and loss prevention.

The Consequences of Imbalance

A popular belief among many investors is that if an investment has performed well over the last year, it should perform well over the next year. Unfortunately, past performance is not always an indication of future performance. This is a fact many investments disclose, but still many investors remain heavily invested in last year’s “winning” portfolios and may be underweighted in last year’s “losing” positions. Remember, equities are historically more volatile than fixed-income securities, so the source of last year’s large gains may translate into losses over the next year.

Normal rebalancing rules would suggest that with the large gain in stocks recently, investors should lighten up on equities and switch to fixed income investments to restore that balance. Due to low interest rates, a number of investing allocation experts are currently questioning the strategy of adding additional fixed income to portfolios.

So, what is another action you could you consider?

An Extra Action for Rebalancing

Action Three: When you design your investment plan, you decide your ideal amounts for fixed income. As we stated earlier interest rates are still historically low. It can be near impossible to know if this will remain true in the next few years. Low interest rates can generate “interest rate risk.” As defined by Investopedia.com, “Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.”

Due to increased interest rate risks, some investment professionals have looked elsewhere for income when appropriate. (i.e. the income-producing side of equities, or preferred shares). Prime rate money market funds or “laddering” with a series of short-term bonds provide other ways to address this problem. Low-duration debt reaches maturity in a short time so the fluctuation in price is not as great as long-term debt during a period of rising rates. While one- to five-year securities pay little in yield, at least investors may recover some or all of their invested capital when the security matures, unless they overpaid for the bonds in the secondary market. Longer term bonds may produce higher yields but are more vulnerable when rate changes or market fluctuations occur.

Recent market volatility has reminded investors that even if you feel equities are a good long-term investment, equities could possibly see a correction on the horizon. Short-term fixed income instruments may have low yields but could be less susceptible to volatility.

Rebalancing Focuses on the Long Term

High level financial strategists like Charles Ellis, Former Chairman of the Yale Endowment, who guided Yale’s massive endowment with a rebalancing strategy based on diversified investments that provided far above-average returns, advise high-income investors to take pains to make sure they rebalance to suit clients’ needs. Ellis says personalized advice and individual goal-setting are key components of successful rebalancing strategy.

The long-term strategy behind a disciplined approach is to stick with asset allocations that you review on a periodic basis.

Final Thoughts on Rebalancing Your Portfolio 

Your primary goal as an investor should be the overall success of your portfolio.

Changes in your lifestyle may warrant a change to your asset-allocation strategy. Whatever your preference, this guideline provides basic actions that can help you in rebalancing your portfolio:

1. Record – If you have recently decided on an asset-allocation strategy that is best for you, then after you purchase the appropriate securities in each asset class, keep a record of the total weightings you are attempting to hold in each asset class. These numbers will provide you with historical data of your portfolio.

2. Compare – On a chosen future date, review the current value of your portfolio and of each asset class. Calculate the weightings of each holding in your portfolio by dividing the current value of each asset class by the total current portfolio value. Compare this figure to the original weightings. Are there any significant changes?

3. Adjust – If you find that changes in your asset class weightings have distorted the portfolio’s exposure to risk, take the current total value of your portfolio and multiply it by each of the (percentage) weightings originally assigned to each asset class. The figures you calculate will be the amounts that should be invested in each asset class in order to maintain your original asset allocation. You may want to sell positions from asset classes whose weights are too high and purchase additional investments in asset classes whose weights have declined. Before selling assets to rebalance your portfolio, consider taking a moment to consider the tax implications of readjusting your portfolio. If you are adding new money to your portfolio, sometimes it might be more beneficial to simply not contribute any new funds to the asset class that is overweighed while continuing to contribute to other asset classes that are underweighted. Your portfolio might rebalance over time without you incurring capital gains taxes.

Conclusion

Rebalancing your portfolio can help you maintain an asset-allocation strategy and allow the implementation of any changes you may want to make to your investing style. The optimal frequency of portfolio rebalancing depends on your transaction costs, personal preferences and tax considerations, including which account you are rebalancing and whether your capital gains or losses will be taxed at a short-term versus long-term rate. This is where a qualified advisor can provide help.

The primary goal of rebalancing is to focus on minimizing an investor’s risk by staying within targeted allocations. It is not a pursuit of maximizing your investment returns.

How often and how much of your portfolio you need to rebalance is where a qualified financial advisor can add value. Simple rebalancing suggests that your entire portfolio is performing well, and sometimes that might not be the case. Essentially, rebalancing tries to help you stick to your investing plan regardless of what the market does.

If you would like to discuss rebalancing your portfolio, please call us. Our goal is to understand our clients’ needs and to monitor their portfolios. Our primary objective is to take the emotions out of investing for our clients. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

So, I recently lost my driver’s license which of course required me to get a new one. I’ve heard these rumors and whispers that we all need to get a “REAL ID” prior to a deadline in 2020, so this seemed as good a time as any to knock that off the list.

What is the REAL ID Act? Per the CA department of motor vehicles, “Passed by Congress in 2005, the REAL ID Act enacted the 9/11 Commission’s recommendation that the federal government ‘Set standards for the issuance of sources of identification, such as driver’s licenses.’ The Act established minimum security standards for state-issued driver’s licenses and identification cards and prohibits federal agencies from accepting for official purposes licenses and identification cards from states that do not meet these standards. States have made considerable progress in meeting this key recommendation of the 9/11 Commission and every state has a more secure driver’s license today than before the passage of the Act.”

Do you need a REAL ID? Per the CA DMV site, if you travel by airplane or visit federal facilities then you need a REAL ID if you do not have a valid passport, military ID or other federally approved document. The website goes on to say that starting October 1, 2020, if you do not have this REAL ID then you will not be able to board an airplane or enter a secure federal facility. You may also require showing further evidence of legal presence to purchase a firearm. For more information, you’ll want to visit REALID.dmv.ca.gov

If you decide you need one or just want to knock this out, here are some tips from my experience:

• You are required to go to the DMV to get this ID.
• I checked multiple locations and appointments were all at least a couple months out.
• You will need two documents each to verify your Social Security Number and your Address.
• CA DMV provides this checklist: https://www.dmv.ca.gov/portal/dmv/detail/realid/checklist USE IT!!
• You will need to have a passport or birth certificate (or 6 other items listed on checklist)
• There will be 6 other items for the second verification. I used my W2 which wound up knocking off two birds with one stone. This document verified my Social Security number and my address.
• Third document I used was a copy of my mortgage statement. The checklist has a large list of alternate items you can utilize such as lease agreement, utility bills, medical docs, etc.
• Be sure to have all of these docs handy when you go to the DMV and also make sure the address on your documents are indeed your home address (and not a PO Box, office)
• Be sure to fill the application online in advance of the meeting and print out the confirmation number. The application can be found at: https://www.dmv.ca.gov/portal/dmv/detail/forms/dl/dl44
• You cannot pay with a credit card. Only cash, check or ATM/debit card are accepted. The fee was $28 when I signed up.
• Are you in the OC? Avoid Santa Ana! Parking is very difficult and the lines are long, even with an appointment. I was scheduled for 3pm, arrived at 2:45. Found parking at 3:05pm, waited in line, and was seated at 3:35pm. Once I got to my actual appointment it was smooth sailing.
• Where should you go? I’ve had good luck at the Stanton DMV in the past, but it never hurts to ask around. Long and the short of it, don’t let October 2020 sneak up on you, especially if you can’t locate your birth certificate or a passport. It’s busy now, just imagine how it will be when the deadline comes!

Remember failing to plan is a plan to fail. Get on it! 🙂

Daniel S. Romero, CFP^®

New York, NY — February 28, 2019 – Daniel Romero of Romero & Levin Wealth Management, Inc. was recently ranked No. 48 in California in the annual Best-In-State Wealth Advisors list published by Forbes.

According to Forbes, the annual list highlights over 2,000 of the nation’s top-performing advisors, nominated by their firms and then evaluated based on a qualitative algorithm and quantitative criteria administered by SHOOK Research. The criteria includes interviews, industry experience, community involvement, revenue trends and client retention*.

“I congratulate Dan on behalf of LPL,” said Andy Kalbaugh, LPL managing director and divisional president, National Sales and Consulting. “This recognition is a reflection of his commitment to providing objective financial advice that is uniquely geared toward his clients’ needs. His success is a great service to the financial advice industry and the value of independent advice. LPL is proud to support Dan and we thank him for the work he does to enrich the financial lives of his clients.”

Daniel Romero, CFP^® is based in Orange County, CA and provides a full range of financial services, including retirement and financial planning, individual money management, individual stocks and bonds, mutual funds, annuities and more.

Romero is an LPL Financial advisor. LPL is the nation’s largest independent broker-dealer** and a leader in the retail financial advice market, providing resources, tools and technology that support advisors in their work to enrich their clients’ financial lives.

About LPL Financial

LPL Financial is a leader in the retail financial advice market and the nation’s largest independent broker-dealer**. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow thriving practices. LPL enables them to provide objective guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. LPL.com

*Received in 2018 and 2019, The Forbes Best-In-State Wealth Advisor ranking, developed by SHOOK Research, is based on in-person and telephone due diligence meetings and a ranking algorithm that includes: client retention, industry experience, review of compliance records, firm nominations; and quantitative criteria, including: assets under management and revenue generated for their firms. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes nor SHOOK Research receives a fee in exchange for rankings.

LPL Financial, Forbes magazine and SHOOK Research are all separate entities.

**Based on total revenues, Financial Planning magazine, June 1996-2018

The financial representatives of Romero & Levin Wealth Management are registered with and securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.