It’s the season of change! We have officially welcomed Fall and completed our merger with Charles Schwab. My team appreciates your patience as we continue to make sure everything is in good order.

You are now able to log in and view your accounts through Schwab Alliance. If you have not already set up your credentials, I encourage you to do so. Visit schwaballiance.com, select New User, and then follow the prompts.

Investment Update

Since the last quarter, our stance on your investments has remained essentially the same: defensive.  After posting a strong rally in the first half, equity markets stalled in the summer and have fallen in September.  High valuations, bubbly technical factors, and questionable earnings prospects in a slowing economy hurt stocks. Higher interest rates and risk of rising inflation also provide headwinds.  Your investments are positioned in a large chunk of T-Bills (minimal credit and low interest rate risk), liquid alternatives (equity long/short, merger arb) with smaller amounts of commodities and equities (mainly US, small emerging market).

Not All Coupons Are Created Equal

A major change over the last year has been an increase in interest rates offered on different investments.  Our newsletter from a year ago highlighted emerging opportunities in select high coupon, low credit risk fixed income that we had not seen in previous years.  Since then, yields on corporate bonds, preferred stock, bank CDs, and annuities have also risen.

The question remains: does all that glitters equate to gold?  We have written an extensive guide that explains why all that glitters is not gold.

We would caution investors not to chase investments simply because they advertise a high yield.  Credit risk (“Will they actually pay you back?  Are they paying you a competitive rate relative to similar borrowers?”) and interest rate risk (“How will this investment look if markets raise/lower overall rates?” are key factors to consider.

Liquidity is another factor.  If you need your principal sooner, how long would it take for you to get it out?

Each investment has specific risks.  Bank deposits insure up to $250,000 in FDIC insurance per depositor.  But what if you have more money to invest?  CDs penalize you on interest earned for early withdrawal before maturity.

Annuities advertise the opportunity to lock in rates for a longer time.  Yet, they come with high costs and limited liquidity (surrender charges, minimum withdrawals) over many years.  What if you need your money sooner?

T-Bills have minimal credit and interest rate risk.  The main risk is if the Fed were to begin cutting interest rates; yields then might fall.

Preferred stocks offer high yields, but they face price risks depending on what both stock and bond markets do.  Additionally, if the issuing company faced bankruptcy risk, bondholders would get paid before preferred share investors.

The Myth of Compound Market Returns and the Reality of Why Timing Matters

When the stock market is doing well, you are likely to hear about “compound market returns.” This concept is often used to convince regular investors to put their money into Wall Street’s hands. But what exactly is it, and is it as great as it sounds?

The idea of compound market returns is based on the belief that the stock market always goes up, making it a good time to invest no matter when. You might have seen charts that suggest if you had invested 120 years ago, you would have earned a consistent 10% annual return (8% after inflation).

However, the problem with this rosy picture is that most people don’t have 123 years to invest. We need to focus on the time we actually have.

For most of us, retirement is not so far away. Many people I know say they have at most around 15 years. This is quite different from the 30 or 40 years often suggested by financial advisors.

Many people don’t start saving seriously for retirement until their mid-40s. By that time, they’d graduated, found a job, gotten married, had kids, and sent them off to college. So, they only have about 20 to 25 productive working years before retirement.

Another factor is Stock market valuations, which go through cycles of highs and lows.  When valuations were high in the past, the market didn’t perform well until those high valuations came back down.

The key point here is that when you start investing is critical to your financial future.

Now, let’s address the second myth: “Compound Market Returns.” Albert Einstein famously said, “Compound interest is the eighth wonder of the world.” But he was talking about interest, not stock market returns.

Popular sources have used this quote to encourage people to keep putting money into the stock market consistently, assuming an 8% annual return. They claim compounding will make your money grow.

However, there’s a big difference between actual returns from the stock market and an average or compound market return. Stock market returns are unpredictable and can vary widely from year to year.

In reality, compound market returns are a myth. Market downturns can have a severe impact on your investments, especially if they happen when you’re close to retirement. You might be able to recover lost money over time, but you can never recover lost time.

With current high valuations and interest rates, there’s a real risk of another market downturn. Investors need to be realistic about their future returns and the time it takes to reach their financial goals.

Beware of Smishing: A Sneaky Cyber Threat

Smishing, a blend of “SMS” and “phishing,” is a real cybersecurity risk. It can happen through text messages, WhatsApp, or other social media chats. Attackers send mass messages with a sense of urgency, aiming to trick recipients into clicking malicious links. Once lured in, victims may end up on fake websites where their personal information is stolen. Be aware of bogus messages posing as trusted banks or financial institutions

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 4Q23 appeared first on AWM.

So, what’s the good, the bad and the ugly of the SECURE Act?

Let’s find out!

PROS:

1.      Now you can contribute to your IRA beyond age 70 ½ 

The new law eliminates age restrictions for traditional IRA contributions as long as you have earned income.

2.      Required minimum distributions (RMD’s) moved up to age 72

IRA owners catch a break in 2020 and can postpone their RMD’s until they turn 72.

3.      Qualified charitable distributions (QCD’s) from your IRA

It’s a great tool to use in tax planning strategies. But it can have a negative impact if you’re not careful.

CONS:

1.      Inherited IRA distributions generally must now be taken within 10 years

If you inherited an IRA on January 1^st, 2020 or later, the stretch IRA is replaced with a 10-year rule for most beneficiaries. Inherited accounts prior to 2020 still carry the old rules.

2.      Eligible designated beneficiaries are the exception

If you are a surviving spouse, minor child (not grandchild), disabled, chronically ill, and/or not more than 10 years younger than the IRA owner you can still qualify for a stretch IRA.

3.      Trusts no longer work as planned under the SECURE Act

Your trust needs immediate review, especially if it names your IRA as a beneficiary. Seek out an estate planning specialist to explain the new laws.

PROCEED WITH CAUTION:

1.      Each parent can withdraw up to $5k penalty-free from their retirement plan(s) per birth and/or adoption

This will help to pay for adoption expenses.

2.      Employer plans will start to offer annuities

Many provisions of the SECURE Act are designed to make it easier for employers to offer annuities. If you’re not sure an annuity is the best option for you, get a second opinion. Annuities might pose problems down the road.

It’s time to talk to a professional financial advisor

A fiduciary financial advisor can help clarify changes in the tax code and how they impact your family and personal finances. Take this opportunity to update your planning strategies. Your plan should evolve as you do.

The post How SECURE Should We Feel about DC’s New Tax Laws? appeared first on AWM.

Contributing to your IRA by April 15^th could lower your tax bill for 2019.

The annual contribution limits for IRAs (both traditional and Roth) for 2019 is $6,000 for any working individual under the age of 50. Those over the age of 50 can contribute up to $7,000 each year.

These contributions might lower your taxable income if you have earned an income. Here are a couple examples:

Let’s assume you are single and earn an adjusted gross income (AGI) of $60,000. If you contribute the maximum of $6,000, you will only pay taxes on $54,000 of your income.

If you’re married, filing jointly and have an AGI of $98,000, you can both contribute up to $12,000 ($6,000 each) for 2019. You will pay taxes on $86,000, assuming you make the maximum contributions allowed under the law.

Traditional IRA contributions are non-itemized deductions, which means you can claim them on your return.

However, there are limits for who can deduct their IRA contributions based on a few different factors:

1. If you make too much income, you might still be able to contribute to your IRA, but might be limited or disallowed deductions.
2. If you’re married and not covered by a retirement plan, your AGI limits are higher. It’s always good to check with your financial advisor or accountant for clarification on these limits.

For more information, you can visit irs.gov. I encourage you to speak with a fiduciary financial advisor and your tax specialist. They can help you maximize the deductions you qualify for and make the most of your tax returns for 2019.

Schedule Appointment

The post Contributing to Your IRA by April 15 Could Lower Your 2019 Tax Bill appeared first on AWM.

Traditional IRA contributions increased by $500, now totaling $6,000 for anyone under 50. If you are turning 50 or older this year, you can contribute up to $7,000 to your IRA.

1.    IRS Increases IRA Limit

This is the first increase to the annual contribution limit since 2013. For the past five years, anyone under the age of 50 was able to contribute a maximum of $5,500, or $6,500 for those 50 and older. IRA contribution limits are adjusted periodically to keep up with the cost of living. These contributions are only increased in $500 increments, so they don’t necessarily increase each year we experience inflation.

2.    Rules to Remember

A word of caution as you plan out your contributions for the year: not everyone is eligible to contribute the full amount. Here are some rules to remember:

• IRA contribution limits are per-person, not per-account
• You can make IRA contributions anytime during the calendar year, or in the following calendar year up to the regular tax deadline (April 15).
• You must be earning an income
• Taxable income might not be considered earned income (i.e. social security/investment income)
• Anyone 70 ½ or older cannot make traditional IRA contributions. However, if you are still working and your employer offers a 401(k), you might be able to participate in the plan. Talk to a fiduciary advisor to see if you are eligible.
• You might make too much money to contribute to a traditional IRA
• You might have limits on your deductions for traditional IRA contributions

Also, keep in mind that the higher limit applies to contributions made for 2019, not necessarily all contributions made in 2019. If you are planning to make a 2018 contribution in 2019, you will be limited to the 2018 amount of $5,500 ($6,500 if you are over 50).

3.    Other Limits Increased

The IRA raised limits on other retirement accounts as well. Salary deferrals into 401(k) plans have increased to $19,000 and $25,000 if you are 50 or older. Other increased limits include the eligibility to make a Roth IRA contributions and limits for deductibility of traditional IRA contributions for active participants. For more information on the new 2019 limit changes, visit the IRS website.

I encourage you to seek out professional advice when planning out your annual contributions. A fiduciary financial advisor can help you maximize your contributions and answer any question along the way. Strategically placing your retirement savings is vital to your future and we would love to help guide you on your journey.

Schedule Appointment

The post You Can Save More to Your IRA in 2019 appeared first on AWM.

The start of a new year is the perfect time to set new goals and save more. In 2019, you can contribute more than ever into your retirement accounts. Total contributions increased by $500, now totaling $19,000. If you are expecting a raise, bonus, or are able to sock away a little extra, consider upping your contributions this year to take full advantage. Don’t forget that even the little increases can have a large impact in the long run.

2.    Make catch-up 401(k) contributions

Anyone over or turning 50 years old this year can make catch-up-contributions. That means you can add an extra $6,000 to your 401(k), maxing out at $25,000. If you are turning 50 in 2019, it doesn’t matter when your birthday is, you can start making these catch-up contributions anytime. Think of it as a birthday present to yourself—you’ll be thankful you took full advantage later on.

3.    Go Roth 401(k)

There can be great benefits in contributing to a Roth 401(k) vs. a traditional 401(k). Traditional accounts are pretax and grow tax-deferred until retirement. Then, they are subject to taxation. Roth contributions have no immediate tax break – but once they are rolled into a Roth IRA, you won’t pay taxes on your distributions.

Roth 401(k)s have no required minimum distributions (RMDs) once you hit age 70 ½. Another thing to keep in mind is that Roth IRAs have limited contributions, whereas a Roth 401(k) will not. If most of your savings are in a traditional 401(k) or IRA, consider diversifying and making your 2019 contributions to a Roth 401(k). Ask your employer about switching contributions – it’s an increasingly more common option.

4.    Don’t forget after-tax 401(k) contributions

You might be able to make after-tax contribution to your 401(k). Many plans, both traditional and Roth, allow for the contributions to help you reach the $62,000 limit

HR departments often don’t mention this option because not many people are able to take advantage of it. If you earn a large bonus or commission checks or are living within your means, this might be a good fit for you. Then, once you retire or separate from service, you can roll over most of this money into a Roth IRA.

5.    Take the time to review

It’s a good idea to review your 401(k) investments with your fiduciary financial advisor each year. They can help to make sure your contributions are still in line with your goals, evenly distributed, your risk is frequently re-evaluated, your cash flow needs, etc. Even if you have a rebalancing feature on your portfolio, it never hurts to double check. Most people don’t think about this as part of their annual review, but we review our clients’ 401(k)s in our annual meetings. Many things can influence your 401(k) contributions, like the economy, investment options, or changes in your own life.

6.    Do you have a side hustle?

If you have multiple sources of income, consider various retirement plans, a SEP plan or a cash balance profit-sharing plan. SEP plans could allow you to contribute up to $255,000 each year, depending on your age and income. You have lots of options, but they can quickly become complicated. Ask your financial advisor to go over your options if you are earning multiple incomes.

7.    Max out your IRA contributions

Don’t forget your annual IRA contributions! As long as you or your spouse are earning an income, you can contribute $6,000 into a traditional or Roth IRA. Anyone over the age of 50 can contribute up to $7,000. Ask your financial advisor about building out your Roth IRA – either by meeting the income requirements or making a “back door” Roth conversion.

8.    Include a health savings account

Do you have a health savings account (HSA)? These are not well known or utilized, but have triple tax-free benefits. Basically, you can take tax deductions when funding the plan, the money grows tax-free and is not taxed on withdrawals when used for health care expenses.

In 2019, a family can contribute $7,000 towards an HSA and individuals can make $3,500 in contributions each year. An HSA acts as a Roth IRA for health care costs—the money is tax-free after the age 65 when used for medical care. If you don’t use this money for medical care, then it is taxed similarly to a traditional IRA. But you will most likely have more and more medical expenses as you grow older, so this should not be a concern

You cannot contribute unless you have a high deductible medical plan and only before the age 65. If you are contributing to an HSA, make sure they match your time horizon and focus on the account is you plan to use it for medical expenses in retirement.

9.    Consider Roth conversions

Especially when the market drops or in low-income years, Roth conversions can be a really good idea.

Roth conversions allow you to convert all or some of your traditional IRA into a Roth – tax-free growth in the future with no RMDs. Just a reminder, the 2018 tax law eliminated the ability to “recharacterize” a Roth IRA. So, no do-overs if you change your mind. Roth conversions are best left for the end of the year once you have a better idea of what your income will look like.

10.    Roll old 401(k)s into IRAs

Are your old 401(k)s consolidated and rolled into IRAs? If not, it might be time to roll them over. Not only is it easier to track your performance, you might even have more investment options and be able to avoid some fees if your new balance exceeds a certain threshold. Talk to your financial advisor to see if this is the right option for you.

11.    Design a comprehensive financial plan

Are you on track to reach your retirement goals? Do you need to make any changes? The ups and downs of the market are easier to manage if you have a solid plan to follow. If you are unsure, it might be a good idea to review your portfolio with a financial advisor annually. We encourage all of our clients to put together a plan that reflects their family goals and priorities and is achievable and measurable.

You have the potential ability to contribute up to $69,000 + $7,000 to an HSA in 2019. If you have multiple sources of income, there are even more options for you. The markets will always be uncertain, but you can always get ahead and have some peace of mind by designing a financial plan with your fiduciary advisor.

Schedule Appointment

The post 11 Retirement Planning Strategies to Jumpstart 2019 appeared first on AWM.

Roth IRA vs. Traditional IRA

The primary way the IRS differentiates between a Roth and Traditional IRA is when you pay taxes: now or later. Let me explain:

For a Traditional IRA, anyone under the age of 70 ½ and who is earning income, can contribute $5,500 each year to their individual retirement account. Those who are over 50 can contribute $6,500 per year. These contributions are often tax-deductible – depending on your income and other various factors. When you take distributions from this account, it will be taxed as ordinary income.

The exact opposite is true for a Roth IRA. All contributions to a Roth IRA are made after taxes are paid on your income. It’s important to remember that Roth contributions are not tax deductible. That said, when you’re ready to take distributions, most withdrawals are not taxed.

The other major difference between these types of accounts is distributions. Traditional and Roth IRAs allow you start taking distributions at age 59½ without penalties, however, if you take a withdrawal less than five years after the first contributions were made, the Roth IRA loses its tax-free status. Traditional IRAs require you to take minimum distributions annually, starting at the age of 70½. Roth IRAs, on the other hand, have no required distributions. If you don’t need the extra income, it can stay in your account and continue to grow. This is a great strategy, especially if you want to set up an inheritance for your heirs.

Benefits of a Roth IRA

At a quick glance, paying taxes “now or later” might feel like an either/or option. However, we encourage you to take a closer look. There are potential tax and estate planning advantages that might suggest a Roth IRA is a better option. Here are three reasons why:

1.    Tax Advantages

With traditional IRAs, account owners end up paying taxes sooner or later on their contributions and on their investment returns. A Roth IRA requires the taxes to be paid up front when the contribution is made. Because of this, Roth IRA holders see tax-free growth on all their investments. Learn how you can make direct distributions to qualifying charities to save on taxes. 

2.    Penalty Avoidance Benefits

Apart from a few exceptions, distributions from a traditional IRA cannot be made before the age of 59½, without penalty (along with the taxes you will already pay). With a Roth IRA, as long as your contributions have been in the account for at least five years, the contribution can be withdrawn without taxes or penalties—even before the age of 59½. Take note, however, that early withdrawals of investment returns are still subject to a penalty through a Roth account.

3.    Estate Transfer Benefits

Annual distributions are required for all traditional IRAs after the age of 70½, even if you don’t need the extra money. On the other hand, with a Roth IRA, there are no mandatory distributions. In fact, if you never need the money in your retirement account, it could even be passed down to your heirs. They can spread out their own tax-free distributions over any length of time.

Opening a Roth IRA and Working Around the Income Limitations

Most anyone can open a Roth IRA, simply by declaring the account a Roth from the beginning. All you need to do is find an investment firm or fiduciary financial planner who offers Roth IRAs.

Unfortunately, most high-income taxpayers quickly find out this option is not available to them. Individuals with an adjusted gross income (AGI) of $135,000 or more, and married couples filing jointly with an AGI of $199,000 or more are unable to make contributions to a Roth IRA. On the bright side, there is a work around. It’s possible for these high-income clients to create a Roth IRA through an IRAconversion. We call this the “back-door method.”

There are 2 common ways to approach this method:

1. You put money into a traditional IRA, usually through a contribution. Anyone earning an income can make contributions to a traditional IRA. The only disadvantage for people with higher incomes is that their contributions are not tax deductible. Because the goal of the back-door method is a conversion to a Roth IRA, paying tax on contributions is unavoidable.
   
   
2. You transfer money from a 401(k) or another employer compensation plan. This is what we call a Rollover. Rollovers are not under the same constraints as the regular IRA contribution thresholds of $5,500 or $6,500. So, your entire 401(k) or pension fund can be transferred in one transaction. Easy, right?

Once you choose your back-door method and your traditional IRA is set up, you can convert to a Roth IRA. These conversions are no longer limited by income; current laws allow anyone to use this back-door approach. In fact, the Tax Cuts and Jobs Act of 2017 approves the use of this approach.

Potential Risks of a Roth IRAs

The primary risk that comes with a Roth IRA is the unpredictability of future investment values, tax rates, and regulations. For example, should the investments of a Roth IRA drastically drop in value, you might regret paying taxes up front. 

In the past, Roth IRA holders were able to escape this outcome through a recharacterization—basically an IRA “backspace” button. Unfortunately, under the 2017 tax reform, recharacterization was outlawed and the terms no longer apply. Since this change, many investors approach the conversion to a Roth IRA with more consideration. Talk with your fiduciary financial advisor to ensure the best possible outcome on your IRAs.

Conclusion

Looking at the facts, the tax and wealth management advantages of a Roth IRA drastically outweigh the cons. Discuss the best course of action to take with your fiduciary advisor and your accountant. While IRAs potentially might benefit you, you still ought to consider carefully which IRA will best work for you as you plan for your retirement years.

Start the Conversation

The post Retirement Planning: Roth IRAs vs. Traditional IRAs appeared first on AWM.

Checking your client’s beneficiary forms can be one of the highest levels of service you give them. Not only will this deepen your relationship with the client, but also communicates that you are seeking out their best interest. This simple but crucial form can open the doorway to many discussions about your client’s loved ones and dreams.

Not keeping up-to-date with these forms can quickly turn into a costly legal battle and hurt your client’s family. Missing or incorrect beneficiaries are an irreversible mistake. Because it’s only discovered once the client has died, this problem is rarely fixed.

This is where legal, tax and financial advisors are brought into the picture. They must decide how to distribute the inheritance without clear instructions and many legal obstacles. This frustrating process quickly leads to very long and expensive family disputes. This mistake is so easy to avoid by simply checking the beneficiary forms before your client passes away.

As a financial professional, the last thing you want to do is have your client’s family waiting for their money or to find out they have been disinherited altogether because no one checked the proper forms. This is bad news for both of you—even if this wasn’t your fault.

The best times to review and update beneficiaries’ information are at annual meetings and around major events such as:

• A birth
• A death
• A marriage
• A divorce
• A remarriage
• A new grandchild
• A change in the tax laws
• Charitable inclinations
• Any other changes that influenced your client to select certain beneficiaries in the first place.

Any of these situations (or others) could prompt your client to change their mind and wish to eliminate a listed beneficiary or add a new heir to their IRA. You should have the kind of relationship with your client to know when these life-changing events occur and proceed to follow-up on their intentions.

The area’s most prone to problems with the beneficiary forms are divorce and IRA trusts.

Divorce:

A great example is the U.S. Supreme Court Case of Kennedy Vs. Plan Administrator.

The court ruled that a $402,000 401(k) should be paid to the ex-wife because she was never removed as a beneficiary after their divorce—even though she had reneged her claims for those assets during the settlement. This eight-year court battle ended with the daughter losing the inheritance her father had intended to give her all because the beneficiary form was not updated after the divorce was settled.

IRA Trusts:

1. Name contingent beneficiaries. Here’s what happens when you don’t:

   Your client’s children could potentially lose their inheritance to their step-family.

   A man and a woman, with children from previous marriages, joined their lives together. The father names his new wife as the primary beneficiary while neglecting to add his own children or a trust as a primary or, at least a contingent beneficiary. This scenario could go in one of two ways:

   Option A: The new wife dies first and he doesn’t change beneficiaries before he dies. Since the new wife was named the legal beneficiary for his IRA, his kid’s inheritance goes to his second wife’s estate.

   Option B: The man dies, leaving his IRA to his second wife. She then proceeds to write out his kids despite his original intentions.

   Again, this would have been easily avoided if the current forms had been kept up to date, the advisor understood the intentions of the client, and chose to make the proper recommendations.

2. A will does NOT replace the IRA beneficiary form.

   A common example is when a client assumes their IRA beneficiary is covered in the will. They go ahead and name one child (who is helping out with the paperwork or caring for the aging parents) with the intent of having their IRA split evenly between their three children.

   He states his wishes for the split assets in his will, but after he dies, the IRA beneficiary form overrides and the entirety of the IRA goes to the named beneficiary.

   Knowing the true intent of her parents, the named beneficiary wanted to make sure the inheritance was split fairly among all three siblings. This process exhausted time, legal fees, tax advice, nerves, and disclaiming other assets to make things even out. This chaotic situation could have easily been avoided.

3. Losing a Stretch IRA.

   IRA beneficiaries can easily extend Required Minimum Distributions (RMD’s) over their lifetimes with something called a “Stretch IRA”. However, a Stretch IRA is only valid if the heir was specifically named as an IRA beneficiary on a current form.

   If the heir receives the IRA through the estate, they forfeit the benefit of the Stretch IRA since the estate is not a designated beneficiary.  Thus, the heir is likely to end up paying higher taxes on the inheritance.

As you consider a new approach to helping your clients, remember that simply writing down a name and social security number is not all that an IRA beneficiary form includes. Consider the recommendation of a fiduciary financial advisor within your network to make sure all of these issues are covered:

• Keeping documentation that is current and accessible in the event of the loss of the account holder.
• Tracking primary and/or contingent beneficiaries (“beneficiaries of beneficiaries”) is also vital to client due diligence.
• Specifically designate the name of the beneficiary as an individual or qualifying trust. Make sure the estate is NOT named as a beneficiary.
• Make sure the most current IRA or retirement plan beneficiary form is on file and is up to date with current information.
• Finally, ask the client to update beneficiaries for investments (example: 401k, pension assets) not directly held with the advisor. Truly fiduciary advisors care about the client’s whole being, not just where they have a direct business relationship.

Don’t make this mistake. Show your client’s that you have their back.

Schedule appointment

The post Where’s the Beneficiary Form…? appeared first on AWM.