As the vibrant spirit of spring blooms around us, we’re thrilled to reconnect with you in this quarter’s newsletter!

Investment Update: Enhancing Your Diversification

Just because the S&P 500 is close to all-time highs does not mean everything else is.

We remain concerned about inflation, interest rates, and market valuations.

To be cautious does not mean we are passive.  We have made some additions to your investments in liquid alternatives as well as commodities (what we call “diversified sleeve”).  These investments potentially offer opportunity for principal growth and diversification outside of traditional stocks (“growth sleeve”) and bonds (“income sleeve”).

Depending on your account’s risk/return profile, you might have exposure to some or all of these liquid alternative investments (daily pricing, and in all but one case, daily liquidity):

1. Equity long/short fund that takes limited exposure to direction of stock markets. This fund seeks to make returns on buying cheap companies with strong market positions and cash flows and hedging by selling shares in overvalued companies with deteriorating balance sheets.  Returns can be volatile, particularly in markets that lack trend or narrowly-focused rallies.  Longer term, the fund has had a positive long-term track record due to strong stock selection despite various headwinds (growth stocks outperforming value, momentum stocks continuing to be bid up beyond fundamentals).
2. Corporate event driven fund that consists of 2 strategies: (1) merger arbitrage, the majority of the fund, seeks to profit from the completion of announced corporate mergers and acquisitions, typically by going long the acquisition target selling at a discount to the announced price and shorting the stock of the acquiror, which nets to limited exposure on absolute direction of stock markets, and (2) special situations, the minority of the fund, seeks to profit on idiosyncratic opportunities. Examples might include buying/selling options around investor days, special dividends, and other situations.  Taxable clients have the potential to benefit from limited capital gains distributions as this fund was inherited from a previous manager’s strategy that generated meaningful tax loss carryforwards.  While this is a lower volatility strategy than other of your investments, principal can go down if certain deals break up or trades in the event driven strategy do not work out.
3. Late state venture capital fund that invests in private companies with sales of over $100mn and potentially further rapid growth. This space has lagged public markets since the peak of the venture capital bubble in 2021, yet the companies in the portfolio have continued to grow, in some cases turning profits, and secondary market liquidity has also increased, providing more transparency for valuations.  Future catalysts for appreciation might come from a rise in mergers and acquisitions (larger public companies or other funds buying the fund’s underlying companies), further financing rounds for future growth, and IPO’s into the public market.  Investors with longer time horizons (years) potentially benefit from the only public vehicle with a daily NAV.  Risks include economy and specific risks to any of the fund’s nearly 100 company investments.  The fund also has limited windows for redemption.  (Accordingly, it is a modest allocation to portfolios with more aggressive risk appetites.)
4. We have also begun a position in a managed futures fund that invests across multiple asset classes based on technical price factors. Times of macroeconomic and political uncertainty, including trending inflation and interest rates, potentially might offer bouts of volatility to traditional asset classes, but they might also provide opportunity for managed futures managers to shine.  Managed futures managers take positions long or short on equities, bonds, commodities, and interest rates depending upon their views of price and other technical trends in the markets.  Low volatility driven by low inflation and interest rates was a significant drag on performance for many funds in the last decade, but we believe the times might be shifting in favor of managed futures.  Our specific manager invests in an index meant to replicate the returns of some of the world’s leading managed futures managers.
5. Additionally, we have maintained meaningful exposure to commodities (precious metals, broad based commodities including energy, agriculture, metals). Recently, we have added small positions to cryptocurrency and gold miners.  These all potentially benefit from rising government debt, uncertainty in inflation and interest rates, and geopolitical risk as well as loss of confidence in the US Dollar globally.  Supply shortages in certain commodities offer a further potential catalyst.  The main risk would come if the US Dollar regained credibility at the expense of alternative currencies.

Beyond Price: Nourishing Your Wealth and Future

Let’s talk about family wealth management. It’s not just about numbers and transactions; it’s about values and relationships.

In the media, there’s a lot of talk about whether financial planning and family wealth management is all about the price. Some suggest that the cheapest option is the best because all you need is a basic portfolio and no personalized service. But that’s like saying all you need for dinner is fast food.

We see things differently. We understand that each family is unique, with its own goals, dreams, and challenges. That’s why we offer personalized advice and services tailored to your specific needs.

Our approach is about more than just investments. It’s about building a long-term relationship that extends beyond the numbers to include your family and your future. We’re here to help you stay on track and avoid costly emotional decisions that can derail your financial goals.

So, while others may offer quick-service solutions, we believe in serving up a gourmet meal—a comprehensive plan that nourishes your financial health and empowers you to live your best life. Because when it comes to your wealth and your family’s future, value matters more than price.

Maximize Your Financial Management with Our Online Portal

Are you taking full advantage of your online portal? It’s a powerful tool at your fingertips. Here’s what it offers:

• Consolidated Financial Overview: Link external assets and liabilities to easily track all your finances in one centralized platform.
• Personalized Planning Tools: Tailored features to assist in your financial planning journey.
• Comprehensive Reporting: Access various reports related to your AWM accounts effortlessly.
• Data Collection Tools: Streamline your financial planning process with tools designed to gather relevant information.
• Secure Vault: Safely store and access AWM reports, upload documents for sharing, and maintain a private documents folder.

If you need help setting up your credentials, logging in, or navigating your online portal, please contact Debbie.

Looking Ahead: Proactive Planning for Your Financial Future

As we bid farewell to another tax season, it’s a fitting moment to shift our focus forward. My most successful clients recognize the value of planning and have peace of mind in knowing that they are taking care of their financial health.

While tax season may be behind us, the opportunity for strategic planning lies ahead. Don’t wait until the year’s end to assess and make crucial decisions. Now is the time to be proactive and set the groundwork for a prosperous retirement.

Whether it’s mapping out investment strategies, optimizing tax efficiency, or safeguarding your legacy, our team is here to guide you every step of the way. Remember, true wealth isn’t measured by how much you earn, but rather by how effectively you preserve and grow what you have.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 2Q24 appeared first on AWM.

I could not agree more! Let’s learn from 2 of my friends (hypothetical Mike and Donna). These examples apply to people who are still working and those already enjoying retirement.

Solutions for High-Income Earners

Donna is 63 and earns a substantial income. Mike, on the other hand, is 71 and retired. Because Mike holds an IRA (with a large balance), he is required to take $100k in required minimum distributions (RMDs) each year and report that amount as taxable income.  This RMD can bump them up to a higher marginal tax bracket. Even though they don’t need the extra income, Mike must take the RMD or pay a substantial penalty.

Mike can make a Qualified Charitable Distribution (QCD)that potentially might lower their reported taxable income. As long as they stay below the IRS limits, this charitable gift satisfies Mike’s RMD and does not count as taxable income. This allows Mike and Donna to stay within their preferred lower tax brackets while doing good for their community.

If you don’t need the extra income and RMDs are pushing your income into a higher tax bracket, consider making a Qualified Charitable Distribution with all or a portion of the RMDs.

Ideas for Complex Tax Situations

Mike and Donna are high-income earners and have a complex tax situation. They are negatively impacted by new tax law changes, which limits their ability to achieve a tax reduction through itemizing their deductions.

Mike and Donna face a dilemma. They could donate to charity to balance out their tax benefits. But they are not ready to give away a large sum of money all at once.

A donor-advised fund might be a viable option. Mike and Donna can open a fund to optimize their tax deductions.  They can also direct how, when, and to whom their gift is distributed.

Keep What’s Yours

Mike is happily retired. He decided to roll his 401(k) and two IRAs into one retirement account to simplify his life. In November, Mike checked the remaining balance for RMDs on his newly consolidated account and took the distribution listed Yet he did not take enough in RMDs.

Mike just made a costly mistake, and the IRS will penalize him for it. He miscalculated his RMD’s because he neglected to add the RMD amounts listed on his other accounts.

This is a subtle but common mistake. It will cost him a 50% penalty on the remaining balance of the RMDs he didn’t take. Remember RMDs cannot be rolled over into the next year.

Would you want to pay an extra 50% penalty instead of spending it yourself?

Let Us Help You to Enjoy Your Holidays

Some of these options can be complicated and overwhelming. We would love to help you simplify your life.

The post How Can I Give More to My Loved Ones and Less to the IRS? 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.

Walking my clients through this process helped me to narrow down 10 things you need to know about your RBD.

10 Things to Know About RBDs:

1. The first minimum distribution (RMD) must be taken by your required beginning date (RBD).
2. Your RBD will always be April 1^st of the year following your 70 ½ birthday. This is a standard date for all IRA owners and no exceptions apply.
3. That said, there are two exceptions to the April 1 RBD for what we call “plan participants”. First, the “still working” exception. This is for anyone still working for an employer plan. Second, the “old money” exception, which is for 403(b)s. These exceptions do not apply to IRAs.
4. You are allowed to delay your first RMD until April 1^st of the following year but are not delayable for any future RMDs. Your required minimum distributions are always held to the December 31^st deadline of that same calendar year. Beware, by delaying until April 1^st of the next year, will require that you take double RMDs that year—which is more taxable income.
5. If the IRA owner passes away before their RBD, there is no RMD due for the year following their death—even if they reached the age 70 ½.
6. Additionally, beneficiaries are able to stretch the distribution requirements over the life expectancy or use the five-year rule.
7. If the IRA owner passes after their RBD, their beneficiary(s) must take the year-of-death RMD if it was not already taken. Otherwise, the beneficiary(s) will face penalties.
8. In this situation, the five-year rule is not an option.
9. If the IRA owner passes on or after their RBD, the beneficiary(s) can take the RMDs over their own life expectancy or the IRA owners, whichever is longer.
10. Roth IRAs do not have required beginning dates because Roth IRA owners are never subject to required minimum distributions during their lifetime.

Closing Thoughts:

Following these 10 rules is a great place to start if you are an IRA owner or a listed beneficiary. You can also check out our post on IRA accounts and charitable distributions for more information. However, individual retirement accounts and RMDs are complicated and intricate.

Seek out professional help to make sure you understand each aspect of your requirements and to avoid any penalties or hefty fees.

Start the Conversation

The post 10 Things You Need to Know About the Required Beginning Date (RBDs) for IRAs appeared first on AWM.

Advisors can show their added value by focusing on these seven specific topics:

1. Required Minimum distributions (RMDs).
   

   While this annual IRA ritual is well known among financial advisors, it’s just as common to miss distributions or deal with computational errors. Remember, clients who don’t take their required minimums will get hit with a hefty 50% penalty on any distribution amounts they should have taken. This fee in some special circumstances could be waived by the IRS, but why add stress to you or your client.

   Advisors should be aware of every client who is or will be subject to RMDs by the end of the year. Most have the experience with regular clients who are over 70½ years old and are taking their RMDs annually. Even though it’s not obvious, you will have clients who sneak up as newcomers to the 70½ club or sophomores who might need to take two RMDs this year (their first and second) and required distributions for IRAs or Roth IRAs that they inherited (these include trusts that are IRA beneficiaries). Roth 401(k) plans are also subject to required minimum payouts (Roth IRAs owners are not). This is an important conversation to have with clients if a Rollover is appropriate.

2. Qualified charitable distributions.

   The Tax Cuts and Jobs Act of 2017 provided help for taxpayers through an expansion of standard deductions. That being said, clients who do not itemize their deductions will no longer be able to deduct their charitable contributions. If any of your clients have IRAs subject to RMDs, it’s not too late to contact them and suggest the qualified charitable distributions (QCD) provision. They should also consider making their contributions directly from their IRA.

   The amount your client contributes will count towards their RMD amount and be excluded from income. This creates an “effective” tax deduction on top of the standard deduction. The QCD only applies to IRAs—not plans and IRA owners or beneficiaries who are at least 70½ years old. Donor-advised funds and private foundations are not eligible for the qualified charitable distribution and nothing is given in return for the gift. The annual limit per person is $100,000.

   When contemplating a one-time large donation, clients can still do the QCD even though the gift might exceed the RMD amount, so long as the amount is below the $100,000 limit. Giving more than the RMD removes more IRA funds that will then not fall under income and might even lower the RMD amount for the next year. QCDs will lower adjusted gross income, which may help you with other tax benefits or deductions. Qualified charitable deductions lower tax bills and must be completed before year’s end in order to count for the same tax year.

3. Roth conversions.
   

   The biggest change for IRA planning affected Roth conversions. As of January 1, 2018, conversions are no longer allowed to be reversed. They are permanent and taxes will be due as soon as the funds are converted. Roth conversions are still valuable for certain clients, but going forward, conversions need to be carefully and accurately thought through. In order to qualify for a Roth conversion this year, the funds must leave the IRA or plan by year’s end. Some people confuse Roth conversions deadline (year’s end) with Roth IRA contributions which can be made until April 15th of next year.

   Other tax changes should become a factor when projecting the tax on a Roth conversion. This is in addition to the usual items like taxability of Social Security, increases in Medicare Part B and D premiums, student financial aid eligibility, to name a few. Also, be aware that some clients will lose state tax deductions (the cap is now $10,000, also known as SALT) and the increased standard deduction might not make up the difference. All 2% miscellaneous deductions are also gone.

   For business clients, the new 20% deduction for qualified business income (the section 199A deduction) and the effect a Roth conversion should be reviewed carefully. While some might think these are reasons to avoid a Roth conversion, when looking at long-term financial and tax planning strategies, they are short-term bumps as the additional taxes would only be for the year in which conversion takes place. These issues should be considered carefully, Roth conversions no longer can be undone.

4. Check estimated taxes on RMDs.
   

   Double check to make sure any clients that are new to RMDs had enough money withheld or paid in through estimated tax payments to avoid any penalties. If they did come up short, it might be a good idea to withhold taxes from year-end IRA distributions. This would help satisfy the estimated tax payment timing requirement.

   Add this item to your end-of-the-year checklist for clients with RMDs. Some of our clients will even withhold projected taxes due for the year of their required minimum distributions—taking one more step to avoid penalties. We make it a practice to get to know our client’s network of other professionals, especially their tax advisors. This can build trust and loyalty while also providing holistic services for your clients. IRA withholdings can sometimes be used to cover other income items. RMD money is not usually needed for a large number of clients, which is why the IRA withholdings work so well. The required minimum distribution will often go straight into an investment account. Instead of writing checks for taxes owed, use IRA withholding strategy to satisfy tax liabilities.

   It’s easy for older clients (or even the family members caring for them) to forget or make quarterly estimated payments late and trigger penalties. This is where the IRA withholding works. It eliminates penalties and additional taxes during tax season. Do what you can to relieve some pressure from your clients and their families. This is your time to shine.

5. Split inherited IRAs by year’s end.
   

   If one of your clients, who owned an IRA with multiple individual beneficiaries, passed away during 2017, it’s time for you to help their family make sure all necessary paperwork is completed timely. Each named beneficiary can use their own life expectancy to calculate required minimum distributions (known as the stretch IRA) if the inherited IRAs are split into separate shares before the end of this year. It’s important to get this done in order to use the Stretch IRA. If not, all beneficiaries will be stuck using the age of the oldest, named beneficiary—even if they decide to split their shares later on. The split must be completed by the end of the year after the IRA owner’s death. (We strongly encourage our clients to split the IRAs as soon as possible to avoid forgetting and missing the deadline).

6. You should know how to time a 10% penalty exception.
   

   If your client had to take an early withdraw from their IRA, they may qualify for an exception to the 10% penalty. If they do, the payment must be made in the same year as the IRA (or plan) distribution. This is easily missed at the end of the year, which voids the exception and forces the client to pay a huge penalty that could easily have been avoided. This situation usually affects those who need the money and cannot afford the extra penalties on top of their tax bill.

   Here’s a theoretical example: your client is 54 and needs to help her son pay a college tuition bill by the end of the year. She adds the charge to her credit card in December of 2018. In January, when the credit card bill comes in, she takes an early distribution from her IRA—thinking she qualifies for the education exception to the 10% early distribution penalty for IRAs. Only to find out, she doesn’t actually qualify.

   Your client still has to pay the 10% penalty because the tuition payment (made in December 2018) and the January 2019 IRA distribution were not in the same year.

   Check to make sure your clients who took, or are planning to take an early withdrawal will actually qualify for an exception and not run into similar situations with this “same year” rule. This is a more common issue than most people realize and as advisors, it’s our job to protect our clients.

7. Check the state of lump-sum distributions for the net unrealized appreciation tax break.

   Don’t forget about net unrealized appreciation (NUA) in employer securities. This can dramatically cut your client’s tax bill down. This tax break is for clients who own a share of their companies’ stock through their 401(k). Depending on the stock’s appreciation, it might qualify for the lump-sum distribution tax break on NUAs. Generally, this is triggered by an event: the employee leaves the company, they reach the age 59½, they pass away, or becomes disabled. Under any of these situations, the company funds must be distributed within one year of this life-altering event taking place. If any of your clients qualify for this tax break, check with them to make sure all their plan funds have been withdrawn before the year’s end.

   Non-company stock funds can be rolled over, tax-free, to an IRA, while the company stocks go into a taxable account. Tax (ordinary income) is only paid on the cost of the stock. The appreciation is not taxed until the stock is sold. When it is sold, the NUA is taxed at a lower, long-term capital gain rate—regardless of how long the stock was held.

Here’s a free extra tip: while you are checking these items off your list, check your client’s beneficiary forms. Make sure they exist and are updated with your client’s latest wishes. Beneficiary form errors are rampant, costly, and far too frequent. Do your client a favor and show your added value. When you go the “extra mile”, your clients will notice that you truly have their back and will reciprocate with their loyalty and trust. They will also know that you have their back and are helping them to live their lives with purpose.

Start the Conversation

The post Retirement Planning Strategies: 7 Year-End Mistakes to Avoid appeared first on AWM.