Karen and Michael were feeling stressed about money and were referred to us for guidance. In our initial conversation, we learned that Karen has a corporate job and Michael is a freelancer. They have significant bank savings to compensate for Michael’s irregular income. They feel behind in saving for retirement and their kids’ educations. They are considering selling their first home to invest the proceeds, rather than continue renting it.
Integras Analysis
From a comprehensive review of their finances, we determined there was more than enough savings to offset Michael’s unpredictable income. Instead, they can direct some excess cash and income towards getting their investment goals on track.
Recommendations
· Because they moved out less than 3 years ago, they can sell their rental house tax-free and reinvest the proceeds towards meeting their goals.
· Since their savings are sufficient, Karen can increase contributions to her 401(k) plan which will help build retirement investments. Because they were paying taxes on the money before saving it, she can put even more pre-tax money into her 401(k).
· Establish a Roth IRA for Michael, which will provide tax-free distributions in retirement.
· Establish 529 education savings accounts for the kids and make monthly contributions. 529s are a great opportunity to grow money tax-free for education.
· Pay off high-interest rate car loans.
· Put the remaining home proceeds into our Income and Dividend Growth strategies. Dividends and gains in non-retirement accounts are taxed at lower rates and will complement taxable retirement distributions later.
Karen and Michael now have greater peace spending today, knowing that they are following a plan for funding their future goals!
An IRA (Individual Retirement Account) is a great opportunity for younger investors to save for retirement. IRAs come in two flavors, Traditional and Roth, the main difference being when taxes apply.
While traditional IRA contributions may provide a current year tax deduction, Roth IRAs contributions are not deductible, but the investments grow tax free forever. Traditional IRA distributions will always be taxed as ordinary income.
You must have earned income to contribute to any IRA (compensation received from working), and there is a maximum contribution amount set by the IRS each year ($7,000 for 2024).
Considerations when choosing between IRA types:
Age: The younger you are, the more sense it makes to contribute to a Roth IRA. The compounding tax-free growth is likely to outweigh the value of the up-front tax deduction.
Income: At higher income levels the ability to contribute to any IRAs phase out. However, your employer 401(k) plan may include a Roth option.
Deductibility: If you are covered by an employer retirement plan, you’re likely not eligible to make deductible IRA contributions. However, you may still be able to contribute to a Roth IRA.
Flexibility: With limited exceptions, withdrawals from an IRA before age 59 ½ are subject to a 10% penalty. Roth IRAs offer more flexibility, allowing for penalty-free withdrawals of contributions (but not earnings) after the account is at least 5 years old.
Laser-focus on inflation was the key driver of both interest rates and market performance over the past two years.
Inflation continues retreating towards the targeted 2% range, which should largely be achieved around mid-year. We expect the Fed will begin lowering rates during the summer. While the bond market has priced-in 6 rate cuts for the year, beginning as early as March, we believe it will be a more modest and later cutting cycle. From there, the narrative should shift from inflation and interest rates back to the fundamentals of economic growth and earnings. There is still a risk that the economy could pick up steam and inflation return to haunt us once again, a la 1980. Nor are we out of the woods of potential economic weakness. But we see light at the end of the tunnel.
We remain optimistic about the long-awaited resurgence of small-cap, value, and international stocks closing the performance gap versus U.S. large-cap growth over the ensuing economic cycle.
The old maxim of ‘no tree grows to the sky’ will ultimately prevail. We find it unlikely that valuations of the “Magnificent 7” can continue to rise unabated. Valuation is a fundamental driver of long-term performance, and small caps and international markets remain undervalued relative to history.
As we expect a return to economic fundamentals over 2024, much depends on the economic growth and labor productivity needed for earnings to meet or exceed expectations. Should the economy slow, stock markets will have a hard time producing meaningful gains. While not our base case, we will remain mindful of the many economic indicators still flashing red.
We understand it is an election year. As November approaches, we typically see markets stagnate or slightly decline as the uncertainty and anticipation mounts. However, history tells us that regardless of who wins, there is negligible impact on financial markets in aggregate. In the end, regardless of whether your favored party wins or loses, there is no advantage in changing investment policy.
The normalization of interest rates is an uncertain path and forecasting economic growth is even more difficult. As investment themes change throughout the year, we will be looking for areas where valuation and earnings potential appear strongest – a disciplined approach that has served us well long-term.
What remains paramount is our desire to always take care of our clients’ current investment needs, while working towards achieving long-term investment goals.
With our time horizon investment process, we have successfully sheltered near-term spending needs from market disruptions, giving the longer-term assets the time needed to allow these disruptions to play out. Our long-held mantra of “go live life, we’ve got your back” has worked throughout this period of upheaval and we will be making sure that continues.
So, enjoy today and tomorrow, and let us do the worrying!
While the S&P 500 rose 26% at the headline level, it was almost entirely due to just seven “magnificent” tech stocks. The remaining 493 names contributed very little – on average up just 4%. This concentrated market condition continued through October when we finally enjoyed broadening market participation. Small cap stocks began a long-awaited turn-around with a two-month advance of 16%. The broad International Index rose 18%. Both are areas we overweighted in 2023 due to their relative valuations. While we think these sectors will continue to waffle back and forth for several months (as January has already shown), we expect a further broadening of market performance once we get some assurance on timing of Federal Reserve rate cuts.
Interest rates have been the story since early 2022 and October showed what happens when our uncontrolled fiscal deficit intersects with decreasing foreign demand for Treasuries. The 10-year Bond went from a yield of 3.3% in May to 5% in October as auctions witnessed a pullback in foreign investors. This will become a larger theme in the future should our deficit growth continue unabated. Nevertheless, as inflation readings continued to decrease during the Fall and the market began anticipating rate cuts, the yield on the 10-year treasury ended 2023 at 3.9%.
We wrote last quarter that we were cautiously optimistic.
But the year ended better than, even we, anticipated. Surprising employment strength and increasing home prices have remained dominant forces keeping the U.S. from entering recession. As consumers spend down COVID savings, they remain heartened by job stability, so overall spending has remained quite strong. Strong home values have also buoyed consumer confidence. This is very different from the historical pattern (although welcome and needed). In a normal economic contraction, people lose jobs and must sell homes, increasing housing inventories which bring prices down. In this rate cycle over 90% of existing homes carried mortgages under 4%. People were not forced to sell and have no desire to trade a 3% mortgage for a 7% mortgage. Inventory remains tight while demand stays solid, so prices have risen. The banking system remains resilient, financial conditions have eased, and financial market performance followed.
Heading into 2024, we see light at the end of the tunnel, while recognizing the risks that are still present.
So, enjoy today and tomorrow, and let us do the worrying!
If you are already charitably inclined there are two gifting strategies that you should be aware of, Qualified Charitable Distributions (QCDs) and gifting appreciated stock.
In Strategies for Charitable Giving – Part 1 we discussed the tax benefits of QCDs which can be done by IRA owners who are at least 70.5 years old. But what if you are younger and giving to charities? Are there any tax benefits available? Most people take the standard deduction since the Tax Cuts and Jobs Act increased it, and if you’re not itemizing you lose the ability to deduct charitable contributions.
If you have appreciated stock (owned for more than a year) in a taxable investment account, donating stock instead of cash could provide a tax benefit to you and result in a greater gift to the charity.
Let’s look at an example.
Jim plans to donate to his favorite charity. He owns $30,000 of Microsoft stock that he purchased several years ago for $5,000. Jim is subject to 15% capital gains tax. If he were to sell the stock, he would pay $3,750 in taxes, leaving him with $26,250 to donate. If Jim is able to itemize his tax deductions, he would be able to deduct $26,250.1
If, instead, Jim donated the stock directly to the charity, he would avoid paying the capital gains tax. The charity receives the full $30,000 value, rather than $26,250. And if Jim itemizes, he may be able to deduct the full $30,000.1
To be eligible for a charitable deduction for this tax year, donations of stock need to be received by the end of the year.
Determining charitable giving strategies is one way that we partner with clients. We can help you determine if donating appreciated stock is right for your situation.
Call us to review your investment approach (404) 941-2800.
