Financial Insights- October 29, 2021

YEAR-END TAX PLANNING

With only two months left in the current tax year, there is still time to reduce your tax bill due April 15. For the business owner, you need to think about deferring income into next year and paying all expenses this year, especially if you think you will be in a lower tax bracket next year. However, you want to do just the opposite if you think you will be in a higher tax bracket next year. Congress is on the verge of making significant changes to the tax structure and we will keep you updated over the next sixty days if anything gets passed.

For the rest of us, what can you do? First, make sure that you max out your retirement plan (401k, 403b, 457, IRA, etc.) between now and the end of the year. The limit on employee elective deferrals for 401k and 403b is $19,500 in 2021. If you are age 50 and older, you can add an extra $6,500 in “catch up” contributions, bringing your total contributions for 2021 to $26,000. The annual IRA contribution limit for 2021 is $6,000 ($7,000 if age 50 or older). Although the stock market has been kind to investors this year, you may have a few investments that have a loss. Consider selling these before the end of the year as these losses can be used to offset any gains and up to $3,000 of ordinary income. If you have losses left over, you can carry them forward. Of course, do not buy the same security within 30 days before or after the sale as it will be considered a wash sale, i.e., like you never sold it in the first place. If you are over age 59½ and under age 72, consider taking enough money out of your IRA today that will keep you in the same tax bracket, pay the taxes with other savings, and move 100% of the withdrawal into a Roth IRA which will grow tax-free if left for at least five years. While it will not reduce your taxes this year, it will help in the future.

MEGA IRAs A THING OF THE PAST?

Amongst the many proposals being advanced in Congress is one that would make significant changes to mega IRAs. Currently, that is being defined as an IRA with $10 million or more in value and taxpayer with an income of $450,000 for a couple or $400,000 for an individual. Once again, another form of marriage penalty. First, the owner could no longer make any future contributions to either a regular or Roth IRA. Not a big deal since this only amounts to $6,000 for those under age 50 and $7,000 for those 50 and above. The proposals make no mention of contributions to a 401(k) which are higher at $19,500 for everyone and a catch-up of $6,500 for those 50 and above. 

The BIG issue, however, is the requirement to take Required Minimum Distributions (RMD) prior to age 72 which is currently the age at which RMDs start. This would happen under the same value and income levels described above. The RMD would be equal to 50% of the retirement savings over $10 million. If the taxpayer is under age 59½, the 10% non-deductible penalty is waived. How generous of Congress and IRS. But like on those infomercials on TV – “wait there is more!”. If some lucky owner has retirement savings with a combined value that exceeds $20 million, then they must distribute 100% over $20 million and it needs to come from the Roth accounts first, even to the point of exhaustion. 

In a blow to many less-rich taxpayers, the proposal calls for the total ban of the “back door Roth”. But wait, there is more. In pure financial game playing to raise money in the future, it would eliminate converting a regular IRA into a Roth IRA even when taxes are being paid on the conversion. It would apply to the same $450,000/$400,000 income limits. BUT this doesn’t start until 10 years from now. That is the game playing.

Whether any of this becomes law, we will likely know before the end of the year. Remember tax law is permanent until Congress changes it. We think several of these proposals could be challenged in court as unconstitutional.

WHAT ABOUT BITCOIN’S ETF?

Earlier this month, bitcoin advocates hailed the approval of the first Exchange Traded Fund (ETF) that gives investors another way to play in this asset class. The ProShares Bitcoin Strategy ETF doesn’t invest in bitcoin itself, but rather invests in futures contracts that are traded on the Chicago Mercantile Exchange. As a result, it will not be 100% correlated with a bitcoin itself as it reflects bitcoin’s anticipated future price, not the present price. It will likely have as much, if not more, volatility. In short, in our opinion, investors beware. This is probably the first of many choices. No, you are not likely to see it in your portfolio with ProVise.

THE BIGGEST CONTRIBUTOR TO STOCK MARKET RETURNS OVER THE LAST DECADE WAS… 

Stock returns essentially come from three sources: 1) earnings, 2) dividends, and 3) price-to-earnings multiple expansion. Since 2011, the largest contributor to S&P 500 returns has been none of the above…sort of. Share repurchases, or buybacks, made up 40% of the market’s total return over the last decade. Earnings (after adjusting for buybacks) was the second-largest contributor at 31%, while 21% of returns were attributed to P/E multiple expansion (after adjusting for buybacks) and 7% from dividends. With that said, it pays (literally) over the long term to invest in companies with strong share repurchase programs.

WOMEN AS THE NEW FACE OF WEALTH 

Did you know that by 2030 American women are expected to control between $25 – $30 trillion in assets through generational and spousal transfers? To put this number in perspective, McKinsey & Company described it as approaching the annual GDP of the United States. 

Sources: McKinsey & Company, “Wealth as the next wave of growth in U.S. wealth management” (2020); Mary Quist-Newins, “Untapped Market: Women May Be Gaining Economic Power, but They Still Feel Financial Planners Are Not Recognizing their Potential.”  March 1, 2010.

PANDEMIC WIPED OUT SAVINGS FOR MANY 

As the pandemic got underway and lockdowns started, the thought was that people would save more because there was no place to go. It is true that across the country savings increased, but there was an imbalance. Keep in mind that many studies have shown that the average American had very little in savings for an emergency or opportunity in the pre-pandemic world. In a poll conducted by NPR, the Robert Wood Johnson Foundation and the Harvard T. H. Chan School of Public Health, determined that 20% of about 3,500 households surveyed had their entire savings wiped out and it rose to 30% for those making $50,000 or less. Two weeks ago, we reported that a substantial number of people planned to work longer than they anticipated pre-pandemic, some as much as 10 years. It is becoming clearer that a lack of savings is just one of many reasons.

WHICH STATES HAVE THE LARGEST RETIREMENT ACCOUNT?

Personal Capital reviewed the retirement accounts of people across the country who use their platform to learn who had the biggest balance in retirement accounts. It is not surprising that there is a correlation to the percentage of millionaires in each state. Here are the top ten states with the average balance and the percent of millionaires:

10) Washington – $469,987, 7.85%;

  9) Minnesota – $470,549, 7.43%;

  8) Massachusetts – $478,947, 9.38%;

  7) Maryland – $485,501, 9.72%;

  6) Virginia – $492,965, 8.31%;

  5) Vermont – $494,569, 6.29%;

  4) Alaska – $503,822, 8.18%;

  3) New Hampshire – $512,781, 8.47%;

  2) New Jersey – $512,245, 9.76%;

  1) Connecticut – $545,754, 9.44%. 

Our observation… With most people believing they need $1,000,000 in retirement savings, America has a long way to go. We need to save more and spend less.

CONGRATULATIONS, RAY!

For the fourth year in a row, Ray Ferrara, our Founder, Chair and CEO, was selected by Florida Trend magazine to be among the top 500 business leaders in Florida. Among the criteria for selection are longevity, influencer, and one to whom others look for leadership. For a complete list, visit FloridaTrend500.com. Way to go Ray!

IMPORTANT DISCLOSURE