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                    [post_date] => 2023-02-02 09:22:13
                    [post_date_gmt] => 2023-02-02 15:22:13
                    [post_content] => By Kevin Oleszewski CFP®, MST, EA, Senior Wealth Planner

Multiple retirement savings vehicles are available but having options can be overwhelming. Each option comes with different rules leading to a variance of outcomes in the short-term and long-term. It’s not that dissimilar to choosing what to eat. There are options which are satisfying in the short-term but may necessitate a more vigorous workout later to compensate. Other menu options might be less satisfying immediately but reduce the need to work out as intensely. Similar to how different foods affect the way the body is fueled, retirement contribution choices affect the fuel for retirement. How you save is just as important as how much you save.

Traditional IRA vs. Roth IRA

One example of two similar, yet very different, retirement saving vehicles are Traditional IRAs and Roth IRAs. Both are Individual Retirement Accounts meaning the account is opened and funded by the worker and are tax-advantaged accounts designed for retirement savings. Certain other types of retirement accounts are sponsored by employers and can be funded with both worker and employer contributions. Traditional and Roth IRAs can be distinguished by their tax treatment. So how do they differ and how does each fuel retirement?

Traditional IRA

The Traditional IRA is what usually comes to mind when hearing about an IRA. Often, it’s called a simple IRA, whereas a Roth IRA goes by its full name or Roth for short. The features commonly associated with an IRA include tax-deductible contributions and tax-deferred growth. Because Traditional IRA contributions are made during income-earning years for a time when earned income ends or is reduced (and tax liabilities are frequently lower), the IRA can be a nice way to reduce the current income tax liability while also targeting retirement saving goals. Traditional IRAs provide tax benefits at the point of contribution for those within the income limits for qualification of a tax deduction. Whether an employer-sponsored retirement plan is offered affects the income limits for contribution deductibility. In 2023, for example, the Modified Adjusted Gross Income (MAGI) limits are as follows:
Single / Head of Household Married Filing Jointly Married Filing Separately
No Employer Retirement Plan No Limit Phase Out $218,000 - $228,000   No Limit if spouse is not covered by a plan Phase Out $1 - $10,000   No Limit if spouse is not covered by a plan
Employer Retirement Plan Phase Out $73,000 - $83,000 Phase Out $116,000 - $136,000 Phase Out $1 - $10,000
If MAGI exceeds the limits to qualify for an income tax deduction, contributions to a Traditional IRA can still occur. The nondeductible IRA contributions will not provide in an income tax deduction, but the account will still benefit from tax-deferred growth. The trade-off for tax-deductible contributions is taxable distributions. IRA distributions can occur at any time but may be subject to an additional 10% penalty if the account owner is under age 59½. Distributions of pre-tax contributions and the earnings are includible in taxable income.  Alternatively, nondeductible contributions increase basis in the account and distribution of the basis is not taxable. The earnings, however, on non-deductible contributions are taxable.  Leaving the assets inside the account to avoid taxable distributions cannot continue indefinitely.  At age 73, a minimum amount must be distributed from Traditional IRAs. These distributions are known as required minimum distributions (RMDs), and the penalty for failure to take the distribution is 50% of the short-fall.

Roth IRA

Like the Traditional IRA, the Roth IRA (Roth) benefits from tax-deferred growth. Unlike the Traditional IRA, Roth account contributions are not tax-deductible. Roth accounts, however, have two attractive features the IRA does not offer: tax-free distributions and no required minimum distribution necessity. Because minimum distributions are not required, Roth accounts can benefit from tax-deferred growth until the account owner chooses to take a distribution. Roth assets can be used to manage taxable income during retirement by providing a tax-free stream of income and funds not withdrawn before death maintain their tax character for the account beneficiary. Only qualified Roth distributions are tax-free and penalty-free so it’s a good idea to know the requirements for a distribution to be qualified:
  • Over age 59½ AND at least 5 years has passed since the Roth was first opened and funded
  • Death or disability
  • Qualified first-time home purchase
Non-qualified distributions are subject to a 10% penalty unless an exception applies:
  • Distributions part of a series of substantially equal payments (greater of 5 years or age 59½)
  • Unreimbursed medical expenses exceeding 10% AGI
  • Medical insurance premiums after a job loss
  • Distributions not more than qualified higher education expenses (self or eligible family)
  • Distributions due to an IRS levy
  • Qualified reservist distribution
  • Qualified disaster recovery assistance distribution
Not everyone is eligible to contribute directly to a Roth IRA. Income limits, based on MAGI, exist as follows:
Single / Head of Household Married Filing Jointly Married Filing Separately
  Phase Out $138,000 - $153,000   Phase Out $218,000 - $228,000 Phase Out $1 - $10,000
Individuals not eligible to save directly into a Roth IRA could consider a backdoor Roth IRA contribution. The backdoor Roth contribution is a 2-step process beginning with a non-deductible contribution to a Traditional IRA.  Then the contribution is immediately converted to a Roth. Individuals with existing Traditional IRA balances, especially if the result of tax-deductible contributions, should work closely with their CPA because the conversion could be a taxable event. For those eligible to make tax-deductible IRA contributions and full Roth IRA contributions, it can be tough to decide which account to contribute or the best combination among the two. The maximum contribution amount to Traditional and Roth IRAs in 2023 is $6,500, and those age 50 and over may also make a catch-up contribution of an additional $1,000. That $6,500 contribution can be made entirely to a Traditional IRA, entirely to a Roth IRA, or some combination of the two as long as the contribution amount in total does not exceed the limit and catch-up amount, if applicable. Just as dietary choices have short-term and long-term implications, Traditional and Roth IRA contributions have variances in their short-term and long-term impact. Choosing which IRA works for you is best done with careful consideration, and it all starts with making the decision to build wealth for the future. For more free information from a financial professional, download a free guide for additional insights on everything from investment advice and financial advisors to tax rates and the Internal Revenue Service.
  [post_title] => Should I Open a Traditional or Roth IRA? [post_excerpt] => Multiple retirement savings vehicles are available but having options can be overwhelming. Each option comes with different rules leading to a variance of outcomes in the short-term and long-term. It’s not that dissimilar to choosing what to eat. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => should-you-invest-in-a-roth-or-traditional-ira [to_ping] => [pinged] => [post_modified] => 2023-02-02 10:22:32 [post_modified_gmt] => 2023-02-02 16:22:32 [post_content_filtered] => [post_parent] => 0 [guid] => https://divi-partner-template.carsonwealth.com/?p=17967 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [1] => WP_Post Object ( [ID] => 65623 [post_author] => 90034 [post_date] => 2023-01-25 13:02:37 [post_date_gmt] => 2023-01-25 19:02:37 [post_content] => At long last, The Carson Investment Research team is proud to officially release our 2023 Market and Economic Outlook, aptly titled Outlook ’23: The Edge of Normal. You can download the whitepaper here. As you are all painfully aware, 2022 wasn’t pretty for investors – it was the first year to ever see both stocks and bonds down 10% or more. Higher-than-expected inflation was the theme of 2022, surging to the highest level since 1981. Add an aggressive Federal Reserve and an unfortunate war in Ukraine, and the result was a very poor year for investors and growing uncertainty for the U.S. and global economies. A bleak year, no doubt, but where do we go from here? We in the Carson Research team believe there are many potential reasons to be optimistic about the year ahead. For example, Inflation already started to pull back in the second half of 2022, and 2023 may actually be disinflationary, with several factors that drove inflation higher last year reversing this year. This could allow the Fed to slow down on the aggressive policy stance, and although it won’t be easy, we think there’s an above-average chance we can avoid a recession in 2023. Much like you don’t drive looking out of the rearview mirror, to look backward to predict what could be next isn’t wise. Housing and manufacturing could be headed to recessions, but the consumer remains the most important and largest part of the economy, and they are still very healthy. Just because 2022 was a poor year for stocks and bonds doesn’t mean the same will be true for 2023 (past performance isn’t indicative of future results). Stocks and bonds could bounce back nicely, with the potential for stocks to lead the way higher and for bonds to begin meaningfully contributing to investors’ portfolios again. We expect stocks to produce a total return of between 12% to 15% in 2023. We also expect a more normal year for bonds, with most of the return coming from yield. Our expectation is that the Bloomberg US Aggregate Bond Index may produce a total return between 4% to 5% in 2023. You can read the full Outlook ’23: The Edge of Normal here. We hope you find it useful! If you’d like to discuss the report further, or talk about what 2023 might mean for your finances, please reach out. Schedule a conversation.
  The views stated in this article, are not necessarily the opinion of Cetera Advisor Networks LLC or CWM, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. [post_title] => Carson Investment Research’s Outlook '23: The Edge of Normal [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => carson-investment-researchs-outlook-23-the-edge-of-normal [to_ping] => [pinged] => [post_modified] => 2023-01-30 12:32:56 [post_modified_gmt] => 2023-01-30 18:32:56 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?p=65631 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [2] => WP_Post Object ( [ID] => 65621 [post_author] => 182385 [post_date] => 2023-01-25 12:34:26 [post_date_gmt] => 2023-01-25 18:34:26 [post_content] => Mike Valenti, CPA, CFP®, Director of Tax Planning
Tom Fridrich, JD, CLU, ChFC®, Senior Wealth Planner
It’s January, so it’s officially tax season! One of the most common client questions heard by tax preparers is, “So, what do you need from me?” The short answer to that question is often, “Everything.” But that isn’t helpful, nor is it entirely true. Let’s dig into what your tax preparer needs from you to prepare your tax return efficiently and in a timely manner.

Communication Is Key

Your preparer should tell you when to expect the engagement letters, organizers, etc., and when they need all the information by to finalize or extend the return before the deadline. Adhering to their timeline and providing documents in the instructed manner (such as through a client portal or a secure drop box) will reduce any back and forth and minimize the chance that your preparer misses something you already provided. If you’re asked to complete a questionnaire or organizer, there’s a reason why. Those two documents cover most, if not all, of what you will need to provide for your return to be complete and accurate. Most of life’s major events have a tax impact, so it’s important to keep your preparer apprised. Marriage, divorce, births/adoptions, deaths, home purchases and sales, new business ventures and side hustles, and inheritances are a few examples of events that have tax consequences.

Documentation Needed for Your Tax Return

Any government-issued forms, such as W-2s, 1099s, 1098s, and K-1s, you receive are all reported to the IRS. If your return is missing information reported on one of these forms, the IRS and state taxing authorities will reconcile your return and issue notice adjusting the return to match what was reported. This can result in additional tax owed, plus penalties and interest. Other information, such as business income and expenses, medical expenses, charitable contributions, and some tax strategies, is not reported to the IRS and sufficient records must be maintained. Examples of income reported to the IRS:
  • Form W-2
  • Form 1099s from all sources, including:
    1. • Bank interest
    2. • Brokerage accounts
    3. • Stock dividends
    4. • Stock sales
    5. • Sale of real estate
    6. • Nonemployee business income/payments on the 1099-NEC
    7. • Social Security
    8. • Retirement account distributions and other retirement income
    9. • Cancellation of debt
    10. • Unemployment, state tax refunds, and other government payments
    11. • 529 distributions
    12. • Rents and royalties
    13. • Miscellaneous income
  • Form K-1s from all sources, including:
    1. • Trusts
    2. • Partnerships
    3. • S Corporations
Examples of expenses and contributions reported to the IRS:
  • Form 1098s from all sources, including:
    1. • Mortgage interest
    2. • Tuition
    3. • Student loan interest
  • Form 5498s with retirement account information
Examples of information not reported to the IRS and require adequate record keeping:
  • Business income and expenses
  • Medical expenses
  • Charitable contributions, including Donor Advised Funds and Qualified Charitable Distributions
  • State and local tax payments, including real estate, personal property, and sales taxes
  • Contributions to tax-advantaged accounts, including IRAs, 529s, and HSAs
  • Tax basis for equity compensation transactions
For information not reported to the IRS – such as business income and expenses, charitable contributions, and medical expenses – it’s important to keep accurate and contemporaneous records. You’ll also want to keep any supporting documentation, such as receipts and transactions histories, as the IRS may ask you to support the number reported on the return. However, you should provide the total number for each income and expense category to your preparer first and offer to provide supporting documentation if needed. For example, if you donate food to the local food pantry every week, you should keep physical or digital receipts of purchase and donation, but your preparer may be content with a summary of the donations and ask you to hold on to the receipts. You should also track estimated tax payments. You might think that the IRS and states would be able to track payments accurately, but that is often not the case. Even if labeled properly, sometimes taxing authorities do not credit tax payments to the correct tax year, and matching errors occur. Keep a record of the payments, with payment confirmations and cancelled checks, and provide those to the preparer.

What If I Need to File an Extension?

For many taxpayers, not all the information is available to file a return by the April 15 deadline (March 15 for corporate and partnership filers). K-1s are a common reason for extending, as returns for entities issuing K-1s generally require additional time given the complexity of the return. Sometimes life events make it impractical or too stressful to collect all the documents on time. It’s okay to extend if you need to do so. There is no penalty or downside to filing an extension. Once extended, the filing deadline for individual returns is October 15 (September 15 for corporate and partnership filers, September 30 for trusts and estates). Please note that an extension is an extension of time to file the return, not to pay the tax due. The IRS still requires 100% of the total tax liability be paid or withheld by the April 15 deadline. This is an important distinction. Your preparer should be able to assist you in filing an extension and making the requisite payments. Many preparers have a due date (usually mid-March) for you to provide documents in order to file the return before the April 15 deadline. If you think you may be unable to provide all your information by that date, talk to your preparer to determine whether an extension is appropriate.

Provide All the Documentation as Early as Possible

Most tax documents are issued in January. Brokerage account 1099s are typically available by mid-February. The quicker you can provide all the documents to your preparer, the earlier your return can be prepared. Avoid sending documents one-by-one – sending all the documents at once to your preparer will allow them to start working on the return sooner. If you have all but one or two documents, ask your preparer for their preference as to when you should send in your tax documents. Tax season is rarely fun, but a great working relationship with your tax preparer can reduce the stress caused by April 15. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. [post_title] => What Documents You Should Provide to Your Tax Preparer [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => what-documents-you-should-provide-to-your-tax-preparer [to_ping] => [pinged] => [post_modified] => 2023-01-25 13:09:48 [post_modified_gmt] => 2023-01-25 19:09:48 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?p=65628 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [3] => WP_Post Object ( [ID] => 62500 [post_author] => 99865 [post_date] => 2023-01-05 17:05:19 [post_date_gmt] => 2023-01-05 23:05:19 [post_content] => There’s more to tax planning than you think. Do you understand how each of your accounts are taxed? How did you set up your retirement plan? Have you considered an HSA? Take control of your taxes and how they fit into the big picture. Check out these income tax planning tips. Click here to open fullscreen [post_title] => 10 Tax Planning Tips That Could Reduce Your Taxes [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => 10-tax-planning-tips-your-cpa-might-have-missed [to_ping] => [pinged] => [post_modified] => 2023-02-02 11:44:01 [post_modified_gmt] => 2023-02-02 17:44:01 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/blog/10-tax-planning-tips-your-cpa-might-have-missed/ [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [4] => WP_Post Object ( [ID] => 65575 [post_author] => 182385 [post_date] => 2023-01-05 13:15:41 [post_date_gmt] => 2023-01-05 19:15:41 [post_content] => Mike Valenti, CPA, CFP®, Director of Tax Planning Qualified retirement plans – such as 401(k)s, 403(b)s and IRAs – offer clear tax advantages. Traditional 401(k)s, 403(b)s, and IRAs offer a tax deferral on contributions and growth until distribution. Their Roth counterparts can provide an inverse benefit: Contributions are taxed up front, but growth and qualified distributions are tax-free. To prevent individuals from taking advantage of the tax-deferred growth in perpetuity, there are certain rules in place. One of those is the Required Minimum Distribution (RMD) rule. Taxpayers with qualified retirement accounts are required to start taking distributions from the accounts once a certain age is reached. That age was 70½ prior to 2020, 72 from 2020 to 2022, and will be 73 starting in 2023 with the passage of the SECURE 2.0 Act. The bill also includes a provision to increase the RMD age in ten years to 75. Note: those who are beneficiaries of inherited retirement accounts may also be subject to RMDs, but that topic is not covered here.

RMD Basics

The RMD rules apply to all employer-sponsored qualified retirement accounts (401(k)s, 403(b)s, etc.) and IRAs, with exception of Roth IRAs – and beginning in 2024, due to the SECURE 2.0 Act provisions, Roth 401(k)s. If someone is still working at or beyond the RMD age and their company offers a qualified retirement plan such as a 401(k), the distribution requirement for that plan specifically is deferred until the person retires or otherwise stops working for that company. If you own more than 5% of the company when you hit your required beginning age you would still need to take RMDs from that company plan. Due to the mechanics of the RMD age increase from 72 to 73 in 2023, a smaller subset of people will be required to take their first distribution in 2023. If you turned 72 in 2022, your first RMD would need to come out by April 1, 2023 and a second RMD, for 2023, would need to be distributed by December 31, 2023. Thus, the only people required to take their first RMD in 2023 will be those who continued to work past the RMD age and are retiring in 2023. The RMD amount – the minimum amount that must be withdrawn and subject to tax – is calculated using life-expectancy tables provided by the IRS. The intent is to draw down tax-advantaged retirement accounts over the life of the taxpayer. As a result, the minimum distribution amount will change every year depending on the current age factor and the prior year’s distributions and market performance. The minimum distribution is required to be taken by year-end, with one exception. In the first year an RMD is required to be taken, there is a three-month grace period and the distribution needs to be taken by April 1st of the following year to avoid penalty. The second year’s RMD is still required to be taken that year, so this does result in two distributions the second year. The RMD age should not be confused with the age 59½ threshold, which is when an individual can start taking distributions without penalty.

How to Calculate Your RMD Amount

As noted above, the minimum distribution is calculated by using a formula based on a life expectancy factor provided by the IRS, which can be referenced in IRS Publication 590-B. The factor is primarily based on age, but also the spouse’s age, if applicable. Most people will use the Uniform Life Expectancy Table, but those with spouses 10+ years younger who are the sole beneficiaries of the account are subject to the Joint Life and Last Survivor Expectancy Table, which takes into account that the younger spouse may live significantly longer and may rely on the inherited assets well past the death of the first spouse. To calculate the RMD, the balance of the applicable accounts on the last day of the prior tax year (December 31, 2022 for 2023 distributions) is divided by the life expectancy factor. While there is not a requirement to take distributions from every single account, i.e., a distribution from one IRA can suffice for all IRAs, there is a distinction between IRAs and employer-sponsored accounts. If you have IRAs and a 401(k), two pro rata distributions must be taken: one from an IRA to meet the RMD for the collective IRAs and one from the 401(k) to cover for the employer-sponsored plan(s). For a simple example, assume you are 73, single or have a spouse the same age and have $50,000 in a 401(k) and $50,000 in an IRA for a total of $100,000. Your life expectancy factor is 26.5. Divide $100,000 by 26.5 and your total RMD for the year is $3,774, and furthermore, at least $1,887 is required to be withdrawn from each account.

How to Take the RMD

To take the distribution, you must direct the account custodian to make the distribution. There will be a form to fill out, which includes how much to withdraw, when to withdraw, how and where the distribution will be paid, and how much in taxes to withhold. The default federal tax withholding is 10%, but you can request specific amounts or percentages to be withheld for federal and state taxes. Some custodians will allow you to set up automatic distributions, which can be helpful if you have multiple and/or smaller accounts to ensure the RMD is not missed. For tax reporting purposes, you will get a 1099R that lists the distributions and taxes withheld. You should always provide this form to your tax preparer. Prior to 2023, failing to take the RMD could result in a costly 50% penalty on the minimum distribution not taken. Due the SECURE 2.0 Act, the amount not withdrawn is now penalized at 25%, with a reduction to 10% if corrected in a timely manner.

Choosing an RMD Strategy for You

In the first year, although you have grace period, it generally makes sense to take the first RMD to reduce the overall tax liability. However, in certain circumstances, it could be worth considering a delay until the following year. As examples, if you are retiring this year with a sizeable severance package or you expect to have significant gains (perhaps from the sale of property), it could make sense to defer the income to the following year. You will double up on your RMDs in 2024, but you'll be paying less in taxes overall if properly planned. A very common planning strategy involving RMDs is to use them as a vehicle to withhold taxes. Once you have a good idea of what your net tax liability will be for the year – typically in November or December – you can take your distribution and withhold the necessary taxes needed for the year. The custodian will then pay federal and state tax authorities and remit the balance to you. This is generally more attractive than making estimated tax payments during the year because the tax withheld from your RMD is considered ratably paid throughout the year and can reduce the chance of an underpayment penalty due to a timing mismatch between income and estimated payments. There is no limit on the number of distributions you can pull throughout the year, other than what your custodian may impose. You can take them yearly, monthly, or even bi-weekly if you wish, to cover living expenses. Additionally, there is no maximum distribution other than the account’s balance. If, for example, your RMD is $100,000, but you need $120,000 for living expenses, you can withdraw $120,000 or more to meet your needs. Perhaps a monthly distribution of $10,000 is more attractive. On top of those distributions, you could take a year-end distribution to cover the expected tax liability.

Consult with Your Advisors

Given the complexity of the RMD calculation and process, you should always consult with your financial planner and/or tax advisor to discuss how much to withdraw, how much to withhold, and when to take to the distributions as you near age 73. Jamie is not registered with CWM, LLC as an investment advisor representative and does not provide product recommendations or investment advice. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. CWM, LLC, any other named entity or any of their representatives may not give legal or tax advice. [post_title] => Planning for Your First Required Minimum Distribution in Retirement [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => planning-for-your-first-required-minimum-distribution-in-retirement [to_ping] => [pinged] => [post_modified] => 2023-01-17 09:47:36 [post_modified_gmt] => 2023-01-17 15:47:36 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?p=65589 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) ) [post_count] => 5 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 17967 [post_author] => 181805 [post_date] => 2023-02-02 09:22:13 [post_date_gmt] => 2023-02-02 15:22:13 [post_content] => By Kevin Oleszewski CFP®, MST, EA, Senior Wealth Planner Multiple retirement savings vehicles are available but having options can be overwhelming. Each option comes with different rules leading to a variance of outcomes in the short-term and long-term. It’s not that dissimilar to choosing what to eat. There are options which are satisfying in the short-term but may necessitate a more vigorous workout later to compensate. Other menu options might be less satisfying immediately but reduce the need to work out as intensely. Similar to how different foods affect the way the body is fueled, retirement contribution choices affect the fuel for retirement. How you save is just as important as how much you save.

Traditional IRA vs. Roth IRA

One example of two similar, yet very different, retirement saving vehicles are Traditional IRAs and Roth IRAs. Both are Individual Retirement Accounts meaning the account is opened and funded by the worker and are tax-advantaged accounts designed for retirement savings. Certain other types of retirement accounts are sponsored by employers and can be funded with both worker and employer contributions. Traditional and Roth IRAs can be distinguished by their tax treatment. So how do they differ and how does each fuel retirement?

Traditional IRA

The Traditional IRA is what usually comes to mind when hearing about an IRA. Often, it’s called a simple IRA, whereas a Roth IRA goes by its full name or Roth for short. The features commonly associated with an IRA include tax-deductible contributions and tax-deferred growth. Because Traditional IRA contributions are made during income-earning years for a time when earned income ends or is reduced (and tax liabilities are frequently lower), the IRA can be a nice way to reduce the current income tax liability while also targeting retirement saving goals. Traditional IRAs provide tax benefits at the point of contribution for those within the income limits for qualification of a tax deduction. Whether an employer-sponsored retirement plan is offered affects the income limits for contribution deductibility. In 2023, for example, the Modified Adjusted Gross Income (MAGI) limits are as follows:
Single / Head of Household Married Filing Jointly Married Filing Separately
No Employer Retirement Plan No Limit Phase Out $218,000 - $228,000   No Limit if spouse is not covered by a plan Phase Out $1 - $10,000   No Limit if spouse is not covered by a plan
Employer Retirement Plan Phase Out $73,000 - $83,000 Phase Out $116,000 - $136,000 Phase Out $1 - $10,000
If MAGI exceeds the limits to qualify for an income tax deduction, contributions to a Traditional IRA can still occur. The nondeductible IRA contributions will not provide in an income tax deduction, but the account will still benefit from tax-deferred growth. The trade-off for tax-deductible contributions is taxable distributions. IRA distributions can occur at any time but may be subject to an additional 10% penalty if the account owner is under age 59½. Distributions of pre-tax contributions and the earnings are includible in taxable income.  Alternatively, nondeductible contributions increase basis in the account and distribution of the basis is not taxable. The earnings, however, on non-deductible contributions are taxable.  Leaving the assets inside the account to avoid taxable distributions cannot continue indefinitely.  At age 73, a minimum amount must be distributed from Traditional IRAs. These distributions are known as required minimum distributions (RMDs), and the penalty for failure to take the distribution is 50% of the short-fall.

Roth IRA

Like the Traditional IRA, the Roth IRA (Roth) benefits from tax-deferred growth. Unlike the Traditional IRA, Roth account contributions are not tax-deductible. Roth accounts, however, have two attractive features the IRA does not offer: tax-free distributions and no required minimum distribution necessity. Because minimum distributions are not required, Roth accounts can benefit from tax-deferred growth until the account owner chooses to take a distribution. Roth assets can be used to manage taxable income during retirement by providing a tax-free stream of income and funds not withdrawn before death maintain their tax character for the account beneficiary. Only qualified Roth distributions are tax-free and penalty-free so it’s a good idea to know the requirements for a distribution to be qualified:
  • Over age 59½ AND at least 5 years has passed since the Roth was first opened and funded
  • Death or disability
  • Qualified first-time home purchase
Non-qualified distributions are subject to a 10% penalty unless an exception applies:
  • Distributions part of a series of substantially equal payments (greater of 5 years or age 59½)
  • Unreimbursed medical expenses exceeding 10% AGI
  • Medical insurance premiums after a job loss
  • Distributions not more than qualified higher education expenses (self or eligible family)
  • Distributions due to an IRS levy
  • Qualified reservist distribution
  • Qualified disaster recovery assistance distribution
Not everyone is eligible to contribute directly to a Roth IRA. Income limits, based on MAGI, exist as follows:
Single / Head of Household Married Filing Jointly Married Filing Separately
  Phase Out $138,000 - $153,000   Phase Out $218,000 - $228,000 Phase Out $1 - $10,000
Individuals not eligible to save directly into a Roth IRA could consider a backdoor Roth IRA contribution. The backdoor Roth contribution is a 2-step process beginning with a non-deductible contribution to a Traditional IRA.  Then the contribution is immediately converted to a Roth. Individuals with existing Traditional IRA balances, especially if the result of tax-deductible contributions, should work closely with their CPA because the conversion could be a taxable event. For those eligible to make tax-deductible IRA contributions and full Roth IRA contributions, it can be tough to decide which account to contribute or the best combination among the two. The maximum contribution amount to Traditional and Roth IRAs in 2023 is $6,500, and those age 50 and over may also make a catch-up contribution of an additional $1,000. That $6,500 contribution can be made entirely to a Traditional IRA, entirely to a Roth IRA, or some combination of the two as long as the contribution amount in total does not exceed the limit and catch-up amount, if applicable. Just as dietary choices have short-term and long-term implications, Traditional and Roth IRA contributions have variances in their short-term and long-term impact. Choosing which IRA works for you is best done with careful consideration, and it all starts with making the decision to build wealth for the future. For more free information from a financial professional, download a free guide for additional insights on everything from investment advice and financial advisors to tax rates and the Internal Revenue Service.
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Should I Open a Traditional or Roth IRA?

Multiple retirement savings vehicles are available but having options can be overwhelming. Each option comes with different rules leading to a variance of outcomes in the short-term and long-term. It’s not that dissimilar to choosing what to eat.
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                    [post_date] => 2022-05-26 08:18:44
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                    [post_content] => By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions

Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion for photography and spending time with her son and her grandkids.

The pandemic changed everything. Her son contracted COVID-19 in the early days of the pandemic. His health deteriorated quickly and he died at only 35 years old. He didn’t have life insurance. A gig worker without a 401(k), he had very minimal retirement savings.

Rose’s grandchildren, ages 2 and 6, joined the more than 140,000 U.S. children under the age of 18 who lost their primary or secondary caregiver due to the pandemic from April 2020 through June 2021. That’s approximately one out of every 450 children under age 18 in the United States.

Rose’s ex-daughter-in-law battles drug addiction and had lost custody of the kids during the divorce, so Rose became the children’s primary caregiver. She quickly discovered that caring for young children as an older adult is more physically challenging than when she raised her son, so she made the difficult decision to leave her part-time job to have the energy to care for her active grandchildren. She wants to do everything for these kids who have lost so much — but it puts her financial security at risk.

Sadly, she is far from alone.

Read the full article
                    [post_title] => COVID’s Financial Toll Isn’t What You Think
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                    [post_content] => By: Erin Wood, CFP®, CRPC®, FBS®, Senior Vice President, Financial Planning, Carson Group

 

Laura and Caroline are in their late 50s. Friends since meeting at a playgroup for their toddlers, both were in long-term, seemingly happy marriages. Laura married her high school sweetheart right after they graduated from college and worked as an RN while her husband attended medical school. When their first child was born, Laura decided to become a stay-at-home parent. She just celebrated sending her last child off to college and was looking forward to enjoying an empty nest with her husband.

Already established in her career as an accountant for a large insurance firm, Caroline married a bit later, at 33. Today, she’s a financial controller for the same firm. Her spouse owns his own landscaping business. Caroline is the high-wage earner in the family.

Unfortunately, both women are now surprised to be facing a “gray” divorce: a divorce involving couples in their 50s or older. Each will need to make some tough choices as they deal with the emotional devastation of unraveling a long-term marriage. Although my focus as a financial planner is to help my clients find their financial footing during and after divorce, I also encourage clients to build a strong network of family and friends as well as a therapist or clergy person to offer critical emotional support during this time.

Read full article on Kiplinger.com

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Roth conversions can be a powerful tax and retirement planning technique. The idea behind most Roth conversions is to take money from an IRA and convert it to a Roth IRA. Essentially, you’re paying taxes today instead of paying taxes in the future.

The Tax Cut and Jobs Act lowered taxes for many Americans and with the SECURE Act Roth IRAs became even more powerful as an estate planning vehicle to minimize taxes, so it’s a convenient time to take advantage of Roth conversions. However, Roth conversions can come with some issues. Before you engage in one, be aware of these common problems as it can be hard to undo the transaction.

Conversions After 72

IRAs and Roth IRAs are both retirement accounts. It’s easy to assume Roth Conversions are best suited for retirement, too. However, waiting too long to do conversions can actually make the entire process more challenging. If you own an IRA, it’s subject to required minimum distribution rules once you turn 72, as long as you had not already reached age 70.5 by the end of 2019. The government wants you to start withdrawing money from your IRA each year and pay taxes on the tax-deferred money. However, Roth IRAs aren’t subject to RMDs at age 72. If you don’t need the money from your RMD to support your retirement spending, you might think, “I should convert this to a Roth IRA so it can stay in a tax-deferred account longer.” Unfortunately, that won’t work. You can’t roll over or convert RMDs for a given year. So, if you owe a RMD in 2020, you need to take it and you cannot convert it to a Roth IRA. Despite the fact you can’t convert an RMD, it doesn’t mean you can’t do Roth conversions after age 72. However, you need to make sure you get your RMD out before you do a conversion. Your first distributions from an IRA after 72 will be treated as RMD money first. This means, if you want to convert $10,000 from your IRA, but you also owe an $8,000 RMD for the year, you need to take the full $8,000 out before you do a conversion. Full article on Forbes   [post_title] => 3 Roth Conversion Traps To Avoid After The SECURE Act [post_excerpt] => Roth conversions can be a powerful tax and retirement planning technique. The idea behind most Roth conversions is to take money from an IRA and convert it to a Roth IRA. Essentially, you’re paying taxes today instead of paying taxes in the future. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => 3-roth-conversion-traps-to-avoid [to_ping] => [pinged] => [post_modified] => 2020-02-28 16:01:10 [post_modified_gmt] => 2020-02-28 22:01:10 [post_content_filtered] => [post_parent] => 0 [guid] => https://divi-partner-template.carsonwealth.com/?post_type=news&p=53316 [menu_order] => 0 [post_type] => news [post_mime_type] => [comment_count] => 0 [filter] => raw ) [3] => WP_Post Object ( [ID] => 51325 [post_author] => 6008 [post_date] => 2019-12-06 10:26:33 [post_date_gmt] => 2019-12-06 16:26:33 [post_content] => By Jamie Hopkins People plan on having a good day, a good year, a good retirement and a good life. But why stop there? Why not plan for a good end of life, too? End of life or estate planning is about getting plans in place to manage risks at the end of your life and beyond. And while it might be uncomfortable to discuss or plan for the end, everyone knows that no one will live forever. Estate planning and end of life planning are about taking control of your situation. Death and long-term care later in life might be hard to fathom right now, but we can’t put off planning out of fear of the unknown or because it’s unpleasant. Sometimes it takes a significant event like a health scare to shake us from our procrastination. Don’t wait for life to happen to you, though. Full article on Kiplinger [post_title] => 10 Common Estate Planning Mistakes (and How to Avoid Them) [post_excerpt] => Estate planning and end of life planning are about taking control of your situation. Death and long-term care later in life might be hard to fathom right now, but we can’t put off planning out of fear of the unknown or because it’s unpleasant. Don’t wait for life to happen to you, though. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => 10-common-estate-planning-mistakes-and-how-to-avoid-them [to_ping] => [pinged] => [post_modified] => 2020-02-28 16:02:24 [post_modified_gmt] => 2020-02-28 22:02:24 [post_content_filtered] => [post_parent] => 0 [guid] => https://divi-partner-template.carsonwealth.com/?post_type=news&p=51325 [menu_order] => 0 [post_type] => news [post_mime_type] => [comment_count] => 0 [filter] => raw ) [4] => WP_Post Object ( [ID] => 63308 [post_author] => 273 [post_date] => 2019-11-11 16:27:38 [post_date_gmt] => 2019-11-11 21:27:38 [post_content] => By Jamie Hopkins

Everyone’s heard the stories of celebrities who died without a proper estate plan in place. It’s been a hot topic in the last few years with Prince and Aretha Franklin serving as unfortunate faces of the phenomenon. But it’s not just freewheeling entertainers. Abraham Lincoln – a lawyer by trade – didn’t have one either, which leads me to say something you’ve probably never heard anyone say: don’t be like Abraham Lincoln.

Most people want to plan for a good life and a good retirement, so why not plan for a good end of life, too? Let’s look at four ways you can refine your estate plan, protect your assets and create a level of control and certainty for your loved ones.

1. Review Beneficiary Designations

Many accounts can pass to heirs and loved ones without having to go through the sometimes costly and time-consuming process of probate. For instance, life insurance contracts, 401(k)s and IRAs can be transferred through beneficiary designations – meaning you determine who you want to inherit your accounts after you die by filing out a beneficiary form. You can often name successors or backup beneficiaries, and even split up accounts by dollar amount or percentages between beneficiaries with these forms. Full article on Forbes [post_title] => 4 Ways To Improve Your Estate Plan [post_excerpt] => Most people want to plan for a good life and a good retirement, so why not plan for a good end of life, too? Let’s look at four ways you can refine your estate plan, protect your assets and create a level of control and certainty for your loved ones. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => 4-ways-to-improve-your-estate-plan [to_ping] => [pinged] => [post_modified] => 2020-02-28 17:02:59 [post_modified_gmt] => 2020-02-28 22:02:59 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/news/4-ways-to-improve-your-estate-plan/ [menu_order] => 0 [post_type] => news [post_mime_type] => [comment_count] => 0 [filter] => raw ) ) [post_count] => 5 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 64691 [post_author] => 90034 [post_date] => 2022-05-26 08:18:44 [post_date_gmt] => 2022-05-26 13:18:44 [post_content] => By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion for photography and spending time with her son and her grandkids. The pandemic changed everything. Her son contracted COVID-19 in the early days of the pandemic. His health deteriorated quickly and he died at only 35 years old. He didn’t have life insurance. A gig worker without a 401(k), he had very minimal retirement savings. Rose’s grandchildren, ages 2 and 6, joined the more than 140,000 U.S. children under the age of 18 who lost their primary or secondary caregiver due to the pandemic from April 2020 through June 2021. That’s approximately one out of every 450 children under age 18 in the United States. Rose’s ex-daughter-in-law battles drug addiction and had lost custody of the kids during the divorce, so Rose became the children’s primary caregiver. She quickly discovered that caring for young children as an older adult is more physically challenging than when she raised her son, so she made the difficult decision to leave her part-time job to have the energy to care for her active grandchildren. She wants to do everything for these kids who have lost so much — but it puts her financial security at risk. Sadly, she is far from alone. Read the full article [post_title] => COVID’s Financial Toll Isn’t What You Think [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => covids-financial-toll-isnt-what-you-think [to_ping] => [pinged] => [post_modified] => 2022-05-26 08:33:22 [post_modified_gmt] => 2022-05-26 13:33:22 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=news&p=64940 [menu_order] => 0 [post_type] => news [post_mime_type] => [comment_count] => 0 [filter] => raw ) [comment_count] => 0 [current_comment] => -1 [found_posts] => 6 [max_num_pages] => 2 [max_num_comment_pages] => 0 [is_single] => [is_preview] => [is_page] => [is_archive] => [is_date] => [is_year] => [is_month] => [is_day] => [is_time] => [is_author] => [is_category] => [is_tag] => [is_tax] => [is_search] => [is_feed] => [is_comment_feed] => [is_trackback] => [is_home] => 1 [is_privacy_policy] => [is_404] => [is_embed] => [is_paged] => [is_admin] => [is_attachment] => [is_singular] => [is_robots] => [is_favicon] => [is_posts_page] => [is_post_type_archive] => [query_vars_hash:WP_Query:private] => 8bbea74eca9b0e937ac286f0d22d32a8 [query_vars_changed:WP_Query:private] => [thumbnails_cached] => [allow_query_attachment_by_filename:protected] => [stopwords:WP_Query:private] => [compat_fields:WP_Query:private] => Array ( [0] => query_vars_hash [1] => query_vars_changed ) [compat_methods:WP_Query:private] => Array ( [0] => init_query_flags [1] => parse_tax_query ) [tribe_is_event] => [tribe_is_multi_posttype] => [tribe_is_event_category] => [tribe_is_event_venue] => [tribe_is_event_organizer] => [tribe_is_event_query] => [tribe_is_past] => )

In the News

In the News

COVID’s Financial Toll Isn’t What You Think

By Erin Wood, Senior Vice President, Financial Planning and Advanced Solutions Just a few years ago, Rose retired with a decent-sized 401(k). With some careful budgeting and a part-time job, her retirement finances were on track. Rose was looking forward to traveling, reigniting her passion …
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                    [post_content] => As poor as last year was for investors, 2023 has fortunately been a near mirror image. Stocks and bonds have both made solid gains to kick off the new year. The economy is in better shape than most expected, and overall inflation is also coming down, making a very nice combo.
  • Stocks have had a huge start to 2023, but a better economy could open the door to continued gains.
  • The January employment data show no sign of slowdown.
  • The economy does not appear close to a recession.
  • Wage growth is trending lower, which should be good news for the Fed as it downshifts the pace of rate hikes and closes in on a peak rate.
  • A relatively stronger than expected economy means the Fed is likely to keep rates higher for longer.
Stocks bottomed in mid-October and have gained as much as 17% off those lows. What could be next? After previous bear market lows, stocks had gained nearly 40% a year later and 60% two years later. Yes, the returns off the October lows have been impressive, but more gains are likely if history is a guide. The stock market’s strength is also a good indicator of economic growth, since stocks lead the economy. In other words, strength in stocks could be the market’s way of sniffing out better economic data. That means we could see a surprisingly strong second half of 2023. The Labor Market is Defying Recession Forecasts Let’s keep it simple: The economy created 517,000 jobs in January, well above expectations for a slowdown to 175,000. The unemployment rate is 3.4%, the lowest level since May 1969. It’s like the labor market, i.e., America’s employers, are on a mission to upend forecasts of a recession in 2023. Also, revisions suggest payroll growth was stronger than we thought in 2022. The Bureau of Labor Statistics now says the economy created 4.8 million jobs in 2022, as opposed to the previous estimate of 4.5 million. Forget recessions and landings; these numbers suggest an employment boom! Strong Numbers Under the Hood The data corroborate what we’ve been seeing in leading employment indicators, such as weekly initial claims for unemployment, which fell to the lowest level in nine months last week. January data typically tend to be quite noisy, due to seasonal effects. But even accounting for that, let’s not miss the big picture, which is that the labor market is very resilient, if not outright on fire. The huge payroll gain in January was not due to outsized gains in one sector either. Cyclical sectors, such as manufacturing, construction, and wholesale/retail trade services, all added a total of 85,000 jobs. That contradicts the narrative of a significant slowdown in these areas. Meanwhile, the service industry is growing rapidly. Americans are spending, and employers are responding, including by adding 113,000 net jobs across accommodation, restaurants, and bars. Information processing, which includes technology and utilities, were the only sectors that saw job losses, and not many. What Does This Mean for Monetary Policy? The Federal Reserve raised rates by 0.25% last week, taking the federal funds rate to the 4.50-4.75% range. This is the slowest pace of increases since last March and a welcome downshift after the aggressive pace last year. Fed officials also said ongoing interest rate increases will be appropriate to return inflation to their 2% target over time, suggesting they’re not done with rate increases yet. But the extent of future increases will take the totality of rate hikes so far plus incoming data, which indicates they are close to peak rate, perhaps around 5%. Mainly, the Fed is waiting to see disinflation in the “core services inflation, ex housing” category. This is closely tied to wage growth, and there’s good news on that front. Wage growth is decelerating. The employment cost index, which is perhaps the most stable measure of wage growth, showed a sharp deceleration in the fourth quarter, corroborating other measures. The best news is that wage growth is slowing even as the unemployment rate is at 50+ year lows. This is not what textbook theory or forecasters would predict. But we’ll take reality over that. And Fed Chair Jerome Powell’s comments after the Federal Open Market Committee (FOMC) meeting suggest the Fed might be inclined to do the same. In other words, they don’t need to be convinced that inflation is coming down and will remain low only if the unemployment rate surges. They just need to see the data, i.e., continued deceleration in wage growth, and disinflation in core services ex housing. Of course, stronger economic growth means the Fed is likely to keep interest rates higher for longer, which is contrary to market expectations of rate cuts in the second half of 2023. But we believe the economy is strong enough to handle higher rates currently.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. Compliance Case # 01649284 [post_title] => Market Commentary: More Positive Signs [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => market-commentary-more-positive-signs [to_ping] => [pinged] => [post_modified] => 2023-02-06 10:54:18 [post_modified_gmt] => 2023-02-06 16:54:18 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=market-commentary&p=65680 [menu_order] => 0 [post_type] => market-commentary [post_mime_type] => [comment_count] => 0 [filter] => raw ) [1] => WP_Post Object ( [ID] => 65654 [post_author] => 90034 [post_date] => 2023-01-30 11:11:29 [post_date_gmt] => 2023-01-30 17:11:29 [post_content] => Last week the stock market rally continued, with various sectors showing renewed strength. This time a year ago, defensive areas, such as utilities, consumer staples, and health care, were leading. That was a warning sign, and it sure turned out something was wrong. Today small-caps, cyclicals, industrials, and technology are leading. These are more risk-on areas and their strong performance is another sign of underlying health.
  • The stock market’s great start to the year continued last week, which could be a good sign as strong starts can open the door to more gains.
  • Better overall economic data last week continued to increase the chances of avoiding a recession in 2023.
  • The consumer remains in solid shape and will help offset weakness in the housing sector.
  • Price pressures continue to ease, and the inflation outlook remains good.
With only two days to go, the stock market is off to one of its best January starts, with the S&P 500 up close to 6%. This is a great sign for the bulls, as the so-called January Barometer is typically a good indicator for the year. When stocks are green in January, the next 11 months are up close to 12% on average, and the market is higher 86% of the time. When January is down, such as it was in 2022, those averages drop to 2.1% and 60%, respectively. When January is up more than 5%, the returns get even better. The following 11 months are up more than 14% on average, and the market is higher nearly 86% of the time. We wouldn’t suggest blindly investing based on January’s performance, but the returns provide another clue that conditions have changed and higher stock prices in 2023 could be quite likely. More Strong Economic Data The latest GDP growth numbers for the fourth quarter of 2022 came in at 2.9% quarter-over-quarter (annualized rate), which was higher than expectations for a 2.6% reading. This is only slightly below the third quarter growth rate of 3.2%. The first two quarters of last year saw negative growth, so this is a nice bounce back. Over the full year, GDP growth was up just 1% compared to the end of 2021. But this hides the fact that economic growth picked up in the second half of 2022. However, the first-half slowdown leaves the economy about 2.5% below its pre-pandemic trend. The big picture: The economy is more than 5% higher than it was at the end of 2019, which shows how strong the recovery has been despite the early slowdown in 2022. The employment data corroborate this as well. Details Matter GDP is measured as: GDP = Consumption (68%) + Investment (18%) + Government Spending (17%) + Net Exports (-3%) Note that net exports are exports minus imports, and since the U.S. imports more than it exports, net exports tend to be a drag. The table below shows how the various components contributed to GDP growth in the third and fourth quarters. Consumption contributed close to the same amount in both quarters. But in the third quarter the other big driver of GDP growth was net exports, whereas in the fourth quarter it was “change in private inventories.” These are the two most volatile elements of GDP, which is why it helps to look under the hood. The details also help us to consider how the markets and economy will behave in 2023. For that let’s start with the most important category — consumption, which makes up just under 70% of the economy. Consumption Stays Solid, Even as Services Normalize Consumption barely slowed from the third quarter, but there were important differences. Services consumption eased, rising 2.6% in the fourth quarter compared to 3.7% in the third. But that 2.6% pace is well above the 2015-2019 average of 1.9%. The good news is goods spending picked up in the fourth quarter and offset some of the services slowdown. This was almost entirely due to increased auto sales, gas, and grocery purchases — the latter two thanks to lower prices. This is important because we believe this trend will continue into early 2023, especially with auto sales and production picking up. Further good news: Consumers have more money in their pockets due to falling inflation, which will be a tailwind for consumption.   Housing Slowed, Thanks to the Fed The Fed’s aggressive rate hikes had barely any impact on consumption last year. They did have an impact on investment, specifically residential investment, i.e., housing. Higher interest rates led to higher mortgage rates, and that led to a crash in housing activity. Housing pulled economic growth down by about 1.3-1.4 percentage points in the third and fourth quarters. Across 2022, residential investment fell 11%, which is the largest drop since 2009 when it fell 22%. The good news is housing data appear less bad. In fact, mortgage activity has even picked up recently with rates pulling back from peak levels. So, there is sound reason to think housing will be less of a drag in 2023. Nonresidential investment also slowed, which is concerning because it indicates businesses are investing less. However, it turns out the pullback in the fourth quarter was due to businesses spending less on communications equipment, which may simply be a reversal of spending that occurred after the pandemic hit when employees had to shift to their homes.  Government Spending No Longer a Drag Investors forget that government spending makes up about 17% of the economy, and it matters. Over the last two quarters, government spending has picked up, reversing the drag from the prior five quarters. This has helped offset some of the pullback in private investment. It also is in sharp contrast to what happened after the 2008-2009 recession, when government spending was slashed and remained a drag on GDP growth all the way through 2014. Government spending should continue to add to GDP growth in 2023. Congress passed some big spending bills over the past year and half: a $1 trillion infrastructure bill, the Inflation Reduction Act, and a $1.7 trillion government budget, which increased spending significantly. The money will really start to flow into the economy in 2023.   Still No Sign of a Recession As we wrote in our recently released 2023 outlook, we don’t expect a recession in 2023, and the latest data corroborate that story. Our reasoning is simple: Inflation is slowing, and if employment and incomes hold up (as they seem to be doing), real incomes will rise. Considering goods consumption is likely to recover on the back of vehicle purchases, we’re expecting consumption to remain solid. Beyond that, housing should be less of a drag in 2023, especially as the Fed eases rate hikes, which looks likely to happen. So, the peak negative impact of aggressive rate hikes may be behind us. Non-residential investment, especially in structures and equipment, may remain weak. However, recovering auto production, and even aircraft orders, should help U.S. manufacturing. That will be enhanced as the global economy starts to strengthen later in 2023, which should also help exports. GDP growth data may be volatile due to unpredictable inventories and net exports, as we saw in 2022. But the underlying message is there still is no sign of a recession.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. Compliance Case # 01640562 [post_title] => Market Commentary: As Goes January, So Goes the Year [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => market-commentary-as-goes-january-so-goes-the-year [to_ping] => [pinged] => [post_modified] => 2023-01-31 11:40:37 [post_modified_gmt] => 2023-01-31 17:40:37 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=market-commentary&p=65652 [menu_order] => 0 [post_type] => market-commentary [post_mime_type] => [comment_count] => 0 [filter] => raw ) [2] => WP_Post Object ( [ID] => 65610 [post_author] => 90034 [post_date] => 2023-01-23 10:25:42 [post_date_gmt] => 2023-01-23 16:25:42 [post_content] => Stocks sold off early in the week on disappointing retail sales and industrial production numbers, but they staged a nice bounce on Friday to close out the week. Although some recent data has been disappointing, inflation data continues to show fast improvement, with producer-level inflation coming in lower than expected last week. Additionally, prices-paid components of regional surveys and supply chain data continues to quickly improve. All this matters, as lower inflation opens the door for the Fed to end its aggressive rate-hiking regime (more on this below).
  • Large bounces off midterm-election-year lows are normal, and we expect this to happen again in 2023.
  • The goods sector, both in consumption and production, may be pulling back as the economy continues to normalize.
  • Price pressures continue to ease, and the inflation outlook is good.
  • Rental prices are decelerating, and the supply picture indicates this trend will likely continue into 2023.
Investors should also take comfort in how strong stocks tend to be one year off a midterm-election-year low. As the chart below shows, midterm years tend to see the largest market corrections, down more than 17% on average. Considering stocks fell more than 25% last year, this scenario played out once again. The good news is stocks tend to see a huge bounce one year off the lows, up 32.3% on average and higher a year later every time. Given the S&P 500 bottomed at 3577.03 on October 12, 2022, a 32.3% bounce would bring the index about 1% away from a new all-time high. As hard as it is to believe that could be possible, history indicates new highs in 2023 aren’t as crazy as they sound. Good News for Rental Inflation The Carson Investment Research Team just released its 2023 outlook, which we titled “The Edge of Normal.” The big theme for 2022 was higher-than-expected inflation, which surged to the highest level seen since 1981. This resulted in the Federal Reserve embarking on its most aggressive rate-hike cycle in 40 years, which led to an ugly 2022 for investors, with stocks and bonds falling more than 10%. However, we are optimistic about 2023, mostly because we believe this year may be disinflationary, with several factors that drove inflation higher last year reversing. Amongst the three major drivers of lower inflation in 2023:
  • Gas prices as a deflationary force over the short term;
  • A reversal of core goods (ex. food and energy) prices; and
  • Shelter inflation pulling back in the back half of the year.
The third leg, i.e., shelter inflation, is probably the most important because that will ultimately drive inflation lower and, most importantly, keep it low. That is especially true for core inflation (ex. food and energy), since shelter makes up 40% of the core CPI basket. The good news is market rents are decelerating quite rapidly. Data from Apartment List showed rents have declined for four consecutive months. Rents fell 0.8% in December, which is the largest month-over-month decline ever seen in December. On a year-over-year basis, market rents peaked at 18% at the end of December 2021. The pace was down to under 4% as of last month. Now, as we have discussed in the past, official shelter inflation data is not going to capture this deceleration for another 8-10 months (see here and here). That is because private data reviews only market rents as related to new leases. But renters do not renew their leases every month. So official data considers both existing and new leases, which means there is a lag. On top of that, official data also averages the numbers over several months to smooth them out. But there is even better news on the horizon for shelter inflation. More Rental Supply is Coming The housing data looks awful, thanks to activity cratering amid the surge in mortgage rates. However, this has mostly been concentrated in the single-family housing segment. Dynamics within the multi-family sector have been markedly different. Multi-family units under construction are well outpacing completions and are currently at their highest level since 1973. Typically, construction outpacing completions would be a sign of over-building, as in the mid-2000s amid the housing bubble. This time around, it is due to supply-chain issues and labor shortages. But these are improving. That means a lot more rental units will come onto the market, perhaps by late 2023 and early 2024. We believe that will put even more downward pressure on rental prices. Of course, all of this is going to take a while to show up in the official data, but it further strengthens our view that disinflation is coming, with the largest component of the CPI basket, i.e., shelter, driving that downtrend in late 2023 and even into 2024. Critically, the timing will also likely coincide with a period when the impact of lower goods prices begins to wear off (barring any unexpected shocks). And with shelter inflation on the decline, the Fed will be less likely to argue that disinflationary trends are “transitory.” As a result, the Fed could start to cut rates in response, although this is unlikely until the very end of 2023, if not early 2024 — unless the economy plunges into recession. But that is not our base case currently, for all the reasons we discuss in our outlook.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. Sonu Varghese and Ryan Detrick are non-registered associates of Cetera Advisor Networks. Compliance Case # 01632615 [post_title] => Market Commentary: New Market Highs are Possible in 2023 [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => market-commentary-new-market-highs-are-possible-in-2023 [to_ping] => [pinged] => [post_modified] => 2023-01-24 08:07:39 [post_modified_gmt] => 2023-01-24 14:07:39 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=market-commentary&p=65619 [menu_order] => 0 [post_type] => market-commentary [post_mime_type] => [comment_count] => 0 [filter] => raw ) [3] => WP_Post Object ( [ID] => 65588 [post_author] => 90034 [post_date] => 2023-01-17 08:35:11 [post_date_gmt] => 2023-01-17 14:35:11 [post_content] => After one of the worst years ever for investors in 2022, we are quite happy to report that 2023 is off to a much better start. The S&P 500 is already up more than 4% for the year and flirting with the round number of 4,000. Optimism that the economy can avoid a recession (more below) and clear signs that inflation has peaked, thus forcing the Fed’s hand on continued interest rate hikes, have led to a great first half of the first month of the year.
  • 2023 is off to a great start for stocks, a welcome change from 2022.
  • Many are calling for a recession in 2023, but there are clues they could be wrong.
  • Various parts of the economy are still growing while the consumer remains quite healthy.
  • Inflation continues to fall and likely will fall quicker than most expect.
China potentially reopening has sparked strong buying in various industrial metals, specifically copper. Copper is reaching new monthly highs, and we don’t think this would be happening if a large global slowdown was coming. Historically, copper has been a good gauge for the global economy, and its strength is yet another clue the situation is different (and better) than 2022. Lastly, strength in the first month of a pre-election year is nothing new. In fact, January is typically the best month in a pre-election year, up a very solid 4.1% on average. The first few months of a pre-election year also tend to be strong based on seasonality, which investors should be open to yet again. Why is Everyone Predicting a Recession? Most outlooks are forecasting a recession in 2023. In contrast, we on the Carson Investment Research Team believe the economy can avoid a recession this year. The recession calls are all predictions and clearly not reflections of where the economy is right now. The NBER’s preferred list of economic indicators, which is used to determine a recession, shows every single indicator grew over the past three months and year-to-date (2022). In fact, four out of the six indicators have exceeded their pre-pandemic growth rates over the past three months (comparing the yellow bars against the dark blue bars). Of course, this is 2022 data and the question is what will happen in 2023. So far this year, inflation has fallen, and with relatively strong wage growth that means higher real incomes. Lower gas prices, lower energy prices (utilities), and lower food prices mean consumers will have more money in their pockets. Just as higher inflation is effectively a tax on income, falling prices are akin to a tax cut. And unless households choose to save this excess income, consumption will stay up. In addition, 38 states have significant tax changes that took effect Jan. 1. As the Tax Foundation notes, most represent net tax reductions, which are the result of a wave of tax cuts over the past two years as state revenues surged and governors/legislatures looked to ease the impact of higher prices on residents. Also, Social Security recipients are slated to receive a cost-of-living adjustment of 8.7% to their incomes in 2023, a function of last year’s high inflation but coming just as inflation starts to pull back. Seniors will get another break from Medicare premiums, which are slated to fall this year. These are all tailwinds for consumption, which makes up 70% of the economy. So, Why the Recession Calls? In short, forecasters are expecting the Fed’s aggressive rate hikes of 2022 to hit the economy in mid-2023 and beyond. The idea is that monetary policy impacts the economy with “long and variable lags,” as Milton Friedman said. Even Fed Chair Jerome Powell and other Fed officials have cited the uncertainty around the lagged impact of their rate hikes as a reason for stepping down the pace in December. They want to wait to see the impact of the 425 bps of rate hikes they implemented last year. However, the reality is monetary policy impacts the economy through financial conditions. Higher interest rates can crimp household demand for mortgages, and tighter credit conditions can curb business spending, including hiring, capital expenditures, and mergers and acquisitions. In fact, because of the Fed’s forward guidance and other commentary (including leaks to the press), financial conditions can tighten well in advance of actual rate hikes, as investors anticipate future Fed actions. The chart below illustrates this point. Across 2022, financial conditions tightened well ahead of the Fed’s rate hikes. This means financial conditions can impact the economy sooner than most people expect. The steep falloff in housing activity is a good example of how tighter financial conditions can be felt almost immediately. Residential investment has been a significant drag on GDP growth since the second quarter of 2022, which is when financial conditions started to really tighten in anticipation of the Fed’s aggressive turn. On an annualized basis, residential investment fell 18% in the second quarter of 2022 and 27% in the third. So, we may be beyond peak negative impact of rate hikes on the economy. Most of the tightening in financial conditions occurred during the first three quarters of 2022. In fact, financial conditions have eased since October (coinciding with a stock market rally). That is even more positive for economic growth, as the drag from tight financial conditions declines. Good News on the Inflation Front We now have a trend! Headline inflation fell 0.1% in December, the slowest pace since May 2020. Inflation has now decelerated to 6.5% year-over-year, quite a pullback from the 9.1% level six months ago. As the chart shows, the big driver has been falling energy prices. In fact, gas prices at the pump fell 9.4% in December and are 1.5% lower than a year ago. Even better news is inflation is falling more broadly now.
  • Food inflation continues to decelerate, rising just 0.3% in December, the slowest pace since March 2021.
  • Core goods prices, excluding food and energy, fell 0.3% in December, the third consecutive month of price declines.
  • A big factor was used car prices, which fell 2.5% in December and are almost 9% lower than a year ago.
  • New vehicle prices fell 0.1%, the first monthly decline in two years and a welcome one.
  • Pandemic-impacted services, such as vehicle rentals and airfares, are also seeing less price pressures now.
  • Housing is keeping pressure on prices. But housing inflation looks to have peaked, and the deceleration in market rents will be reflected in official data eventually.
The Fed will eventually have to acknowledge that price pressures are easing in a broad way, with the obvious implication that they need not maintain policy at such a restrictive level. This is what investors, at least in the bond market, are currently betting will happen, with rate cuts priced for the back half of 2023.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. Compliance Case # 01626019 [post_title] => Market Commentary: Welcome, 2023! [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => market-commentary-welcome-2023 [to_ping] => [pinged] => [post_modified] => 2023-01-17 08:47:00 [post_modified_gmt] => 2023-01-17 14:47:00 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=market-commentary&p=65601 [menu_order] => 0 [post_type] => market-commentary [post_mime_type] => [comment_count] => 0 [filter] => raw ) [4] => WP_Post Object ( [ID] => 65579 [post_author] => 90034 [post_date] => 2023-01-09 10:19:55 [post_date_gmt] => 2023-01-09 16:19:55 [post_content] => The December payroll report was yet another upside surprise. Monthly payrolls rose by 223,000, above expectations for a 200,000 gain. As Fed Chair Jerome Powell has noted, the economy needs to create about 100,000 jobs a month to keep up with population growth. That’s less than half the current pace.
  • Employment data continues to show strength, but we are also seeing better news on wages.
  • December was historically weak, which has many investors worried. But those concerns could be overblown.
  • Santa Claus came to town, which is one less worry for investors.
The good news from the report is hourly wages rose less than expected. Hourly wages were up only 0.3%, compared with a huge initial 0.6% jump the previous month. The other bit of good news is November’s initial 0.6% rise was revised down to 0.4%. This matters because the Fed needs to see signs that wage growth is slowing, which are finally appearing. Is there farther to go? Or course. But this lowered trend is quite welcome. The jobs report had a Goldilocks feel to it. Just like the fairytale, the data was not too hot nor too cold. The economy creating more than 200,000 jobs but hourly wages slowing down is a pretty good combo at this stage of the cycle. A Bad December Many market watchers have said the stock market’s poor performance in December could be a warning sign. Historically, the last month of the year is quite strong for stocks. But as with much of last year, that wasn’t the case in 2022. In the end, the S&P 500 fell 5.9%, marking one of the worst Decembers ever and the worst since 2018. So, how worried should investors be? It turns out that very poor final months of the year haven’t typically been the warning signs we might expect. December 2018 for instance was the worst December ever for stocks, and they went on to gain nearly 30% in 2019. In fact, the last four times the S&P 500 fell 4% or more in December, the following years were up three times for gains of 38%, 26%, and 29%. There are many worries out there, but a big drop in December apparently shouldn’t be one of them.   Santa Came to Town Let’s end on some good news. Santa Claus did come to town, as the seven days that encompass the well-known Santa Claus rally were indeed higher. Although many people think the Santa Claus rally takes place during the whole month of December, in reality it is the final five days of the year and first two days of the new year. These seven days sported a gain of 0.8%, the seventh consecutive year stocks were higher during this historically strong period. These seven days are higher about 80% of the time, and no period is more likely to be positive. At Carson, we take note when the rally does not occur as this typically is a warning sign, such as it was in 2000 and 2008. The markets present many worries, but the large drop in December and the Santa Claus rally should not be among them.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. Compliance Case # 01616683 [post_title] => Market Commentary: The Goldilocks Jobs Report [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => market-commentary-the-goldilocks-jobs-report [to_ping] => [pinged] => [post_modified] => 2023-01-09 10:47:38 [post_modified_gmt] => 2023-01-09 16:47:38 [post_content_filtered] => [post_parent] => 0 [guid] => https://carsonhub.wpengine.com/?post_type=market-commentary&p=65591 [menu_order] => 0 [post_type] => market-commentary [post_mime_type] => [comment_count] => 0 [filter] => raw ) ) [post_count] => 5 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 65696 [post_author] => 90034 [post_date] => 2023-02-06 10:37:47 [post_date_gmt] => 2023-02-06 16:37:47 [post_content] => As poor as last year was for investors, 2023 has fortunately been a near mirror image. Stocks and bonds have both made solid gains to kick off the new year. The economy is in better shape than most expected, and overall inflation is also coming down, making a very nice combo.
  • Stocks have had a huge start to 2023, but a better economy could open the door to continued gains.
  • The January employment data show no sign of slowdown.
  • The economy does not appear close to a recession.
  • Wage growth is trending lower, which should be good news for the Fed as it downshifts the pace of rate hikes and closes in on a peak rate.
  • A relatively stronger than expected economy means the Fed is likely to keep rates higher for longer.
Stocks bottomed in mid-October and have gained as much as 17% off those lows. What could be next? After previous bear market lows, stocks had gained nearly 40% a year later and 60% two years later. Yes, the returns off the October lows have been impressive, but more gains are likely if history is a guide. The stock market’s strength is also a good indicator of economic growth, since stocks lead the economy. In other words, strength in stocks could be the market’s way of sniffing out better economic data. That means we could see a surprisingly strong second half of 2023. The Labor Market is Defying Recession Forecasts Let’s keep it simple: The economy created 517,000 jobs in January, well above expectations for a slowdown to 175,000. The unemployment rate is 3.4%, the lowest level since May 1969. It’s like the labor market, i.e., America’s employers, are on a mission to upend forecasts of a recession in 2023. Also, revisions suggest payroll growth was stronger than we thought in 2022. The Bureau of Labor Statistics now says the economy created 4.8 million jobs in 2022, as opposed to the previous estimate of 4.5 million. Forget recessions and landings; these numbers suggest an employment boom! Strong Numbers Under the Hood The data corroborate what we’ve been seeing in leading employment indicators, such as weekly initial claims for unemployment, which fell to the lowest level in nine months last week. January data typically tend to be quite noisy, due to seasonal effects. But even accounting for that, let’s not miss the big picture, which is that the labor market is very resilient, if not outright on fire. The huge payroll gain in January was not due to outsized gains in one sector either. Cyclical sectors, such as manufacturing, construction, and wholesale/retail trade services, all added a total of 85,000 jobs. That contradicts the narrative of a significant slowdown in these areas. Meanwhile, the service industry is growing rapidly. Americans are spending, and employers are responding, including by adding 113,000 net jobs across accommodation, restaurants, and bars. Information processing, which includes technology and utilities, were the only sectors that saw job losses, and not many. What Does This Mean for Monetary Policy? The Federal Reserve raised rates by 0.25% last week, taking the federal funds rate to the 4.50-4.75% range. This is the slowest pace of increases since last March and a welcome downshift after the aggressive pace last year. Fed officials also said ongoing interest rate increases will be appropriate to return inflation to their 2% target over time, suggesting they’re not done with rate increases yet. But the extent of future increases will take the totality of rate hikes so far plus incoming data, which indicates they are close to peak rate, perhaps around 5%. Mainly, the Fed is waiting to see disinflation in the “core services inflation, ex housing” category. This is closely tied to wage growth, and there’s good news on that front. Wage growth is decelerating. The employment cost index, which is perhaps the most stable measure of wage growth, showed a sharp deceleration in the fourth quarter, corroborating other measures. The best news is that wage growth is slowing even as the unemployment rate is at 50+ year lows. This is not what textbook theory or forecasters would predict. But we’ll take reality over that. And Fed Chair Jerome Powell’s comments after the Federal Open Market Committee (FOMC) meeting suggest the Fed might be inclined to do the same. In other words, they don’t need to be convinced that inflation is coming down and will remain low only if the unemployment rate surges. They just need to see the data, i.e., continued deceleration in wage growth, and disinflation in core services ex housing. Of course, stronger economic growth means the Fed is likely to keep interest rates higher for longer, which is contrary to market expectations of rate cuts in the second half of 2023. But we believe the economy is strong enough to handle higher rates currently.   This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. 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. Past performance does not guarantee future results. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services. A diversified portfolio does not assure a profit or protect against loss in a declining market. 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Market Commentary

Market Commentary

Market Commentary: More Positive Signs

As poor as last year was for investors, 2023 has fortunately been a near mirror image. Stocks and bonds have both made solid gains to kick off the new year. The economy is in better shape than most expected, and overall inflation is also coming down, making a very nice combo.
Continue Reading!
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                    [post_content] => Published by Kevin Oleszewski

As the end of the year approaches, we start to think more and more about our tax picture. What boxes can we check to reduce our taxable income?

Tax-loss harvesting is one such approach. A tax-efficient way to rebalance your portfolio, tax-loss harvesting can help you offset earnings and get back to your target allocation. Tax-loss harvesting is traditionally thought of as an end-of-year event, because it can help you minimize your tax bill.

Consider tax-loss harvesting now, before you ring in the new year. And as you head into 2022, revisit this tax-efficient tactic at least quarterly to make the most of this strategy. 

Here’s what you need to know about tax-loss harvesting, including the wash sale rule.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy that lowers your taxable earnings after you sell taxable investments and use those losses to offset the gains you have to claim as income. It can also allow you to push your capital gains further out, allowing you to save on your taxes in future years when your tax bill might be higher.  For example, if you sold some of your investments this year at a loss, but your portfolio is doing well, you can lower your taxable income by claiming that loss. Also, if your losses exceed your gains, you can claim up to $3,000 on your taxes to offset ordinary income.  Let’s look at a specific, strategic and tax-efficient example. Say you have stock in Verizon that you want to sell and purchase stock in another cell phone company, AT&T. If you had a big loss in Verizon, you want to capture that loss while maintaining exposure to a cell phone company. Or, you might want to sell Verizon stock while it’s down to lower your tax footprint and soon after repurchase, because you believe it will rebound. A savvy investor might turn to either of those strategic scenarios. But before you move on this strategy, remember the wash sale rule.

The Wash Sale Rule

Let’s talk about the wash sale rule for a minute. This Internal Revenue Service (IRS) rule prevents you from taking a tax deduction for a security sold in a wash sale.  A wash sale occurs when you sell or trade securities at a loss and you also do three things within 30 days before or after the sale: 
  • Buy a substantially identical security
  • Acquire substantially identical securities in a fully taxable trade
  • Acquire a contract or option to buy substantially identical securities
Essentially, you want your allocation to stay the same. You don't want the savings on the tax to change your asset allocation. You have to be especially mindful of swapping a holding for a similar holding so you don’t trigger the wash sale rule. So, going back to the Verizon and AT&T example, say you want to buy back the Verizon stock instead of purchasing AT&T – you have to wait at least 31 days to buy it back or you can’t claim the loss.

Who Should Engage in Tax-Loss Harvesting?

Generally, tax-loss harvesting is ideal for people in higher tax brackets since the idea is to help lower tax bills.  A group of researchers from MIT and Chapman University found that tax-loss harvesting yielded a tax alpha, or outperformance by using available tax-saving strategies, of 1.10% per year from 1926 to 2018.  However, it could also be useful for people in a lower tax bracket, since you could carry those losses forward to times when you might have a higher tax bill, like if you get a higher-paying job or the government raises tax rates.  Tax-loss harvesting will play a huge role in planning if we move into a higher-tax environment. Higher tax rates call for investors to pay closer attention to tax efficiency of their taxable accounts.  There are certain situations in which you should consider tax-loss harvesting: 
  • Your investments are subject to capital gains tax. 
  • You are able to use tax-deferred retirement plans to postpone paying taxes until you retire. 
  • You anticipate you’ll change tax brackets. 
  • You invest in individual stocks. 

Questions to Ask Your Advisor About Tax-Loss Harvesting

If you don’t yet have an advisor, and you’re in the process of interviewing one, you should ask them to tell you about their process of rebalancing portfolios. They should explain to you how they do so and in what type of account they do so.  Here are a few more questions you can ask: 
  • Do you do tax-loss harvesting? 
  • How does tax-loss harvesting fit into your overall investment philosophy? 

Connect With a Financial Advisor

While we tend to focus on tax-loss harvesting now at the end of the year, it could be a beneficial strategy all year, especially as we gear up to potentially enter a higher-tax era. But it’s imperative that you discuss this with your financial professional to determine the frequency and timing of tax-loss harvesting for your particular situation.  Reach out to our team today to discuss your financial plan and how tax-loss harvesting can fit into your strategy. Kevin Oleszewski is not affiliated with Cetera Advisor Networks LLC. Any information provided by Kevin is in no way related to Cetera Advisor Networks LLC or its registered representatives. [post_title] => Any Time is Tax-Loss Harvesting Time [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => any-time-is-tax-loss-harvesting-time [to_ping] => [pinged] => [post_modified] => 2021-12-15 12:31:47 [post_modified_gmt] => 2021-12-15 18:31:47 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/any-time-is-tax-loss-harvesting-time/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) [1] => WP_Post Object ( [ID] => 64118 [post_author] => 6008 [post_date] => 2021-12-02 11:02:48 [post_date_gmt] => 2021-12-02 17:02:48 [post_content] => Many people have the idea that tax planning is only about paying less money right now, and that’s not the case. Tax planning is about paying less money over time. There are many avenues to do that. As we’re nearing the end of 2021, it’s prime time to get your finances in order for the upcoming tax season, and hopefully this article can help you figure out how to pay less money over time. In this article, we’ll focus on a few areas for your end-of-year tax planning: tax-loss harvesting and rebalancing, charitable giving, retirement plan contributions and Roth conversions.

Tax-Loss Harvesting and Rebalancing

Rebalancing your portfolio in the most tax-efficient way is key. You want to make sure you are pairing up gains and losses. In other words, if you have gains in your portfolio, you should pair them with losses to offset or minimize your tax exposure.  I recently wrote about this strategy, tax-loss harvesting, which is essentially a method that helps you lower your taxable earnings after selling taxable investments and using those losses to offset the amount of gains you have to claim as income. Tax-loss harvesting can also let you push your capital gains further out, allowing you to save on your taxes in future years when your tax bill might be higher.

Charitable Giving

Giving directly to a charity is good for your soul, but maybe not for your tax bill, especially if you aren’t itemizing. You won’t get to deduct the full donation if you aren’t itemizing, but you’ll still get a $300 above-the-line deduction.  Since the standard deduction for 2021 is so high – $25,100 for married filing jointly and $12,550 for single filers – more taxpayers have chosen to take it over itemizing deductions. CNBC reported that 16.7 million households claimed itemized deductions on their 2018 income tax returns, down from 46.2 million in the 2017 tax year.  There are two avenues to explore charitable giving this time of year: establishing a donor-advised fund and making qualified charitable distributions from your IRA.  A donor-advised fund allows you to bunch your charitable contributions this year so that you’ll be able to get a tax break. For example, you can bunch your charitable contributions for the next five years – say $10,000 a year – into a DAF and still be able to take the full tax deduction this year. This $50,000 donation will definitely get you over the standard deduction.  If you want to get more in-depth on donor-advised funds, check out our blog post on DAFs and charitable remainder trusts.  Qualified charitable distributions (QCDs), on the other hand, are good for people who have to take required minimum distributions (RMDs) but don’t need the money. QCDs allow you to donate $100,000 per taxpayer (so a married couple can donate $200,000) per year to a charity directly from your IRA if you’re over age 70½. The benefit here is you don’t have to pay income tax on that amount while also satisfying your RMD.

Establish and Contribute to Retirement Accounts

If you’ve taken a break from contributing to your retirement account, now is the time to catch up if you are able. The maximum amount you could donate this year is $19,500. If you are a small business owner and have yet to set up a retirement account, doing so by the end of the year is a good idea. First, you’ll want to explore which option is right for you. For example, if you don't foresee yourself going over the $6,000 contribution limit for traditional IRAs, that would be a good option for you. But if you anticipate you’ll contribute more than that, the SEP IRA or solo 401(k) are also both viable vehicles. These two options have different rules. For example, SEP IRAs are more cost-effective to set up and you can contribute 25% of your qualified business income or $58,000, whichever is less for 2021. So for example, if you’re self-employed and your qualified business income is $100,000, you can donate $25,000. With a solo 401(k), the contribution limit is $58,000 plus a $6,500 catch-up contribution or 100% of earned income, whichever is less for 2021. So long as you establish your solo 401(k) by year end (December 31, 2021), you have until your company’s tax return deadlines (including extensions) to make contributions.

Roth Conversions

Roth conversions are when you transfer money from a traditional IRA and convert it to a Roth IRA, which is a taxable event. Essentially, you would pay taxes on that conversion as it becomes part of your taxable income now, versus paying taxes on that money in the future. Let’s look at an example: Say you have $50,000 in an IRA and you want to transfer it into a Roth IRA. Your taxable income will now be $50,000 more than it would have been before. You and your financial professional need to evaluate whether this would be a good idea for your situation. There are many benefits to doing the Roth conversion. First, we don’t know what is going to happen with taxes in the future, so if you anticipate you’ll be in a higher tax bracket next year, you can do your Roth conversion now and take advantage of this low-tax-rate environment. Second, Roth IRAs don’t have RMDs, so you won’t be required to take from this bucket in retirement.  Also, you don’t have to pay taxes on the earnings from the Roth IRA if you meet certain IRS criteria. And since you’re contributing after-tax dollars, you can withdraw your contributions tax- and penalty-free.  Lastly, Roth IRAs are a tax-efficient asset to leave to heirs. While they still must draw down the account in 10 years, when they do inherit the funds and draw down, it’s not a taxable event.  One more thing to keep in mind when doing a Roth conversion: pay the taxes on it with cash, your taxable investment account or a trust account, instead of paying with the conversion.

In Conclusion 

Planning what you’re going to serve for the holidays might be top of mind right now, but you want to make some space for your tax planning so you can maximize your savings. Taxes are inevitable, and good tax planning will help you pay less over time. It’s imperative that you connect with your trusted financial professionals to make the best tax plan for your unique situation. Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. Re-balancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional. [post_title] => Areas of Focus for End-of-Year Tax Planning [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => areas-of-focus-for-end-of-year-tax-planning [to_ping] => [pinged] => [post_modified] => 2021-12-02 13:52:36 [post_modified_gmt] => 2021-12-02 19:52:36 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/areas-of-focus-for-end-of-year-tax-planning/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) [2] => WP_Post Object ( [ID] => 64014 [post_author] => 6008 [post_date] => 2021-11-04 09:14:03 [post_date_gmt] => 2021-11-04 14:14:03 [post_content] => Each person’s relationship with charitable giving has an origin story. Maybe it was when your grandmother would cook dinner for people in your community who were less fortunate. Or you were required by parental contract to give up a certain percentage of your allowance to the church collection basket. No matter how it started, now you’re grown and you are still a charitably-minded individual who wants to give to causes you care about. You’re not the only one. Charitable giving, giving back through volunteering and donations soared during the COVID-19 pandemic, as exemplified by these statistics:
  • 88% of affluent households gave to charity in 2020 (according to Bank of America and the Indiana University Lilly Family School of Philanthropy).
  • Americans gave $471.44 billion in 2020, up 5.1% from 2019 (according to the National Philanthropic Trust).
  • Giving in every sector increased, but especially gifts that benefit the public/society (up 15.7%), the environment and animal rights (up 11.6%) and individuals (up 12.8%) (according to the National Philanthropic Trust).
  • 86% of affluent households maintained – and in some cases increased – giving, despite uncertainty caused by the pandemic (according to the National Philanthropic Trust).
If you are part of this increased giving trend – or want to be – among the tools available to you for your charitable giving are donor-advised funds and charitable remainder trusts. While both of these tools play a role in charitable giving – in that they both provide long-term resources for charitable causes – they are quite different. We’ll give you an overview of both, when they might be the appropriate choice and some tips for getting started with each.

Deeper in the DAF

A donor-advised fund (DAF) is a tool that can help you maximize your charitable giving. Essentially, you make an irrevocable contribution to the DAF of either cash or other assets, like appreciated securities. While there is no startup cost associated with a DAF, the initial contribution with some DAFs is at least $5,000. The DAF is sponsored by a 501(c)(3) nonprofit organization, which subsequently owns those assets and handles all the administrative tasks and the grant administration process. Some DAFs allow the financial advisor of your choice to manage the investments in your DAF so make sure you know all of the requirements as DAFs vary. Although you recommend where the money is donated to, the sponsor has the final say-so as to where the money goes. While you may get a tax deduction at the time of the original donation to the DAF, you cannot deduct the amount again when the money is distributed from the fund to the qualified charity. National Philanthropic Trust reported that grantmaking from DAFs to qualified charities increased 93% between 2015 and 2019. With DAFs, no mandatory amount has to come out of the fund. Their popularity has grown in recent years, making them the fastest-growing philanthropic vehicle, due to their flexibility and ease of use. If you were never one for the limelight or the credit, another benefit of the DAF is that you can make anonymous charitable gifts. Some restrictions with DAFs, according to the National Philanthropic Trust, include that donors can’t:
  • Advise grants be made to individuals.
  • Receive goods in exchange for donation.
  • Advise grants be used for tuition.
DAFs are a good tool to use when you want to leave a legacy or pass on your values while also giving more meaning to the wealth you’ve built. DAFs are good if you’re passionate about helping others and donating to charitable causes. If you’re having a hard time picturing it, DAFs can be likened to a checking account that holds the monies that can be distributed later on to various charitable organizations. You can even have your loved ones take over being the successor manager of some DAFs upon your passing.

Cracking the CRT

A charitable remainder trust is an irrevocable trust established to provide annual payments to current beneficiaries – which can be you – with the remainder balance distributed to a charity. CRTs are a little bit different from DAFs, as they are a trust, customized to your situation and more of an estate planning tool. Essentially, you have your attorney create a trust, you determine what asset you’re going to put into it and your professionals will run the numbers to determine the current and remainder payout parameters. The lifetime beneficiary payout has to be at least 5% of the trust assets, but cannot exceed 50%. The chosen charity must receive at least 10% of actuarial value of the assets initially transferred to the CRT at the end of its term. Keep in mind that if the assets you donate are not cash or publicly traded securities, they may need to be appraised. The type of appraisal you get depends on the type of asset it is. For example, if you are contributing art to your CRT, you will need an art appraiser. Your financial professional can help you figure out which type of appraisal to get. There are two types of CRTs:
  • Charitable Remainder Unitrust (CRUT): distributes a fixed amount each year, but no additional contributions can be made.
  • Charitable Remainder Annuity Trust (CRAT): distributes a fixed percentage on the balance of trust assets, but additional contributions can be made.
Your professionals can help you figure out which type of CRT is the best fit for your situation. Regardless of what type of CRT you use, note that there are fees associated with setting up the trust, including legal fees. With the CRT, there is a mandatory amount or percentage of the trust assets that has to come out annually to the beneficiary or beneficiaries, as noted above, and there are expenses associated with the administration of the CRT. Those expenses could include paying the trustee to administer the trust and the cost of the filing of a tax return for the trust. CRTs have a definite endpoint. Payments can stretch anywhere from 20 years to life, but at some point they stop. And also unlike DAFs, gifts from CRTs are not given anonymously. CRTs are great if you have highly appreciated assets and you want to have a defined stream of cash flow for you or your beneficiaries.  The good news is that both CRTs and DAFs offer tax benefits to you in the form of income tax deductions and capital gains tax deferral or avoidance. Both allow for an immediate tax deduction but the amount of the deduction depends on your specific tax situation, and also what type and how long you have owned the asset or assets that you are contributing. In the case of the CRT you receive an immediate tax deduction on the present value of the assets that will eventually go to charity, several charities or your DAF. Also, in most cases, capital gains tax on appreciated assets can be completely avoided or deferred when assets are transferred into the CRT or DAF and then sold. CRTs and DAFs can be used together. This happens if you want to set up a DAF as the charity to receive the assets at the end of the term of the CRT.

Working with a Professional is Key

The main reason people give to charity is because they want to help a cause, which is also among the reasons people employ these tools. But there are also benefits to using these tools, nuances you should be aware of and pitfalls to avoid. Your financial advisor can help you determine the right solution and also run point with your other professionals, like your CPA or attorney, to craft the ideal solution for your unique situation. This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. [post_title] => Tools for the Charitably Minded: Donor-Advised Funds and Charitable Remainder Trusts [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => tools-for-the-charitably-minded-donor-advised-funds-and-charitable-remainder-trusts [to_ping] => [pinged] => [post_modified] => 2021-11-04 09:14:03 [post_modified_gmt] => 2021-11-04 14:14:03 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/tools-for-the-charitably-minded-donor-advised-funds-and-charitable-remainder-trusts/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) [3] => WP_Post Object ( [ID] => 63943 [post_author] => 6008 [post_date] => 2021-10-07 09:02:07 [post_date_gmt] => 2021-10-07 14:02:07 [post_content] => There’s a scene in the TV show Friends where Rachel gets her very first paycheck as a waitress at Central Perk. “Who is FICA and why is he getting all my money?” she poses to the gang. Some people age 65 and older might have a similar sentiment when they get their Social Security check and see a chunk missing that’s gone to IRMAA. “Who is IRMAA and why is she getting some of my money?” you might ask. IRMAA is your income-related monthly adjustment amount, which you pay on top of both your Medicare Part B (medical coverage) and Part D premiums (prescription coverage). We’re going to get into the subject of IRMAA in this article, as well as give you some pertinent background information necessary to understand it. We’re also going to offer you some planning tips and common mistakes to avoid.

What Is IRMAA?

When we set up retirement plans for clients, oftentimes we'll send them a worksheet and ask them to work through and itemize all their monthly expenses. Typically, when we do this with somebody who is about to retire, they’ll list their dining-out trips, their Netflix and other streaming subscriptions, but they’ll forget their health insurance costs. Many people have the misconception that all Medicare is free because they’ve paid into it all their working lives. We have to tell them that’s only partially correct. You may be getting your Medicare Part A for free, but you must pay for your Medicare Part B (medical coverage) and Medicare Part D (prescription coverage) and, based on your income, your income-related monthly adjustment amount for both Part B and Part D. IRMAA is an extra surtax you pay based on your income. I was working on a financial plan the other day for clients who are high net worth individuals. Because of their current income and projected income, we had to add an extra $400 per person per month for IRMAA to their budget. This created some discussion. The clients thought they were good with a $6,000 per month budget. But then we added on this IRMAA piece, which is essentially an additional $9,600 per year ($800 per month) – an amount that could’ve gone to a travel fund or annual gifts to family members. According to Medicare.gov, Medicare Part B premiums (which already include IRMAA) for 2021, plus Part D IRMAA surcharges based on income from 2019, are as follows:
  • Monthly premium of $207.90 + $12.30 IRMAA per person for single filers making between $88,000 and $111,000, and for married filing jointly filers who made between $176,000 and $222,000.
  • Monthly premium of $297.00 + $31.80 IRMAA per person for single filers making between $111,000 and $138,000, and married filing jointly filers who make between $222,000 and $276,000.
  • Monthly premium of $386.10 + $51.20 IRMAA per person for single filers making between $138,000 to $165,000, and married filing jointly making between $276,000 and $330,000.
  • Monthly charge of $475.20 + $70.70 IRMAA per person for single filers making between $165,000 and $500,000, married filing jointly making between $330,000 and $750,000, and married filing separately making between $88,000 and $412,000.
  • Monthly charge of $504.90 + $77.10 IRMAA per person for single filers making $500,000 and above, married filing jointly making $750,000 or above, and married filing separately making $412,000 or above.

Laying the Groundwork and Planning Tips

To give you a more robust picture of IRMAA, let’s examine some things that might impact the amount you will owe. Right now, Roth conversions are in the news because people are concerned about impending tax hikes. Roth conversions bump up your adjusted gross income (AGI), and that will impact your IRMAA. Many clients come to us thinking they are diversified from an investment standpoint – however, they might not have thought about tax diversification. If you look at the tax triangle, on one side are tax-deferred accounts like 401(k)s and IRAs, which are typically the easiest ways to save. On another side, you have taxable money, like brokerage accounts – clients will typically start building those up after they’ve built up some of those tax-deferred buckets. On the third side, you have the tax-free bucket, which includes Roth IRAs, Roth 401(k)s and the like. Under the current rules, you won’t have to pay taxes when you pull money out from the third side of the triangle. Many clients find themselves overweighted in tax-deferred money. Regardless of whether somebody is retiring with $500,000 or $5 million, I have yet to see a client retirement picture that has more tax-free money than tax-deferred money. This is relevant to the IRMAA conversation because movement of money among these three sides of the triangle – as well as pulling money from any of them – has implications on your modified adjusted gross income used to determine how much you pay in IRMAA. For example, because a Roth conversion moves money from a tax-deferred vehicle to a tax-free vehicle, it’s seen as income reported on your 1099-R. When your income is bumped up, your adjusted gross income and your modified adjusted gross income also bump up, which is what IRMAA is tied to. IRMAA looks back two years in arrears. In other words, your 2022 coverage will be based on your 2020 income. So the time to start planning for it is at age 63, two years before you have to enroll in Medicare. If you’re thinking of Roth conversions now, it may impact your IRMAA two years down the road.

Avoid Common Mistakes with IRMAA Planning

There are three common mistakes you might make when it comes to IRMAA planning. Be sure to steer clear of these: Not factoring it into your retirement budget. It’s easy to skip over how much your health insurance is going to cost. IRMAA is a significant addition to your monthly budget. It can potentially add up to $1,000 per month, in addition to what you’re already planning. If you’re on a fixed income, this could make a big difference – especially if you’re in a higher income bracket during retirement. Making sure you account for IRMAA in your retirement roadmap and monthly expenses is important. Not realizing how much income you’ll have in retirement. I have had some clients who make more in retirement than they did while they were working. However, the sources of their income are fixed, so they don’t have the ability to decrease them – like pension, Social Security or required minimum withdrawals from tax-deferred accounts, which increase every year. Many clients realize that they’ve done well and saved up, which leads to their income going up in retirement – but also has an adverse consequence on their IRMAA adjustment. Not having a plan for where you’re pulling income from. Pulling $200,000 from cash vs. pulling $200,000 from an IRA has very different tax consequences that could impact IRMAA adjustments. In your working years, you get used to getting a paycheck and knowing where your income is coming from. But in retirement, you have to create your own income by turning assets into income. This could get a little confusing. It’s important to consult a professional so that you can plan. If you need some guidance specific to your own situation, call your financial professional. This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Converting from a traditional IRA to a Roth IRA is a taxable event. [post_title] => Who is IRMAA and Why Is She Getting My Money? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => who-is-irmaa-and-why-is-she-getting-my-money [to_ping] => [pinged] => [post_modified] => 2021-10-07 09:02:07 [post_modified_gmt] => 2021-10-07 14:02:07 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/who-is-irmaa-and-why-is-she-getting-my-money/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) [4] => WP_Post Object ( [ID] => 63849 [post_author] => 6008 [post_date] => 2021-09-02 08:25:43 [post_date_gmt] => 2021-09-02 13:25:43 [post_content] => Are you healthy? Or are you anticipating some hefty medical bills coming up? Or do you want to save money in a tax-advantaged way for future medical expenses? If so, a health savings account (HSA) might be a good choice. An HSA is a tax-favored savings and investment account that’s used for qualified health care expenses and tethered to high-deductible health plans (HDHPs). There are three tax benefits to HSAs: The first is that contributions are pre-tax if they’re coming through payroll, and if they’re not made pre-tax, the account owner will get a tax deduction; second, the growth on the account – interest or returns – is tax-free; and third, if distributions are made to pay for qualified health care costs, those come out tax-free. Outside of tax benefits, you could also get a contribution into the account from your employer when you sign up for an HSA. HSAs could also potentially play a role in retirement planning, to the extent that people are fortunate enough that they don’t use the HSA regularly. There’s an opportunity to build up that account over the years and take out the funds tax-free to pay medical expenses later in life when those costs are higher. Maybe you’re considering an HSA, or maybe you already have one. Either way, you can learn from this article how to avoid common mistakes and other ways to maximize your HSA.

Who are HSAs For?

First of all, you have to meet some criteria before you can get an HSA. According to Benefit Resource, those criteria are that you:
  • Be covered in a qualified high-deductible health plan
  • Can’t be claimed as a dependent on someone else’s taxes
  • Can’t be enrolled in Medicare
  • Can’t be covered by a non-qualified health plan
In addition to these, the ideal candidates for HSAs are people who: 1. Want to allocate assets for medical costs in the future. Do you want to start planning for how to fund medical costs in the future? 2. Only go to the doctor for routine checkups. Are you relatively healthy and only go to the doctor for preventative care? 3. Are anticipating high medical costs in a single year. If you’re on the other end of the spectrum and are going to have high medical bills, an HDHP with HSA might make sense because your deductible gets capped and total out-of-pocket medical costs – including premiums – could be lower than with other medical plans. Take a family of four who all have deviated septums. If all of them need septoplasties in the same year, an HSA might be good for them. According to eMedicineHealth, depending on where and what services you get, the average cost of a septoplasty is $8,131. For this family of four, the total cost for their septoplasties is $32,524. With an HDHP, the out-of-pocket costs for 2021 are capped at $7,000 for individuals and $14,000 for families. So that family with the deviated septums will only have to pay $14,000 out of pocket, which they can pay with their HSA. Bear in mind that those out-of-pocket limits are going to rise to $7,050 for individuals and $14,100 for families in 2022.

Common HSA Mistakes to Avoid

The first way to maximize your HSA is to avoid common mistakes. There’s room for making mistakes with HSAs because they’re flexible. Here are some to avoid:
  • Confusing HSAs with FSAs. People might be more familiar with flex spending accounts. Unlike with FSAs, when you put money into an HSA, you don’t have to use it that year – you can just let it sit and grow as long as you save your receipts. With HSAs, the entire amount you contribute can be rolled over year after year. Also, HSAs are portable, meaning you can take them with you when you change jobs or retire.
  • Not keeping your receipts. Save receipts whether you have an HSA debit card or not, because at the end of the year when you’re filing your taxes, the IRS will get a document from your HSA custodian detailing how much money went in and how much went out. You want to ensure you keep receipts should there be a tax issue.
  • Not having outside assets to cover medical care. Getting started with an HSA might be a challenge – if you don’t get the HSA funded right away and you have a medical expense early on, you might need to pay for it with assets outside of the HSA. Not having those backup funds upfront is a common mistake people make.
  • Banking on not needing medical care. The Mayo Clinic reports that people wanting to save more in their HSA sometimes forgo medical treatment. You should get medical treatment when you need it. You also can’t predict medical emergencies. Some years, you will be able to stack money in your HSA; other years, you might use everything you put in. The good news is if you do have a medical emergency, the out-of-pocket contribution is capped with HDHPs. Also, it’s nice that you still get that triple tax benefit even if you don’t get the long-term growth.

Ways to Maximize Your HSA

If you have an HSA, there are four ways to maximize it:
  • Maximize your contributions to your HSA. The maximum contribution limits for 2021 are $3,600 for self-only coverage or $7,200 for family coverage. For 2022, those limits are $3,650 for self-only coverage and $7,300 for family coverage. Also, if you are 55 and older, you can contribute up to $1,000 additional dollars each year.
  • Be aware of the investment options available. If you are in a position to invest funds in your HSA, find out if that option is available to you. HSA plans differ, and some plans have an opportunity to invest the way you do with regular investment accounts. Also be aware that, as with any investment, there is risk.
  • Have the cash flow to pay medical costs. If you are able, paying your medical costs with your cash flow or other accounts can allow your HSA to grow for the long-term. It’s also a must to have some assets outside your HSA while you’re building up the account. Keep in mind the out-of-pocket limits mentioned above.
  • Work with your financial advisor. As with everything, you need intentional planning based on your situation. Among the best ways to maximize your HSA is to work with your advisor to put together a plan specific to you.
Even if you meet all the criteria for an HSA this year, medical care is a unique, personal decision, and the direction you go with it can change from one year to the next. This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. [post_title] => Got an HSA? Learn How to Maximize It [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => got-an-hsa-learn-how-to-maximize-it [to_ping] => [pinged] => [post_modified] => 2021-09-02 08:25:43 [post_modified_gmt] => 2021-09-02 13:25:43 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/got-an-hsa-learn-how-to-maximize-it/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) ) [post_count] => 5 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 64166 [post_author] => 6008 [post_date] => 2021-12-15 12:31:47 [post_date_gmt] => 2021-12-15 18:31:47 [post_content] => Published by Kevin Oleszewski As the end of the year approaches, we start to think more and more about our tax picture. What boxes can we check to reduce our taxable income? Tax-loss harvesting is one such approach. A tax-efficient way to rebalance your portfolio, tax-loss harvesting can help you offset earnings and get back to your target allocation. Tax-loss harvesting is traditionally thought of as an end-of-year event, because it can help you minimize your tax bill. Consider tax-loss harvesting now, before you ring in the new year. And as you head into 2022, revisit this tax-efficient tactic at least quarterly to make the most of this strategy.  Here’s what you need to know about tax-loss harvesting, including the wash sale rule.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy that lowers your taxable earnings after you sell taxable investments and use those losses to offset the gains you have to claim as income. It can also allow you to push your capital gains further out, allowing you to save on your taxes in future years when your tax bill might be higher.  For example, if you sold some of your investments this year at a loss, but your portfolio is doing well, you can lower your taxable income by claiming that loss. Also, if your losses exceed your gains, you can claim up to $3,000 on your taxes to offset ordinary income.  Let’s look at a specific, strategic and tax-efficient example. Say you have stock in Verizon that you want to sell and purchase stock in another cell phone company, AT&T. If you had a big loss in Verizon, you want to capture that loss while maintaining exposure to a cell phone company. Or, you might want to sell Verizon stock while it’s down to lower your tax footprint and soon after repurchase, because you believe it will rebound. A savvy investor might turn to either of those strategic scenarios. But before you move on this strategy, remember the wash sale rule.

The Wash Sale Rule

Let’s talk about the wash sale rule for a minute. This Internal Revenue Service (IRS) rule prevents you from taking a tax deduction for a security sold in a wash sale.  A wash sale occurs when you sell or trade securities at a loss and you also do three things within 30 days before or after the sale: 
  • Buy a substantially identical security
  • Acquire substantially identical securities in a fully taxable trade
  • Acquire a contract or option to buy substantially identical securities
Essentially, you want your allocation to stay the same. You don't want the savings on the tax to change your asset allocation. You have to be especially mindful of swapping a holding for a similar holding so you don’t trigger the wash sale rule. So, going back to the Verizon and AT&T example, say you want to buy back the Verizon stock instead of purchasing AT&T – you have to wait at least 31 days to buy it back or you can’t claim the loss.

Who Should Engage in Tax-Loss Harvesting?

Generally, tax-loss harvesting is ideal for people in higher tax brackets since the idea is to help lower tax bills.  A group of researchers from MIT and Chapman University found that tax-loss harvesting yielded a tax alpha, or outperformance by using available tax-saving strategies, of 1.10% per year from 1926 to 2018.  However, it could also be useful for people in a lower tax bracket, since you could carry those losses forward to times when you might have a higher tax bill, like if you get a higher-paying job or the government raises tax rates.  Tax-loss harvesting will play a huge role in planning if we move into a higher-tax environment. Higher tax rates call for investors to pay closer attention to tax efficiency of their taxable accounts.  There are certain situations in which you should consider tax-loss harvesting: 
  • Your investments are subject to capital gains tax. 
  • You are able to use tax-deferred retirement plans to postpone paying taxes until you retire. 
  • You anticipate you’ll change tax brackets. 
  • You invest in individual stocks. 

Questions to Ask Your Advisor About Tax-Loss Harvesting

If you don’t yet have an advisor, and you’re in the process of interviewing one, you should ask them to tell you about their process of rebalancing portfolios. They should explain to you how they do so and in what type of account they do so.  Here are a few more questions you can ask: 
  • Do you do tax-loss harvesting? 
  • How does tax-loss harvesting fit into your overall investment philosophy? 

Connect With a Financial Advisor

While we tend to focus on tax-loss harvesting now at the end of the year, it could be a beneficial strategy all year, especially as we gear up to potentially enter a higher-tax era. But it’s imperative that you discuss this with your financial professional to determine the frequency and timing of tax-loss harvesting for your particular situation.  Reach out to our team today to discuss your financial plan and how tax-loss harvesting can fit into your strategy. Kevin Oleszewski is not affiliated with Cetera Advisor Networks LLC. Any information provided by Kevin is in no way related to Cetera Advisor Networks LLC or its registered representatives. [post_title] => Any Time is Tax-Loss Harvesting Time [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => any-time-is-tax-loss-harvesting-time [to_ping] => [pinged] => [post_modified] => 2021-12-15 12:31:47 [post_modified_gmt] => 2021-12-15 18:31:47 [post_content_filtered] => [post_parent] => 0 [guid] => https://retirementextender1.carsonwealth.com/insights/monthly-newsletters/any-time-is-tax-loss-harvesting-time/ [menu_order] => 0 [post_type] => monthly-newsletters [post_mime_type] => [comment_count] => 0 [filter] => raw ) [comment_count] => 0 [current_comment] => -1 [found_posts] => 27 [max_num_pages] => 6 [max_num_comment_pages] => 0 [is_single] => [is_preview] => [is_page] => [is_archive] => [is_date] => [is_year] => [is_month] => [is_day] => [is_time] => [is_author] => [is_category] => [is_tag] => [is_tax] => [is_search] => [is_feed] => [is_comment_feed] => [is_trackback] => [is_home] => 1 [is_privacy_policy] => [is_404] => [is_embed] => [is_paged] => [is_admin] => [is_attachment] => [is_singular] => [is_robots] => [is_favicon] => [is_posts_page] => [is_post_type_archive] => [query_vars_hash:WP_Query:private] => 33360e3352fab1dda1687c7ecea517e1 [query_vars_changed:WP_Query:private] => [thumbnails_cached] => [allow_query_attachment_by_filename:protected] => [stopwords:WP_Query:private] => [compat_fields:WP_Query:private] => Array ( [0] => query_vars_hash [1] => query_vars_changed ) [compat_methods:WP_Query:private] => Array ( [0] => init_query_flags [1] => parse_tax_query ) [tribe_is_event] => [tribe_is_multi_posttype] => [tribe_is_event_category] => [tribe_is_event_venue] => [tribe_is_event_organizer] => [tribe_is_event_query] => [tribe_is_past] => )

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Any Time is Tax-Loss Harvesting Time

Published by Kevin Oleszewski As the end of the year approaches, we start to think more and more about our tax picture. What boxes can we check to reduce our taxable income? Tax-loss harvesting is one such approach. A tax-efficient way to rebalance your portfolio, tax-loss harvesting can he …
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