Roth Conversions are a Big Deal

It is no secret 2020 took the world by surprise and will be the year we all remember. It also seems investors have learned there are many things we certainly cannot control. However, when it comes to financial planning, and in particular tax and retirement planning, there are significant opportunities we all should consider now since they may not be available for long. If you haven't considered Roth conversions before, 2020 may be the year.

Why 2020? It's because we have historically low tax rates and some have suggested they could rise in the near term. Taxes could also rise due to the increasing budget deficit, increased stimulus spending and highest deficit since World War II. For those whose employment has been impacted by the Covid-19 pandemic, this may present planning opportunities. And the obvious may be that higher tax rates put tax-deferred retirement savings at risk; so some of us may want to pay off the "debt" at the lowest possible tax rates.

KEY CONSIDERATIONS:

Assess overall market conditions and factors to determine if a Roth IRA conversion makes sense.

Determine which group of assets and/or asset class to convert.

Work with Advisor or CPA to determine the amount to convert.

Determine how you will pay the income tax on the conversion.

Compare other viable long-term tax planning strategies.

NEXT STEPS

Evaluate your need for a 2020 tax conversion. One option is to perform a series of smaller annual conversions over time. This fills up the lower tax brackets each year and manages the tax liability. Also, be sure funds are available to pay the taxes.

A second option is to convert larger amounts in 2020. By now, you should have a reliable estimate of 2020 income. If the pandemic caused business losses, a job status change from retirement or unemployment, or a large change to income, this year may allow for a larger conversion.

This popular planning strategy can allow you to pay lower tax rates today and allow the funds in your Roth IRA to grow tax-free. It can also allow for the potential for 100% tax-free withdrawal from your Roth in the future.

While a Roth IRA conversion can remove some risk of uncertainty to your planning process, keep in mind your Roth is not subject to required minimum distributions (RMDs). Smaller RMDs can reduce tax liability and increase sustainable lifetime income.

The benefits can be significant, but this strategy is not for everyone.

As always we are here to help.

Best,

CAM Investor Solutions

Source: AICPA; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

History and Presidential Elections

What History Tells Us About US Presidential Elections and the Market

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.

Stocks have rewarded disciplined investors for decades, through Democratic and Republican presidencies. It’s an important lesson on the benefits of a long-term investment approach.

Shareholders are investing in companies, not a political party. And companies focus on serving their customers and growing their businesses, regardless of who is in the White House.

US presidents may have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few.

The anticipation building up to elections often brings with it questions about how financial markets will respond. But the outcome of an election is only one of many inputs to the market. Below is a link to an interactive exhibit that examines market and economic data for nearly 100 years of US presidential terms and shows a consistent upward march for US equities regardless of the administration in place. This is an important lesson on the benefits of a long-term investment approach.

Follow this link to learn more about each presidency:   Interactive Exhibit - Markets Under Each Presidency

As always, we are here to help.

Best,

CAM Investor Solutions

Source: In US dollars. Stock returns represented by Fama/French Total US Market Research Index, provided by Ken French and available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html; US Government Presidential and Congressional data obtained from the History, Art & Archives of the United States House of Representatives. US Senate data is from the Art & History records of the United States Senate; Federal surplus or deficit as a percentage of gross domestic product, inflation, and unemployment data from Federal Reserve Bank of St. Louis (FRED). GDP Growth is annual real GDP Growth, using constant 2012 dollars, as provided by the US Bureau of Economic Analysis. Unemployment data not reported prior to April 1929; Dimensional Fund Advisors; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

Should I Be Buying or Selling Stocks Now

It seems investor sentiment has quickly changed since the beginning of the year, not to mention from just about 10 days ago as witnessed by the recent stock market decline. Many argue "why" this has happened and here's a quick look at the potential reasons:

Coronavirus: Most argue this is the primary reason for the recent market sell off. Its certainly terrible what is happening across the globe to humans who are suffering or have passed away. Our hope is that we have containment and a cure soon.

Presidential Election Uncertainty: Others will point to the future expectation being priced in on who will win the next election based on recent debates. We won't go here, especially because the market will figure it out faster and price it in before any of us can profit from the future results.

"We were due for a correction"Always a classic reason for market sell offs, especially coming off all-time market highs just a couple of weeks ago.

Insert your own "crisis of the day": We are adding this one in advance of what will happen in 2020 and beyond. We don't know what the next crisis will be or when, but its highly probable that it will be something we can't control or predict.

Who should be concerned? Its simple: those who have not put a good financial plan in place. For those of you who have taken the time to establish a well thought out financial plan, you've been planning for short-term market fluctuations like this which will have no impact on your current or future lifestyle. For the latter audience, it is also probable that you and/or your advisor are rebalancing your portfolio given the opportunity. This is how risk is properly managed and how investors build a larger nest egg over time. It is also what we call investor discipline, but we know its not always easy to watch depending on your stage of life.

Chart end date is 12/31/2019, the last trough to peak return of 451% represents the return through December 2019. Bear markets are defined as downturns of 20% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

In light of recent investor questions, market volatility, lower interest rates, and lower inflation expectations, we thought we would leave you with some additional food for thought as you might be considering rebalancing and/or different investment strategies going forward. And of course beware of those trying to sell you the "guaranteed" products that are not a fit. These folks seem to be everywhere at a time like this.

Investment Strategy Considerations/Risks:

PASSIVE FIXED INCOME

Many investors use the Barclays Agg as a proxy for the fixed income universe. The Barclays Agg has no TIPs, 28% of the index is short volatility and 32% has credit spread risk. Some larger, well-known mutual funds hold this type of risk.

REAL ESTATE

While rates are extremely low, any jump in higher rates increases the all-in cost of buying a home or other property, which can depress demand. Increased rate volatility can reduce mortgage lenders' appetite for new loans.

MINIMUM VOLATILITY / LOW VOLATILITY STOCKS

Min vol / low vol stocks can be seen as "defensive" and used with the goal to generate yield with less equity risk than the broader market. However, investors might be overpaying for "safe" stocks. These stocks have nothing to do with owning "volatility".

SHORT DURATION BONDS / TIPS

TIPS are set using the Consumer Price Index (CPI), which only represents today's inflation level.

FLOATING RATE NOTES (FRN)

Frequently used to profit from higher yields, FRNs may have credit risk and almost no sensitivity to interest rates. Currently 91% of the bonds trading in the Bloomberg Barclays Floating Rate <5 Year Index are trading above par.

PRIVATE ALTERNATIVE INVESTMENTS

While some private alts may serve as a good diversifier, caution is recommended as most strategies in this arena perform just like the stock market with a lag in reporting. Not to mention, most are super expensive, over-leveraged, and illiquid.

EQUITIES / GLOBAL STOCKS

Global Equities are a very efficient and low cost way to gain exposure to the capital markets. They can also serve as a way to keep pace with inflation over time. Given their risk/return characteristics, global equities are subject to market sell-offs due to deteriorating economic conditions.

Of course, there is a lot more to consider given investor needs, circumstances, and risk tolerance. Having a well-designed plan can address most all of these concerns and uncertainties. 

As always, we are here to help.

Cheers,

CAM Investor Solutions

Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved; Bloomberg; Dimensional Fund Advisors; Nancy Davis, Quadratic Capital Management, LLC; M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Any stated performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Charts and graphs provided herein are for illustrative purposes only. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.