I don’t know about you but it sure seems like the post-summer pace is increasing. We’re almost in October and the start of the fourth quarter, so it’s a good time to consider lingering financial considerations and deadlines.

But first, the highly anticipated Fed meeting is upon us this week. As I type the CME FedWatch tool indicates an almost 65% chance the Fed will lower rates by half a point when it meets tomorrow and a 35% chance of a quarter point decrease. A case could be made for either outcome. That the Fed will lower rates seems like a forgone conclusion because they’ve so clearly telegraphed it in recent weeks. Still, lots of people will be paying attention to the announcement and subsequent press conference.

While this isn’t the most exciting stuff in the world, I suggest watching the recording of the presser if you can’t watch live at 11:30am PST. These press conferences happen after each regular meeting of the Federal Open Market Committee and are a great way to keep tabs on how the macro economy is doing. Here’s the site: https://www.federalreserve.gov/

Okay, on to our main topic this morning. As you’re likely aware, the deadline for a lot of financial actions each year is December 31^st. We’re about 3 ½ months out but calendar inertia builds into year-end so don’t wait too long on these items. We’ll spread these topics out over the next several weeks, but here’s a short list of financial stuff to consider based on age and other factors, and that have year-end deadlines.

If you’re 73 or older, have you taken this year’s Required Minimum Distribution (RMD) from your retirement accounts?

If you’ve inherited an IRA, have you taken your RMDs? This is less about age and depends on when you inherited the account.

Does a Roth conversion make sense this year?

Will you have a need for cash from your investment portfolio soon?

Have you reviewed your (non-retirement) investment portfolio for losses to offset realized gains?

There are other considerations, but these are several of the big ones. Each can be complicated and I’ll risk glossing over some of the minutiae in an effort to keep things simple. As always, consult your humble financial planner or tax professional for specific advice.

Let’s look at taking RMDs from your own retirement accounts –

The beginning age for RMDs is now 73. This means that if you turned (or will turn) 73 anytime this calendar year you’ll need to start taking minimum distributions from your retirement accounts by December 31^st. In practice this means you’ll need to do so at least a few business days before the deadline to account for processing time. Beyond that, the government doesn’t really care when and how often you take distributions. What matters is that you at least take the minimum out so you’ll owe tax on it.

Your RMD is based on your account value at the end of the prior year. That balance gets applied to a table that is widely available via a Google search. I like this one: https://www.bankrate.com/retirement/ira-rmd-table/

The table shows how the portion you’re required to withdraw grows as you age. For example, at age 73 you’re RMD is worth about 3.8% of your IRA balance. At age 83 it’s about 5.5%. By 93 it’s almost 10%. By age 103 it’s nearly 20%.

The amount is calculated for each separate IRA by the account’s custodian, so finding it shouldn’t be a problem. Some custodians put the RMD amount on your monthly statement but all of them will have it available when you log onto their website. I also have the RMD for accounts I’m responsible for managing.

Once you know the RMD for each account, you can add up the various amounts (assuming you have multiple accounts) and take the total from one account or from each account, it’s up to you. You can withhold taxes at the time of distribution or elect to not withhold. But be careful here. Every dollar you take from a Regular, Contributory, Traditional, or Rollover IRA (different names for essentially the same thing) is taxed as ordinary income and adds to your tax burden. Will you have ample cash to pay the extra taxes when you file your return? If not, withholding from your RMD is a better option.

What to do with your distributions? If you don’t need to spend the money you can move your RMD into your non-retirement account to keep it invested. One thing you can’t do is move your RMD into a Roth IRA. You can do Roth Conversions, which are also taxable and beyond the scope of this post, but this is a separate transaction involving non-RMD dollars.

If you forget your RMD you’ll be charged a large penalty plus the tax on the amount you didn’t take. Our benevolent government will give you a pass on forgetting your first RMD by letting your due date slide until April 1^st of the following year. However, you’ll have to take two RMDs that year and pay tax on the whole amount. That could make sense from a tax strategy standpoint but be careful.

If you’re wondering, the only way around paying taxes on your RMDs is to give the money to charity. You can donate some or all of your RMD up to $105,000 per year. This is known as a Qualified Charitable Distribution and would be handled through your custodian. Some custodians make checkbooks available for this purpose, which is nice because there are specific rules for processing QCDs. These dollars wouldn’t be taxable in the year donated so it’s a great option if you’re at least 70 ½ (or older on the date of the gift – a holdover from prior RMD rules) and would otherwise be making donations anyway.

To sum this up, RMDs can be complicated but are required, hence the name. The good news is that if we’re managing your investments we’re also managing your RMDs. We’ll be in touch soon if you still have some to take. Otherwise, feel free to ask questions as you enjoy autumn.

Have questions? Ask us. We can help.

Good morning and Happy Tuesday. I hope you enjoyed the Labor Day holiday, our unofficial end of summer. It also marks the end of the summer market doldrums (although this one was pretty busy) and the start of what’s typically a volatile period for stocks. Volatile but also positive. While September can be rough, the final three months of the year are usually favorable. Whatever the reasons, and there are many, these next several months will certainly be interesting for investors.

But this week I’d like to stray from my typical posts with a quick note welcoming a new member to the Ridgeview Financial Planning team. Suzanne Allen comes to us from a career ranging from owning a small business to business administration and project management. She is joining us as our Operations Manager and will be handling all you might expect that sort of job to entail. We’re excited to welcome Suzanne and I look forward to her helping us help you better.

Otherwise, I wish you a good week and a pleasant beginning to autumn.

Have questions? Ask us. We can help.

“May you live in interesting times” is an ominous saying based on an old Chinese curse, although the history of that is a little dubious. I looked it up because the variety of news we’ve been subjected to lately has a lot of people feeling stressed and perhaps even doomed to constant uncertainty. I don’t have any answers for that and you probably don’t either. However, I’ll suggest that optimism is a choice that can be difficult to make but at least offers a break from the stress of life.

I’m also thinking about this while reflecting on all we’ve been through in the markets during the past ten years. There have been selloffs, flash crashes, full-blown meltdowns, election surprises, political and social turmoil, wars, and a pandemic that shook our markets, economy, and culture to their respective cores. Never a dull moment or a lack of things to worry about. Maybe that’s the downside of paying attention.

So much has happened these past ten years and yet the stock market has done extremely well. Massive volatility has often been followed quickly by massive gains, so much so that only two years in the past ten saw the S&P 500 posting annual declines. During 2018 the market dropped due to a trade war with China, slowing global growth, and concerns about the Fed and interest rates. During 2022 it was inflation and, again, concerns about the Fed and interest rates. But investors did well if they bought and held quality investments, paid attention to rebalance as needed, and generally focused on what could be controlled. These investors were rewarded for their patience and intestinal fortitude while being reminded of another popular saying, “If it was easy, everyone would do it.” Investing is an optimistic act often done during times of pessimism. Is that ever easy?

If you’re wondering, I’m thinking specifically of this timeframe because this July/August marks my ten-year anniversary of leaving the brokerage world and starting my own firm.

It’s always tough to charge out on your own and my situation was probably typical. I had a young family, a mortgage and not enough savings, but a dream of putting clients first, owning my own tomorrow, righting industry wrongs, and so forth. I left my former employer with nothing and they still sued me. Go figure. That, I came to find out, was more about perpetuating a cautionary tale to keep other colleagues from hanging up their own shingle as I did. I’m sure it worked to keep other would-be independent advisors chained to their desks, but it pissed me off and helped drive me when times were lean. And lean they were. Since I didn’t sell products with a large upfront commission, I had to build and wait, aided by raiding my 401(k). I like to think this paid off handsomely but doing so was nerve-wracking at the time.

Anyway, these past ten years have often been challenging but always fulfilling. I don’t think everyone can or even should own their own business, but I wouldn’t have traded my experience away for anything. All the decisions. The mistakes. All the surprises. All the stress. Not even during the dark early days of Covid, when major indexes were moving with otherworldly wildness, did I think seriously of throwing in the towel. Sure, there were times I reminded myself of the scene in the original Top Gun when Goose asks Maverick about the number for that truck driving school, but there was always another day and, as I suggested, optimism is a choice.

All kidding aside, the last ten years have been a blast and I’m excited about the next ten and beyond. I continue to build slowly for the long-term and hope to make a staffing announcement soon.

But while I’ve done the work you’ve provided the most important ingredient – your trust. I’m deeply grateful for and humbled by the trust you place in me and my staff and we hope to keep earning it.

That said, as I’ve done seasonally in the past I’m taking some time off from writing these posts. I’ll still be hard at work, just cutting the workload back a bit. If you need anything, please ask. Otherwise, have a great rest of your summer and I’ll be back to these posts again soon.

Have questions? Ask us. We can help.

Last week wasn’t a good one for stocks but, as I mentioned in a recent post, September is usually a volatile month so some bumpiness is to be expected. Major market indexes were down from about 3% to nearly 6% for the week with the largest losses impacting small companies and big tech names most. These were also areas of the market with the highest returns lately. The more broadly-based S&P 500 was down a little over 4%. Bonds were up a percent or so and that helped soften the blow for investors with portfolios containing bonds.

It can be helpful to put short-term market volatility into broader context. The S&P 500 is up better than 14% year-to-date, better than the Dow’s 9% and the NASDAQ’s 12%. Core bonds are finally posting positive returns this year, up around 4% or so depending on the index. And foreign stocks are up in the mid-single digit range. So it’s been a good year but market seasonality is amping things up a bit as usual. Add the election calendar and Fed policy expectations to the mix and, again, volatility should be expected.

For some historical context, my research partners at Bespoke Investment Group looked at S&P 500 performance since markets started trading five days a week in 1953. Last week was the worst start to September on record. There have only been four other times when the broad market benchmark declined by more than 2.5% in the first week of September. Why does that matter other than to demonstrate it doesn’t happen very often? One week doesn’t make a trend but it’s interesting market trivia anyway.

Going further, Bespoke looked at the same 1953 start year but from the second week of September to see how markets have fared during that month and through the fourth quarter. They found that the S&P 500 was up 76% of the time with average cumulative gains of over 4%. Notable losses occurred during this historical timeframe such as Black Monday in October 1987, when the Dow index lost 23% in a day. The onset of market meltdowns in September 2008 related to the Great Recession also marred the timeframe. Otherwise, September has tended to be weak and volatile but the final three months of the year often make up for it.

That said, I don’t want to overstate this. I recall plenty of times when the last few months of the year felt nasty related to trade wars, Fed policy, and various other causes of market anxiety. And I’ll never forget the “coming unglued” nature of late-2008. However, those market events were juiced up by excessive leverage and complex/risky trading strategies, global trade issues, a US and/or global economy on the rocks, and rising interest rates. Depending on one’s opinion our current environment has excesses, such as lofty valuations in some parts of the market, but we’re in a much better place than back in 1987 and 2008.

Market volatility can be disconcerting, especially when it seems to come from nowhere. We should always prepare our portfolios and minds for all eventualities but remember that volatility goes both ways. Major market indexes were up yesterday and again as I write this morning, without a major positive catalyst other than prices being down last week. We’ll see how this week pans out but we have to think beyond just the next few days, of course.

I’ve mentioned this numerous times before but it bears repeating: As long-term investors we need to deal with seeing our statement values bounce around, sometimes quite a bit, as we grow our wealth. Growth will happen but you have to give it time.

Have questions? Ask us. We can help.

What a few weeks we’ve had. Summertime has usually been a quiet time for stock and bond markets but that hasn’t been the case in recent memory. Just this month we’ve had a major shot of volatility, a rapid snapback, and then last week the Fed telegraphed as clearly as it could that it’s time to reduce interest rates. Add those events to all the election cycle news and it’s been a busy summer indeed. Let’s take a few minutes to assess the situation with everything that’s been going on in the markets.

We saw stock prices drop quickly earlier in August. The tide started to turn going into the first weekend and selling accelerated the following week. Ostensibly this was about a disappointing jobs report and Fed policy but what it really seemed like was a lot of trading algorithms taking profits. Whatever the catalyst, it was fast to go down and fast to come back up. According to my research partners at Bespoke Investment Group, the S&P 500 went from “extremely overbought” (compared to its 50-day moving average) to “extremely oversold” in 13 days and then roundtripped that over the next 14 days. That’s one of the fastest bouts of V-shaped volatility in decades. Prices have mostly been higher since so you’d be forgiven if you were on a cruise or something and didn’t know what all the fuss was about. Volatility like that feels horrible at the time but, unfortunately, it’s part of what we have to put up with as long-term investors.

Markets react to a variety of information on any given day but Fed policy/interest rates have been top-of-mind for so many for so long that rate anxiety can occasionally bubble over. That certainly fed into the market volatility just mentioned and, perhaps ironically, also helped markets to recover so fast. This was because as stock prices were falling investors quickly assumed that the Fed would have to lower interest rates soon, and some even said an emergency Fed meeting would be imminent. It’s not the Fed’s job to prop up the stock market but assumptions about a shift in Fed policy got baked in anyway. That, plus other positive economic news helped push prices higher.

Then last week Fed Chair Jerome Powell said in a speech that “the time has come” to start lowering rates. This wasn’t because of market volatility; it was because the inflation situation has improved and higher interest rates have become “restrictive”. Fed Chairpersons usually aren’t that explicit and the rate-setting committee hasn’t yet made a formal decision. However, it seems like this is the shift investors have been waiting for.

Usually the Fed begins an easing cycle by cutting rates by a quarter point, followed by larger reductions over subsequent meetings. As I type investors are pricing in a 70% chance of that quarter point cut while 30% assume a half-percent cut when the Fed meets again in September. This means exactly 0% of the market assumes no cut next month. Further cuts are priced in over following months that would take the Fed Funds rate, the main short-term benchmark that’s relied on so heavily in our financial system, down by maybe 2% from about 5.5% now. Whatever the reduction ultimately is, this should be a tailwind for the economy and, by extension, the stock and bond markets.

Earlier in August when stocks were faltering bond prices were rising. The yield on the benchmark 10yr Treasury note dropped (as bond prices rose) to about 3.8% from over 4%. This yield drives the rate on 30yr mortgages and led to a spike in refinance activity that has settled down a bit sense. Expect those rates to fall further in the months ahead, probably leading to more refinancings which helps more recent homeowners who bought amid higher rates. Lower mortgage rates should also help a national housing market that has been struggling in some areas. And lower rates from the Fed will help borrowers with loans, like credit card balances and equity lines of credit, tied to the PRIME rate. This benchmark is currently at 8.5%, not historically high but certainly high compared to recent history. Any reduction in PRIME will lower borrowing costs for a lot of people, but a 2% reduction perhaps by next Summer would be welcome indeed.

The prospect of lower interest rates has also been giving the bond market a lift. Assuming rates follow something like the expected path, this should continue to buoy bond prices and is a reason to cautiously start putting cash (money market cash and short-term CDs maturing soon) back into medium-term bonds.

Volatility spikes like we saw earlier this month aren’t very common. However, when they have occurred it’s often been in the context of a rising market. Whatever happens in the months ahead, just try to be prepared for the unexpected. Ensure your investment portfolio is set up correctly (my job for many of you reading this) and that your financial house is generally in good order.

So we’ve had some excitement this Summer amid an otherwise positive market and economic environment. Some parts of the stock market had gotten a little ahead of themselves earlier this year and this has levelled out a tad. Inflation is nowhere near the problem it was two years ago and the economy seems to be trucking along. Eventually we’ll see a recession but it doesn’t seem likely anytime soon (I’m literally knocking on wood as I write this…).

One of the bottom lines we should remind ourselves of is that we’re still, even after four-plus years, dealing with issues stemming from the pandemic. Our economy and financial system is large and complicated so it makes sense that historic government intervention back then would take time to work its way through the system. The Fed getting its benchmark short-term rate back to normal (generally agreed to be around 2% lower than current) would be sort of like closing the book on a lingering chapter of Covid’s history.

Have questions? Ask us. We can help.

Pay now or pay later, that’s the main question when we think about taxes on our retirement accounts and it’s one with lasting consequences. A client recently sent me an article about converting traditional IRAs to Roth IRAs in the context of government debt. Let’s touch on that while discussing some of the basic considerations for people who feel they need to play catchup when it comes to Roth accounts.

The history of individual retirement accounts coincides with the decline of employer-sponsored pension plans. I won’t go into all of that here. However, some context is important. The shift began in the 70’s and 80’s to account types that were owned, managed, and the responsibility of employees instead of employers. This led to the 401(k) structure we’re all familiar with and, over time, the expansion of IRAs. To incentivize savings the government gave workers a tax deduction on contributions and the employer got a tax break (and less burden from not having to provide workers with a pension) when it added money to an employee’s account. Employers had rules to follow when structuring plans, but otherwise employees were on their own to manage their 401(k)s if that was an option and, if not, their IRA.

That was (and still is) the primary option for retirement savings until the late-90’s when Roth IRAs were created by Congress. Roth accounts flipped the tax savings thinking around – savers gave up a tax deduction on their contribution but got tax free growth if they left money in the Roth long enough. As with traditional IRAs, Roth accounts weren’t available in the workplace. Instead, savers opened and funded these accounts based on various limitations, such as the original $2,000 maximum annual contribution. This was raised over time to the current $7,000, or $8,000 for those age 50 or older.

Decades of inertia around this led to most savers having most of their money in tax-deferred 401(k) accounts and IRAs instead of in a Roth. Any dollar saved for retirement is positive, but the long-term reliance on traditional plans leaves many savers facing a series of tax bills because every dollar in those accounts will be taxed as ordinary income when withdrawn.

Say you contributed $100,000 during your working years and your balance grew to $1 million. Nice job! You saved on taxes while saving for retirement and haven’t paid taxes on dividends, interest, and gains in your account the whole time. The US Treasury has been waiting decades for tax revenue and they’ll eventually get it. Part of how they collect is by requiring you to start taking distributions by age 73 whether you need the money or not. Most retirees would have already started taking distributions for obvious reasons, but many don’t. These latter folks are left paying taxes on income they don’t actually need. On a million-dollar balance the first required distribution could be $38,000, all taxable in the year distributed. That could kick the account owner into a higher tax bracket or more if this income coincides with a spouse’s distribution, Social Security income, and so forth. Too much taxable income is a good problem to have but it’s still a problem.

It’s this group that Roths appeal to most in hindsight since Roth IRAs don’t have the minimum distribution requirement. The challenge is how to get money that’s currently in a traditional retirement account into a Roth.

This is where Roth Conversions come in. You do this by having your existing custodian (your workplace plan or brokerage firm) move cash and/or investments from your traditional balance into Roth. Sounds straightforward, right? There might be some forms but otherwise it’s all electronic and shouldn’t cost anything… in fees. However, the conversion gets taxed as income during the year you convert. You have the option to withhold taxes at the time, but generally speaking it’s better to pay at tax-time with other money (doing so helps the Roth conversion break even faster). The ultimate tax bill depends on a variety of factors that are beyond the scope of this post, but your tax advisor or humble financial planner can help you figure this out.

So planning ahead to reduce the impact of required distributions makes good sense depending on your current tax situation. But what if taxes are higher in the future, and should you try to preempt that by converting more now? Aren’t higher taxes a given with government debt being so high?

Our national debt is massive, more than twice that of any other country and larger than the next four higher-debt country’s debt load combined, according to a quick Google search. That sounds bad. However, we should remember that our economy is equally massive and our nation’s debt functions differently than our personal household debt does. To grossly oversimplify, our government can continue to refinance its debt indefinitely so long as there are willing lenders. And willing lenders abound. Our bonds are the most liquid in the world and our currency is involved in an overwhelming majority of all foreign exchange transactions. Sure, there may come a time when our economic status and currency is meaningfully different, but that’s not likely anytime soon.

Ensuring long-term dollar primacy requires that we keep our fiscal house in order. However, it doesn’t necessarily matter in the way many in the marketplace use to scare (for lack of a better word) people into buying a product or books about investing in gold or paying abnormally high tax bills when converting traditional retirement account balances into a Roth.

So consider your motivation for doing a Roth conversion and make sure it makes sense for your personal situation. Run some tax projections while weighing other options for shielding your IRA from taxes, such as donating money from your IRA to charity tax-free if you’re at least 70.5 years old. This can be a good way to offset taxes on required minimum distributions while helping the organizations you value. Beyond that, be careful about how quickly you try to play catchup with the perceived benefits of a Roth IRA. 

Have questions? Ask us. We can help.