A Few Things...

There are a variety of things percolating this morning. I’ll share some below, although there’s no clear throughline.

The Federal Reserve meets again this week for another decision on its short-term interest rate benchmark. As I type there’s a 99% chance of a quarter-point rate reduction. Then there’s a 94% chance of another quarter-point reduction at the Fed’s last 2025 meeting in December. Odds of further reductions even out quickly into the new year, but three rate reductions (including September’s) would be a large puff of wind into the economy’s sails.

The stock market is currently pricing those changes in. That, plus giddiness from softening rhetoric related to trade negotiations with China is helping lift major indexes to new highs. Eventual confirmation of these factors should keep investors happy but any contrary whiff will create volatility. Remember that the fourth quarter is usually the best quarter for stocks all year, but it also tends to be one of the most volatile.

Should You or Shouldn’t You when it comes to doing a Roth conversion? Our individual goals and tax situations are unique but there’s enough common ground to develop a short-hand for whether you should consider converting money from a traditional retirement account into a Roth. Here are a few questions to ask, in order of priority. Answering yes to one means you should consider a conversion and more yesses mean the obvious.

Look at your 2024 tax return. Were you in the 22% or lower Federal tax bracket?

Is your income roughly the same this year?

Or will your income be lower? Maybe you’ll show a large loss or you’re expecting more deductions?

Are you anticipating, for whatever reason, that your tax rate will be higher in the future?

When it comes to Roth conversions, we’re looking for calendar years when your taxable income is lower than it would otherwise be, or maybe it’s low for an extended period. A simple way to measure this is by tax bracket. The lower brackets, 10% and 12%, are no-brainers when it comes to considering a Roth conversion. From there the brackets jump to 22% and 24%, before jumping again to 32% and higher. Staying within the 22% bracket is usually solid for conversions, while the 24% can still make sense – it depends on your situation.

Essentially, we’d backfill “missing” income to the top of the bracket you’d otherwise be in since converted dollars are taxed as ordinary income. You can go into the next higher bracket, of course, but don’t do so by mistake.

You’d then plan to leave the converted dollars in the Roth for at least five years (and to at least age 59.5) for the money never to be taxed again. Given enough time, this Roth conversion process could grow your savings substantially to be spent by your surviving spouse or even your kids or other beneficiaries. The alternative is leaving the money to grow in your tax deferred accounts to eventually be required to be withdrawn and taxed later. That’s certainly not a horrible outcome, just potentially more expensive.

And if you’re younger and answer yes to the above questions, focus on making Roth contributions instead of traditional. That way you won’t need to convert, or at least not as much, because you’ll already be there.

JPMorgan’s asset management arm has been banging the drum for allocating beyond a typical 60/40 stock/bond portfolio for a while. Their recent research suggests that adding “alternative” asset classes like private credit, private equity, real estate and precious metals to name a few, can help achieve better risk-adjusted performance. The thinking is to take 5% from the stock side of your allocation and 5% from bonds and add to alternatives. Doing so has back tested well and could provide additional hedges over the next 10-15 years. Their 60/40+ portfolio concept could generate an extra 0.2% return over that sort of timeframe. Frankly, I think it speaks to diversification in general and making sure that everything in your investment portfolio is there for a reason. But back testing is tricky since, as we all know, past performance is not indicative of future results. And do you need expensive actively-managed funds and less liquid investments to accomplish what could be a marginal improvement? I’m not entirely sold on this but it’s an interesting idea to explore during the weeks ahead.

The Shutdown Snowball. According to my research partners at Bespoke Investment Group, impacts from the federal government shutdown continue to widen given that SNAP (“food stamp”) benefits for November likely won’t be disbursed for the roughly 40 million Americans, on average, who receive them monthly. These folks are geographically dispersed and SNAP dollars flow directly into the economy. Apparently Walmart alone collects about 25% of this spending, which makes sense. Bespoke doesn’t suggest that Walmart will suffer because of this lost consumer spending, but the longer the government shutdown goes, the closer it will feel to more Americans.

Personal politics and the understanding of political maneuvering aside, I vividly remember living off food stamps as a kid so it’s hard not to imagine the impact this will have on millions of households, even if it’s only one missed month. Add that to the myriad other issues impacting low-income Americans, and it could be a gloomy holiday season for many families. Consider donating to your local food bank – nonperishable food donations are good but, as I recall, cash is king because food banks can buy bulk food cheaper than you can.

Have questions? Ask us. We can help.