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Lesser Known Provisions of the SECURE Act

What younger investors need to know.

The SECURE Act passed into law in late 2019 and changed several aspects of retirement investing. These modifications included modifying the ability to stretch an Individual Retirement Account (IRA) and changing the age when IRA holders must start taking requirement minimum distributions to 72-years-old.1,2

While those provisions grabbed the headlines, several other smaller parts of the SECURE Act have caught the attention of individuals who are raising families and paying off student loan debt. Here’s a look at a few.

Changes for college students. For those who have graduate funding, the SECURE Act allows students to use a portion of their income to start investing in retirement savings. The SECURE Act also contains a clause to include “aid in the pursuit of graduate or postdoctoral study.” A grant or fellowship would be considered income that the student could invest in a retirement vehicle.3

One other provision of The SECURE Act:  you can use your 529 Savings Plan to pay for up to $10,000 of student debt. Money in a 529 Plan can also be used to pay for costs associated with an apprenticeship.4

Funds for a growing family. Are you having a baby or adopting? Under the SECURE Act, you can withdraw up to $5,000 per individual, tax-free from your IRA to help cover costs associated with a birth or adoption. However, there are stipulations. The money must be withdrawn within the first year of this life change; otherwise, you may be open to the tax penalty.5

Annuities and your retirement plan. This might be the most complicated part of the SECURE Act. It’s now easier for your employer-sponsored retirement plans to have annuities added to their investment portfolio. This was accomplished by reducing the fiduciary responsibilities that a company may incur in the event the annuity provider goes bankrupt. The benefit is that annuities may provide retirees with guaranteed lifetime income. The downside, however, is that annuities are often the incorrect vehicle for investors just starting out or far from retirement age.6

The best course is to make sure that you review any investment decisions or potential early retirement withdrawals with your advisor.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements.

2 – Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.

3 – forbes.com/sites/simonmoore/2019/12/23/if-youre-a-graduate-student-the-secure-act-makes-easier-to-save-for-retirementheres-how/#207d85d322ef [12/23/2019]. A 529 plan is a college savings play that allows individuals to save for college on a tax-advantages basis. State tax treatment of 529 plans is only one factor to consider prior to committing to a savings plan. Also consider the fees and expenses associated with the particular plan. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may be different than federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

4 – forbes.com/sites/simonmoore/2019/12/21/who-benefit-from-the-recent-changes-to-us-savings-programs/#4b86e86f6432 [12/21/2019]

5 – congress.gov/bill/116th-congress/house-bill/1994/text#toc-HCF4CC8DCF6E14B28968474EB935AB36D [05/23/2019]

6 – marketwatch.com/story/will-the-secure-act-make-your-retirement-more-secure-2020-01-16 [01/16/2020]. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxes as ordinary income. If a withdrawals is made prior to age 59 ½, a 10% federal income tax penalty may apply (unless an exception applies).

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Measuring the Value of a Financial Advisor

One study asserts that these relationships can make a difference for investors.

What is a relationship with a financial advisor worth to an investor? A 2019 study by Vanguard, one of the world’s largest money managers, attempts to answer that question.

Vanguard’s whitepaper concludes that when an investor worked with an advisor and received professional investment advice, they saw a net portfolio return about 3% higher over time.1

How did this study arrive at that conclusion? By comparing self-directed investor accounts to an advisor model, Vanguard found that the potential return relative to the average investor experience was higher for individuals who had financial advisors.1

Vanguard analyzed three key services that an advisor may provide: portfolio construction, wealth management, and behavioral coaching. It estimated that portfolio construction advice (e.g., asset allocation, asset location) could have added up to 1.2% in additional return, while wealth management (e.g., rebalancing, drawdown strategies) may have contributed over 1% in additional return.1

The biggest opportunity to add value was in behavioral coaching, which was estimated to be worth about 1.5% in additional return. Financial advisors can use their insight to guide clients away from poor decisions, such as panic selling or accepting excessive risk in a portfolio. Indeed, the greatest value of a financial advisor may be in helping individuals adhere to an agreed-upon financial and investment strategy.1

This study provided feedback and estimates based on customer experience. The value of advice is not a guarantee of performance. Actual returns will fluctuate.

Of course, financial advisors can account for additional value not studied by Vanguard, such as helping clients implement wealth protection strategies, which protect against the financial consequences of loss of income, and coordinating with other financial professionals on tax management and estate planning.

You could argue that a financial advisor’s independence adds qualitative value. It should be noted that not all financial advisors are independent. Some are basically employees of brokerages, and they may be encouraged to promote and recommend certain investments of those brokerages to their clients.2

Both types of financial advisors may receive their compensation in two ways: through transaction fees and through ongoing fees. Financial advisory firms are required to disclose how their professionals are compensated with the Securities and Exchange Commission (SEC).2

After years of working with a financial advisor, the value of a relationship may be measured in both tangible and intangible ways. Many such investors are grateful they are not “going it alone.”

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf [2/19]

2 – cnbc.com/2019/10/23/guide-to-choosing-the-right-financial-professional-for-you.html [10/23/19]

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Bumps in the Road

The start of 2020 has brought increased stock market volatility. The uncharacteristically calm market environment we experienced for much of the past four months was bound to end, but identifying the catalyst for a potential sell-off became more difficult after the U.S.-China phase-one trade deal was signed. Not even the recent major escalation in the U.S.-Iran conflict could knock down this market. Unfortunately, the coronavirus appears to have done the trick.

That story is still developing, but so far, the coronavirus has been less deadly than the SARS outbreak, one of the best historical comparisons we have. However, the speed with which the illness has spread within China has grabbed the stock market’s attention. Analysis of prior outbreaks such as SARS, bird flu, and swine flu—and the aggressive ongoing containment efforts—suggests the global economic impact likely may be modest and short-lived, although the situation is unpredictable at this stage. The Chinese economy is being negatively impacted by business closures and travel restrictions, which may have spillover effects on the rest of the world, given the size and global interconnectedness of that economy.

In his post-meeting remarks January 30, Federal Reserve (Fed) Chair Jerome Powell acknowledged the risk to the U.S. and global economies from the coronavirus outbreak. He also slightly downgraded the Fed’s assessment of consumer spending, although based on the January gross domestic product (GDP) report, it is possible the U.S. economy could continue to grow at or near the 2.1% pace reported for the fourth quarter of 2019. After the Fed’s announcement, the bond market factored in one quarter-of-a-point interest rate cut this fall. While that action isn’t a given, well-contained inflation would allow the central bank room to make interest-rate adjustments more easily if needed.

The fundamentals of the U.S. economy and stock market—interest rates, inflation, wage growth, and jobs—still appear favorable overall. Although S&P 500 Index companies have reported minimal earnings growth during fourth-quarter earnings season, commentary from corporate America over the past several weeks has helped solidify the outlook for corporate profits in 2020. It still appears profits could be the primary driver of any potential stock market gains over the next 11 months.

Investing fundamentals may continue to help support stocks over the balance of the year, though the magnitude of potential gains from current levels may be limited. In addition, there are some risks to consider beyond those already mentioned: The 2020 election could negatively impact certain segments of the market due to policy uncertainty; the United Kingdom will officially leave the European Union at the end of this year; and trade tensions with China could flare up again.

Bottom line, there may be some bumps in the road, but the economic expansion may continue through 2020 and help power forward this nearly 11-year-old bull market.

Thank you for your business, and please contact me if you have any questions.

Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Economic forecasts set forth may not develop as predicted.

All data is provided as of January 31, 2020.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. Tracking # 1-946762

Managing the National Debt

You probably know that the U.S. national debt is exploding, but if you don’t, try looking at the U.S. debt clock (https://usdebtclock.org/) which shows how high our national debt is every second (currently $23.2 trillion and counting).  Our federal budget deficit will exceed $1 trillion this year.  The clock says that the federal debt per individual taxpayer is $187,632—and rising.  (The clock also calculates interest paid, debt per citizen, debt per family, mortgage debt, gross domestic product and a lot of other interesting things.)

Sooner or later, our federal debt will have to be paid back—or, at least, we will have to reduce the annual deficit to more manageable numbers.  The question is: how?  A recent article looked at different options that politicians will eventually have to consider.

One is a new inheritance tax.  You probably know that the first $11.58 million of a deceased person’s wealth is now exempt from federal estate taxes, which means that very few people will pay any estate taxes at all—today.  The article says that if we moved the exemption threshold down to $2.5 million, the government would raise an estimated $34 billion more a year.  At a lower threshold of $1 million, taxes collected would go up by $92 billion.

The article considers the wealth tax, which is favored by Democratic presidential candidates Bernie Sanders and Elizabeth Warren.  The Hamilton Project has proposed four types of wealth taxes, which would tax people with wealth ranging from a low of $8.25 million to taxes that would start at a net worth of $25 million.  Each of the wealth tax options would raise approximately $300 billion a year.

Another possibility is a value-added tax—a tax levied at various levels of production for goods and services.  This, of course, is popular in most developed nations, and it causes prices to rise for consumers.  A 10% VAT would raise around $1 trillion a year—which might conceivably reduce our annual debt to $0.

A final possibility is a financial transaction tax, which would put a 0.1% fee on all trades of stocks, bonds and derivatives.  This would raise costs for investors, but it might, if implemented, raise government revenues by $60 billion a year.

The article also talks about raising corporate taxes, but the problem there is that you would have to get tax havens like Ireland and Luxembourg to go along.  Otherwise, companies would set up shop in those lower-tax countries (many have already) and avoid the higher U.S. rates.  It might be possible to raise the highest corporate tax rate from 21% (today) to 25% or 28% and not cause corporations to create offshore tax solutions.  This would raise an additional $110 billion per year, and might also boost economic growth and stimulate investment.

The point of the article is that some form of additional taxation is coming.  What the article doesn’t say is that raising today’s personal income tax rates (particularly on the higher end) will probably be the first thing our next President and Congress consider.

Source:

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The Market Timing Hoax

A lot of “smart” investors will tell you that you should never invest when the market has been moving up, but instead should wait until there’s a pullback in order to buy at a bargain price.  But is that really a good strategy?

The biggest problem with this strategy is that you never know when the market will bottom out and start rising again.  But what if you actually did?  Would this strategy lead to incredible returns?

In a recent blog post, market analyst Nick Maggiulli decided to compare dollar-cost averaging against this perfect foresight of waiting to buy in until the markets hit a recent low, right before they started the next rise.  He found that if you randomly picked any trading day for the Dow Jones Industrial Average since 1970, there was a 95% chance that the market would close lower on some other trading day in the future.  That would be the time to buy, right?

Looking back, he found that just one in 20 trading days closes at a price that will never be seen again.  Between those days, our astute investor would hoard the cash that would otherwise be invested, and put it all in at the low point.  Maggiulli found that his hypothetical “buy at market lows” strategy would outperform a simple strategy of investing the same amount every day in the market by (get ready for this) 0.4% a year.

And remember, this strategy requires you to have perfect foresight—which, to be clear, none of us have.  In the real world, you are 95% likely not to get the best possible price when you buy into the market.  There’s no alternative but to accept this.

Even so, this is actually good news.  It means you don’t need a crystal ball to get pretty much the same returns that you would have gotten had the crystal ball somehow given you a view of the future.  All you have to do is continue to invest in a disciplined manner from now until you need the cash (in retirement?), and if the past is any indication, the market itself will take you where you want to go.

Source:

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Annual Financial To-Do List

Things you can do for your future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.1 

Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.2

Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.3

These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy.

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.4

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.5

If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pretax accounts, and your most tax-efficient securities should be held in taxable accounts.

Before adjusting your asset, consider working with an investment professional who is familiar with tax rules and regulations.

Review your withholding status. Should it be adjusted due to any of the following factors?

* You tend to pay a great deal of income tax each year.
* You tend to get a big federal tax refund each year.
* You recently married or divorced.
* A family member recently passed away.
* You have a new job and you are earning much more than you previously did.
* You started a business venture or became self-employed.

These are general guidelines and are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.

Are you marrying in 2020? If so, why not review the beneficiaries of your retirement accounts and other assets? When considering your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2020, you will need a new Social Security card. Additionally, the two of you may have retirement accounts and investment strategies. Will they need to be revised or adjusted with marriage?

Are you coming home from active duty? If so, go ahead and check the status of your credit as well as the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still there and consider revoking any power of attorney you may have granted to another person.

Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way in 2020? Do you anticipate selling an investment that is held outside of a tax-deferred account?

If you are retired, and in your seventies, remember your RMDs. In other words, Required Minimum Distributions (RMDs) from traditional retirement accounts. There is a new development to report on this, as the Setting Every Community Up for Retirement Enhancement (SECURE) Act just altered a key rule pertaining to these mandatory withdrawals. Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts. The previous “starting age” was 70½.6

This new RMD rule applies only to those who will turn 70½ in 2020 or later. If you were 70½ when 2019 ended, you must take your initial RMD(s) by April 1, 2020, at the latest.6

If you have already begun taking RMDs, your annual deadline for them becomes December 31 of each year. The I.R.S. penalty for failing to take an RMD can be as much as 50% of the RMD amount that is not withdrawn.6

Vow to focus on being healthy and wealthy in 2020. And don’t be afraid to ask for help from professionals who understand your individual situation.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thefinancebuff.com/401k-403b-ira-contribution-limits.html [7/16/19]
2 – kiplinger.com/article/retirement/T032-C000-S000-how-much-can-you-contribute-traditional-ira-2020.html [1/10/20]
3 – irs.gov/newsroom/charitable-contributions [6/28/19]
4 – nerdwallet.com/blog/taxes/home-office-tax-deductions-small-business/ [1/22/19]
5 – cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html [6/4/19]
6 – thestreet.com/retirement/secure-retirement-act-makes-big-changes-to-how-you-save [12/21/19]