Other common questions include:

• How much life insurance should I carry? I’ve heard different recommendations, but I don’t know what to believe.
• I have this policy from years back. Is it still adequate? Is the price I’m paying fair compared to today’s marketplace?
• My group disability policy through my employer only covers 60% of my income. Should I own an individual policy to cover the gap?
• Should I be considering long-term care coverage? At what age should someone start looking into the matter?

These what-ifs aren’t anyone’s favorite subject matter, but being proactive in this area is much better than being reactive. So, if any of these questions sound familiar or if you have other concerns related to this topic, don’t hesitate to contact us for a conversation. Matt Dorweiler joined our team October of 2021, and he brings over 15 years of experience in helping individuals and small businesses with risk management.

The post It Doesn’t Matter Until it Does appeared first on Strategence Capital.

Recently, the Standard & Poor’s 500 (S&P 500) had declined  13.9% from the January peak ¹. Stocks are not the only asset class getting beated down. Year to date, through April, core bond funds were down 9.5%, which, if the year ended in April, would be the worst year ever for core bonds (previous worst was –2.9% in 1994) ². Pair all of this with a swelling inflation rate of 8.5 (Consumer Price Index; March 2022), and an investor can’t be blamed for wondering what to do.

It may be a good time to make lemonade out of lemons by considering a Roth conversion.

Huh?

Roth conversions are when an individual takes a portion of a retirement account that has not yet been taxed (I.e., traditional IRAs) and moves it to a retirement account that is post tax (I.e., Roth IRA). Some qualified retirement plans, such as a 401(k), may allow this, too.

Here are reasons why I believe that Roth conversions can make sense right now:

1. The stock market is on sale. When I go to the store, and I see a special sale on that exact thing I’m looking for, why would I wait for that item to go back up in price before I buy it? When completing a conversion to Roth when the market is down, you get to swap out your investments at a lower tax basis. I’ll provide an example later in this article.
2. Taxes are on sale.³ We are experiencing an extremely favorable tax environment right now. With the Tax Cuts and Jobs Act that is set to expire in 2026, this is could be a good time to realize income.
3. There are no required minimum distributions in Roth IRAs. That is not the case for traditional IRAs. Every year, starting at age 72, investors are forced to take money out of their IRAs, no matter if they need the money or not.

Let’s look at an example to give you a better understanding of a Roth conversion. If an Indiana resident (home state bias on display, here) in the 22% federal tax bracket, and with a state tax rate of 3% (rounded down), converts $50,000 of a traditional IRA to a Roth IRA, their taxable income for the year will increase by $50,000. Assuming they stay in the same 22% bracket* with the $50,000 of additional income from the conversion, the tax liability is approximately $12,500 in federal and state taxes at the time of conversion. Hopefully you are tracking with me so far. The next part of the Roth conversion scenario is where investors can really benefit from this strategy.

It’s important to consider one’s tax bracket. A jump from the 22% tax bracket to the 24% tax bracket, the next one, isn’t a big one, but jumps from the 12% and 24% brackets are big moves.

If a market correction reduces the investment account by 15% and the Roth conversion is completed at $42,500 in value, the federal income tax liability from the conversion would fall to $10,625 yielding a $1,875 tax savings upfront. The caveat is once the funds are held inside a Roth IRA, any future market rebound and appreciation will be free of tax ⁴. The S&P 500 has never not rebounded over some time frame.

Other Considerations

The decision to convert all or a portion of your pre-tax IRA accounts depends upon an individual’s own facts and circumstances. Taxpayers are advised to speak with their tax and financial advisers prior to undertaking a Roth conversion. Some of the additional considerations include:

Sources:

1. LPL Research 

2. LPL Research

3. “Low Tax Rates and What to Do” , Strategence Capital Blog

4. “Everyone is Talking about Roth IRA Conversions and Here’s Why” , Kiplinger

The opinions voiced in this material are for general information only and are 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.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

The post An Opportunity in the Making appeared first on Strategence Capital.

• How much can you afford to contribute to the plan?
• Which should you contribute to, the Traditional or the Roth plan?
• How should it be invested?
• Are your beneficiaries correct?

Most participants can figure out number one by themselves, and we address number two in this blog post. Number three can be a tricky one, though, so I will address it here.

The investment choices in your retirement plan will likely fall into one of three investment product categories:

1. Age-based investment products – these are investment products intended to follow one’s career all the way to—and sometimes beyond—retirement. They employ what is called a glide path, which is a systematic way to shift the mix of investments from risky to safer as one gets older. In short, a 60-year old should not have the same mix of assets as a 20-year old, all else equal. These were designed to be all-in-one funds, to represent 100% of one’s account/plan, but don’t have to be. Additions of other investments, however, will dampen the systematic shifting described above.
2. Allocation or other all-in-one investment products – these are similar to the age-based products, in that they can be complete investment choices if they are properly diversified. Typically, these include within them a mix of stock and bond investments. They differ from the age-based products in that they do not factor in one’s age. Often there’s a connotation of risk; words like “aggressive” or “moderate” may be included in the names.
3. Everything else. Your retirement plan includes a menu of fund choices that likely includes one and/or two above, but it probably also includes other funds, such a foreign stock fund, a small-company U.S. stock fund, bond funds, etc.

From here, we have a choose-your-own-adventure way of considering these options. You can choose the restaurant metaphor or the plant metaphor.

The Restaurant Metaphor

I deliberately included the word “menu” in #3, above to transition into this metaphor—and it’s a bit of a stretch. Option #3 is like ordering off the restaurant menu, ala carte. You choose the entree, your sides, and maybe a dessert—or you can choose two desserts; it’s up to you. Option #2 is like ordering a combo meal, where everything is chosen for you. You get the burger, fries, and a drink. Option #3 requires a little imagining, but it’s like ordering a combo meal tailored to your BMI (Body Mass Index). Maybe your BMI is a little too high, so you might get the grilled chicken with lettuce, tomato, and no sauce instead of the burger. I’m not aware of this option at any restaurant, and that’s fine with me…I can make my own choices, just like in a retirement plan, but if you want some help, options 1 and 2 are available.

The Plant Metaphor

Imagine three plants you can choose from, an orchid, a succulent (e.g. a cactus), or a silk plant. Orchids are notoriously difficult to grow—one has to know how to care for an orchid; neglect it, and it dies. This is like investment choice #3, above; you really need to know what you’re doing. Invest too much in the wrong fund, and you could be in for a wild ride or you may come up short of your retirement goals. What’s more, you’re going to need to check in on your investments to make sure they haven’t gotten out of alignment. Option #2 is more like owning a succulent. The snake plant in my office thrives on a monthly watering. Otherwise, I can just enjoy it. It needs a little care, but nothing like an orchid. Option #1 is like buying a silk flower arrangement. It won’t ever need watered, and it will still look nice. You can’t totally neglect it though; it’ll need a periodic dusting off so that it looks nice.

For me, it’s the age-based option because even though my entire career has been in investments, I don’t want to have to check on my 401(k). I have more important things to do like raising a family and going fishing. Maybe for you, though, there’s a thrill in allocating portions of your retirement plan to different investment types. Just keep in mind that you will need to be a bit more involved with your retirement plan.

To be clear, your retirement plan’s investments should never be neglected, but some need more/frequent attention than others. We are happy to help you understand your plan’s investment options, and you can reach us by clicking on the Contact Us button on the upper right-hand corner of every page on our website.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult with an investment professional prior to investing.

The post How Should I Invest my Company Retirement Plan appeared first on Strategence Capital.

Let’s review the difference between the two options. The Traditional option has been around as long as 401(k)s. With it, you contribute before taxes are taken out; it’s a pre-tax contribution. The funds grow tax free. In the future, when the funds are withdrawn, they’re taxed at the then-prevailing tax rate.

In contrast, a Roth contribution is an after-tax contribution. With this option, the contribution is made after all taxes have been paid. Then, in the future, when funds are withdrawn, there’s no tax to be paid for qualified withdrawals.

A pre-tax contribution is essentially a bet that taxes in the withdrawal phase will be lower, while a post-tax contribution is a bet that taxes will be higher. As to which one you should consider, just figure out when your tax rate will be lower—now or in the future—and make the corresponding type of contribution—which is a lot easier said than done.

One rule of thumb is that the younger you are, the more a Roth contribution makes sense. Salary and compensation usually increase over the course of one’s career, putting one into higher tax rates because of our marginal income tax system, which taxes higher income at higher rates. So, if you expect to have a long career ahead of you, consider making a Roth contribution.

In contrast, the older you are, the easier it is to estimate your income in retirement and, in turn, income tax rates. Someone contributing to a qualified retirement plan at age 63 should have a better estimate of their income at age 66 than someone who is 33. You might think of this as a tipping point, that age when your income in retirement will be lower than it is now. That may be the time to switch to a pre-tax contribution.

One can also consider current income tax rates and where they are in relation to past income tax rates to give one an idea of what tax rates could be. Right now, in 2021, income tax rates are about the lowest they’ve been since the end of World War II. On top of that, our national debt continues to grow, which suggests that tax rates will have to go up to service that debt in the future, although there is no guarantee that will be through the income tax system.

If you don’t know what your income tax rate will be in the future—I sure don’t, why not consider making both types of contributions? Call this the-future’s-uncertain strategy. With this strategy, one aims to have both pre-tax and after-tax (Roth) funds in retirement. That way, regardless of what tax rate you face in retirement, you have options. Tax rates higher than you expected, you have the after-tax funds to draw from; tax rates lower? one has the pre-tax funds to draw from.

Furthermore, if your employer offers a match, as of 2021 that match is a pre-tax contribution. So, if your employer matches 80% of your contribution up to 5%, you’re part way to my proposed strategy above. In this example, a 5% after-tax, or Roth, contribution is matched with a 4% pre-tax contribution and—voila—you’ve got the-future-is-uncertain strategy; money ends up in both categories. Then, as you progress in your career, you can consider increasing the pre-tax contribution.

Roth Contributions also mean you are saving more for retirement because the $100,000 in Roth funds is all your money, whereas the IRS will get a portion of the $100,000 pre-tax contribution.

There are also no Required Minimum Distributions for Roth IRAs. With a traditional IRA, you may be forced to take more money out of your accounts than you want to.

Finally, your heirs will inherit Roth accounts tax free. If they’re in a higher tax bracket, it’s a good way to pass along generational wealth.

I hope that’s helpful. If you have more questions, call us or shoot us an email.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

There can be no guarantee that strategies promoted will be successful and no guarantee of positive results.

The investment strategies mentioned here may not be suitable for everyone.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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I’ve always thought that if you don’t have a proper will, that it’s better to scribble something on a legal pad about your last wishes and sign it. It might be nice for your loved ones to have a handwritten message from you to remember you by, but that might be all it’s good for, depending on where the writer resides—or resided.

Such a document is known as a holographic will, and while that might conjure up images like the one on the right, it’s just a handwritten will—cursive or printed.

The problem with a holographic will—as Larry King’s family—or families—is finding out—is that they’re not valid in every state. In fact, in my state, Indiana, only the bordering states to the north and south, Kentucky and Michigan, honor them. Neither Indiana, nor Ohio, nor Illinois honor them. Here is a list of the [currently] 27 states that honor them.

I’m pretty sure that our Compliance Department is going to require that we add a disclosure that says this shouldn’t be construed as legal advice, but rather than take a chance with a holographic will, why not spend the bucks to meet with an attorney who can draft a will that is legally recognized in all courts of law. Your heirs—or one of your seven former wives, if you’re Larry King—might thank you some day.

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“When should I file for Social Security?

This is a common question we receive here at Strategence. My typical response is that “it depends.” I recently read Social Security Made Simple, by Mike Piper CPA⁽¹⁾. Even after reading the book, I find myself returning to my highlighted and bookmarked pages for reference, as the Social Security rules can be convoluted. In the book, the author highlighted six rules of thumb when it comes to Social Security that can help simplify your filing decision.

Without further ado, here are the author’s five rules of thumb that can help you navigate the complicated world of Social Security. (The author’s sixth rule had to do with deemed filing, which was eliminated with the Bipartisan Budget Act of 2015.) What follows is my paraphrasing of his central points.

5 Rules of Thumb

Rule #1 – The longer you expect to life (or the more worried you are about running out of money), the better it is to delay taking Social Security benefits. In my attempt to simplify the rules of social security, in general, this rule will help guide you to an easy decision on when you should file.

Rule #2 – An unmarried person trying to decide whether they should file at 62 or wait until age 70, the breakeven point is approximately 80 ½ years of age. For reference, the life expectancy of a 62-year-old male is 82, while a 62-year-old female is 85⁽²⁾. So, if you’ve never married, and expect to live past 80 ½ years, you would be better off to wait until 70 to collect your monthly paycheck from Uncle Sam.

Rule #3 – If you are married, it may make sense for the person with the higher primary insurance amount to delay receiving benefits. This strategy will increase the monthly amount you, as a couple, will receive while either of you is alive.

Rule #4 – Here is another rule for you married folks out there. Delaying the benefit of the person with the lower primary insurance amount will only increase the monthly benefit while both of you are alive. This makes it less attractive for this person to hold off on taking benefits.  A word of caution: before you march into the Social Security office and demand your monthly check, if you are worried about running out of money in retirement or if both individuals have a long life expectancy, it may make sense to delay claiming your benefit.

Rule #5 – The higher the real rate of return (after inflation) that you can earn on your money, especially on your bonds, the better it becomes to file early for Social Security. Unfortunately, as of this writing, interest rates are near an all-time low, so delaying your Social Security benefit and spending down your investment portfolio may be a good option. For every year you wait past your retirement age, until 70, you will receive an 8% bump in your monthly social security benefit. That’s as close to a guaranteed return as one can get today.

Keep in mind…

There are many variables that go into the decision process on when to file for your social Security benefits. The rules above are general guidelines and depending on your situation it may make sense to not follow one or more of these rules.

At Strategence Capital, we have the tools and expertise to examine your unique situation and help determine an appropriate claiming strategy for you. As always, operators are standing by. Click here to contact me.

(1) Source: “Conclusion.” Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less, by Mike Piper, Simple Subjects, LLC, 2019.

(2) Source: http://www.ssa.gov/OACT/STATS/table4c6.htmlPeriod Life Table, 2016 | Last Updated: June 13, 2019

The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The strategies mentioned here may not be suitable for everyone.

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