Just like that it’s October and we’re done with the third quarter. It was raucous at times but ended well for most investors. I’ll send out my Quarterly Update letter next Tuesday instead of today so we can stay on track with our theme of financial decisions that have a year-end deadline.

This week let’s discuss Roth conversions. You can do as many of these as you like within the year but they must be completed by December 31^st to count for 2024.

Conversions happen when you have money in a tax-deferred retirement account like a Traditional IRA or 401(k) and move a portion or the whole thing to a Roth IRA. Why would you want to consider doing this? You’re already saving for retirement, so that’s good. Beyond that, it’s all about taxes and when you pay them.

Your typical retirement account is tax-deferred, meaning the government gives you a tax deduction when you contribute and they’ll wait until you withdraw money before taxing you. That could be a while, maybe decades. In a sense, the government is making an investment because by forgoing income taxes on your initial $1,000 contribution, they could ultimately get to tax an account valued at maybe ten times that.

You can get around this future tax issue in two fundamental ways. One is to skip contributing to a Traditional IRA in the first place and contribute to a Roth instead. You’ll give up the near-term tax benefit in exchange for growth that would be tax free in retirement. This method works great the younger you are. Unless you’re in a higher federal tax bracket, say 24% or more, you should strongly consider only contributing to a Roth IRA and Roth 401(k), assuming your workplace offers the latter. Take the pain now and enjoy the benefits later.

The second way is to force money into a Roth via conversion. Here are some considerations.

• Is this a low taxable income year? Maybe you’ve had tax losses or started a business, had large deductible medical expenses, or anything that artificially lowers your taxable income. Maybe you retired early and aren’t taking Social Security yet. A yes to any of this (and other reasons – these are just some of the big ones) means you are a candidate for a Roth conversion.
• Conversions aren’t contributions so income limitations don’t apply.
• Roth conversions add to your taxable income in the year you do them so making educated guesses about your place in the federal tax brackets is critical.
• There is no minimum amount for a conversion, so try to stay within the relevant tax brackets.
• You can Google the brackets but the 22% bracket for Married Filing Jointly goes from about $94,000 to $201,000. Try to stay within that bracket or lower for Roth conversions. Paying proportionally more tax than that makes it harder to break even.
• Breaking even on the conversion deals with the size of the tax bill and how long you have to grow money in the Roth.
• Plan to pay the tax from cash in the bank since paying from your IRA also makes it harder to break even.
• Once your money is in your Roth you can grow it until age 59 ½ when you’re allowed to withdraw penalty-free. But you can grow for longer, maybe your whole life.
• You’ve already paid tax on your conversion so those specific dollars won’t be taxable again. Any gains in your account wouldn’t be taxed either unless you break the rules. One rule is that each conversion has to remain in the account for five years to be tax free. It might make sense to open individual accounts for each year’s conversion to help with bookkeeping if you think you might need to break into the conversion early.
• Investment options are the same whether money is in a Traditional IRA or a Roth.
• The conversion shouldn’t cost anything. You can move existing investments or cash from your IRA to a Roth. Moving investments is less precise because your custodian might take a few days to process the conversion so you won’t know the exact dollar amount until after the conversion happens. This is why I favor moving cash. I suggest you do so assuming you don’t have transaction costs to sell and repurchase investments. Ask your custodian about this.
• While conversions typically take a few days to process, custodians get backed up as year-end approaches. Procrastinators should try to make December 15^th their deadline.
• Under current tax rules you won’t be required to take RMDs from your Roth. This is huge for people who start converting to Roth early because it buys down future RMDs when your tax rates are (hopefully) lower. Still, weigh your options because future RMDs may not be a big enough issue to warrant paying taxes on Roth conversions.
• Roth conversions can be like prepaying taxes for beneficiaries. Sometimes that’s reason enough to convert to Roth. Again, weigh your options.

So those are some situational questions and considerations dealing with converting some or all of your traditional retirement money into a Roth. This sounds great, and I suppose it is, but it’s not necessarily for everyone. Do your homework and get good advice so you can hopefully avoid stepping on any retirement savings landmines.

Have questions? Ask us. We can help.

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.

As you’ve no doubt heard, the Fed finally lowered its short-term benchmark interest rate last week. That’s a sea change in the financial world and should, hopefully, provide a bit of a tailwind for the economy and markets in the near-term. The Fed opted for a 50 basis point (half a percent) reduction.

Fed Chair Jerome Powell indicated further reductions in the coming months without guaranteeing anything. However, markets are pricing in about a 50/50 chance the Fed drops another half percent but by at least a quarter point when they meet again in November. Markets are also expecting reductions totaling around 2% from here, so all this will continue to be top-of-mind for some time to come.

Okay, on to our main topic this morning and continuing our theme from last week.

The deadline for a lot of financial actions each year is December 31^st. We covered “standard” Required Minimum Distributions last week. Now let’s look deeper into the weeds and review considerations when taking RMDs from IRAs you’ve inherited.

RMDs can seem exponentially more complicated when you’ve inherited an IRA. As with last week, I’ll gloss over some of the minutiae to provide a straightforward approach to this topic. As always, consult your humble financial planner or tax professional for specific advice.

The starting age for taking RMDs from your own account is 73 but with inherited IRAs it’s all about how old the decedent was when they passed and how old you are and what your status is when you inherit the account.

Here’s how this process usually begins. The account owner died with you listed as their beneficiary. The custodian of the decedent’s account will want a death certificate and some paperwork completed. You won’t be able to get specific information about the account until the custodian completes their initial processing, but this doesn’t take too long, maybe a couple of weeks if you’re a person versus an entity like a trust or charity.

The custodian will ask if you’d like to open a new account with them or have them send the inherited money elsewhere. Unless you need to spend all of the money now, non-spouse beneficiaries will want to move the money into an Inherited IRA. Assuming so, the custodian will usually take the decedent’s RMD for that year if required and it hasn’t been done already (often splitting this among beneficiaries if there are multiple). Then they’ll transfer the remaining balance into your new account that will be titled something like, “Jane Doe Inherited IRA, Beneficiary of Sally Johnson”. You can often elect to receive the investments already in the account, or you can have everything sold and receive cash into your new account – either way the transfer itself isn’t taxable.

This sets your new account apart from your other IRAs, Roth IRAs, 401(k) plans, etc, and is where the complexity begins.

If you’re the surviving spouse, it’s generally best to skip the Inherited IRA and put this money into your own IRA, assuming you have one. This let’s you treat the inherited money as your own for RMD purposes and generally makes the process simpler.

Pretty much everyone else will need to contend with a variety of issues.

If the decedent died this calendar year, the government lets you wait until next year to start taking money out. You can withdraw immediately, but you won’t be required to start taking your own RMDs until the following year. The deadline is December 31^st each year.

Distributions from a Traditional, Rollover, or Contributory IRA (different names for essentially the same account) are taxed as ordinary income, so yours will be too. Distributions from a Roth IRA likely won’t be taxed but still follow the same general RMD rules. There are penalties for missing an RMD, so you’ll want to understand how they work and not forget about them.

Look up the “Single Life Table” via a Google Search, or you can use this one: https://www.fidelity.com/building-savings/learn-about-iras/irs-single-life-expectancy-table

Find your age during the year the account owner died and divide the balance (a specific number provided by the custodian) by that year’s life expectancy factor. That’s your RMD. In subsequent years you’ll subtract 1 from the starting-year factor and redo the math with the then-prior year’s ending balance.

However, the government mandates that most non-spouse beneficiaries completely drain the account by the end of ten years starting the year after death. That used to be a five-year window and you had the ability to “stretch” an IRA over a beneficiary’s lifetime. No longer in most situations.

So does that mean you should skip the Single Life Table and divide the balance by ten? Or should you just take the minimum each year and draw the remainder in year ten? Or some other variation?

For some the answer is simple. They’ll take all the money quickly because they’re going to spend it. But others might prefer to let the money grow.

Essentially, it’s all about taxes and when you pay them.

There are specific rules depending on if the decedent was taking RMDs, but I suggest for most non-spouse beneficiaries its simplest to divide by ten to smooth out the tax burden over the full distribution period. But you can opt to take the minimum each year while opportunistically taking more in other years as your tax situation allows. Careful planning is critical to manage taxes but also to ensure the account is emptied on time.

As I mentioned above, this is meant to be helpful summary and shouldn’t be considered specific advice. Part of this is due to the rules being different for:

A spouse more than ten years different in age from the decedent.

Beneficiaries who are minors when they inherit.

Beneficiaries who are chronically ill when they inherit.

Beneficiaries who inherit from other beneficiaries.

Certain types of trusts that inherit a retirement account.

Or inheriting an account from an employer plan versus an IRA or Roth IRA.

Of course we’ll help you with this stuff if you’re a client, but here’s a more detailed article for the DIY types out there. This content is meant for planners so it’s a little dense and long. However, there are some good flow charts to help determine what options are available to different types of beneficiaries.

https://www.kitces.com/blog/secure-act-2-0-irs-regulations-rmd

Isn’t our tax code wonderful!

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.