For the nation, 2020 has been one of the most difficult years in memory. We are grappling with Covid and its fallout, economic upheaval, racial tensions, wildfires, hurricanes, a presidential election, and a polarized electorate. This certainly could be called a “wall of worry”.
Despite this year’s difficulties, a strong economic recovery, record low interest rates, and an aggressive stance by the Federal Reserve and Congress have helped the major market indexes rebound from March’s steep sell-off.
But where do we go from here? What’s in store over the next four years? If we view the future through the lens of public or tax policy, visibility is extremely limited. Who will reside in the White House and who controls the Senate is yet to be determined as of this writing.
If we narrow our scope and review the landscape through the lens of the investor and the market, I believe we can look to history for guidance and at least obtain some degree of clarity.
First, let me say this. No one has a crystal ball. Any stock market forecast that you may hear from analysts is simply an educated guess. They may get lucky for the right or the wrong reason. Or analysts might miss the mark by a wide margin. As we already know, even the smartest folks in the room don’t know the future. Besides, we already know that consistently timing the market is nearly impossible.
However, over a longer period, we recognize that the S&P500 have historically had an upward bias regardless of who is in the White House.
What’s that mean? If you shunned stocks when either a Republican or Democrat was president, you missed out on the lion’s share of the market’s gain.
If we take the last 12 years into consideration, a similar pattern emerges. Those who pulled out of stocks after the 2008 election because they were discouraged by the results lost out on a significant stock market rally over the ensuing eight-year period.
Anyone discouraged by the 2016 results also failed to participate in a significant stock market rally.
A disputed election could create short-term uncertainty. Yet, emotional decisions made outside the boundaries of a well-crafted financial plan have rarely been profitable over a longer period.
Longer term, the economic environment, Federal Reserve policy and interest rates, corporate profits, and inflation trends have historically had the biggest impact on the broader market.
Whether the election ended in the result you might want or not, the result is truly American. A reflection of the current views of the nation and who that nation entrusts to lead it at the national level.
This is true in 2020 perhaps more so than at any other time because more people have used their political voices (by voting) in this election than almost any other in modern times.
Nearly 100 Million ballots were cast BEFORE Election Day. Historic. Turnout in Texas for early voting & absentee surpassed all votes cast in the 2016 election. Historic. In a normal presidential election, only about 60% of registered voters cast a ballot. We’ll see where the numbers shake out in 2020, but it’s sure to be significantly higher.
If there is one thing to celebrate it’s that everyone got the opportunity to cast their vote without fear of reprisal. This result is uniquely American and engagement in the political process and ownership of its outcomes is vital to our beloved democracy’s ongoing success.
This fact is sure to get lost in the headlines, and the country is far from healing, but we think it’s important nonetheless.
5 financial planning steps to make at year-end
The end of the year is fast approaching. As the calendar days march toward 2021, let’s keep in mind that there are several ideas we should review as you work to get your year-end financial house in order.
Before we get started, the tips below are simply guidelines. Feel free to check with your tax advisor, as various nuances can crop up. As always, we would be happy to assist you.
- Did you max out your retirement accounts? You can put up to $6,000 into an IRA in tax year 2020; $7,000 if you are 50 or older. You will have until Tax Day to make a 2020 tax-year contribution. The sooner you contribute, the longer your assets can have the opportunity for grow tax-deferred growth.
Contributions to your 401(k) are automatically deducted from each paycheck. Contributions for tax year 2020 must be made by the end of the year to count against 2020 income.
The[[ https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500 401(k) contribution limit]] is $19,500 for 2020 and the catch-up limit is $6,500.
As we have said in the past, we strongly suggest that you contribute the minimum amount necessary to receive your entire employer’s match. It’s free money. Don’t leave free money on the table.
- This year’s RMD wrinkle. If you are 72 (or turned 70½ before January 1, 2020), you are obligated to take a required minimum distribution (RMD) from your IRA. But this year is an exception.
Thanks to the CARES Act, the [[https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act RMD is waived in 2020]]. This [[https://www.ameriprise.com/research-market-insights/market-volatility/cares-act-waives-rmd-2020 RMD waiver]] applies to everyone with a 401(k), IRA, 403(b) or 457(b) account. Owners of inherited IRAs may suspend RMDs for 2020, too.
If you took an RMD between January 1 and August 31, you were eligible to roll the funds back into your retirement account up until the [[https://www.schwab.com/resource-center/insights/content/can-you-forgo-taking-rmds-2020 August 31 deadline]].
- If you are over 70½, you may be eligible to transfer up to $100,000 from your IRA to a charity without paying taxes on the distribution. This is called a [[https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds qualified charitable distribution or QCD]]. Moreover, a QCD satisfies the RMD requirement as long as certain rules are met.
- Let’s consider “harvesting” tax losses. Do you own stocks, exchanged-traded funds, or mutual funds that are below the purchase price? If so, you may sell by the end of the year and offset up to $3,000 in ordinary income or capital gains.
Short-term capital gains occur when an asset that is sold was held for one year or less. Short-term capital gains are taxed as ordinary income. Long-term gains are taxes at a more favorable rate.
- Consider converting your traditional IRA to a Roth IRA. Depending on the outcome of the election, tax rates may rise next year. Therefore, converting a traditional IRA into a Roth IRA this year would require taxes to be paid at 2020’s rate, but it would enable the account holder to withdraw funds without paying federal taxes at retirement.
Whether or not tax rates rise next year, a Roth IRA is an excellent retirement vehicle.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax- free. Withdrawals of earnings prior to age 59 1⁄2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
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.
Final thoughts
Let me remind you that these year-end financial planning steps are guidelines. One size does not fit all. The advice we recommend is tailored to your specific needs and goals. We would be happy to entertain any questions that you may have. We are simply a phone call or email away.
If you have questions or concerns, let’s have a conversation. That’s what we’re here for.
November 2020
The economic forecasts set forth in this material may not develop as predicted.
Content in this material is for general information only and 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. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
