We know most of you are not quite as excited as we are about the 21st annual Financial Literacy Month, but we know you are excited about our annual financial literacy quiz!

As a reminder, Financial Literacy Month was created to build awareness of smart money habits, including budgeting, saving, spending, and investing.

Now to the quiz:

1. Which of the following assets would be expected to hold value during a period of inflation?

a. A certificate of deposit

b. A corporate bond

c. A house

d. This is a dumb question because we never have inflation.

e. No idea. Guess I better call LFS.

2. Which of the following investment strategies has historically shown the highest return over several years?

a. Avoiding the stock market entirely and keeping cash in a FDIC insured savings account.

b. Moving money in and out of stocks frequently to avoid downturns and take advantage of upturns.

c. Buying and holding a variety of stocks while largely ignoring short term fluctuations.

d. This is a dumb question because the stock market never has downturns or upturns.

e. No idea. Guess I better call LFS.

3. A 15-year mortgage usually has higher monthly payments than a 30- year mortgage on the same property. The total interest paid over the life of the loan is

a. More for a 15-year mortgage than a 30-year mortgage

b. Less for a 15-year mortgage than a 30-year mortgage

c. Exactly the same interest regardless

d. Too much

e. No idea. Guess I better call LFS.

4. When GE stock split earlier this month, why did I get some cash in my account?

a. GE paid me to take some shares in the new company.

b. A dividend was paid in cash right after the split.

c. GE paid cash for my fractional GE Aerospace share instead of issuing a partial share of GE Verona

d. It doesn’t matter because I already spent both dollars GE gave me.

e. No idea. Guess I better call LFS.

5. What should I do if I get a website link in an email from Schwab that I have not been told about by LFS? Or if Schwab calls me?

a. Do not click on the link or call Schwab. Call LFS immediately.

b. Do not click on the link or call Schwab. Call LFS immediately.

c. Do not click on the link or call Schwab. Call LFS immediately.

d. Do not click on the link or call Schwab. Call LFS immediately.

e. Got it?

There is a growing concern about “spoofed” websites which are designed to convince users that they are visiting legitimate sites.  Some of you have reported this huge concern to us with links from Schwab which are not actually from Schwab.  Because of the reports from account holders, Schwab has provided some information and talking points for advisors to share with clients.  We have also gotten reports of fake emails with links which look like they are from us.

How this happens:

Potential fraudsters purchase “sponsored links” to fake websites which appear at the top of search results.  They hope that we, as unsuspecting potential victims, will click on these links and be directed to these fake websites where we could be exposed to malware or asked to provide confidential information. 

What we all need to do, for all website links, not just for Schwab links

• Watch for URL errors, including misspellings, grammar/format errors or unusual website domains.  Even one letter out of place is a signal that something is likely amiss.  The fake emails from us have originated from fake email addresses.  Check that. 

• When you click on the site link, you are notified of a login issue and often directed to a hotline phone number.  There may be a mention of unauthorized account activity.  Remember that Schwab will never ask you over the phone for your account login password so if someone asks you for that, do not provide it.  Obviously, we will never ask you for passwords in email or on the phone either. 

• Question anything from Schwab which looks like an attempt to create a sense of urgency.  Call us right away before you act.

Additional steps we are taking:

• As you know, we look at all account activity every day in every account so we will track you down if we see something unexpected – that we didn’t talk about, that we didn’t initiate, or which doesn’t follow your patterns of financial behavior. 

• We have seen some of these attempts via DocuSign or other electronic document approval systems. 

• We only use DocuSign and only via Schwab.  Links from any other document approval systems are not from us/Schwab.

• We originate 100% of the DocuSign envelopes you get from Schwab.  Schwab cannot do this on their own.  And we will TELL YOU via email, text, or phone when we send you a DocuSign agreement via Schwab so that you know we sent it.  If you have not heard from us, don’t open until or unless you confirm with us. 

• Some Schwab documents from us are delivered via email link to your Schwab.com (Schwab alliance log in) rather than via DocuSign.  But we will also TELL YOU via email, text or phone when we send a document this way so you know it is from us.  For extra security, consider logging into your Schwab.com account vs using the email link. 

• If you are not sure, call us right away. 

Tax time is here, and everyone is so happy about it.  Said no one ever and especially not this year.  There has been a fair amount of chaos surrounding 1099’s from Schwab and Ameritrade.  It should be easier than this, but at this point, we are all for just getting through it!   This should be much cleaner for 2024.

 Easier part first:

1. If you took a RMD in 2023, your 1099R will be issued by either Ameritrade or Schwab – depending on where the account was custodied when the RMD was done.   If you took RMD’s from both Schwab and Ameritrade accounts, you should receive a 1099R from each.

2. There is no such thing as a combined Ameritrade and Schwab 1099 for a taxable account.  If you had a taxable account (individual, joint, trust etc) at both Schwab and Ameritrade in 2023, you get a 1099 from both Schwab and Ameritrade, as long as there was at least $10 in dividends paid. 

3. As always, if you have an IRA but are not taking RMD’s, you will get no 1099 for that account.

 Now for the tricky part:

1. These forms should be mailed to you as always, but this has been spotty so far.  We do not have ours via US Mail yet.

2. If we moved your taxable account or IRA prior to the Labor Day automatic rollover, your Ameritrade 1099 may or may not be available on your Schwab Alliance account, despite what Schwab is saying.  It should be mailed to you and/or we can get it for you.

3. If your taxable account or IRA account was moved over Labor Day, your Ameritrade 1099 should be available on your Schwab Alliance account, along with your Schwab 1099 or 1099R. 

4. There is still one more Ameritrade 1099 batch to be produced.  This is scheduled to happen by 02.29.

5. We are happy to help with anything you need.  We can access all of the old Ameritrade accounts and statements so don’t hesitate to tell us what you need. 

And while you are on Schwab Alliance, have a look at your document delivery preferences.  Now is the time to get those updated to reflect how you want to receive statements and tax forms in the future.  Your Ameritrade preferences were supposed to have been carried forward, but that has not consistently occurred.  As always, we can also reset these preferences for you if you confirm what you would like to have happen. 

 Enough already!

For those of you in the Required Minimum Distribution (RMD) taking stage, who are also charitably inclined, there is a new option, appropriately nicknamed “legacy IRA”.   As always, the rules are complicated and the answer to most questions is “well that depends” but have a read here and then call if you want to learn more.  We will phone a friend if needed!

What is a Legacy IRA?

A Legacy IRA is also known as a Qualified Charitable Distribution Charitable Gift Annuity (QCD CGA).  Under certain conditions (this is the “it depends” part) a donor can make a

1. one-time per tax-payer

2. tax-free

3. charitable distribution up to $53,000 in 2024

4. across multiple charities if desired and allowed by charities

This donation is in exchange for an income stream for a period of years.  Yes, this is an annuity of sorts.

1. This distribution counts toward your RMD in the year the donation is executed.

2. A standard charitable contribution (QCD) can also be made in the same year for the additional allowable amount (which is an additional $52,000 in 2024).

3. The annuity payments can be made to the donor or spouse

4. All annuity payments are taxable as ordinary income in the years received

5. Minimum annuity pay-out is 5% annually.

6. Charity must have capability to do since the charity is responsible for the documentation

Why do? 

1. No tax bill on the distribution

2. Income stream for life (annuity-like)

3. Proceeds on death go to your designated charity

There is also an option to make this one-time contribution to a Charitable Remainder Trust (CRT) rather than to a Charitable Gift Annuity.  That is equally as complicated so call on that too.    

Happy 2024! 

For 2024, there are plenty of changes which impact IRA’s and 401K’s.  There could be additional changes later in the year of course with some big changes expected for 2025. 

For 401K/403B/457:

• The maximum employee contribution has been increased from $22,500 to $23,000.  The catch-up contribution for employees age 50 and over remains at $7,500 for a total of $30,500.  NOTE:  in 2025, employers must put the employee catch-up contribution into a Roth 401K.  Some employers are offering the option to do that in 2024 so check with your employer or plan administrator if you are interested in doing this.  We can call with you as needed.      

For Traditional IRA’s:

• Contribution limit has been increased to $7,000 from $6,500.  The catch-up contribution for those age 50 and over is $1,000 for a total of $8,000.  The income tax deductibility level has also been increased. We will review with you individually as needed.

For ROTH IRA’s:

• Contribution limit increased to lower of earned income or $7,000 for each spouse.  Catch-up contribution of additional $1,000 for age 50 and over. 

• Contribution eligibility has increased:

• Full contribution with Adjusted Gross Income (AGI) less than $146,00,000 for a single taxpayer.  Phase-out between $146,000 and $161,000.  We can help with the phase-out math.

• Full contribution for each with total Adjusted Gross Income (AGI) less than $230,000 for married/filing jointly taxpayers.  Phase-out between $230,000 and $240,000.  We can help with the phase-out math. 

• 2023 contributions (of $6,500 or $7,500 if age 50 or over) can be made until April 15, 2024.  Let us know if you plan to do this so we can ensure the deposit gets applied to the correct year.

Call with questions or if we can help get these changes made for you. 

As promised earlier in the month, we are now going to re-introduce you to Roth IRA’s, but this time, as great financial gifts for your lucky and hard-working children or grandchildren.  As I said earlier, there are very few investments which grow tax free, but 529 plans and Roth IRA’s do just that!

Many of you are familiar with Roth IRA’s, but for those of you that are not, here is a brief overview:    

Roth IRA’s were created by the Taxpayer Relief Act of 1997 to help Americans save for retirement.  These IRA’s have become enormously popular in the last 20 years but there are some important considerations:

• The dollar contribution limits are the same for Roth IRA’s and traditional IRA’s.  Eligibility for a Roth IRA requires “earned income,” subject to an income cap which is not present for traditional IRA’s. 

• Contributions are made with after-tax dollars, unlike those in traditional IRA’s or most company sponsored retirement plans

• Because the contributions are made with after-tax dollars, the contributions can be withdrawn at any time, without tax or penalty.  This might be important for young investors like your children or grandchildren who might need the money they invested before retirement

• Unlike traditional retirement plans, the earnings can also be withdrawn tax-free, subject to owner age and account duration rules, and there is no requirement for distributions to begin at any age.

As I said above, there is a requirement for the Roth IRA account holder to have “earned income” in order to be able to contribute BUT the actual contribution can be funded by anyone (YOU in this case) as long as the dollar amount of the contribution does not exceed the owner’s earned income or annual maximum allowed.

Head spinning?  How about an example?  You have a 19 year old grandson who worked over the summer stocking shelves in the middle of the night for Kroger.  He earned $2000 and will receive a W-2 from Kroger.  I am guessing he probably can’t invest this $2000 in a Roth IRA because he is saving every penny for college, BUT you can fund it for him.  You have until April 2024 to make this 2023 Roth contribution.  We will help you understand eligibility requirements and then help you actually pull this off.

Want to read more about Roth IRA’s?  See attached link. https://www.investopedia.com/terms/r/rothira.asp

Back by popular demand, the next two Bernie’s BLOG posts will provide info on some great financial holiday gifts for you, your children, or grandchildren.  This blog will cover 529 educational plans and the next one will re-introduce many of you to Roth IRA’s.   By the way, we are not suggesting that you forego fun gifts for your offspring, but we really like the idea of longer term not nearly as “fun” gifts to help secure the financial futures of your lucky family members. 

As many of you know, there are very few investments which grow tax-free, but 529 plans and Roth IRA’s do just that, at least for now. 

529 plans are state run educational savings plans which can be used for very broadly defined educational expenses for adults or children.  These funds can be used for pre-college, trade school or college tuition/fees.  The investments in a 529 plan can be made by anyone, subject to gift tax requirements, and are made with after-tax dollars although some states offer a state tax credit to parents who contribute in their state of residence (North Carolina does not offer this credit at this time).  The funds in a 529 plan can be moved to another child and the funds do not have to be used in the state in which the plan was funded.  Unlike other investments, 529 plans are controlled by the account “owner”,  not by the child.  Taxes and penalties are due if money is not used for educational expenses, but again, the definition of educational expenses is quite broad and usually includes computers, books, and room and board.   There has also been an important recent change to 529 plans – up to $35,000 of unused funds can now be rolled over to a Roth IRA for the child, subject to lots of rules of course. 

These plans carry low management fees because they tend to be “target date” funds where the investment mix is automatically rebalanced as the child gets closer to college age. 

Although 529 plans are not LFS managed assets, we would be happy to assist you in starting one for your children or grandchildren, or even yourself!  There is no minimum dollar requirement to open an account and dollars can be added throughout the year. 

If you want to read up, see link below, or feel free to call us to talk more. 

https://www.investopedia.com/terms/1/529plan.asp

Like most of our investment advisor peers, we spend a lot of time every month listening to Fed Chairman Jerome Powell trying to explain the Fed’s perspective on inflation and interest rate hikes.  Since the explanations are way too circular and complicated for me, I have developed my own inflation metric, and I am trying to use it to understand what is happening with inflation.  I thought I would share what I see and what I have learned.

As you can see from the attached photo, I measure inflation based on the prices of these two household staples:  my favorite cinnamon hazelnut coffee and a can of tomato basil soup.  I know many of you will claim that my favorite cinnamon hazelnut coffee is not real coffee and that this soup tastes more like the aluminum can than like tomatoes.  Both of these claims might actually be true but humor me just for the moment.  The cost of this coffee has increased from $5.99/bag in 2020 to $9.99/bag in 2023.  The soup which cost $1.70 in 2020 is now $3.09 per can at my local Publix.  Both items are subject to occasional Buy One, Get One promotions, so I do stock up.  More on this later. 

Let’s start out with some simple definitions:

Inflation:  a general increase in prices of goods and services; a reduction in the purchasing power of money.  (ok I think we know this)

Deflation:  a general decrease in prices of goods and services; the inflation rate falls below 0%.  Deflation is actually quite rare and happens with a very weak economy.   When companies have to reduce prices to get consumers to buy, they have to reduce their costs too.  Often that results in layoffs or lower wages for employees.  Unemployment, or under-employment with lower salaries, means that more people do not have the money to buy these goods and then the companies have to continue to lower prices.   This is not good for the companies or for their stock prices.  Deflation can lead to a recession so central banks try to act swiftly when deflation occurs.  Again, this is rare in stable economies like ours. 

Jerome Powell and his buddies at the Federal reserve and at central banks around the world actually want to stem inflation and deflation.  Both can be very bad for the economy depending on why they happen and how quickly they come about.   Does that mean I don’t really want the price of my coffee to come down because it means the economy might be bad?  Not sure I’m there yet.

So what do we actually want to see happen to prices?   The answer is a much less well-understood term that we hardly ever talk about - disinflation.

Disinflation: inflation rate falls but it remains positive; prices continue to rise but at a slower rate.  This is the current and healthy scenario which prevents the economy from overheating or underheating.  Inflation at 2-3% is much lower than the 9% peak in 2022 but it is nowhere near the 0% or lower rate we saw in mid-2020.  It is still painful, however. 

Ok so now that we know the big picture economic goal is not actually for deflation, what do I want for my coffee and soup prices?   In truth, the prices have been very stable for the last six months and have not budged a penny in either direction.  I keep waiting for the prices to come down so that I can confidently declare that inflation is getting better – and that the bonds in our portfolios will start to rebound.  But maybe my goal is wrong, and for the sake of the broader economy, I should be happy that the prices are not going up.  I’m trying, but it sure feels like someone other than me is coming out way ahead here! 

The Schwab purchase of TD Ameritrade which was announced nearly 3 years ago is about to become a reality for all of us! 

As usual, if we have already moved your TD Ameritrade accounts to Schwab and/or you never had any accounts at TD Ameritrade, you can stop reading now and start your holiday weekend.  Enjoy!

For the rest of us, let’s summarize what’s in all those envelopes you have been receiving from Schwab and what you need to do.

Over Labor Day weekend, your existing assets at Ameritrade will be moved to new identically registered accounts to Schwab.  There is nothing you have to do for this to happen.  In one of those many envelopes from Schwab is a list of your new account numbers.  Don’t worry if you can’t locate this envelope, we have your new account numbers too.   Starting on Friday evening September 1, you will not be able to access your old Ameritrade account.  The plan is that you will be able to access your new Schwab accounts bright and early on Tuesday September 5.

Starting on September 5, you will be able to access your new Schwab accounts online via Schwab Alliance (schwaballiance.com).  Schwab Alliance is much like Ameritrade’s AdvisorClient but we think it is easier to use.  If you haven’t already done, you can go ahead and set up your Schwab Alliance credentials:

1. Go to schwaballiance.com

2. Select New Schwab user

3. Follow prompts

Note that each client must have their own unique Login ID and password.  After the log ins are established, you can link the accounts together so you can see them with a single log in if you wish.  We can help with all of this!  This is not urgent as your account will transfer and we can access it whether or not you have set up your credentials.  And if you do not use AdvisorClient, you do not have to use Schwab Alliance.  We can drop everything to paper just as we do now. 

If you have your existing Ameritrade accounts connected to a checking account and/or you have automatic transfers established from your checking account, these will carry over to Schwab.  Presumably.  So will your beneficiaries.  Presumably.   If you have a checkbook from Ameritrade which you have used in the last year, you will automatically get a new one from Schwab.  Presumably.  Over the first few weeks, we will be checking all of these details but please help us by letting us know if something is missing or is incorrect.

If you have automatic asset purchases or sales, we have had to cancel some of them since Schwab’s timing to do and transaction fees are different than Ameritrade’s.  We will be adjusting these individually with you as needed over the first few weeks if we have not already done with you.  There is nothing you have to do on your own. 

We can access any statements from Ameritrade that you may need after the transition.

As always, we will be available in our office, with plenty of coffee, up to and after the conversion so do not hesitate to call or drop by.   

As you remember, Schwab acquired TD Ameritrade in 2019.  The systems integration has been happening for the last two years and now the time for client transition to Schwab is rapidly approaching.  The actual account move is scheduled to happen over Labor Day weekend, about two months from now.  The plan is that we will all end our day on Friday September 1 as TD Ameritrade clients and wake up Tuesday September 5 as Schwab clients – all happening behind the scenes while we enjoy our long weekend.  Uh…..  let’s hope we are anywhere near close to this plan!  We do know that your TD Ameritrade accounts will not be viewable via AdvisorClient.com during the Labor Day holiday weekend, which can be a little disconcerting for sure, but nothing to worry about. 

If we have already moved your accounts to Schwab and/or you never had any accounts at TD Ameritrade to begin with, you should be able to stop reading now! 

If you still have accounts at TD Ameritrade:

You have probably already received from Schwab, or will soon receive, an Account Transition Notice, aka Negative Consent Letter.  This communication will come to you via U.S. mail or email, depending on your TD account preferences.  This letter will contain further details on transition timing and Schwab’s cash sweep feature/rate.    NOTE:  You will not need to take any action regarding this negative consent letter, which simply allows your accounts to transition to Schwab.  If you do not want this transition to happen for some reason, please let us know asap. 

In August, you will receive a pre-conversion packet from Schwab which will have specific account information.  This packet should include information about how to set up your Schwab Alliance access which functions much like your AdvsiorCient.com access, but which we think has more capability and is easier to use.  That’s good news!   

We are working with Ameritrade to get inactive accounts closed prior to the transition but we will undoubtedly miss a few which should be closed and close a few which we will need at some point.  Don’t worry – we can open or close accounts at Schwab as needed.  

We have left some of our personal accounts at Ameritrade so we can see the communications and experience the transition with you.  We have already transitioned about 1/3 of client TD accounts so we now have considerable experience here.  We can also still transition additional accounts to Schwab ahead of August if you want to do. 

Do not hesitate to reach out when you have questions or are worried about ANYTHING, except the market of course. 

We are usually in favor of KNOWING more, so we are sharing what little we have learned about AI in our investment advisory and personal investing world. 

First of all, just what is AI?  The simple definition is that AI is the ability of a computer to do tasks which are commonly done by (intelligent?) people.  It combines computer analysis with huge data sets to solve problems.  Got it?

Which begs the “so why should I care” question. 

We have all experienced very simple forms of AI when we have purchased from Amazon and seen the “people who purchased what you bought also bought xxx”.  Or when you have searched a vacation spot on GOOGLE and then started getting ads for that location on Facebook.  We can debate how useful any of that is, but it’s certainly there.  Some experts believe that AI will be the most disruptive influence of our lifetimes!

AI is used today in the financial advisor and retail investor space, although LFS is not currently using AI for anything related to our advisory business.  We did try ChatGPT – more on that below.  Large financial services firms are using AI to analyze historical market/company date to build portfolios for clients or for their own managed funds.  Some brokers are using it to automatically buy and sell stocks.  And some are using it to enhance fraud detection capability – which is a great application in our minds.   

Outside our world, there is work to use AI to improve cybersecurity, to enhance self-driving vehicles and to aid drug research and manufacturing scale-up.  And of course, to deliver increasingly tailored recommendations to us on Amazon, whether we want them or not.

Now let’s talk about ChatGPT which is one of the most visible signs of AI in our everyday lives.   ChatGPT is a “chatbot” or digital assistant which is capable of conversing with people.  It follows directions given in a prompt and provides a detailed response.  If you have used SIRI or Alexa or a customer service online chat feature, you have interacted with a digital assistant.  The promise is that the technology is evolving rapidly and that these experiences will improve quickly too.   

For those of you that are curious about ChatGPT,  I want to share our experience, albeit limited. 

If you are a faithful Bernie’s Blog reader, you may remember that April was Financial Literacy Month and as usual, we provided questions designed to test our collective financial literacy and have a little fun.  We do actually write Bernie’s Blog – it’s not a ChatGPT creation – but I thought it would be interesting to ask ChatGPT to provide some financial literacy questions for us to consider.  What I discovered is that the detail provided in the prompt is critical and it took me three tries to get anything even remotely usable.  See attached.  You can see that by the third try,  I requested multiple choice questions and answers although I did not use the answers ChatGPT gave me since ChatGPT doesn’t do fun.  Apparently.

For those of you who are interested in investing in AI, there are ways to do that.  In many cases, you probably already have some exposure via ownership of Amazon, Microsoft, NVIDIA, Alphabet, or any of the numerous funds which own these stocks.  There are no “pure play” AI companies today BUT there are some ETF’s designed to give investors more concentrated exposure.  We can help!

ALPHARETTA April 18, 2023 -- Linder Financial Services has been selected for the 2023 Best of Alpharetta Award in the Financial Advisor category by the Alpharetta Award Program.

Each year, the Alpharetta Award Program identifies companies that we believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and our community. These exceptional companies help make the Alpharetta area a great place to live, work and play.

Various sources of information were gathered and analyzed to choose the winners in each category. The 2023 Alpharetta Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the Alpharetta Award Program and data provided by third parties.

About Alpharetta Award Program

The Alpharetta Award Program is an annual awards program honoring the achievements and accomplishments of local businesses throughout the Alpharetta area. Recognition is given to those companies that have shown the ability to use their best practices and implemented programs to generate competitive advantages and long-term value.

The Alpharetta Award Program was established to recognize the best of local businesses in our community. Our organization works exclusively with local business owners, trade groups, professional associations and other business advertising and marketing groups. Our mission is to recognize the small business community's contributions to the U.S. economy.

And so as always it is also time for our annual financial and investment literacy quiz…

But first some interesting findings from those who study financial literacy among American adults over time:

• The recently released 2022 Personal Finance Index sponsored by the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington School of Business said that the biggest gap in financial literacy is “understanding financial risk” while the area where U.S. adults are the most knowledgeable is “borrowing money”.  Hm.  You can find all of the results of this study at https://www.tiaa.org/public/institute/publication

• One of the questions on this 2022 survey asked which of the following is a greater financial risk:

• 50% chance of car needing repairs of $1000 in 6 months

• 10% chance of air conditioner needing replacement at cost of $4000 in 6 months

We have not included this question in our quiz because our definition of financial risk (as all of you can now recite) is having to sell an asset at an inopportune time to cover an expected or unexpected expense. 

Now our quiz:

• What is the difference between a market order and a limit order?

1. A market order means that Marci decides when to buy or sell and a limit order means that Lori decides when to buy or sell

2. A market order is an order to buy or sell at current price while a limit order is an order to buy or sell at a specific price or better

3. A market order is one that happens when the market is open and a limit order is an order which happens when the market is closed

4. This is a dumb question - I am investing for the long term, not buying and selling every day

5. No idea.  Guess I better call LFS.

• What is an expense ratio?

1. The cost of buying or selling a stock

2. One of the many useless columns in the LFS quarterly spreadsheet

3. The amount of money I pay to borrow money from a bank

4. The percentage of a mutual fund assets which are used to pay that fund’s expenses

5. No idea.  Guess I better call LFS

• What is the difference between a traditional IRA and a Roth IRA?

1. Traditional IRA contributions are tax-deductible and Roth contributions are not

2. Roth IRA withdrawals are tax-free and Traditional IRA contributions are not

3. Both a and b are correct

4. I have both so what difference does it make anyway?

5. No idea.  Guess I better call LFS

• If interest on my high yield savings account is 1% and inflation is 2%, my ability to buy anything in a year will be

1. Better than today

2. Worse than today

3. Bring it on – love to have THIS problem

4. Who cares?  There is nothing worth buying anyway.

5. No idea.  Guess I better call LFS. 

• Which of the following are FDIC insured?

1. The $25,000 CD I just bought in my new Schwab account

2. The $25,000 in my Synchrony High Yield Savings account

3. The $25,000 in cash in my Ameritrade Roth IRA

4. My GE stock

5. The $25,000 in the Schwab Money Market Mutual Fund

6. No idea.  Actually do call LFS on this one!

For those of you who have not heard Schwab CEO Walt Bettinger talk on CNBC, we have attached his letter to all of us, clients of Ameritrade and Schwab, sharing his perspective on the banking sector challenges.  Clearly this is an evolving story so we expect more to follow. 

Our Most Recent Perspective on Industry Events from Founder Charles Schwab and CEO Walt Bettinger. 

March 23, 2023

To our clients, employees, and owners:

As someone with an interest in financial markets, you may have seen some of the recent news about the banking sector. If you are like us, you may have also wondered why Schwab has recently been lumped in with concerns regarding regional banks in particular. The fact is we are a different kind of financial firm, which can make us harder to understand. That may help explain many of the misconceptions about us compared to other parts of the financial sector. As such, we want to offer an updated perspective on some of the topics that have come up.

First and foremost, Schwab is a brokerage firm. We exist to help investors and those who serve them. Schwab is the largest public broker-dealer in the U.S. and the most regulated, since we are also regulated by the Federal Reserve. Approximately 95 percent of the $7 trillion clients have entrusted us with is custodied at the broker-dealer and segregated for clients and their benefit. Every client of a U.S. broker-dealer enjoys the same SEC-mandated customer protections. That means these assets are not subject to risk related to banking or credit. Anyone who claims that client investments are at risk from banking issues is ignoring this basic fact. For more information on asset protections, please visit: www.schwab.com/legal/account-protection.

Schwab also owns a bank, though not like other retail banks. Our bank structure exists to help us serve investors’ banking needs. It also helps our financial performance, which enables us to better serve our clients and continue to lower costs. As a different kind of firm – a broker-dealer with a banking side – we do not believe one should confuse our business model with regional banks, or any other banks for that matter, that have different business lines, client bases, and geographic footprints.

It is also important to remember that Schwab was built to serve clients through all economic environments. Our broad base of high-quality clients is well protected. Our firm has capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio of securities backed by the U.S. Treasury and various government agencies. And more than 80 percent of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC.

We hope our long track record, conservative approach, and strong financial foundation is all you need to know to feel confident in our ability to serve clients over the long term. But we do know in the swirl of the past two weeks, some very important points are being misunderstood (or sometimes misrepresented) in the public discussion of what is happening. Here is our perspective on some of the misconceptions that have come up:

1. Our stock price does not reflect the strength of our business. Stock prices go up and down and we do not manage our business according to the stock price, but rather according to our long-term view on what is best for our clients and the health of the business. That said, we do not believe recent stock performance reflects our long-term business fundamentals and opportunity. As we shared for the week ending March 17, clients brought to Schwab more than $16 billion in core net new assets. We have attracted core net new assets of approximately $116 billion year to date through yesterday, and have added nearly $1 trillion in the past two years. We see strong flows continuing and remain confident in our fundamentals.
    

2. Focusing attention on ‘unrealized losses’ in our held-to-maturity (HTM) portfolio is very misleading. These “paper losses” are unrealized and would only be realized if we had to sell those securities. The profile of our depositors is very different from regional banks. Given our significant access to sources of liquidity, there is a near-zero chance we’d need to sell any of our HTM portfolio prior to maturity. That would be akin to assuming a large retail bank would sell a substantial portion of its loan portfolio.
    

3. Client deposits may move, but they are not leaving the firm. As is the case in every cycle, clients make choices about where to best allocate their assets. As interest rates have increased over the last year, our clients have made choices to reallocate assets within their Schwab portfolios, to reflect their preferences in this market. And in fact, we have actively encouraged them to do so. The important point is that those allocation decisions result in the assets staying at Schwab. Despite the events of the last two weeks, we have not seen any meaningful change in client behavior regarding their cash.
    

4. We have taken relatively little risk in our portfolio. We take very little credit risk. More than 85 percent of our assets are in a high-quality, liquid portfolio invested in government or agency-backed securities. As a comparison, most major banks have a majority of assets in multi-year residential and commercial loans with significant duration, varying credit quality and little liquidity. We feel comfortable that our portfolio carries materially less credit, duration (sensitivity to rate changes) and liquidity risk than many of those other banks.
    

5. The way we manage our balance sheet is very straightforward and hasn’t changed. We invest in high-quality securities with a portfolio duration that today is around four years, and just over two years in our available-for-sale (AFS) portfolio. Because of the quality of our portfolio, we are able to maintain access to high levels of liquidity that allow us to hold these investments to maturity if we choose. We have taken this same approach since we began offering banking services almost 20 years ago. We did not make a bet on interest rate movements going down or up, and we did not extend our portfolio long term like some other institutions.
    

6. We do not forecast Fed rates or make investments based on where rates are going. In our regular business updates, we have relayed the consensus opinion of the market (e.g., Fed Dot plots) at the time. These are not our predictions; we never base our strategy off our own view of interest rates. We share those market opinions in the context of helping analysts understand our business model and potential financial performance.
    

7. Comparing unrealized losses across firms with different business models can be misleading. Schwab Bank has a different business model than traditional banks. Our deposits come from transactional cash in clients’ brokerage accounts that is swept to our banks. We use about 10 percent of that cash to fund loans to our existing clients and with the remaining 90 percent, we buy securities – the vast majority of which are backed by the U.S. Government. With rates moving up, the fair value of all fixed rate assets – loans or securities – has gone down. But given that our securities are very high quality, we fully expect our securities to reach par at maturity, which means the unrealized “paper” losses will decrease over time. Because a much higher percentage of our assets are securities – and traditional bank loans are not disclosed the same way – our paper losses may appear larger than those of traditional banks. But that assessment lacks the appropriate context. In reality, our portfolio has less credit risk and is actually less sensitive to changes in interest rates than many large banks.

Not all financial institutions are the same; not even all banks are the same. So, one can understand how many watching the public dialogue on banking issues right now might conflate our brokerage-centric business with that of other banks. That is why it is important we set the record straight on some of these topics.

For more than 50 years, our conservative approach to managing risk has allowed our clients to weather market cycles and successfully manage their wealth. We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company. We are different than other banks. But it is precisely because we are different that we have grown to earn the trust of more than 34 million accounts across a broad spectrum of business lines in the U.S., Asia, and Europe. With this additional information, we trust you too can see why we are proud to be a firm like no other.

Sincerely,

Charles Schwab
Founder and Co-chairman

Walt Bettinger
CEO and Co-chairman    

Remember that you can still make 2022 Roth or Traditional IRA contributions until April 17, 2023.  The contribution limit for 2022 is $6,000 for those of you younger than 50 and $7,000 for those of you older than 50.   Please note on your check that your contribution is for 2022 or let us know and we will send you a deposit slip.  (If the year is not indicated, Ameritrade will code the contribution for 2023.)   While you are at it, you can also make your 2023 contributions - $6,500 if you are under 50 and $7,500 if you are over 50.  You can also increase your employee retirement plan contributions and we can help you with the math to get that done.

We are making good progress moving clients from Ameritrade to Schwab ahead of the official transition which is scheduled for Labor Day weekend.  We do expect that the upcoming transition might be a little messy, despite all the work that Ameritrade and Schwab are doing, so we are ready and excited to move as many clients ahead of that date as we possibly can.  There are some investment options at Schwab which were not available at Ameritrade, so there are some new things for us to review with you as we move your accounts.  Let us know if/when you are ready to do ahead of Labor Day when the transition will happen “automatically.”   I will say that some of the transitions have been done 100% electronically and some have been 100% on paper – and we do not know which it will be until we get into it – but we can get this done with you regardless. 

And finally, some good news on 529 Education Plans.  Many of you have set these up and are contributing dollars for children or grandchildren to pay for future educational expenses.  A newly changed rule under the SECURE Act 2.0 now allows dollars (up to $35,000) left over in 529 plans to be rolled into a Tax-free Roth IRA in a beneficiary’s name, as long as the plan has been open for at least 15 years.  This change takes away the worry that the dollars will not be needed for educational expenses and then will be partially subject to tax/and or penalties at withdrawal.  So good time to get those 529 plans open, even with a small contribution.  

Dear Family, Friends and LFS Clients,

We are happy to share our BIG NEWS: 

We are moving to Atlanta!

We have finally realized that our three daughters all of whom live in Atlanta, and our three Atlanta-based grandchildren, need way more parental supervision than we can provide from western North Carolina, so duty calls!

We will not be living in the boring suburbs as our children do, but rather will be going back to our urban roots and will be moving into Heartis, a brand-new high-rise retirement community in Buckhead, which is a very nice area just north of midtown Atlanta.

Move date:                      Depends on which of us you ask, but likely in February

New Address:                  2051 Peachtree Rd NE

                                         Atlanta, GA 30309

                                         Apt 909

Phone:                              828-692-0061 (home) - same

                                         828-279-5247 (Bernie cell) – same

                                         828-708-2973 (Toby cell) – same

Email:                               bernd.linder@linderfinancial.com - same

                                         tobyleelinder@gmail.com – same

Wine:                               yes.  Available now.

Bernie and Toby

Happy New Year again!   As we begin 2023, we have our usual list of things for us to do together.  The good news for you is that not all of these action items will apply to you!

First of all, RMDs:  As usual, your required minimum distribution (RMD) is based on the year-end balance in your traditional or beneficiary IRA’s.  Because the market was less than stellar in 2022, your 2023 RMD is likely less than your 2022 requirement.  Your RMDs can be fulfilled in any combination of cash, shares transferred to an after-tax cash account or a tax-advantaged charitable contribution.  We will help you get this done, either as one distribution or as periodic withdrawals.  Your federal and state taxes are usually withheld.  Traditional Roth IRAs have no RMD requirements while Beneficiary Roth’s do, although no taxes are due.  The age at which RMDs must be initiated has increased but as always, there are rules around this change.  If this change impacts you, we will tell you and help you figure out what to do.

Secondly, contribution limits for all types of retirement accounts have been increased for 2023:

• 401K or 403B:  Employee contribution is being increased from $20,500 to $22,500.  If you are over 50, your contribution has increased from $27,000 to $30,000.  You need to make this change directly with your plan administrator, but we can help you figure out how to adjust your monthly contribution.  As always, this contribution can be in any combination of Roth 401K/403B and traditional 401K/403B if your plan offers both.  There are no income limits for a Roth 401K. 

• Traditional or Roth IRA’s contribution limit is being increased from $6,000 to $6,500.    If you are over 50, your contribution is being increased from $7,000 to $7,500.

• Roth IRA’s:  Earned income eligibility has been increased:

• Modified Adjusted Gross Income (MAGI) for full contribution increased from$129,000 to $138,000 for single taxpayers

• Modified Adjusted Gross Income (MAGI) for full contribution increased from$204,000 to $218,000 for married, filing jointly taxpayers

• There are partial contributions allowed above these limits.  Call us for details.

• SEP or SIMPLE IRA’s:  Call us 

• You can still make 2022 IRA contributions until April 17, 2023.  Special paperwork is required to ensure the contribution is applied to the correct year.  Call us. 

Next, if you have your cash reserve fully funded (in a high yield savings account please) and have extra coins under your sofa cushions, you can now buy another I Bond for $10,000.  The annual interest rate is 6.89% for the first six months for any I Bonds issued by May 30.  At that time, the rate will be adjusted again.  We can help you purchase I Bonds whether or not you bought one in 2022.  Lots of rules here just like last time.  Call us. 

This is enough for now.  We are here to help so feel free to call, text or email.  Or drop by!

Hello!  It’s Bradley, Marci’s eldest here again (with some light editing from my mom) hoping to shed some light on what FTX is, why it is collapsing, and what that means for your portfolio (spoiler alert, hopefully, not much).

First things first, what is FTX?  FTX is (was) a cryptocurrency exchange.  This is, very simply, a place where people can buy and sell cryptocurrency (for more on what cryptocurrency is, see the February 28th, 2021 Bernie’s Blog post about Bitcoin).  It works similarly to how our Ameritrade/Schwab accounts work.  An investor puts money into an account there, and then buys and sells Bitcoin, or other cryptocurrencies (including FTT, the cryptocurrency started by FTX),  just as we buy and sell other securities in our Ameritrade and Schwab accounts. 

Now, what happened?  Like brokerage accounts and banks, FTX did not actually hold all of its deposits in cash.  There’s nothing necessarily wrong with this; we all know that banks make loans with much of their deposits (they are required to hold approximately 10% of their deposits as reserves at any given point in time to accommodate customer’s withdrawals), and Ameritrade does similarly with money in money market accounts.  However, unlike banks or brokerages, FTX held its reserves in its own cryptocurrency FTT and had lent much of its customer’s deposits to its sister trading company Alameda Research.  Because cryptocurrencies are highly volatile, this means that the value of its reserves could very rapidly diminish.  And diminish they did, as the value of FTT has plummeted this year along with most other cryptocurrencies.  When customers of FTX heard that FTX was in trouble, many tried to withdraw their deposits at the same time, leading to an old-fashioned bank run.  This caused FTX to have to declare bankruptcy, which is where we are now.

What caused FTX’s downfall?  Several things:

1. The CEO of FTX, Sam Bankman-Fried was less than transparent to his customers about the risks of trading cryptocurrency and then used his customers’ money to fund his other businesses. This is against the law, and he could be looking at significant consequences if found guilty.

2. Cryptocurrency is highly volatile, and essentially unregulated. Unlike stocks and bonds, it has no inherent value, and cryptocurrency exchanges are not protected by the same regulations that banks are. (For example, bank deposits are insured by the FDIC, protecting against bank runs).

How does this affect you, and what can we learn from this?   Marci here.. 

1. Because we do not recommend cryptocurrency for clients, any direct impact of FTX’s collapse should be very small. As of yet, cryptocurrency is quite separate from traditional stock and bond markets, so any spillover should be insignificant.

2. LFS is a fiduciary which means that we are legally obligated to act in your best interests. That includes only recommending investments that are appropriate to your particular situation and which we can explain to you (including the risks).

3. As always, if an investment idea sounds too good to be true, it very likely is.

It’s hard to believe that we have never actually written a BLOG or talked with most of you about investment tax loss harvesting but now, unfortunately, is the time.  This is a very complicated topic so we will attempt to keep this overview simple and then we will talk to you individually, where applicable, over the next 4 - 6 weeks. 

Quite simply, investment tax loss harvesting is selling an investment in a taxable account when you have a tax loss (on paper) and then using that tax loss to offset capital gains from other investments and/or to offset ordinary income.  Sounds quite straightforward, but there are guidelines to ensure that the process is done in accordance with both IRS guidelines and your individual long term investment plan.  

Just what is it?

• As a reminder, the investment capital gain or loss is defined as the difference between the market value on the day the investment is sold and what you paid for it, a.k.a the cost basis. This cost basis includes any dividends or capital gains which have been re-invested in the security while you owned it.

• After the tax harvesting loss is applied against capital gains, any additional loss can be applied against ordinary income up to $3K per tax return per year ($1500 per return if married, filing separately) But any excess tax losses can be carried over to future years with no expiration date on the carry-over amount.

• The resulting tax benefit applies only to Federal income taxes.

• Tax loss harvesting is only done in taxable accounts. In IRA’s, we apply many of the same principles when we rebalance but there is no immediate income tax impact.

What’s the Biggest Watch-out? 

The most complicated piece of tax loss harvesting is compliance with the IRS “Wash Sale” rule.  Your CPA can provide a lot more information here, but basically the Wash Sale rule says

• An investor cannot buy back a security which has been sold with a tax loss or buy a “substantially identical” security for 30 days before or after the tax loss sale, in any account associated with the investor. The IRS will disallow the tax loss if this happens.

• The “substantially identical” requirement is quite gray. We tend to be very conservative here. So for example, if an investor sells Home Depot with a tax loss in a taxable account, we recommend waiting 31 days before buying Lowes, even in a different account.

Why Now? 

Besides the obvious market downturn which means there are some tax losses to take, there are other reasons for this to be a priority as we head into the last two months of the year.

• The security sale with the tax loss must be done by 12.31.2022 to be helpful for your 2022 Federal tax filing.

• As bad as the market has been in 2022, after a pretty darn good bull market for the last 15 years, not all of you will actually have a tax loss in a taxable account. In some cases though, we would like to take the opportunity to re-position or re-balance portfolios with more tax-efficient investments while we have the opportunity to do it without creating a large tax bill for you. For example, we might replace a not very tax-efficient mutual fund with a tax loss (or with only a small gain) with a much more long term tax-efficient exchange traded fund. After 30 days of course.

• And this is the complicated piece – many mutual funds distribute capital gains at the end of the calendar year. As you know, this distribution is a taxable event, with absolutely no value to the shareholder, so it makes sense to avoid paying taxes on those capital gains if the plan is to sell the fund anyway.

For those of you that haven’t yet gotten around to buying an I Bond yet this year or if you haven’t bought your full $10K allotment, there is some good news….  You can still do before October 31 and get the 9.62% interest rate for the first six months.  After November 1, the interest rate on new I Bonds (and those that have been held for 6 months) will go down – probably to the 6% range.  That’s still not bad, but it’s not 9.62%!

The process is a bit clunky, but we have some tools to help make it a little easier for you to do or we can do it with you on the phone.  Just let us know if you need help.

Refer back to Bernie’s Blog of Jun 11 for all the details or just keep reading…  I have copied the text from the June 11 Bernie’s Blog post below: 

Most of you have probably heard of I Bonds by now, either from us or from your favorite media personality.  Let’s talk about what these actually are and who can benefit.  Spoiler alert, if you are reading this, you can most likely benefit!

What is an I Bond and how does it differ from a TIP? 

I Bonds are inflation adjusted 30-year U.S. savings bonds.  The inflation adjustment happens twice per year and is based on the Consumer Price Index (CPI).  From now until October, the annual variable interest rate (coupon) is 9.62%.  No really, 9.62%.  These are U.S. treasuries so 100% safe, the actual value of the bond does not fluctuate, and the interest is added to the bond value every six months.  These bonds are also tax efficient because the interest is only subject to Federal income taxes and only when the bond matures or is sold. 

Since many of you own TIPs (Treasury Inflation Adjusted Notes), you are undoubtedly asking yourself if these are different.  The answer is that they are different in some important ways, but they complement each other perfectly.  First of all, for a TIP, the coupon rate stays constant throughout the bond life but the principal amount on which the coupon rate is applied is adjusted twice per year, based on the CPI.   TIPs are great for long term inflation protection, and we like them, especially in IRA’s because the TIP interest and inflation adjustment are taxed every year at your full tax rate.  There is also no dollar limit on TIP purchases, and you can own TIPs in your Ameritrade accounts and sell them at any time.   

Are I Bonds too good to be true?

I Bonds are not too good to be true BUT there are some important limitations:

1. Each person can only purchase $10K in electronic I Bonds each year. There are no income or age limitations. They can also be purchased for children (and grandchildren!). Minors can own I Bonds but they can’t have their own Treasurydirect account.

2. These must be purchased via the Treasurydirect website and held at the Treasury. The account set up and purchase is a bit of a clunky process, but we can help you. I Bonds cannot be owned in brokerage accounts or IRA’s or your bank.

3. These bonds must be held for at least 12 months. If they are sold between 1 and 5 years, there is an interest penalty of three months. I Bonds will earn interest for up to 30 years, but obviously when inflation moderates, they will become less attractive.

4. Each I Bond can have only one beneficiary.

Are I Bonds for me and how do I get started?

In general, I Bonds are for you, as long as you have enough cash remaining in your cash reserve after the purchase to sustain you for at least one year, and preferably 5 years.  We will discuss individually with you this quarter but feel free to call if you want to discuss now.  Obviously, the sooner you purchase, the more interest you will earn! 

As I said above, the process is a little clunky with a lot of information, multiple passcodes/security questions and double factor authentication required.  Because these are not held at Ameritrade, our normal “do for you with your approval” process does not work.  We have developed a form for you to use on your own so that you have all the info you need in front of you when you begin the process, and we are also happy to undertake a “do with you” process to open the account and buy these I Bonds.     

Happy to answer questions and to help!