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• Because the contributions are made with after-tax dollars, the contributions can be withdrawn at any time, without tax or penalty.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• Unlike traditional retirement plans, the earnings can also be withdrawn tax-free, subject to owner age and account duration rules, and there is no requirement for distributions to begin at 72 years of age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 2022 to make this 2021 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.

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

It’s Marci on the blog this week with the age-old question: “How much can I safely spend from my portfolio without running out of money?”

The 2021 Ameritrade/Schwab annual conference was held late last month, virtually, so we had opportunities to drop in on several different sessions of interest and the session on this topic obviously caught my attention.

Historically, we as investors have relied on four components for income from our portfolios: bond coupons, stock dividends, capital gains, and principal. In today’s environment though, with interest rates on bonds and cash at record lows, and stocks at record highs, it’s logical to wonder whether the 4% rate that has been generally agreed upon as the acceptable safe withdrawal rate is reasonable now.

As we know, past performance is not a guarantee of future results, but the presenter of this session attempted to use historical market returns to determine what a sustainable withdrawal rate would have been over thirty-year spans beginning every year since 1871. The major factor outside of market performance that he considered in his analysis was the sequence of returns.

As an example, consider the following: The average market return over the period is 10%. In the first scenario, the first two years are 0% and the next two years are 20%. In the second scenario, the first two years are 20% each, and the next two years are 0%. The 10% average holds in both cases, but the portfolio amount, and therefore the withdrawal amount varies greatly. So, what did he learn from this analysis to share with all of us? Going back in history through times that included the Depression, the dot.com bust, the financial crisis of ten years ago, and most recently, the coronavirus-driven downturn, as well as many, many years of double-digit market gains, the safe withdrawal rate that worked through all of that: 4 to 4½%. And interestingly, that percentage held in his analysis in with stock/bond allocations ranging in some studies from 40/60% to 70/30%.

Obviously, this analysis is not the only consideration when spending from portfolio, but I thought it was interesting and hope you do too!

There is no doubt that international funds have recently under-performed domestic funds. Vanguard has an interesting perspective about the future of international funds. Click the button below for the pdf:

Us too! Here’s how we cope – feel free to join us in person or virtually…

Alright, now for a little fun and a little perspective…..

Today is Oct 11, 2021. The last time we actually posted a photo like this one on Bernie’s Blog was Oct 11, 2018, three years ago today! Hm…. In that photo, we actually had CNBC on the TV in the background so we could see that the Dow that day was 25,572. Right now, the Dow is at 34,532. That’s a 35% gain in the last three years.

And as painful as the last month has been on many days, let’s remind ourselves of just how good the market has been even year to date. As the chart below shows, the S&P 500 is up 17% YTD!

So, what do we recommend:

• Don’t panic or make sudden market moves. Turn off the TV and don’t look at the market. We are looking at both and we will let you know individually if you need to know something or do something.

• Re-look at, and recommit to, having a healthy cash reserve to cover planned and unplanned expenses for the next year to 18 months. As your life changes, so does your cash reserve need, so this is a good time to ensure that you have this cash readily available. We recommend a high yield savings account for this money. We can help you locate one and set it up if needed.

• If you still have some extra cash in those coffee cans in your backyard after boosting your cash reserve, now might be a good time to begin to dig it out to invest Will the market go down? Yep. Will it also go up? Yep. As usual, buying stocks a little at a time is the right strategy here. As many of you have experienced, this is the best way to build long term wealth.

We are here to talk, whine or wine with you!

It’s Tim here, blogging once again about one of my favorite topics….

Once again, Congress is “looking” at regarding changes to retirement savings plans. No one knows what will actually pass.

Reportedly under discussion:

• Raising the age of taking Required Minimum Distributions (RMDs) from 72 to 75. This would be done over a 2-to-3-year period.
• Letting people over 60 contribute more to 401Ks.
• Allowing part time workers to contribute to 401Ks
• A revenue raising proposal to reduce the amount of pretax pay into 401K’s. This bipartisan house bill would require that catch-up contributions to workplace qualified retirement plans would be subject to Roth treatment. This means that the extra $6500 contributed by workers who are 50 or older would automatically go into a Roth 401K and come from post-tax salary rather than pre-tax wages. Another provision would provide the option of having employer matching contributions put into a Roth 401K account. This raises tax revenues today to pay for other retirement savings measures. This may not be a bad thing.
• Ideas to limit Roth IRA benefits for high income earners are back on the table. The 2016 proposal prohibited contributions to Roth IRAs with balances over $5MM. It also called for limiting high earning individuals from making after tax deposits into traditional IRAs and then converting them over to Roths. Both proposals were pushed by Sen. Ron Wyden (D-OR) who now heads the Senate Finance Com., which is the tax writing committee for the upper chamber. As of 2019, 28,615 individuals had $5MM or more in their IRAs (this compares to 8,000 in 2011). Of these 497 have over $25MM or more.

Stay tuned!