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!

We are asking ourselves this question so you might be too.  The answer is “too long” of course. 

We like this chart from Schwab which provides a historical perspective, which of course means nothing about the current situation – except that bear markets have ended 100% of the time they have happened in the past!

After you have purchased I Bonds (you can still do, and we can help!) we want to share two more ideas!

Stock up on stamps and run low on gasoline.  We are…. 

We ask ourselves this question nearly every day so some of you are probably ready for an update too. 

As a reminder, in 2019 Schwab announced that it was acquiring TD Ameritrade.  The deal actually closed in October 2020 with the implementation timeline expected to be 30 to 36 months from that point.  As you may remember, the news at that time was that both companies would continue to operate as largely separate entities until the transition was complete.  Schwab is now confirming that the actual conversion is expected to be on schedule – sometime between April and September 2023. 

What have we experienced so far? 

Both Schwab and Ameritrade realize how complicated this transition is – for them, for us and for you.  They are committed to minimizing the disruption for all of us while delivering a customer experience and platform which is better than what we have now.  Both companies are committed to getting the conversion right the first time – for advisors and for clients.  All good to hear.   Thus far, we see great commitment, communication, and lots of testing, but we recognize the heavy lifting ahead. 

As many of you know, we signed up for the Schwab “jumpstart” program which allows TD Ameritrade advisors an opportunity to get an earlier look at and experience using the Schwab platform.  We did this so we will not be on our Day 1 while you are on your Day 1!  We moved a handful of our personal accounts (lots of paperwork to do!), absorbed a few onboarding sessions and then jumped into “learning by doing.”   See attached photo of Marci “learning by doing.”  You will be happy to know to know that at least so far, we haven’t messed anything up badly enough that we couldn’t undo and redo – although there has been a fair amount of undoing and redoing.  Not a problem. 

There are a few things we have already seen which we really like:

• The client interface (called Schwab Alliance) which will replace TD Advisor Client is easy to use and the mobile experience is much improved. The security has been upgraded and some features which were not available on TD Ameritrade’s mobile platform will be available on Schwab’s. That’s good.

• Schwab doesn’t allow DocuSign as much as TDA does (not sure THAT is such a bad thing) but they do have an electronic signature process via Schwab Alliance which is easy to use and doesn’t require clients to remember the car they owned in 1967. This is good too!

• The phone support has been excellent – and we have needed it.

What have we been told will happen, but we have not seen yet?

• There will be no need for any paperwork for account transfer from TD Ameritrade to Schwab unless accounts are moved before the official transition date. Spoiler alert – we will want to continue to build our Schwab experience in the next year so we will want to move some additional client accounts but we will do the paperwork as usual so you will not have to do. Let us know if you want to be early adopter.

• Existing account and advisor authorizations which are on the Ameritrade platform (trading authorization, fee deductions, option trading, electronic statement delivery, etc) will be carried over to Schwab.

• Most account history will be transferred over. We also have all of your LFS quarterly updates since you joined our LFS family.

• Some of the beneficiary info will have to be updated after the transfer.

• There are likely hundreds of questions we haven’t even though of yet!

What do we need to do with you over the next 9 to 15 months?  We will take the lead here!

• Data clean-up. Since most information will be directly transferred, we can all help by ensuring that what we transfer is up to date. That includes mailing and email addresses, phone numbers etc. We will also want to close any account which are not funded. We can always re-open those at Schwab if they are needed.

• Where possible, we want to update any automatic transfer instructions between your Ameritrade accounts and your checking account to “pull” from Ameritrade rather than “push” from Bank of America (for example). These transfer instructions will then automatically migrate to Schwab. If that can’t happen, it’s fine – we will just have to redo those after the conversion with your new Schwab account info.

• We have been told that this transition will be much easier if clients have an active Advisor Client account at Ameritrade. We know that some of you do not use Advisor Client but for those of you that do, we will want to ensure that your access is up to date.

Let us know what questions you have so far!  We have time to get this work done with you way ahead of the actual transition. 

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!

As all of us who drive and/or absorb news know, gasoline prices are painfully high and seem to be getting higher by the hour.  Why is that and when will it end? 

First of all, we are right, we are paying more, well let’s just call it what it is, a lot more for gasoline right now. Today, the national average for regular unleaded gas is about $4.60, up 40% from $3.28 at the start of 2022 and 51% higher than the $3.04 national average a year ago.  Clearly, there are a number of reasons for the increase, which means the “why” question is hard to answer.  But what is clear is that no one person, company, or government controls gas prices, which also means no one person, company, or government can fix this mess.  

Reason 1:  Covid caused serious pain for global oil in 2020 and this large and slow-moving market has just not yet recovered.  As you may remember (or you can go back and read Bernie’s Blog) oil prices dropped precipitously seemingly overnight, as millions of people around the world sheltered in their homes whenever they could.  There was a time in April 2020 when benchmark world oil prices were actually negative.  Physical oil reserves filled rapidly, and energy producers/OPEC nations drastically cut production due to the really low prices.  So now if we fast forward to 2022, oil demand is almost to pre-pandemic levels, but the supply has not been built back up yet – a slow process.  Not to mention that much of the least cost-effective production was permanently shut down over the last two years.   Oil companies are just not anxious to dig new wells because oil pricing is so volatile.  And let’s be honest, the oil companies and their investors are pretty happy with status quo.  Just take a quick look at your energy holdings….. the only holdings we are actually encouraging you to look at!

Reason 2:  Besides the financial disincentive to dig new wells, there is growing support around the world to replace fossil fuels with more carbon neutral alternatives.  This support and public debate have made future oil drilling even more challenging, especially in a mid-term election year. 

Reason 3:  The war in Ukraine has resulted in sanctions against and voluntary import stops of Russian oil.  Prior to February, Russia supplied 10% of the world’s oil, albeit a much larger percentage in Europe than in the U.S.  The reliance on Russian oil can be reduced but it takes time and money to do – with financial pain for all. 

So now the question we all have… when do gas prices come down for real?  It doesn’t feel like the three factors above, which largely impact oil supply, are going to improve markedly anytime soon, which means a demand change will be required.  That demand change is most likely to come about with higher interest rates and slower economic growth, which come with their own set of challenges, as we all know.  Not an easy problem to solve.  We can add it to the list of hard problems to solve.   

For those of you who are continuing to look at your statements, despite our advice to the contrary, you have undoubtedly noticed that your bond and bond fund prices are falling.  We all know that bond prices fall as interest rates go up but what does that really mean and what should we, as investors, do about it?

First of all, experts have expected interest rates to increase for 15 years, so the fact that that is now happening is not a surprise. What is a surprise is the speed with which it has happened.  But of course, we are also now experiencing unprecedented inflation.  Bonds are still a critical part of our portfolios to provide generally “non-correlating” performance with equities and to provide income and lower volatility – usually.  But bonds are not a great inflation hedge – which is why we usually recommend TIP’s which have lower coupons but better overall yield when inflation is increasing. 

• If you own single bonds, remember that the day-to-day fluctuations of bond prices (as ugly as they can be) do not impact the face value redemption price at maturity. And interest continues to be paid until the day the bond is sold or matures. If you own Treasury Bonds (including TIPs of course) the default risk is really non-existent.

• If you own shares of a bond fund, your share price has been declining, rapidly. But the monthly interest payments are still intact, and as bonds mature in the fund, they will be redeemed at face value and replaced with higher-paying (or higher-yielding) bonds. That eventually helps the overall investment to recover. The replacement of the existing bonds in the fund obviously happens more quickly if the fund owns shorter duration (time to maturity) bonds. Think Vanguard Short Term Bond Fund. Over time, the re-invested dividends will compensate for the decline in price, but this does not happen immediately.

In this period of bond price volatility, one strategy we are starting to selectively pursue is using a TIP fund instead of single TIPs.  The fund manager of the TIP fund buys multiple duration TIPs within the fund to better manage the interest rate risk.  This is a discussion topic with many of you as we talk over the next quarter.  

And time for our annual financial literacy quiz! 

As a reminder, financial literacy is defined as the ability to understand and effectively use financial skills and tools, which include personal financial management, investing and budgeting.  Ongoing financial education of ourselves, and our children/grandchildren, is considered the backbone of financial literacy so we are furthering the cause by providing some fun and educational questions for you. 

Spoiler alert, some of these questions refer to prior “Bernie’s Blog” posts, so feel free to look back as needed.  Some questions have more than one right, or wrong, answer. 

1. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would your ability to buy something with the money in this account be:

a. more than today

b. less than today

c. exactly the same

d. I can’t imagine the interest rate on my savings being 1% and inflation being 2%

e. No idea. Better call LFS

2. You read that you should have some “liquid” assets. Which of these is most liquid?

a. a boat on the nearest lake

b. the cash in the coffee cans in my backyard

c. my Ameritrade IRA

d. my glass of wine

e. No idea. Better call LFS

3.   How much should my emergency fund be?

a. This is a silly question - enough to cover my emergencies of course

b. 3-6 months of average expenses

c. 2 years of average expenses

d. Whatever it needs to be so I can sleep at night

e. No idea. Better call LFS.

4. When will the stock market fully recover?

a. This is not a financial literacy question, so I am not answering

b. Is the stock market down? I don’t know because LFS told me not to look.

c. When the Federal Reserve more aggressively raises interest rates

d. When the war in Ukraine is over

e. No idea. Better call LFS so they can tell me they don’t know.

5. Why are my 2022 Required Minimum Distributions (RMD’s) so high even though the market is down?

a. What’s a required minimum distribution?

b. Because I/LFS did a lousy job planning

c. Because the stock market ended 2021 at a record high

d. Because the government needs my tax dollars

e. No idea. Better call LFS.

6. When interest rates rise, what happens to bond prices?

a. They go up

b. They go down

c. They stay the same

d. They get indexed to bitcoin

e. No idea. Better call LFS

This is Tim blogging today about IRS guidance on the timing of required distributions from beneficiary IRAs. 

The 2019 Secure Act revised rules for retirement plans.  The IRS just issued preliminary guidance regarding the changes with final guidance expected by the end of the year.  This guidance impacts the timing required for withdrawal by heirs.

• Heirs who are spouses, someone less than ten years younger, and disabled individuals will continue to be allowed to take the withdrawals based on their own life expectancy using the IRS tables.

• Generally, for all other heirs the money must be taken out over ten years. It was thought that the withdrawal could be delayed until the tenth year. Under the new guidance:

  • Heirs subject to the 10-year rule are required to take annual withdrawals if the original owner died after the owners required beginning date for payouts (April 1 after the year the owner turned 72)

  • If the owner died before reaching the “required beginning date” the heirs do not have to take annual withdrawals.

  • Heirs of Roth IRA’s also do not have to take annual withdrawals.

  • If the heir is a minor child (but not a grandchild) the 10-year payout does not begin until the child turns 21. At that point, the 10-year clock starts to run. Use expected IRS life expectancy tables until that time.

• A required IRA distribution is required the year the account owner died as there is a 50% penalty for failure to do so.

Since the guidance is confusing, the consensus is to continue with current practice until final rulings are provided.  We are always happy to work through individual situations with you. 

As we all watch the horrifying events unfolding in Ukraine, we are all thinking about what we can do to help all the people who are suffering and those in the neighboring countries who are opening their homes and their hearts. 

For those who are charitably inclined, we want to provide some ideas.

As always, make sure that the organization(s) you are donating to are legitimate and meet your own personal criteria for charitable contributions.  We recommend donating directly through the charity’s website.  Scammers are definitely out there, as we all know.  For those of you who have not done your 2022 RMD yet, you can donate that distribution to a registered charitable organization without paying income taxes on the donation.  Let us know if you are interested in doing this and we will generate the paperwork for you. 

Red Cross:  https://www.icrc.org/en/donate/ukraine  Helps with shelter, first aid and medical supplies inside and outside Ukraine.

UNICEF:  https://www.unicefusa.org/   Supports health, nutrition, safe water and protection for children and families.

Doctors without Borders:   https://www.doctorswithoutborders.org   works with local volunteers to help victims access medical care and prescriptions.

And our personal favorite which you may have read about

AirBnb:  https://www.airbnb.org/  Book a “stay” at a home in a besieged city in Ukraine.  Airbnb is waiving the guest and host fees and the dollars go directly to the host you choose right away.  Just tell the host you will not be using your stay, at least not right now.  Be sure the host is legitimate and has been operating for a while.  OR you can donate to “host” a Ukrainian refugee in another country.  Two great ways to get dollars directly to Ukrainians very quickly! 

For those of us who are looking for some good financial news these days, we finally have some!

For the first time in 20 years, the life expectancy tables, which dictate the amount of money which must be withdrawn annually from retirement accounts, have been updated.  These tables show a life expectancy at birth of 84.6, up from 82.4. 

Why is this good financial news? 

Required Minimum Distributions (RMDs) from retirement accounts will be going down in 2022, and not because the market is down!

The Required Minimum Distribution (RMD)  is calculated by dividing each retirement account balance at prior year end (December 31, 2021) by the life expectancy factor calculated by these life expectancy tables.  That also means the tax bill on these distributions will also be going down. 

If you have to take a RMD for 2022, you will use these new tables, even if you have been taking distributions for years or inherited an IRA years ago.  The RMDs shown at Ameritrade have been updated to reflect this new guidance. 

NOTE:  There is also some chatter about an increase to the age at which RMDs are required to start, but nothing official yet.

As always, call or email with questions! 

For those of you have heeded our advice the last few weeks and not looked at your portfolios, we have news for you – the stock market has been absolutely terrible.  The losses (on paper) are very much reminiscent of March 2020. Just about all equities and bonds are significantly down in January, with a few exceptions like energy stocks/funds.  Technology, which has been the star performer over the last two years, is now leading the way down while more defensive cyclicals (big and boring, as we call sometimes call them) are down but not quite as bad. 

Before we talk about what to do at times like this, which will feel a lot like what not to do, let’s try to understand WHY this is happening and why it’s happening right now. 

This is definitely a perfect storm of external and often related factors which have come together right now:

• Ongoing and worsening inflation. Lots of causes for this inflation, but clearly not transitory. A little inflation is a good thing but the 5%+ we now have, probably not.

• Federal Reserve planning rate hikes and stopping bond purchases. Raising rates is the lever the Fed has to help curb inflation because it slows the economic growth by making it more expensive to borrow money. Over time, the higher rates will translate into higher interest rates for our cash reserves but that good part will take a while.

• Covid 19 variants are here and will likely continue to be here. The hope we all had to have Covid behind us by now is clearly not happening. We are learning how to live with it because we have to!

• Mixed to lower corporate earnings. It’s corporate earnings time and although the majority of companies which have reported to date have actually reported strong results, which were consistent with expectations for Q4, 2021, the forward outlook for most of these companies has disappointed analysts and investors. See bullets above!

• The Ukraine/Russia conflict. The market, much like all of us, doesn’t like uncertainty and the conflict in eastern Europe is certainly creating plenty of that.

So now what? 

As one of the financial pundits said this week, his best advice is to “sit on your hands and do nothing.”  That’s easy to say and hard to do, so let’s expand a little:

• Do not look at your portfolio every day. We are watching and we will let you know if we see something which requires your immediate attention. Markets go down. It’s hard to watch but if markets didn’t go down, there would not be any risk. And without risk, there is also no gain.

• At the same time, think about how your stomach feels right now. If you are very nervous, let’s re-evaluate your holdings and consider reducing the risk as the market improves.

• Ensure that your cash reserve is fully funded so that you do not need to sell holdings at a loss to fund expenses. This action will keep the losses on paper! But of course, if you have bonus dollars sitting in your checking account, think about whether you may want to invest some of it. Some good buys right now! Fund your cash reserve first.

• And remember we are always here to talk and answer questions.

Thus far in 2022, there are just a few changes which impact IRA’s and 401K’s.  There could be additional changes later in the year of course.

For 401K/403B:

• The maximum employee contribution has been increased from $19,500 to $20,500. The catch-up contribution for employees age 50 and over has been increased from $26,000 to $27,000.

For Traditional IRA’s:

• No change to the contribution levels but the income deductibility level has been increased. We will review with you individually as needed.

For ROTH IRA’s:

• No change to contribution levels – still lower of earned income or $6000 for each spouse. Catch-up contribution of additional $1000 for age 50 and over.

• Contribution eligibility has increased:

  • Full contribution with Adjusted Gross Income (AGI) less than $129,000 for a single taxpayer. Phase-out between $129,000 and $143,999. We can help with the phase-out math.

  • Full contribution for each with total Adjusted Gross Income (AGI) less than $204,000 for married/filing jointly taxpayers. Phase-out between $204,000 and $213,999. We can help with the phase-out math.

• 2021 contributions can be made until April 15, 2022. Remember to use a deposit slip that we will provide to ensure that contribution is applied to 2021.

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