As Albion grows and matures – and we’re now in the early years of our fifth decade – it’s inevitable that we find ourselves celebrating the retirement of long-time team members, honoring their contributions, yet continuing into the future without disruption. We’ve had a few over the years and it’s time to celebrate another. Doug Wells, Partner and head of business development, will be retiring in early July. Doug reached out to Albion in the 1990’s when he was looking for financial planning advice. He liked what he saw. Several years later, in 2002, Doug came back and pitched Toby and me on why we should hire him. Those of you who know him know he can be persuasive! We brought him into Albion and never looked back. His desire to learn was immediately apparent and within a few years had earned, in addition to his MBA, the CFP (Certified Financial Planner) and CFA (Chartered Financial Analyst) designations. He helped us along our path of continuous improvement where we strive to add more value to everything we do on behalf of clients. And he worked to get the word out into our community about Albion. Over the years he turned his network of business associates into a group of lifelong friends. From being a ski instructor at Deer Valley, hosting a radio show on KPCW, trying Bikram Yoga, or organizing group mountain bike rides, Doug has never shied away from trying new things. And with that spirit, he is trying a new chapter in his life, that of retirement.
He has helped scores of Albion clients make the decision to retire. More often than not the decision is far more personal than financial; it can be difficult to leave what you’ve known for decades and step off into the unknown. Having successfully counseled people through the transition he knew it was time to follow his own advice.
We will miss Doug. His energy, upbeat attitude, and intelligence are all characteristics we knew we could depend on. But we also know he leaves behind a highly functioning team that is already filling the void he leaves behind. Thank you, Doug, for choosing Albion!
Note: This blog post is an excerpt from Albion’s Quarterly Letter to clients. Find the entire letter posted in the Learning Center of this website.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
After several hotter-than-expected inflation prints in Q1, the data released in Q2 suggest that price pressures began to cool a bit. The m/m increase in Core CPI and Core PCE fell sequentially in both April and May, leaving Core CPI at +3.4% y/y and Core PCE at +2.6% y/y. Substantially all of the remaining inflation in the economy is in core services. Food and energy inflation are roughly +0.5% y/y combined as of the end of Q2, while core goods inflation is actually negative (i.e., deflation) at -0.4% y/y.
Monetary Policy
There were no changes to overnight interest rates in Q2, and the June update to the Summary of Economic Projections clearly reflected a “higher for longer” outlook, due to lingering inflation concerns. The median projection among FOMC members fell to just one 25bp rate cut in 2024, although to be fair, the committee was quite close to being evenly split between one rate cut and two. Fed Chair Jerome Powell reiterated during the most recent press conference that the committee will need to see more sustained progress towards the 2% inflation target before they will have sufficient confidence to begin cutting rates.
Economy
Data released in Q2 suggest a slowing, but still growing, US economy. The labor market is normalizing: new jobless claims rose by ~20k per week, open jobs fell to 8.06 million, and unemployment ticked higher by 20 basis points to 4.0%, but job creation remained solidly positive (3m avg +249k nonfarm payrolls added). Persistently high mortgage rates have inhibited housing sector activity. Manufacturing remains weak, but strength in services driven by solid consumer demand continues to drive the economy forward. Analysts currently forecast an acceleration in S&P 500 earnings growth in Q2, with bottom-up consensus estimates at +8.8% y/y.
Bond Market
Treasury yields moved higher across the curve in Q2, particularly in the belly and long end as investors continue to grapple with longer-term inflation assumptions and US budget deficits. Credit spreads tightened in April and early May, but then retrenched in June to finish slightly wider for the quarter. In the aggregate, the US investment grade bond market is down slightly YTD at the halfway point of 2024.
Stock Market
Gains were concentrated in Q2, continuing the “narrow rally” theme. Large caps that could be tied to the generative A/I theme did well in Q2, led by semiconductor stocks like Nvidia (+36.7%). Public utility stocks also continue to benefit from the significant expansion in power and cooling that will be required to support the growing A/I infrastructure. Elsewhere though, it was a difficult quarter, with cyclicals, small caps, and most international benchmarks finishing lower.
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Overfunded 529 Plans can be rolled into a Roth IRA to jumpstart retirement savings.
This can be a great strategy in certain situations, avoiding the 10% penalty on non-qualified distributions and receiving tax-free growth and withdrawals in retirement.
However, there are complex rules to consider, like the 15-year account age requirement and the $35,000 lifetime rollover cap.
In addition, the beneficiary must have earned income, and the rollover amount must stay within annual contribution limits.
Lastly, changing the beneficiary may restart the 15-year clock, though the IRS has not released official guidance at the time of writing.
And it makes sense, because while a 529 plan is great for qualified education expenses (benefitting from tax-free growth and tax-free distributions), when used for other purposes, 529 distributions can incur unwanted taxes and penalties.
Of course, in a perfect world, savers would end up with the exact amount they need to fund their education expenses, but the reality is not so simple. Instead, many wind up with extra funds, opting for overfunding rather than underfunding their college needs.
Which raises the question: what should you do with the extra 529 funds?
Fortunately, you’ve got options: from simply withdrawing the funds and incurring taxes and penalties, to changing the beneficiary of the account to an eligible family member and funding their college needs.
And now, with the passage of SECURE 2.0 you’ve got another powerful option: Roll the funds into a Roth IRA for the beneficiary, helping them jumpstart their retirement savings.
In this article, we will explore the pros and cons of this approach and highlight the key rules and regulations to consider.
First, let’s look at the pros and cons of rolling unused 529 money into a Roth IRA.
Pros of Funding a Roth IRA with Unused 529 Money:
Jumpstart retirement savings: Rolling unused 529 money into a Roth IRA can help the beneficiary get an early start on retirement savings.
Avoid Penalties: By rolling funds into a Roth IRA, you can avoid the 10% penalty on non-qualified distributions.
Tax benefits: Roth IRAs benefit from tax-free growth and tax-free distributions in retirement, making them a powerful investment account.
Ultimately, rolling unused 529 money into a Roth IRA can jumpstart retirement savings for the beneficiary, avoid the 10% penalty on non-qualified distributions, and offer tax benefits with tax-free growth and distributions in retirement.
Cons of Funding a Roth IRA with Unused 529 Money:
Withdrawal Rules: While Roth IRAs are great for retirement savings, they do have certain withdrawal rules that can limit your ability to access funds penalty-free.
Loss of control: With a 529 plan, you own the funds, no matter who the beneficiary is. Alternatively, if you contribute to a Roth IRA for your child or grandchild, they have full control over the account, assuming they have reached the age of majority.
Complex rules: Lastly, there are several rules that you need to be aware of when rolling unused 529 money into a Roth IRA, which we will cover in detail below.
Ultimately, this can be a great strategy, but be aware of the cons: Roth IRAs have withdrawal rules that may limit penalty-free access to funds, you lose control of the funds once they are in the beneficiary’s account, and the process involves navigating complex rules and regulations.
Next, Here Are The Key Rules and Regulations When Rolling 529 Funds into a Roth IRA
Next, let’s explore the key rules and regulations for rolling 529 money into a Roth IRA. These guidelines are essential to ensure compliance and to maximize the benefits of this strategy.
The 529 plan must have been open for a minimum of 15 years. (Important note: Changing the designated beneficiary of the 529 plan may restart the 15-year waiting period*.)
The Roth IRA must be in the same name as the beneficiary of the 529 plan.
The beneficiary must have earned income during the year the rollover is conducted.
The beneficiary’s income must be below the annual limit for Roth IRA contributions.
The rollover amount cannot exceed the annual contribution limit for IRAs.
The amount rolled over cannot be more than the contributions made to the 529 plan, plus any earnings, within the last five years before the rollover.
The total amount that can be transferred from 529 plans to Roth IRAs is capped at $35,000 per beneficiary.
Contributions made to the 529 plan within the last five years are not eligible for rollover.
*The 529 industry submitted a letter to the IRS in September of 2023 to determine whether a change in beneficiary would reset the 15-year clock. That said, at the time of writing, the IRS hasn’t released official guidance on this issue, and it is unclear if or when they will.
The Bottom Line
In the end, rolling unused 529 money into a Roth IRA can be a powerful way to give your kids or grandkids a jumpstart on their retirement savings. But, like many complex strategies, it’s essential to be aware of the different rules and regulations to avoid running into issues. Consulting with a financial advisor can ensure you’re making the most of this opportunity while staying compliant. By strategically executing this strategy, you can provide a solid foundation for your loved ones’ financial future.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Data released in May suggested that price pressures may have eased back just slightly in April. The m/m change in Core CPI fell 10 basis points sequentially to +0.3%, leaving the y/y figure at +3.4%. Similarly, the m/m change in the PCE Core Deflator also fell 10 basis points to +0.2%, with the y/y figure holding steady at +2.8%.
Monetary Policy:
May featured what might be termed “a meeting in two parts,” at least in terms of how financial markets reacted. At the conclusion of the FOMC meeting on May 1st, markets breathed a sigh of relief that the committee did not appear to be seriously contemplating rate hikes to combat sticky inflation. Rates fell across the curve in early May as a result, while Fed funds futures markets priced in a second rate cut prior to year-end. However, when the minutes from that meeting were released on May 22nd, investors were discouraged by the very clear reminder that many committee members lacked confidence that inflation was sufficiently under control to seriously contemplate rate cuts in the near term. Odds of a second rate cut in 2024 fell to roughly 50/50 by month end.
Economy:
Data released in May was mixed. The labor market remains strong but is gradually normalizing: new jobless claims remain low at ~220k per week, but job creation slowed (175k nonfarm payrolls added) and unemployment ticked higher by 10 basis points to 3.9%. Consumer confidence indicators were also mixed: the Conference Board’s index rebounded 4.5 points to 102.0, while the University of Michigan saw an 8 point decline to 69.1 with weakness in all components. Meanwhile, persistently high mortgage rates appear to have stalled any upward momentum in housing sector activity. Q1 GDP growth was revised lower by 30bp to +1.3% q/q annualized, but Q1 corporate earnings growth was robust at roughly +6% y/y for the S&P 500, well in excess of inflation.
Bond Market:
Treasury yields see-sawed, initially falling after what felt like a dovish FOMC meeting, only to reverse course and retrace most of that ground later in the month after the meeting minutes were released. Finally, yields fell again after the May 30th release of a downwardly revised Q1 GDP print, leaving bond prices higher on the month. Credit spreads remained steady throughout at levels that are very tight by historical standards.
Stock Market:
Stocks of nearly all stripes were higher in May, aided by the tailwinds of lower rates, solid corporate earnings, and renewed enthusiasm for A/I themed companies after yet another blowout earnings report from Nvidia. Falling oil prices pushed the energy sector slightly into the red, but all other sectors in the S&P 500 finished higher, led by technology stocks.
S&P 500 Total Return by Sector – May 2024
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 20.3x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Inflation: Data released in April continued to paint a picture of sticky inflation, with most metrics coming in slightly higher than consensus expectations. Core CPI is now +3.8% y/y based on the most recent print, while the Core PCE Deflator (the Fed’s preferred inflation gauge) stands at +2.8% y/y, both of which are above the Fed’s 2% inflation target. Moreover, real time inflation data suggests that core inflation (CPI and PCE) has been running at an annualized pace of around 4.5% so far in 2024.
Monetary Policy: There were no FOMC meetings in April (technically a meeting began on April 30, to conclude with a rate decision and press conference on May 1), and thus no changes to overnight interest rates. However, sticky inflation data caused market participants to further reassess the timing and magnitude of a rate cutting cycle. At the start of April, futures markets were pricing in 2 or 3 rate cuts in 2024, most likely beginning sometime over the summer. By month end, futures markets implied only one rate cut this year, occurring in either November or December.
Economy: Data released in April was mixed. The labor market remains strong: jobless claims are low (~200k initial claims per week), open jobs are plentiful (8.75 million per the most recent JOLTS report), job creation continues (303k nonfarm payrolls added), and unemployment is low (3.8%). There have been signs of a trough in US manufacturing, which has been in recession for nearly 2 years. However, consumer confidence has wanted in recent months thanks to sticky inflation, and higher mortgage rates appear to have stalled the upward momentum in housing sector activity. Q1 corporate earnings growth has been modest so far at +3.5% y/y, roughly in line with inflation meaning that real (inflation-adjusted) growth is close to flat.
Bond Market: Treasury yields moved higher over the course of April as market participants further recalibrated their expectations regarding the so-called “Fed pivot”, resulting in lower bond prices across the board. Credit spreads remain tight by historical standards, pricing in very little default risk. Mortgage spreads tightened a bit further in April, driving a smaller increase in mortgage rates (+38bp on average for 30y fixed) compared to the move in 10y Treasury yields (+48bp).
Stock Market: After posting significant gains in Q1, most domestic and international stocks struggled in April. China was a notable exception, with the MSCI China Index posting a 6.4% gain on the month, pushing E/M benchmarks into positive territory. In the US, all sectors except Utilities finished in the red, with rate-sensitive sectors like Real Estate and Technology facing the most selling pressure.
S&P 500 Total Return by Sector – April 2024
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.
Thanks to all of you who were able to join us at our annual Albion ski day. As most of you know our roots as a firm are in Alta, Utah. We began our investment management and financial advising journey in the basement of the Alta Lodge in 1982 and through the rest of the 1980’s officed up at the end of Little Cottonwood Canyon. While we’ve long since moved down into the Salt Lake valley our hearts are still attached to that mountain oasis. On to this quarters’ musings.
Money Laundering. Shell games. Hiding the true owner of assets for nefarious purposes. These are a handful of reasons behind one of Washingtons’ efforts; the Corporate Transparency Act (“CTA”), a part of the Money Laundering Act of 2020. Turns out rulemakers believe our current system of LLC’s, Partnerships, and Corporations allow the actual humans who own these entities to hide behind a nearly impenetrable wall of structures to mask their ownership. And perhaps through these opaque structures engage in illegal activities with very little risk of being discovered. The purpose of this law is to pierce that veil.
Unfortunately this will apply to many of our clients. Those with closely held businesses, family partnerships and/or limited liability companies, and closely held entities will find themselves subject to the reporting requirements.
The provided information is not public. Rather, the gathering entity – the Financial Crimes Enforcement Network (“FinCEN”) is authorized to disclose information to U.S. federal law enforcement agencies, with court approval to certain other agencies, to non-US law enforcement agencies upon request of a US federal law enforcement agency, and with consent of the reporting company to financial institutions and their regulators.
Prior to this act the burden of collecting beneficial ownership information fell on financial institutions. This shifts the burden to the entities themselves.
None of us are happy about additional reporting requirements and what feels like further intrusion of the federal government into our affairs. And this note could wax philosophic for paragraphs on the topic. But we’ll spare you such a soliloquy. And focus instead on who this applies to and what you must do to comply. To be clear we are not attorneys and nothing here should be considered legal advice. We encourage every reader to consult with counsel to determine if they have a reporting requirement under the act and if so to ensure reports are filed in a timely manner.
There are twenty-three exempt categories which can be summarized in a few categories. First are financial institutions; for example banks, securities issuers, credit unions, bank holding companies, broker-dealers, money services businesses, securities exchanges and clearing companies, investment companies and investment advisors, venture capital fund advisers, insurance companies, state licensed insurance producers, entities registered with commodity exchanges, accounting firms, pooled investment vehicles. These entities already have stringent reporting requirements.
The next significant category is made up of governmental entities. This includes federal, state and tribal entities and includes political subdivisions which means counties, cities, towns and school districts.
The final category are “large” operating companies. For this law “large” is considered to be companies with over twenty employees, over $5,000,000 in gross receipts from US customers, and with an operating presence at a physical office within the United States.
Know that the entities as outlined above are but an approximate summary of exempt organizations. It’s essential to dive into the details and if there is any question to retain counsel to determine whether or not your entity is exempt. Fines for non-compliance are punitive and run up to $500 per day of non-compliance which can accumulate up to $10,000. None of us want to get this wrong.
So what types of entities will be subject to the reporting requirements? Unfortunately many of the small family partnerships, LLC’s, trusts, and corporations we and our clients work with on a daily basis are subject to this law.
The information required with the reporting includes the legal name, any trade names, DBA’s or trading as names, the current street address and principal place of business, the jurisdiction of formation or registration, and the tax ID number. Beneficial owners must report their name, date of birth, residential address, an ID from an acceptable document (passport, US driver’s license), and the name of state or jurisdiction issuing the document. An image of the document must be provided and it cannot be expired.
Businesses in existence prior to January 1, 2023 must file by January 1, 2025. Businesses formed during calendar year 2024 must report within 90 days of creation of the entity and businesses formed after January 1, 2025 must file within 30 days of creation of the entity.
More information can be found through your legal counsel and online at fincen.gov/boi.
This quarterly note differs from the usual fare. However given the circumstances we believe it’s important to front and center with all of you regarding this new requirement as year end (and the risk of non-compliance) will be here in the blink of an eye.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.
If something cannot go on forever, it will stop. Economist Herbert Stein articulated this principle nearly forty years ago when discussing growing trade deficits with lawmakers. This humble insight can be applied to many situations. These days it feels as though post-pandemic economic strength will go on forever. Yet, we know that it won’t. It can’t. Our central theme of “normalization” is evident over the past eighteen months, and eventually the business cycle will overcorrect causing recession (not to be feared entirely as contractions cleanse the system). But that day isn’t today. Indeed, as we exit the first quarter the US economy is doing fine. Better than fine really, it’s quite robust. Consumer spending is resilient, jobs are plentiful, businesses are investing, and government budgets are expansionary. Real GDP grew by +2.5% in 2023, accelerating from the previous year, and estimates for Q1 sit around +2%. While these are backward-looking figures, more current information – like spending data from credit and debit card companies, retail sales, services PMIs, jobless claims, and even (recently) improving consumer confidence – suggests that momentum has carried into 2024.
But why the potency? The simple truth is economic strength is closely tied to jobs, which remains solid. And because the economy is strong that keeps the labor market strong as business profits support employment and wages. It’s a virtuous loop. And while signs of normalization (there’s that word again) in the labor are present, like softer demand for workers and increased supply, layoffs are low and hiring is steady. This balance is beneficial nurturing a more secure foundation. Until this situation changes, economic expansion should continue. The critical question is now, can we successfully move from too tight to well-adjusted in the jobs market without the pendulum swinging negative? Time will tell.
Inflation’s stride has also cooled over the past 20 months, from over 9% to roughly 3%. While much progress has been made, Jerome Powell asserts more work and greater confidence in the trend is needed to declare victory. We agree. The Fed’s target is ~2% and the “last mile” won’t be easy. Still, our long-held view endures – the contemporary war against inflation will be won.
Speaking of the Fed, last July we opined that the central bank was done hiking interest rates. Be it lucky or good, that view proved correct. We continue to reason that the Fed won’t need to raise rates further. We’ve gone from 0% to ~5.5%, a ton of credit tightening, and without a jump in unemployment. Job well done. The new Wall Street parlor game centers on how long the Fed will maintain its current stance before lowering rates. The answer hinges on the trajectory of the economy, employment, and inflation. Our best guess is the first cut will occur in the second half of this year.
All told, “soft landing” odds have increased compared to a year ago, a time when our preferred forward indicators signaled maximum caution. Several indicators have improved, meaning there’s been considerable diminution of risk over the past year. At this point we see recession odds at about a coin toss (down from over 80%). Historically, in any given year it’s ~15%.
In bonds, the action will likely be on the front end of the yield curve as big moves further out have mostly occurred. While things can move cyclically based on data and mood, structurally speaking longer duration securities appear sensibly priced for the current environment.
Meanwhile, firms are in good shape with profits holding steady in 2023. Despite “no growth”, revenues were higher last year due to an advancing economy and increasing prices. But so too were costs, in many cases more than revenues, resulting in compressed operating margins and inert profits. Looking ahead, analysts predict energetic earnings growth of +11% in 2024 and +13% for 2025, driven by a healthy economy and margin re-expansion. Those are high bars. From our perch, margins may have indeed bottomed if we can avoid a downturn. Thus the near-term direction of profits will largely hinge on the macroeconomy. Regardless, our primary attention is the longer-term outlook. Especially for those investments we own on your behalf. And here, we are optimistic for the years ahead.
For its part, the stock market has continued its momentum, driven by expectations of no recession and Fed rate cuts. Despite unease over the looming election, investor attitudes are (unsurprisingly) cheerful on the back of impressive recent performance. Moreover, the inflation problem is under control and geopolitics, while tense, sit more at a simmer than a boil. Yet risks remain if fundamentals, including lofty earnings expectations, fail to deliver.
On valuation, there’s some level of enthusiasm to be sure, particularly in areas like AI. However, at this juncture, this verve is probably more rational than irrational (paging Alan Greenspan and Bob Shiller!). As declared, the economy is sound, inflation is falling, the 10-year Treasury yield is off its peak, the Fed has finished raising rates, corporate earnings are ample, and technology is bliss. Given this backdrop, although the stock market is not exactly cheap, it is also not overly expensive when you consider where key factors like inflation, interest rates, and profits are expected to be in the coming years. Moreover, there is still approximately $6 trillion in cash “on the sidelines,” mainly in money market funds, a portion of which (not all, but some) will likely seek higher returns when the Fed eventually begins to ease.
Bottom line: while short-term estimates vary, our longer run outlook for US equities remains wildly bullish.
As always, there is perpetual motion in economics and financial markets, so it’s vital to make decisions based on the available information. We find great joy in this important vocation. Which I suppose leads us back to where we began, with Mr. Stein’s observation … but with a twist. What happens if something, like the work of a steadfast financial advisor, can go on forever? Thanks for your unrelenting trust.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.
Retirement planning in America is constantly transforming. The widely accepted concept that everyone can retire is only a few generations old. In such a rapidly changing world, how we achieve such a feat will also continue to evolve, which means that traditional approaches to securing retirement income need to be revised. Longevity is on the rise, traditional pensions (defined benefit plans) are becoming relics of the past, and the onus of retirement planning now squarely rests on the individual.
Given the statistical likelihood of living well into our 90s, especially for non-smokers and those of higher socioeconomic status, the necessity for robust and foolproof retirement planning strategies has never been more apparent. This reality drives us to rethink and innovate in how we protect your financial future.
When creating comprehensive retirement plans for clients, it is important to identify and address some of the potential hurdles future retirees face. I often return to a list that author Larry Swedroe coined as the “Five Horsemen of the Retirement Apocalypse.” One of these five included “historically low bond yields,” which is no longer as relevant today, but I still find this list useful when trying to understand how to best plan for our clients’ futures. So, the following Four Horsemen remain top of mind for retirement planning in 2024:
Historically High Equity Valuations: With the U.S. stock market’s long bull run, it is wise to adjust expectations and prepare for potential downturns in equity investments.
Increased Longevity: As life expectancy rises, retirement planning must account for potentially longer retirement periods, necessitating a portfolio that can last 30+ years.
Long-Term Care Costs: With the likelihood of needing long-term care increasing with age, planning for these costs is essential to avoid financial burden and ensure quality of life.
Social Security and Medicare Benefits: There’s a chance that benefits could be reduced or taxes might go up to support these programs. We need to plan for multiple outcomes.
All we have to do is look at annuity sales in 2023 to see that consumers and advisors alike are turning to insurance contracts for peace of mind in the face of these headwinds. In ways, it’s unfortunate to see a record 25% increase in year-over-year annuity sales, as often, it’s primarily the agents who benefit from these products. Most annuity sales tactics use the same general concerns discussed above to incite fear and force quick action at the client’s own peril. My general thought process for insurance and annuities is straightforward: insurance is a great risk transfer tool but an expensive way to invest. If an annuity contract cannot be clearly explained, including all fees and market-based outcomes, I’m not interested.
A critical, yet often missed, step in sound financial planning is customizing withdrawal strategies to suit individual needs. This should usually be the first move in crafting a tailored retirement income strategy. When done in concert with a comprehensive financial plan, customized retirement withdrawal strategies can provide greater financial security because they allow for flexibility. None of us know what the future holds and unlike an annuity contract that locks you into a particular set of terms with possible penalties for making changes, customized income strategies allow you to make adjustments at the margins or pivot when necessary as your retirement years unfold.
As we consider the often jarring transition from saving to spending, it is essential to understand the various withdrawal strategies for portfolio assets available in retirement, which broadly fall into four categories:
Constant-Dollar Withdrawal: Start with a fixed percentage, then adjust annually for inflation. It can suit those needing a consistent income to cover fixed expenses.
Constant-Percentage Withdrawal: Withdraw a consistent percentage of your portfolio each year. Nice for those with flexible spending needs and lower fixed costs.
Variable-Percentage Withdrawal: The withdrawal percentage adjusts based on your portfolio’s annual value. Suitable for flexible spenders without the aim to leave a significant inheritance.
Spend Only the Income: This approach only spends dividends and interest, preserving the principal. It suits individuals with low expenses compared to their portfolio size or those wishing to use their current asset base for legacy planning.
Note that none of these strategies are a set-it-and-forget-it approach. They are part of a constant discussion about how we can help you most efficiently and comfortably spend the money you have worked so hard to earn.
Morgan Housel’s “The Psychology of Money” emphasizes the personal nature of financial decisions, reminding us of the wide variance in how people view and manage money. This diversity points to the absence of a one-size-fits-all approach to retirement planning. The goal is to find a strategy that aligns with your needs, ensures stability, and adapts to life’s uncertainties.
As your financial planners, we’re dedicated to navigating the complex landscape of retirement planning with you. If you have friends or family who require sound advice and a comprehensive review of retirement income planning options, please reach out and refer them to our team. Our goal is to ensure that our client’s retirement strategies are not only robust and tailored to their needs but also flexible and ready to adjust to the constantly evolving financial world.
Albion Financial Group is an SECregistered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.
As we end another tax season, it’s crucial to address prevalent misconceptions surrounding taxes. Despite their annual familiarity, taxes remain a topic shrouded in confusion and misunderstanding. In this guide, we aim to shed light on some of the most pervasive myths and clarify the nuances of tax deductions, credits, penalties, refunds, and more. By debunking these misconceptions, we hope to empower readers with a clearer understanding of their tax obligations and opportunities for financial optimization.
Tax Deductions
There’s a common misconception that tax deductions automatically translate into a dollar-for-dollar reduction in taxes owed. This is not the case. While they do lower taxable income and can result in less taxes owed, tax savings thanks to deductions are based on your tax rate, unlike tax credits which offer a direct offset of taxes.
Deduction Example:
Last year, we aided a client in donating $20,000 worth of equipment to charity. Despite the substantial donation, the actual tax benefit depends on various factors, most significantly the client’s tax bracket. If the client’s income were to put them into the highest federal income tax bracket of 37%, the donation would lead to a total tax reduction of $7,400, not $20,000 ($20,000*0.37). A deductible expense simply means that you get a discount on the expense and are not required to pay income tax on the purchase.
Tax Credits
When it comes to tax credits, it is often understood that they’re interchangeable with tax deductions, which is not true. Tax credits directly reduce the amount of tax owed, dollar for dollar. Once your taxes have been calculated, any tax credits will subtract the total amount of taxes owed.
Tax Credit Example:
Take, for instance, the Child Tax Credit, which offers a $2,000 credit for a child 17 and under who is claimed as a dependent. If a single parent with a young child has a federal tax liability of $5,000, they could likely claim this credit thus reducing their tax liability to $3,000.
Additionally, it’s important to note that tax credits aren’t necessarily free money. While they can be an added bonus, most credits only provide a refund if you owed taxes to begin with, meaning you earned enough in taxable income during the year to qualify for the credit, but not too much to no longer qualify. Understanding these distinctions is key to maximizing your tax benefits and avoiding misconceptions.
Tax Deductions vs. Tax Credits
Consider the comparison of tax deductions and tax credits in a shopping context. A tax deduction resembles a favorable promo code, providing a certain percentage off your total purchase—equivalent to your marginal tax rate (or the highest rate your income is taxed). Conversely, a tax credit operates akin to a gift card, offering a specific dollar amount reduction from your overall purchase. While not precisely free money, it’s a close second.
Tax Penalties
Another misconception exists around tax penalties, which are often believed to apply solely to those intentionally evading taxes. Tax penalties can stem from various factors, including underpayment, late filing, or inaccuracies on your tax return, regardless of intent.
Tax Penalty Example:
I received a letter a couple years back detailing an underpayment penalty on my tax return. The letter outlined that I owed more than what was listed on my tax return. Since it had been many months since filing my return, I was also being charged additional fees on the “late” amount because the additional taxes were due by April 15 (as federal taxes always are). Despite the stressful process, I enlisted the help of a CPA to appeal the penalty and avoided owing the additional taxes and penalties. If you end up owing more tax than originally paid, you will owe penalties on top of the underpayment amount for however long it takes for the IRS to notify you of the underpayment amount.
Tax Refunds
Regarding tax refunds, many believe that refunds are free money from the government. It’s important to understand that a tax refund is not a gift from Uncle Sam, but rather signifies the return of your overpaid taxes throughout the year, though that doesn’t stop them from feeling oh so nice to receive.
Tax Refund Example:
If you owe $10,000 in federal taxes for 2023 and $9,000 was withheld from your paycheck for federal taxes throughout the year, you will owe $1,000 at tax time. Conversely, if $11,000 was withheld, you would receive a $1,000 refund. I spoke with a CPA friend recently who said that the only thing clients ever want is a refund, joking that he would be seen as a magician if he increased his clients’ paycheck withholdings for them to get massive refunds upon filing their tax returns. Many personal finance gurus have strong opinions for how to optimize withholdings. Find what works for you, just withhold enough that you don’t incur penalties.
Business Write-Offs/Deductions
There’s a common misbelief that all business expenses are automatically deductible. Not all expenses qualify for deductions. Business expenses must meet the criteria of being regular, ordinary, and necessary for the operation of your business to be deductible, with certain limitations and rules in place.
Business Deduction Example:
An individual takes a business trip to a tropical destination, intending to deduct all associated expenses, such as hotel stays and meals. The IRS may deny such deductions if the trip is deemed primarily for personal enjoyment rather than business purposes. Make sure your business expenses qualify to be deducted prior to spending money you hope will be tax deductible.
Gifting
It is often believed that gifting will result in taxation for gifts exceeding the annual gift exclusion limit. While true in a way, it’s essential to understand that the tax-free exclusion amount—$17,000 for 2023 and $18,000 for 2024—applies on a per person basis. Also, individuals can give up to $13.61 million (2024 amount) in tax-free gifts in their lifetime (known as the lifetime gift exclusion), so this exclusion of $18,000 (for 2024) is the amount that can be gifted without counting against the lifetime exclusion. This can get very complex as there are varying gifting strategies to consider, and attempting to implement any of them on your own can be extremely difficult.
Gifting Example:
Consider an older couple aiming to provide generous gifts to their two married children without incurring taxes. In this situation, each spouse could gift $18,000 to both children and their spouses, totaling $72,000 in tax-free gifts per spouse or an impressive $144,000 collectively as a couple. All of this could be done without counting against the lifetime amount in tax-free gifts that can be given.
529 to Roth Conversions
A common misconception exists regarding education savings and deductions, particularly regarding the conversion of unused 529 balances to a Roth IRA (a new strategy from the Secure Act 2.0). While there is some truth to this notion, it’s crucial to understand the limitations involved.
529 to Roth Example:
Consider a scenario where you have $50,000 sitting in a 529 account but decide not to pursue further education. In such a case, you may contemplate rolling the funds into a Roth IRA, which could be an option. This maneuver comes with restrictions. For instance, the 529 account must have been open for at least 15 years, and the rollover cannot exceed the current year’s Roth contribution limits—$7,000 for 2024. There’s also a lifetime maximum of $35,000 per beneficiary for these rollovers. While there are more intricacies to be aware of, the process is not as straightforward as commonly believed.
Tax Preparer Liability
There’s a common belief that the liability for errors or inaccuracies associated with tax returns is solely on the tax preparer. It’s imperative to recognize that the individual, the taxpayer, is responsible for the accuracy of their tax returns, regardless of professional assistance.
Tax Preparer Liability Example:
If someone hires a CPA to file their tax return but provides inaccurate income information or doesn’t send all required information/supporting documents, they remain accountable for any discrepancies. In the event of an IRS audit uncovering errors, the individual is liable for rectifying the mistakes and covering any resulting back taxes and penalties.
Conclusion:
As we end tax season for tax year 2023, we extend our gratitude to the remarkable CPAs we collaborate with. As we at Albion Financial Group are not accountants and do not give tax advice, their expertise ensures accurate tax filing and reporting, guiding us away from the pitfalls of common misconceptions. To those dedicated CPAs tirelessly navigating the complexities of the tax code, we salute your unwavering commitment. Here’s to the invaluable knowledge they impart and the smooth tax planning ahead!
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.
In a financial landscape where interest rates on savings accounts are enticingly high, the decision between paying down debt or stashing cash becomes more intricate. This article aims to unravel a few of the complexities, arguing that even with the allure of a 5% interest rate in a High-Yield Savings Account, strategically paying down debt can often be a superior financial move. We will delve into the nuances of tax considerations and the importance of setting concrete financial goals to guide this decision-making process.
The Emergency Fund
Prior to exploring better potential use-cases for idle cash, a proper emergency fund should be established. It is understood that the purpose of cash in an emergency fund is to provide financial security during uncertain times. For this reason, these funds need to be liquid, and as such, a High-Yield Savings Account is an adequate place to house this cash.
The Temptation of High-Interest Savings
For funds above and beyond what is needed in an emergency fund, a 5% interest rate on a High-Yield Savings Account can be a tempting prospect, seemingly outpacing the interest paid on certain debts. However, the true impact of this nominal rate needs to be dissected, especially when considering the after-tax reality and the inherent trade-offs.
Tax Considerations and the Reality of After-Tax Returns
One critical factor often overlooked is taxes. Interest earned in savings accounts is subject to ordinary income tax (the highest tax rates individuals can be subject to), which can significantly diminish the apparent superiority and allure of a 5% interest rate. The effective return, or after-tax return, will likely be much lower, potentially making the decision to pay down debt more appealing.
Strategic Goal Setting
Rather than being swayed by high interest rates alone, individuals should set clear financial goals to guide their decisions. It comes down to determining a concrete purpose for every dollar in a financial plan. This could include saving for a home, funding education, or securing retirement. Defining a goal for each dollar allows for a clear answer as to how the funds should be used or invested. Rather than chasing the highest interest-bearing savings account in the short-term, it is necessary to shift to a long-term view. With a long-term focus and a goal for every dollar, the decision of what to do with additional funds becomes increasingly clear.
Paying Down Debt
A Closer Look at Mortgage Considerations: Take the example of a 3% mortgage on a home. While the nominal rate appears lower than the 5% savings interest rate, the tax implications must be considered. After accounting for ordinary income taxes (federal, state, and potentially net-investment income tax) on the interest earned in savings, the effective return may not be significantly higher, if at all (surprisingly, in the highest of personal income tax brackets, the calculation tips the scales in favor of paying down the debt in this scenario). In this light, paying down a low-interest mortgage, even in the current higher interest rate environment, can be a financially prudent move if there is alignment with the overall financial plan.
Long-Term Debt as a Strategic Asset
Even when interest rates on savings appear attractive, individuals with long-term, low-interest debt, such as a mortgage, may find value in paying down this obligation. By strategically reducing debt, they enhance their financial flexibility and free up cash flow to use in pursuit of other goals. For this reason, paying down debt is saving.
Conclusion
In the dynamic interplay between high-interest savings and debt repayment, strategic wisdom lies in the details. Nominal interest rates on savings accounts can be alluring, but after-tax considerations and the strategic goals one sets can redefine the narrative. As advocates for financial wisdom and well-being, we urge careful consideration of the overall impact on goals before deciding to invest or pay off debt.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.
Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
