Joel’s Published Column



“It’s the Economy, Stupid”

Happy Independence Day to all!

This year has been a much more volatile year in the stock indices in comparison to 2018. Many of our clients have questioned the ups and downs we’ve experienced for the last four months, pretty much since President Trump has started down the path of placing tariffs on some of our most notable trading partners. These moves are part of what I believe to be a series of negotiable steps to move toward a more favorable trade environment for the United State.

At OLV, we have a very positive outlook with regard to the economy. We’ve had to take the approach of only looking at the headlines and completely blocking out the narrative. We don’t care if you watch CNN, MSNBC or Fox News, we really don’t think any of them are doing the headlines justice and come at all stories with extreme bias. This can be very dangerous to an investor’s health – both mental and financial. When we read the headlines and ignore the narrative, we see a lot of good information, such as an extremely positive unemployment situation. The department of labor said that the unemployment rate reported in June was 3.8% ( Honestly, I don’t need them to report how good the unemployment situation is, because I can look almost anywhere and see “help wanted” signs.

Two of my clients who are in charge of employment for both a manufacturing company and a large court house are both telling me the same thing: they can’t keep employees due to extreme wage pressures and staff being poached by other firms offering better work packages and work environments. I’ve even heard of signing bonuses for manufacturing jobs! The Atlanta Federal Reserve just upped their 2nd Quarter forecast for economic growth to 4.8! ( This number is larger than anything I could ever have predicted 18 months ago. In fact, we haven’t seen 4.8% growth since the 1990s ( Add to this the fact that for the first time in history, there are more job openings than job-seekers, with a record 6.7 million job openings and 6.4 million possible employees (!

I don’t care what side of the aisle you support in Washington, the numbers speak for themselves and they are speaking loudly. We think this could be the second inning of this economic expansionary phase and that we could be well rewarded over the next 5-7 years for staying the course in our investment strategies.

As Bill Clinton’s campaign strategist, James Carville, said in his 1992 campaign: “It’s the economy, stupid!” In fact, it looks like President Trump stole a page out of Slick Willy’s playbook from that campaign, which included the phrases, “Change vs. More of the Same,” and “Don’t forget health care.”
In summary, if investors insist on watching the mainstream media, I encourage them to ignore all the narrative and just watch the headlines. In my opinion, things in the economy are really solid, and it looks like there is much more to come.

Roth IRA Conversion Strategies in 2018

A few reasons why this may be a good idea

For a certain group of investors, a conversion of their Traditional IRA into a Roth IRA could be an effective move to hedge long-term bets against higher tax rates in the future. For some living in Michigan, this strategy could also be a very viable way to pass assets onto the next generation and help manage taxation to them at both federal and state tax levels.

Essentially, there are two groups that can potentially benefit when it comes to Roth Conversions and those are the younger investors (which is relative) and the wealthy. The younger a person is when the conversion takes place, the better – because there is an eventual break-even point in number of years that the conversion will reach, depending on different variables like rate of return, taxes paid on conversion, and future tax bracket. This break-even could possibly happen anytime between nine and 17 years, depending on actual performance, tax rates applied when the conversion takes place, and future tax rates.*

The older, wealthy investor may benefit from Roth IRA conversion in two ways. First, Required Minimum Distributions are not required on Roth IRAs, so this asset can continue to grow, tax-free, as long as the investor lives and then can be transferred to the next generation and maintain that tax-free status. An Inherited Roth IRA is subject to annual required withdrawals by the person who inherited it; but essentially, these can be tax-free withdrawals and will be stretched out over the new owner’s life expectancy.** If you were to leave a Roth IRA to a 30-year-old, you would be able to make withdrawals over the next 54 years while the money in the Roth continues to accumulate, tax-free. The second real benefit of the Roth Conversion for older, wealthy people looking to pass assets on to the next generation is that in Michigan, if you were born before 1946, you are not required to pay Michigan State income tax on your distribution up to $99,723 if filing jointly***, which is currently 4.25%. Anyone born after that would be subject to the Michigan income tax on retirement distributions. So, if you were born before 1946 and are looking to pass IRA assets onto the next generation, you really should work with your tax advisor and develop a sound strategy to possibly convert these assets, so that you and your heirs will be able to completely avoid the state tax associated with regular distributions from inherited Traditional IRAs.

Traditional IRA conversions to a Roth IRA are not a one-shoe-fits-all type of scenario, by any means. Each and every situation will be dependent on the calculations and the numbers specific to that investor. The real-life application of Roth conversions should be done with both your tax consultant and your financial advisor to make sure that everyone is on the same page in terms of the reason driving the conversion and the timeline over which the conversion will happen. Conversions that I have executed for clients rarely happen all at one time, in an effort to manage the marginal income tax bracket’s effect on the last dollar earned.

Given the new tax laws that are in place for the next eight years, I would strongly advise that investors who have an interest in a Roth conversion strategy talk to their financial advisor and tax advisor to start the evaluation process.

This material is provided for general and educational purposes only and is not intended as tax, legal or investment advice (or for use to avoid penalties that may be imposed under U.S. Federal tax laws). Please consult your tax advisor for advice regarding your personal tax situation.
Conversion from a traditional IRA to a Roth first requires paying taxes on any pre-tax contributions, plus any gains. Additionally, the money used to pay these taxes cannot come from your traditional IRA without a 105 penalty, if you are under age 59-1/2.
Converted amounts can be distributed without penalty after five years, beginning January 1 of the year of conversion and ending on December 31 of the fifth year. Each conversion has a separate five-year holding period. If you are under 59-1/2 and take a distribution of converted amounts prior to the five-year holding period you may be subject to the 10% premature penalty. Distribution of earnings before completing a five-year holding period and attaining age 59-1/2 may be subject to tax and 10% penalty.


Strategies for the Cheerful Giver

To say that there have been a lot of changes in Washington could be the understatement of the decade, but one change that should be beneficial to tax payers in the short term is the new Tax Reform act that was passed by congress in December of 2017. Not only is this going to lower the corporate tax from 35% to 21% indefinitely, but it will also be lowering individual and joint marginal income tax rates as well. Although the tax cuts for individual’s sunsets in 2026 *, it should provide a well needed shot in the arm to our middle class in America.
One other feature that will be affecting individuals is that the standard deduction that is able to be claimed by individuals and those filing jointly will almost jump up by double under the new law. What this means is that it will be much harder to itemize your deductions. For many people, this won’t matter much because it mainly benefits those who give substantial amounts to charity, and also those who have large mortgage expenses.

A strategy that I am sharing with clients who are charitably inclined is a strategy called “Bunching”.

This essentially is where you give 2 years-worth of charitable giving in one year, to ensure that you are able to itemize your deductions that year. Let me give you an example.

Example: A family may give a certain amount to their church every month during the year. This amount, combined with their mortgage interest, property taxes and other deductible items get them very close to being able to itemize, but doesn’t quite get to the $24,000 standard deduction limit. What I would encourage people to do, if it is within their means, is to pull forward their giving for the following year all into late December of this year. Of course you would have to have ample cash reserves to do this, but essentially you would make the following years gifts all in December, and then not do your normal monthly giving throughout the next year. The Charity would be happy to have those funds in advance, and you would be able to take advantage of itemizing your taxes that you. In the following year you are still entitled to the $24,000 standard deduction even though your donations for that year are much lower. So essentially, if planned for correctly, cheerful givers could do this every other year systematically to ensure that they are not losing the ability to deduct their giving.

“Bunching” is a strategy that does not apply to everyone

For those people who are consistent in their giving to charities, this could be a very viable strategy. Talk to your financial advisor or your tax preparer about if this strategy makes sense for you. It could be very beneficial to you and allow for you to keep more money out of the Government’s hands and more in yours and your favorite charities. I hope by now the cold weather has broken and we are well on our way to a beautiful spring season.


* – 03/07/2018; New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More

You Still Have Time

Tuesday April 17,2018: the last day that we have to file our income taxes on our 2017 individual earnings. That is, of course, without filing an extension. We also have from now until that day to make our contributions into an Individual Retirement Account. Many are asking whether this new tax law is going to affect what type of retirement account they should be using. In short, it is very much dependent upon the individual’s situation and goals; but, it is also a function of their household income level and whether they are being covered by an employer-sponsored qualified plan.

For 2017, the limits on contributions are the same for both Roth and Traditional IRAs.

We are able to put a total of $5,500 into either, and if over the age of 50, there is an extra $1,000 “catch up” provision that allows for total contributions of $6,500.
Choosing between contributing to a Traditional IRA and a Roth IRA can be a daunting task, but here are some guidelines as to the tax deductibility of the Traditional IRA which may help in the process.

If you are a single filer and covered by an employer-sponsored plan, you can deduct the full amount of your contributions into your Traditional IRA If your income is less than $62,000. This deductibility will phase out if you earn between $62,000 and $72,000; the deduction is completely phased out for you if your income exceeds $72,000.

If you file taxes jointly or with married status, the income levels for deductibility are slightly higher if covered by an employer plan. You would have total deductibility of your IRA contribution if your household income is below $99,000 and it is gradually phased out for incomes between $99,000 and $119,000.

If your employer does not offer a 401k plan, then there are no income limits as to the deductibility of your Traditional IRA contributions. In terms of your income, the sky is the limit.

As for the Roth IRA, your contributions are never tax deductible.

The growth inside of the Roth IRA could be completely tax-free for future qualified distributions. Distributions could be subject to taxation if they are held less than 5 years or withdraw before age 59 ½. There are though, income limits that may prohibit you from contributing. As a single filer, your income needs to be below $118,000 to contribute the full amount into your Roth IRA, and it phases out between that level and $133,000. For households filing married or jointly, the income limitations start at $186,000 and the full contribution amount phases out again between $186,000 and $196,000.
One other thing to consider is that in 2018, there is the possibility that your income tax bracket could be lower due to the new tax laws. You may be able to make a tax-deductible contribution for 2017 into a Traditional IRA when your tax bracket is higher, and then make Roth IRA contributions going forward for the next eight years if you are in a lower tax bracket. You may also want to work with your tax advisor to determine whether it could be of value to you to start converting your Traditional IRA into a Roth IRA over the next eight years while this tax law is in place.*

If the Trump Economic Plan doesn’t work out like he hopes it will, and we just end up adding a lot to our national debt, we very well could have much higher tax rates in the future to pay for all these current tax cuts, the military spending, and proposed infrastructure bill. In that case, your Roth IRA qualified distributions could come in very handy.

My Take

So many people I run into lately seem to be in a complete state of confusion regarding our current economy and the overall stock market. They can’t understand why the markets feel “okay” about such a politically incorrect, volatile and sometimes downright vile person in the Oval Office. My response to this sentiment lies in something that I’ve never done before; I’m going to quote myself from my November 2017 My City article: “The possibility of pro-economic growth policies could inspire animal spirits in the markets for hope of a brighter economic future.”

Americans have forgotten what strong economic expansion feels like.

Although many disagree with the President’s antics, capitalists couldn’t care less what he says – they care about what he is doing. Since taking office, President Trump has broadcasted his entire agenda: Business! Business! Business! He believes that the best path to economic freedom for the marginalized in America is to have extreme economic growth in which those who want to be employed can start down the path to financial freedom through the means of a good job.

Congress recently passed what I would consider to be the largest piece of Pro-Economic Growth legislature in our history – the tax reform act to cut the corporate tax rate from 35% to 21%. The entire theory behind this tax bill is that companies will be enticed to use the excess profits to invest in new property, plant, equipment and labor. A labor shortage will then attract more people back into the workforce as inflation sets in and wages start to increase. These economic forces will, hopefully, then create a self-fulfilling prophesy of more workers, more earnings and more demand for products. Will this work? I sure as heck hope so; because if it doesn’t, we’ll be paying off one huge tax bill for decades to come.

I’m going out on a limb here and predicting the President’s next steps.

I believe that he will very aggressively target an infrastructure-spending bill. This is the same spending bill that President Obama wanted, but was unable to get into place due to Republicans blocking his efforts. One might ask, “Infrastructure spending? That’s not a Republican thing to do,” and one would be right to ask. The key here is that President Trump isn’t a real Republican … he’s a businessman who saw a road to the White House through an angry Middle America. So, my prediction is that Donald Trump will use Universal Health Care and DACA as bargaining chips to get a $1 trillion infrastructure bill and build his “wall.” Three out four of these initiatives are democratic in nature, with of course the “wall” being for his ego. He would do this because he doesn’t care about debt like your average Republican claims to, and he knows that the spending bill would give the economy a huge shot in the arm. Heck, he may even throw in that he won’t run as a Republican in the 2020 Presidential election to get the entire Congress to vote for the measure. If he was able to cut corporate taxes, get a spending bill, universalize healthcare AND build his wall, all in four years – he may just drop the mic, walk offstage, go back to his old life and be a one-term president. Of course, not before saying, “You’re welcome, America.” Or, who knows … maybe he would keep his word and not run as a Republican, but square off against Oprah as an Independent. Well, now I’m just being crazy!

Hope your year’s off to a great start and I hope you enjoyed the fairytale ending of this crazy story.