Joel’s Published Column

OLV_Masthead_5
985x20


985x20
Joels-Column-Header
985x20

Taking Full Advantage of Possible Tax-Free Growth

In December 2017, President Trump and his republican-held Congress passed a sweeping corporate tax reform bill lowering the corporate tax rate from 35% to just 21%*. This is a permanent decrease of corporate taxation that will remain in place until both houses of Congress pass a bill to increase it. They also cut income taxes on individuals in all tax brackets. This is good news in the short term, as we get to keep more of the money we earn and spend it on things we want. Taxes that were decreased on individuals, though, are schedule to go back up as those cuts have a “Sunset Provision” in 2026 and revert to the way they were, unless Congress acts to make them permanent.

This scenario is creating a great opportunity for people who are working, as well as retirees. The Roth provision of the IRS code allows for workers who qualify under the income limits to put money away on an after-tax basis. Those assets can then grow tax-free, as long as they have been held in the “Roth account” for at least five years, and the person has reached age 59 1/2. Many employers are also now offering a “Roth 401k” provision to their traditional 401k plans, which allows for high-income earners to also contribute to a qualified work savings account on an after-tax basis.
When George W. Bush left the White House, the national debt was approximately $8 trillion dollars; President Obama added $10 trillion during his tenure to bring the total to $18 trillion. As I write this article, according to usdebtclock.org, President Trump’s government has added approximately $4 trillion, making the debt $22.2 trillion. If the President doesn’t get spending under control, and if he is re-elected, we could be looking at a $30 trillion+ national debt by 2024. Eventually, it is my opinion, tax rates could possibly increase – substantially – on the individual American to try to pay down this debt. The U.S. had a top rate that exceeded 90% through the 1950s and early ‘60s and a 70% top tax rate from 1971-1980. Then, President Reagan got Congress to cut it to 50% starting in 1982. More recently, the top rate has fluctuated between the mid- and high-30s.
I encourage clients to work with their financial and tax advisors to devise and implement a strategy that will allow them to take advantage of our current low personal income tax rates, and start adding to accounts that will possibly allow tax-free asset growth. This opportunity to add to Roth 401ks, Roth IRAs, and possibly convert Traditional IRAs to Roth IRAs, will hopefully last until at least 2026, when the sunset provision on the personal tax break goes away. It is fully possible that a more socialist-leaning president could rally Congress to raise rates significantly as soon as the 2020 election is decided. Employers who have added the Roth 401k provision to their plans and tried to disseminate this information in a timely and explanatory manner find that the message often falls flat with employees.

Determining the best savings vehicle for you and your family takes research and evaluation. Putting money into your traditional 401k or IRA to get the tax deduction now, may be more beneficial for your individual situation than the after-tax strategies listed above. Meet with your trusted advisors to determine which plan of action makes most economical sense for you. Personal income tax rates are at the lowest we’ve ever seen – don’t miss your chance to set yourself up for success in the long run.

* Peter G. Peterson Foundation
**forbes.com

Taking Full Advantage of Possible Tax-Free Growth

In December 2017, President Trump and his republican-held Congress passed a sweeping corporate tax reform bill lowering the corporate tax rate from 35% to just 21%*. This is a permanent decrease of corporate taxation that will remain in place until both houses of Congress pass a bill to increase it. They also cut income taxes on individuals in all tax brackets. This is good news in the short term, as we get to keep more of the money we earn and spend it on things we want. Taxes that were decreased on individuals, though, are schedule to go back up as those cuts have a “Sunset Provision” in 2026 and revert to the way they were, unless Congress acts to make them permanent.

Great Opportunity for Workers

This scenario is creating a great opportunity for people who are working, as well as retirees. The Roth provision of the IRS code allows for workers who qualify under the income limits to put money away on an after-tax basis. Those assets can then grow tax-free, as long as they have been held in the “Roth account” for at least five years, and the person has reached age 59 1/2. Many employers are also now offering a “Roth 401k” provision to their traditional 401k plans, which allows for high-income earners to also contribute to a qualified work savings account on an after-tax basis.

When George W. Bush left the White House, the national debt was approximately $8 trillion dollars; President Obama added $10 trillion during his tenure to bring the total to $18 trillion. As I write this article, according to usdebtclock.org, President Trump’s government has added approximately $4 trillion, making the debt $22.2 trillion. If the President doesn’t get spending under control, and if he is re-elected, we could be looking at a $30 trillion+ national debt by 2024. Eventually, it is my opinion, tax rates could possibly increase – substantially – on the individual American to try to pay down this debt. The U.S. had a top rate that exceeded 90% through the 1950s and early ‘60s and a 70% top tax rate from 1971-1980. Then, President Reagan got Congress to cut it to 50% starting in 1982. More recently, the top rate has fluctuated between the mid- and high-30s.

Tax-Free Asset Growth

I encourage clients to work with their financial and tax advisors to devise and implement a strategy that will allow them to take advantage of our current low personal income tax rates, and start adding to accounts that will possibly allow tax-free asset growth. This opportunity to add to Roth 401ks, Roth IRAs, and possibly convert Traditional IRAs to Roth IRAs, will hopefully last until at least 2026, when the sunset provision on the personal tax break goes away. It is fully possible that a more socialist-leaning president could rally Congress to raise rates significantly as soon as the 2020 election is decided. Employers who have added the Roth 401k provision to their plans and tried to disseminate this information in a timely and explanatory manner find that the message often falls flat with employees.

Determining the best savings vehicle for you and your family takes research and evaluation. Putting money into your traditional 401k or IRA to get the tax deduction now, may be more beneficial for your individual situation than the after-tax strategies listed above. Meet with your trusted advisors to determine which plan of action makes most economical sense for you. Personal income tax rates are at the lowest we’ve ever seen – don’t miss your chance to set yourself up for success in the long run.

* Peter G. Peterson Foundation
**forbes.com

The Financial Crisis 10 year Anniversary

In 2008 our country’s entire banking and financial system came to a screeching halt as we realized that the exotic debt instruments that had been created to finance the housing bubble, were possibly, a little too exotic. These Collateralized Debt Obligations, were packaged up and sold to large banking institutions as “Sure Things”, and in the end, caused the bankruptcy of multiple different financial firms.

The Stock Market, as Measured by the S&P 500*, dropped from a high in October of 2007 of 1576, to a low of 666 in March of 2009. That was a total decline of almost 58%. I am convinced the only thing that was able to keep the stock market from going even lower, was that the Government approved a tax payer bailout of the financial industry. The Government vowed to never allow tax payer bailouts of the financial industry every again, as the “To Big to Fail” mentality won out over the moral dilemma of using American Citizens tax money to pay for the greedy mistakes of the financial industry.

Well, happy 10 year anniversary!

The crisis officially ended last month on March 9th 2009! I want to personally thank each and everyone of us, for the donation of our tax dollars, that was used to temporarily fix the crisis. Although I say these things tongue and cheek, I have to admit, that the bailout that was done 10 years ago, has allowed for us maintain a functioning banking system, save the U.S. Dollar, and make it so that our bank accounts stayed secure and in place. Without that bailout, life today would like dramatically different than it does now, and I shutter at the thought of what might have been.

We have learned a lot, and let me stress again, A LOT, of lessons from the 2008 financial crisis. One of those lessons is that, the world only ends once and 2009 wasn’t it. It also taught us that the resolve of the financial industry and the governments willingness to act in the best interest of it’s constituents were both very underestimated.

With the financial world put back together, and President Trump’s economically positive tax plan, our financial markets have found footing in the hope of brighter days to come. Our Employment situation is the strongest it has been in 50 years according to the BLS and we continue to have strong economic numbers. If I wagered a guess about what the next 10 years brings, I would say it will be wrought with crazy attention grabbing headlines, followed by periods of volatility, and then periods of sustained economic growth. The occasional recession, followed by an expansion, then another recession and another expansion. The American capitalistic spirit will continue to drive innovation. Think about life 20 years ago… 1999, and someone approaching you and tells you that you are going to be able to “download” a 2 hour movie, and watch said movie on my cell phone. That everyone you know is going to be connected and addicted to their phone and a “virtual interaction platform”. That you would be able to use your phone to order and pay for anything you want and have it be delivered by a brand new book seller called “Amazon”.

I hope you are catching my overarching theme here. In the very long term, it is going to take more than a financial crisis to stop the innovative spirit of America. As long as we promote a competitive environment in which hard working people are rewarded for creating, perfecting, and adding over all value to our citizens, we will never cease to be the best country to live in.

Mixed Signals and Interest Rates

To say that the investing climate over the last four months has been challenging, would be an understatement. The volatility that exploded onto the scene from October 1 through December 24 was more than a little concerning. We saw the blended averages go from solidly positive on the year as of the end of September, to losing 20% from that recent high as measured by the S&P Index 500.* What is most unique about this sell-off, is that I could argue that it was brought on by stronger than expected economic data and jobs reports.

According to the Bureau of Labor Statistics, we had 4.2% economic growth in the second quarter of 2018, and followed that up with 3.5% growth in the third. We have yet to hear how the fourth quarter performed, due to the government shutdown. Although I don’t think it will be as robust as the first or second quarters, I think the number will remain very positive. We haven’t had 4.2% economic growth since 1997 – that was 21 years ago! With 3.9% unemployment, the work environment is the best that it’s been in decades.

So, why all the volatility and decline in stock prices? I point clients and readers to the Federal Reserve and their mixed signals regarding rising interest rates. Since 2008, the economy had been growing at a very slow rate. This encouraged the Federal Reserve to lower the rate to 0%, and they have kept it at that level or just slightly higher to encourage easier business conditions. All through the last decade, the stock market got used to the fact that bad economic data was “good news” because interest rates would stay low. This is a slightly perverted view of the economy, given that historically, and by definition, good economic news has always been viewed as “good news.” Well, now we find ourselves in a pickle. The economy is great, but now, that means that interest rates should go up to help balance out the risks of rising wages and inflationary pressures, as too much money chases around not enough goods. Investors have gotten used to the low interest rate policy that the Fed implemented when trying to nurse our economy back to health. We could equate it to someone who is addicted to a substance, having that substance being taken away from them. This action is typically accompanied by withdrawal symptoms and fits of rage. This, in my opinion, is exactly what the stock market did in the fourth quarter, when Fed Chairman, Jerome Powell, indicated that he was looking to raise interest rates four times in the next nine months! Why was Chairman Powell going to raise rates? Because the economy was doing so well and inflation was starting to set in. Then, our addict (the stock market) went into fits of rage, and became very volatile.

In my opinion, the Fed Chairman was right in his assessment, and interest rates need to go higher. As the economic doctor, he decided that was the best route to keeping our patient in good order. Here is where the mixed signals have come from. The first time that Chairman Powell had an opportunity to actually raise the interest rates in January, like he had said he was going to, he decided to hold off. This is where the Fed is now talking out of both sides of its mouth, trying to do what is right AND keep the stock market happy. This is a dangerous game, and the Fed needs to ensure that their decision-making is independent of both stock market fluctuations, as well as President Trump’s constant insulting rhetoric.

When it comes to the economy, I believe that we still have much brighter days ahead. Eventually, our markets will return to more normal conditions where good news is again viewed as “good news.” Until then, I encourage investors to develop a plan and stick to it. Tough markets don’t last, but tough investors do.

The “New” New Year’s Resolution

I was just reading an article on huffpost.com, that by Valentine’s Day, 92% of all New Year’s Resolutions have been broken. In light of that statistic, I thought it would be valuable to send out an encouraging word and some thoughts that may help you get back on the horse and finish what you’ve started.

I applaud New Year’s Resolutions

Any time someone wants to change, better themselves, create new behaviors – I’m all for it! Craig Groeschel, one of my personal all-time favorite pastors, states that “successful people do often what unsuccessful people do occasionally.” In our instant gratification society, we have a very difficult time with small, incremental changes. During that first week of January, we hop on the treadmill three times, eat healthy, then step on the scale the following Monday, see that we’ve actually gained a pound and lose our minds. We scream “this doesn’t work!” and head to the fridge to eat a half-gallon of ice cream.

Before we set any “new” New Year’s Resolutions

I want you to try something different. Instead of focusing on the goal for yourself, like losing 20lbs or getting out of debt, focus first on who you want to be. Once you’ve determined that, you can start to change your decision-making process. Here’s the trick, you have to make all future decisions based on you actually being that person. Here’s an example: If you want to be a healthy, fit person who feels great about themselves, you have to start by believing that you are that person now. The sum of all of your past decisions had formed you into who you used to be.

The person you ARE is constantly being created

Once you have decided who you want to be, you can start making decisions based on who you are becoming. I know it sounds a little “new-ageish,” but the mind is in control of your decision making and you have to retrain your mind to realize that you have already changed. Once you grasp this concept, you will be able to see the world and view your decisions through your new lens.

Let’s say you’re a smoker and your New Year’s Resolution is to quit. When someone asks if you would like a cigarette, don’t answer, “I can’t. I’m trying to quit smoking.” By speaking those words, you are admitting that you ARE a smoker and training your brain for failure. When someone asks you if you’d like a cigarette, you answer “No thank you. I don’t smoke.” You see, the OLD you used to smoke, but that isn’t who you are anymore.

Remember, even though the first step to succeeding at making meaningful change in your life is to shift your mindset, don’t be discouraged if you don’t see instant results. It is the million little changes you make that will achieve the long-term difference. You didn’t gain 30 extra pounds, get into financial trouble or sabotage your relationships all over night. Getting out of debt, getting back into shape, having better relationships will take time.

Successful people do often, what unsuccessful people do occasionally

State who you want to be. Write it down. Believe it is who you are … and repeat. This is one recipe for making meaningful, long-term change and keeping those New Year’s Resolutions. I know it’s the middle of February; but that means there is a 92% chance that you’re in a great spot to make your “New” New Year’s Resolution.