Reasons to Stay Invested and Reasons to Adjust

Reasons to Stay Invested and Reasons to Adjust

We are quickly wrapping up summer 2020. And wow…we won’t forget it! What is normally a time of recharging and checking out from the norm has been a time for many of checking in to the daily number of COVID-19 cases and deaths. The toll this can take on us is brutal. I don’t think we were designed as humans to digest constant news and data from around the globe. Of course, the bulk of this news is negative and life-taking, not giving.

But there is some good news that hasn’t been reported as much as COVID-19 – the stock market. Would you believe that on July 21st this year the S&P 500 index closed at the same value where it started the year (3,257)? Also, on July 22nd it even exceeded the starting value (3,276)? So what are investors to do? We have some suggestions.

Stock Market vs. The Economy

You might be asking: “How can the stock market be back up given the horrible news of COVID-19 and discouraging (to say the least) economic reports such as unemployment numbers?” Answer: The stock market and economy are not the same. Yes, there is some correlation between the two. However, as often said in our client email communications and previous blog posts, the stock market is a leading economic indicator. The stock market is forward-looking and prices in what it believes lies ahead.

No question the actions of Congress and the Fed has provided stability to the markets. Now, it comes at a cost to the government and eventually taxpayers. But in the short-term, the stock market is pricing in stability.

Reasons to Stay Invested

You might feel the temptation to bail-out now given you are back (or almost back) to your January 1st starting values. However, what is your motivation? Most likely it’s fear which is seldom a good reason to make adjustments. So why stay invested?

  • Remember why you invested in the first place. Investing was never a short-term plan (at least not for Rivertree clients). It’s not a sprint; it’s a marathon. Don’t lose focus of this long-term goal.
  • Recognize the Opportunity. For those still in the accumulation phase of retirement planning (i.e. still contributing regularly to retirement accounts), have you celebrated the investment purchases that occurred in February through May? You bought more shares of companies whose values were beaten-down. With this short-term recovery, you now own more shares than you would have previously! This valuable investment strategy is called dollar-cost averaging. And it works well with time.
  • Recognize the Alternatives. Should you choose to abandon your long-term investment plan, what are your investment alternatives? Cash? If you’re like me, you have received multiple emails from savings account companies stating that your interest rate was being lowered. You’re doing really good to get 1% now for online FDIC insured savings accounts. Is a 1% rate of return going to accomplish your long-term goals? Most likely not unless you have significant wealth and can afford for inflation to erode the purchasing power of your dollars. Savings accounts are great for emergency funds and short-term savings needs. They are lousy for long-term investing.

Reasons to Adjust

No question there are times to make adjustments to your investment allocations. These adjustments could better suit your long-term goals and needs. When is a time to adjust?

  • Your goals have changed. Perhaps your retirement age moved from 62 to 70 or vice versa. This eight-year difference could affect the amount of stock and fixed-income holdings you have. If your retirement is delayed until age 70, you could afford to have a larger allocation towards stocks. If your retirement age is expedited to age 62, consider allocating more to fixed-income investments.
  • Your risk tolerance has changed. It’s common that a once aggressive investor shifts to a more moderate investment risk tolerance, especially as one approaches retirement age and considers that little will be added to investment accounts. And, you wonder if you’ll live long enough to see your investments recover in the event of a downturn. Maybe the year 2020 has exposed this change in risk tolerance and it’s time to make adjustments.
  • Your financial circumstances have changed. Maybe you’ve had a change in income or lost a loved one. These life events would certainly be cause to revisit your investment allocations. 

Closing

In summary, there are wise reasons to revisit your investment strategies and goals. There are also unwise reasons to make adjustments. Presidential elections come and go. The pandemic will eventually pass. Volatility in the stock market will rear its head during times of uncertainty. But don’t let these fears be the driver of your investment decisions. Research continues to show that investment decisions based on fear do not produce long-term results.

Our job is to walk alongside our clients during these times of uncertainty and help them make wise long-term decisions. Should you feel the need to have a conversation, please don’t hesitate to contact us.

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

How the SECURE Act 2020 Affects You

How the SECURE Act 2020 Affects You

I hope 2020 has started off well for you. In Mississippi, we have recently been having to choose between wearing rain gear or shorts (or both). It has been an interesting time of weather!

On the business front, did you happen to see what law was signed just before Christmas? The SECURE Act (The Setting Every Community Up for Retirement Enhancement) was signed by the President on December 20th with a January 1, 2020 effective date. This Act was part of the Spending Bill and significantly affects IRA planning.

We have summarized a few of the major changes that might affect you and your accounts. It’s worth a quick read to see if any of these apply to your current situation. Of course, contact us directly should you have any questions specific to your accounts or overall financial plan.

Required Minimum Distributions

Starting in 2020, the required minimum distribution (RMD) age changes from 70 ½ to 72. So those of you who are turning age 70 ½ in 2020 have another year and a half before you have to start distributions! If you turned 70 ½ in 2019, the old rules still apply and you must take your first distribution by April 1, 2020.

Qualified Charitable Distributions (QCDs)

Some good news from the law is that the opportunity to donate your RMD is still available, even at age 70 ½. Therefore, even though you are not required to take any distributions at age 70 ½, it could still make sense to donate from your IRA using the qualified charitable distribution up to a maximum of $100,000 per person. Utilizing this strategy allows you to give pre-tax dollars to charities rather than after-tax.

Non-Spouse Beneficiary/Inherited IRAs

Unfortunately, a quite common planning strategy called the “Stretch IRA” does not stretch as far. For spousal beneficiaries, the rules are unchanged. But for non-spouse beneficiaries, the inherited IRA must be depleted after 10 years if the IRA account holder died on or after January 1, 2020. Inherited IRAs previously set up are “grandfathered” to the old rules if the IRA owner died on or prior to December 31, 2019.

There are a few exceptions in the new rules applying to minor children, disabled and chronically ill individuals, and individuals not more than 10 years younger than the IRA account owner. Therefore, work closely with your financial planner and tax professional ensure your calculations are accurate.

Contributions into Traditional IRAs after age 70 ½

Lastly, a significant change occurred regarding contributions to Traditional IRAs after age 70 ½. Starting in 2020, every IRA account holder may make contributions to his or her Traditional IRA after the age of 70 ½ if they have earned income (W-2 or self-employment income).

We understand that changes in retirement and tax laws can be confusing, so please contact us with any questions. We are glad to help.

Here’s to a great 2020! Blessings to you in the New Year.

Important: Specific tax guidelines exists for each of these items mentioned, so be sure to talk with your tax professional before implementing any of these strategies.

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

Jesus and Taxes (Ways to Pay Less)

Jesus and Taxes (Ways to Pay Less)

You may recall the story of Jesus being confronted by the Pharisees about whether or not to pay taxes to Caesar. This was not the first attempt to trap Jesus in his teachings. His response was surprising and enlightening. (And if you keep reading, you might find new ways to reduce what is “Caesar’s”…)

The Story

15 Then the Pharisees went and plotted how to entangle him in his words. 16 And they sent their disciples to him, along with the Herodians, saying, “Teacher, we know that you are true and teach the way of God truthfully, and you do not care about anyone’s opinion, for you are not swayed by appearances.[a] 17 Tell us, then, what you think. Is it lawful to pay taxes to Caesar, or not?” 18 But Jesus, aware of their malice, said, “Why put me to the test, you hypocrites? 19 Show me the coin for the tax.” And they brought him a denarius.[b] 20 And Jesus said to them, “Whose likeness and inscription is this?” 21 They said, “Caesar’s.” Then he said to them, “Therefore render to Caesar the things that are Caesar’s, and to God the things that are God’s.” – Matthew 22:15-21

Mic drop. (Well, pretty sure He didn’t have a microphone at the time, but if he did, a drop would be appropriate.)

The Response

How we most likely respond to this teaching is that we should pay taxes. If you believe in the Bible as the ultimate authority, there is further instruction found in Romans 13:

1 Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God…6 For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.

Now let me be clear: I do NOT like paying taxes. Period. However, I also prefer to not be in jail while my kids grow up into adults. Therefore, I pay taxes that are owed to local, state and federal government entities. I also constantly look for opportunities to reduce what is owed.

As one of my tax professors asked: “What is the difference in tax avoidance and tax evasion?” Answer: Avoidance = Legal; Evasion = Illegal.

Ways to Pay Less

So how can you pay less in taxes? If you’re a resident of the State of Mississippi, you have a newly established tax credit opportunity! A tax credit is a dollar-for-dollar reduction of taxes owed.  A deduction lowers your overall taxable income. Bottom line: A credit is better than a deduction. You are redirecting tax dollars owed to the State to a select charity (or group of charities).

The Children’s Promise Act

The new credit allows for a State tax credit up to $400 (single) or $800 (married filing jointly) for donations made to a select list of charities. There is another $500 credit (single) or $1,000 (married filing jointly) for a separate list of charities. That’s a potential $900 total credit for single tax filers and $1,800 married filers! There is a $3 Million cap for the entire amount available. As of mid-November, there is approximately $2.8 Million still available! Click on this link to learn more. And of course, discuss with your CPA or tax professional to see if this opportunity works for your specific tax situation.

Retirement Accounts

Saving for retirement in tax-advantaged accounts continues to be a significant way to reduce your tax liability. The IRS recently released the new contribution limits for retirement plans and accounts. A highlight is that 401(k), 403(b) and most 457 plans allow for a $19,500 deferral, a $500 increase from 2019. Contribution limits for Traditional and Roth IRAs are unchanged at $6,000. However, don’t forget about the age 50 and over catch up contributions! (Click here for the IRS update on contribution limits.)

College Planning

Saving for college continues to be a struggle as college costs increase. Thankfully, there are several tax-efficient ways to save for college (and high school) for children and grandchildren, such as a 529 plan, Education Savings Account (ESA), Minor’s investment account (UTMA or UGMA) or a pre-paid tuition program. Each of these plans or accounts has its place in college planning. Deciding which one starts with the goal in mind. We would be glad to help walk you through the pros and cons of each option.

Hopefully, you have learned a new strategy or two that could help reduce your tax burden. The tax code continues to be quite complex. But if you look hard enough, you may find a way to better direct your hard-earned dollars.

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

Self-Awareness and Money

Self-Awareness and Money

I hope your fall season is going well and that you’re enjoying the cooler weather. Our newsletter topic this month might seem peculiar. What does money have to do with self-awareness, and self-awareness have to do with money? Quite a bit I’d say.

A Case Made

“Without knowledge of self there is no knowledge of God…without knowledge of God there is no knowledge of self.” Who said this? John Calvin, the great reformer! Now, we can take this quote out of context and too far by saying that introspection or self-awareness is more important than a knowledge of God. Calvin makes the case that these go together. We must see ourselves for who we truly are before a holy, righteous God. After true introspection should come humility.

But what I would also argue is that Calvin saw a place for knowledge of self. We often hear of self-forgetfulness – ignore our needs and only focus on others. But as I reflect on the life of Jesus, I can’t help but notice how many times he left the crowd to be alone. He recognized the times he needed to be alone with the Father, even though there were sick people to heal and lessons to be taught. Jesus had greater self knowledge and awareness than any other man who has walked this earth. He knew his calling, his mission, and his identity. And these impacted every decision he made.

And Money?

We all relate to money in different ways. Some of us never (or seldom) worry about it. Others think about it more often. And others are consumed by it. Where do you fall?

I would argue that first knowing how you personally relate to money is critical to making progress financially. If we know we’re prone to blow cash the minute it comes out of the ATM, then maybe that method is not best. Or perhaps it’s the opposite for you: cash gives you needed boundaries of when it’s gone, the spending stops. If it’s plastic, then spending continues.

We’re often asked by clients: Which budgeting system is best? We respond: “The one that you’ll actually do.” If a yellow pad and pencil keep you on track, then that’s best. If an excel spreadsheet, great. If an app, so be it! Ultimately, which system best helps you accomplish your goals?

What about investment account balances? TV financial pundits? Research online? Are these helpful for you, or do they create more stress? Perhaps you check your blood pressure next time you partake. Or maybe you already know the answer…you just don’t want to change. That’s okay for now. At least you know. But maybe change will come when “the pain of staying the same becomes greater than the pain of changing.” -Dr. Henry Cloud

Having self-awareness about your tendencies with money is critical.

A Helpful Tool

The Rivertree Team recently started the book The Road Back to You: An Enneagram Journey to Self-Discovery by Ian Cron and Suzanne Stabile. Whew! We have already had some good laughs as we’ve discussed our types and tendencies (and some occasional grunts as we read about the not so good parts of ourselves). The goal is that we know one another and ourselves better to create an even healthier work environment.

And at the spiritual level, considering what Brother Dave said to Ian, the author of this book: “Just remember, it’s only one tool to help you deepen your love for God and others….There are plenty of others. What’s important is the more you and Anne grow in self-knowledge, the more you’ll become aware of your need for God’s grace. Not to mention, you’ll have more compassion for yourselves and other people.”

What used to frustrate us about ourselves and one another can hopefully be replaced with compassion…and some friendly chuckles. 

Now What

Have you taken this journey before? If so, has it been helpful? If you haven’t taken this journey, I’d encourage you to do so. I am confident you’ll find it worthwhile.

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

Rivertree Celebrates 10 Years!

Rivertree Celebrates 10 Years!

We often hear of celebrating milestones: victories, championships, new beginnings, births, etc. But I generally don’t associate milestones with defeats, losses, deaths, and other unfortunate events. Listen to what Tim Fortner says:

“A ‘milestone’ comes from the use in olden times of having stones which told the traveler how many miles it was to the next city. They were a reference point which reassured the traveler they were on the right path.  Milestones have also been used to describe significant events in one’s lives.  In the Bible, especially, the Old Testament, we see a heap of stones to commemorate a significant event in the life of an individual or of the nation or people.

Joshua and the nation of Israel were experiencing some milestone events. Milestone events can be wonderful or they can appear as trouble, a loss, a setback. Certainly the defeat at Ai was especially troubling for Joshua and the nation of Israel.

With the Lord, a setback is a set up for a comeback. Now in order for this to be true, we must learn from our mistakes. We must learn the lesson the Lord would have us to learn, don’t we? Or else we are doomed to repeat them.  And when we learn something, we can begin again, more intelligently.   After what had happened at Ai, Joshua and the Israelites were discouraged.  Let’s face it- discouragement over the past failure and fear of the future are two common reactions which accompany failure.”

Your Milestones

In light of Fortner’s words, how would you describe and document your milestones? Could you do it in the form of a story? I was challenged some thirteen years ago to document the “fence posts” in my life – the significant people, places and events that have most shaped me. If you had to list your ten most significant “fence posts”, who or what has shaped your life, for better or for worse, what do you think that would look like?

For me, this exercise was fascinating, eye-opening and sobering all together. Then came the harder challenge: sharing these fence posts (i.e. “milestones”) with others. But not just any others – safe, loving people whose undivided attention was listening to my story. Whew! I’m having to take a deep breath even now as I remember!

Financial Milestones

What are your financial milestones? First job, first house, first credit card, last credit card (better!), debt payoff, mortgage payoff (party!), retirement account balance, extravagant giving, etc.? The list could go on, but again, what are yours? We’ve discussed many times the importance of setting goals. You are far more likely to celebrate some financial milestones if you have a plan in place. Behavioral finance research (which we believe in and practice with clients) continues to show that having a plan in place alongside your goals gives you far more probability of achieving them.

Our Milestones

In August, Rivertree set a milestone of its own. We were thrilled to celebrate the 10-year anniversary of the Company! Wow, how the time flies! As often said (particularly about parenting), the days are long but the years are short.

We have many milestones here at Rivertree:

-Opening an independent shop in 2009 on the tail-end of the Great Recession

Amy joining the team (and taking a leap of faith in a young Company) in 2010

Jonathan joining the team in 2013

Brent joining the team in 2015

Phillip joining the team in 2016 and continuing in a consulting role after leaving in 2017

Valerie joining the team in 2017

Fast forwarding to today, we oversee approximately $140 Million in client assets and service over 500 households. We’re amazed and humbled at these milestones. And, they would never have been possible without the trust and confidence of our clients. We are committed to continually earning our client’s business as we walk alongside them and celebrate their milestones. From the bottom of our hearts, Thank you!

Now What?

Do you have the courage to document your milestones – the good, the bad, the ugly – that shaped you? Or better said – your personal story? If you do, I challenge you to share your story with a good friend. The outcome of this process may surprise you!

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

The Perils of Do-It-Yourself IRA Transactions

The Perils of Do-It-Yourself IRA Transactions

I hope your summer months wrapped up well. For many of you, kids are now back in school and a routine is gladly welcomed. For others, this time of year may be business as usual. But may I share with you an observation I’ve had throughout my career? August and September tend to be restart months…perhaps a second New Year. Goals for the year may be revisited. Commitments slacked on become a priority again. A renewed energy might be felt to conquer certain tasks. If you haven’t already, I encourage you to revisit your goals and see what you’d like to accomplish before year-end. Once Thanksgiving comes, you’ll find it harder and harder to find that energy.

Shifting to this month’s topic, I’d like to share an article I recently read by Ed Slott, the “IRA Guru” as I call him. In this article from Ed Slott in Investments news, he shares real life stories about IRA transactions gone wrong. I think there is much to learn from these stories. Here are some thoughts.

The “Do over” option is gone

Prior to 2017, investors had the option of recharacterizing Roth IRA conversions in the event a mistake was made (or often times a better conversion opportunity occurred). The Tax Cuts and Jobs Act eliminated this strategy. When implementing a Roth IRA conversion, an investor is converting pre-tax dollars to tax-free growth dollars. How do you get there? By paying taxes on the amount converted.

In the story Mr. Slott references, an investor made a mistake by converting $2,000,000 rather than $20,000. Whew! How a simple decimal point caused significant taxes due! You might desire to be in the highest income tax bracket, but this is not the way to get there.

Working with an advisor could have helped correct this problem. Unfortunately, this investor is most likely going to tax court pleading for a private letter ruling from the IRS (which is a costly endeavor I might add).

Checking the correct box

Few realize the incredible importance of completing retirement plan rollover paperwork accurately. You could have it 95% accurate, but the 5% mistake could cost you thousands, if not tens of thousands, in taxes.

Mr. Slott references a Veterans Affairs person who attempted to do a tax-free rollover to an IRA from her Thrift Savings Plan (TSP). Rather than her retirement dollars being rolled over tax-free, she was paid directly with 20% mandatory federal tax withheld. Here’s the problem: The 20% may not be enough depending on the dollars at stake. Here’s the bigger problem: Even with this mistake, the rollover could have still occurred utilizing the “60 day rollover rule.” However, this investor was working alone and failed to get this done. And sadly, after spending considerable money on pleading her case in tax court, she lost her case.

Beneficiary Designations: Oh, How Important!

The extreme importance of proper beneficiary designations is something we have seen firsthand at Rivertree. The rules for retirement plan beneficiary designations (e.g. 401k, 403b, TSP, pension plan) and IRAs can be quite different. We often say to our clients that the “I” in IRA stands for individuals…that’s you! Qualified retirement plans set their own beneficiary and distribution rules. And their rules may not be exactly what you would desire for your beneficiaries.

Know this: Some plans will distribute 100% of the qualified beneficiary’s money paid directly to them rather than to an Inherited IRA. Whew! This is another significant tax hit that could have been avoided with proper planning.

As part of our financial review checklist, we revisit and update beneficiaries on accounts. Keep in mind that for some qualified plans, particularly pension plans, beneficiary designations are kept on file in the HR department. And these accounts could still have an ex-spouse listed as primary beneficiary. Even if you have updated your estate plan (e.g. Last Will and Testament), the beneficiary designation takes precedent over a will.

Conclusion

In closing, here’s a quote from Mr. Slott: “The tax laws are particularly complicated and unforgiving. Some mistakes, usually the biggest ones, cannot be undone. Advisers can help clients avoid these tax disasters and provide real tangible value, before the damage is done.

We would be glad to discuss with you any of the items mentioned in this article. In the meantime, finish strong for 2019!

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.