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Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

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Peter Locke

Backdoor Roth 

If you’re looking for tax free income in retirement getting as much money into your Roth is the way to go. Tax free growth turns into tax free income. Executing on backdoor Roth strategies can be a little confusing but the math is highly predictive. If it’s right for you, it will support the broader tax strategy in retirement. When you retire most people think their tax rates will go down substantially. However, for those that have done a great job saving in their 401ks and IRAs, building their rental property empire, acquiring high growth assets, or anyway that’s not an asset in a tax-free account then you’re probably going to stay in a high income bracket throughout retirement. When you take into consideration social security, pensions, RMDs, and rental incomes you may have a difficult time not paying a large percent to the government. If you’re trying to sustain an income of $100,000 in retirement you cannot simply take out $100,000 from your 401ks and IRAs without losing a large chunk of it to taxes. So you’ll have to take out more and more each year in order to sustain your income due to inflation. However, if you’re receiving $100,000 per year from your Roth IRA then you’ll dramatically reduce your effective tax rate for your other tax-deferred distributions due to the Roth distributions being tax free. Unfortunately, for those high earners you may be thinking it’s not feasible or a smart strategy. I am here to tell you that for some it truly doesn’t make sense but for the majority of people it does and here’s how. If you’re in the 35%+ tax bracket this is a difficult decision; however, if time is on your side it still may be a good idea. For those that are in less than a ~35% tax bracket you’re in a great spot. First, let’s tackle the 35%+ individuals and families. For high income earners, you have a couple of options. Invest a portion of your 401k contributions to your Roth 401k each year. Some clients like doing a half and half strategy where half goes to the pre-tax 401k and half goes to their Roth 401k up to the annual 415(c) limits. That way, they’re taking advantage of some tax deduction but not fully. Another way is to do a Roth conversion or a backdoor Roth  conversion. Now be very careful here, because if you have rolled your 401k into your IRA then certain rules apply to you which I will touch on. You cannot make a Roth contribution if you file single and make over $139,000 (2020) and can only make a partial contribution if you make between $124,000 – $139,000 (tax year 2020). If you’re married and file jointly, your phase out is between $196,000-$206,000 (tax year 2020), meaning if you make over $206,000 then you’re ineligible. So here’s what you can do: A Roth conversion is taking money from your deductible pre-tax IRA and converting it into a Roth. You pay income tax now and the money grows tax deferred for life.  You can withdraw that money penalty free after the age of 59.5 or earlier if it’s a qualified distribution. A backdoor Roth conversion is when you make a non-deductible contribution to an IRA and convert that money into a Roth. The great thing about this strategy is any person with any income can make a non-deductible or after-tax contribution (a contribution that doesn’t reduce your current year tax liability). Before you do this you MUST understand this key rule. If you have a traditional IRA or rollover IRA (not 401k), then you must do a pro rata conversion, which for most, isn’t a great option. For example, I have 100k in my IRA and I open a non-deductible IRA and contribute the annual limit ($6,000 if I am under the age of 50 and $7,000 if I am 50+) and want to convert my $6,000 over since I already paid taxes on it and I want it to grow tax free. Well the IRS doesn’t allow you to just convert the after-tax/non-deductible contribution on it’s own and forces you to take a portion of both. In this case, $6,000 makes up 6% of all my IRA money so then I can only convert 6% of my after-tax contribution to my Roth and the rest has to come from my deductible pre-tax IRA because the IRS wants its money now forcing you to pay income tax when you didn’t want to. Don’t worry, you’re not out of luck. If, let’s say, you only have money in a 401k, then you can do a backdoor Roth conversion now. However, if you moved your 401k into an IRA and haven’t contributed any more to it then you could move that money back into a 401k at your current employer or a solo 401k if you’re self-employed and don’t have employees. By doing this, you no longer have to do the prorated conversion and are eligible to make non-deductible contributions and convert them immediately to a Roth. Before you do this, please consult with a tax advisor as we’re not tax professionals. For those that aren’t earning over the income thresholds set out by the IRS each year, you can simply contribute directly to a Roth without all these extra steps. Keep in mind that you’re only allowed to make one contribution or multiple contributions for a total of the annual limit to either the IRA or the Roth (or split the total to both). If you’re under the income threshold then contributing to a Roth may be best but consult with a tax advisor first. Converting money by using a backdoor Roth strategy is similar to delaying social security. After a certain amount of years and growth you break even and it starts paying off. So, if you’re older and your life expectancy isn’t expected to be very long this option may not be for you unless you

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November 23, 2020 No Comments
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Kevin Taylor

Why you need an Estate Plan

Everyone needs to plan and when you fail to plan; you will create a storm of questions and controversy your family may not be prepared to solve. When we hear the term estate plan, most times we think it is for the super-wealthy. But everyone, especially dentists, need to have an estate plan that resolves issues for your family, and your practice. Dentists have a fantastic capacity to generate wealth both in and outside of their practice. As a result, the issues that arise from a practices owner’s passing are made more complex by their role as breadwinner at home, and the chief source of cash flow for the practice. “If you fail to plan, you are planning to fail” ~ Benjamin Franklin By Kevin T. Taylor AIF® and Peter Locke CFP® After working for decades to make the grin on other people wider and whiter, they will be required to have a series of documents that will explain specifically how they want their hard work distributed. This is made increasingly complicated if the dentist has an ownership stake in the practice, has a child that may take over, and has employees that rely on them.  In order to execute a proper estate plan you should consult professionals that understand both the nuances of your profession and the intricacies of asset management/transfer. A properly executed estate plan fulfills your healthcare directives, provides liquidity at death, property transfers and wishes, all while maximizing the net assets that pass to heirs or charity and minimizing costs and taxes.  This is not simple and can have a huge effect on the legacy you leave behind. It ensures your financial matters are organized so when your loved ones deal with your grief they don’t have the added stress of trying to figure out your financial affairs. This should be done and reviewed annually for the following reasons: Your wishes stay granted As stated earlier, an estate plan contains instructions that you leave when you die or become incapacitated where you can no longer decide for yourself what needs to be done next. Whatever decision or wish you have will be included in this plan. You get to choose who gets this or that, and what portion goes to a particular person or charity.  If your children are young, you will choose who takes care of them and with what financial support. Your wishes will be carried out the exact way you want them to be and all your instructions will be respected. Protect your family, business, and legacy After years of hard work, or worse a life cut short, you don’t want your family to go through the challenges of distributing your assets when you are no longer with them.  An estate plan will have multiple choices and decisions that must be made in order to best execute on what you want to happen when you’re no longer able to make those decisions on your own. It can ensure your business and family have liquidity. If you have partners in your practice, it will provide them liquidity to buy your portion of the practice to enable your family to get the support they need when you’re no longer there.  An estate plan will help your loved ones avoid expenses and legal hassles and helps protect your children’s future. It prevents your assets from going through the public process of probate which is not only expensive but cumbersome. With a proper plan, your family has money to live, without a plan or sufficient assets, your family could be left in a hard place.  If you’re the sole owner of your business and you pass, your family could be left with a fraction of what you had built. Think about a scenario where you listed your practice as a sole proprietorship because when you started it you didn’t have clients or a family.  Overtime, your net worth grows and your practice is generating a large amount of revenue.  You start a family and have two young daughters. Then one morning, you’re involved in an accident on your drive into work and you pass away.  Unfortunately, without a proper estate plan, your business could cease from existing or best case, your family or a legal representative is appointed by the courts after months of waiting and sells it to a third party for a fraction of what it was worth.  Closely held business interests generally represent a considerable portion of the business owner’s net worth and generally aren’t liquid.  This creates a need for liquidity within the estate and often for the surviving spouse. However, if you haven’t done an estate plan you probably don’t have adequate funds saved to provide the cash flow necessary to sustain your family’s current lifestyle let alone future needs. When an individual becomes incapacitated or is suffering from cognitive impairment, life doesn’t stop, neither do the bills or your practice.  You and/or your kids may need a guardian to support you.  Without planning, who will support you? How? Would it cause your family to fight?  While this gets decided, no changes can be made on your behalf to your accounts or practice. Simply adding joint ownership doesn’t resolve your issues and it may even make matters worse depending on the circumstances.  By planning for these events which are becoming very common, you can help support yourself, practice, and family with the right plan. Authority Granted Besides adding a joint owner to your accounts (which not all accounts are eligible for) who is responsible for what happens to you in the event of “I just never thought it would happen to me” disability or incapacitation. A Durable Power of Attorney can grant someone to act on your behalf when something happens but ends at death.  The goal of a Durable Power of Attorney is to grant authority to act on your behalf to the extent legally possible, and with regard to all of your assets and accounts.  A General Power of

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October 15, 2020 No Comments
Articles
Kevin Taylor

Choosing Between a Roth IRA and a Traditional IRA for Retirement Savings

When planning for retirement, one of the most common decisions you’ll face is whether to save in a Roth IRA or a Traditional IRA. Both are individual retirement accounts designed to help you grow your savings with tax advantages, but they work differently. Let’s break it down in simple terms to help you choose which one might be right for you. The Basics Traditional IRA: You contribute money before taxes (or deduct contributions from your taxable income if eligible). Your money grows tax-deferred, and you pay taxes when you withdraw it in retirement. Roth IRA: You contribute money after taxes, meaning you don’t get a tax break now. However, your money grows tax-free, and you can withdraw it tax-free in retirement. Key Differences Feature Traditional IRA Roth IRA Tax Benefits Now Contributions may reduce your taxable income today. No immediate tax break (contributions are after-tax). Tax Benefits Later Withdrawals are taxed as regular income. Withdrawals are completely tax-free. Income Limits No income limits to contribute. Income limits apply (e.g., high earners may not qualify). Required Withdrawals Must take Required Minimum Distributions (RMDs) starting at age 73. No RMDs—your money can keep growing tax-free for life. Age Limits No age limits for contributions. No age limits for contributions. When to Choose a Traditional IRA A Traditional IRA might be the better choice if: You Want a Tax Break Now: If you’re in a high tax bracket and want to reduce your taxable income today, a Traditional IRA lets you deduct contributions (if you qualify based on income and workplace retirement plans). You Expect Lower Taxes in Retirement: If you think your tax rate will be lower when you retire, paying taxes on withdrawals later might save you money. You Earn Too Much for a Roth IRA: If your income exceeds the Roth IRA contribution limits (e.g., in 2025, the limit is $153,000 for single filers and $228,000 for married couples filing jointly), you can still contribute to a Traditional IRA. When to Choose a Roth IRA A Roth IRA might be the better choice if: You Want Tax-Free Income Later: Roth IRA withdrawals are tax-free, so if you think your tax rate will be higher in retirement, this is a great option. You’re in a Lower Tax Bracket Now: If you’re early in your career or earning less, paying taxes on contributions now might cost less than paying taxes on larger withdrawals later. You Want Flexibility in Retirement: Since Roth IRAs don’t require RMDs, your money can keep growing tax-free as long as you want. You can even pass it down to your heirs. You’re Concerned About Rising Taxes: If tax rates increase in the future, having tax-free income from a Roth IRA could be a big advantage. Can’t Decide? Split the Difference! You don’t have to choose just one. You can contribute to both a Traditional IRA and a Roth IRA in the same year, as long as your combined contributions don’t exceed the annual limit ($6,500 in 2025, or $7,500 if you’re 50 or older). This approach gives you tax diversification—some money is taxed now (Roth) and some later (Traditional), helping you adapt to future tax changes. Final Thoughts Choosing between a Traditional IRA and a Roth IRA depends on your current tax situation, income, and goals for retirement. If you’re unsure, consult a financial advisor or tax professional to figure out the best strategy for your needs. No matter which account you choose, starting early and saving consistently are the most important steps toward a comfortable retirement!

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November 27, 2021 No Comments

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