History only gets written after the fact, but at this moment, it feels like the bear market of 2022 will be one that is remembered and studied for many years to come. The abysmal performance of bonds was most noteworthy with the primary U.S. bond benchmark index posting its worst decline since inception, falling 13% for the year. To pile on, global stocks were down 18%, marking the first time in 50 years that both bonds and stocks have fallen in a calendar year.
Only time will also tell us whether 2022 will mark the beginning of a decadal change from an era of falling rates and rock bottom interest rates when growth stocks and long-term bonds seemed to go in only one direction. But in the short term, investors who seemingly ignored the ever-growing interest rate risk for fear of missing out were dealt a serious blow with long-term government bonds down 31% and U.S. growth stocks falling 29%. With minimal exposure to these assets, many of our portfolios were able to deliver better returns than their benchmarks.
There is much uncertainty going into the year ahead, and that likely means continued volatility. 2022 reminded us that volatility can take many forms, not just wild swings day to day, but months of up followed by months of down. But we do know that with each passing month of down markets, investor expectations become more pessimistic, and it becomes easier to exceed expectations and for a rebound to be sustained over the long term. Our goal is to be positioned to capture that growth when it happens.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
Tax adjustments happen every year, but this provides an excellent opportunity to review and plan for a better personal tax situation for 2023. Let’s take a look at the changes! Legislation has given even more planning opportunities for employees and retirees than usual. The planning opportunities for 2023 fall into three broad categories: tips for current workers, tips for retirees, and ongoing strategies.
Updates for Current Workers
Here are some items that people who are currently working will want to review for the new year:
New Tax Brackets and Standard Deduction: Tax brackets and the standard deduction are all indexed to inflation. The large numbers in 2022 created bigger changes than usual in 2023, making it worth reviewing tax withholding.
Higher 401k (and 403b and 457) Employer Plan Contribution Limits: 2023 will see an increase from $20,500 ($27,000 if age 50+) to $22,500 ($30,000 if age 50+) that can be added to your employer retirement plan.
Higher IRA and Roth IRA Contribution Limits and Phase Outs: The contribution limits to IRA and Roth IRA accounts will also increase, potentially in addition to employer plan contributions. There will also be an increase to the income limits regarding when your ability to take advantage of these plans starts to phase out.
Health Savings Account Increases: For employees with a health savings account (HSA), the amount that can be contributed to the plan will also increase in 2023.
NEW Employer Matching 401k Contributions as Roth: Starting in 2023, employers may start allowing employees to take matching contributions as Roth contributions rather than pre-tax contributions. This is brand new and opens up significant planning opportunities.
Updates for Retirees
Retired individuals will also see several changes in 2023 to plan around:
NEW RMD Age Increased from 72 to 73: The biggest change for retirees in 2023 is the delay of the first required minimum distribution (RMD) from age 72 to 73. Individuals turning 72 in 2023 now have an additional year of flexibility for things like Roth conversions or other strategies to minimize taxes over their lifetimes.
Social Security Benefits and Medicare Premiums: Social Security will get an 8.7% increase in 2023. The base monthly premium for Medicare will decrease from $170 to $165.For higher earning retirees, the thresholds for Medicare’s IRMAA surcharge will be increasing.
Ongoing Planning Opportunities
There are several ongoing planning opportunities as individuals start looking ahead at 2023:
Qualified Charitable Contributions (QCD): For individuals who are at least 70½ years old, qualified charitable distributions (QCDs) from an IRA may be one of the most tax-effective ways to give to charity.
Roth Conversions and “Backdoor” Roth IRA Contributions: Depending on your current income and current retirement accounts, Roth conversions or “backdoor” Roth IRA contributions may allow more savings into accounts that will grow tax-free in the future.
Tax Loss Harvesting: With the decline in both stock and bond markets in 2022, there may be more opportunities than usual to sell investments at a loss and offset taxable income realized in other areas.
The Bottom Line
The new tax changes have created significant planning opportunities to review. It’s worth exploring how your personal tax situation may benefit from making adjustments in 2023. At Merriman, we live and breathe this stuff so you don’t have to. We are happy to answer your questions and partner with you to develop and/or refine the best approach for your taxes for 2023. Schedule some time with us today!
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
Having been born and raised in Seattle, the start of fall is always a bittersweet feeling for me. I get sad that our short but beautiful PNW summer is ending, but I love that football season is beginning. I have seen many terrific and many not-so-great Seahawks teams over the years, but I always continue to show up as a fan. After having watched the start of our season thus far, one word comes to mind: uncertainty. Over the past few years, we’ve lost cornerstone players to other teams and to retirement. This truly reached a new level when we traded away our star quarterback this past summer. Those players had brought us over a decade of stability and success. All we knew was winning, and we easily left behind the memories of the 2008 and 2009 seasons where we had 9 wins and 23 losses.
I can’t help but notice the parallels between the Seahawks and the financial markets in 2022. This year has been full of uncertainty and volatility for investors. After more than a decade of mostly positive returns, we easily forget the pain of going through the short but sharp decline of 2020, the financial crisis of 2008, and the many bear markets before that. It’s human nature to do so. So, as we are currently in the midst of a difficult season, how do we put together the right team to win you a super bowl trophy (or at least help you achieve your goals)?
Your financial advisor will be your quarterback. You and your advisor must create the proper game plan together for what you are looking to achieve. They will be responsible for knowing exactly what play every teammate is supposed to carry out, and you need to keep in constant communication as the game progresses in order to make the necessary adjustments.
Your research and investment team will be your offensive line. They are critical to protecting your assets and marching your team down the field. As your research team watches the markets, like a great coach, they need to understand when to bring an additional player to the line for extra strength—especially when churning through tough, muddy times. They also need to understand when to send an extra player such as a tight end out on a passing route for additional firepower for your offense.
Many other players are vital to the functioning of your team. These positions are filled by your client service members, your trading department, internal operations, and outside experts like accountants and attorneys. If just one of these pieces is lagging, then your roster will be exploitable.
It is important to call out that not every drive down the field is going to result in a touchdown, much like financial markets won’t generate positive returns every year. But if you can put together an excellent roster, minimize mistakes, and follow a well-crafted dynamic game plan, then you put yourself in a position for success.
Are you ready to have a team that supports you? I really enjoy watching football, but I LOVE helping clients make it to their financial goal line. Call me this season, and let’s strategize on some plays!
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
When I was a kid, my parents took us on a five-week trip to Europe and it completely changed my view of the world and traveling. Up until then, I had thought that people didn’t travel before retirement or didn’t travel with kids because they couldn’t walk away from their everyday activities and responsibilities. That experience helped me see that it is possible to get out there and go on your dream vacation before age 65 with some intentional planning.
Now, I love having the chance to help others plan and encourage them to travel and take their dream vacations. It’s so rewarding to watch others live out their dreams of bike touring the Pacific Coast from Canada to Mexico, traveling the country in their Tofino van, and backpacking through Europe after missing the chance to do so in college.
With fall in full swing, many families are finding their kids back at school, and some families are experiencing an empty nest for the first time in 18 years or more. If that’s the moment you’ve been waiting for to finally take that trip you’ve been dreaming about, there might still be some items you’re unsure of or haven’t yet thought about.
Let’s say your job offers an unpaid sabbatical, but you’re not sure if taking a few months off is going to push back your retirement timeline substantially. You know you need to make your travel plans and determine your trip route, but you’re not sure what else you need to consider.
As financial advisors, we help provide clarity around these unknowns. We can certainly answer your questions about how your trip might impact your retirement timeline so you’re comfortable making the decision to take time away now that you finally can! In helping answer what else you should be keeping in mind, we’ve compiled a list of some important planning items for long-term trips:
Financials. Consider setting all your bills to autopay if you haven’t already done so. You can also set up automatic transfers for any bank or retirement accounts that you add funds to on a regular basis. Be sure to notify your financial advisor that you’ll be gone, especially if you might be unreachable for some period of time. It’s also important to notify your bank if you’re traveling so that they don’t flag your purchases as fraudulent and deny your purchases in other countries or states.
Documents. Organize your important documents and know where they are in case you need to direct someone to access them. Consider making copies of your passports, medical cards, and other documents you may need to access while traveling in case you misplace any actual documents. If you don’t already have Wills, Powers of Attorney, or Health Care Directives in place, we’d highly recommend creating those estate planning documents in case something happens while you’re traveling.
Home. Consider having someone check on your home while you’re away. You can leave them instructions for caring for your home such as watering the plants, checking that appliances are working properly, and starting up your sedentary cars every so often. Consider setting up automatic timers for lights in your home and an alarm system for security purposes if someone won’t be at your home regularly while you’re away. You can have your mail forwarded or held by the post office while you’re away as well if that’s needed. Also consider turning on auto-replies for email and tailoring your voicemail to let others know if your usual response timing may change.
Pets. If you have pets and aren’t planning on taking them with you, you’ll need to find someone to care for them while you’re away. Whether that’s family, a pet sitter through a platform like Rover, or a boarding company, it’s great to leave them with detailed instructions about your pet’s food, routine, and behavior.
Health Care. Not all medical insurance plans offer coverage outside of your home state or country. If your coverage doesn’t extend to where you’re traveling, consider putting travel medical insurance in place in case something happens. If you have any regular prescription medications, you’ll also need to work with your pharmacist to be sure you have a plan for refilling your prescriptions.
Travel Insurance. Travel insurance can help provide emergency medical coverage as well as coverage for cancelations, delays, and/or accidents while you’re traveling. Consider working with an agent to determine what the right coverage is for your travel plans.
Contingency Plan.In case something goes awry, it’s important to have a contingency plan in place. Be sure you have an emergency contact back home and have equipped them properly for anything that could come up while you’re away. For example, be sure they know who’s watching your pets or caring for your home. Consider creating a “just-in-case” bag with additional items you might need sent to you should plans change.
Conversations about planning for dream vacations is one of the best parts of my job. I’m grateful to be able to work with people to help uncover their dreams and figure out a plan to make them happen now—not only in retirement. If you’ve got ideas about what’s important for you and your future, let’s connect! I’d love to help you get there!
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
In the spirit of Halloween, I want to share something I did earlier this year that scared the candy corn out of me, something that chilled my bones and chattered my teeth, something that made my stomach flip like stepping off a cliff ledge…
…I got married.
Jokes aside, after the streamers come down and the wedding party goes home, you and your partner are officially married. I distinctly remember thinking to myself, “Ok, now what?” It turns out I wasn’t alone in asking this question. A number of us at Merriman got married in 2022. During one of our regular meetings, we talked about the adjustment period that occurs as couples move from dating to marriage. And while I recommend couples discuss finances prior to getting married, it doesn’t always sink in or hit home until you and your spouse are trying to plan a clearer picture for your future as a married couple.
Life is short and moves at a brisk pace. The average age for couples to get married in the US has jumped up from early to mid-20s to late 20s and early 30s. Many of the young couples I meet come to me in a panic because they feel they are behind on retirement savings, late in buying a house, or overdue in thinking about their children’s education expenses. Sitting across the table, they unfurl a scroll’s worth of goals they want to tackle simultaneously. Here’s what I tell them:
You are not “behind.” There is still plenty of time to achieve your financial goals. I’m also guilty of entertaining the fallacy that one night I’ll go to sleep at 35 years old and wake up at 65. Your income will increase. You will experience promotions and fits and starts in your career. Don’t fall into the trap of thinking your current financial situation will last from now until retirement.
It’s okay to divide and conquer. My partner and I would like to buy a house in the next few years. One of the biggest obstacles we face — aside from astronomical housing prices in Western Washington — is that my MBA program created substantial student loan debt. Compared to my partner, my ability to save for a house is hampered by monthly student loan payments. After we got married, we had a conversation about the nature of our finances. It’s no longer “my money” and “his money” but “our money” and how we plan to allocate where it goes. When we had the chat about how to buy a house, we decided each spouse had a job that would bring us closer to our goal. His job became focused on putting cash away for a down payment. My job became focused on paying down as much student debt as I can. These conversations are critical because they reduce the risk of emotional tensions getting in the way of clearly seeing the end goal. There is no longer the pressure of feeling as if one spouse is doing more than the other to get us closer to buying a house.
Set a target date. Setting a mutually agreed upon date for meeting your financial goals is important because it provides a light at the end of the tunnel. Say that you have a goal for a home down payment that’s three years in the future. If the goal requires a lifestyle adjustment where you eat out less or skip a vacation, you at least know it’s temporary. There’s an end date in sight. If you’re diligent, the lifestyle adjustments will stick even after you meet your goal, leaving more cash in your wallet.
Track your progress. When I worked for Disney, I was responsible for the Shanghai Disney Resort’s onboarding orientation program, an operational beast that moved thousands of employees through the onboarding process. I had a manager who constantly reminded me, “What isn’t measured isn’t managed.” Put another way, if you’re not tracking your progress, then you have no way of knowing whether you are on track to meet your goals. I love using an app called You Need a Budget that shows our progress. Furthermore, you lose any bragging rights to your successes if you don’t know what successes you have achieved. Imagine a friend asking how saving for a house is going. Excitedly, you tell them, “Great! We saved up some amount of cash and will start maybe sometime, I don’t know, looking. We’ll see.” Way to go…?
Life will get in the way. You both are a unit now. When life hits one spouse, it hits you both. Dishwashers break. People are laid off. Babies are born. When this happens, lean into it. If your progress becomes derailed, talk about solving the issue — whether it’s allocating money to the extenuating circumstance or adjusting your goal’s timeline — and recommit to the new game plan. It’s extremely easy to become demoralized or despondent, but if you go into this knowing life will get in the way, it allows you to focus your mind and energy on getting back on track.
At the risk of sounding like a marriage counselor, the advice provided here is to help the shift from thinking as two separate individuals to thinking as two halves of a whole unit. The reality of getting married is that, while you may not feel any different, your commitments to each other ultimately demand a higher level of communication to identify how — together — you will meet your goals. You undoubtedly will have disagreements and competing priorities, but your financial plan necessitates coming to an agreement on how and where to focus your financial resources. Start having that conversation right now.
The advisors at Merriman can help you identify, plan, and keep you on track for your financial goals. Feel free to reach out to us to schedule an initial consultation.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
Minimizing Lifetime Taxes with Roth Conversions in Early Retirement
Moving into retirement is an exciting opportunity to live fully. It can be a time to travel, explore new hobbies, or spend time with grandchildren.
For many, this period at the start of retirement can also be an opportunity to provide additional financial security—and minimize lifetime taxes—by making partial Roth conversions.
The Retirement “Tax Valley”
Many retirees will be in a lower tax bracket early in retirement than they were just before retirement while they’re still working—or than they will be in later in retirement. To understand why, consider Jim and Susan (both age 61) who recently retired.
While working, Jim and Susan had a combined household income of $250,000. This put them right in the middle of the 24% tax bracket for a married couple. At retirement, Jim and Susan have the following assets:
$1 million (Jim’s IRA)
$1 million (Susan’s IRA)
$100,000 (Jim’s Roth IRA)
$500,000 (Taxable account – with a $300,000 cost basis)
$300,000 (Cash savings in bank accounts and CDs)
$800,000 (House – No Mortgage)
Jim and Susan will also have the following income in retirement:
$50,000 (Jim’s annual pension – starting at age 65)
$30,000 (Susan’s annual pension – starting at age 65)
$40,000 (Jim’s annual Social Security – Starting at age 70)
$35,000 (Susan’s annual Social Security – Starting at age 70)
In addition to that income, Jim and Susan will each have to start taking required minimum distributions (RMDs) out of their IRAs starting at age 72. Assuming they don’t make withdrawals from the IRA between now and age 72, and that the accounts grow at 7% annually over the next 11 years, they would each be worth about $2.1 million by age 72. They would each have an RMD of about $76,650 the year they turn 72 ($2,100,000 / 27.4).
This would potentially give them a taxable income at age 72 of about $308,300 from pensions, Social Security, and their RMDs. This puts them back at the top of the 24% tax bracket, and they could easily move up to the 32% tax bracket or higher.
However, in their first years of retirement, they could basically have no taxable income if they are using cash savings and the taxable investment account to fund their goals if they choose to do so. Is it a smart idea to minimize taxes this much during these early retirement years?
Strategic Roth Conversions Early in Retirement
Let’s say that Jim and Susan would have $0 taxable income in early retirement. Their modest interest, dividend, and realized capital gain income is offset by their $25,900 standard deduction.
If they each convert $65,000 annually from their IRA to their Roth accounts ($130,000 total), they will initially pay tax on that conversion primarily at the 10% and 12% rates, with just a little being taxed in the 22% bracket each year.
If they do this each year until age 72 when their RMD begins, they would have about $1,079,000 in each IRA, assuming 7% annual returns. This would reduce their initial RMD at age 72 by about half. Their taxable income at age 72 would be reduced by about $74,500 and their tax liability by about $17,880 since they were in the 24% tax bracket.
Much of the earlier conversions each year would have been taxed at 10% or 12% rates, resulting in less overall tax being paid during their lifetimes.
Protection Against Rising Tax Rates
The example above shows the benefits of Jim’s and Susan’s Roth conversions, assuming tax rates stay the same. If 10 years from now, tax rates on higher earners increase, they will have less income being taxed at those higher levels due to the smaller IRA balances and smaller RMDs.
They would also have about $1,000,000 in each Roth IRA by age 72, assuming a 7% rate of growth. This can be withdrawn tax-free if additional money is needed. This is always a benefit but especially so in a world where overall tax rates are higher.
Roth Conversions to Take Advantage of a Market Decline
In addition to the benefit of taking Roth conversions when in lower tax brackets, Jim and Susan can take advantage of market declines to make strategic Roth conversions.
Say a market decline in the first six months of the year produces the following negative returns:
-2% (Bonds)
-10% (Large US stocks)
-15% (Large international stocks)
-20% (Small US stocks, small international stocks, emerging market stocks)
This becomes a great opportunity for Jim and Susan to strategically move some of the small US, small international, and emerging market stocks from the IRA to the Roth accounts. Assuming the investments recover as expected, Jim and Susan can pay tax on the conversion when the prices are down and enjoy a significant tax-free recovery after the investments are in the Roth account.
Additional Factors to Consider
There are several other factors for Jim and Susan to consider when making Roth conversions early in retirement.
When purchasing individual health insurance in retirement before Medicare begins, retirees may qualify for subsidies to reduce the cost of their premiums based on their taxable income. In Jim and Susan’s case, they have retiree healthcare from their employer that doesn’t qualify for tax subsidies, so this is not a factor.
Once Medicare Part B benefits start at age 65, there is an additional IRMAA premium cost when taxable income increases beyond a certain level. In 2022, this additional premium begins when income is above $182,000 for a married couple.
For retirees who expect to have money at the end to leave to an heir, Roth conversions can be an important part of an estate plan, as leaving Roth assets to heirs are significantly more valuable than leaving traditional IRA money to heirs.
Conclusion
While they won’t be a perfect solution for everyone, for the right families, Roth conversions early in retirement can be a powerful tool to minimize taxes over your lifetime and maximize overall expected wealth.
This can be one more tool to ensure the ability to make the most of retirement and really live fully!
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. While this benefit may not sound too exciting, it represents essential insurance coverage that you should consider.
I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. This is troubling, largely because it’s so preventable. Check out these tips all women should be aware of to improve this relationship and strengthen their financial futures.
I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. This is troubling, largely because it’s so preventable. Check out these tips all women should be aware of to improve this relationship and strengthen their financial futures.
I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. This is troubling, largely because it’s so preventable. Check out these tips all women should be aware of to improve this relationship and strengthen their financial futures.
I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. This is troubling, largely because it’s so preventable. Check out these tips all women should be aware of to improve this relationship and strengthen their financial futures.
