Category Archives: Investing

Wait, Don’t Throw That Out!

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Do you ever get so much “stuff” piled up on your kitchen counter…or desk, or side table or wherever you keep the “papers I may need but don’t have time to address right now” pile…that you just want to take it all and throw it in the trash?
 
Poof! Gone. Out of your mind, off your list. Except for the little voice in your head saying, “I hope I don’t need that for anything.”
 
You may not know if you need to keep it because YOU DON’T EVEN KNOW WHAT IT IS!
 
Please allow me to introduce Form 5498.

This past tax season, I had a client who needed to track down Form 5498 to “prove” her contributions to a Roth IRA over the years, so that these distributions were not counted as income on her tax return.
 
She had made a withdrawal of contributions (not growth) from her Roth IRA to help cover college expenses. Contributions made to a Roth IRA are able to be withdrawn at any time, tax and penalty free, regardless of age or how long you’ve had the account.
 
After all, you already paid taxes on this income.
 
While I usually encourage clients to keep their assets in their IRAs, in this situation, contributions were made as far back as 2012 for just this reason…to potentially use someday to help cover college costs.
 
Form 5498 is mailed to clients in late May (that’s NOW) from their brokerage firm when a client has either contributed to or rolled over retirement assets to their IRA.
 
In today’s online age, you will often simply receive an email telling you the form is ready in your portal, but often records only go back 5 years, so it’s best to download it and keep it with your digital records.
 
Why is it not available until May as opposed to before the tax deadline?
 
This is because you can make contributions for the prior year up until the tax filing deadline in April, so they don’t send them out until AFTER the filing deadline.
 
“But didn’t I need it to file my return”, you ask?
 
No, you don’t need the actual form, but you do need to make your CPA aware of any type of contributions you made so they can complete any necessary information or filings for your return.
 
Review it, make sure it is accurate (mistakes do happen) and then retain it for your tax records. An online file where you organize your tax documents is best, or the kitchen counter, if you must.

Spring Cleaning!

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Everyone thinks of January 1st as the time to start fresh and change things we want to change, but I see spring as an even more opportune time for this.

Here are eight SPRING CLEANING items you can tackle now:

  • Tax planning: Did you owe more than you expected on your taxes? Was it a one-time thing or does this tend to happen every year? Review your current paycheck and adjust your withholdings as needed (using form W4), or talk with your tax preparer about paying estimated tax payments throughout the year.
  • Tax planning: Did you get a very large refund? You need to adjust how much is being withheld. Don’t give the IRS an interest free loan. That extra money could be put to much better use for your benefit
  • Tax planning: Could you have saved more on taxes in 2023 if you had increased your retirement contributions or added money to a deductible IRA? Make adjustments to your paycheck contributions now so you are not in the same position next year.
  • Employer Benefits: If every year feels like “crunch time” during open enrollment, now is great time to review the benefits offered to you and ask your HR team for deeper explanations or clarifications if you do not understand something.
  • Emergency Fund Checkup: Make sure your emergency fund is fully funded or consider boosting it if needed. Aim to have enough saved to cover 3-6 months’ worth of living expenses.
  • Investment Portfolio Review: Evaluate your investment portfolio to ensure it aligns with your risk tolerance and both short and long-term goals. Consider rebalancing if necessary. Do you have the right types of investments in the best type of account? It can make a big difference over the long term.
  • Educate Yourself: Use this time to learn more about personal finance topics that interest you. Whether it’s investing, retirement planning, or debt management, increasing your financial literacy can pay off in the long run. Working with a trusted advisor will speed up this learning tenfold.
  • Make a list: what is in your head that keeps you up at night regarding your finances? One of my clients refers to this as her “financial brain dump”, which she then sends to me for safekeeping. 😉 Just writing it all out can help take a load off your shoulders and give you more clarity, making tackling each one over the next several months seem less daunting.

Let’s face it, when the sun is shining, the days are longer and the temps are rising, we are typically more motivated in just about anything we do!

‘Tis the Season to be…Fearful?

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Elf on a Shelf

Earlier this week, I was engaging in the nightly ritual of moving the Elf on the Shelf to a new location. As the tale goes, he had flown back to the North Pole overnight and reported to Santa whether my children were naughty or nice that day. Given my boys are now 16, 14 and 12, (edited: now 16, 18 and 20 Yikes!), there’s a whole lot of not so nice around here and long gone is the fear that Ruckert the Elf is going to tell Santa about it.

At best, my youngest is humoring me by even looking for the Elf each morning.

It got me thinking about what we all know as the “fear tactic”, most often used with children, to get them to do or act in a way which we desire…

  • Behave nicely or Santa won’t bring you any toys.
  • Eat your vegetables or you won’t grow big and strong.
  • And let’s not forget about Pinocchio and his nose!

But let’s face it, kids aren’t the only targets of the fear tactic.

If it’s a subject area I know little or nothing about (like car maintenance for example), I could be “told and sold” just about anything. After all, they’re the experts, right? 

And they ALWAYS have my best interest at heart, right?

Well, the financial services industry is no different. There are folks out there trying to instill fear to get you to take action.

And not always, but often, that action is favorable to them in some way.

Statements such as:
What has happened to YOUR 401(k) balance with the recent market volatility? 
Are you afraid of outliving your money?

and my personal favorite….

Don’t let the nursing home take all of your hard earned cash. Come see us before it’s too late!

FEAR TACTIC at it’s best!

The point is, when it comes to financial decisions, making a rash decision to DO or BUY or CHANGE anything out of fear is often met with regret down the road.

You have time… to ask questions and understand, to plan according to your needs and to make a decision from a place of knowledge and clarity.

Punt Returns and Roth IRAs

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Family & Football

I’ve been watching my boys play football for years, and I LOVE watching them, but I still struggle with many of the rules.

Recently, I’ve been trying to figure out punt return vs kick return and when you are supposed to touch the ball vs not touch the ball and just let it roll. Go ahead football aficionados, have your laugh.

No matter how many times my husband explains it, or I ask my football guru friend Tricia what is happening, I can never seem to keep it straight.

I mention this because instances like this help me to remember how my clients might feel when I am spurting out planning concepts and recommendations for them.

One topic area that can be difficult to keep straight, even for us advisors, is the rules surrounding Roth IRAs.

Read on to see how I will now differentiate between a punt and kick return.  

When it comes to Roth IRAs, there are TWO ways they can be funded and TWO “5-year rules” that must be differentiated when it comes to distributions from the IRA.

But like the punt and kick return, they may seem like the same thing, but they are not, which is what leads to the confusion.

First, some differences between the two ways a Roth can be funded:

ROTH CONTRIBUTIONS

  1. Contributions are made with after-tax dollars.
  2. Contribution amounts are limited each year by the IRS.
  3. If you earn too much (according to the IRS), your contributions may be phased out, or you may not be able to directly contribute to a Roth IRA at all.
  4. Your CONTRIBUTIONS can be withdrawn at any time, penalty free (but the goal is to keep them in!)

ROTH CONVERSIONS

  1. Conversions are typically made from an IRA. You are converting from a “pre-tax” account to an “after tax” account.
  2. Conversions are not limited by amounts or income levels. You can convert as much or as little as you want at any time, regardless of how much you earn (this is the rule that allows for the back door Roth strategy)
  3. Since you are converting pre-tax dollars, you must pay taxes on the amount being converted in the year it is converted.

Now here is where the PUNT RETURN analogy comes in – Don’t touch it, just let it roll.

There are two 5-Year Rules for Roth IRAs.

5-Year Rule #1 – Pertains to Growth only (for both contributions or conversions)

For the GROWTH in your Roth IRA to become what is called a QUALIFIED DISTRIBUTION (tax and penalty free distribution), two conditions must be met:

  • 5-Year Rule #1 – the account must have been open for at least 5 tax years (there are favorable rules around when the clock starts on the 5-years).   AND
  • The IRA owner must be 59.5 or older (or totally disabled; a few other exceptions exist)

Don’t touch it, just let it roll.

5-Year Rule #2 – Pertains to the CONVERSION amounts

The SECOND 5-year rule pertains to whether the amount you converted can be withdrawn penalty free. Unlike Roth CONTRIBUTIONS that can be taken out penalty free at any time, you cannot pull your conversion amounts out before the 5-year clock is up (unless you are 59.5 or older),or you will pay a penalty on the withdrawal.

Don’t touch it, just let it roll.

It’s too much to dive into the specifics on the ”start clock” for the two 5-Year rules, but know that even the start clock rule has rules. But the gist is… Don’t touch it, just let it roll.

Ultimately, the rules for Roth IRAs exist to keep the “spirit of the law” in place to prevent misuse of this type of tax advantaged account.

But when managed effectively, and in the right situations, Roth contributions and conversions can offer great planning opportunities for many clients.

With the markets in turmoil, should I be doing anything different with my 401(k)?

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I took a spin class last week and the instructor kept reiterating two things as we climbed a hill, and it got me thinking about the two recommendations I referenced above. I know, I think about work WAY too much.

The two things she was selling to us tired riders were “discipline” and “add one more”.

I will explain.

The instructor was expressing (aka shouting over the music) how we must maintain discipline to make it up this hill. That it is long and strenuous and we must pace ourselves to reach the top.

Have you ever heard the term “disciplined investor”? I’m not making it up, it’s a real thing. Here’s one clip describing the disciplined investor in a Forbes article:

  1. Have a long term investment philosophy.
  2. Form a prudent asset allocation based on this philosophy.
  3. Select low cost funds to represent asset classes in the allocation.
  4. Maintain this portfolio through all market conditions.
  5. Don’t change the asset allocation due to recent market activity.

You have probably figured out by now how our discussion went.

This client has a well-diversified portfolio with an appropriate asset allocation for her time horizon and goals. She is also making regular contributions to her retirement savings. Outside of a possible need to rebalance, she is good to go and should maintain this disciplined approach and keep climbing that hill.

Most important to me was that she came away from our conversation feeling better about the current situation with an understanding that her plan was still in motion and she is on track.

Unless retirement is right around the corner for you, in which case you should have a plan in place well before that date, you will ride out this storm like you have all the others in your years of saving and investing. If you are a younger investor and haven’t yet experienced these market “thrills”, don’t fret, as time is really on your side.

History has shown time and again that the disciplined, long game will reward your portfolio, and investors have seen A LOT of reward over the past 10 years alone.

Now to my last point on the other recommendation I threw in there for this client. It relates to the final point below from the Forbes article and the spin instructors quip to “add one more”.

Don’t hold back on new investments while waiting for market clarity.

Non-disciplined investors tend to want to pull back or stop adding to their portfolio when the line is trending down. If you’ve ever had this reaction, it’s completely normal, but I want to help you understand why, in most situations, this is not the way to go.

Think about this. If you are OK with making a purchase when the cost of a product is at Think about this. If you are OK with making a purchase when the cost of a product is at a premium, but it’s really what you want and you know it’s worth the investment (literally), then why would you NOT be OK with purchasing the SAME PRODUCT when it’s at a steep discount?

It’s a bargain to be buying into the market when it’s down, so if you are not already maxing out your 401(k) or other retirement plan, try to “add one more” (increase your contributions).

If you know your company will do a true up match at the end of the year (mentioned here in last month’s newsletter), you may want to consider frontloading your contributions now while the market is down. Yes, it may still be down in December, but there is no crystal ball and we know it’s down now, so it can’t hurt. But ONLY if your company does a true up. You don’t want to max out too soon and leave free money sitting on the table.

Stick with it. You’ll get there!

Quote

“The ability to learn is the most important quality a leader can have”.

– Sheryl Sandberg, Facebook COO

THIS Drives Me Crazy!

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Last week, I was out running errands and listening to the local news station on the radio. The 60 second financial segment came on, and they were talking about the volatility of the S&P and how the month of September had ended with “significant” losses.

I get it, it’s the news, and we all know their main goal is to sensationalize EVERYTHING.

Here’s the part that burns me.

The reporter goes on to make a comment, and I’m paraphrasing, about near retirees and how this will seriously impact their ability to retire.

And not just for near retirees, but comments along the lines of, “investors saw their 401(k)’s take a huge hit last month”.

What?!?!

In my not so humble opinion, this is reckless reporting of the “facts”. It’s sensationalism and exaggeration and although it is FACT that the S&P saw a decline in September, it leaves out other very important FACTS, and sends anxious listeners into a panic.

Here are two key facts, one which was reported, the other which was not.

The S&P finished the month of September “down” by 4.7%.
Listeners definitely got the gist of that message, and then some.

Here’s what was NOT reported:

The S&P is UP 16% year to date through 10/11/21 (see lovely trend line in graph below).

Yes, that’s right, your 401(k) may have seen a decline in September, but I will bet the bank that if you have a well-diversified portfolio of investments, you still have more now than you did in January.
 
Heck, even if you only own the S&P index, you can see above that you are definitely up for the year.
 
I’ll leave you with two final thoughts that I know I’ve touted before:
 
Growing your wealth is not about one month of returns, positive or negative. You are in it for the long game. This means consistent and diversified savings of your earnings over time. DO NOT PANIC.
 
The stock market is always going to have up and down DAYS, MONTHS and YEARS.
Always has…always will. And that’s a fact!

My Favorite Quotes

“A goal without a plan is just a wish”

My Two Cents on Cryptos

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A friend of mine recently posed a question on her blog about Cryptocurrency.

You know-Bitcoin, Dogecoin, Ethereum-to name a few.

She was asking her followers what they knew about it, had they invested in it, and she made the statement that she thinks it may be here to stay.

I think she’s right, but whether I think the average person should be investing in it is another question.

Around the same time, I was talking with my oldest about needing to get his taxes filed so we could make a Roth contribution.  I was trying to educate him about why this was a great investment for his future. I liken what he was probably hearing was akin to the teacher’s voice from Charlie Brown.

His response, to my surprise, “I want to buy Dogecoin.”

My darling first born, you don’t even know what FICA taxes are or the difference between owning a stock vs a mutual fund, and you don’t necessarily need to understand all of this right now, but it’s also why you should not be buying Dogecoin with your very few hard earned dollars.

“Crypto” – it’s all the hype, I know. And don’t get me wrong, I’m not saying it’s a scam or investors haven’t or won’t in the future make money by investing in it. They have and they will. They’ve also lost a lot of money over the past month as well, at least on paper.

At this stage of the game, it is unregulated (which is kind of its modus operandi ), extremely volatile and very speculative. Its “buy in” has grown exponentially since its inception. I do think it has the POTENTIAL to EVENTUALLY be a small part of every investor’s diversified portfolio. Maybe. Time will tell.

It is my opinion, and only my opinion, that the AVERAGE investor, of which most of us are and why the term “average investor” was coined, should not be pouring our hard earned money into crypto, at least not for the hyped up reasons of turning a quick profit or easily becoming uber rich.

Unless you plan to “set it and forget it” like you would your 401(k) contributions and savings, and earmark it for the long term, then don’t do it.

Unless you are OK with potentially losing whatever you invest, don’t do it.

If you want to buy it to ride the wave and think it’s a get rich quick option,

DEFINITELY DON’T DO IT.

Because honestly, no one knows for sure what direction this is heading and I’m just not comfortable with the fact that a tweet from Elon Musk can singlehandedly make it soar or tank in a 24 hour period.  Are you???

For the majority of us, investing is meant for the long term, using investment strategies that are tried and true, and have proven to pay off for 100% of those of us who follow a disciplined and diversified approach to saving and investing.

A very small percentage of your portfolio…for the long term…with money you don’t need and are OK with losing?  OK, if you must, but do your research. Be aware, be informed and understand your decision.  

To be buying and selling crypto currencies on a regular basis is nothing short of day trading or trying to time the market. Most lose at that game in the long run.

That’s my two cents…I wonder what it’s worth in Crypto?

Financial Fitness

When you make an IRA contribution of any kind during the tax year, the institution where you made the contribution is required to file Form 5498 with the IRS. You will also receive a copy and it should be kept with your tax records. It is usually right around now.

For a deductible IRA contribution, this filing “proves” to the IRS that you did indeed make the contribution for which you are getting a tax break.

For non-deductible IRA contributions, keeping track of the contributions you make is important because you don’t want to pay taxes on that portion (known as your cost basis) of the IRA again in the future.

The usual deadline for these filings is May 31st and you would receive your copy in June. Since the tax filing deadline was extended this year, they have until June 30th, so don’t be concerned if you don’t see it until July.

There is no action on your part other than to make sure it is accurate and keep it for your records.

Favorite Quote

This month I’m taking a proud auntie moment to congratulate my nephew Jimmy, who is Valedictorian of his Class of 2021 and off to West Point in just a few weeks. He gave an awesome speech to his Senior class this past weekend and used this quote from Mark Twain that I really loved:

“The two most important days in your life are the day you are born and the day you find out why.”

Mega Back Door Roth: This Supersized Option is Good for your Health

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This topic has come up for me twice in the last week, so as is often the case, I’ve made it the topic for my newsletter this month.

I often get asked about the best strategies for saving outside of one’s 401(k).

My first caveat is that one size does not fit all, so what is a great solution for your neighbor may not be the best strategy for your situation.

I’ve highlighted in past newsletters the benefits of saving into an HSA, if you have one.

There’s also the option to contribute to an IRA, but regardless of which type of IRA you are to contributing to (deductible, non-deductible, ROTH, backdoor Roth), you are limited to how much you can contribute each year ($6,000 for 2020, $7,000 if you are over 50).

But what if you are in the fortunate position to be able to save more than this?

Introducing the Mega Backdoor Roth

There’s a little known strategy that I’m seeing as an option with more employers as of late. It’s the option to make after-tax contributions to your 401(k).

This strategy can offer tax diversification in retirement, but there are certain criteria that make it most effective.

It’s known in my industry as a  “Mega Backdoor Roth”, but you will not see it described that way in your benefits guide. It allows you to sock away more into retirement than the annual limits on a 401(k) or IRA.

Here’s how it works:

  1. Your 401(k) plan (your employer) allows after-tax contributions. If they don’t, game over.
     
  2. Your employer offers in-service distributions of these after-tax contributions to a Roth IRA while you are still employed or allows you to move the after-tax potion of your 401(k) to the Roth 401(k) part of the employer plan (if they offer one).

    If not allowed, game might be over, but not necessarily. It depends.

    I know, you hate when I say that. 
     
  3. You convert the after-tax contributions to one of the above as soon as allowed in order that the growth on your contributions is tax-free. You will now have a Roth IRA in retirement where there are no RMD requirements and distributions are tax free. Game changer.

When MIGHT this strategy be an effective strategy for you?

  • You already max out on your 401(k) contributions.
  • You max out on your HSA, if your employer offers one.
  • You make too much money for traditional IRA contributions to be deductible.
  • You max out a Roth IRA or backdoor Roth ($6,000 for 2020, $7,000 if you are over 50).

As with most financial planning and tax strategies, there are a lot of ins and outs and I try to stick to top level highlights to educate and make you aware of possible options available to you.  Consulting with your financial advisor or CPA is always prudent to determine which strategies are your best fit.

Financial Fitness Tip

Speaking of 401(k)’s, we are quickly approaching the end of 2020 (thank goodness). It’s a good time to check where you are with your 401(k) contributions for the year. You may have dialed back the % you contribute when things got a little coo coo in the markets or you had a temporary need for increased cash flow.

If things are looking brighter in your financial world, increase your % for these last few paychecks of the year and into 2021. And if there was never a hardship yet you are not maxing out, consider increasing it a percent or two now.

Little steps carry us a long way over time.

Things I Love

I will be pulling out my mom’s tattered and stained copy of her mom’s recipe to try to match what my grandmother used to create – a true masterpiece! I can never quite match it (my mother always said the same thing when she made it), but I can try.

And besides, it’s simply the tradition of making it and remembering them both that is my true Favorite Thing!

Happy Thanksgiving!

Wowzer, What a Week

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A fun meme was going around on Facebook last weekend that said:

“Just a Warning, this week is starting by changing the clocks, has a full moon and ends with Friday the 13th. Good Luck People.

P.S. Don’t forget to wash your hands”.

As it turns out, that warning did not do the week justice as far as the stock market and our investment portfolios are concerned.

It happened whiplash fast.  A week where the biggest warning for the coronavirus was to wash your hands and stay home if you feel sick ended with many of us feeling quite sick, but not because we had the virus.

This past week ended a record breaking 11 year bull run as the major market indices officially entered bear territory, defined as falling 20% or more below their all-time highs.

Because in this life none of us can predict the future, we rely on what we know and have learned from the past. But there is always that underlying itch that says, “but is this time different”?  In talking with my friend and colleague Michelle this past week, also a financial advisor (a phenomenal one I will add), she remarked, “‘this time’ is always different, but also not different”. Meaning, it’s a new catalyst that pushed our markets into bear territory this week, but not different because we’ve been here before, and each time, the market eventually recovers and investors continue to make money in their portfolios.

So, following this crazy week, I thought I would share with you a compelling video by Loring Ward that depicts the value of $1 invested in the Total US Stock Market in 1927 and if left untouched, the value that single dollar would be today.

It gives a great perspective on the long term effects of “bad news” and “bear markets” on the overall stock market.

It covers over 90 years in about 3 minutes, so stick with it to the end for an inspiring quote from legendary investor Warren Buffet.

This clip will eventually be updated to reflect this past week and whatever the weeks and  months ahead will bring, but I remain confident that history will again repeat.

None of this is to say it’s easy to watch our portfolios take a hit.  It’s a punch in the gut and it takes resilience to stay the course.  But when we ride the wave, history shows us that staying in the market is the best place to be for the long game.