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Articles by Alan & Akemi
Akemi Kondo Dalvi is the owner, Chief Compliance Officer, and an Investment Advisor for Kondo Wealth Advisors, Inc.

New Tax Rules Affect Parents

The Tax Cuts and Jobs Act of 2017 went into effect on January 1, 2018 and started the year off with a bang.  Most notably, the tax reform act imposed a new cap on state and local tax deductions at $10,000 for married filing jointly couples and $5,000 for single filers.  In other words, if you’re single and the sum of your property, state and local taxes exceeded $5,000 during the year (which is easily achievable in California due to high property values), too bad – you don’t get to deduct all the expenses you paid!  Corporations received a huge tax break due to the lowering of the top tax bracket from 35% down to 21%, mostly on the backs of the Middle Class.  The threshold for itemizing taxes went up, and many expenses that qualified for a tax deduction in prior years were eliminated or phased-out, making taxes “simpler” but also resulting in a larger expense, for many. 

 

529 Flexibility

However, one positive outcome of the Tax Cuts and Jobs Act (TCJA) is new flexibility created around 529 College Savings Plans.  A 529 plan is an education savings vehicle that functions much like a Roth IRA.  You put after-tax money into the account, and the growth on the investment is tax-free if the money is utilized for qualified education expenses.  Qualified expenses include tuition, room and board, books and supplies, to name a few. 

 

Previously, the earmarked 529 savings was meant for higher education costs such as university or trade school expenses.  Under the new law, you can now draw annually up to $10,000 per child, tax-free, to pay kindergarten through 12th grade tuition at a public, private or religious school[i].  Given the new benefit, many parents and grandparents are interested in starting the tax-free savings plans as soon as a child is born rather than waiting until traditional college planning has begun.

 

The Tax Cuts and Jobs Act is a federal law, but not all states and educational institutions sponsoring 529s have been able to adopt the new flexibility standards allowing distributions for K-12 education.  In California, legislative change is still pending, therefore, it is important to check with your CPA and 529 sponsor prior to making any withdrawals, so as not to trigger a 10% early withdrawal penalty unexpectedly. 

 

Like many other tax benefits that disappeared, the TCJA rules eliminated tax deductions for interest paid on home equity loans or home equity lines of credit.  For those in a pinch to put their kids through college, the equity loans were an appealing option because the interest paid was tax deductible.  With the removal of any benefits to carry equity loans, many parents are turning towards saving early to stretch hard-earned dollars.

 

Student Loan Interest Deduction Saved

The new law leaves the student loan interest deduction unchanged at $2,500.  However, as mentioned, the threshold to qualify for itemization is higher.  Also, when student loans are cancelled due to death or disability, they are now tax-exempt[ii]

 

Alimony Taxation Changes

New divorcees (divorced post-2018) are also affected significantly under the new TCJA rules.  Under the new laws, alimony is no longer considered taxable income to the recipient[iii], essentially lowering their taxable income and possibly making it easier for the family to qualify for needs-based financial aid.

 

While the new tax laws were supposed to make taxes simpler, change always seems complicated.  The finance industry is scrambling to learn and be complaint with the new rules before the 2018 tax filing season rolls around.  There is still time to initiate planning this year that could reap tax benefits or avoid tax pitfalls.  Consult your CPA or Certified Financial Planner™ before the year is over to make sure you’re on track and taking advantage of available options. 

 This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.irs.gov/newsroom/529-plans-questions-and-answers

[ii] https://www.studentdebtrelief.us/news/discharging-student-loans-no-longer-taxable-income/

[iii] https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23

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Capital Gain Tax Change Looms

Earlier this month, President Trump announced that he and US Treasurer, Steven Mnuchin, were determining if they had authority to unilaterally pass a massive and permanent new tax cut related to capital gains.  While the 2017 Tax Reform Act was spun as a “tax cut for the middle class,” this new proposed tax cut clearly benefits the wealthiest in America.  In fact, according to the Wharton School of Business, over 63%[i] of the new proposed tax cut would benefit just one tenth of one percent of the richest families in America.   

Under current law, when you buy a stock or mutual fund, the price you pay today is marked as your cost basis or taxable basis.  The price you sell that holding for in the future is the market value.  The difference between the market value (what you sold the investment for) and the cost basis (what you bought the investment at) is the capital gain, subject to taxation at both the Federal and State levels.  President Trump’s new capital gains tax proposal would increase the base purchase price (basis) every year by an inflation factor.  This would inherently decrease the gain, and related capital gains tax.  

As an example, say you purchase a stock for $10,000 in 1990.  It’s grown in value and if you sold it in the market today, you would receive $25,000 for that same stock, resulting in a gain of $15,000.  Under the current tax laws, a California resident might be subject to a tax expense of $3,750 (Federal capital gains tax rate of 15% + estimated CA tax rate of 10%).  However, under the new proposed tax law, the basis of $10,000 would get marked up every year since the time of purchase for inflation.  If we used the CPI index as the inflation factor[ii], the adjusted basis would be closer to $20,000.  The resulting gain after inflation would be reduced to $5,000 instead of the original $15,000 gain and the tax might be closer to $1,300; a tax savings of $2,450 or a 65%.  According to the Wharton Budget Model, if the capital gains tax change is pushed through, the tax reform would cost the US more than $100 billion in tax revenue over the next 10 years and the top 1% of US earners would take 86% of the benefit[iii].

Democrats are already pledging to fight the measure due to the bias of the capital gains tax bill to benefit the wealthy and the consequential strain on the national budget.  Normally changes to the tax code go through Congress, but President Trump knows his tax cut proposal would die there.  As such, he and Treasurer Mnuchin are investigating whether the office of the Treasurer has the authority to make this tax change unilaterally.  The last time changes to the capital gains taxes were considered was under President George H. W. Bush in 1992[iv].  However, at that time, it was determined that the US Treasury office did NOT have the authority to make changes on its own.  Therefore, if President Trump proceeds to circumvent congress and push his tax cut through, his bill will definitely face legal challenges. 

Noise regarding the capital gains tax-cut has quieted for now.  However, if the tax cut is pushed through, even for a short window of time, the change will unleash a wave of volatility in the stock market.  People who have long held stock positions fraught with unrealized gain may sell large stakes of ownership to take advantage of what is sure to be a limited tax-savings opportunity. 

Unfortunately, the Tax Reform Act of 2017 and the newly proposed capital gains tax cut benefit the ultra-wealthy at the detriment of valuable government programs like Medicare, Medicaid and Social Security.  The gap between the rich and the poor is widening and the middle class is shrinking.  The President’s divisive behavior continues to pit people against each other rather than bring them together.  Only time will tell where this newest idea settles. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 


[i] https://www.usatoday.com/story/opinion/2018/08/08/trump-capital-gains-tax-plan-helps-rich-hurts-america-column/916377002/

[ii] https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

[iii] https://www.usatoday.com/story/opinion/2018/08/08/trump-capital-gains-tax-plan-helps-rich-hurts-america-column/916377002/

[iv] https://www.nytimes.com/2018/07/30/us/politics/trump-tax-cuts-rich.html

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Graduation Gifts for a Successful Future

It’s incredible how fast the year goes by; it’s already June.  Kids all over the country are graduating and starting new chapters in their lives.  Traditional gifts like an envelope of money or a Hawaiian lei are the norm, but it wouldn’t hurt to consider a few non-conventional gifts that might be equally as meaningful.    

In America, Land of the Free, higher education is anything but free.  In fact, the U.S. actually leads in having the highest average annual tuition fees, worldwide[i].  However, with education being the pathway to future career opportunities, many are willing to take on debt they would not normally consider.  Today, 70%[ii] of college graduates are leaving school with debt.  That means roughly one in four American adults are paying education loans, which amounts to approximately $1.5 trillion in student debt.  Studies have shown that young adults have delayed buying homes, starting families and other major life decisions until they are more financially stable, due in part to the burden of debt. 

With that in mind, it may not hurt to consider the traditional graduation gifts in combination with a few practical ones as well.  Here are a few ideas:

Gift Card to Purchase Books

Text books and course materials can be shockingly expensive.  For high school grads heading to college, a little help with books could go a long way.  Many colleges still sell books in the campus bookstores, but often schools also use the services of education material suppliers. These suppliers provide students print and digital content that can be ordered online and picked up at school or downloaded.  If you know where the student is going to college, you can buy a campus bookstore gift card.  Other textbook gift card options could include Amazon or Follett.  

A Professional Suit

Whether graduating from high school or college, having a quality suit in your closet is essential.   

I remember being invited to a networking event with possible future employers by the Dean of the accounting school.  As a Sophomore in college, my wardrobe consisted mostly of jeans and hooded sweatshirts.  In need of a presentable suit, I went to a local department store and came home with an economical suit, to which my roommate commented, “I’ve never seen a suit made from this material before.”  

Economical suits may work out in the short term, but an affordable quality suit might be an ideal gift that keeps on giving.  

Introduction to a Financial Planner

Schedule your graduate’s first meeting with a financial planner.  While they might not know what questions to ask now, the more powerful tool is that they’ll know who to ask when they have a question – in addition to their sounding boards: mom and dad.  A financial planner can give them advice on how to receive financial assistance for education expenses in the most tax efficient manner or how to effectively put savings away when they get their first real job.  Once employed, a financial planner can help customize an investment allocation for their work sponsored retirement plan and advise on a budget for paying down student loans.  The earlier people start saving for retirement, the more financially sound they’ll be the rest of their adult lives.  An introductory meeting with a financial planner can run in the range of $300-$500, which can be prohibitive for a young adult on a budget.  Some financial planners will offer a complimentary introductory meeting if they’re already working with members of the family.

Roth IRA

Roth IRAs are one of the most powerful ways for a young person to invest.  That is because young adults have the power of time on their side.  If you look at the history of the stock market, including the Great Depression or the more recent Great Recession, there is no 10-year investment window where you would have lost money if you stayed invested the whole time.  In other words, as long as you implemented a buy-and-hold strategy for an investment period of 10 years or longer utilizing a globally-diversified portfolio, you would not have lost money[iii], even if that 10-year window included a dramatic market decrease like the Great Recession.  The stock market is resilient.  Some of the best market surges in history were immediately following a dramatic stock market downturn.  If you are invested in a Roth IRA, not only will you benefit from market growth, all the gains in your investment account are tax-free.  There are many rules about investing in Roth IRAs such maximum annual contributions, participation limits based on your total income, etc.  Consult your Financial Planner or CPA if you feel the Roth IRA might be the right savings vehicle for your graduate. 

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For advice on any of the above strategies, gifting appreciated assets, or investing in preparation for college through the use of a College Savings 529, reach out to your Certified Financial Planner™ or CPA.

Congratulations to your graduate and best wishes to their future! 



[i] http://www.oecd.org/education/education-at-a-glance-19991487.htm

[ii] https://www.cnbc.com/2018/02/15/heres-how-much-the-average-student-loan-borrower-owes-when-they-graduate.html

[iii] https://loringward.com/blog/its-about-time/

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Social Security Options Remain

In November 2015, President Obama signed into law the Bipartisan Budget Act of 2015.  One significant byproduct of the legislation is the elimination or curbing of two Social Security filing strategies that married couples may have been planning to use to optimize their lifetime Social Security benefits.  The two programs include the “File and Suspend” and “Restricted Application” for spousal benefits filings. 

Training about the new legislation was meager at its onset and just weeks before the new rules became effective, many Social Security benefits coordinators were still uninformed.  In January 2017, the Social Security manual was updated to guide benefits coordinators to better service the public and allow those born before 1954 to take advantage of the Restricted Application benefit that remains.[i] 

 

Expired Benefits

File and SuspendThis was when an individual, who was at least at Full Retirement Age (age 66 for most claimants), filed for his or her own retirement benefit and then immediately suspended receipt of those benefits with the Social Security office.  This allowed a spouse or dependent to collect benefit payments based upon the original filer’s record, without affecting their own benefits. 

Under the Bipartisan Budget Act, as of May 1, 2016, no future claimants were allowed to access this benefit.  Those already using the strategy were grandfathered under the old rules.
 

Limited Benefit Remaining

Restricted Application – When an individual is at least Full Retirement Age (FRA), has not filed for any previous benefits, and has a spouse who is collecting Social Security benefits, they may file a Restricted Application (RA) to receive ONLY the spousal benefit based upon the spouse’s record.  Collection of Social Security benefits under the Restricted Application does not affect the individuals’ own pool of benefits. 

This strategy allows a person to collect spousal benefits and concurrently delay their own future retirement benefit so it may grow 8% per year.  Upon reaching age 70, the Restricted Application filer would switch from the spousal benefit income to their own Social Security benefit. This strategy increases the filers benefit to be 32% greater than if they had simply collected their own benefit at age 66.  For example, say you were eligible to collect $1,360/mo. of benefits at age 66.  By employing the RA strategy and deferring collection to age 70, your monthly benefit would increase to $1,795/mo., or an additional $5,220/yr. of income.  For those dependent upon Social Security in retirement, the benefit increase can make a big difference. 

Restricted Application on Ex-Spouses – It may be possible to file a Restricted Application to claim Social Security benefits on an ex-spouse if you were married for 10 years or more and have not remarried.  Your ex-spouse does not have to file for their own Social Security benefits in order for you to file your Restricted Application, but they do have to qualify for Social Security benefits.  The maximum benefit you could receive on an ex-spouse is limited to 50% of their Social Security benefit at Full Retirement Age, regardless of when they actually claim their benefit.  Filing for RA benefit on an ex-spouse in no way affects their own pool of benefits.

 

Under the Bipartisan Budget Act, the Restricted Application filing is no longer available to anyone born Jan. 2, 1954, or later. However, it is still available for those born Jan. 1, 1954, or earlier who have not yet collected their Social Security benefits.  In the next two years, the last of those eligible for the Restricted Application benefit will reach Full Retirement Age and hopefully take advantage of this remaining benefit. 

Many who went to the Social Security office to claim on this benefit were initially, and incorrectly, told the Restricted Application benefit was eliminated when the File and Suspend benefit expired in May 2016.  That is not true. 

New literature and training has been conducted within the organization to help Social Security recipients claim benefits they rightfully deserve.  However, if after speaking with a Social Security representative, they give you an answer that is different than your understanding of your benefits, ask for a Tier 2 representative who might be better trained. 
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Determining when and how to claim Social Security benefits has always been a challenging task. A Financial Planner can help you determine how to best align yourself and take advantage of the benefits you’ve earned.  If you are age 66 now, or will turn 66 within the next couple of years, speak with your Certified Financial Planner™ or CPA about taking advantage of these claiming strategies before you lose the option to do so.

Source/Disclaimer:

Financial Ducks in a Row, “File & Suspend and Restricted Application are NOT Equal”

Market Watch, "Millions of Americans just lost a key Social Security strategy"

Market Watch, “New Social Security Rules Change Claiming Strategies”

U.S. News & World Report, "How the Budget Deal Changes Social Security"

Wall Street Journal “A Strategy to Maximize Social Security Benefits”

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.forbes.com/sites/kotlikoff/2017/05/29/ask-larry-%E2%80%8B%E2%80%8B%E2%80%8B%E2%80%8B%E2%80%8B%E2%80%8Bcan-i-still-file-a-restricted-application-for-spousal-benefits-only-at-fra/#4904207226bc

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2018 SOCIAL SECURITY & MEDICARE: Give with one hand, take with the other

In October 2017, the Social Security Administration (SSA) announced that it would be increasing the social security benefit payments in 2018 by 2% for a Cost of Living Adjustment (COLA)[i].  In dollars, that means the average retirement benefit will increase by $27 to $1,404 per month and the average retired couple will receive a $46 raise to $2,340 per month[ii].  

Many retirees were thrilled at the news, as this was the most generous COLA increase in 6 years.  In 2010 and 2011, the COLA was 0%, making the average increase in the last 9 years a whopping average of 1.2% per year.  During the same period, however, the cost of food, energy, gas, entertainment, and medical coverage seemed to tick up faster.  In 2018, it is estimated that Medicare expenses will go up by 2.8%[iii] meaning that for a retiree, any increase in Social Security Income will be spent in full to try to cover increasing Medicare premium costs.  That just doesn’t make sense, now does it?

Medicare Premium Surcharges

Since 2006, Medicare Part B premiums, the medical insurance portion of your care (i.e.: for doctor’s visits) have been subject to a tiered premium schedule where higher earners pay higher premiums.  In 2018, the surcharge starts at an extra $53.50/month (on top of the baseline payment of $134/month) and can rise as high as an extra $294.60/month for those whose Modified Adjusted Gross Income (MAGI) exceeds $85,000 for individuals, or above $170,000 for married couples.[iv]  As a part of the Bipartisan Budget Act of 2018, in 2019, a 5th level will be added, bringing the premium surcharge to as high as 85%, or $321.40/month on top of the base of $134/month for a total monthly premium of $455.40/month.  

What does that mean for me?

For some unfortunate retirees, even if your income didn’t change much year over year, due to the new tax tables, your Medicare Part B premium might have.  This year’s premiums are based on last year’s taxes, but the new tables will take effect shortly, so it would be prudent to discuss what the future might hold when you sit down with your CPA to file your 2017 tax return.  

The consistently rapid and rising costs of medical care certainly exceed the average return on money market accounts at the bank, but also the COLA used for Social Security benefits and pension payments.  The average annual US inflation rate since 1914 has been approximately 3.24%[v], but the US Department of Labor tracks medical care costs to have increased at a higher rate of approximately 5% per year[vi] during roughly the same period.  This makes the case that in order to keep up with inflation, retirees need to find investments vehicles that allow them to protect their standard of living in retirement with returns that meet or exceed average inflation.  One of the safest ways to achieve this historically, has been a portfolio of diversified investments that captures both domestic and international equity market returns, but also offers protection from fixed income on the downside.  Your Certified Financial Planner™ can help construct a customized portfolio that suits your investment risk tolerance and retirement goals.

One of our clients said she was happy to hear that her Social Security Income was going to increase in 2018, only to find out her Medicare Premiums did too.  She estimates netting an $8 gain at year’s end.  Come to find out, she might have been one of the lucky ones!

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.ssa.gov/news/cola/

[ii] http://www.investmentnews.com/gallery/20180102/FREE/102009999/PH/2018-social-security-and-medicare-changes&Params=Itemnr=2

[iii] https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

[iv] https://www.kitces.com/blog/bipartisan-budget-act-2018-irmaa-medicare-premium-surcharges-tuition-and-fees-deduction/

[v] http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

[vi] https://data.bls.gov/pdq/SurveyOutputServlet

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Happy Birthday Roth IRAs

2018 marks the 21st birthday for the Roth IRA retirement account – officially marking it a young adult, ready to go out and conquer the world!  The Roth IRA was originally passed in the Taxpayer Relief Act of 1997 and named after then Senator William Roth of Delaware[i].  Today, Roth IRA investments account for approximately $660 billion, or just 8.4% of the total IRA investments on record[ii].  Many wonder why the Roth IRA, with all its tax benefits, has not been more popular among investors.

What is a Roth IRA?

A Roth IRA is a type of retirement account for individuals.  Most are familiar with the traditional IRA in which the original contributions are generally tax deductible and the account benefits from tax-deferred growth until withdrawals are taken.  A Roth IRA operates opposite, but with the same end-goal of saving for retirement.  Roth IRA contributions are not tax deductible in the year made.  However, the after-tax dollars contributed to the Roth IRA benefit from tax-free growth, meaning both the original proceeds contributed plus all the accumulated growth during the years of investment can be withdrawn tax-free in retirement.  Depending on the life and gain on the investment, this tax-free benefit could be huge.

Who should open a Roth IRA?

Although each scenario should be independently analyzed, typically Roth IRAs are beneficial investments for:

1.      Young Investors – Youth is an advantage in this scenario because a 40-year-old investor could have 25+ working years and annual contribution opportunities during which their investment may grow.  Approximately 31% of current Roth IRA owners are under age 40[iii].

2.      Households Subject to a High-Income in Retirement – Although the future tax code is undeterminable, if a household expects a combination of retirement income (i.e.: pension income, social security income, dividends and interest, Required Minimum Distribution proceeds) that is equivalent to or greater than their working income, utilization of a Roth IRA may be a desirable strategy to control taxable income in retirement.  That is because Roth IRA withdrawals are generally tax-free, meaning you can take as much as you need, whenever you need, without worrying about taxation.  Unbeknownst to many, high income in retirement can result in a great deal of complexities such as increased taxes on Social Security benefits, higher Medicare premiums, a higher overall tax bracket and IRS required quarterly estimated tax payments. 

3.      Estate Planning – Roth IRAs are excellent estate planning tools.  Roth IRAs are not subject to Required Minimum Distributions, and therefore, can be left alone to grow tax-free.  Then, they can be passed tax-free to children or grandchildren through an Inherited Roth IRA account, extending the tax-free growth for another generation.

Additional Roth IRA Benefits[iv]

  • No Age Limit – After age 70½, the IRS does not allow individuals to contribute to their IRAs.  However, Roth IRAs are not subject to the age rule and contributions can continue as long as the person has eligible working income
  • Roth’s Utilized Alongside Work Sponsored Plans – An investor can participate in their company’s work sponsored plan, such as a 401K, and still contribute to a Roth IRA concurrently.
  • Easy Withdrawals – Generally speaking, as long as the Roth contribution has been invested for 5 years+, the account holder can withdraw gains from the account tax-free and penalty free. The basis, or original investment amount, is not subject to the 5-year rule, and may be withdrawn at any time.  

Roth IRA Contributions and Conversions

Annually, an investor can contribute a maximum of $5,500 per year to a Roth IRA, plus another $1,000 per year catch-up contribution after turning age 50.  Between January 1, 2018 and April 15, 2018, you may be able to make Roth IRA contributions for both 2017 and 2018. If you are getting your taxes prepared, ask your CPA.  

Keep in mind that Roth IRA contributions and conversions are different animals.  A Roth IRA conversion is the transfer of money from a pre-tax IRA account, to an after-tax Roth IRA account.  As the titles might suggest, the conversion is a taxable event and the transfer amount is considered earned income by the IRS.  Therefore, before making the conversion, check with your CPA how much a conversion of say $5,000, $10,000 or $15,000 might create in tax liability and only transfer what you are comfortable with.  Unlike Roth IRA contributions, conversions need to be completed before December 31st to count for that taxable year.

Due to the low Roth IRA annual contribution limits and phase out limits (if your Adjusted Gross Income is too high), many people are not able to make substantial investments directly into the Roth IRA.  Therefore, to take advantage of the Roth IRA tax benefits, investors may want to consider a Roth IRA conversion.  Consult with your CPA, attorney or Financial Advisor to ensure you are taking full advantage of opportunities.  

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://en.wikipedia.org/wiki/Roth_IRA

[ii] https://www.ici.org/pdf/ten_facts_roth_iras.pdf

[iii] https://www.ici.org/pdf/ten_facts_roth_iras.pdf

[iv] Financial Planning: Why aren’t more clients using Roth IRAs?

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Tax Reform Highlights

On December 22, President Trump signed into law H.R.1, the Tax Cuts and Jobs Act.  People are calling the new law the most significant tax reform in 31 years since the Tax Reform Act of 1976 passed by President Gerald Ford.  The difficulty is the original law was passed in the House with tweaks, then passed in the Senate, with more tweaks.  Then the House and Senate versions of the law needed to be reconciled into H.R.1, which also underwent eleventh hour changes before its final presentation on the 22nd, just in time for Christmas.  Not surprisingly, many have not had the chance to read the full 500-odd page brand new law and so the details are sparse and whatever we thought we did know might not have made it into the final version of the passed law.  Here are some highlights of what we do know:

How will tax reform impact individual taxpayers?[i]

The impact of the bill from 2018 through 2025 on individual taxpayers include: 

1.      The top individual tax rate is reduced from 39.6% to 37%;

2.      In 2017, the standard deduction for a single taxpayer was $6,350, plus one personal exemption of $4,050.  Under the new tax code, those deductions are combined into one larger standard deduction for 2018: $12,200 for single filers and $24,400 for joint filers[ii];

3.      Personal exemptions are no longer deductible;

4.      The individual Alternative Minimum Tax (AMT), which is meant to prevent high income earners from paying too little in taxes, has now been eased with a higher exemption amount and increased phase-out levels;

5.      The mortgage interest deduction limit is reduced to $750,000 on new mortgages (previously, no limit) and home equity loan interest (HELOC) is no longer deductible;

6.      Individuals are capped at deducting up to $10,000 in total state and local taxes, which include income or sales tax plus property taxes (previously, no limit);

7.      The child tax credit is increased from $1,000 to $2,000; 

8.      Medical expenses in excess of 7.5% of Adjusted Gross Income (AGI) are deductible in 2017 and 2018, and then in excess of 10% of AGI thereafter;

9.      Moving expenses are no longer deductible;

10.  Alimony payments are no longer taxable or deductible starting in 2019;

11.  Miscellaneous itemized deductions are no longer allowed;

Did Estate Taxes Go Away?

Eliminating the estate tax was high up on the Republican tax agenda and was part of the original Republican Blueprint and the House version of the Tax Reform presented back in November.  However, the final version of the Tax Cuts and Jobs Act does not eliminate the estate tax.  Rather, the tax exemption amount is doubled from $5.6 million to $11.2 million per person for 2018 through 2025.  In other words, a married couple can pass up to $22.4 million of assets to their children upon their death, estate tax free.  

How Does the Tax Reform Affect Small Businesses?

Small Businesses were one of the major parties affected by the Tax Reform.  Changes to the individual taxes are temporary and expire after 2025, but the tax code changes to businesses are permanent.  

Pass-through entities are companies such as S-Corporations or LLCs where the profits of the business flow through to the owner’s personal tax return.  These entities are taxed at the owners’ individual tax rate, which was as high as 39.6% before the Tax Reform.  Under the new legislation, pass-through entities could receive a deduction to their Qualified Business Income (QBI) as high as 20%, subject to limits, restrictions and phase-out[iii].  

C-Corporations are entities with their own tax rate and tax filing.  Shareholders pay taxes at their individual tax rates for dividends or distributions from the company, which created the double taxation adage.  Under the new Tax Reform, Corporations will have a flat tax rate of 21%.  Prior Corporations were subject to a tiered tax table that ranged from 15% to 35%[iv].

Long story short, while the Tax Cuts and Jobs Act was meant to simplify tax filings and remove loopholes, filing taxes for businesses just got more complicated.  If you think you may be affected, reach out to your CPA or attorney to get ask for their advice as to how you can benefit from the new tax code.  

How will this affect me?

For high tax states like California, the cap on your ability to deduct state and local taxes and property tax could reduce your eligible itemized deductions and therefore increase your taxes.  You should consult your CPA to determine if you are affected.  

The National Association of Realtors argues, anytime you make home ownership less appealing, home owners suffer through reduced or stagnant home values.  The new Tax Act puts a cap on the amount of mortgage interest that can be deducted in your tax return and no longer allows home equity loan interest to be deducted.  Only time will tell how much these changes truly affect the personal real estate market.  

Other analysts have said the newly passed tax reform will greatly benefit corporations and stock holders which in turn benefits the stock market and ultimately mass America – Trickle Down economics theory.  Since the passage of the Tax Reform act in the House, we have seen the stock market react positively to the reduced taxation and therefore higher corporate profitability anticipated in the years to come.  

Our hope is that the truly neediest Americans are able to benefit from Corporate Tax cuts.  The changes discussed will affect your 2018 tax year which you will file in 2019.  However, businesses considering a corporate structure change need to act by March 15th to have that change apply for the 2018 tax year.  Consult with your CPA, attorney or Financial Advisor to ensure you are taking full advantage of opportunities.  

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i]https://www.aicpa.org/taxreform?utm_source=Tax_SpecialAlert_A17DC902&utm_medium=email&utm_content=tax13&utm_campaign=TaxDec17&tab-1=2

[ii] http://www.businessinsider.com/tax-brackets-2018-trump-tax-plan-chart-house-senate-comparison-2017-11

[iii] https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#5a83e26f6de3

[iv] https://www.fool.com/taxes/2018/01/03/heres-who-got-the-biggest-tax-rate-break-from-corp.aspx

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BITCOIN 101

It’s hard to turn on your TV or read the paper without some hype about becoming a millionaire off of Bitcoin investments.  Usually it ends with a scare tactic, call-to-action like, “If you don’t act now, you’ll be left behind!”  For many, the next couple of questions are, “What is Bitcoin?” and “How safe is it?”

Bitcoin is a “new” type of cryptocurrency - or more simply put, a form of digital money.  In 2009, Bitcoin was created by Satoshi Nakamoto as the first decentralized cryptocurrency.  All forms of prior digital currency were centralized, through an authority or middle man such as a banking institution.  Bitcoin’s decentralized model uses miners or record-keepers who transfer coin and record transactions in a public distribution ledger.

How Bitcoin works

Currency exchanges exist online, all over the world, where Bitcoin can be purchased in one’s native currency.  Your Bitcoin balance is digital and accessible online through any technology such as your home computer or phone.  Theoretically, you can use your Bitcoin to purchase anything, like you would with regular cash, but your Bitcoin is not subject to cash limitations such as dollar limit of purchase, currency exchange, international borders, transfer limits and fees, etc. It is touted by Bitcoin users that more everyday vendors such as restaurants and movie theatres are accepting Bitcoin payment around the world.   

Bitcoin in a nutshell

Bitcoin Advantages:

-          Payment is transferred person to person online, rather than through an institution, such as a bank.  The peer-to-peer structure theoretically removes fees that a bank would charge for facilitating the transfer, currency exchange, etc.

-          No pre-requisites or limits

-          Your account cannot be frozen

-          The upside potential for growth and acceptance of Bitcoin could yield a hefty return for the initial investors.

Bitcoin Disadvantages:

-          There is currently little to no regulatory oversight over the cryptocurrency industry, nor protections in place for the investors

-          The primary current uses of Bitcoin are rumored to relate to illegal drugs and illicit weaponry

-          The value of Bitcoin is arbitrary in an unregulated market.  Therefore, the risk of a bubble or sudden drop in value is high.

Bitcoin bubble?

Bitcoin excitement circulates around the unknown potential of the new currency.  Some Initial Coin Offerings (ICOs) have even hired celebrities like Floyd Mayweather and Paris Hilton to promote their projects and endorse virtual money – a move highly criticized by the Securities & Exchange Commission[i].  

Perhaps unfair, but some have compared the Bitcoin buzz to the likes of the Dutch Tulip Mania of the 17th Century or the Dotcom Bubble of 2000.  Bitcoin (BTC-USD) is trading near 12,700, up approximately 1,300% in 2017[ii], compared to the Dow Jones Industrial which was up a stingy 21%[iii] during the same period.  In 1999, tech stocks with negative earnings were going up in value, on what was coined as “the new norm” because net earnings were deemed less relevant than internet traffic and future potential.  The normal rules about prudent investing were thrown out the window.  In hindsight, the tech phase was not different, but a bubble that burst.  The Bitcoin craze is showing signs of the same rapid growth, but with no regulation at all.    

The consensus of many investment professionals is that buying Bitcoin now would be late in the game (buying high), and the highly speculative investment could end in financial hardship to the average person.  

Digital currency is still in its infancy.  The idea of a currency medium that transcends international boundaries and is tracked and exchanged online is transformative.  However, it is too early to know who the winners and losers will be in the cryptocurrency horse race.  Going back to the Dotcom timeframe, many of our current household names like Facebook and Twitter, didn’t even exist until after the crash.  However, they were birthed from the innovative foundations (and subsequent deaths) of trailblazers like Classmates.com, Friendster and MySpace.

Before you make a large financial decision about a speculative investment, consult your Financial Advisor to ensure you are investing in a manner that matches your risk tolerance and not compromising your overall retirement planning.  When you have a network of professionals working together to provide you sound recommendations, you are more likely to create a plan that provides you and your family peace of mind.  

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.nytimes.com/2017/11/01/business/sec-warns-celebrities-endorsing-virtual-money.html

[ii] https://finance.yahoo.com/chart/BTC-USD

[iii] https://finance.yahoo.com/quote/%5EDJI?p=^DJI

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Easy Estate Planning Tips

In the juggle of daily life, many have a running list of To-Do’s that they steadily chip away at.  Some agenda items take priority, like grocery shopping or paying the bills, and inadvertently, some are pushed to the bottom of the totem pole to achieve “tomorrow.”  Unfortunately, estate planning is often in the latter category due to what we perceive as too complex or not urgent.  However, these are simple tips that can make estate planning effective and ensure that your kids, not the IRS are your biggest beneficiary after you pass away.    

Review your living will and trust regularly

Time flies by in the blink of an eye.  We recommend that you meet with your attorney at least every 5 years (max 10) to ensure that your trustees, executors, guardians, beneficiaries, and healthcare agents are all up-to-date.  Equally as important, you should ensure that your trust takes advantage of the most recent tax rules, which seem to be changing rapidly these days.  In the year 2000, the estate tax exclusion was $675,000[i].  Today, the estate tax exclusion is $5.49M[ii] per person, and under the Trump Tax Proposal, the gift tax exclusion may double to nearly $11M[iii] per person or nearly $22M per couple.  Meeting with your attorney regularly will ensure that your trust is taking advantage of the current tax code and structured to pass assets to your beneficiaries in the most efficient manner.  

A revocable trust provides privacy over a will

Sometimes people feel that their finances are too simple to require a trust and their wishes can be captured in a will alone.  What many don’t realize is a will does not protect your privacy.  When you pass away, your estate transfer is a public record that anybody can have access to.  That can lead creditors to tie up your estate in probate if they claim rights to your assets.  On the other hand, a revocable trust will provide you privacy and pass assets to your heirs upon your passing, escaping probate. 

Fund your trust

Often people go through all the steps to create a thorough and well thought-out trust but then fail to actually retitle assets into the trust name.  Consult with your attorney regarding which assets should be transferred into the trust title for protection if you pass away.

Provide titling consistency

Review the beneficiary designations on accounts such as retirement accounts, life insurance policies and annuities.  Your beneficiary designation will take precedence over your will or trust if there is a discrepancy.  For example, if the beneficiary of your life insurance policy is your ex-spouse, proceeds will go to that person, no matter what the will or trust dictates.  

Pre-tax or qualified assets such as IRAs typically have individuals listed as beneficiaries instead of your trust.  That is because IRA assets afford better tax benefits to the beneficiaries if they are inherited directly, rather than being inherited through the trust.  For example, if a parent lists a child as the primary beneficiary of their IRA, when he/she passes away, the child can receive the money in an Inherited IRA and continue to benefit from the same tax deferral treatment.  If the trust is the primary beneficiary instead, the IRS can take income taxes from the account which has grown tax deferred all these years and only the net proceeds may be disseminated per the trust language.  

Utilize the annual gift tax exemption

Under the current tax code, you can gift up to $14,000 per year, per person, gift-tax free.  For a couple, that means you could gift a total of $28,000 to each person annually without triggering gift taxes.  For a family of four, that could amount to a total gift of $112,000, tax free, every year!  This annual gifting strategy does not tap into your lifetime gift tax exemption (currently $5.49M per person).  

Future tax law changes

Tax laws are currently in limbo and could change within the next year.  However, delaying your estate planning for future tax changes could leave you or your loved ones in financial disarray if no planning is completed and something unexpected happens.  Even if the estate tax exemption is repealed in full, there’s no telling if the next administration will put estate taxes back in effect.  When drafting a living will and trust, you can draft a durable power of attorney over health and finances to designate someone to act on your behalf if you become incapacitated.  In addition to wills and trusts, there are many estate planning tools available that provide protection of assets against lawsuits and claims.  

What’s next?

If you don’t have a will and trust in place, ask an attorney if creating one would be appropriate for you.  If you have a will or trust already, look at the last time it was updated and make an appointment with your estate planning attorney if it’s time to revisit the good planning you’ve already done.  Often, you can update your trust with an amendment rather than recreating the entire trust from scratch.  

Once the new tax laws are finalized, consult with your attorney, CPA and Financial Advisor to ensure you are taking full advantage of opportunities available.  When you have a network of professionals working together to provide you sound recommendations, you will create an estate plan that provides you and your family peace of mind. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[ii] https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

[iii] https://www.cnbc.com/2017/11/03/the-good-the-bad-and-the-money-what-the-gop-tax-plan-means-for-you.html

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ADJUST YOUR ASSET ALLOCATION FOR CHANGING TIMES

These days, it's difficult for me to watch the news without a feeling of dread.  The Breaking News is a stream of political turmoil, division, violence and geopolitical stress.  If it's not a mass shooting next door, it's a prediction for World War III around the corner.  It makes for exciting evening news headlines, but I would prefer calm, reason and compassion.  

When something unexpected happens, it’s important to understand the facts and risks without panicking.  In the short term, political disorder may result in temporary market disruption, or a fluctuation in the stock market.  For younger investors who have a long investment window, stock market turmoil isn’t as concerning because they have time on their side and can ride out the temporary ups and downs.  However, retired investors who have less time to recover from market volatility, and rely on their investment portfolio for steady income, may want to consider making a conservative adjustment to their investment portfolio.  

Analyzing Your Asset Allocation

As we know, financial markets can be unpredictable, no matter how much we might hope for comfortable stability.  Although good times can make us exuberant and tough times can make our stomachs churn, reacting to market ups and downs isn’t useful.  There are few guarantees in life, but taking sensible precautions and staying focused on your important long-term goals can make a real difference as change inevitably comes.

A practical starting point is reviewing your asset allocation to ensure it is still appropriate for your life circumstances.  Typically, investors start with an asset allocation that is appropriate for them with a balance of US equities and International equities for growth, and fixed income or bonds for downside protection when the market experiences a decline.  A well-constructed asset allocation can reduce the volatility of your portfolio, and serve you well over reasonable fluctuations in the market.  

However, when significant life events occur, such as retirement, it is important to review and revise your asset allocation to reflect the change in your goals.  During your working years, your investment goal may have focused primarily on growth.  In retirement, the goal of preservation may take priority instead.  

Understanding Fixed Income

Fixed income or bonds are often a significant portion of an investor’s portfolio.  Commonly investors will say, “That bond fund hasn’t been doing well – maybe it’s time to sell it!”  However, fixed income is never added to a portfolio with the intent that it will be the best performing fund in the batch.  Rather, fixed income is in your portfolio to give you downside protection if the stock market goes south.  When uncertainty arises, the value of fixed income tends to increase and counteracts the loss on the equity side of your portfolio.  Fixed income is meant for protection.  

In years past when interest rates were at moderate levels, we often suggested individual tax-free municipal bonds, or corporate bonds for our clients.  Individually-held tax-free municipal bonds, or corporate bonds are great fixed income products that provide stable interest income to investors and return of principal at maturity.  However, we are now in a period of record low interest rates and buying moderate or long-term bonds today essentially means you are locking in yesterday’s low rates.  The Federal Reserve has increased interest rates twice this year and four times since 2015[i].  In other words, if you bought a 10-year Treasury at 2% at the beginning of the year, the same investment would be paying a higher return of 2.5% today.  Consequently, if you had to redeem your 2% bond prior to maturity, you would probably have to sell it at a loss. 

In a rising interest rate environment, like we are currently experiencing, short-term fixed income mutual funds work well.  Short-term is considered anything with a maturity of 5 years or less.  In this "basket" of many individual bonds, there are bonds maturing every week.  As they mature, they are replaced with new bonds at the (probably higher) market interest rate.  This allows your fixed income fund to keep up with rising interest rates and still provide you downside protection if the equity market dips.

When interest rates go back up to normal levels, you can reposition from fixed income mutual funds into individual bonds. The advantage of an individual bond is that it can lock in high interest, and as long as you hold onto it until it matures, the return of principal can be guaranteed. 

Ask for a Second Opinion

As you get older or transition into retirement, you may want to reduce volatility in your portfolio and take a more conservative stance.  Act proactively, and have your financial advisor review your asset allocation (the balance of the different elements that make up your investment).  He or she may recommend that you increase your fixed income holdings now while the market is at a high.  Making changes to your investment portfolio as your life changes is natural and prudent, and is the opposite of market timing.   

It may feel like today’s news headlines are more alarming than ever.  However, keep in mind that over the history of the stock market, the Dow Jones Industrial Average has recovered from what nay-sayers have called the end-of-investing…. many times.  From the Great Depression, to Black Monday of 1987 to the Dot-com Bubble and through the Great Recession in 2008 and 2009, the market has shown resilience and strength.  If you feel it’s time, ask your Certified Financial Planner™ for a check-up, and for candid answers to your concerns.  If you don’t have a financial sounding board already, many financial planners will offer you a free initial consultation where you can ask questions and get timely feedback, no (financial) strings attached.  

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 


[i] http://www.npr.org

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Dissecting Turmp's Tax Reform

On Wednesday September 27th, President Trump and Republican leaders in Congress unveiled a new tax plan that, if passed in its current form, could create dramatic changes to the current tax code.  

Highlights of the new tax reform include[i]:

  • Compression from the current 7 income tax brackets (ranging from 10% to 39.6%) to 3 brackets: 12%, 25% and 35%.  Congress can add a fourth bracket above 35%.

  • Doubling the standard deduction from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples

  • Boosting the child tax credit from $1,000 to an unspecified higher amount

  • A new $500 credit for caring for elderly relatives

  • Reducing the corporate tax rate from 35% to 20%

  • A lower top tax rate for small businesses at 25%

  • Taxpayers in high tax states such as California and New York could lose the ability to deduct state and local income taxes and property taxes on their federal return 

  • Elimination of the corporate and individual Alternative Minimum Tax

  • Elimination of estate taxes on large inheritances

  • Elimination of many other (currently) non-specified tax deductions

How will this affect me?

President Trump declared his proposal will “protect low-income and middle-income households, not the wealthy and well-connected.”  However, Democrats are already opposed to the tax reform, calling it a tax break for the wealthy.  

On the surface, it appears that the lowest tax bracket is increasing from 10% to 12% and the highest tax bracket is lowering from 39.6% to 35%.  However, the specific income levels tied to each of the new tax brackets is yet to be revealed, so it’s not certain where everyone will fall or how they’ll be affected.  Republicans say those who are paying 10% now might not be subject to taxation at all under the new plan, so they are going down to 0%, not pushed up to 12%.  

The National Association of Realtors argues that having a higher standard deduction could make home ownership less valuable in comparison to renting.  Further, it could decrease the value of existing homes.  This is because as the standard deduction rises, people are more likely to take the standard deduction and less likely to itemize their taxes.  Mortgage interest expenses and property taxes can only be deducted if a person itemizes their taxes.  

Other analysts have said that the proposed tax reform will greatly benefit corporations and stock holders.  Although the details aren’t clear yet, the plan proposes a shift from a worldwide tax system to a new territorial system.  International companies based in the U.S. would not be taxed on income earned overseas.  This would allow companies to bring back the profits earned overseas without incurring additional taxes.  To discourage companies from shifting all profits to countries with low tax rates, the plan also includes an unspecified minimum foreign tax.  The goal is to make US companies more competitive internationally and for foreign profits to reinvest back into the US market, furthering the economy and job growth.  

Analysts believe that other tax deductions and credits must be eliminated to make up for the tax cuts proposed in the reform.  However, exactly which deductions will be eliminated is yet to be seen.  Some worry that public programs and benefits for the countries neediest will be eliminated.  The elderly are particularly worried about the benefits under Social Security and Medicare; programs and benefits they depend on to make ends meet.  

Experts predict that the current tax reform proposal could reduce government revenue by more than $2 trillion dollars[ii] over the next decade.  This will add to the current $20 trillion dollars of debt carried by the US currently.  

What’s next?

President Trump’s goal is to implement the new tax code by the end of 2018, but it’s unknown what revisions will be made to gain more support for passage.  Next week the Senate is to begin deliberating the new tax bill.  Currently the Republicans dominate both the House and the Senate.  Some guess that the President has left areas for negotiation that will help to gain greater support from Democrats – such as the possible fourth tax bracket.  

Truly, nothing is certain at this point and each proposal is a bargaining chip for the Republican and Democratic parties until the reform is passed.  However, the economic market and stock market are never predictable.  This further reiterates the need for an investment strategy that is highly diversified and balanced.  Rather than trying to predict where the market will go, investors should have a predetermined exposure to each asset class and capture gains wherever they arise.  

Once the new tax laws go into effect, consult with your CPA or Financial Advisor to ensure you are taking full advantage of opportunities.  Hopefully the new tax system will benefit all Americans. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.cbsnews.com/live-news/trump-tax-plan-remarks-live-updates/

[ii] https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html?mcubz=1

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EQUIFAX BREACH

These days it’s harder than ever to protect our personal information.  I get phishing emails daily alerting me I am the lucky lotto winner in a foreign country – all I need to do is send my bank information to have the proceeds deposited into my account.  Those scams are pretty straight forward.  While the everyday person might not have all the right security measures in place to protect themselves, we assume the big businesses and government do – they have a whole IT department that focuses on that kind of stuff, right?

Apparently, not so.  This month, we found out that Equifax, one of the nation’s three major credit reporting agencies had a data breach that lasted from mid-May through July in 2017[i].  During that time, hackers accessed personal information data including names, social security numbers, dates of birth and addresses.  The data breach affects as many as 143 million people[ii] in the US, Canada and United Kingdom.  In the wrong hands, this data could be used by identity thieves to rack up debt in your name and potentially ruin your credit. 

A week after the Equifax breach, the Securities & Exchange Commission (SEC), the nation’s top financial markets regulator, admitted it had also been a victim of computer hacking.  Although just recently discovered, the data breach occurred in 2016.  The top securities regulator said hackers accessed corporations’ financial information before it was made public (financial statements, quarterly earnings reports, IPOs, mergers and acquisitions, etc.) in its’ corporate filing system EDGAR (Electronic Data Gathering, Analysis and Retrieval).  According to the SEC, that data could have been used to make “illicit gains” through stock trades[iii].  Somewhat ironic, the SEC had been pressuring investment advisors and broker dealers to beef up their cybersecurity protections.  At the same time, the Government Accountability Office which audits the SEC found that the organization had not implemented 11 of 58 security recommendations related to its own computer network that would have helped to detect intrusion[iv].  

Am I at risk?

You can visit the Equifax website, www.equifaxsecurity2017.com to find out if your information was exposed.  Under the “Potential Impact” tab, you will be asked to enter your last name and the last six digits of your Social Security number.  The site will tell you if you’ve been affected by this breach.  

If Equifax feels your data was compromised they will encourage you to enroll in TrustedID Premier, a credit file monitoring and identity theft protection program.  There are five types of credit monitoring offerings, complimentary.  You can customize which of the below services you want to utilize.  You will be asked for a great deal of personal information so make sure you are on a secure computer and encrypted network connection. Credit monitoring options include:

1.      Equifax Credit Report – Copies of your Equifax Credit Report.

2.      3 Bureau Credit File Monitoring – Credit file monitoring and automated alerts of key changes to your Equifax, Experian and TransUnion credit files.

3.      Equifax Credit Report Lock – Allows you to prevent access to your Equifax credit report by third parties, with certain exceptions.

4.      Social Security Number Monitoring – Searches suspicious web sites for your Social Security number. 

5.      $1M Identity Theft Insurance – Up to $1 million in ID theft insurance. Helps pay for certain out-of-pocket expenses in the event you are a victim of identity theft.

After signing up for TrustedID Premier, you will receive an email with a link to finalize your enrollment and activate your customized security protection.  Due to the recent breach, traffic to the Equifax website is quite high and they warn it might take several days before the confirmation email arrives in your inbox.  

In a highly criticized move, Equifax added an arbitration clause to the free credit monitoring service that required users to give up their right to sue or join class-action lawsuits.  Due to public backlash and social-media shaming, the arbitration clause was rescinded[v].  

What else can I do?

If after visiting the Equifax website, you are told your data was not compromised, US consumers still have the option to obtain one year of free credit monitoring.  Due to high volume on the website currently, you will be given a date to come back to enroll in the future.  You have up until November 21, 2017 to enroll for this benefit.  

Other steps you might consider to protect yourself could include the following:

  • Placing a credit freeze on your files – A credit freeze locks your credit file with a PIN that must be used for anyone to add new credit in your name.  The freeze won’t stop someone from fraudulently charging to your existing credit lines.  You will have to enroll with each of the three credit agencies individually to initiate the freeze.
  • Active monitoring – Above and beyond annual credit report reviews, you should also monitor your existing credit cards and bank accounts regularly and question any charges you don’t recognize.
  • If you have minor children, consider checking their credit history regularly.  It is counterintuitive because minors should not be issued debt.  However, some young adults have applied for their “first” credit card, only to find their credit is shot because identity thieves have been using their social security for years, undetected.
  • File IRS taxes early – The Federal Trade Commission (FTC) recommends you file your tax return as early as possible to avoid tax identity theft which occurs when someone uses your social security to collect your tax refund before you do.  The FTC recommends that you respond to any IRS notifications timely, but remember that the IRS only sends letters.  They do not call you and ask for your personal information.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] www.consumer.ftc.gov

[ii] http://www.latimes.com/business/la-fi-sec-hack-20170921-story.html

[iii] https://www.sec.gov/news/press-release/2017-170

[iv] http://www.latimes.com/business/la-fi-sec-hack-20170921-story.html

[v] http://www.latimes.com/business/lazarus/la-fi-lazarus-equifax-arbitration-clauses-20170912-story.html

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HOW CAN I PROTECT MY FAMILY?

Lately we’ve noticed an increased interest in life insurance.  Client’s ask: When should I buy it?  Why do I need it? When is it too late?  I attribute some of the increased interest to the demographic shift as Generation X’ers (those born between 1965 and 1976) begin to think about estate planning and Generation Y’ers or Millennials (those born between 1977 and 1995) are starting families of their own.

Risk Factors

There are three main risks that life insurance aims to address.  Not coincidentally, these are the three biggest risks to the Gen XY groups mentioned.  The first risk is income replacement, as many want to ensure that their spouse or partner are financially stable should they pass away prematurely.  

The second risk is debt coverage.  Debt, or the idea of leveraging money, has become engrained in the American culture.  With the high cost of homes, cars, college and kids, it is nearly impossible to be debt free in today’s age.  The average American carries $137,000 in debt[i], mostly attributable to home mortgage debt.  In L.A. County, the median home price is $550,000[ii].  Life insurance can play a vital role in providing peace of mind that your family can stay in their home, even if you aren’t around.  

Another common concern is education or financial support for children.  A college degree is often a minimum requirement for employment these days, and many kids go on to get upper level education or specialization thereafter.  The average cost of attending a UC school for California residents is currently $34,700 per year and $61,444 for non-residents[iii].  To add to that headache, education costs increase at an average of 6% annually, or about double the general inflation rate[iv].  Life insurance can ensure your children will have education funding until they are financially independent. 

When should I buy?

Timing tends to work itself out organically for each person.  When I bought a house, I knew I should consider life insurance.  When I had my second child, I knew I was taking on more risk than I was comfortable with, so I purchased a life insurance policy.  

Life insurance premium pricing is carefully constructed by actuaries, but generally, it's based on age and health. The older you get, the more expensive a policy becomes. You also want to insure before you have a serious medical illness that would make you uninsurable or make a policy too expensive.  

Depending on the type or severity of illness, some insurers will still consider you for insurance after a significant health change after you show two years of stable health with medication or recovery without reoccurrence, but each case is independently analyzed.  

Theoretically, some insurers will insure a person in good health up to their 80’s, but the cost benefit analysis of the policy then comes into play and the policy might not be worth the premium payment.

Term or Permanent Insurance?

Term and permanent insurances have different purposes.  Term gives you the greatest leverage of your money, dollar for dollar, and is usually used to cover a time sensitive risk such as a mortgage. Permanent insurance protects against premature death as well, but can also be used as an estate planning tool because the intent is to hold the policy until you pass away, rather than to cover a temporary risk.  

Permanent insurance such as Whole Life, Universal Life and Variable Universal Life have features that can cater to a variety of needs.  In recent years, the cost of insurance (COI) within Universal Life policies have increased, causing policyholders to pay more in premiums than originally anticipated.  

One of the best ways to shop for life insurance is through an independent agent who is not tied to a company, but rather, can shop the entire market and quote the policy that best suits your needs.  Certified Financial Planners and CPAs are Fiduciaries, meaning they have pledged to act ethically in the client’s best interest, and can recommend a company or policy for you.   

What else should I consider?

Another tool to protect the assets you’ve worked hard for is a living will and trust.  People often think they are one and the same, but they serve different purposes and can work together well. A living will is for medical affairs and allows you to state wishes for care in case you are not able to communicate your decisions.  A trust takes effect as soon as you create it, and can be utilized to hold title of property for the future benefit of your loved ones.  After you pass, a trust does not need to go through the timely and expensive probate process and the settlement of your estate is private.  An attorney can assist you in customizing a will and trust.

Your attorney can also bundle your living trust with a durable power of attorney, with which you can authorize someone to act on your behalf if you become incapacitated.  Ensure it is HIPAA compliant so doctors, hospitals and medical staff will communicate with your designated person.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.nerdwallet.com/blog/average-credit-card-debt-household/

[ii] http://www.latimes.com/business/la-fi-home-prices-20170523-story.html

[iii] http://admission.universityofcalifornia.edu/paying-for-uc/tuition-and-cost/index.html

[iv] http://www.finaid.org/savings/tuition-inflation.phtml

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Aren't Record Highs a Good Thing?

I hope you are enjoying the dog days of summer!  Global stock markets delivered robust gains in the second quarter of 2017 as stronger earnings growth, upswings in global economic data and diminished political uncertainty in Europe all buoyed markets around the world.  The S&P 500 rose 3.1%[i] while domestic economic data continued to plug along at a healthy, if not exciting, pace.  It’s wonderful to have positive economic data to reflect upon.  However, whether the headlines this week are about the new market high or a looming market correction, the most important takeaway is to stick to your long-term investment plan and concentrate on the big picture.

This week the Dow Jones Industrial, arguably the most frequently referenced stock market index in the world, reached an all-time high of 22,000.  Since the bottom of the recession in March 2009, the Dow has more than tripled in value, creating one of the strongest bull markets we’ve ever seen.  However, our current bull market reached a milestone 8 year run this March[ii].  While some are finally comforted to get back into the market, others are warning that the sky is falling and to lock in gains while you can.  While a typical market timer might move from stocks into bonds when they expect the market to pull back, other financial experts caution that bonds are the wrong move in a rising interest rate environment.  All the warnings and predictions make the initial exuberant Dow record a frightening position to be in.  

So what do you do? 

My father and mentor, Alan Kondo, has always liked the adage, “The market timer’s Hall of Fame is an empty room.”  It’s true that an 8 year bull market does give rise to concern.  However, perfectly timing the top of the market so you can sell to lock in gains and then predicting the exact time to reenter the market before it picks up again is as likely as winning the lotto – twice in a row.  

What has historically worked more effectively to provide reliable returns and protect your nest egg is to create a long-term investment plan that you can stick to, in both good and bad markets.  Construct a balanced portfolio of equities and fixed income (bonds) that will capture market growth when it occurs, but also provide you a measured amount of downside protection if the market has a pull-back.  The exact weighting of equities to fixed income depends on a variety of factors like your retirement date, the return you hope to achieve annually and your personal risk tolerance.  A Certified Financial Planner™ can help you customize an asset allocation that is tailored to you.  

Success in Short-Term Fixed Income

For some, fixed income has been a difficult component to keep in their portfolio during the last 8 years as equities have climbed at a remarkable pace.  Further, with rising interest rates and inflation, long-term bonds may have a difficult road ahead.  We should be mindful of how we invest in fixed income these days.  The Federal Reserve has already increased interest rates twice this year and four times since 2015[iii], signaling that they believe the economy is still strong.  That means you don’t want to lock in a 10 year Treasury at 2.25% now if the going rate is going to be 2.50% by year-end and even higher next year.  Instead, now is the time to invest in short-term fixed income, with maturities of less than 5 years and preferably 1-3 years.  Employ a laddering strategy where multiple bonds are purchased, each with different maturity dates.  Having short-term laddered fixed income means that each quarter, some of the bonds in your portfolio or bond fund will mature.  The matured bonds will be replaced with new short-term fixed income at the going market interest rate, allowing your fixed income fund to keep up with rising interest rates and still provide you downside protection if the equity market dips.  

Why Market Pullbacks are Good

A market pullback is defined as a temporary market decline in what was otherwise an upward trend in the stock market.  Some are claiming that a market pullback is on the horizon that will wipe out the Trump Rally[iv] which has amounted to a whopping 3,000 points on the Dow since President Trump took office last November.  A market correction can be as much as a 10% decline, but it’s important to remember that market corrections happen often and are actually indicative of a healthy stock market.  Just as the economy has peaks and valleys, so too does the stock market.  When the market goes too long without a correction, the risk of stock prices deterring too far from their actual value grows.  

Keeping a big picture perspective, in a 20 or 30 year investment window, a market correction is hardly a blip on the retirement radar.  So if you have set up a good investment allocation, let your investment ride out that temporary trough and get back on track.   Don’t sweat the small stuff.  

In the last 20 years, the S&P 500 returned an annual average of 7.68%.  However, during that same window of time, the average U.S. stock investor earned just 4.79%. That is an almost 3% difference each year[v].  Mostly this is the detriment of market timing and locking in lows due to panic.  Many investors are smart people who could do a good job at investing their retirement funds if they dedicated themselves to it full-time.  The benefit of a good financial advisor is the experience, objective advice and guidance that can help keep investors on track and stop them from potentially cutting their long-term returns in half.  

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] http://www.marketwatch.com

[ii] http://fortune.com/2017/03/09/stock-market-bull-market-longest/

[iii] http://www.npr.org

[iv] https://www.cnbc.com/2017/03/24/a-health-care-bill-setback-may-create-a-great-buying-opportunity-raymond-james.html

[v] http://360.loringward.com/rs/303-IYC-235/images/Blog_Don%27t_Just_Do_Something.pdf

 

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Leaving Debts After Death

For many parents, the last thing they want is to leave their children debts after they are gone. However, this is becoming more and more common. The Federal Reserve's Survey on Consumer Finances showed that for families headed by seniors age 65 to 74, those that had debt rose from 50% in 1989 to 66% in 2013. Not only that, during the same period of time, the debt load doubled.

Some of the main reasons for this trend is the rising cost of healthcare, people living longer, and the reality that about 40% of your lifetime expenditure on healthcare occurs after age 70. For those seniors who don't have a Long Term Care policy or adequate healthcare protection, those costs are paid from credit cards, or from refinancing their homes.

It's not uncommon for surviving children to discover that their parents left dozens of credit cards with overdue payments, and large mortgage balances. What happens to unpaid bills when you die? What debts are passed onto the next generation? Here are some answers to these questions.

What happens to unpaid debts after you die?

Typically, when a person passes away, the person's estate owes the debt. If there is not enough in the estate to pay the debt, the debt goes unpaid.

What happens to credit card debt?

Children are usually not responsible for any remaining credit card debt that their parents owed, no matter what the reason is for the debt. However, a child who is a co-owner of the credit card would still be liable for the debt.

What about loans that were taken out by parents for the children's education?

For a parent's federal student loan, or Parent Plus loan, any balance remaining at their death is taken off the books. However, according to the Education Department, their estate could be required to pay taxes on the forgiven loan.

How do I protect retirement assets from creditors?

Many attorneys will advise their clients not to name their living trust as the beneficiary of their retirement accounts, such as Individual Retirement Accounts, 401(k)s, 403(b)s and 457 deferred compensation accounts. What can happen is that the Internal Revenue Service would tax these accounts, and only the net amount after taxes would be distributed to family members.

It's often better to name real people (like children or grandchildren) as beneficiaries of retirement accounts rather than the trust. This way, the children can create Inherited IRAs after the parents have passed away, the money can be transferred from the parents' IRAs to the children's IRAs tax-free, and the money is able to grow tax-deferred for another life expectancy. Even a modest IRA, when it benefits from 2 generations of tax-deferred growth, can balloon to an impressive value. The owner of the Inherited IRA has to take a Required Minimum Distribution each year, but it's age-weighted and can be quite small.

Similarly, if the living trust is named as the beneficiary of a retirement account, existing creditors can attach the estate even before it gets to the children. However, a retirement plan that has real people as beneficiaries cannot be touched by the creditors of the deceased.

Consult with an attorney that specializes in wills, trusts, or estate planning if your parents passed away with significant debt. He or she can give you advice for your specific circumstances and goals.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Millennials: On Investing And Retirement

Move over Baby Boomers. These days all eyes are on Millennials, those young adults between the ages of 18 and 34 who are now America's largest living generation.1 According to the U.S. Census Bureau, Millennials in the United States number more than 75 million -- and the group continues to expand as young immigrants enter the country.1

Due to its size alone, this generation of consumers will undoubtedly have a significant impact on the U.S. economy. When it comes to investing, however, the story may be quite different. One new study found that 59% of Millennials are uncomfortable about investing.2 Another study revealed that just one in three Millennials own stock, compared with nearly half of Generation-Xers and Baby Boomers.3

On the Retirement Front

How might this discomfort with investing manifest itself when it comes to saving for retirement -- a goal for which time is on Millennials' side?  According to new research into the financial outlook and behaviors of this demographic group, 59% have started saving for retirement, yet nearly two-thirds (64%) of working Millennials say they will not accumulate $1 million in their lifetime.  Research showed that the Millennials with the more negative view of the future earn a median income of $27,900 a year.Just over a third of this group are putting away more than 5% of their income in a retirement savings account. 

As for the optimistic minority who do expect to save $1 million over time, they enjoy a median personal income that is about twice that -- $53,000 -- of the naysayers. Two-thirds are deferring more than 5% of their income and 28% are saving more than 10%.2

So despite their protestations, their reluctance to embrace the investment world, and a challenging student loan debt burden, Millennials are still charting a slow and steady course toward funding their retirement.2

For the Record

Here are some interesting facts about Millennials and retirement:

  • The vast majority (85%) of Millennials view saving for retirement as a key passage into becoming a "financial adult."

  • A similar percentage (82%) said that seeing people living out a comfortable retirement today encourages them to want to save for their own retirement.

  • Those who have started saving for retirement said the ideal age to start saving is 23.

  • Those who are not yet saving for retirement say they will start by age 32.

  • Of those who are currently saving for retirement, 69% do so through an employer-sponsored plan.

  • Three out of four said they do not believe that Social Security will be there for them when they retire.

  • Most would like to retire at age 59 – much earlier than the actual retirement age of the generation before them.

Perhaps what Millennials are forgetting is that time is their greatest weapon in the battle for a successful retirement.  The earlier they start saving, the longer their investment will benefit from tax-deferred growth and the greater the ability for long term compound growth to take effect.  A challenging entrance into the job market during the Great Recession coupled with immense and looming education loans certainly explain the pessimism of this generation.  Couple that with a volatile stock market and insurmountable hurdles to purchase a home, and it becomes clear why some Millennials are reluctant to save for retirement at all! 

However, the longer and broader their retirement savings years, the more these initial setbacks will become just a blip in the radar.  Encourage the Millennials in your life to start saving early, utilize those around them as a financial sounding board, and construct a retirement savings plan early that they can build off for years to come.  By saving now, they may be able to attain that goal of retirement at age 59 after all!

Source/Disclaimer:

1Pew Research Center, "Millennials overtake Baby Boomers as America's largest generation," April 25, 2016.

2Wells Fargo & Company, news release, "Wells Fargo Survey: Majority of Millennials Say They Won't Ever Accumulate $1 Million," August 3, 2016.

3The Street.com, "Only 1 in 3 Millennials Invest in the Stock Market," July 10 2016.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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To Diversify Wealth, Think Outside the Business

Small business owners face a unique, but critical investing challenge: diversifying investment holdings outside of the business.  For business owners, diversifying your sources of wealth takes on added importance. Focusing too much on your business could leave you exposed in the event of an economic downturn or some other change in circumstances.

Luckily, there are many options to consider that can help diversify the wealth you have earned.  Earmarking funds for retirement, using a trust to bequeath your legacy to heirs, and/or broadening your investment mix may be helpful in reducing reliance on your business.

Earmark Assets for Retirement

A small-business retirement plan may help an entrepreneur divert a portion of salary for use in his or her later years.  Plans with high contribution limits, such as a 401(k) plan, may be especially helpful in this regard.  If your business elects to sponsor a 401(k) plan, traditional and Roth-style plans present different types of tax benefits.  Contributions to traditional 401(k) plans are tax deferred, which lowers taxation during the year the contribution is made.  After age 70½, required minimum distributions (RMDs) are taxable as income in the year distributed.  Contributions to Roth 401(k) plans are made with after-tax dollars, but RMDs during retirement are generally tax free.1

Entrepreneurs with the means to invest for retirement above and beyond an employer-sponsored plan may want to consider a Roth IRA.  With a Roth IRA, the maximum annual contribution for the 2017 tax year is $5,500, plus an additional $1,000 catch-up contribution for those aged 50 and older.  To contribute the full amount allowed, your modified adjusted gross income (MAGI) needs to be $118,000 or less if you are a single taxpayer or $186,000 or less if you are married and filing a joint tax return (in 2017).  Contributions are taxable, but qualified distributions after age 59½ are tax free.  RMDs are not required from Roth IRAs during your lifetime, which enhances their appeal as an estate planning vehicle.  If you desire, you can leave the assets in a Roth IRA and pass it to your heirs, income-tax free as an inherited Roth IRA when you are gone. 

Leaving a Legacy

As you age, estate planning is likely to become increasingly important.  A trust can help you maintain control of assets during your lifetime, shield assets from taxes, and create a legacy for heirs.  There are many types of trusts, and your ultimate selection may depend on whether you want the trust agreement to be revocable or irrevocable.  Depending on the type of trust selected, a trust agreement can make it possible to use life insurance proceeds income- and estate-tax free, to remove your residence from your estate, to bequeath assets to grandchildren, or to capitalize on a low-interest-rate environment and potentially reduce estate taxes.  You should discuss the many trust options available with your tax or legal advisor.

Your Investment Mix

When managing investments, the old saying about not putting all your eggs in one basket is especially important for entrepreneurs.  Exposure to equities, fixed income, real estate, and other types of assets can potentially help to diversify your investment mix and protect the wealth you have accumulated.  Although there are no guarantees, if one area within your portfolio declines in value, another could potentially increase or hold steady, possibly reducing your exposure to loss. This strategy of balancing asset classes and diversifying your holdings is known as Modern Portfolio Theory.  When implemented correctly and tailored to your individual risk tolerance, this strategy can help you achieve returns market rate returns in a conservative portfolio that also allows downside protection.   

To truly diversify when investing, small business owners need to think outside the business.  Reach out to a financial advisor that will work with you to help define an overall investment strategy that is in line with your goals and objectives.

Source/Disclaimer:

1Early withdrawals may be subject to a 10% penalty tax in addition to regular income taxes on any investment earnings.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Retirement Tax Breaks You Don't Want to Miss

Some federal tax laws adjust to offer varying benefits or tax breaks at different age brackets.  This can present opportunities to save or alternatively, create costly pitfalls to avoid.  Being alert to the rolling changes that come at various life stages is the key to holding down your tax bill to the legal minimum.  Below are a few ideas that the 65 and older might want to consider.

1.  Bigger Standard Deduction

When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2016 returns, for example, a single 64-year-old gets a standard deduction of $6,300 (it will be $6,350 for 2017). A 65-year-old gets $7,850 in 2016 (and $7,900 in 2017).

The extra $1,550 will make it more likely you’ll take the standard deduction rather than itemizing and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket. Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. When both husband and wife are 65 or order, for example, the standard deduction on 2016 joint returns is $15,100 (and $100 more for 2017). Be sure to take advantage of your age.

2.  Easier Medical Deductions

Until 2017, taxpayers age 65 and older get a break when it comes to deducting medical expenses. Those who itemize on 2016 returns get a money-saving deduction to the extent their medical bills exceed 7.5% of adjusted gross income. For younger taxpayers, the AGI threshold is 10%. If you’re married, only one spouse needs to be 65 to use the 7.5% threshold. For 2017 returns, the 10% threshold will apply to all taxpayers.

3.  Deduct Medicare Premiums

If you become self-employed—say, as a consultant—after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.

This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses for those age 65 and older in 2016. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse's employer (if he or she has a job that offers family medical coverage).

4.  Spousal IRA Contribution 

Retiring doesn’t necessarily mean an end to the chance to shovel money into an IRA.  If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own.  If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½. If you use a Roth IRA, there is no age limit. As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter’s doors remain open to you. The $6,500 cap applies in both 2016 and 2017.

5.  Avoid the Pension Payout Trap

Upon retirement, many retirees are offered the opportunity to take a lump-sum payment from their company plan, such as pensions, annuities, IRAs and other retirement plans.  However, if you take a lump-sum payment from a company plan, you could fall into a pension-payout trap where the IRS mandates you withhold a flat 20% for income taxes… even if you simply plan to move the money to an IRA via a tax-free rollover.  The IRS will hold on to the 20% until you file a tax return for the year and demand a refund. 

Fortunately, there’s an easy way around that miserable outcome when initiating a rollover from your employer sponsored plan to an IRA.  Simply ask your employer or Certified Financial Planner to send the money directly to a rollover IRA.  As long as the check is made out to your IRA and not to you personally, there’s no tax withholding.

Even if you intend to spend some of the money right away, your best bet is still to ask your employer to make the direct IRA transfer.  Then, when you withdraw funds from the IRA, it’s up to you whether there will be withholding.

To find out which of the above strategies is appropriate for you, consult your Certified Financial Planner or CPA.  Some can be utilized in combination, but others should be selected in lieu of one another, so find out which will provide you with the greatest benefits overall. 

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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2016 in Reflect: The Disciplined Investor Won

Calling 2016 an eventful year in the stock market feels like a bit of an understatement.  We started the year with negative sentiments stirring fear in many.  After the first full week of 2016, USA Today headlined an article noting, “Stocks close out week with worst start to year EVER.[i]  It was nerve rattling, to say the least.  The end of January was no better with the market diving as much as 500 points in one trading day, only to close at a loss of 250 points. 

The market dropped quickly in reaction to slowed growth in China as it shifted its economy from one fueled by trading with other countries, to one that is driven more by internal consumer spending, similar to the U.S.  To further fears, oil was selling at $28[ii] a barrel in early 2016, sending many corporations tied to the oil and gas industry into a downward spiral.  While crude oil prices have recovered greatly, unrest in the Middle East, has kept oil prices lower than the commonly seen $100 a barrel price from the 2011-2014 period. 

Then in late June, the world was surprised by the British Exit coined “Brexit” vote to leave the European Union.  The decision had immediate ripple effects around the world, causing stock markets to plummet and the British pound to fall to its lowest levels in decades. 

Shortly thereafter, the US election surprised the world again with presidential candidate Donald Trump making an unforeseen surge to surpass Hillary Clinton and become the 45th President of the United States.  As the US election announcements were declared, overseas markets sharply declined.  However, by morning, the market had reversed course to start what has been coined as the “Trump Rally” through year-end. 

Just over a week away from the 2016 year-end, the S&P 500 is closing in on a 10% gain for the year and the Dow, a gain of approximately 16%.[iii]  Hardly anyone remembers that just 11 months ago, the market was down about 9% and people were questioning whether the US was heading into a bear market. 

Everything in hindsight is 20/20.  However, what 2016 emphasizes again is that the disciplined investor who stays the course, or in this case, stays invested in the market, wins!  As the saying goes, it is an investors’ time in the market, and not market timing that yields returns. 

Many investors are stirred by unpleasant financial headlines, political shifts or negative market sentiments that are backed by very convincing data.  However, reacting on emotion can have a detrimental effect on an investment portfolio.  The important thing that a long-term investor needs to know is that after each market decline, the market pushes on to new record highs.  This is why those who sell at the bottom of the downturn, locking in losses, are often regretful later on.  Although it is sometimes difficult, those who are patient and do not panic are rewarded. 

Case in point, a person invested solely and unwavering in the S&P500 during the 2010’s would yield a whopping return of 95% on their investment.  However, if that same investor were to have timed the market and missed just the top 10 performing days in the market, their return would drop to 34% during the same window.[iv]

History has shown that the best-performing asset class doesn't hold the position very long, and changes quickly.  U.S. large company investments, like the Standard and Poors 500 index, had a good run since the bottom of the recession in March 2009.  In 2016, the U.S. small companies, emerging markets and U.S. value asset classes took the lead, proving that a diversified strategy is often the most prudent way to invest.   

Sir John Templeton, one of the founders of the Franklin Templeton mutual funds, famously said, "The only investors who shouldn't diversify are those who are right 100% of the time." One of the more reliable strategies in a volatile market is to build a portfolio that is just the opposite of "putting all your eggs in one basket." It's difficult to guess the best-performing asset class for the year, even for research firms that study investments 24/7 with analysts stationed around the world.  When you have a globally diversified portfolio that balances all of the available asset classes, no matter which asset class is performing well, you will benefit from its good performance.

Taking advantage of the market's long-term potential is one of the better ways to beat inflation and accomplish your family's most important goals.  Don’t forget, time is on your side!

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


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Lower Your Tax Bill with Year-end Planning

As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there's no better time for tax planning than before year-end. That's because there are a number of tax-smart strategies you can implement now that will reduce your tax bill come April 15.

As the year begins to draw to a close, consider how the following strategies might help to lower your taxes.

Maximize Contributions to Tax-Advantaged Accounts

Contributing to your employer sponsored retirement plan such as 401(k)s and 403(b)s is one of the smartest tax moves you can make. For 2016 you can defer as much as $18,000 of pre-tax income towards your retirement, essentially, reducing your taxable income for the year.  If you are age 50 or older, you can shelter an additional $6,000 for a total income reduction of $24,000.  Additionally, the money in the account is allowed to grow tax deferred until you begin taking withdrawals, usually in retirement.1

If you are interested in supplementing your contributions to your employer's plan, consider funding a traditional IRA. You can contribute up to $5,500 in 2016, and an additional $1,000 catch-up contribution if you are 50 or older. Like 401(k)s, IRAs offer a "one-two punch" in tax savings: tax deferral on your investment until you start withdrawing money, along with a potential tax deduction on all or part of your annual contribution if you meet the IRS's eligibility rules.  However, keep in mind that IRA contribution deductions (tax benefits) are phased out above certain income levels, depending upon your filing status and if you or your spouse are covered by an employer-sponsored retirement plan. 

If you’re subject to a phase-out of tax deductions, consider directing your savings to a Roth IRA or a Roth 401(k), if offered by your employer. Although contributions to Roth retirement vehicles are made with after-tax dollars, the future withdrawals (including investment gains) are tax free, provided certain conditions are met. Keep in mind that those with higher annual household incomes may be unable to make a Roth IRA contribution, so check with your CPA.

Put Losses to Work

If you expect to realize either short- or long-term capital gains, the IRS allows you to offset these gains with capital losses.  This strategy of minimizing your exposure to capital gains tax is often referred to as tax-loss harvesting.  Short-term gains (gains on assets held less than a year) are taxed at ordinary rates, which range from 10% to 39.6%, and can be offset with short-term losses.  Long-term gains (gains on assets held longer than a year) are taxed at a top rate of 20% and can be reduced by long-term capital losses.2  To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year's tax return and carry forward any unused losses for future years.

Given these rules, there are several actions you should consider:

  • Avoid short-term capital gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term capital losses to offset them, try holding the assets for at least one year.

  • Take a good look at your portfolio before year-end and estimate your gains and losses to date. Strategize with your financial advisor how you can offset gains and losses to minimize your capital gains tax.

  • Consider taking capital losses before capital gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.

When evaluating whether or not to sell a given investment, keep in mind that a few down periods don't mean you should sell simply to realize a loss.  Stocks in particular are long-term investments subject to ups and downs.  Moreover, taxes should only be one consideration in any decision to sell or hold an investment.  If you are considering employing this strategy, evaluate carefully the investments you may select for sale, then discuss your plan with a trusted financial advisor.

Consider a Qualified Charitable Distribution (QCD)

An important year-end consideration for older IRA holders is whether or not they have taken required minimum distributions (RMDs). The IRS requires account holders aged 70½ or older to withdraw specified amounts from their traditional IRA each year. These amounts vary depending on your age, increasing as you grow older.

Some retirees have a steady income stream from Social Security or a pension plan and don’t actually spend their RMDs to cover daily living expenses.  However, meeting the IRS requirement of taking an annual IRA distribution can increase your adjusted gross income (AGI).  This can increase your taxable income, push you into a higher income tax bracket, increase your Medical premium rates (based on annual income), etc. 

For those with high income sensitivity, a strategy of direct gifting your RMD to a non-profit organization might be the key.  A Qualified Charitable Distribution (QCD) is a nontaxable distribution made directly from your IRA to an organization eligible to receive tax-deductible contributions.  You must be at least age 70 ½ when the distribution is made. The QCDs count towards your IRA required minimum distribution.

A QCD is generally nontaxable to you, the donor, up to a maximum annual exclusion limit.  This allows you to stretch your dollars because you can gift pre-tax money directly to a charity that is eligible to receive the gift without paying taxes on the funds.  In other words, your AGI can be unaffected and your Required Minimum Distribution has been met, a win-win.

Regardless of what Congress does in the future, there are many steps you can take today to help lighten your tax burden. Work with a Certified Financial Planner and CPA to see what you can do now to reduce your tax bill in April. 

Source/Disclaimer:

1Withdrawals from traditional IRAs are taxed at then-current income tax rates. Withdrawals prior to age 59½ may be subject to an additional federal tax.

2Under certain circumstances, the IRS permits you to offset long-term gains with net short-term capital losses. See IRS Publication 550, Investment Income and Expenses.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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When Planning, Focus More on Goals, Less on Numbers

Reaching a place of financial well-being often requires a different way of thinking about investments.  Financial planning is a complex, lifelong process that people tend to approach with a numbers orientation.  What rate of return do I need to reach my goal?  How much insurance do I need?  Can I afford a bigger house?  How much money do I need to save for retirement? 

To support their pursuit of the "right numbers," people often use separate advisors -- for instance, a banker, a financial planner, an insurance agent, a tax professional, and an estate planning attorney -- to oversee the various components of their household wealth.  

However, this "siloed" approach to financial planning can easily lead to exclusionary investment strategies that make sense in one aspect of your life, say your investment growth goals for example, but neglects to consider another equally important facet, say your taxes.  Narrow investment strategies could create exposure to unnecessary levels of risk.  It may also result in multiple, random investment accounts in need of consolidation.  Furthermore, such an approach may inadvertently overlook crucial tools, leaving entire planning areas to chance.

Unlocking Financial Synergies

When viewing their financial goals -- such as buying a home, paying for a child's education, or saving for retirement -- individuals typically think in terms of what those goals cost rather than how achieving them might affect their lives.  If, however, they were to reengineer the planning process and assess their current life issues and future aspirations prior to selecting investments and asset allocation strategies, they may be in a better position to achieve satisfactory outcomes.  Perhaps equally important, by putting life circumstances at the center of financial decision-making, individuals may find more meaning in their actions with regard to money.

Indeed, values have a significant role to play in determining how individuals manage their assets. This is one way in which a holistic approach to "financial life planning" enables individuals to better assess their wants and needs, establish meaningful priorities, and avoid misguided investments.  As life circumstances and priorities change -- and they inevitably will -- so too, do financial goals.  In this way, individuals employing a holistic approach to planning can easily identify and address those areas of their financial lives that are still working well and those that may be hindering their financial well-being.

Crafting a Plan

Crafting a plan that reflects your unique situation and that ties your life aspirations to your financial goals is part art, part science.  To achieve this level of planning you need to rely on the guidance of a collaborative minded advisor -- someone who will take the time to get to know you and your circumstances, will put together an appropriate combination of vehicles or strategies and will work in conjunction with additional financial professionals to help achieve your goals -- whatever they may be. 

Certified Financial Planners and CPAs are licensed professionals who take a fiduciary oath – pledging to put your best interests before their own.  Seek professionals who have a trusted track record and can help you create a tailored plan for your specific needs.  The more your professionals work together, the better your plan will make sense from every angle.  When you have a plan of action that your financial planner, accountant and attorney have all blessed, you’ll likely have peace of mind that will help you to act decisively and achieve your goals that much sooner. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Impact of Income Inequality on Women's Retirement

Women earn less than men, live longer than men, and often take time out of the workforce to have children and/or to care for an aging parent or sick loved one. The potential consequence of these realities? While most U.S. workers are facing a retirement savings deficit, for women, the effect is compounded: Lower pay translates into reduced Social Security benefits, smaller pensions, and less retirement savings. This makes smart financial management especially important for women.

Consider the Facts

Many women will need to make their retirement nest eggs last longer than men's. According to the latest data from the Society of Actuaries, among females age 65, overall longevity has risen 2.4 years from 86.4 in 2000 to 88.8 in 2014. Similarly, among 65-year-old men, longevity has risen two years during the same timeframe, from 84.6 to 86.6 in 2014.¹

The gender wage gap has a ripple effect over a woman's entire career. The National Women's Law Center has found that a woman starting her career now will lose more than $430,480 over a 40-year career; for Latinas, this wage gap could total $1,007,080 over a career, and for an African American woman, the total wage deficit could reach $877,480. ² Put another way, a woman would have to work 51 years to earn what a man earns in 40 years.²

Family caregiving causes career interruptions that can have significant monetary consequences over time. Research conducted by the AARP revealed that family caregivers who are at least 50 years old and leave the workforce to care for a parent forgo, on average, $304,000 in salary and benefits over their lifetime. These estimates range from $283,716 for men to $324,044 for women.³

The retirement income gap is very real. The average Social Security benefit for women older than 65 was $14,234 annually in 2014, compared with $18,113 for men, according to Social Security Administration data.⁴ Research shows that women also receive about a third less income in retirement from defined benefit pension plans and have accumulated about a third fewer assets in defined contribution retirement accounts than their male counterparts.⁵

Beating the Odds

Despite these challenges, many women retire with enough money to relax and enjoy their later years. Here's how they do it:

  • Saving as much as they can: This year you can save up to $18,000 in an employer-sponsored retirement plan, plus an additional $6,000 "catch-up" contribution if you are age 50 or older. Your contributions are made on pretax income, which means you're paying taxes on a lower amount.⁶
  • Chances are your employer-sponsored plan won't provide all of the money you'll need once you retire. Educate yourself about other sources of retirement income, and strategies for optimizing your benefits -- as well as IRAs and other investments that can help fill in the gaps.⁷ Your Certified Financial Planner™ or Investment Advisor Representative can help.

  • Make the connection between life expectancy and income needs. Even if you already have a healthy nest egg, it's important to continue saving and investing. You could end up spending 20 or 30 years in retirement, which means your money will have to continue growing to keep pace with inflation, and to avoid running out in retirement.

Regardless of your personal challenges, you can take charge of your financial future -- starting today.

¹ Society of Actuaries, Society of Actuaries Releases New Mortality Tables and an Updated Mortality Improvement Scale to Improve Accuracy of Private Pension Plan Estimates," October 27, 2014.

² The National Women's Law Center, "Wage Gap Cost

s Women More Than $430,000 Over a Career, NWLC Analysis Shows," April 4, 2016.           

³ AARP: Understanding the Impact of Family Caregiving on Work, Fact Sheet 271, October 2012 and MetLife Mature Market Institute, "The MetLife Study of Caregiving: Costs to Work Caregivers: Double Jeopardy for Baby Boomers Care For Their Parents," 2011.

⁴ Morningstar, "Retirement: The Other Economic Gender Gap," June 7, 2016.

⁵ National Institute on Retirement Security, "Shortchanged in Retirement: Continuing Challenges to Women's Financial Future," March 2016.

⁶ To make the catch-up contribution, you are first required to save the annual maximum of $18,000.

⁷ Distributions from a traditional IRA will be subject to taxation upon withdrawal at then-current rates. Distributions taken prior to age 59½ may be subject to an additional 10% federal tax.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The Fallout from Brexit

"Brexit," or Britain's referendum on whether to exit from the European Union, took an unexpected turn yesterday when British citizens, in a narrow vote, decided to leave. Although Britain will remain in the European Union for at least another two years, the uncertainty over the impact of the change has roiled global markets. British Prime Minister David Cameron has stepped down. The British Pound dropped 9% in value, and global markets fell 3 to 9% as analysts assessed the consequences.

Analysts generally agree that the economy of the United Kingdom will not collapse, and neither will the Euro.  Nevertheless, the ripple effect of Brexit will be lengthy and broad.  Some have compared this to a divorce settlement between Britain and the EU that will take two years to finalize. The immediate financial reaction was a flight to safety in U.S. Treasury bonds, British and German bonds, and gold. Oil fell by 5%, and British bank stocks were down 12 to 14%.

Because the U.S. dollar is suddenly stronger against other global currencies, it could slow the demand for U.S. exports, since they will become more expensive overseas. Morgan Stanley analysts estimate this may reduce U.S. growth by 0.6% over the next two years.¹

A positive outcome of the uncertainty in Europe is that increased interest rates in the U.S. are unlikely. There is even speculation that the Federal Reserve Bank may reduce interest rates. Low interest rates are a stimulus for the stock market and may help to offset the downturn from Brexit. Lower interest rates are also a stimulus for large purchases like homes and cars where an attractive financing rate is a consideration.

The U.S. economy remains fundamentally strong. Existing home prices have hit a 9-year high², and retail sales have had their biggest increases in a year as Americans stepped up purchases of cars and a range of other goods.³

What remains largely unaddressed by the media is the underlying cause of Brexit -- unequal economic income and wealth. The economic recovery from the Great Recession in 2008 and 2009 has mostly benefitted only the top 1 to 2% of the global population. The ultra-wealthy have done well, thanks to generous tax breaks, government bailouts and financial manipulation. By comparison, the general population is still struggling, mired in low income, low employment, loss of benefits, high taxes, and stagnant prospects. When the vast majority of the population is forced to fight over crumbs, there can be a growing tendency towards insularity, self-defense, and blaming immigrants who are "different."  What Brexit really reflects is growing resentment against being cut out of economic prosperity and decision-making.

Ironically, the financial markets, although volatile, may be one of the few ways that the middle class can protect itself from economic shocks and inflation, and participate in global economic growth. Since the bottom of the Great Recession in 2009, the Standard and Poors 500 has grown from 735 to 2,107 points, a gain of 187%.  

Although today’s one-day drop in the market is shocking at onset, if we take a step back, the market rescinded yesterday’s market boost of 225 points (built up when the market anticipated Brexit defeat) and took us back to our financial position a month ago in May.  The Dow is still 1,700 points higher than it stood in February of this year, and 10,000 points higher than it stood at the bottom of the Great Recession.  No one likes to take a step back, but occasionally you have to take one step back in order to take two steps forward. 

Likely the market will continue to be volatile until the November Presidential elections.  As we have seen with past crises, like the tech bubble, the housing crisis and the Great Recession, this is not the time for knee-jerk reactions and panic selling. In the short-term, markets tend to be volatile, but in the longer-term, they are quite resilient and provide reliable growth. The fallout from Brexit is likely to extend for several years, but those who stick to their long-term plans are likely to be rewarded for their patience, and gain from unexpected opportunities.

¹ Washington Post 6/24/2016

² Fox Business News 6/22/2016

³ Reuters 5/13/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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The Lowdown on Robo-Advisors

Robo-advisors or robo-advising has been a buzz word lately but both its meaning and future have been unclear to many.  Robo-advising is the practice of providing investment management services, typically online only.  The service is provided through programs and algorithms, and therefore excludes the use of human financial planners, face-to-face meetings, or a consistent point-of-contact for service and follow-up.  Robo-advisors have access to the same software and information as traditional financial planners, but tend to focus on investment management services only.  Therefore, robo-advisors do not offer comprehensive wealth management services such as retirement planning, estate planning and tax management.  Because robo-advising utilizes computer programs for servicing, they can cut a great deal of overhead costs associated with employing humans or having a brick and mortar office for you to meet in.  As a result, the cost to the end user is lower. 

The trend toward robo-investing and robo-advice is gaining momentum, but industry participants are struggling to get a handle on how retail investors view and/or use robo-services to conduct their financial affairs.

Recent research conducted by major asset management firms has gleaned insight, yet often their findings turn up contradictory information. For instance, one study conducted by State Street Center for Applied Research found that 65% of retail investors believe that technology will do a better job at meeting their needs than human advisors.[i] Other research conducted by Allianz Life®, which focused on generational approaches to investing and managing finances, revealed more complex attitudes.

Case in point: When baby boomers and Generation Xers were asked about using robo-advisors, a significant majority (69%) from both demographic groups said they "don't really trust online advice." Further, 76% opined that "there is so much selling online that it's hard to trust the financial advice."[ii]

The same study revealed that while more than a third of respondents expressed some interest in working with a robo-advisor, just one in 10 would be comfortable having a relationship with an advisor that existed solely online. [iii]

Indeed, study after study on the emerging impact of digital advice is finding widespread ambivalence on the part of investors.  On one hand, they are increasingly comfortable with getting their financial information and conducting more business through digital channels, while on the other, they still gravitate toward human relationships when dealing with complex "big picture" planning issues such as meeting their income needs in retirement and setting and managing other long-term financial goals.

Robo-advising has been popular with young consumers who are comfortable conducting financial business online.  Because robo-advisors have less overhead expenses, they also tend to have lower account minimum requirements.  This has been great for new investors who may want to open an account with $5,000 that would have otherwise been turned away due to the small investment size.  However, beware --some robo-advisor platforms that are tied to big financial institutions advertise “no advisor fees” but make up the “lost income” by investing clients’ money in their own proprietary mutual funds, allowing them to collect an internal expense charge.

Robo-advising is ideal for consumers who don’t mind being hands-on, are comfortable conducting business online, and are financially experienced such that they understand the volatility of the market and can keep a long-term investment perspective.  There are a great number of robo-advisors available currently, so I would steer those interested towards a company that aligns with their investment philosophy.

Still in its infancy, the world of web-based financial services will no doubt evolve and present exciting new developments in the future.

Source/Disclaimer:


[i]financial-planning.com, "Can Advisors Rebuff Challenge of Automated Investing?" February 25, 2016.

[ii]Allianz Life®, ' "Robo" Financial Advising on the Rise, But Gen Xers and Boomers Still Prefer the Human Touch,' February 16, 2016.

[ii]Allianz Life®, ' "Robo" Financial Advising on the Rise, But Gen Xers and Boomers Still Prefer the Human Touch,' February 16, 2016.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Five Things Baby Boomers Need To Know About RMD's

The first of the baby boom generation will be required to start taking RMDs from their retirement accounts this year.  The generation that lived through and influenced the revolution in the retirement industry is now poised to begin withdrawing money from their retirement-saving vehicles -- namely IRAs and/or employer-sponsored retirement plans such as 401(k)s.

If you were born in the first half of 1946 -- you are among the first baby boomers who will turn 70½ this year. That's the magic age at which the Internal Revenue Service requires individuals to begin tapping their qualified retirement savings accounts.  While first-timers officially have until April 1 of the following year to take their first annual required minimum distribution (RMD), doing so means you'll have to take two distributions in 2017.  Taking two RMDs in one year could potentially push you into a higher tax bracket.

This is just one of the tricky details you'll have to navigate as you enter the "distribution" phase of your investing life.  Here are five more RMD considerations that you may want to discuss with your CPA or Certified Financial Planner™.

  1. RMD rules differ depending on the type of account 
    For all non-Roth IRAs, including traditional IRAs, SEP IRAs, and SIMPLE IRAs, RMDs must be taken by December 31 each year whether you have retired or not. (The exception is the first year, described above).  For defined contribution plans, including 401(k)s and 403(b)s, you can defer taking RMDs if you are still working when you reach age 70½, provided your employer's plan allows you to do so AND you do not own more than 5% of the company that sponsors the plan.
  2. You can craft your own withdrawal strategy
    If you have more than one of the same type of retirement account -- such as multiple traditional IRAs -- you can either take individual RMDs from each account or aggregate your total account values and withdraw the total annual RMD amount required from a singular account.  As long as your total RMD value is withdrawn, you will have satisfied the IRS requirement.  Note that the same rule does not apply to defined contribution plans.  If you have more than one 401(k), for example, you must calculate separate RMDs for each account, then withdraw the appropriate amount from each.
  3. Taxes are still due upon withdrawal
    You will probably face a full or partial tax bite for your IRA distributions, depending on whether your IRA was funded with nondeductible contributions. Note that it is up to you -- not the IRS or the IRA custodian -- to keep a record of which contributions may have been nondeductible.  For defined contribution plans, which are generally funded with pretax money, you'll likely be taxed on the entire distribution at your income tax rate since this is money that has never been taxed before.  Keep in mind that the amount you are required to withdraw could possibly bump you up into a higher tax bracket.
  4. Penalties for noncompliance can be severe
    If you fail to take your full RMD by the December 31 deadline on a given year or if you miscalculate the amount of the RMD and withdraw too little, the IRS may assess an excise tax of up to 50% on the amount you should have withdrawn -- and you'll still have to take the distribution.  Note that there are certain situations in which the IRS may waive this penalty.  For instance, if you were involved in a natural disaster or became seriously ill at the time the RMD was due, the IRS might be willing to cut you a break.  To request the excise tax waiver, you’ll need to file IRS Form 5329 with your annual tax filing – and a brief but specific letter of explanation might help.  If the IRS does not honor your waiver request, you will be notified. 
  5. Roth accounts are exempt
    If you own a Roth IRA, you don't need to take an RMD. If, however, you own a Roth 401(k) the same RMD rules apply as for non-Roth 401(k)s, the difference being that distributions from the Roth account will be tax free.  One way to avoid having to take RMDs from a Roth 401(k) is to roll the balance over into a Roth IRA.

For More Information

Additional information about retirement account RMDs can be found in IRS Publication 590-B, including the life expectancy tables you'll need to figure out your RMD amount.  

Navigating your Required Minimum Distribution for the first time can be tricky, so get in touch with your Certified Financial Planner™ or CPA well before year-end and create a plan that works for your individual circumstances.  Your financial and tax professionals can help you determine your RMD amount and advise you what to do with the proceeds.  You may choose a simple transfer of funds from a pre-tax account to an after-tax account for continued growth of investment portfolio.  However, perhaps those proceeds could help to fund an overdue vacation.  Paying taxes on RMDs is no fun, but when life gives you lemons…. 

The information in this communication is not intended to be tax advice. Each individual's tax situation is different. You should consult with your tax professional to discuss your personal situation.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Focus on the Forest, not the Trees, of Investing

FOCUS ON THE FOREST, NOT THE TREES, OF INVESTING

 For long-term investors, keeping a focus on big-picture goals, such as retirement, and not being distracted by day-to-day market moves is key to success.  You probably already know this, but it's a message worth repeating.  Investing is a matter of focus.  Despite recent disappointments in stock market performance, investors who keep their sights set on long-term investment goals may find that a "forest, not trees" approach to investing offers the greatest potential for success.

Focus is especially important for retirement savers -- those who are still in the accumulation stage -- as well as for retirees who need to keep the potential for growth alive in their portfolios.

Are You a Micromanager?

As a retirement saver, your employer-sponsored retirement plan gives you the freedom to make your own investment decisions.  Because you can easily change the investment holdings inside your plan, you may find yourself becoming a micromanager.  That's an investor who changes investments frequently because of daily market movements instead of focusing on the big picture: a long-term investment strategy.  However, "chasing returns" by moving your money into whatever investment type or stock market sector happens to be doing well at the time rarely pays off in the long run.  Typically by the time market-moving news hits mainstream media, stocks have already adjusted in price.  People who follow trends tend to inadvertently buy-high and sell-low, hurting the long-term performance of their investment. 

The Unknowable Future

The problem with chasing returns is that it's virtually impossible to predict how long a particular investment or market sector will continue to be a top performer.  History has shown that it is not unusual for an asset class to go from being the top performer in investment returns one year to the lowest performer the very next year. That can present a problem if you build your investment portfolio based strictly on recent performance. 

The Solution: Keep a Long-term Perspective

You may be much better off by the time you retire if you use a "forest, not trees" perspective when you invest.  Concentrate on your goal, and choose an investment mix with the potential to help you reach that goal over time.

Your retirement plan offers several investment options, allowing you to choose a well-diversified investment mix for your account.  The idea behind long-term investing is to choose a mix that offers you a realistic opportunity to achieve gains while reducing the overall risk to a level you are comfortable with.  A Financial Planner can help you to find this balance and design a custom portfolio that matches your risk tolerance level.

After you've chosen your investments, you shouldn't ignore market and economic developments.  However, you'll generally want to stick to your plan unless you decide that a change in your personal situation makes an adjustment necessary, or you discover that your risk tolerance needs revision. Investors who adhere to an investment policy that relies on a well-diversified mix of investments, who are patient with the market's changing moods, and who have the discipline to set goals and review them on a regular basis may be in the best position to achieve the results they are looking for -- despite the market's short-term gyrations.

If you're a "forest, not trees" investor, you can be much less concerned with what the markets do on a day-to-day basis.  You'll be free to switch your investments, but you won't feel compelled to make a move every time the markets zig or zag, and hopefully you’ll sleep better at night too.  Consult with your CPA or Certified Financial Planner to make sure that your investment strategy makes sense for you and your on the right tract to a successful retirement.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Life Stages and Financial Planning

Financial resolutions are only as good as your follow-through. Here are some planning considerations for the three key stages of your financial life -- accumulation, preservation, and transfer.

As you progress through the major stages of your life, it's normal for your goals to change too. In addition, current volatility in the financial markets along with other unsettling factors such as the impending presidential election and widespread geopolitical unrest may cause you to pause, rethink your financial situation, and set new expectations for the future.

Resolutions typically fall into one of three financial "life stages" -- accumulation, preservation, or transfer of wealth. In order to establish action plans for these phases, you need to examine opportunities, identify challenges, and add a dose of reality to your planning efforts.

Accumulating Assets

The key to pursuing longer-term financial goals, such as retirement and education funding, is to have a well-thought-out plan that assigns actual dollar amounts to each goal -- and a timetable for getting there. On this score, many investors are falling well short of the mark.

For instance, research compiled by the Employee Benefit Research Institute (EBRI) indicates that a sizeable percentage of workers say they have virtually no money in savings and investments.¹ Specifically, among workers who provided this type of information, 57% reported that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. This includes 28% who say they have less than $1,000 in savings. ¹

If you find yourself behind in your accumulation efforts for major life expenses, such as retirement, don't despair. There are many opportunities to jump-start your savings campaign.

  • Make the most of employer-sponsored plans. For participants in 401(k)s, 403(b)s, and 457 plans, the contribution limit stands at $18,000 for 2016 with an additional $6,000 in catch-up contributions allowed for those who are 50 or older.

  • Maximize IRA contributions. In 2016, you can contribute up to $5,500 to a traditional or Roth IRA (or split that amount between the two types of accounts). Add another $1,000 to that total if you are making catch-up contributions.

Don't let procrastination get the better of your best-laid plans. Make 2016 the year you get serious about saving.

Preserving Assets

Holding on to your assets requires a disciplined, long-term view. Most people plan for a retirement to span 25-plus years. However, when we encounter volatile market conditions, investors tend to move in and out of positions too quickly, potentially causing them to sell low, buy high, and abandon asset allocation fundamentals.² Short-term declines are normal and inevitable, but can tempt the most grounded investor to make impulsive investment choices. Consulting with your Certified Financial Planner™ during market downturns can help you better understand the market environment and allay your fears.

Many investors tend to hold on to a stock too long because they want to avoid paying capital gains taxes. Sometimes, making decisions based on tax consequences alone can be like the tail wagging the dog. It could cause you to miss opportunities. Speak to your CFP™ or CPA now about your 2016 strategy, particularly if you plan to rebalance your portfolio.

Transferring Assets

To leave a financial legacy requires significant advance planning. Questions regarding how much you want to leave to loved ones, how long your bequest will last, and how much will be eroded by taxes are difficult to assess on your own. Planning converts uncertainty into real strategies to make a difference.

When crafting your estate plan, be sure that documents are written to be flexible and easily adapted to changing circumstances. If balances on investment accounts decline, you may need to rethink -- and restate -- your intentions, perhaps even change beneficiary designations to reflect changing market dynamics.

When faced with these and other important financial planning considerations, a trusted advisor can be an invaluable resource. Working together, you can address new realities by setting practical expectations and crafting a plan for success in 2016.

¹ Employee Benefit Research Institute, 2015 Retirement Confidence Survey, April 2015.

² Asset allocation does not assure a profit or protect against a loss.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Budget Deal Curbs Social Security Claiming Options

BUDGET DEAL CURBS SOCIAL SECURITY CLAIMING OPTIONS

In November 2015, President Obama signed into law H.R. 1314, more commonly referred to as the Bipartisan Budget Act of 2015.  One significant byproduct of the legislation is the elimination or curbing of two social security filing strategies that married couples may have been planning to use to optimize their lifetime social security benefits.  The two programs include the “File and Suspend” and “Restricted Application” for spousal benefits filings.  As with most things related to federal programs, there's a great deal of complexity in the details.


What's at Stake?

File and SuspendThis is when an individual, who is at least at Full Retirement Age (age 66 for most claimants), files for his or her own retirement benefit and then immediately suspends receipt of those benefits with the social security office.  This sets a Filing Date under the individual’s record, which allows a spouse or dependent to then initiate benefit payments to be paid out to them based upon the filing individual’s record.  These auxiliary payments do not negatively affect the benefits to be received by the original filing individual.  In fact, since the individual suspended his or her own social security benefits, their future benefit is allowed to grow.  Between age 62 and 70, each year social security collection is delayed, benefit payments will increase by 6-8%.  This could potentially provide thousands of dollars in additional income to couples over their lifetimes.

Keep in mind that the original person must file first to enable the second person to file for spousal or dependent benefits.  After the initial filing, the original filer can continue to receive benefits or elect to suspend.  The suspension part is not necessary to enable the auxiliary benefits.  Suspending simply allows the original filers’ benefits to grow for a later payout date. 

Anytime between Full Retirement Age (FRA) and age 70, the individual could change their mind and “unsuspend” their benefits.  The Social Security office would retroactively pay out some or all of the suspended benefits in a lump sum. 

Under the Bipartisan Budget Act, starting May 1, 2016, your spouse and children will no longer be able to receive social security income on your suspended record and you will no longer be able to retroactively collect all past social security income if you elect to unsuspend.  If your payments are currently suspended, or if you request suspension before the upcoming May 2016 deadline, you will be grandfathered under the old rules.

Restricted Application – When an individual is at least FRA, has not filed for any previous benefits and has a spouse who has established a Filing Date (suspension does not matter), they may file a Restricted Application (RA) to receive ONLY the spousal benefit based upon the spouse’s record.  Collection of social security benefits under the Restricted Application does not affect the individuals’ own pool of benefits.  Therefore, this strategy allows one to collect spousal benefits and concurrently delay their own future retirement benefit so it may grow by the same 6-8% per year as mentioned above.  Upon reaching age 70, the individual would switch from the spousal benefit income to their own social security benefit, which in theory should be larger. 

Under the Bipartisan Budget Act, the Restricted Application filing is no longer available to anyone born Jan. 2, 1954, or later. It continues to be available for anyone born Jan. 1, 1954, or earlier.


Recap

-- For anyone younger than age 66 by May 1, 2016 (born after May 1, 1950), the File and Suspend method will no longer be available.

-- For anyone younger than age 62 by January 1, 2016 (born after January 1, 1954), Restricted Application is no longer available.


Window of Opportunity

For anyone younger than age 66 by May 1, 2016 (born after May 1, 1950), the File and Suspend method will be available up until May 1, 2016.  After such date, the filing method will be removed as an available option. 

Are you thoroughly confused?  Determining when and how to claim social security benefits has always been a challenging task, but these new rules create even more complexity for those nearing retirement.  If you are age 66 now, or will turn 66 within the next three months, definitely speak with your Certified Financial Planner™ or CPA about taking advantage of these claiming strategies before you lose the option to do so.


Source/Disclaimer:

Financial Ducks in a Row, “File & Suspend and Restricted Application are NOT Equal”

Market Watch, "Millions of Americans just lost a key Social Security strategy"

Market Watch, “New Social Security Rules Change Claiming Strategies”

U.S. News & World Report, "How the Budget Deal Changes Social Security"

Wall Street Journal “A Strategy to Maximize Social Security Benefits”

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How Rising Interest Rates Might Affect Your Stock Investments?

In a long anticipated move, the Federal Reserve raised its target federal funds rate on Wednesday December 16th to a range of 0.25 to 0.5 percent.  This is the first increase since June 29, 2006. 

The Federal Reserve's actions have a marked influence on the economy and financial markets. Some market analysts believe that the Fed's massive, multi-year bond-buying program coupled with a record-setting period of near-zero interest rates fueled the six-year bull market for stocks. Now investors are grappling with what a period of rising short-term rates will mean for their investment portfolios and retirement accounts.1

While many market watchers have speculated about the effect of rising rates, history provides a window into how stocks have reacted to such policy shifts in the past.

A Look Back

Research looking at the past 35 years (and six rate-hiking cycles) found that stocks don't necessarily follow a straight path up or down in reaction to a rate hike.  Instead, they present a mixed bag of performance.  For

instance, analysis reported on CNBC.com found that in two of the six cycles, stocks, as represented by the S&P 500, were lower a year after the initial rate hike.  Even so, the average gain for all six periods was 2.6%.  On

average, a year and a half after the first rate hike in a cycle, the market was up 14.4%.2

What's Different This Time?

While heightened volatility is often a byproduct of the Federal Reserve initiating a rate hiking cycle, there are unique variables at play this time that may help to lessen the market's reaction.

First, the federal funds rate was set at 0% to 0.25% for nearly the past seven years -- far below its starting point for the previous several rate hiking cycles -- it is believed that the Fed has a lot of leeway to move rates up

before creating a significant drag on the economy.  Second, Fed Chairwoman Janet Yellen has reiterated over and over again that the rate hike will be gradual in the coming years in an attempt to minimize market

disruption.3

Considerations for Investors

Given the inevitability of the interest rate hike, you may be cautious in your outlook for your investment portfolio.  However, don't let your emotions get in the way of potential investment opportunities.  Consider

discussing the following strategies with your Certified Financial Planner ™ or financial advisor at your next meeting.

  • Dollar Cost Averaging -- If stocks dip each time the Fed announces interest rate increases, many analysts feel the drops will be short-lived and may in fact prove to be a good time to selectively add to your portfolio.  On a long term basis, a systematic purchasing plan, also known as dollar cost averaging, can help in volatile times.  Dollar Cost Averaging creates a systematic purchase schedule over a period of time, taking the guesswork out of specific timing of purchases.4  The advantage of this method is you’re buying less stocks when the prices are high and more when the market dips and stocks are priced at a “bargain.”

  • Consider high-quality dividend stocks -- Equity investors looking to limit volatility may want to consider an income-producing strategy via dividend-paying stocks.  As we saw during the Great Recession, companies tend to continue issuing dividends regardless of the stock price, creating stability to the owner.  Although a company can potentially eliminate or reduce dividends at any time, a dividend may provide something in the way of a return (i.e., income plus any potential price appreciation) even when stock prices are volatile. 

  • Review sector allocations -- History supports the notion that Fed actions affect equity sectors in different ways.  For instance, in a rate-hiking cycle, defensive sectors, such as utilities, energy, and consumer staples have tended to perform better, as these sectors produce necessary goods and services that have less reliance on consumer discretionary spending.  In a rate-cutting cycle, leading sectors tend to be those that are more dependent on consumer spending, such as retail, autos, and construction.5

These are just a few of the strategies you may want to consider heading into a rate-hiking cycle.  Work with your Certified Financial Planner ™ or financial advisor to review your unique circumstances and make changes,

as deemed appropriate, for your situation.

Source/Disclaimer:

1Investing in stocks involves risks, including loss of principal.
2CNBC.com and Nuveen Asset Management, "When the Fed raises rates, here's what happens," September 17, 2015.

3CNBC.com, "Wall Street history says stocks can survive Fed rate hike," September 15, 2015.
4Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in any markets.

5Forbes, "How Rising Interest Rates Will Affect The Stock Market And Your Investments," May 19, 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Coping With Market Volatility

Global market volatility ramped up this summer as worries about the tenuous state of the Chinese economy shook virtually all major financial benchmarks, indicating once again how interrelated the world's economies and investment markets have become.

Widespread uncertainty has not only heightened anxiety among investors, it was also a likely contributor to the Federal Reserve's decision to leave interest rates near zero when the Central Bank's decision-makers met in September.  Indeed, despite the continued strengthening of the U.S. economy, there are many signs that indicate that this turbulent period for stocks may linger indefinitely.

Five Investing Strategies for a Volatile Market

For long-term investors, dealing with volatile markets can be taxing.  Here are some points you may want to consider while riding out the storm.  None of these should be new to you, but they are particularly important in a turbulent environment, which is when their true value is realized.

  1. Don't panic -- When markets become volatile, the gut reaction for most of us is to panic -- to buy when everyone else is buying (and when prices are high) -- and panic sell on the downside (locking in losses).  In investing, you always want to buy low and sell high.  In the moment of stress, the herd mentality can cause you to do just the opposite.  

    Panicked selling also runs the risk of missing the market's best-performing days. Did you know, for example, that missing just the five top-performing days of the 20-year period from July 1, 1995, through June 30, 2015, would have cost you $21,780 based on an original investment of $10,000 in the S&P 500?  Missing the top 20 days would have reduced your average annual return from 9.79% to just 3.58%.1

  2. Take advantage of asset allocation -- During volatile times, riskier asset classes such as stocks tend to fluctuate more, while lower-risk assets such as bonds or cash tend to be more stable.  By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs.  Anytime you can reduce short-term volatility, your long-term return improves. 

    Take for example two portfolios, both with average returns of 10% over a three year investment period.  Portfolio 1 is up and down but nets a 10% average return.  Portfolio 2 yields a steady return of 10% per year. If you invested $100,000 into both portfolios, Portfolio 1 would leave you with a balance of $124,800, while Portfolio 2 would give you an ending balance of $133,100.

    Portfolio 1: Yr 1 +30%,  Yr 2 (20%),  Yr 3 +20% = $124,800 ending value
    Portfolio 2: Yr 1 +10%,  Yr 2 +10%,  Yr 3 +10% = $133,100 ending value[i]
  3. Diversify, diversify, diversify -- In addition to diversifying your portfolio by asset class, you should also diversify by sector, size (i.e.: large cap, small cap), and style (i.e.: growth versus value funds).  Why?  Because different sectors, sizes, and styles take turns outperforming one another.  By diversifying your holdings according to these parameters, you can potentially smooth out short-term performance fluctuations and mitigate the impact of shifting economic conditions on your portfolio. 

    Today, many investors ask why we invest in international equities given all the turmoil overseas we’ve seen the past two years and the associated poor returns.  However, if you had no international holdings in between 2000-2010, your US portfolio of equities would likely have a negative return or be flat, at best.  Each asset class has its day in the sun and it’s important to keep an allocation of each sector that makes sense for your long term investment objectives. 
  4. Keep a long-term perspective -- It is all too easy to get caught up in the stock market's daily roller coaster ride -- especially when markets turn choppy.  This type of behavior is natural, but can easily lead to bad decisions.  History shows that holding stocks for longer periods has resulted in a much lower chance of losing money.  For example, from January 1, 1926, through June 30, 2015, stocks have never had a period of 20 years or longer where returns were negative.[ii]  The lesson here?  Don't get caught up in day-to-day or even week-to-week variations in stock movements in either direction.  Instead, focus on whether your long-term performance objectives, i.e., your average returns over time, are meeting your goals.
  5. Consult with your Certified Financial Planner ™ or Financial Advisor.  He or she can help you develop a customized long-term investment strategy and can help you put short-term events in perspective.

No one is certain what impact current drivers of volatility will ultimately have on the economy and financial markets.  However, as an investor, time may be your best ally. Consider using it to your advantage by sticking to your plan and focusing on the future.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] The portfolio value does not take into consideration trading charges or fees.

[ii]ChartSource®, Wealth Management Systems Inc. For the periods indicated. Stocks are represented by the total returns of Standard & Poor's Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Copyright © 2015, Wealth Management Systems Inc. All rights reserved. Not responsible for any errors or omissions.

 

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Smart Gifting

Special occasions often call for gift giving: a graduation in May, a wedding in June, an anniversary in July, birthdays throughout the year and holidays at year end.  Each event seems to sneak up on us…and our budgets!  Retailers plan for holidays and seasonal sales, so why not do a little gift planning of your own?

Here are a few tips for your planning list:

  • Save now -- Gift buying will seem more manageable if you've been saving for it a little at a time. Whether you set up a formal gift account and contribute to it regularly or just stash away a few extra dollars here and there, it's good to accumulate cash that is earmarked for gift giving.

  • Put a cap on spending -- Work out a gift-giving budget for the year that includes a comfortable spending limit as well as a detailed list of individual gifts with spending caps for each. Then stick to it!

  • Avoid credit traps -- If you choose to charge your purchases, have a set plan for a payoff schedule.  Department store cards typically charge a much higher interest rate.

  • Take advantage of post-holiday sales -- In Canada, the United Kingdom, and other Commonwealth countries they call it Boxing Day, but here it's just the Day-After-Christmas Sale. For those truly die-hard shoppers, it can be the best shopping day of the year.  Stores slash already reduced prices even more to make way for spring inventories.

    Gift giving is one of the easiest ways to overspend. But if you do a little planning before you shop, you'll approach each occasion with your budget and generosity intact.

UGMA/UTMA - Gifts That Last a Lifetime

If you'd like to give a child money but want to do something more lasting than writing a check, consider setting up a custodial account under either the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) through a bank or investment company.

Custodial accounts can help finance a child's future and lessen the giver's tax burden. Here are a few details you should be aware of.

  • There are no income limits affecting eligibility to fund a custodial account.

  • You can gift away up to $14,000i per child, each year ($28,000 for married couples) to as many children as you like without owing gift taxes.  Beyond those amounts, gifts may be subject to federal gift taxes.

  • Gifts made to UGMA/UTMA accounts are considered irrevocable.  In other words, once the child reaches legal age (18 or 21, depending on the state), he or she gains full control over the assets.

  • Since custodial accounts belong to the child, account assets may decrease the amount of financial aid a child can receive.

Beware the "Kiddie Tax"

Tax rules affecting UTMA/UGMA accounts bear careful consideration. Under the so-called "Kiddie Tax" rules, a child's investment income over a certain level is taxed at his or her parents' rate rather than the child's lower rate (typically 5% for most children).  Prior to 2006, the Kiddie Tax rule applied only to children younger than 14.  However, the age limit has risen twice in the past few years.

Now the Kiddie Tax includes dependents up to the age of 19 and those up to the age of 24 who are full-time students.  Any investment income earned in excess of $2,000ii will be taxed at the parents' higher tax rate.

529 College Savings Plans

College Savings Plans, often referred to as 529 plans (named after section 529 of the Internal Revenue Code) are a great gift for the kid who has everything.  A 529 account is a tax advantaged way of saving for a child’s future higher education expenses.  The account owner is typically a parent or grandparent and the future college-bound child, the beneficiary.  Anyone can contribute to a 529 once it’s created. 

The principal grows tax deferred and future distributions are tax-free to the beneficiary if the funds are used towards qualified education expenses.  Typical qualified expenses include tuition, fees, books, supplies, and equipment required for study at an accredited college, university, or vocational school in the United States and at some foreign universities. 

Another benefit is that the account owner maintains control over the account, not the beneficiary.  Therefore, if the original named beneficiary gets a full-ride scholarship and no longer needs the 529 funds, the beneficiary can be changed to another child who is college-bound or even to the owner for graduate education or interest courses at your local college. 

Although the contributions are not tax-deductible for the donor’s federal tax filing, some states offer state tax deductions for contributions made by the donor (if your plan is managed by the state you reside in). 

Your Certified Financial Planner® or CPA can help you set up strategies for gifting that work best for you and your family. 

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



i https://www.irs.gov/pub/irs-drop/rp-15-53.pdf

ii IRS Tax Topics 553 www.irs.gov/taxtopics/tc553.html

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Bull or Bear Market? Plan Both Ways

by Akemi K. Dalvi

After another good year on Wall Street in 2014, some stock market prognosticators are predicting a reversal of fortunes for 2015, while others expect another good year for investors. However, no one really knows what will happen next, and the best thing you can do is to plan for all possibilities. You also can learn from stock market history, while recognizing that past performance is not a guarantee of future results.

These days we keep hearing word that the Fed is going to raise interest rates and the market will respond with a temporary pull-back. The timing of rising interest rates is a topic up for discussion weekly that causes the market to sway back and forth, hanging on indicative words like “patient” by Fed Chairman Janet Yellen. Then there’s the other school of thought that market valuations are too high and a pullback of sorts is in order. However, such talk was said at after each new market high in 2013 and 2014. Nevertheless, the market kept marching upwards, making the bears sound like Debbie-downers and convincing sidelined investors to re-enter the market and chase returns at dangerous market highs.

The stock market is known as a leading economic indicator -- that is, it tends to rise or fall in advance of economic gains or losses. That's what happened when the most recent bear market bottomed out in March 2009. Finally, several months later, the U.S. economy, too, moved into positive territory, although the recovery has been painfully slow by historical standards. During most bull markets, the economy is strong and unemployment low. Consumers feel relatively confident, and their outlays help fuel economic growth. Additionally, because times are good, people usually are more than willing to take the risk of owning stocks.

Conversely, worries about the economy may make investors sell their stocks, and that drop in demand can lead to a bear market. Usually, prices will begin rising again after a fall of 40% or so. However, in a particularly bad bear market, such as during the Great Depression, that percentage drop can be significantly greater before things turn around. In such a situation, as the economy sputters and unemployment rises, investors shy away from taking risks in the market.

Some investors try to gauge what market sector is going to do well and move assets there ahead of everyone else to get in early and capture growth. However, it’s easy to be wrong or “buy high” after everyone has already realized this is the hot market sector and pumped up the prices.

Conversely, in a bear market, some investors consider tactics like "selling short" -- borrowing stock you don't own, selling it, and waiting for the price to drop. Then if you're able to buy back the stock at a lower price, you'll profit. However, this is a lot like betting in Vegas. You could be right and turn a pretty penny, but there’s a 50-50 chance you’re wrong and you end up buying to stock higher than you anticipated to pay back a loan at twice the cost. Market timing is hard because greed can make you hold out longer for your profit margin to grow larger. But if you’re too greedy, you end up trying to reduce your losses rather than maximize your profit.

The best strategy to use in any market is to diversify your portfolio of investments so that in a good market, you are capturing market growth in measured way, and in a declining market, you have assets that protect you on the downside to offset equity volatility. Modern Portfolio Theory has been a tried and true strategy that builds on this philosophy of balancing asset classes. Under this approach, if small US companies have a good month, you have some money invested in that asset class so you benefit. If the US economy is slow but the international market takes off, you’re happy too because you have a proportionate share of money invested in that international funds too. This strategy is the opposite of putting all your eggs in one basket. You can avoid the volatility of holding just one stock or one sector of the market and that helps many investors sleep better at night.

A Certified Financial Planner or investment advisor can guide you on how to implement a strategy of diversification for you. Each portfolio should be tailored to your risk tolerance and personal financial goals to help you be the most successful. For example, a person who is saving for retirement in 30 years can take a lot more risk than a person who plans to retire in 5 years. Your portfolio should recommend who you are and where you’re going.

The main thing to learn from stock market history is that you have a better chance of succeeding by maintaining a long-term approach. Over time, the stock market bounces back from bear markets, and it's advisable to not buy or sell stock just because the market is bullish or bearish. Being informed and methodical will serve you better than selling stocks in a panic or trying to jump on a bandwagon.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How Well Do You Know Your 401(k)?

by Akemi K. Dalvi

The old saying "knowledge is power" applies to many situations in life, including retirement planning. The more you know about the benefits your plan offers, the more likely you'll be to make the most of them and come out ahead financially when it's time to retire. Here are some questions to test your knowledge about your plan.

How much can I contribute?

The maximum contribution permitted by the IRS for 2015 is $18,000, although your plan may impose lower limits. Further, if you are age 50 or older, you may be able to make an additional $6,000 "catch-up" contribution as long as you first contribute the annual maximum. Check with your benefits representative to find out how much you can save.

What investments are available to me?

Recent research indicated that a third of retirement plan participants were "not at all familiar" or "not that familiar" with the investment options offered by their employer's plan.1 The study went on to reveal that individuals who were familiar with their retirement plan investments were nearly twice as likely to save 10% or more of their annual income, compared with those who report having little-to-no knowledge about such investments.1

Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk. For example, a person in their 30’s has many years until retirement and can ride the ups and downs of a more volatile asset allocation with the goal of long-term growth in mind. However, someone in their 60’s may not want to take as much risk. They’ve worked hard to save and don’t want a risky portfolio allocation to take a dive the year in which they planned to retire. For more advice on portfolio allocation, reach out to a Certified Financial Planner or qualified investment representative for guidance and a custom plan that suits your risk tolerance and long-term goals.

What are the tax benefits?

Contributing to your employer's retirement plan offers two significant tax benefits. First, since your contributions are taken out of your paycheck before taxes are withheld, you get the up-front benefit of lowering your current taxable income. Plus, since you don't pay taxes on the money you contribute or on any investment earnings until you make withdrawals, more goes toward building your retirement nest egg.2

Will my employer make contributions to my account on my behalf?

Many companies try to encourage participation in their retirement plans by matching workers' contributions up to a certain percentage of each worker's salary. Defined contribution benchmarking studies indicate that the average company contribution in 401(k) plans is now 2.7% of pay.3 The most common type of fixed match reported by 40% of plan sponsors is $.50 per $1.00 up to a specified percentage of pay (commonly 6%).3 For their part, employees interviewed recently cited "taking advantage of the company match" as the top reason for participating in their company's retirement plan.4

How long before the money in the plan is mine?

Any money you contribute to your retirement account is yours, period. However, any matching contributions made by your employer may be on a "vesting schedule," where your percentage of ownership increases based on years of service. Current research indicates that 40.6% of employers now offer immediate vesting of matching contributions.3 Because vesting schedules vary from plan to plan, be sure you know the specifics of yours.

Your Certified Financial Planner or company benefits representative can help you answer these and other questions about your employer-sponsored plan. Being "in the know" may help you avoid missteps and make as much progress as possible on the road to retirement

Source/Disclaimer:

1 Pensions & Investments, "TIAA-CREF: Participants with knowledge of investment options more likely to save," February 26, 2014.

2 Withdrawals from tax-deferred retirement accounts will be taxed at then-current rates. Withdrawals made prior to age 59½ may be subject to a 10% additional federal tax.

3 401(k) Help Center.com, "Benchmark Your 401(k) Plan, 2015."

4 Deloitte Development LLC, "Annual Defined Contribution Benchmarking Survey," 2013-2014 Edition. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Market Confusion: Up is Down and Down is Up

by Akemi K. Dalvi

If you were watching the markets day to day, you experienced a mild roller coaster, what trading professionals refer to as a sideways market. One day it was up, the next down, each day (or week) seeming to erase the gains or losses of the previous ones. The best explanation for this phenomenon is that investors are still looking over their shoulders at interest rates, waiting for bond yields to jump higher, making bonds more competitive with stocks and triggering an outflow from the stock market that could (so the reasoning goes) cause a bear market in U.S. equities.

However, investors have been waiting for this shoe to drop for the better part of three years. Meanwhile, interest rates have drifted decidedly lower in the first quarter. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 2.93%. 30-year Treasuries are yielding 2.48%, roughly 0.3% lower than in December, and 10-year Treasuries currently yield 1.87%, down from 2.17% at the beginning of the year. At the low end, you need a microscope to see the yield on 3-month T-bills, at 0.02%; 6-month bills are only slightly more generous, at 0.10%.

This interest rate watch has created a peculiar dynamic where up is down and down is up in terms of how traders and stock market gamblers look at the future. The generally positive economic news is greeted with dismay (The Fed will notice and start raising rates sooner rather than later! Boo!). Conversely, any bad news sends the stock market back up again into mild euphoria (The Fed might hold off another quarter! Yay!).

There are several obvious problems with this. First, probably least important, the Fed’s future actions are inscrutable. You will hear knowledgeable Fed-watchers say that the Fed will take action as early as June or as late as next year, and none of them really know.

Second, small incremental rises in interest rates are not closely associated with bear markets, as everybody seems to assume. When rates have gone up in the past, the price people will pay for stocks has also gone up. Why? For exactly the reason you think: rising rates are a sign of a healthy economy, which is precisely why the Federal Reserve Board would decide that stimulus is no longer necessary. Companies—and their stocks—tend to thrive in healthy economies.

Finally, we should all welcome the Fed pullback, not fear it. A lot of the uncertainty among traders and even long-term investors is coming from anxiety over how this experiment is going to end. The U.S. Central bank has directly intervened in the markets and in the economy, and is still doing so. When that ends, normal market forces will take over, and we’ll all have a better handle on what “normal” means in this economic era. Is there great demand for credit to fuel growth? What would rational investors pay for Treasury and corporate bonds if they weren’t bidding against an 800-pound gorilla? Would retirees prefer an absolutely certain 4.5% return on 30-year Treasury bonds or the less certain (but historically higher) returns they can get from the stock market? These are questions that all of us would like to know the answer to, and we won’t until all the quantitative easing interventions have ended.

What DO we know? The U.S. economy is less dependent on foreign oil than at any time since 1987, and the trend is moving toward complete independence. Oil—and energy generally—is cheaper now than it has been in several decades, which makes our lives, and the production of goods and services, less expensive.

Meanwhile, more Americans are working. The U.S. unemployment rate—at 5.5%—is trending dramatically lower, and is now reaching levels that are actually below the long-term norms. Unemployment today is lower than the rate for much of the booming ‘90s, and is approaching the lows of the early 1970s.

Further, real GDP—the broadest measure of economic activity in the United States—increased 2.4% last year, after rising 2.2% the previous year. America is growing. Not rapidly, but slow growth might not be so terrible. Rapid economic growth has, in the past, often preceded economic recessions, where excesses had to be corrected. Slow, steady growth may be boring, but it’s certainly not bad news for the economy or the markets.

It has been said that people lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up, than by holding their ground during actual downturns. In every case so far, the U.S. market has eventually made up the ground it lost in every bear market we’ve experienced. The last trading day of the quarter looked bearish, as have many other gloomy trading days during this seven year bull market. It seems like every week, somebody else has predicted an imminent decline that has not happened. People who listened to the alarmists lost out on solid returns. You filter out the good news at your peril.

Sources:
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-
bonds/us/http://www.bloomberg.com/news/articles/2015-04-01/u-s-oil-imports-from-opec-have-plunged-to-a-28-year-low
Aggregate corporate bond rates: https://indices.barcap.com/show?
url=Benchmark_Indices/Aggregate/Bond_Indices
Aggregate corporate bond rates: http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Tax Time: Tips for Getting Organized

By Akemi K. Dalvi

Ask many Americans about their experience with tax time and they are likely to describe lots of paperwork, confusing rules, and late nights on their computer. But it doesn't have to be that way. Getting organized now may help streamline your tax preparation and help you identify deductions that you might otherwise overlook in the last-minute rush.

You'll need the right paperwork to get started, but you may want to consult a tax advisor to determine whether you need to consider additional factors that are unique to your situation. Tax Preparation Documents

  • Form W-2 from your employer - The starting point for determining your taxable income.
  • Form 1099 and other statements from investment firms - Helps you compute capital gains, which are taxable, or capital losses, which you may be able to deduct. Dividends and interest are typically taxable at ordinary income tax rates. Contributions to a traditional IRA may be tax deductible if you meet income thresholds established by the IRS.
  • Real estate records - You may be able to deduct mortgage interest and real estate taxes. Expenses associated with investment real estate may be deductible. If you sell real estate at a profit, you may be required to pay taxes on a portion of the gain.

After you have accounted for the most common aspects of tax preparation, dig a little deeper to discover other areas of your life that may offer tax breaks.

Parenthood

Children are not just a blessing to your family. They also bring with them a host of potential tax breaks.

  • Dependency exemption. For the 2014 tax year you can deduct $3,950 for each qualifying child you claim as a dependent on your tax form. If your adjusted gross income is above a certain level, you may not receive the full exemption amount.
  • Child Tax Credit. This credit can be worth as much as $1,000 per child under the age of 17 that you claimed as a dependent on your tax return. For 2014, the amount of the credit begins to phase out for joint filers with adjusted gross incomes that exceed $110,000 and for single filers and heads-of-household whose income exceeds $75,000.
  • Child Care Credit. If you paid childcare for a dependent child under age 13 so you could work, you can earn a credit of between $600 and $1,050 in 2014. If you are paying for the care of two or more children, the potential credit you can earn increases to between $1,200 and $2,100. As with most other tax breaks, the size of the credit depends on your income and, in the case of this particular credit, how much you pay for care. (You can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).1
  • Adoption credit. If you adopted a child in 2014, you can claim a credit of up to $13,190 help offset the cost. Income phase-outs apply for adjusted gross incomes that range from $197,880 to $237,880.1

Lesser-Known Deductions

You may be able to benefit from either a tax deduction or a tax credit if you had any of these types of expenses during 2014.

· Purchased an electric car or plug-in hybrid · Had student loan debt paid by parents · Had out-of-pocket expenses related to a job search · Had moving expenses associated with a first job · Were self-employed and paid Medicare premiums · Had jury duty pay that was surrendered to employer · Utilized the American Opportunity Credit and/or other government-sponsored education programs to pay for education expenses · Made energy-saving home improvements

These are just a few of the tax savings that may await you come April 15. Of course, your individual circumstances will determine if you are eligible for these and other tax breaks. Your CPA should be able to provide more information on what you do and don't qualify for.

Source/Disclaimer:
1Source: TurboTax, "Birth of a Child," updated for tax year 2014.

This communication is not intended to be tax advice and should not be treated as such. Each individual's situation is different. You should contact your tax professional to discuss your personal situation.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Can I Save More on My Taxes???

Akemi Kondo Dalvi, CPA

The holidays are behind us and many of us are getting ready for that much dreaded tax season. The whole ordeal can be pretty daunting. First we wait for our W2s and 1099s to come by mail. Then we figure out which documents never arrived and track those down manually. Next steps are to dig through our files and figure out what deductible expenses we incurred during the year (medical expenses, donations, etc.) and what supporting documents we have saved so we can deduct them if itemization is an option. Preparing your tax return can be a challenge you decide to take it on yourself (bless your soul if you do) or pay a professional to save you the headache. Finally, the end result can be a welcomed tax refund or a loathsome tax payment due. Although the government appears to spend our money wisely, the latter is never welcomed news.

Whichever category you find yourself falling into, one thing many people ask in the end is how they can save more on their taxes. Below are a few helpful tips. Some of these can be implemented this year and some will help in the tax-year to come.

  • Itemized Deductions – It is much simpler to take the standard federal deduction over the itemized deduction, and if you have a very straight forward financial situation, this may also be your best option. However, if you have more complex finances, your expenses such as mortgage interest, education expenses, dependent care expense or medical expenses to name a few, could provide you tax savings if you itemize your deductions. Other deductible items include investment management fees paid to your Financial Advisor or tax preparation fees paid to your CPA. The list of itemized deductions is pretty long and it may pay off to ensure you’re deducting everything you can. Refer to the IRS website to see a full list of possible itemized deductions:
    http://www.irs.gov/taxtopics/tc500.html
  • Maximize Your Retirement Savings – Many of those currently working have the option of contributing to a work sponsored retirement plan such as a 401k, 403b, 457, Simple or SEP IRA. Your contributions to your own retirement accounts are also a direct dollar for dollar reduction in your taxable income for the year. This is a quick and relatively easy way of moving money from your taxable pocket to your tax-deferred pocket and the money is still 100% yours. In 2015, the maximum contribution limits for a 401k, 403b and 457 are $18,000, plus another $6,000 “catch up” contribution for those age 50+i. For a Simple Plan, the maximum contribution limits in 2015 are $12,500 plus another $3,000 “catch-up”ii. The maximum contribution limits are adjusted regularly for inflation so you should check annually for the new limit.
  • Donor Advised Funds – Charitable giving strategies are also an excellent way to reduce your income tax, capital gains tax and estate tax liabilities. Despite many misconceptions, you do not need to be a millionaire to consider charitable strategies. A donor-advised fund is a tax-advantaged charitable giving vehicle that offers maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are public charities under Section 501(c)(3) of the Internal Revenue Code, and contributions to such funds are tax deductible. Donor-advised funds are particularly family-friendly, as parents and children can consolidate their giving activities through a single fund account. In addition, children can be named as successors to a fund, ensuring the continuation of a family's giving legacy. Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as a charitable contribution. Checks/wire transfers, commercial paper, mutual fund shares, securities, bonds, and restricted stocks all are acceptable assetsiii. In addition, the account has the potential to grow over time, increasing the donor's giving power. Your Certified Financial Planner ™ can help you evaluate if this approach is suitable for you.
  • Plan Ahead – Many only examine their taxes after they are filed, but there are many things you can do ahead of time to minimize your taxes. Tell your Financial Advisor and CPA ahead of time what your goals are for the year to come and give them permission to communicate with each other during the year so they can work together as a team to accomplish your goals. For example, we had a client come to us who had realized losses of $90K from a prior investment venture. When she began working with us, she asked if we could help her offset gains in her account with losses she had incurred in prior years. Coordinating with her CPA, we were able to help her realize tax free gains in her accounts over a 3 year period.

We’ve found that the most successful people plan for success rather than stumble upon it. With good planning and preparation, you can probably save some of your hard-earned money. Set an appointment with your Certified Financial Planner™ and your CPA in May or June and ask them to work together as a team to help you in the year ahead.

i http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits
iihttp://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions
iiiInvesting in mutual funds involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in stocks involves risks, including loss of principal.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Don’t be a victim of financial crime!

By: Akemi Kondo Dalvi

Protecting ourselves from financial crimes in the modern day can be much more elusive than what we were used to in the past. We hear the common adage around the holidays like, “Don’t leave your Christmas gifts visible in your car while you’re gone.” Those are easy warnings to heed and implement but it’s the unknown vulnerabilities that we’re scared of like identity theft, embezzlement and phishing scams. Until, that is, we become the victim of such crimes and have to learn how to clean up the mess someone else has left for us.

Knowing what to do after you’ve become a victim is important, but unfortunately the crime has already occurred. What could be more valuable is knowing how to prevent such crimes from happening in the first place.

We recently had a client who was utilizing free Wi-Fi in the airport while catching a flight across the country for work. Being the productive woman she is, she was sending emails while waiting for her plane to arrive. One of those emails was to me. We’ll call our client ‘Susan’. Susan asked me what the tax implications would be of distributing $50,000 from one of her investment accounts to create some extra liquidity around the holidays – just an inquiry. Susan’s plane arrived, she caught her flight to D.C. and returned to LA two days later to a phone message from me. In the message I told Susan I received her email request to distribute $75,000 from her investment account, but I needed to get verbal authorization/confirmation as well as a signature authorizing the disbursement if she wanted to proceed. Alarmed, Susan called our office and said that she had not asked for a distribution! As it turns out, someone hacked into the Wi-Fi network at the airport, saw Susan’s email to me and continued the conversation where she left off….asking for $75,000 to be wired to his bank account instead of Susan’s. Thankfully we were able to detect the fraud in time.

This prompted us to interview Detective Erika Aklufi of Santa Monica Police Departments’ Criminal Investigations Division, Financial Crimes Unit. She said, “People are extremely intelligent, but they are really unaware of phishing scams where criminals are trying to illicit information or money.” Erika explained that more often than not, a criminal has a sophisticated ring where there are money drops and bank accounts that are being hacked into as a temporary holding place for stolen money in route to yet another transfer destination. Often the holders of the “money drop” accounts are unsuspecting victims themselves and don’t know they’re a part of the scam. It’s not a matter of if, but when, because everyone will have their identity stolen at some time. However, here are a few steps you can take now to protect yourself from becoming a victim of financial crime.

  1. Be Aware – Just like you need to be aware of your physical safety, you need to be aware of the places you go and the people who might be able to see your personal identifying information: name, DOB, SSN, tax ID, anything that can be used to create a false persona. Be extremely aware of the different places that you are using that information and limit the use whenever possible.
  2. Be cautious with public Wi-Fi networks –Don’t count on the provider of the Wi-Fi network to protect your personal information. Browsing for fun is OK, but don’t sit at a coffee shop and pay all your bills online. Who knows who’s sitting there watching?
  3. Be cognizant of phishing scams – Don’t call the number on the notice saying your credit card has been compromised. That could be the scam! Instead, get your credit card in hand, turn it over and call the number on the back to ask if your credit card has been accessed.
  4. Don’t click on links in your email – Open up a new browser and go directly to the bank or credit card you wish to get information from. By clicking on a link, you could be routed to a very believable but fraudulent financial institution page. When you attempt to log in with your user ID and password, you’ll be giving that information away to the criminal who hosted the fake webpage.
  5. Utilize activity monitoring services – There are many low cost services offered which will alert you when new accounts are opened in your name or your credit is run. You will be alerted within 24 hours of the event by text, email, mail, etc. AAA members get identity theft monitoring for free. AAA also offers a premium service for approximately $80/year where you are granted access to all three credit reports at any time so you can constantly check yourself if you want to.
  6. Set transaction alerts on your Credit Card – You can preset alerts for activity on your account that you know would be alarming or unusual, such as a transaction over a specific dollar amount.
  7. Be smart with your passwords – Don’t use the same password for multiple sites. Use strong passwords and change passwords frequently. Don’t use your pets’ name!! People spend hours trying to figure out your personal information and pet names are the first thing people try to guess.
  8. Use a credit card over a debit card – When you use a debit card, the money is coming directly out of your bank account. If fraud occurred, the bank may give your money back, but there can be an extended period of time that your account is frozen while you and the bank are sorting out the mess. Use a credit card instead! You can dispute a bill and you are not out of money during the investigation period.

If you have already been the victim of a financial crime, let the credit bureaus help you. Get a police report and submit it to the bureaus. They will put an alert on your account for 6 months to 7 years, noting that you have been the victim of identity theft. They’ll give you options on how to protect yourself going forward.

It can be a scary world when we realize how many predators are around us. However, it can also be empowering to know you can protect yourself and there are lots of good people out there who want to help you do so.

We wish you a safe and happy holiday season and a prosperous New Year!

Many thanks to Detective Erika Aklufi who so generously gave her time and advice to help us safeguard ourselves from identity theft and financial crimes.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS


 

2018 SCHEDULE 

INVESTING AFTER AGE 70.5 AND RMDS

NOTE: STREET PARKING ONLY 

Saturday, September 22, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

2019 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

La Canada Flintridge Library**

4545 North Oakwood Ave.

La Canada Flintridge, CA  91011

**does not constitute endoresement by the Library

 

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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