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SECURE Act

SECURE ACT

In the last weeks of December, the Senate voted 71 to 23 to pass the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Act was originally passed by the House of Representatives in July, and was subsequently passed by the Senate in December and signed into law by President Trump on December 20, effective January 1, 2020.    

Some of the highlights of the Act include the following:[i]

  • Repeals the maximum age for making traditional IRA contributions (previously 70½)
  • Increases the age at which Required Minimum Distributions (RMDs) must start from 70½ to 72
  • Limits the life of an Inherited IRA for non-spousal beneficiaries
  • Allows a $5,000 penalty-free withdrawal from a retirement account related to the birth or adoption of a child
  • Expands the types of qualified education costs allowed by 529 College Savings Plans

 No Age Restriction on IRA Contributions

Prior to the SECURE Act, working individuals could not make contributions to a Traditional IRA after age 70½. Now, individuals can make IRA contributions so long as they have earned income, with no age restrictions. The new law allows workers to save more for retirement and increase tax-advantaged savings.

Prior to the SECURE Act, a working individual could make Roth IRA contributions past age 70½ and that is unchanged under the new law. 

RMD age limit increased from 70 ½ to age 72

Prior to the SECURE Act, individuals had to take a Required Minimum Distribution upon reaching age 70 ½.  For those who were already age 70 ½ before 12/31/2019, the old rules still apply.  However, individuals who turn age 70 ½ in 2020 and thereafter are not required to take their initial RMD until age 72.  In line with the prior tax code, if a person is working past the RMD age (now age 72) and that employee is not a 5%+ owner of the company they work for, they can defer taking an RMD from their employer sponsored retirement plan until the year in which they retire.

Also unchanged, the individual’s first RMD can be taken as late as April 1st of the year following the required beginning date.  For example, if a person turns age 72 in 2021, they must take their first RMD by April 1, 2022.  Every year thereafter, the annual RMD must be taken by 12/31.

Death of the Stretch IRA

One coveted estate planning tool was the Inherited IRA, also known as the Stretch IRA.  For example, under the old rules, when mom passed away, her daughter could receive her mom’s IRA as an Inherited IRA.  The daughter would be subject to taking annual RMDs on the Inherited IRA over her lifetime, but the daughter could continue to benefit from the tax-deferral treatment her mom had, stretching the life and tax-deferral benefit over two+ generations.  The Stretch IRA was a powerful tax management strategy.  Using the same example as above, under the SECURE Act, mom could still pass her IRA to her daughter upon her passing. However, under the new tax rules, her daughter would have to withdraw the Inherited IRA balance, in full, by the 10th anniversary of mom’s passing, eliminating the use of Stretch IRAs over multiple generations and accelerating the taxation of the IRA funds, to the benefit of the IRS.  According to the Congressional Research Service, the new tax-deferral limit on the Stretch IRA strategy has the potential to generate about $15.7 billion in tax revenue over the next decade.[ii] 

As a result of the new Inherited IRA rules, careful income tax planning will be more essential than ever.  Short-sided IRA distributions could have long-lasting ramifications to the recipient such as being pushed into a higher income tax bracket, subject to higher Medicare premiums, and potentially assessed a higher taxation rate of SSI benefits and so forth.

Additionally, anyone who has listed a Trust as the beneficiary of their IRA should meet with an advisor right away to ensure that decision is still appropriate.  Listing a Trust as an IRA beneficiary could restrict access to the beneficiaries of the Trust over the 10-year distribution window.  This could cause the beneficiaries to receive the entire IRA balance in full at the 10th year and inadvertently subject them to massive taxes.

The new 10-year IRA withdrawal rule does not apply to spouses and other eligible designated beneficiaries who can continue to inherit the deceased owners IRA into their own name (versus an Inherited IRA titling) and are not held to a 10-year withdrawal timeline. 

Birth or Adoption of a Child

Under the SECURE Act, a retirement account holder under the age of 59 ½ can now make a penalty-free withdrawal of up to $5,000 from their retirement account, including a 401(K) or IRA, for expenses relating to the birth or adoption of a child after the child has joined the family. A couple can potentially withdraw a total of $10,000 penalty-free, if they each had separate retirement accounts. This flexibility allows young individuals to save more, with the peace of mind they have a back-up to pay for bills associated with a new child during a busy time.

Expanded Definition of 529 Qualified Education Expenses

As of 2019, student debt in the U.S. totaled more than $1.5 trillion.[iii]  A benefit of the SECURE Act is you can now use up to $10,000 from a 529 College Savings Plans over your lifetime to directly pay-off outstanding student debt.  This is a lifetime, and not an annual limit. 

The SECURE Act will dramatically change the financial planning and estate planning strategies utilized going forward.  Be sure to meet with your Certified Financial Planner™, CPA or attorney early to develop strategies to take advantage of the benefits available and circumvent pitfalls.  Incorporating the new tax law into your Comprehensive Financial Plan can ensure your long-term goals are still on track. 

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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Impeachment and the Market

This week, President Trump achieved a somber distinction as the third President in the history of the United States to be impeached. Trump has famously predicted that if he were booted from the White House, the stock market would crash. However, history has shown that impeachment trials are largely sideshows when it comes to market performance. Wall Street is predominantly affected by corporate profits and the economy.

When President Nixon was under investigation in 1973 and 1974, the economy was more concerned with the Arab oil embargo, which caused long lines at the gas pump and drove up prices. The government was also trying to rein in inflation by raising interest rates to double-digit levels. Then, November 1973 marked the beginning of one of the worst recessions in U.S. history. Nixon's impeachment was a relatively minor concern.

President Clinton's impeachment proceedings began in 1998. The Senate eventually acquitted him in 1999, allowing him to complete his term. However, the investigation and trial occurred during one of the strongest bull markets in history. Stocks were up 28% between the start of impeachment hearings and the Senate acquittal.

Today, the market is enjoying the longest bull market in U.S. history, an all-time high for corporate profits, and a 50-year low for unemployment. Trump would like to take credit for these gains, but he has benefitted from a shift to corporate power and an attack on labor that began long before the 2016 elections. The transfer of American jobs overseas, the use of technology to devalue workers, and the decline of union power began back in the Reagan presidency and has escalated ever since.

During the Great Recession of 2008 and 2009, U.S. firms fired more workers than usual. This allowed them to jumpstart profits when sales recovered. Consequently, the robust economy has hardly affected the average worker, whose wage growth has been tepid. Since wages represent over two-thirds of corporate costs, it's no surprise that corporate earnings have skyrocketed.1

Many analysts feel that if the Trump impeachment were to have any impact on the market, it would have been baked into stock prices long ago. Rather than impeachment, the stalled trade talks with China have been the biggest drag on the market. In fact, Trump's risk of impeachment may ease the way to an agreement, since Trump badly needs to show something positive. Trump has been motivated to move into Phase 1 of a mini-agreement with China, which offers some trade relief to China in exchange for increased purchases of agricultural products from the U.S.

At times like these, we sometimes need to step back and take a hard look at reality. When we focus on Breaking News that changes hourly, it's easy to lose sight of long-term goals, react emotionally, and make unwise investment decisions. What happens in the next few days, months or years is unlikely to have a lasting impact on retirement goals that will be important to you for the next 25 to 30 years.

We know that over the long-term, the market tends to go up, regardless of the political situation. One of most effective ways to capture these returns is to build a diversified portfolio that doesn't put all your eggs in one basket. The balance of different asset classes in your portfolio reduces the impact of market volatility. If you keep your eyes on the prize, Trump's impeachment will likely be a faded footnote to your successful retirement. 

********************************************************************************

This will be my last Rafu Shimpo article after a 25-year career in the finance industry. Thanks to my wonderful clients, top-notch staff, and my talented daughter, Akemi Kondo Dalvi, I'm able to retire. I feel so fortunate to leave Kondo Wealth Advisors with the peace of mind that our clients will receive even better service and advice.  Akemi has worked alongside me since 2008 and is both a CPA and Certified Financial Planner™.  She will continue to lead Kondo Wealth Advisors and inherit the privilege of writing finance articles for the Rafu. Thank you to the sharp and dedicated folks at the Rafu Shimpo for their support to grassroots community causes, and for allowing me to bend your ear for so many years.  It has been my honor to serve the financial needs of this community. 

1 CNN Money 8/29/2018

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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Revisiting Investment Philosophy

The Great Recession in 2009 was the largest market downturn the stock market experienced since the Great Depression in 1929.  Since then, we’ve had 10 relatively consistent years of strong market performance to make up for the losses incurred in 2009 and take us to new market highs. On Thanksgiving week, the Dow Jones Industrial Average, one of the most commonly quoted US stock market indexes, reached an all-time market high of 28,164.[i] However, unlike prior stock market highs, this new record seemed to be shrouded in fear that the market was teetering at the top of a mountain with an ominous downward sloping path ahead. Whether the predicted future stock market downturn is true or just good attention-grabbing headlines is yet to be seen. 

However, the discussion gives way to an opportunity to revisit your current investment philosophy.  Admittedly, many investors don’t have a sophisticated strategy other than to get the best return with the lowest amount of risk.  In a good stock market, a loose investment strategy can seem sufficient.  However, in the market to come where volatility is the new norm and no rules are the new rules, a sounder investment philosophy would be prudent.  

Foundations of a sound investment philosophy include factors of returns that are persistent, pervasive, robust, implementable and intuitive.[ii] For example, style factors such as asset class investing might group Large Cap stocks into a group of securities with capitalization attributes ($10 billion+) that are associated with specific expected returns.  Another factor or investment grouping is Small Cap stocks, which have different attributes of capitalization ($300 million to $2 billion) and different typical responses to macroeconomic factors.  By grouping various factors together, academic and industry research leads to an expected return that can then be analyzed to meet the outlined philosophy goals mentioned above.

For example, research has indicated that Small Cap stocks tend to outperform Large Cap stocks in a long-term (10 years+) investment window.[iii]  In analyzing whether Small Cap stock would be a sound investment philosophy, the returns of Small Cap stock should be persistent, in that the asset class continues to outperform its larger counter-parts in spite of obstacles and opposition, and throughout various historical market cycles. Following the sound investment strategy philosophy, the factor should also be pervasive, such that the rule of outperformance applies to the asset class throughout many world markets and is not singular to the US stock market.  The factor should also be robust, meaning the adherence to the rule of outperforming should be measurable and meaningful. To have a valuable investment philosophy, the strategy must also be implementable in the real-world stock market.  There must be a clear way to measure capitalization, sort companies by size and easily invest in small companies. Finally, investment in the factor, such as Small Cap stocks, must intuitively make sense.  Small Cap stocks are subject to more volatility and more risk.  Therefore, the investor must be adequately rewarded for the additional risk undertaken. 

It would be easy to say that Small Cap stocks in the U.S. have consistently underdelivered in the last market cycle and dismiss the investment holding.  However, a prudent investment strategy would be to analyze the philosophy, determine logically that an investment in Small Cap stocks makes sense and overcome the emotion as a disciplined investor.  In fact, economists in the market anticipate that Small Cap has a good probability of taking the lead in investment returns in the next 12 months.[iv]

While we used an investment in Small Cap stocks as the factor in this example, the same philosophical examination of each portfolio holding can be done systematically to ensure each piece of your investment portfolio makes sense for you individually.  Large Value and Emerging Markets are additional asset classes that have not fared well in the recent history, yet academically prove to be valuable pieces to a sound long-term investment strategy and a diversified portfolio. 

On the flip side, consider an investment factor that doesn’t intuitively make sense.  For example, what if the factor of grouping investments chosen was simply a letter of the alphabet, such as the letter “A”.  Under such parameters, you might invest in Apple, Amazon, and Alphabet (Google), and the portfolio likely would have done well over the last 10-years!  However, the letter A as an investment philosophy doesn’t hold up to the sound investment philosophy rules of persistence or intuition.  In the long term, this tech-heavy portfolio would be subject to a great deal or risk and volatility for a retiree hoping to protect their life savings. 

In summary, the investment philosophy you implement should make sense for your specific investment risk tolerance and long-term goals.  A good investment strategy should have a foundation of historical evidence or academic support that can take emotion out of difficult decisions.  When dealing with your life savings we want to be prudent rather than chasing a trend or leaving an investment up to chance.  If you have questions about your current investment strategy, seek the opinion of a Certified Financial Planner™ to help you reach your financial life 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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LOOKING TOWARD 2020

Those who are mad at Costco for bringing out the Christmas decorations before Thanksgiving are really going to be infuriated with me now.  Yes, the U.S. Internal Revenue Service (IRS) has come out with the annual inflation adjustments for the year 2020. As Financial Planners, we’re already looking ahead and, you guessed it, we’ve started planning. Most of the news is good. Included in the new 2020 rules are adjustments to tax rates and contribution limits, including higher estate tax and gift-tax exclusion limits.

TAX BRACKETS & STANDARD DEDUCTION

Staring January 1, 2020, the IRS increased the amount that can be earned in the current seven-tiered tax table for inflation.  The lowest tax rate remains at 10% and the highest at 37% with varying income limits by filing status. 

The standard deduction amount for single filers increased in 2020 to $12,400 from $12,200 in 2019.  The deduction for married filing jointly couples also increased in 2020 to $24,800 from $24,400 in 2019. [i]

GIFTING

Starting in the year 2020, individuals will now be able to gift a total of $11.58 million during their lifetime, free from federal estate or gift taxes.  For a couple, that means they could potentially shelter an estate worth $23.16 million from federal taxes when they pass away – wow!  The 2019 lifetime gift-tax exclusion was $11.4 million per person. In 2009, the estate tax exclusion limit was $3.5 million.  With the 2020 Presidential Election on the horizon, many are wondering if the estate tax exclusion’s dramatic increase under President Trump will be ratcheted down to prior levels in an effort to equalize wealth and help underfunded government programs such as Medicare and Social Security. 

In addition to the lifetime gift limit, individuals can also make annual gifts, free of taxation and excluded from the accumulative lifetime gift-tax exclusion. In 2020, the annual gift-tax exclusion is $15,000 per person or $30,000 per year for a married couple filing jointly.  In other words, if Bachan and Jichan wanted to give money to their two grandchildren during their lifetime, they could each give $15,000 to each grandchild, for a total annual tax-free gift of $60,000.  The annual gift-tax exclusion is a powerful gifting tool that is often overlooked.  The annual gift limit for 2020 was unchanged from prior year.

MAXIMUM RETIREMENT CONTRIBUTIONS

The IRS also increased the limit that individuals can contribute towards a Defined Contribution plan such as a 401(k) or 403(b) for the year 2020 to $19,500.  The limit was $19,000 in 2019.  To take advantage of this increased contribution limit, employees should tell their employer sponsored plan representatives to increase their paycheck contribution amount to meet the higher maximum in the beginning of 2020.

Workers age 50 and above are also eligible to make a catch-up contribution on top of the $19,500 limit, increasing the amount of income they can shelter from income taxation annually.  The new 2020 catch-up contribution is now $6,500, up from $6,000 in 2019. 

The amount individuals can contribute to an Individual Retirement Account (IRA) is unchanged for the year 2020 and remains at $6,000.  IRAs are also eligible for a catch-up contribution for savers age 50 and older.  However, that too remains unchanged in 2020 at $1,000 per year.The savings limit for self-employed persons utilizing a SEP-IRA will also increase in the year 2020 to $57,000 from the prior $56,000 limit.

The savings limits seem high and perhaps unattainable at first.  A Vanguard study in 2018 noted that only 13% of employees with a work sponsored plan saved the maximum limit allowed.[ii]  However those who save, and particularly those who save early on in their careers, have the smoothest retirement cash-flow metrics and are often able to retire earlier in life with greater peace of mind.  If you feel that your retirement savings plan could use review or an adjustment, reach out to a Certified Financial Planner™ for a second opinion.  It’s never too late to start planning.

 

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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End of Year Planning

What a surprise! We're close to the end of the year already, and Christmas trees are sprouting up in the malls and stores. Before you become consumed with holiday preparations and Christmas shopping, don't neglect the decisions you can make on your finances that can have a long-term impact if you act before the end of the year.

MAXIMIZE RETIREMENT CONTRIBUTIONS

Contributing to your retirement savings can both reduce your income taxes and enable you to take advantage of tax-deferred growth. If you have an employer-sponsored plan like a 401(k) or 403(b), you may be able to max out your contributions before the end of the year. The maximum contribution for 2019 is $19,000 ($25,000 if you are age 50 or older).

If you don't have a 401(k) or 403(b), you can open or contribute to a traditional IRA or Roth IRA. For 2019, the maximum contribution you can make to your traditional IRA or Roth IRA (combined) is $6,000 ($7,000 if you are age 50 or older).  Income limits may reduce how much you can contribute.

401(k)s, 403(b)s and traditional IRAs grow tax-deferred for most people. That means you don't get a 1099 at the end of the year on the growth. Your retirement accounts enjoy maximum growth. You only get taxed later in retirement when you make withdrawals.

Roth IRAs go one step further. Even though you don't receive a tax deduction on Roth IRA contributions, the growth is tax-free after you've held the account for 5 years or more. Withdrawals after age 59 1/2 are tax-free as well.

MAKE SURE YOU TAKE YOUR REQUIRED MINIMUM DISTRIBUTION

If you turned 70 1/2 this year, or were over age 70 1/2 at the beginning of the year, you have to take an annual Required Minimum Distribution from most of your retirement accounts. You don't have to cash out all of your retirement accounts, just 4 to 6% for most people, based on your age. Your bank or financial advisor can calculate how much it should be. In most cases, this will be automatic, but we've seen some cases where the financial institution let it slip through the cracks.

Not taking your Required Minimum Distribution can have severe consequences. The IRS can penalize you 50% of what you should have taken. Be sure to follow up with your bank or financial advisor if you haven't received your RMD by mid-December.

A couple of exceptions to the Required Minimum Distribution rule are Roth 401(k)s and Roth IRAs. These have no Required Minimum Distributions. In other words, you can leave the money in to grow as long as you want.

REVIEW YOUR INTEREST RATES

You might not have noticed, but interest rates have gone down this year. Last year, the average national mortgage interest rate was over 4.8%. Now, it's as low as 3.6%. If you already have a home, you may be able to lower your mortgage costs if you refinance. Check with your mortgage loan company. They can crunch the numbers for you, and calculate whether refinancing makes sense for you.

If you are a prospective home buyer, lower interest rates might make it possible to afford the home you've been looking for.

REVIEW YOUR INVESTMENTS FOR LOSS-HARVESTING OPPORTUNITIES

If you have a properly-diversified investment account, it probably includes U.S. large companies and small companies, International large companies and small companies, Emerging Market holdings (like China, Latin America and India), real estate and bonds. They usually don't all go up and down at the same time. This is a phenomenon you can use to save taxes.

Let's say you want to make a distribution from one of your taxable accounts to take a vacation. If one part of your investment declined in value, it might make sense to sell some of that, and claim a capital loss. Simultaneously, you might sell some of another taxable holding that has a gain. The loss and gain can cancel each other out, and your distribution could be tax-free! Ask your financial advisor to look for loss-harvesting opportunities.

GIVE TO YOUR FAVORITE COMMUNITY ORGANIZATION, CHURCH OR TEMPLE

If you are charitably-inclined, and itemize expenses on your federal tax return, you might qualify for a tax deduction by donating to a charity. If you have appreciated investments, you can donate them directly, avoid paying capital gains tax, and get a tax deduction to boot!

If you are age 70 1/2 or older, you can write a check (maximum $100,000 annually) directly from your retirement account, using a strategy called Qualified Charitable Distribution. The distribution doesn't touch your Adjusted Gross Income (and consequently doesn't increase your Medicare premium or taxation on your Social Security benefits), you don't get taxed on the distribution, and the charitable organization receives full value.

Some of the strategies above may help you reduce taxes and benefit your long-term finances. Consult with your Certified Financial PlannerÔ or CPA to see which ones might be appropriate for you.

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

2020 SCHEDULE 

 

Investing: What to expect in 2020

Saturday, January 25, 2020

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

 

Retirement Planning & the SECURE Act

Saturday, June 13, 2020

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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