2020 Year End Financial Planning

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Just as change and uncertainty unnerves people, it’s also one of the biggest triggers for volatility in the stock market. The stock market hates the risk of the unknown. Therefore, we can imagine the remainder of 2020 to resemble a roller-coaster as we close out a Presidential Election year, battle a global COVID resurgence, and impatiently await the next Federal Stimulus package and availability of the COVID vaccine. That leads many to wonder, what should I be doing now to prepare for the market volatility ahead?

Politics and your Portfolio

The current election call is that Biden wins the Presidency of the United States and Republicans retain control of the Senate. Historically, the divided government scenario plays out most ideally of all variables for the stock market. The divide promotes compromise between the left and the right, and ultimately results in moderate changes. Given Republicans will continue to control the Senate, Biden’s proposal for sweeping tax reform will be reduced significantly. Further, Biden’s experience is seen as ideal for international negotiations, such as the looming trade agreement with China, which is also positive for the stock market.

Investment Check-up

In times of market volatility, the best course of action is typically to stay on track with your overall financial plan. Ensure you’re not taking more risk than necessary in a volatile market, but also be positioned to capture market gains as the global economy enters the rebuilding phase. Diversifying ensures you’re not oversaturated in one market sector that unexpectedly experiences decline, due to COVID, or a subsequent COVID vaccine, for example. A well-diversified portfolio spreads out your risk and allows you to capture gains wherever they emerge. While US Growth performed tremendously in the last decade, we cannot forget the Lost Decade of the 2000s where the same asset class posted a -1% annualized return over a 10-year window. Many analysts predict we might be at the point of a global shift where Value stocks take the lead in the near future. Now is a great time to review your portfolio with your financial advisor and ensure you’re on track as the market rotates.

Consider Roth Conversions

We are currently experiencing some of the lowest federal income tax brackets in recent history, and likely in the years to come. Further, under the SECURE Act, IRA rollovers must now be distributed by beneficiaries within 10-years from the date of inheritance, triggering income tax that makes the IRS a substantial unintended beneficiary of your IRA. Therefore, if you do not think you will use all your IRA assets during your lifetime or if you have a long retirement ahead, it might make sense to consider converting, or rolling, pre-tax retirement funds into an after-tax Roth IRA. If the market is down, that “sweetens the deal” allowing your investment to grow within and be distributed from the Roth IRA tax-free.

Roth conversions especially make sense for those who would normally be required to take Required Minimum Distributions (RMDs) before proceeding with a Roth conversion. Under the CARES Act, for 2020 only, the RMD can be waived and tax would only be due on the Roth conversion.

Anyone experiencing lower earned income in 2020 due to job loss related to COVID, for example, may want to consider realizing taxable income through IRA withdrawals or Roth conversions they might otherwise have deferred. Keep in mind that anyone who collected unemployment in 2020 may have received payments, tax-free during the year, that will be 100% taxable as income when they file their 2020 tax return next April. Therefore consider setting aside funds for tax-time or making estimated quarterly payments. [i]

Turning Lemons into Lemonade with Tax Loss Harvesting

Loss harvesting is a strategy that allows you to realize, or lock in losses, on an after-tax investment when the stock market is down. By creating a taxable loss with the IRS, you can offset current or future taxable income on gains, or if you have no taxable gains offset taxable income up to $3,000/year. Loss harvesting has several rules and factors that should be considered in advance, so consult your Certified Financial Planner™ or CPA to ensure the strategy can be effectively implemented.

Gifting in 2020

Under the CARES Act, for the year 2020 only, if you itemize deductions, the tax deduction for cash gifts to non-profits was increased from 60% of Adjusted Gross Income (AGI) to 100% of AGI. If a donor gifts more than 100% of their AGI, the excess can be carried forward for up to five additional tax years.

Also under the CARES Act, people who file using the standard deduction can get an above-the-line deduction on charitable gifts. In other words, standard filers will get a direct reduction of income on donations; a benefit that is typically only achieved through Qualified Charitable Distributions (QCDs). Itemized deduction filers will still need to do a QCD to achieve the desired reduction of income treatment on donations.[ii]

The best financial planning is done throughout the year as both high and low equity markets present unique opportunities. It is also important to note that a long-term investment perspective not only reduces the short-term stress of market volatility but also helps your bottom line return. A prudent investment portfolio should weather anticipated volatility, and ensure your investment strategy aligns with your financial planning goals.

[i] https://buckinghamadvisor.com/2020-year-end-tax-planning/

[ii] https://www.kiplinger.com/slideshow/taxes/t054-s001-cares-act-expands-charitable-giving-tax-deductions/index.html

The commentary on this website reflects the personal opinions, viewpoints and analyses of 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.