Making Up For Lost Time: Prepping for Return to Normal Spending in 2022

Making Up For Lost Time: Prepping for Return to Normal Spending in 2022

I originally wrote this blog post in July 2021. I am updating the post as a great deal has changed in our lives since last summer. We are still dealing with the impact of COVID on a daily basis; albeit, it is in many different ways. Our consumer habits are much closer to pre-pandemic patterns. We are dining in restaurants and shopping in stores. Travel is returning to more normal levels as well. All of that said, we are still a country very much dealing with this virus. Our hospitals are better equipped to handle life-threatening cases and, fortunately, those case numbers are falling. We are still seeing friends and family members test positive at a high rate, and we are frequently utilizing home testing kits to determine the cause of symptoms. I believe that most people are coming to the realization that COVID will be us, in some form, for many years to come.    

Through the first year and a half of the pandemic, we heard the phrase “new normal” ad nauseam. Pundits and media types love to tell us that this is a different time, situation, or environment than we have ever seen before. I tend to look skeptically at these prognostications because history has a way of repeating itself. However, this won’t be a new normal as much as a move toward “back to normal,” not only in our personal and social lives but also in our financial lives. 

In the chart above, 2020 became one of only two years since 2000 that Americans’ personal savings rate eclipsed 10%. Click here for the interactive chart. Source: Statista.com

Savings Rates Are Off Of Their Early Pandemic Highs

We all were forced to adjust our lives and adapt to a COVID world. We all stayed at home more and limited our exposure to crowded situations. A silver lining emerged from this very difficult period in our lives by way of our personal savings rates. Personal savings rates in the United States skyrocketed in 2020. The savings rate in 2020 was almost double that of 2019 and more than doubled the respective rates of 2016 and 2017

That’s changed over the last year. Savings rates have fallen off of their pandemic highs, dropping in all but two of the last 13 months since March 2021 and trending below the 10-year average. The recently released rate for the month of April shows that the savings rate for Americans hit its lowest level since 2008 (4.4%). This is likely a result of people’s spending habits returning to pre-pandemic levels as well as an increase in the cost of goods. Inflation is having a very real impact on household budgets. For this reason, we should review our cash/emergency savings levels and determine if we need to allocate more of our income to short-term savings accounts. The economy is facing headwinds that we haven’t seen in some time, and we should all be prepared for a possible slowing of economic growth. 

The Challenging Beginning to 2022

The domestic stock markets are dealing with myriad economic issues as we near the mid-year point. Supply chain issues caused by COVID shutdowns are still generating disruptions with companies trying to deliver finished products and keep shelves stocked. As a result, companies are having to forecast lower revenue projections, and the equity markets are reacting negatively. This, in conjunction with a bond market facing strong indications from the Federal Reserve of significantly higher interest rates, is stressing the fixed income markets and yielding an uncertain second half of 2022. The country is also seeing a shift away from work-from-home employment to workers going back to offices, stores, and production facilities. This puts pressure, particularly on technology companies such as Zoom, DocuSign, and others, which soared in the WFH environment and are now struggling to adjust to employees traveling back to work.

Assess Your Financial Situation 

Your financial life is in a different place than it was at the beginning of 2020. 

We are all attempting to find the correct footing for ourselves and our families in this post-pandemic, but still lingering COVID world. From a financial perspective, it is important to keep in mind that correctly positioned emergency funds are imperative. It is difficult to predict how 2022 will finish and where the economy will sit at this time next year. For that reason, reviewing your financial plan and understanding the impact of recent market downturns have had on your plan is critical. Prioritizing your financial situation during these times will most likely produce better results as the country hopefully gets beyond this current phase of COVID. 

Nate Condon, Financial Advisor

Are No-Fee Custodians Really Free?

Are No-Fee Custodians Really Free?

In the world of investing, it is important to have your money and securities held securely. The vast majority of these investments are held through a custodian. These custodians – Fidelity, Charles Schwab, TD Ameritrade, and others – are often custodian banks and are in the business of protecting clients’ assets and facilitating the tracking of the trades and transactions the client needs to execute in their accounts. Many Registered Investment Advisory (RIA) firms engage custodians on behalf of their client accounts and are tasked with understanding the costs associated with utilizing them. In recent years, many of these custodians have gone away from transaction costs for trading securities per trade and have adopted a “Zero-Commission” or “No-Fee” model. It is important to understand that this does not mean that there is no cost. 

Here are some of the main ways that custodians make money: 

Many custodians do not charge commissions or account level fees and brand this service as a “No-Fee” account. As my mother used to tell me though, nothing in life is free. 

Expense Ratios, Servicing Fees & More

With trillions of dollars on platforms like Charles Schwab, TD Ameritrade, and others, there is a lot of money to be made through the deposits that are often swept into the banks that own these custodians or operate directly with them. Even at small percentage points as low as 0.1%, they can generate billions of dollars in revenue. It remains to be seen if this is the best model for the RIA industry which, like us, works hard to bring value and fiduciary guidance to our clients.

Looking into the underlying fees that Exchange Traded Funds (ETFs) and mutual funds charge and how it fits into our client’s best interest is very important when evaluating the portfolios that are utilized. It is also important to know how those fees are being allocated to the custodians that we use. Since many of the custodians are no longer charging “commissions” for each transaction, there has been a rise in the number of assets that are being held by these custodians, creating an opportunity for them to make more money off of the deposits, cash, and servicing fees than they were able to make charging a commission. 

Managing the Bid-Ask Spread

Managing the bid-ask spread is another way that custodians can make money. The bid is simply the price that a buyer wants to pay for a security; the ask is the price that a seller wants to sell a security. The difference between the bid and ask is called the spread. In many cases, the spread of a security could be pennies. For example, at the time of this writing, the ETF SPY (one of the most frequently traded S&P 500 index funds) has a bid of $414.83 and an ask of $414.84. It doesn’t take a mathematician to realize that the spread in this case is a single penny. Custodians can profit by selling shares at the ask price and buying shares at the bid price (they are called “market makers” in this capacity). Some securities like SPY are traded over 100 million times per day. When that amount of trading occurs, pennies add up. We have discussed this in a past blog when many brokerages reduced their trading commissions to $0

Payments for Order Flow

Payment for order flow is yet another way that custodians generate revenue. Custodians can route trades through high-frequency electronic trading firms such as Citadel Securities. Somewhat behind the scenes to the average investor, Citadel is one of the largest market makers on the planet. By routing trades through firms like Citadel, custodians receive payment in return. Custodians may receive fractions of a penny ($0.001 – $0.002) per share. Again, this can add up when we are talking billions of trades.  

Custodians play an important role in the process for independent fiduciary financial advisors to manage their client’s investments and financial transactions. The partnership that we have together should continue to grow. Knowing where your money is held is vitally important, but it is also good to know how they are making money and collecting fees. Interest is a powerful measure of return on money, and banks are in the business of loaning out money to make money. They definitely have an “interest” in having more deposits and available cash.  

Jonathon Jordan

What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA

Do NFTs Get a Step-Up in Cost Basis at Death?

Do NFTs Get a Step-Up in Cost Basis at Death?

With the adoption of digital assets such as non-fungible tokens, or NFTs, questions around estate planning will become more prevalent. At the date of death, many assets “step-up” in basis, effectively wiping away any unrealized gains.

NFTs are treated as either property or as a collectible depending on the type of asset it is. Both property and real estate are eligible for a step-up in basis at the date of death for the beneficiary. 

That means that if you bought your Bored Ape Yacht Club NFT for the low price of $50,000, and it’s now worth $500,000, the basis resets at $500,000 when you pass away (or whatever the equivalent is in ETH at the time should you prefer to value things in ether). 

One exception to this: If you happen to own your NFT inside of an individual retirement account (most likely in a “self-directed IRA”), such as an IRA or Roth IRA, this step-up in basis would not occur.

Additional reading: Here a blog post that does a good job of giving examples of what NFTs could be considered property and real estate.

Clint Walkner

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

What Assets Get a Step-Up in Basis at Death?

What Assets Get a Step-Up in Basis at Death?

With the death of a loved one, one question we often get is, “What assets are entitled to a step-up in basis and what assets aren’t entitled to a step-up in basis at death?” To define what we mean by step-up in basis, sometimes referred to as stepped-up basis, here is an example:

Your mother purchased 100 shares of XYZ company at $10 per share in 1950, costing her $1,000, which is her “basis.” She holds the shares without selling until she passes away in 2022. The share price is $1,000 per share at her date of death. 

Despite the fact that she has a significant gain of $99,000 in this example, the basis “steps up” on the date of death to the share price on that date – or $100,000. If the beneficiary of this stock decides to sell it a few months later, their basis is $100,000 and the gain or loss is simply the value of the shares sold minus the basis. For example, if they were sold at a value of $110,000, they would owe tax on $10,000 of capital gains (and in this case, short-term capital gains).

Examples of Assets That Step-Up in Basis

  • Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts.
  • Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. 
  • Businesses and the equipment in the business.
  • Art, collectibles, home furnishings – such as antiques that may have increased in value.
  • Cryptocurrencies.
  • Non-fungible tokens, or NFTs.

Examples of Assets That Do NOT Step-Up in Basis

  • Individual retirement accounts, including IRAs and Roth IRAs.
  • 401(k), 403(b), 457 employer-sponsored retirement plans and pensions.
  • Real estate that was gifted prior to inheritance.
  • Tax-deferred annuities.

We encourage our clients to seek out the counsel of a qualified estate planning attorney to plan out their wishes and assure that they are making good choices regarding future taxation of their assets and avoiding unintended consequences of their actions.

– Clint Walkner

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

Does Cryptocurrency Get a Step-Up in Basis Upon Death?

Does Cryptocurrency Get a Step-Up in Basis Upon Death?

With the rise of virtual currency – such as Bitcoin or Ethereum – there are many investors that have significant unrealized gains embedded in their holdings. But when someone passes away, their holdings may go through a step-up in basis (depending on what it is they’re holding and how it’s held, e.g. brokerage account, Roth IRA, etc.). Effectively, the value at the date of death becomes the new cost basis for that asset. This may benefit the beneficiary greatly since there are no longer any unrealized gains to recognize at the date of death.

Because of the novelty of virtual currencies, many investors who have cryptocurrencies may be wondering where those fall in terms of a step-up in basis. Here’s your answer.  

Cryptocurrencies are treated as property in the eyes of the IRS. One bulletin to read is IRS Notice 2014-21. Due to the tax treatment as property, the step-up in basis provision does apply to cryptocurrency, including Bitcoin, Ethereum, and yes, even Shiba Inu

However, there is one important exception to this. If crypto assets are held inside of an individual retirement account such as a Roth IRA or IRA, the step-up in basis does not apply, as these assets are not eligible for the step-up in basis.

You can read more about other assets that step up in basis in our general overview of step-up in basis here.

– Clint Walkner

Disclosure: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.