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Six Things to Know about U.S. Treasury Series I Savings Bonds and Their High Yield

Six Things to Know about U.S. Treasury Series I Savings Bonds and Their High Yield

By chance, I came across something that hadn’t been on my radar screen for a very long time. Enticed by the rate of return I saw in this current yield-starved environment, I saw 7.12%. Must be a junk bond or something that has significant default risk, right? 

Wrong! The current yield of 7.12% is in none other than Series I savings bonds through the U.S. government. For review, “I” bonds pay two different rates, one tied to a fixed rate (which is currently a whopping 0%), and the other tied to the inflation rate. These are based on a 30-year term, with some liquidity provisions I will explain below. 

As inflation has increased, I bond rates have significantly increased, with the most current rate being the second-highest rate in history according to TreasuryDirect. 

THE DETAILS & SOME FAQs ABOUT SERIES I SAVINGS BONDS

How often are interest rates set? 

Semi-Annually. When I say “7.12% interest rate”, it means you are receiving an annual interest rate equivalent to that percentage, but the rate changes after that six-month period. (It could stay the same, but it is unlikely). The new rate is then set and you earn interest at that rate. For example, if you had $10,000 invested in the current bonds, you essentially would earn one-half of the 7.12% after six months. If you buy the November issue, the new rate starts May 1st.

Can I get out before 30 years? 

Just because it is a 30-year bond does not mean you must keep it in that long. You cannot withdraw any money in the first year. After that, if you cash it in prior to holding it for five years, you will forfeit the latest three months of interest. 

How do I buy them? 

You can buy them without any fees directly at TreasuryDirect

How much can I buy? 

For electronic bonds, you may buy up to $10,000 each calendar year per social security number. This is also a way to buy $5k more in paper bonds utilizing your tax refund. See TreasuryDirect for more information on that.

Why should I consider this in my portfolio? 

Everyone’s situation is unique. For many of us, we are looking for some places that are conservative that just keep pace with inflation and don’t carry stock market risk. While it’s likely a very small amount for many of our clients, it still may help beat CDs or other short-term fixed income investments. Furthermore, as a general rule when interest rates rise, bond values fall. This is not an instrument that trades like that, so the prospect of higher rates will not affect this investment. 

If this inflation does end up being more “transitory”, or short-term, you can always cash out with the interest penalty after one year, so it’s quite liquid and flexible.

Why didn’t my financial advisor mention this to me? 

First, is your financial advisor a fiduciary and acting in your best interests at all times? If so, perhaps they should have at least discussed the topic with you. Second, if your advisor is compensated with assets under management, perhaps they didn’t want to reduce their fees by seeing assets leave their doors. Last, if they are compensated on commissions it’s highly likely that they would rather sell you something and get paid instead of offering suggestions that are pro bono. 

If you have any questions related to the topics listed above, do not hesitate to contact me at [email protected] or leave a comment and we will get back to you.

Clint Walkner, Managing Partner – Walkner Condon Financial Advisors

What the Certified Exit Planning Advisor Designation is and Why I Pursued It

What the Certified Exit Planning Advisor Designation is and Why I Pursued It

One of the most overlooked yet essential steps that a private business owner, or owners, should take is establishing an exit plan. It is vital to know that at the end of years of hard work and dedication the three critical components of success in succession are met – personal goals, financial goals, and business goals. 

More than Just the Face Value of Your Business

The question that most often goes unanswered, or is not known, is “What is my business really worth?” It is possible to get a business valuation to determine a value, but in many cases, there is more to the success of the transition than just the final amount. That is why I decided to study to achieve the Certified Exit Planning Advisor accreditation through the Exit Planning Institute. I want to add value to my clients who are business owners as well as those that I come into contact with throughout my career.

As one of the owners here at Walkner Condon Financial Advisors, I have first-hand experience with understanding the needs of a growing business. We have grown tremendously over the last four years, and I am incredibly grateful for the people I work with and for all of the clients that we get to work for. Creating an exit plan is something that we have discussed and simply put, it is good business. It can and should be a win-win for everyone if the process of exit planning is done thoroughly. Creating a team around you that has professional experience crafting and implementing exit plans is extremely important and can add to the value of the company for the owner or owners. It can also help with the morale of the employees of the company and then increase the chances of long-term success. 

Baby Boomers and Business Ownership

The majority of privately-owned businesses are owned by Baby Boomers, who are being forced to consider the options that they have to exit their businesses at an alarming rate. Every day since 2011, 10,000 people in the United States turned 65. That will continue for a couple of years still. With so many businesses being owned by Baby Boomers, they need to have an exit plan in place that will benefit their personal, financial, and business goals. That is where a Certified Exit Planning Advisor can really add value to these owners by organizing the team of professionals and experts around the ownership group to create and execute this plan. In reality, most companies are not ready to be sold when the owner wants to sell, which makes the exit planning process even more important. 

The Power of Planning Ahead

I am proud of the CEPA designation that I pursued, and I am looking forward to utilizing the skills and knowledge that I learned to help owners as they plan for the inevitable exit of their business. I have already had a handful of conversations with current clients and others in the community, conversations that have reinforced the value that I believe someone with the CEPA designation and expertise can add to financial planning for their personal and business goals. I know one thing is certain in this uncertain business world: You will exit your business at some point…either in a way that you planned for or one that you did not plan for! 

 

Jonathon Jordan, CFP®, CEPA

Six Things to Know about Employee Stock Options

Six Things to Know about Employee Stock Options

Employee stock options can be a valuable part of a compensation package. They can also be misunderstood. Here is a quick guide to walk through some of the common questions that we get from clients and prospective clients regarding employee stock options, as well as some additional items to consider.  

There is the possibility you found this blog by searching “employee stock options,” but you may not have options at all (more on that later). There is also a reasonable chance that you do, in fact, have employee stock options available to you (hence why you conducted the Google search in the first place). So, let’s define employee stock options. 

TYPES OF EMPLOYEE STOCK OPTIONS

Investopedia defines employee stock options as “a type of equity compensation granted by companies to their employees and executives.” They are considered derivatives because the value of a stock option is derived from the price of the underlying stock. If you own a stock option you do not own the actual stock itself. Rather, you have the right to buy the stock at a predetermined price (the strike price). If the price of the actual stock is greater than the strike price, the option is considered “in the money”. Of course, you’d rather have an option that is in the money than out of the money; an out-of-the-money option is worthless! There are two main types of employee stock options: Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs, or sometimes you’ll see NQSOs). They are treated differently than standardized options contracts that trade on an exchange. Standardized options contracts are similar in that they may give someone the right to buy (or sell) a stock at the strike price, but anyone can own them (you don’t have to be an employee of the company). Investors can buy or sell standardized options contracts to hedge risk, generate income, or use them speculatively.

ISOs and NSOs are similar in that they give the employee the right to buy the stock at the strike price. They are also both subject to a vesting schedule. Once options vest, the employee can exercise the option. For example, let’s say an employee is awarded 1,000 options (either ISOs or NSOs) that vest over a four-year period. Assuming that they are still with the company and have met the criteria outlined in the stock award’s plan document, the employee vests 25% after one year passes. They are then able to exercise 250 options (i.e. they buy the stock at the strike price). If the strike price of the stock is $50, the employee can purchase 250 shares for $12,500. This could be a good deal if the market price of the stock is $100/share! However, the option doesn’t have value when the market price of the stock is $25, for example (why would you want to buy a stock for $50 when it is worth $25?).

Before diving into the rest of this blog, I want to remind you that, although taxation is discussed at a high level, I am not a legal tax advisor! Taxes, especially around the various forms of equity compensation, get complicated. That is why there are good tax advisors and CPAs out there! Please remember that this blog is NOT exhaustive and that it makes sense to work with a financial planner alongside your tax advisor/accountant. Let’s continue. 

TAXATION OF EMPLOYEE STOCK OPTIONS

The big difference between ISOs and NSOs is taxation. Generally, ISOs are more favorable from a tax perspective. ISOs may not be taxable when exercised, whereas the difference between the fair market value and exercise price of an NSOs will be subject to ordinary income tax. Note that exercising your ISOs may trigger the Alternative Minimum Tax (AMT). The AMT is essentially a tax code that runs parallel to the federal income tax code. The purpose of the AMT is to ensure that taxpayers with the tools and resources to greatly reduce their tax bill through deductions etc. still have to pay a minimum tax. Most U.S. taxpayers are not subject to the AMT. Your tax preparer will compare your tax liability that is shown on your “normal” tax return (IRS Form 1040) to the tax liability calculated from the AMT, and the taxpayer will have to pay the higher amount. 

Without going too far down the AMT rabbit hole, let’s get back to ISO and NSO taxation. There is also a difference in how ISOs and NSOs are treated when the underlying stock is sold. ISOs may provide the opportunity to have a larger share of the gain subject to capital gains tax, compared to NSOs. In the case of the ISO, the difference between the sale price and the exercise price could be subject to capital gains rates. Compare that to the NSO, where the difference between the sale price and the fair market value price on the exercise date could be subject to capital gains rates (all else equal, a smaller portion than the ISO). Why is this important? In most cases, the long-term capital gains rates are lower than the ordinary income tax bracket. For example, someone in the 37% ordinary income tax bracket would be in the 20% long-term capital gains tax bracket (well, it could be 23.8%: 20% capital gains tax + 3.8% net investment income tax). I don’t know about you, but I’d rather have most of my gain generated from my ISOs be taxed at 20% (or 23.8%) rather than 37%! It is also worth noting that depending on the state that you live in, there may be a capital gains tax at the state level in addition to federal taxes. To qualify for the more favorable long-term capital gains rate upon disposing of stock obtained from exercising an ISO, one must hold the stock over one year from the exercise date and over two years from the stock option grant date.

PRIVATE COMPANY VS. PUBLICLY TRADED

How does this change if a company is privately held, compared to a publicly-traded company? In the case of a publicly-traded company, the market value of the stock is pretty easy to determine. Not necessarily the case for a private company. Here in Madison, Wisconsin, there are a lot of people that work for Exact Sciences (publicly traded: EXAS) as well as Epic Systems (private). Both companies have robust equity compensation plans. It is quite easy to find the price of EXAS stock, just ask Siri (she’ll tell you!). On the other hand, try asking Siri to provide you with the price of a share of Epic Systems. Spoiler alert: I tried this, and she will politely respond, “I don’t see the stock ‘Epic Systems’”. Ultimately, Epic obtains an annual assessment of the price of a share of their stock that is approved by the Board of Directors. Disposing of the shares will also be treated differently between a public and private company. If you obtain stock from an employee stock option or another form of equity compensation (assuming fully vested and no remaining restrictions), you can probably sell the stock to any buyer on the open market. With private companies, disposing of the stock typically means that you sell the vested shares back to the company. The stock plan document will describe the logistics of how the transaction occurs. If you sell the stock back to the company, the transaction is subject to capital gains. Taxation of Restricted Stock or a stock option of a private company is typically treated the same as it would a publicly-traded company; however, as always, this is a topic that should be run by your tax advisor.

OTHER FORMS OF EQUITY COMPENSATION

You might be wondering, what about my RSUs, ESPP, SARs, or other flavors of equity compensation that I have through my employer? A trend that we see within the world of equity compensation is an uptick in Restricted Stock Unit (RSU) awards. An RSU isn’t a direct share of the underlying stock. Rather, the delivery of shares of stock occurs after the RSUs vest. An RSU is granted to an employee and is usually subject to a three or four-year vesting schedule. Taxation occurs, at ordinary income rates, when the RSUs vest and the stock is delivered. Once you own the vested stock, taxation is treated just like any other stock: It depends on 1) the holding period (if it is greater than one year or not) and 2) if the stock is sold at a gain or loss. Employee stock options still exist, of course, but RSUs have become more popular since they usually have some value – unless the company stock goes to $0. In the case of ISOs and NSOs, if the options are out of the money, there is no value (technically there might be some “time value,” which is the concept that an option has more value the further away it is from its expiration date). I’ll leave it to Bill Gates to describe it in a way that I couldn’t do better myself: 

“When you win [with options], you win the lottery. And when you don’t win, you still want it. The fact is that the variation in the value of an option is just too great. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times. The variation is huge; much greater than most employees have an appetite for. And so as soon as they saw that options could go both ways, we proposed an economic equivalent. So what we do now is give shares, not options.”

I’ve had many conversations with people and they find themselves using the terms “Restricted Stock” and RSUs synonymously. Restricted Stock (RS) is different from an RSU! Restricted stock is company stock that is granted to you but you have voting rights and the right to dividends during the vesting period. That is not the case with RSUs. From a taxation perspective, the big difference between RS and RSUs is that the RS has the option to make an 83(b) election. If an employee has RS, the 83(b) election allows the employee to be taxed on the grant date, instead of the default of being taxed at vesting. The 83(b) election might make sense when the employee strongly believes that the price of the stock will increase over time. The thought process is that they would rather get taxed on the grant date when the value of the stock is, say $1000, opposed to when the stock vests when its value is $2000, for example. An 83(b) election is risky. There is a chance that one makes the 83(b) election and is taxed on an amount that is higher than the value when the stock vests or is sold at a later date. In that case, the employee overpaid taxes, and cannot get refunded for the overpayment. Therefore, if the employee thinks that the stock price might go down, they might not want to utilize the 83(b) election. Ultimately they should engage with their tax advisor to take into consideration all other tax-related factors in their decision.

Employee Stock Purchase Plans (ESPP) are also quite common. These plans allow employees to purchase company stock with funds deducted directly from their paycheck, usually at a discount (up to 15%). In the case of an ESPP that has a 15% discount, if the fair market value of the stock is $100 (as defined by the plan document), the employee has the opportunity to buy the stock at $85. Taxation upon sale of stock acquired from an ESPP can be a combination of ordinary compensation income and capital gains. The amount of time that you hold the stock from the offering period (when money is deducted from your paycheck) and the purchase period (when the actual stock is purchased) will determine the type and extent of taxation. ESPP taxation is similar to the tax treatment of ISOs, from the perspective of a qualified disposition (generally favorable tax treatment) vs. a disqualifying disposition (generally not as favorable). 

Stock Appreciation Rights (SARs) are another form of equity compensation. We still see SARs, but in our experience much less than RSUs or traditional employee stock options (ISOs & NSOs). With SARs, an employee can profit when the stock appreciates, just like the name implies. Depending on how the plan is set up, the employee can be paid in cash or company stock (taxed as ordinary income upon exercise, regardless if you receive cash or stock). Note that the SAR must be exercised! The payout doesn’t occur automatically when the price of the underlying stock appreciates. Similar to employee stock options like ISOs and NSOs, SARs may have no value, in the case where the stock never appreciates after the SARs were granted. The “gain” (fair market price of the stock minus exercise price) is taxed as ordinary income upon exercise.

WITHHOLDING

As you can see, a taxable event may occur at different stages of the game, depending on what type of equity compensation we are talking about. Many wonder, will I have to pay taxes out-of-pocket? In most cases, you will be able to withhold an amount to account for the tax due from a taxable event. Depending on the type of plan you have, there could be multiple options when it comes to withholding. This is another area where a good review of the plan document will tell you your options. 

In some cases where the employee receives cash (e.g. exercise of a SAR where they get their payout in cash instead of shares of stock), the company may simply withhold taxes in the form of cash, similar to withholding from your paycheck. They will withhold for federal & state income tax, Social Security, and Medicare. In a case where the employee is receiving stock (e.g. RSU vests, shares of company stock are delivered to the employee’s brokerage account), the company may withhold the appropriate amount in the form of shares. In that case, the employee receives an amount of shares net of withholding (I’ve also seen it described as “surrendering” shares). By withholding shares, it allows the employee to avoid paying the withholding with cash. Note that just because taxes are withheld doesn’t mean that a taxpayer won’t have to pay anything out of pocket! In other words, there are cases where the tax withheld was too little, and the taxpayer still owes a portion of their tax liability by the time they file their taxes. 

RISKS

Investing comes with risk, although not all risks are equal. Obvious statement ahead, but people participating in the many types of employee stock plans mentioned above want the price of their company stock to go up! However, we know that stocks don’t increase exponentially (or linearly, for that matter) into perpetuity. They can be volatile and in some cases can lose significant value. As discussed earlier, in the case of employee stock options like ISOs and NSOs, forms of equity compensation can lose all of their value. Think back to the Bill Gates quote above. All in all, equity compensation plans can provide a unique opportunity for you to save, invest, and grow your net worth. It doesn’t always work out exactly as planned, but if managed appropriately, equity compensation plans can provide an excellent supplement to help you meet your financial goals in a tax-advantaged way. 

 

Mitch DeWitt, CFP®, MBA

The Case for Using Dividend-Paying Stock in a Yield-Starved Market

The Case for Using Dividend-Paying Stock in a Yield-Starved Market

As we look to the second half of 2021 and take an assessment of the markets one year after the post-pandemic recovery began, it’s frankly difficult to feel anything but extremely relieved and grateful that global markets faithfully marched onward through human tragedy, political turmoil, and the Aaron Rodgers pseudo-holdout that followed a second straight defeat in the NFC title game. Clearly, the market has been more like Tom Brady than Kirk Cousins, continuing to win even though the run has left both Brady and the U.S. stock market’s bull run a bit long in the tooth, but still hard to bet against.

However, as we turn the page on the first half of 2021 and look ahead to 2022, it’s hard to ignore valuations and worry that, like the Minnesota Vikings, money put to work here and now may give us a Kirk Cousins-like vibe sooner rather than later, meaning that we run the risk of overpaying for expectations that may be beyond our grasp or control. In short, valuations matter, and we shouldn’t give stocks or our quarterback a blank check.

But the core issue facing investors should rarely, if ever, be whether to invest, but where to continue to invest, or how to properly allocate their investments. That seems even more important than ever when we look at the following relative performance metrics over the past 12 months (August through July), based on the total return of popular ETFs tracking the following indexes:

%

S&P 500

%

NASDAQ 100

%

Russell 2000

%

MSCI EAFE (Developed Markets ex: US)

%

MSCI Emerging Markets

%

Barclays Aggregate U.S. Bond Index

That’s an impressive throttling by all major stock markets versus the bond market! Looking closer, and perhaps not surprisingly, the relative return of various stock markets appear to be inversely related to the dividend yield generated by each respective index. Here is an approximate 12-month trailing yield for each of the ETFs upon which these stock index returns were calculated:

%

S&P 500

%

NASDAQ 100

%

Russell 2000

%

MSCI EAFE

%

MSCI Emerging Markets

I would argue that interest rates played more than a minor role in the relationship between valuations, dividend yields, and the outperformance of high-valuation/low-dividend-paying (or we could use the oversimplified term “growth”) versus the lower-valuation/higher-dividend-paying (“value”) stocks over the past year (and going back over the past several years going back to the Great Recession). When interest rates are abnormally low, the “valuation” of the distant future earnings promised by younger, fast-growing companies is distorted by an abnormally low “discounting” of the future earnings, because the discounting is based on prevailing interest rates. Thus, lower interest rates result in a higher present value calculated for companies that promise massive earnings in the more distant future. 

So what happens should interest rates rise, or even rise dramatically? That would tend to have a more negative effect on the valuations of companies with future projected earnings streams that are more back-end-loaded (meaning the bulk of the future earnings are still several years out from today). We’ve seen this play out in the Russell 2000 and the Nasdaq on trading days when interest rates climb on robust economic data (e.g., a strong employment report), often resulting in considerable rotation out of the growth stocks and into “safer,” or “blue chip” stocks that have lower valuations and, quite often, pay dividends out of the company earnings on a regular basis.

Therefore, while rising interest rates are a substantial risk to bond holdings and, arguably, growth stocks that have dramatically outperformed in recent years, the allure of dividend-paying stocks appears rational from both a risk management and a valuation perspective going forward. This volatility (risk management) and return proposition have always been true, but relative underperformance of dividend payers in recent years may increase the odds that dividend payers will enjoy a more profound comparative risk/return profile going forward.

A study by Ned Davis Research and Hartford Funds compared the relative average annual returns and volatility (measured by the standard deviation of returns) of dividend payers in the S&P 500 versus those companies in the S&P 500 that did not pay a dividend. The study examined return data over a very long period: March 31, 1972, to December 31, 2019. It was discovered the dividend payers enjoyed average annual total returns of 12.9%, which was a dramatic outperformance compared to the average annual total return of 8.6% by S&P 500 component companies that did not pay dividends. The relative volatility characteristics of the dividend payers versus the non-dividend payers were equally profound. The average standard deviation over the study period for the dividend-paying component companies of the S&P 500 averaged 15.6% versus a staggering 24.3% average standard deviation for the non-dividend-paying component companies! The upshot is undeniable: Dividend-paying stocks provided both superior returns and lower risk for their investors, a proverbial best of both worlds.

We also want to share some additional points for those investors who want to harvest some (if not all) of the income from their portfolios: Where else but dividend-paying stocks are you going to find yield today, tomorrow and in the years to come? While the potential for rising bond yields in the future increases the potential that bonds may one day again provide a meaningful income stream for investors, this would very much come at the expense of bonds that have already been issued. In other words, bonds carry interest rate risk, and the further out the maturity for the bond, the higher the interest rate risk. Moreover, bonds also carry substantial inflation risk, meaning that the risk that rising prices will reduce the value of the interest stream (coupons) paid by bonds and also the purchasing power of the principal that is promised to the investor when the bond matures. While stocks, even dividend-paying stocks, carry some interest rate risk and also inflation risk, stocks and particularly dividend-paying stocks have distinct advantages. For one, companies can, to varying extents, pass rising costs of doing business on to their customers. Similarly, dividend-paying companies can increase their dividends over time, while most bonds pay fixed sums of regular interest.

Accordingly, for years, the global stock markets have risen in part on their relative attractiveness compared to bonds in a low-interest-rate environment. These stock markets might continue to do so in a rising interest rate environment, and/or in an inflationary environment. However, not all stocks are equally up to the challenges of rising rates and inflation. Those companies with relatively higher current earnings power and those companies that can increase their income payouts to shareholders should be better positioned to weather either, or both, storms and, therefore, we believe that they can play a very important role in investors’ portfolios going forward.

Stan Farmer, CFP®, J.D. 

DISCLOSURES
Walkner Condon Financial Advisors is a registered investment advisor with the SEC and the opinions expressed by Walkner Condon Financial Advisors and its advisors in this article are their own. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.

Information presented in this article is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.  

Information in this article does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Financial Check List for the End of the Year

Financial Check List for the End of the Year

There is a small, but distinct, satisfaction that comes from crossing items off of a list. The immediate sense of accomplishment gives us a boost that propels us to the next thing on the list. Whether it is a chore list on the weekend or items off a grocery list, we, as a whole, increase our productivity when we have a set of priorities. 

Our financial lives would benefit from a task list just the same. As we move through 2021 with Covid still in the news and the stock market enjoying another great year, we should keep in mind that there are still things to accomplish pertaining to our finances. Think of this as a mid-year financial checklist: 

1: Fund your IRA, HSA accounts

If you have personal retirement accounts, such as Roth or Traditional IRAs, be aware of how much you have contributed to this point and how much you plan to fund before April 15, 2022. The maximum contribution amount for Roth or Traditional IRAs for 2021 is $6,000, or $7,000 if you are over the age of 50. Monthly systematic contributions plans are a great way to fund these accounts; however, many of these plans were set up years ago when the contribution limits were lower. You may not be max funding your account if you haven’t increased your monthly amount within the last few years. Health Savings Accounts are another great way to save money in a tax-preferred way. Not everyone is eligible for an HSA, so check to make sure you qualify. The 2021 contribution limit for individual HSA accounts is $3,600 and $7,200 for family accounts. 

2: Complete your RMDs from IRA, Beneficiary RMD

Required minimum distributions, or RMDs, are annual distributions from IRA accounts. In 2020, required minimum distributions were suspended and have been reinstated for 2021. Recent legislation has increased the age for RMDs to 72 for tax-deferred IRA; however, inherited IRA accounts have different distribution restrictions, so be aware if you are the owner of an inherited IRA as you may need to take distributions prior to age 72. RMD’s must be taken by December 31 of each year, except in the year that you turn 72, in which you have until April 1 of the following year. It is the responsibility of the IRA owner to ensure that the total RMD amount due is withdrawn each year and that the calculation takes into consideration all of their tax-deferred IRA assets.  

3: Verify your 401k, 403b Contributions

The maximum amount that employees can contribute to their 401k or 403b accounts for 2021 is $19,500, with an additional $6,500 allowed if the employee is over the age of 50. This maximum contribution amount has been increasing over the last few years so it is important to verify the amount coming out of each paycheck if your desire is to max fund your account. These limits do not take into consideration any match provided by your employer. Most employers offer flexibility in making and changing contribution amounts, so you could increase your amount mid-year if you are not on track. Also, be aware that many of the 401k or 403b plans now offer a Roth option within their plan. This doesn’t affect any Roth IRA contributions. 

4: Check Your Mortgage Rate For Possible Refinance Opportunities

I fully realize that the mortgage refinance discussion is becoming quite repetitive at this point, but it does bear repeating. The current mortgage rates are under 3% for a 30-year fixed mortgage, and the 15-year mortgage rate is in the low 2% range at many lending institutions. We generally advise looking into a mortgage refinance if you are planning on staying in the home for at least 3-5 more years and a rate reduction of at least .5%-.75%. That said, everyone has a different financial situation and should consult with a financial advisor or mortgage specialist prior to making a final decision. For many people who have refinanced within the last few years, another refinance may not be appealing; however, it would behoove you to look into this option again if the variables are in your favor. 

5: Review Your Cash Position, Travel Expenditures

Take time to review your current cash position and the amount of cash you prefer to have at any given time. A person or family’s cash position is an interesting subject within the world of financial advising. We have clients who need six-figure cash positions to feel comfortable, while other clients desire to hold small cash positions as they don’t like “money on the sidelines.” We like to frame this conversation by taking into consideration any other investment and retirement accounts. For example, a client with a large taxable account can afford to get away with a smaller cash position in contrast to a client with all of their non-cash assets in IRA or 401k accounts, where liquidity provisions are more onerous. We strongly believe that every well-built financial plan has a healthy cash position to cover job losses, emergency expenses or unexpected travel. The current low-rate environment is creating a challenge to find a decent return for cash; however, safety is the main job for this portion of your financial plan. 

This is not a comprehensive list, by any means, but I hope this makes you think about a few things to review between now and the end of the year. We are more than happy to discuss any of these items with you and how they pertain to your overall financial plan.

Nate Condon