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Hello All-
I hope you’re enjoying the holiday season, and able to find some time to relax.
As I’m writing this, I’m looking over at my Grandma Sidney’s Christmas cactus, which is in nearly full bloom, just like clockwork. She received this as a gift in the 1960s and with minimal maintenance, it continues to thrive perennially. A true gift that keeps on giving.
In the wealth management world, this is an especially busy time of year, and I’m looking forward to some time away with friends in Puerto Vallarta, Mexico this week. I don’t know about you, but for me, there is a power of anticipation that helps keep me motivated and focused throughout the year. Even when you love your vocation, looking forward to something is especially helpful when times are busy and stressful. According to a study at Cornell, you can experience the benefits of a vacation beforehand through anticipation (in addition to the vacation itself). Another study in the Netherlands found that travelers experience their highest level of happiness in the weeks and months before the trip. For me, the positive impact of an experience like a trip boosts happiness far more than the anticipation of buying material objects. So, as a rule, I always make sure to have the next trip booked by the time I return from one, especially because ‘no man needs a holiday so much as he who just returned’!
It has been a great 2023 at Marathon Financial Group. This was the second full year following our transition to independence and we have been very focused on tightening up our systems and processes, and enhancing the client experience through high-touch, proactive communication. I can now very genuinely say that I’m glad we made the move and can serve you better because of it.
To start us off, I’m first going to share some useful guides:
Important Numbers 2024 (Updated figures on qualified retirement account limits, tax brackets, RMDs, etc.)
AGI/MAGI Summary Guide (Table to help you determine your AGI/MAGI for the year)
Important Dates 2024
One of the most important things to highlight is, if you’re still working and funding 401k’s &/or 403b’s, the limit is increasing from $22,500 (2023) to $23,000 (2024). If you’re age 50+ (or turn 50 in 2024), you are eligible to do an additional ‘catch up’ contribution of $7,500 (for both 2023 & 2024). So, your new limit is $30,500 for 2024.
So, you should check your current contribution % or $ amount and divide your salary into the updated contribution figure limit, and adjust the % if necessary. If you’re able to select a $ amount per paycheck, this is optimal, as sometimes bonus distributions can throw off the cadence of an even contribution schedule over the full year. If you’re paid weekly, that would be $442.31/paycheck ($586.54 for age 50+), biweekly $884.62 ($1,173.08 for age 50+), monthly $1,916.67 ($2,541.67 for age 50+).
As a reminder, if you do any type of IRA funding, we have until the moment you file your 2023 taxes to finish making those contributions for 2023 (so Feb/Mar/Apr-ish). Same goes for Solo 401k contributions, as long as the Solo 401k account was established by 12/31/2023. Also, keep in mind that these contribution limits are also changing for 2024 and details can be found in the ‘Important Numbers’ guide above. If you have any non-W2 income from consulting, moonlighting, etc., you are likely eligible to make additional tax-deferred retirement contributions with some or all of the funds, so please be sure to bring this income to our attention right away.
Miscellaneous compilation of other planning reminders/updates:
- If you receive employee stock compensation (RSUs, ISOs, etc.), typically you need to take deliberate action each and every year to indicate tax-withholdings on vested shares (often via ‘sell to cover’). If action is not taken, we have discovered many instances of under withholding for this portion of compensation, which, depending on the size of it, can result in significant unpleasant surprises.
- For Employee Stock Purchase Plans (ESPP), we typically recommend selling shares ASAP, especially if you already have a large amount of RSUs &/or ISOs, so you can capture the primary benefit of these, which is the immediate gain in the form of the discounted purchase price (10-15%).
- Earlier this year, it was believed that, as a part of SECURE Act 2.0, certain highly paid individuals ($145k+) are now mandated to make age-50 catch-up contributions on a Roth (after-tax) basis. However, it was recently announced that there would be a 2-year ‘administrative transition period’ and this won’t apply until 1/1/2026.
- If you make IRA contributions, especially back-door Roth IRA, and/or fund a Solo 401k, reminder to make sure your tax-preparer is informed, as it is very important that the tax return accurately reflects/records these moves.
- If you have parents age 73+ (who are not already our clients), it might be a good idea to check in with them to make sure they are taking necessary Required Minimum Distributions (RMDs) on their IRA accounts. The penalty for not taking these by 12/31 of calendar year is significant. Let us know if you need any assistance.
- If you inherited an IRA 1/1/2020 or beyond, you do not need to take an RMD this year (but will still be required to fully draw the account down over the 5- or 10-year period from date of death)
- If your taxable income (see AGI/MAGI summary guide above) is in the 24% bracket (maxes @ $182k single/$364k married), and there’s ‘room to spare’ before hitting the max, this is often the ‘sweet spot’ for IRA>Roth conversions. If we can pay taxes in the 20’s (especially if you were used to paying taxes in the 30’s for a long period of time), and shift all future growth to tax-free status, this is often a win. Especially because the ability to do this, regardless of income level, may not last forever.
- If you’ve made any significant changes to your estate planning this year, please make sure we know about them, so we can make any necessary updates to account beneficiaries & titling.
- If you recently started paying Medicare B&D premiums, those premiums are based on income from two years ago, when, in many cases, you were likely still earning at a significant level. However, you may be able to get these premiums reduced via a IRMAA appeal
- If your mortgage is paid off or at a very low balance, you may not be itemizing deductions on your tax return (given lack of mortgage interest deduction and the fact that state income tax+property tax deduction is now limited to $10k cap). If you’re only taking the standard deduction and not itemizing, your charitable giving isn’t actually reducing your taxable income. One way to exceed the standard deduction and re-capture deductibility of some of your charitable giving is through a charitable bunching strategy (intentionally doing multiple years worth of giving in a single tax year, to clear the standard deduction).
- Many provisions of the Tax Cuts & Jobs Act (2017 law passed under Trump) are set to expire at the end of 2025. This could be both advantageous and/or disadvantageous, depending on your situation, but one of the biggest implications for our clients is the possible expiration of the SALT limitation ($10k limit on deduction of state income taxes + local property taxes). As mentioned above, the SALT cap resulted in a lot more of our clients doing the standard deduction, rather than itemized deductions, unless they have a lot of mortgage interest. So, if this cap is eliminated, that could provide some relief for many of our clients in states with high income & property taxes. Other provisions that may also be sunsetting: lower mortgage interest deduction ($750k balance cap), reduced rates at the top tax brackets (may go back to 39.6%, from current 37%), the phasing out of the alternative minimum tax (AMT), altered rules for bonus depreciation and certain deductions for business-related meals, and more favorable estate tax exemptions (the law doubled the estate tax exemption to $22.4 million for couples, indexed for inflation).
- If you plan to give a meaningful amount to charity in 2024, you should consider donating appreciated shares from your non-IRA/401k investments (aka brokerage account). When you give shares to charity or into a Donor-Advised Fund (DAF) you can get an income tax deduction for the full current market value of the shares, and skip paying tax on the capital gain/appreciation of the stock relative to the price you originally paid for it.
- If you took out a mortgage or other large purchase loan at some point over the last two years, chances are, the interest rate is high (at least on a relative basis in comparison to rates in 2021 & prior). With inflation in a sustained downward trend, the Fed has indicated that they will likely be reducing their benchmark interest rate several times in 2024. So, you should start to consider a refinancing strategy (i.e. at what rate level would it make more economic sense to refinance). Most likely, rates will continue to fall into 2025 & beyond, so you will likely refinance several times, but this should be done strategically/thoughtfully.
- If you’re a business owner, here are a few tax tips that business owners can implement to be as tax efficient as possible: Augusta Rule (rent out home tax-free), business mileage deduction for vehicles, Hiring your children to work in your company (under age 18 and paid less than $12,550, no federal income taxes due- provided, of course, child is actually doing documented work for your company), Implement a 401k & Cash Balance Pension Plan, and utilizing an S-Corporation election to lower salary.
While John has been doing most of the market commentary in those separate distributions, after these last few ‘wild’ years, I want to briefly stop and zoom out a bit for some perspective as investors. While things feel ‘good’ right now, and our outlook for 2024 is ‘good’, the ‘good’ times don’t last forever, and volatility will remain the ‘nature of the beast’—so we need to remain prepared for it (and to remain invested, through it). But let me point out that in the 13 years from it’s closing low in the Great Panic (March 9, 2009) to its most recent high (January 3, 2022), the S&P 500 went up seven times, and delivered an average annual compound return in excess of 17%.
At that point, a couple of noteworthy things happened. (1) There was an absolute explosion of consumer inflation, unlike anything seen in more than 40 years. (2) In response, the Federal Reserve implemented the sharpest, fastest interest rate spike in its 110-year history. The result was a howling bear market in both stocks and bonds—an outcome many investors had been encouraged to believe could not happen.
The S&P 500 went down 25% in ten months, then stabilized somewhat, to the point where it ended the year down ‘only’ 18%--its fourth worst year of the previous 50. The price of the benchmark 10-year Treasury bond was down more than 15%, its worst year ever. Thus the much acclaimed 60/40 portfolio—regarded in some quarters as the thinking person’s defense against ‘volatility’—experienced its worst year since 1937.
As all this was taking place, and continuing on into the current year:
- The West has engaged in a proxy war with Russia in response to the invasion of Ukraine.
- The Middle East has once again descended into violent conflict, as Iran edges steadily closer to nuclear capability.
- Our country’s budget deficit and national debt have continued to increased at rates which appear unsustainable in the long run.
- Social Security and Medicare have continued on parallel paths to eventual insolvency unless reformed.
- Though the rate of inflation has slowed considerably, prices themselves have not come down, seriously stressing middle class households. The affordability of the single family home is at a low ebb.
- Serial shutdowns of the government continue to loom, while a presidential election is now less than a year away.
Where does that leave those of us who must try to invest intelligently for retirement—or who are already retired, and quite legitimately concerned about the stability of our investments? After this two year (and open-ended) gauntlet of negative trends/developments, where do we find ourselves?
Well, one narrow answer is: as of this writing, it leaves us right back at the all-time high. And that ignores cash dividends, which went up 11% in 2022, and are projected to reach another record high this year.
There appears to be something of a disconnect here, right?
You would think—given the fiscal/monetary/political/geopolitical litany of perilous phenomena listed above—that the mainstream equity market might very well be reeling. Why isn’t it? What doesn’t it understand about the gravity of the situation?
That is, of course, one of two ways to phrase the same question. The other way is to ask what might the market be correctly perceiving that investors who regard themselves as realistically gun-shy are failing to see?
I have an answer to this question, whichever way it is posed. But no shame in this for me; I’m convinced that no one else does either. There are always innumerable opinions about the future, but never any facts. The purpose of this writing is simply to think ‘out loud’ with you, and to state the issue, as follows:
It is very clear that there are myriad intractable problems that America and the world must deal with. How these quite genuine crises will be resolved is not at all obvious or predictable. Yet an index of the values of 500 of the world’s most successful companies doesn’t seem as frightened as one might very reasonably expect it to be. It isn’t even in a classically defined correction (-10%) from it’s all-time high.
Having thus accomplished what I set out to do, I will only add one very personal observation, for whatever it may be worth. Every time I’ve become convinced that I knew something the market didn’t, it wasn’t the market that turned out to be wrong.
Recent articles I consider useful/informative:
Why everyone was so wrong about the 2023 economy
US inflation decelerating in boost to economy
113 Million people will join the global middle class in 2024
More Americans Than Ever Own Stocks
US nuclear-fusion lab enters new era: achieving ‘ignition’ over and over
The United States is producing more oil than any country in history
The pros and cons of taking refuge in cash now that yields are hovering above 5%
The long-term bull market in stocks is alive and well, Bank of America says
Markets in 2023: Soaring stocks and roaring bonds defy the doubters
Economy grew at 5.2% rate in the third quarter, even stronger than first indicated
Bond Market’s Dramatic Recovery Is Seen as Opening Act for Broader Revival
Inflation finally dips below 3 percent as U.S. economy nears ‘soft landing’
Retirees can now spend more without worrying about running out of money
Wages are rising. Jobs are plentiful. Nobody’s happy.
The economy is great. Why doesn’t it feel that way?
Again, thank you for your trust and confidence, another year over. I love my work and it is a great privilege to have the opportunity to serve you.
Charlie
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