Key Components:

• 401(k) and IRA Contributions: Maximizing tax-advantaged accounts is essential for retirement savings. Engineers should prioritize contributing to employer-sponsored plans like 401(k)s and IRAs, ensuring they take full advantage of employer matching where applicable.
• Asset Allocation: A diversified portfolio typically includes both equities and fixed income, adjusting the ratio as retirement nears.
• Emergency Funds: Maintaining an adequate emergency fund is critical for unanticipated expenses.

How to Implement Investment and Risk Management Strategies: A Step-by-Step Guide

1. Maximize Tax-Advantaged Accounts
   Contribute to your 401(k) or IRA and consider a backdoor Roth IRA for tax-free growth. This step forms the backbone of any retirement strategy.

2. Diversification of Investments
   Spread your investments across various asset classes—stocks, bonds, real estate, commodities—to reduce risk.[1] Geographic and sector diversity can also mitigate inflation risk.

3. Regular Portfolio Rebalancing
   Conduct periodic reviews and rebalances of your portfolio to ensure it aligns with your risk tolerance and retirement goals. This practice helps maintain the desired asset allocation.

4. Income Diversification
   Balance withdrawals from various income sources like Social Security and annuities. Guaranteed income should cover essential expenses to buffer against economic downturns.

5. Cash Reserve for Market Downturns
   Maintain a cash reserve or establish a fund to access during market downturns to avoid forced withdrawals from your investments, which could exacerbate losses.

6. Debt Management
   Prioritize paying off high-interest debts before retirement. This reduces financial strain and contributes to a stable retirement portfolio.

Pro Tip: Regularly communicate with a financial advisor to adapt your retirement plan to evolving financial situations and market conditions.

Based on our comprehensive research, here are the essential points to keep in mind:

1. Start retirement planning as early as possible to benefit from compounding.
2. Diversify investments to manage risk effectively, especially in uncertain economic climates.
3. Work closely with financial advisors to continuously adjust your plans based on market conditions.

By combining these investment strategies and risk management techniques, engineers nearing retirement can confidently work towards financial security, ensuring that their decades of hard work translate into a comfortable retirement.

The post Strategic Retirement Planning for Engineers first appeared on Arbor.

Having a checklist? That’s your roadmap. It keeps things simple and ensures you don’t skip over any crucial steps. From setting up emergency funds to sorting out your tax-efficient withdrawal strategies, a well-structured checklist can transform what feels like a daunting process into something totally manageable. So, let’s get started—2025 is closer than you think, and every proactive step now is a stride toward a financially secure future.

Assess Your Retirement Readiness

Retirement readiness isn’t just about checking your bank account balance. It’s a deeper dive into understanding where you stand financially and whether your current trajectory aligns with your retirement aspirations. Start by evaluating your current financial situation. Get a clear picture of what you’ve got saved up in retirement accounts like 401(k)s, IRAs, or any pensions. Are you stashing away enough cash each month to meet future needs? If not, it’s time to ramp up those contributions.

Next, pinpoint your retirement goals. Dream a little—do you envision a snug cabin in the woods or the hustle and bustle of a town downtown? Maybe traveling the world? Whatever your vision, it dictates how much cash you’ll need. Your desired lifestyle will shape your expenditure, so be realistic yet optimistic.

Let’s break it down with a checklist of questions to gauge your readiness:

• At what age do you plan—or realistically expect—to retire?
• What kind of lifestyle do you want during retirement, and how much will that cost annually?
• Do you anticipate any major financial obligations in retirement, like mortgage payments, or are you aiming to be debt-free?
• How diversified is your current portfolio, and does it align with your retirement timeline?
• Have you factored in potential healthcare costs, which tend to rise as we age?
• What’s your backup plan for unexpected scenarios like market downturns?

This isn’t just an exercise in budgeting; it’s about shaping your future. Answer these questions with honest clarity, and you’ll be well on your way to understanding what you need for a comfortable retirement.

Calculate Your Retirement Income Needs

Estimating your retirement expenses isn’t the most thrilling task, but it’s crucial. Here’s a casual, step-by-step approach to get it done.

1. List Your Expenses: Start by making a list of your current monthly expenses. Then, project which of these will stay the same, which might increase, and which could decrease during retirement. Don’t forget to budget for fun – retirement shouldn’t be all penny-pinching.
2. Factor in Inflation: Inflation is that sneaky little variable that can eat away at your purchasing power over time. Assume an average rate – say 2-3% – and adjust your expense estimates accordingly. This way, what you plan to spend today won’t shortchange you down the road.
3. Account for Healthcare: Healthcare costs tend to rise as we age. Make sure you include Medicare premiums, potential long-term care, and other health-related expenses in your calculations. It’s better to overestimate and have a buffer than to be blindsided.
4. Diversify Your Income Stream: Consider all possible sources of retirement income – savings, pensions, Social Security, maybe even part-time work. The more varied your sources, the less risky your retirement plan. Diversity isn’t just a buzzword; it’s security.

By tackling your retirement income needs methodically, you won’t just survive your golden years; you’ll thrive in them.

Explore Tax-Efficient Retirement Strategies

Planning your retirement isn’t just about saving and investing—it’s about keeping as much of that money as possible. That’s where tax-efficient retirement strategies come in. Smart tax planning can make your hard-earned cash stretch further, allowing you to enjoy more of your retirement years with less stress about the taxman’s share.

First off, consider the benefits of Roth conversions. Converting traditional IRA funds to a Roth IRA can be a smart move if you expect to be in a higher tax bracket in the future. Pay taxes on your current lower income, enjoy tax-free withdrawals later. It’s all about timing and tax forecasts.

Then there’s tax-loss harvesting—a tactic that lets you offset your capital gains with losses. This can be especially useful for those with sizable investments outside of retirement accounts. By strategically selling underperforming investments, you can reduce taxable income, keeping more in your pocket.

Let’s not forget about municipal bonds. They might not be as flashy as stocks, but the interest they generate is often free of federal taxes and, in some cases, state taxes too. This makes them a solid, reliable source of income that adds efficiency to your tax planning.

Ultimately, every smart retirement plan should weave in strategies to manage tax implications. Stay alert to tax law changes and consult a tax professional yearly to ensure your plan stays optimized. With a bit of foresight and these strategies, you’ll be well on your way to a tax-savvy retirement.

Optimize Social Security Timing

Social Security is a linchpin in the retirement map, influencing the long-term trajectory of your finances. Timing your Social Security benefits requires a mix of strategy and foresight. Drawing benefits too early or too late has consequences, so let’s tackle the when—and why.

Factors to Consider When Timing Social Security:

1. Life Expectancy: This isn’t predictable down to the day, but consider family health history and personal wellness. Living longer means stretching resources, where delaying benefits could maximize payouts.
2. Spousal Benefits: Coordinate with your spouse. If one spouse earned more over their career, delaying their benefits could fatten the family coffers. It’s teamwork in action.
3. Current Cash Flow Needs: Specifically, what’s the state of your other income streams? If they’re strong, waiting may benefit you. For folks tight on liquidity, dibs on earlier benefits might be the sensible play.
4. Work Plans: Those intending to keep a job past the usual retirement age might find their benefits dinged by the Social Security earnings test. If work’s part of your sunset years, factor that in before diving into benefits.
5. Inflation: Your Social Security payments are adjusted annually for inflation. Delaying benefits until full retirement age or later could help ensure a more inflation-resistant income as prices rise.

Approach Social Security like a chess game: forward-thinking and tactical. Delay might suit one person; immediate collection could favor another. The key is aligning strategy with circumstances, maximizing lifetime income alongside peace of mind.

Invest Wisely with Low-Fee Options

When it comes to retirement planning, every penny counts. That’s why investing with an eye toward minimizing fees is crucial for preserving your savings over the long haul. High costs can erode gains over time, so it’s smart to opt for low-fee investment strategies that align with your goals.

Start by considering index funds. These funds track a market index like the S&P 500 and come with lower expense ratios compared to actively managed funds. They’re a solid choice if you want broad market exposure without the hefty fees.

Next up, look into exchange-traded funds (ETFs). Like index funds, ETFs are also typically low-cost, but they offer the added flexibility of trading like a stock. This can be handy if you’re comfortable with a bit more hands-on management.

Don’t overlook robo-advisors, either. They offer automated, low-cost portfolio management that can help keep your investments aligned with your risk tolerance and retirement timeline. Just make sure the fees and services meet your needs before diving in.

Lastly, keep an eye on mutual funds. While many come with higher fees, there are some that mirror the cost-effective nature of index funds. If you do your homework, you can find mutual funds that align with your long-term financial strategy without breaking the bank.

Remember, every dollar saved in fees is a dollar closer to achieving your dream retirement. Stay vigilant about costs and your savings will thank you.

Seek Fiduciary Financial Advice

Talking to a fiduciary financial advisor might sound fancy, but it’s really about getting solid, personalized retirement planning help. Unlike other advisors, fiduciaries are legally obligated to put your interests first. This means their advice should prioritize your needs and objectives over their own pockets. It’s like having a financial coach who’s really on your team.

Fiduciary advisors help you take a comprehensive look at your financial life. They’ll consider your retirement goals, current savings, investment strategies, and risk tolerance to create a plan that keeps you on track. Their insights can help you align your financial choices with your retirement dreams, ensuring nothing slips through the cracks.

When picking a fiduciary advisor, keep an eye out for these key criteria:

1. Credentials: Look for designations like CFP (Certified Financial Planner) or RIA (Registered Investment Advisor). These indicate a level of education and commitment to ethical financial advice.
2. Experience: The longer they’ve been advising, the more likely they’ve weathered economic ups and downs. This experience can be invaluable as you plan for your future.
3. Fee Structure: Transparency is key. Understand how they get paid—is it fee-only, fee-based, or commission? Fee-only advisors usually charge a flat rate or a percentage of your assets, so they’re less likely to push products you don’t need.

Remember, retirement planning is not a solo journey. A fiduciary advisor can steer you past pitfalls and onto a path where your golden years are truly golden. Contact us if you would like to speak to an advisor.

Conclusion

Let’s wrap it up. You’ve got a roadmap to guide your retirement planning as 2025 nears. From assessing your current financial state and calculating your income needs to choosing the right investment strategies and seeking professional advice—these are your stepping stones to a worry-free future.

But remember, planning is just the start. Taking action is what matters. Tweak your strategies, keep an eye on your progress, and stay informed about any changes that might impact your goals. By being proactive now, you’re paving the way for a snug retirement nest. Don’t wait; those golden years are closer than you think.

The post Retirement Planning 2025: Your Step-by-Step Checklist to Know You Have Enough first appeared on Arbor.

As a financial advisor, I want to ensure you’re well-informed about Required Minimum Distributions (RMDs) and how they may impact your retirement planning. This article will cover key deadlines, calculation rules, and the consequences of not meeting RMD requirements. We’ll also discuss special considerations for inherited IRAs.

RMD Basics and Deadlines

RMDs are mandatory withdrawals from tax-deferred retirement accounts that the IRS requires once you reach a certain age. Here are the key points to remember:

• Starting age: As of 2024, you must begin taking RMDs at age 73.
• First RMD deadline: Your first RMD must be taken by April 1 of the year following the year you turn 73.
• Subsequent RMDs: After your first RMD, all future RMDs must be taken by December 31 of each year.

Important tip: If you delay your first RMD until April 1 of the following year, you’ll need to take two RMDs that year – one for the previous year and one for the current year. This could potentially push you into a higher tax bracket.

Calculating Your RMD

The RMD amount is calculated based on two factors:

1. The total balance of your retirement accounts as of December 31 of the previous year
2. Your life expectancy factor, as determined by IRS tables

To calculate your RMD, divide your account balance by the life expectancy factor corresponding to your age. For example, if your IRA was worth $500,000 at the end of the previous year and your life expectancy factor is 26.5 (for a 73-year-old), your RMD would be $18,868.

Consequences of Missing RMDs

Failing to take your full RMD by the deadline can result in significant penalties:

• Penalty amount: 25% of the amount not distributed
• Reduced penalty: If corrected within two years, the penalty may be reduced to 10%

Tip: Consider setting up automatic withdrawals to ensure you never miss an RMD deadline.

Inherited IRA Rules

The rules for inherited IRAs can be complex and depend on various factors:

Spouse Beneficiaries

If you inherit an IRA from your spouse, you have several options:

1. Treat the IRA as your own
2. Transfer the assets to an inherited IRA and:
   • Delay RMDs until your spouse would have turned 73
   • Begin RMDs based on your own life expectancy
   • Withdraw the entire balance within 10 years

Non-Spouse Beneficiaries

For most non-spouse beneficiaries who inherited an IRA after 2019:

• You must empty the account within 10 years of the original owner’s death
• Starting in 2025, you may be required to take annual RMDs during those 10 years if the original owner had begun taking RMDs

Exceptions for Eligible Designated Beneficiaries

Certain beneficiaries, including minor children, disabled individuals, and those not more than 10 years younger than the original owner, may still be able to use the “stretch” IRA option and take RMDs based on their own life expectancy.

Tips for Managing RMDs

1. Plan ahead: Consider the tax implications of RMDs and incorporate them into your overall retirement income strategy.
2. Consolidate accounts: If you have multiple IRAs, you can aggregate RMDs and take the total from one account.
3. Consider Qualified Charitable Distributions (QCDs): If you’re charitably inclined, you can use QCDs to satisfy your RMD while potentially reducing your taxable income.
4. Review beneficiary designations: Ensure your beneficiaries are up to date, as this can impact distribution options for your heirs.

Conclusion

Understanding and properly managing your RMDs is crucial for maintaining your retirement savings and avoiding unnecessary penalties. As your financial advisor, I’m here to help you navigate these rules and make informed decisions about your distributions. Don’t hesitate to reach out if you have any questions or need assistance in planning your RMD strategy.

The post Wealthy TItle first appeared on Arbor.

• Compare After-Tax Yields: When choosing between taxable and tax-exempt money market accounts or mutual funds, compare their after-tax yields to determine which option provides a higher return after taxes.
• Consider Tax-Exempt Investments: For investors in higher tax brackets, tax-exempt investments like municipal bonds, tax-free money market accounts, and mutual funds holding municipal bonds can offer attractive after-tax returns. Investing in tax-exempt bonds issued by your state of residence may also help you avoid state income tax on earnings.
• Strategic Timing of CD and Treasury Bill Maturities: Interest income from CDs maturing in one year or less and Treasury bills is recognized when the investments mature. Consider purchasing these instruments to mature in the following tax year to defer income recognition, if it aligns with your overall tax strategy. However, if you anticipate being in a higher tax bracket the following year, this strategy might not be advantageous.
• Simplified Accounting for Floating NAV Money Market Funds: The IRS provides a simplified method to account for gains and losses from frequent purchases and redemptions of floating Net Asset Value (NAV) money market funds. This simplifies tax compliance by allowing you to calculate net gain or loss annually without tracking each transaction.
• Leverage Tax Advantages of Treasury Bills: Treasury bills offer tax advantages, including exemption from state and local income taxes. When held to maturity, they generate no capital gains or losses. If sold before maturity, gains are treated as ordinary income to the extent of recovered acquisition discount, and any excess is taxed as a short-term capital gain.
• Understand Treasury STRIPS Taxation: Treasury STRIPS are zero-coupon bonds created by stripping interest coupons from Treasury notes and bonds. They are sold at a discount and don’t make periodic interest payments. Investors recognize income annually under the Original Issue Discount (OID) rules, even though they don’t receive actual payments until maturity.
• Evaluate the Election to Accrue Acquisition Discount: While generally, income from Treasury bills is recognized at maturity, an election allows taxpayers to recognize acquisition discount (the difference between the purchase price and the face value) over the bond’s life. This could be beneficial for accelerating income to utilize expiring loss carryforwards or if you expect higher tax rates in the future.
• Analyze Impact on Other Tax Items: Consider the indirect impact of taxable or tax-exempt income on your overall tax liability. Taxable interest can increase your AGI, potentially reducing certain credits, deductions, and exemptions subject to AGI phaseouts. Tax-exempt interest can impact the taxability of Social Security benefits for those nearing the base amounts for calculating taxable benefits.

It’s essential to consult with a qualified tax professional to determine the most suitable strategies for your specific financial situation. They can help you navigate the complexities of tax laws and develop a comprehensive plan to manage your cash and investments effectively.

The post What are some tax-efficient strategies for managing cash and cash equivalents? first appeared on Arbor.

While the S&P is about 24% down from its high, the Nasdaq is about 34% down and the bond market has been historically bad. Many stocks outside of the major indexes are down more than 90%, stocks of companies that many consider quality investments. The bullet-proof 60/40 portfolio that has done fantastic on a risk-adjusted basis over the years is down about 21% year-to-date. Only 1931 was worse at 27%.

Clearly, the S&P 500 doesn’t accurately represent what a difficult year it has been for investors.

The bond market has left conservative investors reeling. Traditionally used for income, bonds have been used mostly as a portfolio hedge over the past 15 years while interest rates have been low. The rise in target rates by central banks around the world isn’t necessarily a surprise, but the speed of those rate increases in response to inflation has been problematic. The charts below represent the US and global bond markets over the past 10 years.

Why not jump out of bonds now? It is reasonable to expect that as inflation starts to ease and stronger recessionary signals penetrate markets, central banks will start to reverse course. If they do, bond values will go back up. It’s also important to understand that there is a degree of risk premium built into bond prices (expectations of future rate increases). Trying to time the bond market will be as difficult as trying to time the stock market. Bond values may be down, but yields are higher and more attractive going forward. This is positive for conservative investors long-term.

Speaking of inflation, we might be seeing signs of lower inflation coming, oil is down about 40%, used cars are down about 12% and global freight rates are down 67%. Even rents and home prices are falling for the first time since 2011. Unfortunately, inflation has out-paced wage growth for about 18 months. The result is falling US savings rates and increased consumer debt as shown below.

These are not signals of a healthy economy, but they may be signals of slowing inflation. The year-over-year growth rate in the US money supply continues to move down. At 3.4%, it’s below the historical average of 7.2%. Market-based expectations of inflation also continue to fall. The 10-year breakeven inflation rate moved down to 2.22% at the end of September, an 18-month low. These are all positive indicators of slowing inflation.

If the market year ended today it would be the first time ever that both the S&P 500 and bond market was down more than 10% for the year. Not surprisingly this has led to extreme negative investor sentiment. The chart below shows that investors are the 3^rd most bearish they have ever been since 1990.

The silver lining is that historically, fear is good. Investors have seen above-average forward returns in cases following bearish sentiment extremes. While it’s impossible to time the market “bottom”, it’s reasonable to presume that sticking to your long-term investment strategy is going to be more successful over time than trying to time the market by selling and buying back at the right time. We think there is potential for greater downside as the market shifts from inflation fears to recessionary fears, but if the Feds pivot on interest rates as a result, the market is likely to react positively.

You don’t have to be a master of the stock market to achieve financial independence during the later years of your life. We encourage everyone to create a financial plan that includes a low-cost investment plan. One that is designed to weather these types of economic cycles and market cycles so that you don’t run out of money when asset values fall, while still not missing out on market upside when asset values appreciate. There is plenty of historical precedent to support these strategies, especially when you work with a tax expert to stay tax efficient along the way, while keeping investment costs down.

The post Inflation and Investing Going Into Q4 2022 first appeared on Arbor.

It wasn’t all fun and games for everyone, however. As you can see below, some of our favorite stocks, what we consider the companies of the future had significant declines in value from their highs. Sector rotations really hit the high growth equity markets, especially in tech. Some of these companies are more than 80% off their highs today.  

So why would these companies take such massive hits in valuation? Tech stocks are particularly sensitive to interest rate changes because of the discounted cash flow (DCF) models used to value them. The discount factor, which represents borrowing costs, or interest rates in the economy, lowers the present value of future earnings. When stocks are valued heavily on expected growth of future earnings, they will be impacted more by rising rates that companies that are not. Tech stocks are the companies of the future, and for this reason they are valued heavily on future earning expectations and the growth of those earnings. Thus, anticipated interest rate changes can have a significant impact of their present valuations, right or wrong. For long-term investments, we think this is short-sighted pricing and it offers ample opportunity to buy into these companies at lower prices. If you are a short-term investor (trader), you may not feel this way. As the correction continues to fall into 2022, we feel very positive about the long-term outlook of many of these companies.

Speaking of interest rates, we track the 10-year treasury rates the most closely. After the yields fell to a historical low in 2020 they seemed to stabilize in 2021. With the Fed warning of future rate increases over 2022 and beyond to off-set inflation we should see these yields continue to rise slowly.

This may continue to have a negative impact on bond yields in the short term, but it should work itself out in the long run.

As far as inflation goes, 40% of the money supply currently circulating in the economy is money that has been artificially injected into the economy over just the past 2 years. It’s no secret that this can cause significant reactionary inflation, and as the economy has recovered, that is what’s happened. CPI was last valued at 7.04%, and many of us feel it’s been significantly higher. This doesn’t mean that this will continue, however, as many speculate deflation could be on the horizon as things normalize.

As you can see from the interest rate conversation, The ratio of the 10 year treasury yield –  the US CPI has gone to it’s lowest amount in 50 years, which will encourage the Fed to raise rates in the future. Much of this data is what is factoring into the forward looking markets and current market declines.

One of the hottest topics over the past 5 years has been crypto currency and it’s place among investor asset allocations over the next decade. As investors and advisors we track Bitcoin and Ethereum the closest. 3 weeks into 2022 both coins are down over 30% from the end of year prices in 2021, but their growth has still been significant and they have solidified their place as a potential long-term asset class for investors. Arbor will continue to explore ways to potentially add exposure to these asset classes for investors in the future, along with analyzing the volatility and stability of digital assets.

Lastly, a year review wouldn’t be complete without talking about real estate. Home values in 2021 continued to sky-rocket. The Case -Schiller Composite is up over 18% in 2021. US inventory continues to fall despite the US population continuing to increase. A good result for investors that own more than 1 home, but a difficult situation for 1^st time home buyers. As we see interest rates start to rise, we should see softening of prices (lagging the rate hikes), but if inventory doesn’t normalize over time, we may continue to see increases in values despite increases in rates.

Questions on any of these charts or topics? Contact us through arbofirm.com.

The post 2021 in Review first appeared on Arbor.

Roth IRA Background

Since its introduction in 1997, the Roth IRA has become an attractive investment vehicle due to the potential to build a sizable, tax-free nest egg. Although contributions to a Roth IRA are not tax deductible, any earnings in the account grow tax-free as long as future distributions are qualified. A qualified distribution is one made after the Roth account has been held for five years and after the account holder reaches age 59½, becomes disabled, dies, or uses the funds for the purchase of a first home ($10,000 lifetime limit).

Unlike other retirement savings accounts, original owners of Roth IRAs are not subject to required minimum distributions at age 72 — another potentially tax-beneficial perk that makes Roth IRAs appealing in estate planning strategies. (Beneficiaries are subject to distribution rules.)

However, as initially passed, the 1997 legislation rendered it impossible for high-income taxpayers to enjoy Roth IRAs. Individuals and married taxpayers whose income exceeded certain thresholds could neither contribute to a Roth IRA nor convert traditional IRA assets to a Roth IRA.

A Loophole Emerges

Nearly 10 years after the Roth’s introduction, the Tax Increase Prevention and Reconciliation Act of 2005 ushered in a change that relaxed the conversion rules beginning in 2010; that is, as of that year, the income limits for a Roth conversion were eliminated, which meant that anyone could convert traditional IRA assets to a Roth IRA. (Of course, a conversion results in a tax obligation on deductible contributions and earnings that have previously accrued in the traditional IRA.)

One perhaps unintended consequence of this change was the emergence of a new strategy that has been utilized ever since: High-income individuals could make full, annual, nondeductible contributions to a traditional IRA and convert those contribution dollars to a Roth. If the account holders had no other IRAs (see note below) and the conversion was executed quickly enough so that no earnings were able to accrue, the transaction could potentially be a tax-free way for otherwise ineligible taxpayers to fund a Roth IRA. This move became known as the back-door Roth IRA.

(Note: When calculating a tax obligation on a Roth conversion, investors have to aggregate all of their IRAs, including SEP and SIMPLE IRAs, before determining the amount. For example, say an investor has $100,000 in several different traditional IRAs, 80% of which is attributed to deductible contributions and earnings. If that investor chose to convert any traditional IRA assets — even recent after-tax contributions — to a Roth IRA, 80% of the converted funds would be taxable. This is known as the “pro-rata rule.”)

Current Roth IRA Income Limits

For 2021, you can generally contribute up to $6,000 to an IRA (traditional, Roth, or a combination of both); $7,000 if you’ll be age 50 or older by December 31. However, your ability to make contributions to a Roth IRA is limited or eliminated if your modified adjusted gross income, or MAGI, falls within or exceeds the parameters shown below.

Note that your contributions generally can’t exceed your earned income for the year (special rules apply to spousal Roth IRAs).

Now or Never … Maybe

While no one knows for sure what may come of the legislative debates, the current proposal would prohibit the conversion of nondeductible contributions from a traditional IRA after December 31, 2021. If you expect your MAGI to exceed this year’s thresholds and you’d like to fund a Roth IRA for 2021, the next few months may be your last chance to use the back-door strategy. Contact your financial and tax professionals for more information

The post Back Door Roth Conversion May Close first appeared on Arbor.

Expect these proposals to be modified; some will likely be removed and others added as the legislative process continues. As we monitor progression through the legislative process, though, here are some highlights from the previously released proposed provisions worth noting.

Corporate Income Tax Rate Increase

Corporations would be subject to a graduated tax rate structure, with a higher top rate.

Currently, a flat 21% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:

• A 16% rate would apply to the first $400,000 of corporate taxable income
• A 21% rate on remaining taxable income up to $5 million
• The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.

Personal service corporations would pay tax on their entire taxable income at 26.5%.

Tax Increases for High-Income Individuals

Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022, and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)

Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.

New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).

3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.

New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.

Retirement Plans Provisions Affecting High-Income Individuals

New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.

New required minimum distributions for large aggregate retirement accounts.

• These rules would apply to high-income individuals (same income limits as described above), regardless of age.
• The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
• To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
• The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.

Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]

Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make “back-door” contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.

Estates and Trusts

• For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
• The proposal would generally include grantor trusts in the grantor’s estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
• Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of nonbusiness assets.

The post Advancing Tax Proposals Put Corporations and High-Income Individuals in Spotlight first appeared on Arbor.

The National Association of Realtors (NAR), which provides more current data, reported that the national median price of an existing home was $359,900 in July, down from a record $362,800 in June. Even so, this was the 113th consecutive month of year-over-year price increases. The June to July price relief was due in part to increased supply. Total inventory of new and existing homes increased 7.3% over June, but was still down 12.0% from a year ago.²

The July 2021 NAR data suggests that the red-hot market may be cooling slightly, but prices are still extremely high, and industry experts expect them to remain high for the foreseeable future. Here’s a look at some key factors behind the current trend and prospects for future direction.

Low Supply, Surprise Demand

The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages, placing more pressure on existing homes to meet demand.³

The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded despite the economic downturn. With the shift to remote work and remote education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.⁴

At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.⁵

Health concerns also played a part. The pandemic made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.⁶

Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers. All-cash sales accounted for 23% of transactions in July, up from 16% in July 2020. The average home stayed on the market for just 17 days, down from 22 days last year. Almost 90% of homes sold in less than a month.⁷

Freezing Out First-Time Buyers

Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021, down from 34% the previous year.⁸ A common formula for home affordability is to multiply income by three — i.e., a couple who earns $100,000 might qualify to buy a $300,000 house. A study of 50 cities found that home prices in Q2 2021 were, on average, 5.5 times the local median income of first-time buyers, putting most homes out of reach.⁹

The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents. Rents on newly signed leases in July were 17% higher than what the previous tenant paid, the highest jump on record. After dropping while many young people lived with parents during the pandemic, occupancy of rental units hit a record high of 96.9%.¹⁰

Is This a Bubble?

From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.¹¹ Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments. The housing market has always been cyclical, so it’s likely that prices will turn downward at some point in the future, but less likely that prices will collapse the way they did during the Great Recession.¹²

What’s Next?

Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007, but it will take months or years for those homes to increase the housing supply.¹³

The housing market tends to be seasonal, with demand dying down in the fall and the winter. That didn’t happen last year, because pent-up demand was so strong that it pushed through the seasons. With the supply/demand tension easing, the seasonal slowdown may be more significant this year.¹⁴ The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12.1% in 2021, lower than the current pace, and drop further to 5.3% growth in 2022.¹⁵

Location, Location

Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, followed by the Northeast ($411,200), the South ($305,200), and the Midwest ($275,300).¹⁶ Within regions, there are dramatic price differences among states, cities, and towns. The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.

1) S&P Dow Jones Indices, August 31, 20212, 7, 8, 16) National Association of Realtors, August 23, 20213, 4, 6) The New York Times, May 14, 20215) NBC News, July 6, 20219) The New York Times, August 12, 202110) Bloomberg Businessweek, August 18, 202111) NPR, August 17, 202112) The Wall Street Journal, March 15, 202113) Bloomberg, August 19, 202114) CNN Business, August 23, 202115) Freddie Mac, July 2021

The post Too Hot to Handle: What’s Ahead for the U.S. Housing Market? first appeared on Arbor.

The negotiations, overseen by the Paris-based Organization for Economic Co-operation and Development (OECD), represent the most significant attempt in over a century to overhaul the global tax system and bring international tax policy into the modern digital age. The accord has the potential to reshape global commerce.²

What is the crux of the new global tax agreement?

The global agreement has two main pillars. The first would require large, multinational enterprises (including digital companies) to pay taxes in countries where their goods or services are sold and where they earn profits, even if they have no physical presence there. This provision is aimed primarily at large U.S. tech companies that sell their goods and services abroad, and is intended to supercede attempted regulation by other countries that are already in the process of trying to collect taxes on these companies.³

The second pillar, proposed by the United States, calls for a 15% global minimum corporate tax rate in an effort to prevent multinational companies from shopping for a country or jurisdiction with the lowest tax rates, a phenomenon U.S. Treasury Secretary Janet Yellen described as a “race to the bottom.”⁴

President Biden added: “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue.”⁵

The OECD estimated that raising the global minimum corporate tax rate to 15% would generate an estimated $150 billion in additional global tax revenues each year. It stated that the “package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.”⁶

What countries are on board?

All the G20 economies, representing over 75% of global trade, have endorsed the deal. They include the United States, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and most countries of the European Union.⁷ In all, 132 countries are in favor.

However, several countries with low corporate tax rates that currently operate as tax havens have not agreed to the deal, including Ireland, several Caribbean countries, Hungary, Estonia, Kenya, Nigeria, Peru, and Sri Lanka.⁸ These smaller nations are attempting to secure a better deal to enable them to compete with larger countries and make up for the potential loss of any tax advantage. The refusal of Ireland, Hungary, and Estonia to sign on to a global corporate tax rate is a potential roadblock because of the European Union’s requirement for unanimity on tax issues. ⁹

Undoubtedly, there is a significant amount of work to be done to bring “holdout” nations on board. The Biden administration has pushed Congress to approve a new tax rule that would punish companies that operate in the United States but have headquarters in those holdout countries by significantly increasing their tax liabilities. The president has also pushed Congress to increase the minimum tax on revenue earned by U.S. companies outside the United States in an effort to help fund the $4 trillion infrastructure and economic agenda he hopes to pass this year.¹⁰

Has the new global tax agreement been enacted yet?

No. There are still significant, complex technical and policy details that need to be worked out, including how the plan will be executed and which U.S. multinational companies will be subject to the new rules on digital tax.

In addition, the plan needs to be approved by Congress and the national legislatures of participating countries. In the United States, each pillar of the plan could be considered separately. According to Treasury Secretary Yellen, the provision for a 15% global minimum corporate tax rate could be included in a budget bill headed to Congress later in 2021, while the provision on digital taxation of multinational companies might be ready for Congress in the spring of 2022. A further wrinkle is that if the digital tax provision is considered an international treaty, it will require two-thirds approval in the Senate.¹¹

In any event, the global tax accord is due to be finalized by G20 leaders at their next meeting in Rome in October 2021, with G20 finance ministers anticipating global implementation in 2023.¹²

1, 3, 6) OECD.org, 20212, 4-5, 8, 10) The New York Times, July 8, 20217) G20.org, 20219, 11-12) Bloomberg, July 11, 2021

The post New Global Tax Accord Takes Shape first appeared on Arbor.