Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
The world can be unpredictable and volatile. Events like global pandemics, divisive elections, or soaring inflation bring about uncertainty and fear for investors.
However, the best thing you can do is stay focused on developing a plan that will help carry your success forward so you can continue building the future you dream of.
As the saying goes, even if the plan is simple, it may not be easy. But, by leveraging a few key wealth-building strategies and sticking to your plan, you’ll be better positioned for financial success.
1 – Take Advantage of Roth Options
There are a variety of important factors that go into deciding which accounts to use to build long-term savings, but for many people retirement accounts play a starring role. Not all retirement accounts are created equally—Roth accounts (both personal IRAs and workplace retirement plans) afford huge tax benefits to those who can contribute to them.
Unlike traditional pre-tax retirement vehicles, Roth contributions are made with after-tax dollars. While these contributions aren’t tax deductible, you will receive favorable tax treatment (and by favorable, we mean tax-free) whenever you make qualified withdrawals in the future. You won’t reduce your current taxable income by making Roth contributions, but your earnings in Roth accounts will grow tax-free. (Just think about the potential of decades of tax-free compounding!) This is especially beneficial if you expect your tax rate to be higher by the time you retire. Tax rates can change considerably over a lifetime, and you may have more taxable income than you expect in retirement. If this is the case, you will have paid taxes at today’s lower rates on the income you contributed to a Roth vs. taxes at your future rate on taxable withdrawals from a pre-tax Traditional IRA or 401(k).
Opting for future tax-free withdrawals sounds like a no-brainer, so what’s the catch?
- Roth IRAs have relatively low contributions limits, and only those making under a certain amount of income can contribute. While they are simple to set up and independent of what’s available in an employer-sponsored retirement plan, not everyone can contribute.
- Employer-sponsored Roth accounts offer higher contribution limits than Roth IRAs, meaning savers can accumulate a lot more inside of a Roth employer plan. There are also no income restrictions on being eligible to contribute to a Roth employer-sponsored account, However, not all employers offer a Roth component in their retirement plans for employees, which can limit the availability of Roth options for some high-income earners.
New in 2023, business owners can now enjoy the benefits of Roth retirement plans in the form of Roth SIMPLE & SEP IRAs, giving employers and employees more options. This is part of Secure Act 2.0 legislation passed in December 2022.
If you have the option to make Roth contributions, strongly consider them even if you have a high income now. You’d be surprised how much taxable income you may still have in retirement based on the assets you’ve accumulated.
2 – Convert Pre-Tax Retirement Money to Roth
So, let’s say you’re sold on the idea of accumulating Roth funds, but your money is still stuck in a traditional pre-tax savings vehicle. Oh, what to do? For certain investors, a Roth conversion may be a viable option—but this path is not without its own pitfalls. When you convert pre-tax money to a Roth IRA, you must pay taxes on the amount you’ve converted. If you’re a high-income earner, a Roth conversion should be carefully planned to be sure you don’t inadvertently push yourself into a higher marginal tax rate. Fortunately, there’s nothing in the law that states this conversion can’t be done incrementally, so you may still be able to gradually shift your funds to a Roth account over the course of a few years. In any case, the most appropriate move forward will depend on your age and tax bracket. Your best bet is to work with a wealth advisor who can guide you through this process.
3 – Health Savings Account Contributions (HSA)
If you’re enrolled in a healthcare plan with a high deductible, taking advantage of a health savings account (HSA) may be another effective way to optimize for tax-deferred savings. HSAs offer many of the same benefits that retirement plans provide, with both vehicles sharing features like tax-deductible contributions and tax-free investment growth.
Unlike a Roth 401k or IRA, which requires you to wait until age 59 ½ to make a qualified withdrawal without penalty, an HSA will allow you to dip into your savings at any time—provided you’re using the funds to pay for a qualified medical expense. This allows you to use your account to pay for things that aren’t typically covered by your health insurance plan (such as prescription drugs, vision and dental care, and long-term insurance premiums), all on a tax-free basis. Additionally, there’s no requirement to spend your HSA account each year (unlike a Flexible Spending Account), allowing you to accumulate years of tax-free earnings similar to a Roth IRA.
4 – Consider tax-loss harvesting
When it comes to managing a portfolio, it’s not so easy to stomach market volatility or an economic downturn. Seeing losses on your statements obviously isn’t what you want, but selling an investment at a loss may offer an unexpected silver lining…we’ll explain. By “tax-loss harvesting” in your portfolio, investors can sell the positions or parts of a position that have lost money to realize those losses and help offset capital gains that other investments may have generated. If the losses you’ve realized are greater than your gains for the year, you can use those losses to offset up to $3,000 in non-investment income. Have more than $3,000 net capital losses? You can continue to carry these losses forward into future tax years.
While this practice is generally most popular towards year-end (since investors have a pretty good window into their tax year at that point), it can also be deployed strategically during times of market volatility. If there was a sharp decline in the market, for example, it might be a good idea to realize a loss on certain investments with the intention of reinvesting back into the market or even the exact same investment at some point in the future. While selling an investment to realize a loss can be straightforward, reinvesting the proceeds from a “tax-loss harvest” is not.
Investors must take care to abide by the IRS’s Wash Sale rules when reinvesting after realizing a loss. In order to keep the loss you just realized for your taxes, the IRS requires a waiting period of at least 31 days before you can repurchase the same investment or a security the IRS deems “substantially similar” to the one you just sold. Just like #2 above, it is best to work with a wealth advisor to help determine the most effective way to implement tax loss harvesting within your portfolio. You can see how quickly it can become complex as you work to realize losses in your portfolio but remain invested in your chosen strategy.
5 – IT’S ALIVE – Don’t Let your Portfolio become Frankenstein’s Monster
Whether you are actively trading or not, your portfolio’s allocation is changing every day the markets are open thanks to their fluctuating prices. On a single day there may not be much change, but over a longer stretch of time it’s impossible to predict how much your allocation may change. We’ve met investors who haven‘t looked at their portfolios for years. One of the most common reasons why they haven’t looked is they believe their portfolio is meant to be a “set-it-and-forget-it” strategy. Sounds dreamy, right? But remember, your portfolio is an ever-changing, living thing—and living things need to be nurtured.
Simple example: if bonds have a positive year and stocks have a negative year, your portfolio maybe overweight bonds and underweight stocks headed into a new year. Is that the strategic decision you want to make? Should you rebalance? If you do rebalance, should it go back to the old weightings? Should you set new weightings? Now extrapolate that example over decades and add in more asset class options. The questions quickly get messier and the answers less black and white. If ignored long enough, you may find a terrifying monster lurking in your portfolio that you didn’t mean to create.
You can work to avoid those scary surprises by ensuring your portfolio gets regular health checks that go way beyond a simple performance review. It is vital to reconfirm that each individual investment choice fits within your portfolio’s wholistic strategy and your allocation is still appropriate given your unique financial situation and goals.
Every portfolio and allocation is different so there is no right answer on how often to review your portfolio, but the wrong answer is to set-it and truly forget-it. Make sure you have a set schedule for detailed portfolio check-ins and stick to your schedule. It takes time, expertise and dedication to manage, but more importantly, grow a portfolio. If you feel like you are lacking any of those areas, work with a Wealth Advisor who understands the importance of ongoing portfolio management and analysis.
6 – Reassess Your Exposure to Risks Beyond Your Portfolio
The risks in our financial lives consist of more than just investments. What if an unexpected health event prevented you from working and greatly reduced your income-generating potential? What if someone was injured on your property and sued you for an amount above the liability limits of your homeowner’s insurance? What if you were no longer around to provide for your family—would they be okay, and beyond just being okay, would they live the lives you envisioned? We don’t go through life expecting bad things to happen, but they do and they can have profound impacts on our financial well-being and the well-being of our loved ones. The good news is that we can protect against the financial impact of these events by having the right kind of insurance in place before they ever happen.
As our lives change, so do our insurance needs. Take the time to take stock of your current insurance coverage and how that lines up with where you are in your life. Working with an advisor who can help you understand your big picture and weigh in on how your current insurance coverage meets your needs (or doesn’t) will help you sleep better at night and can save you from major financial pain in the future if the unforeseen happens.
Level the playing field.
Even if you feel you have a clear idea of how to move forward with your wealth-building strategies in the new year, it can be tough to stay on top of it all. Despite what’s going on in the world around us in economics and politics, we should still feel optimistic about the future. It’s time to take a deep breath, turn the page, and take a second look at what’s in our portfolios.
Your portfolio has a ton of moving parts, and striking the right balance can be difficult without a clear understanding of market movements and trends. Leveraging the expertise of a wealth advisor like Monument can go a long way in lifting this stress.
Monument Wealth Management believes in providing investors with the knowledge and tools needed to make essential changes to their portfolios, setting them up for success now and in the years to come. At Monument, we not only conduct a step-by-step review of your allocation, but we’ll also help you design a custom portfolio, fine-tuned to your specific needs and long-term objectives. It all starts with one simple meeting so we can discover what financial freedom looks like to you and create a comfortable path to get you there.
10 Things All Investors Should Know
The Monument Wealth Management Team specializes in working with business owners who are planning to exit their business.
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