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.
Over the past year, the world encountered some of the most unpredictable and volatile events we’ve ever seen. As we emerge from a global pandemic and a divisive election, it’s finally time to refocus. After reflecting on triumphs and shortcomings, investors should spend some time developing a plan that will help carry their successes forward into 2021.
It won’t be easy, but by leveraging a few key wealth-building strategies, you’ll be better positioned for portfolio success.
Maximize tax-deferred savings, especially Roth.
When building a portfolio for the long run, paying taxes is pretty much a certainty— but there are still various vehicles that allow you to mitigate that burden. One approach is to use a tax-deferred savings plan like an IRA or a 401(k). Generally, these plans allow an investor to save up for retirement and grow their investments without paying taxes immediately on the earnings. While you may be familiar with the pre-tax “salary deferral” that’s available in your workplace 401(k) plan, which lowers your taxable income now in the form of pay going straight into a retirement account rather than being reported on your W-2, don’t overlook the massive benefits that come with Roth IRAs and 401(k)s.
There are a variety of important factors that go into deciding which accounts to use to build retirement savings, but for many people, a Roth IRA offers some compelling benefits if they are eligible to contribute. Unlike traditional pre-tax retirement vehicles, Roth IRA contributions are made with after-tax dollars, up to a limit of $6,000 in 2021 (or $7,000 if you are over 50). While these deposits aren’t deductible from your gross taxable income, 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 IRA contributions, but your earnings in a Roth IRA will grow tax-free– think about the potential of decades of tax-free compounding! This is an especially beneficial feature if you expect your tax rate to be higher by the time you retire. You will have paid taxes at today’s lower rates on the income you contributed to a Roth IRA vs. taxes at your future rate on taxable withdrawals from a pre-tax Traditional IRA or 401(k).
Your income may be too high to contribute to a Roth IRA, or you may prefer to save as much as you can inside of your retirement plan at work. Maybe you make Roth IRA contributions but still want to save more in this tax-free source. Enter the Roth 401(k), which allows you to contribute up to $19,500 a year on an after-tax basis and accumulate tax-free earnings. This is different from a Traditional 401(k), which allows pre-tax contributions and tax-deferred earnings, which are all taxed when withdrawn in the future. With these higher contribution limits and employer matching (which is likely pre-tax), you can supercharge your savings and build significant wealth that will be tax-free in the future. This may be especially favorable for high-income earners who expect to maintain high taxable income through retirement.
So let’s say you’re sold on the idea of a tax-deferred retirement plan, 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 have to 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.
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 (like with a Flexible Spending Account), allowing you to accumulate years of tax-free earnings similar to a Roth IRA.
Revisit the equity in your home.
While investors typically view their residence as a long-term commitment, there are still plenty of ways to tap into the value of a home in the near-term. Interest rates are at historically low levels, and if you’re looking to lower your monthly expenses, refinancing may be a good place to start. By locking in a lower interest rate, you’ll not only save on month-to-month mortgage payments— you’ll also trim back the total amount of interest paid over the life of the loan. With the amount you save on your monthly payment, you may have more cash to devote to other savings goals.
Another way to leverage the value of your residence is to tap into a Home Equity Line of Credit (HELOC), allowing you to borrow with low interest by using your house as collateral. Rather than tapping into tax-advantaged savings accounts or other investments, investors can use a HELOC to unlock liquidity in their homes at a reasonable interest rate. Whether you’re looking to tap the funds for home renovations or to pay off higher-interest debt, HELOCs can be an attractive, affordable option for freeing up more funds.
Consider tax-loss harvesting.
When it comes to managing a portfolio, it’s not so easy to stomach an economic downturn. Still, selling an investment at a loss may also offer an unexpected silver lining…We’ll explain. In a practice known as “tax-loss harvesting,” investors can turn their losers into winners by selling off their poorest performers, subsidizing other realized capital gains incurred in their portfolio— and even offsetting up to $3,000 in non-investment income if losses exceed realized gains. Still, have more than $3,000 in losses after netting your losses against your gains? You can continue to carry losses forward into future tax years.
While this practice is generally most popular towards the end of the year (once investors have a better understanding of how their portfolios have performed overall), it can also be deployed strategically during a downturn. If there was a sharp decline, for example, it might be a good idea to lock in a loss on certain investments and buy them back at a different cost basis later on. Still, investors must take care to abide by the IRS’s wash-sale rules, which require a waiting period of at least 31 days before repurchasing similar securities. In short, while tax-loss harvesting is a practice that requires careful consideration, it can be one of the most effective tools for preserving portfolio growth in the long run.
Review your portfolio.
As we’ve said since the beginning of the pandemic: now’s not the time to create the portfolio that you wish you had when this all started…now’s the time to focus on the future. Many things have changed (and are still continuing to change), so it’s important to stay on top of maintaining balance in your asset allocations:
- Stocks undoubtedly remain as one of the best asset categories for investors seeking growth, but make no mistake, the pandemic has produced some clear-cut winners and losers. Take care to reexamine your holdings with a renewed understanding of the world we’re now living in, and reallocate accordingly.
- Bonds are still a safe haven for risk-averse investors, but rock bottom interest rates mean they are unlikely to contribute to portfolio growth over the long term. Those seeking reliable fixed-income assets may benefit from diversifying into higher-yielding debt instruments, including convertible bonds and emerging-market debt.
- Cash and other securities are some of the best hedges, particularly in times of volatility. While we all remain hopeful that 2021 will be a less tumultuous year than 2020, it’s important to always have some dry powder on hand— not only to mitigate market risks and reduce the risk of having to tap into your portfolio in a down market but also so you can seize opportunities at the right moments.
Although the global economy is just beginning to shake the side-effects of a protracted pandemic and the instability of political turmoil, we should still feel optimistic about a fresh start in 2021. It’s time to take a deep breath, turn the page, and take a second look at what’s in our portfolios.
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. 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 can go a long way in lifting this stress. Especially with a partner like Monument Wealth Management.
Monument Wealth Management provides you with the knowledge and tools you need to make essential changes to your portfolio, setting you up for success in 2021 and the years to come. At Monument, we’ll not only walk you through 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.
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The Monument Wealth Management Team specializes in working with business owners who are planning to exit their business.
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