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Election 2020 - a nail-biter

Election 2020 - a nail-biter

November 18, 2020
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For the nation, 2020 has been one of the most difficult years in memory. We are grappling with COVID and its fallout, economic upheaval, racial tensions, wildfires, hurricanes, a presidential election, and a polarized electorate.

Despite this year’s difficulties, a strong economic recovery, record low interest rates, and an aggressive stance by the Federal Reserve have helped the major market indexes rebound from the steep sell-off in March. 

But where do we go from here? What’s in store over the next four years? If we view the future through the lens of public or tax policy, visibility is extremely limited.

While Joe Biden seems to be the clear winner of the election, President Trump has yet to concede. Meanwhile, it’s unclear which party will control the Senate but it’s likely to be determined by runoff elections in Georgia early next year.

If we narrow our scope and review the landscape through the lens of the investor and the market, I believe we can look to history for guidance and at least obtain some degree of clarity.

First, let me say this. Any stock market forecast that you may hear from analysts is simply an educated guess. They may get lucky for the right or the wrong reason. Or analysts might miss the mark by a wide margin. As we already know, even the smartest folks in the room don’t know the future.

Besides, we already know that consistently timing the market is nearly impossible.

However, over a longer period, we recognize that stocks have historically had an upward bias.

“Since 1932, the S&P 500 Index has gained an aggregate of 710% under Democratic presidents and 375% under Republican presidents. But staying invested the entire time would have earned 47,000%,” according to the Schwab Center for Financial Research.

In other words, if you shunned stocks when either a Republican or Democrat was president, you missed out on the lion’s share of the market’s gain.

If we take the last 12 years into consideration, a similar pattern emerges. Those who pulled out of stocks after the 2008 election because they were discouraged by the results lost out on a significant stock market rally over the ensuing eight-year period.

Anyone discouraged by the 2016 results also failed to participate in a significant stock market rally.

Elections and other current events often create short-term uncertainty. Yet, emotional decisions made outside the boundaries of a well-crafted financial plan have rarely been profitable over a longer period.

Longer term, the economic environment, Federal Reserve policy and interest rates, corporate profits, and inflation trends have historically had the biggest impact on the broader market.

Keeping perspective

The country will remain divided after the final tally is known. But let’s not forget that the U.S. remains the world’s largest economy; it has the deepest and most transparent capital markets, and innovation isn’t likely to end.

We will face challenges in the days and years ahead. We have always faced challenges. But we are resilient, and I continue to believe that history is on the side of the United States of America.

6 financial planning steps you can implement today

The end of the year is fast approaching. As the calendar days march toward 2021, let’s keep in mind that there are several ideas we should review as you work to get your year-end financial house in order.

Before we get started, the tips below are simply guidelines. Please discuss your particular situation with us first and check with your tax advisor, as various nuances and exceptions can crop up.

  1. This year’s RMD wrinkle. As I wrote earlier in the year, thanks to the CARES Act, RMDs are waived in 2020. This RMD waiver applies to everyone with a 401(k), IRA, 403(b) or 457(b) account. Owners of inherited IRAs may suspend RMDs for 2020, too. This means that your taxable income may be significantly lower this year which opens an opportunity for very useful tax planning strategies such as Roth Conversions – see below.
  1. Consider partially converting traditional IRA funds to a Roth IRA. While almost as difficult to predict as the market, tax rates seem more likely to rise in the future. In addition, if you normally take RMD’s but skipped them this year you may be in a low tax bracket temporarily. Therefore, partially converting traditional IRA funds into a Roth IRA this year would lock-in 2020’s tax rate, enabling you to withdraw funds tax free in the future. In addition, the amount converted to Roth would no longer be subject to RMD’s potentially lowering future taxable income. Depending on the exact income, you may even fall into a lower Medicare premium bracket as a bonus!

    Whether or not tax rates rise next year, a Roth IRA is an excellent retirement vehicle.
  1. If you are over 70½, you may be eligible to transfer up to $100,000 from your IRA to a charity without paying taxes on the distribution. This is called a qualified charitable distribution or QCD. Moreover, a QCD satisfies the RMD requirement as long as certain rules are met. Even though you can skip RMDs this year, if you are charitably inclined, a QCD still makes more sense than writing a check or giving cash for tax purposes.

  2. Health care open enrollment has begun. This is the one time of year you can change your health insurance coverage or enroll. If you obtain your health insurance through the Heath Insurance Marketplace, you have until December 15th to purchase your health insurance for 2021 unless you qualify for a special enrollment period. Plans sold during open enrollment begin coverage on January 1, 2021.

    On a similar note, open enrollment for Medicare has begun. You can sign up for Medicare health and drug plans between October 15th and December 7th, so decide if your coverage will meet your needs during 2021. If you like what you had this year and it is still available next year, you won’t need to take any action. 
  1. Did you max out your retirement accounts? You can put up to $6,000 into an IRA in tax year 2020, or $7,000 if you are 50 or older. You will have until Tax Day to make a 2020 tax-year contribution. The sooner you contribute, the longer your assets can grow tax-deferred.

    Since contributions to your 401(k) are automatically deducted from each paycheck, contributions for tax year 2020 must be made by December 31st to count as a deduction from your 2020 income. The 401(k) contribution limit is $19,500, or $26,000 if you are 50 or older.

    Your employer or plan administrator will let you know if you can adjust changes to your contribution this year. As we have said in the past, we strongly suggest that you contribute at minimum the amount necessary to receive your entire employer’s match. It’s free money. Don’t leave free money on the table. 
  1. Let’s consider “harvesting” tax losses. If you own securities that are below their purchase price, you may sell them and net out other gains and even create a loss to offset up to $3,000 in ordinary income. 

    However, please be aware of the ‘wash sale’ rule and treatment of long-term and short-term losses. The rule defines a wash sale as one that occurs when an investor sells a security at a loss and, within 30 days before or after the sale, buys a "substantially identical" stock or security. If so, the IRS disallows the loss.

    Short-term capital gains occur when an asset is held for less than a year and sold for a profit. Short-term capital gains are taxed as ordinary income so it’s especially helpful when they can be offset through tax loss harvesting.

 Final thoughts

Let me remind you that these year-end financial planning steps are guidelines. One size does not fit all. I encourage you to contact us for advice that is tailored to fit your specific needs and goals. We would be happy to entertain any questions that you may have. We are simply a phone call or email away.

I trust you’ve found this review to be helpful and educational.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.