Market Rally - Confirmed!

As we enter the second half of 2024, I’d like to share a strategy that could potentially yield significant tax savings for clients who operate a family-owned business: Hiring your children as employees. As with any tax advice, this serves as a guideline and should be discussed with your tax professional before making any decisions. Employing your children, provided they are of appropriate age and can perform legitimate work for your business, can offer several financial advantages: Tax Deductions: By employing your children, you can deduct their wages as a business expense, thereby reducing your taxable income. This can lead to lower tax liabilities for you and your business at the end of the year. Income Shifting: You can shift income from your higher tax bracket to your children's lower tax brackets. This is particularly advantageous if your children have little to no other income. The standard deduction for single filers in 2024 is projected to be around $13,950. This means, your children can earn up to this amount in taxable income before they would owe federal income tax. Retirement Contributions: Wages paid to your children can also be used to fund retirement savings accounts such as Roth IRAs (Individual Retirement Accounts). This money grows tax-free at is withdrawn tax free at retirement. An example: Suppose you have 3 children between the ages of 14-20. Your business can choose to hire all three children and pay each child $13,500 for administrative work performed throughout the year. If your business is a pass-through entity, your individual income would be reduced by $40,500. Given the approximate 40% tax rate (Fed and State), you would personally save $16,200 in taxes. If this is the only income each child receives from all sources in the year, no taxes would be owed for the children as the $13,500 is below the standard deduction. In addition to your family saving $16,200 in taxes, each child can place $7,000 into a Roth IRA and invest, thereby growing these monies in their respective retirement account tax-free forever! Furthermore, the excess $6,500 income in this example can be placed in each child’s 529 program, obtaining further tax advantages for education accounts. It's important to note that the IRS requires that the wages paid to your children be reasonable for the work performed and that all employment tax requirements are met. Keeping accurate records of their work hours and duties performed is crucial to substantiating these deductions.

Planning conversations span many topics. One unifying theme, particularly towards the end of the year, is charitable giving. Our goal is to provide you with the knowledge to maximize the benefits of your charitable gifts. Three charitable giving strategies to consider are (1) gifts of appreciated securities from non-retirement accounts, (2) gifts to Donor Advised Funds from non-retirement accounts and (3) Qualified Charitable Distributions from IRAs. For those who do not take required minimum distributions from retirement accounts, gifting appreciated securities or gifting to Donor Advised Funds are great options. For those who take required minimum distributions, QCDs (qualified charitable distributions) should be considered first. The below missive will provide high-level information on each strategy. Tax efficient methods for Charitable Gifts: 1. Gifting appreciated securities directly to charitable organizations – Most individuals make charitable gifts and most of those gifts are made with cash. This year, before writing a check or using your credit card to donate, consider reviewing your portfolio holdings with us. If you have highly appreciated securities, especially positions that are outside our portfolio, you may want to gift shares of stock directly to charity rather than giving cash. By gifting appreciated stock directly to charity, one can avoid selling positions, realizing capital gains, and paying capital gain tax. Charitable organizations are tax exempt. Therefore, the charity can sell the stock without paying tax, keeping more dollars to support their mission rather than the tax authorities. Additionally, for those who itemize their deductions, a deduction may be taken for a percentage of the fair market value of the securities gifted, up to certain limitations. 2. Donor Advised Funds – DAFs are tax efficient vehicles for charitable gifts, particularly for individuals with highly appreciated securities. Like giving appreciated securities directly to charity, gifts to donor advised funds avoid realized capital gains and the subsequent tax liability. One may also take an income tax deduction for gifts to a donor advised fund. The difference between gifts made directly to charity and gifts made to donor advised funds is that the grantor (donor) retains control of the assets in the fund until they are later granted to the 501(c)3 organization of the donor’s choosing. One receives an immediate, upfront income tax deduction for the gift to the DAF but does not receive a deduction when grants are made from the DAF to charity. Donor advised funds are charitable giving accounts that can be used to make future “grants” to qualified 501(c)3 organizations. Gifts to DAFs may remain invested indefinitely and, managed properly, can grow over time. The donor may grant funds out to charities periodically or may designate a charitable organization as the recipient beneficiary at their passing. For individuals who struggle to itemize their income tax deductions, front-loading or “bunching” gifts to a DAF may allow them to itemize in a given year due to the large size of the gift. Instead of spreading out small gifts over several years, donors may consider “bunching” gifts into one year to maximize their income tax deductions or offset a large gain. For example, in a year a business is sold and a capital gain is realized, giving a significant sum to a DAF can offset the realized gains with charitable deductions. Instead of giving a large lump sum to one charity in the same year, DAFs allow donors to make a large gift to the DAF and then subsequently grant many organizations or make grants over many years while maintaining control over the funds in the investment account and allowing the dollars to grow. 3. Qualified Charitable Distributions - QCDs allow individuals to transfer up to $105,000 to charities each year tax free. If the distributions are made directly to the charitable organization, account owners do not owe income tax on the distributions and distributions count towards RMDs. QCDs are a win/win for both the account owner and charitable organization. Account owners can reduce their adjusted gross income by giving directly to charity from IRAs. Gifts are not reported as income and therefore reduce the donor’s adjusted gross income. This can be very helpful for individuals on Medicare because a reduction in AGI may result in a reduced Medicare premium and less tax on social security income. Charitable recipients receive QCDs in full, rather than a reduced amount after federal and state income tax has been withheld. If you plan to make charitable gifts this year and you must take an RMD, consider gifting from your IRA. We will assist you in sending a check from your IRA to the charitable organization of your choice. You cannot be in receipt of the funds; the distribution must go directly from your account to the charitable organization. Frequently Asked Questions How do I know if I need to take an RMD? If you are 73 and you have a non-Roth qualified retirement account, you need to take a required minimum distribution (RMD for short). If you are still employed and have a 401k plan, you will start taking RMDs at age 73 or when you retire (if your plan allows this). We will notify you if you are required to take an RMD and will assist you in taking your distribution before 12/31/24. What types of accounts are considered “qualified retirement accounts”? traditional IRAs SEP IRAs SIMPLE IRAs 401(k) plans 403(b) plans 457(b) plans profit sharing plans other defined contribution plans Can I use a qualified charitable distribution to fund a donor advised fund? No When should I give to a DAF/give appreciated securities from my taxable (non-retirement account) vs. using my QCD? If you are younger than 73 and charitably inclined, consider a DAF (or gifts of appreciated securities) from your taxable account to maximize your charitable giving strategy. If you do not have a retirement account, consider a DAF. If you have retirement accounts and must take RMDs, consider using the QCD since you will get an immediate break on income tax. If your RMD is greater than $105,000 and you want to give more than $105,000 to charity, you may want to consider using both your QCD and a DAF to maximize gifts to charity and minimize your tax liability.

Each year, the IRS announces cost of living adjustments associated with certain dollar limitations for retirement plans and tax brackets for the coming year. The below table is a summary of the increases most relevant to our clients. As the end of the year approaches, now is a good time to review your plan contributions and prepare for increased contribution amounts in 2024.

As a part of our planning process, we often work with clients to model distribution strategies in retirement. For clients who retire before 65, we need to consider health care costs before Medicare eligibility. How will we fund living expenses prior to Social Security and Required Minimum Distributions (RMDs)? What is the tax impact of IRA distributions on the plan? Should IRA distributions begin before your required beginning date or should you wait as long as possible? If you do not need the cash flow from your RMD, should you consider making charitable gifts to reduce the tax impact? Should your RMDs be used to fund insurance premiums for long term care or life insurance to meet an estate planning goal? Each client’s circumstances are unique – taking the time to create a well thought out financial plan can guide your savings goals and decisions (pre-tax vs. Roth?) before you retire. Planning will also provide clarity on how to best utilize your taxable and retirement accounts to maximize your lifestyle and reach your retirement goals. We thought providing the below would be an important introduction to RMDs. If you have specific questions, please contact me at jessica.margetson@invictuspw.com or 720-734-2452. What are Required Minimum Distributions? (Hereafter referred to as RMDs) RMDs are the minimum amounts one must withdraw from specified retirement accounts each year. Distributions must be taken from Traditional IRA, SEP IRA, SIMPLE IRA and pre-tax retirement plan accounts (with limited exceptions) on an annual basis once you reach RMD age. Account owners in a workplace retirement plan (such as a 401(k) or profit-sharing plan) may delay taking RMDs until the year after they retire, unless they are a 5% owner of the business sponsoring the plan. Roth IRAs do not have RMD requirements. RMD Preparation For those of you who take required minimum distributions, we will contact you to discuss your preferences for taking distributions from your qualified retirement account. We will calculate your RMD for both individual and inherited accounts. Because the rules have changed in the past several years, I want to share some detailed information about RMDs to assist your preparation for potential impacts to your cash flow and financial plan. Whether you already started taking distributions from your retirement accounts or you have many years until retirement, it is helpful to understand how RMDs will affect your tax situation and funding for other retirement goals. When do I need to start taking my RMD? In recent years, Congress passed two laws that impact RMDs (among other retirement plan provisions) known as SECURE Act 1.0 and SECURE Act 2.0. The chart below summarizes updates to the date RMDs must begin.

The man who is a bear on the United States will eventually go broke. -- J.P. Morgan After a tumultuous 2022, some good news to report. The equity markets defied skeptics and rallied to start the year. As detailed in your first quarter statement, we experienced a strong Q1 performance. We are now amidst earnings season and will review what U.S. companies have to say about the economy. Nevertheless, in the face of bank collapses, continuous recession fears and a looming debt ceiling fight - the stock market is indicating perhaps the worst of America's economic pain is behind us. Investors are growing increasingly confident that the Federal Reserve will end the cycle of interest-rate hikes that spurred the S&P 500's plunge in 2022. If the stock market can continue to advance from the October bottom, such would signal the start of a bull market. While we are in a wait-and-see mode for the equity markets, another positive opportunity is the U.S. bond market. After experiencing one of its worst years on record, the U.S. bond market is similarly recovering. The 6-month U.S. treasury is paying nearly 5% APR. The point being is that there are now interesting investment opportunities across the risk spectrum. Given this situation, we do not recommend holding a sizeable cash position at this stage of the recovery. In my prior correspondence, Silicon Valley Bank collapsed, and we cautioned investors not to overact to the news. Although we are only one month out from this issue, the events still do not appear to be a banking crisis. A banking crisis is a fundamental problem within the banking system. This was a banking tremor: A few banks were caught offside, poorly supervised, and collapsed. As we saw last week during the initial bank earnings reports, the large banks are fine (JPMorgan, Citigroup, and Wells Fargo each reported an increase in profits). We only hold the large financial institutions within our portfolio. The larger banks appear resilient and safe because they have diversified business models. Granted, the deposit run and the speed thereof at First Republic, Silicon Valley Bank and Signature Bank startled the market and Federal regulators. But this was a failure of supervision and poor bank management. When you change the interest rate paradigm as quickly as the Fed did, some companies will be caught flat-footed. The larger banks can easily adjust. We likely will see a divergence when the smaller capitalized banks report over the next several weeks. On the inflation front, the data last week was encouraging and indicates that inflation may be falling faster than consensus expects. Foremost, the drops in the March Consumer Price Index (CPI) and Producer Price Index (PPI) show the "higher for longer" Fed narrative may not occur. The equity and bond markets are now positioning for the opposite of a deep recession. In fact, the S&P 500 now spent 25 weeks above its 200-week moving average. Checking historical data, since 1950 there are zero instances of the S&P 500 returning to a previous market-cycle low after the market recovered the 200-week moving average and spent 25 weeks there. In fact, after passing the 25-week milestone, the 3-month, 6-month and one-year returns have been positive in every single instance. When we are modeling for probability, we need to take these odds. Avoiding impetuous moves and patiently tilting toward attractive asset classes are the keys to higher performance for long-term investors. This year, it is more important than ever. Kind regards Michael