“Advisors should take advantage of today’s low tax rates — and “do Roth conversions while taxes are on sale!” – Ed Slott, CPA IRA expert
Taxes is a hot potato political topic. (Say that 3 times) There are those who say we should pay more, that the rich don’t pay enough and we need to change the tax code! No matter your politics one thing is always true. Everyone tries to pay the least in taxes.
In the debate leading up to the 2016 presidential election Hilary Clinton recounted how Donald Trump hasn’t released his tax returns. She stated that a casino license application gave us some insight to Trump’s financials. See the 2016 debate below:
From the 2016 debate
“and they showed he (Trump) didn’t pay any federal income tax” exclaimed Senator Hilary Clinton.
“That makes me smart” retorted President Donald Trump.
This maybe a surprise to you, but we have the 3rd lowest tax rate in the last 80 years. These tax rates will not last, CPA Ed Slott tells Financial Advisors,
“Every advisor, should be having this conversation with their clients. This may only last for the next three years (2023, 2024, and 2025). After that, tax rates are scheduled to revert back up to previous levels.” -ThinkAdvisor.
One smart way to leverage low tax rates is to do Roth Conversions. If you have an IRA you can convert some or all to a Roth IRA. It is best to pay the taxes with non-IRA funds. This could be a big check to write. But the tax savings is usually worth it! How many people buy new windows or furnace for the house based on the energy savings you will get in the future? These potential tax savings could be bigger.
Remember, Roth IRA’s inherited are tax free and do not have to be withdrawn for 10 years after your death. That is principal (tax-free) and interest (tax-free), for a decade of tax savings to your heirs. Is that worth paying some taxes now at low rates?
Some have the mistaken view that their taxes go down at retirement but are surprised when they discover that social security payments are taxed. Roth IRA withdraws are invisible (tax free) on your tax return.
Let us help you do some tax planning in order to take advantage of our current rates. Including your CPA or tax professional maybe necessary. We have a Special Report entitled, “How Planning can Reduce Tax.” In it we list 9 reasons not to do a Roth Conversion. Call us for a free copy.
Are We In A Recession Yet?
We have been calling for recession in 2023. When does (did) it start? That is always the question. The data always seem to lag from the time the economy falls into recession to the time we know about it.
The economist John Maynard Keynes (we are not fans) said: “Markets can stay irrational longer than you can stay solvent.”
What we are seeing is that markets seem to be doing well, this year. On a relative basis if you lost 20 – 30% last year, as most did, you are still down this year. (The S&P is up 10.28%5 and small caps are flat.) But a recovery is a recovery, right?
There are many things we measure to indicate the health of the economy. No one data point means anything. For example, new home permits dropping doesn’t mean anything on its own. When economist say this or that about the economy, it doesn’t always translate to stock market performance. So, a bad real estate number doesn’t mean the end of all that is good, in of itself.
Let me explain GDP & GDI3. GDP is often referred to and GDI is rarely spoken of. GDP is a really important number. It tells us the health of the economy.
GDI can be useful in checking on or confirming GDP. Since the numbers seem to track closely if one drops it could indicate a revision in the other. GDP for the first quarter was up +1.3% which is not great but not recession.
GDI fell to -2.3% in the first quarter after falling -3.3% in the previous quarter. GDI tends to be a leading indicator. We believe that is the canary in the coal4 mine warning to potentially bad news coming.
Manufacturing PMI6 dropped from 50.2 in April to 48.5. A number below 50 is considered contraction or a slowdown potentially leading to a small or negative GDP. One bright spot was input prices fell in May for the first time since 2020.
Here is the problem with economic indicators, they are subject to interpretation. We try to read what is going to happen as the data is released. No one data point means anything and the market can be ‘irrationally exuberant’ up to the day that everyone changes their mind and a sell off begins.
We are currently basing investment decisions on the following:
⦁ Rising Interest Rates precede lower stock market values.
⦁ Double Dip -Market decline is usually followed by a 2nd deeper decline 6 months to 1 year after the first. The first dip is 2022.
⦁ Analyst we follow are calling for lower Stock Market
⦁ Federal Reserve Bank is still increasing rates see point #1
⦁ We plan to ‘buy the dip’ as the market recovers every downturn, every time.
Sources Citations Bibliography:
1. If your money is in a 401k, 403b, 457, or another qualified plan it may be necessary to rollover this account to an IRA to facilitate a Roth Conversion.
2. We recommend you consult your tax professional before deciding on a Roth Conversion.
3. Chart and definitions on GDP and GPI provided by Herb Morgan, Efficient Market Advisors Founder, Senior Managing Director and Chief Investment Officer. Economic and Market Commentary 05-30-2023
4. Canary in the Coal Mine – The phrase a, or the, canary in a, or the, (coal) mine denotes an early indicator of potential danger or failure. It refers to the former practice of taking live canaries into coal mines to test for the presence of toxic gases, particularly carbon monoxide, the illness or death of the canaries serving as an indication that such gases were present.
5. Data from Herb Morgan EMA 5/30/2023 Economic and Market Commentary
6. Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. See Investopedia.
Supplemental Disclaimers:
This article is informational only and is not investment advice. This is not an offer to buy, hold, or sell investments like securities or insurance products.
Securities and Investment Advisory Services are offered though Toro Bravo Investment Advisors, LLC. Life Insurance and Annuities sold as an insurance broker are not a fiduciary relationship and are not offered by Toro Bravo Investment Advisors, LLC.
Securities or Insurance are not FDIC/SIPC insured and investments contain risk plus could be subject to loss.
Losses could be short term or permanent. Numbers and figures illustrated are hypothetical in nature and past performance is not a guarantee or indication of future results/performance.
We are not affiliated with the Social Security Administration (SSA), Internal Revenue Service (IRS), or any Governmental Agency.
Do not rely solely on the Legal, Tax, or Financial information presented for it may not be suitable for your individual situation.
Consult your legal, tax, and/or financial professional before acting on any strategy or recommendation (i.e. major changes or before initiating the purchase, hold, or sale of any investment or investment strategy). Every individual’s strategy can differ depending on current circumstances and goals.