OUR LOOK BACK T0 2023
As we close the chapter on another year, we thank you, our valued clients, for the faith and trust you place in us and the referrals of your friends and family. In looking back, we'd like to share some of the highlights of 2023 for each of us:
Laura: "Garret came on board as an advisor in January and has been a great addition to our team. Steve and I had a chance to take a bucket-list trip to Italy. Lastly, my brother was diagnosed with stage 4 cancer this summer but is now cancer-free. I'm grateful for all my blessings."
George: "We had a Cajun family reunion on the bayou in Louisiana-hot, hot, hot! We also enjoyed a vacation on the beach in Destin, Florida."
Suzanne: "For me, 2023 was a year with lots of family gatherings and fun weekend trips with my friends. My never-ending house projects kept me busy the rest of the time!"
Darcy: "I am especially grateful to have gone to Disney World in Florida with my family and on a cruise through the Caribbean, also with my family."
Garret: "This year I passed the SEI, Series 6, Series 63, Series 65, and life exams all on my first try! I also shot my record low round of golf at Meadowink with a score of 76-4 over par!"
MARKET OUTLOOK
This past year was one full of surprises. (That seems to be a common theme anymore.) In March, the collapse of Silicon Valley Bank, the largest bank to fail since 2008, brought turmoil in the banking sector. By April we had experienced 10 interest rate hikes by the Federal Reserve over a 12-month period, the fastest rise in history. There was political turmoil in Washington, and the Speaker of the House was ousted. It was the first time in U.S. history a speaker was removed from office. In October, more geopolitical conflict arose when war commenced between Israel and Palestinian militants, marking it the deadliest year in the Israeli-Palestinian conflict since 2000. As for the U.S. economy, investors came into 2023 expecting a recession and instead saw a surprisingly resilient economy. As for stocks, Wall Street did not predict that nearly all the gains in the U.S. stock market would come from seven stocks, termed the "Magnificent 7". Those companies were primarily the large tech stocks like Microsoft, Apple, Meta, and NVIDIA, who were also some of the worst performing stocks the year before. By year-end, corporate earnings, in general, beat expectations set by the analysts, consumer spending remained strong, as did the job market, and inflation drifted down. In the final six weeks of the year, we finally saw more participation from stocks other than the Magnificent 7. In the end, the majority of all asset classes and sectors ended the year with positive returns, unlike 2022.
Heading into 2024, Wall Street largely expects the major indexes to advance, but it will come with a lot of ups and downs. There are a number of issues that could increase volatility. First, there was still narrow participation in the stock market rally late last year, which is uncharacteristic of a bull market. The percentage of stocks that outperformed the index was roughly 28%, which remains well below the median of 49% going back to 1990. Second, last year's rally in a handful of the tech giants will likely be vulnerable to sell-offs. Last year investors were focused on the potential of artificial intelligence, which can't be argued. However, it might be some time before AI provides an investment opportunity, not just an economic one. Third, we will need to navigate our way through a Presidential primary. Historically, primary season is a volatile one for stocks, though markets tend to bounce back later. U.S. stocks have trended up regardless of which party won the White House. Since 1932, the S&P 500 index has gained an average of 11.3% in the 12 months following the conclusion of the primaries, according to research by Capital Group. Lastly, inflation has eased so the Federal Reserve may be at or near the end of its rate hiking cycle. But further rate hikes in 2024 have not been ruled out, according to minutes of the Fed's December meeting.
Whether you're investing for growth, income or a combination of both, there are investment opportunities in a variety of sectors and asset classes, as well as around the world. So don't let the threat of volatility, a recession, or headline news overshadow those opportunities. As one of the senior portfolio managers with American Funds recently suggested, "Get comfortable with being uncomfortable." Now could be an opportunity for moving cash off the sidelines. One year following the four most recent Federal Reserve tightening cycles, both stocks and bonds have realized healthy returns. Core bonds (as measured by the Bloomberg U.S. Aggregate index) gained 10.1% and stocks (as measured by S&P 500 index) have gained 16.2%. Municipal bonds, in particular, can benefit from historically strong state tax revenues. Tax-equivalent yields could surpass those of taxable bonds. As for equities, the valuations of high dividend payers are far below the market average. Capital spending in the U.S. could also spark a manufacturing revival. From an international perspective, it's not just U.S. technology companies experiencing breakthroughs. Europe is home to many businesses making advancements across a range of industries such as pharmaceuticals, chemicals, aerospace and defense. In fact, 79% of the top 50 companies over the past 10 years were domiciled outside of the U.S.
Morgan Housel writes in his latest book, Same as Ever, that "history is filled with surprises no one could have seen coming. But it's also filled with so much timeless wisdom." This past November, Charlie Munger, former Vice Chairman of Berkshire Hathaway and known as Warren Buffet's right-hand man and trusted business partner, passed away at the age of 99. One of the key aspects of Munger's discipline of clear thinking and timeless wisdom was his focus on long-term value rather than short-term gains. For him, investing was not about chasing the latest market trends or following popular opinion; it was about understanding the intrinsic value and potential of a business and allocating capital accordingly. When discussing his formula for success, Charlie had said "It's so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, etcetera etcetera. And do a lot of deferred gratifica- tion because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don't, you're gonna need a lot of luck."
WHO OR WHAT IS "IRMAA"?
Those age 65 or on disability, in general, are eligible for Medicare as their primary health insurance coverage. While Medicare Part A (for hospital coverage) is free for most recipients, Part B (for outpatient coverage) does come with a cost. Since 2007, the monthly premium for Medicare Part B, as well as for Medicare Advantage (also known as Medicare Part C), has been based on the recipient's income. "IRMAA" is the acronym for Medicare's income-related monthly adjustment amounts in determining the cost someone pays for their coverage.
The monthly premium for Part B in 2024 will be $174.70. To determine whether or not you are subject to IRMAA, the Social Security Administration will use income reported on the tax return from two years prior. Therefore, the premiums for 2024 will be based on the recipient's 2022 income tax return. Single filers with modified adjustment gross income (MAGI) greater than $103,000 and married filers with MAGI greater than $206,000 will pay higher premiums. That surcharge could be anywhere from an additional $69.90 to $419.30 per month, depending on how much above the threshold their income falls.
However, if you've had a life-changing event that reduced your income, such as marriage, divorce, death of a spouse, or loss of income (i.e. retirement), you can file SSA-44 to request that your premium be reduced. Additionally, the income of those receiving Medicare is reviewed each year. Therefore, if you have additional income one year that will not be recurring in the following year, such as capital gains or larger IRA withdrawals, your Medicare premium costs could go back down in following years. We are sharing this information to plan ahead for those who are currently on Medicare or who will be turning 65 in the near future.
MINORS CAN BE PROBLEMATIC BENEFICIARIES
It is not uncommon for clients to name their children or grandchildren as beneficiaries on an account such as an annuity, IRA or 401(k). However, naming a minor as a beneficiary can be problematic. In the state of Pennsylvania, the age of majority is 18 and anyone younger is considered a minor. A minor, because they are not legally adults, is not allowed to handle their own legal or financial affairs, including receiving inheritances. Therefore, their inheritance would need to be managed by a guardian. If plans were not made in advance to prepare for such an event, estab- lishing guardianship could be a costly and involved process.
Creating a trust for minor children is one of the most common solutions. This can easily be done with language in your Will, commonly called a testamentary trust. With a trust, a trustee is designated to manage the assets and/or property for the minor until the minor turns a certain age. The person who creates the trust (trustor) to pass on the inheritance has control over the details of the trust. For example, if the trustor wishes for the minor to have access to the assets in the trust at age 25, 30, or 35 instead of age 18 or after college, they could set it up in such a manner.
If you have minors designated as a beneficiary on your investment accounts or property, it's important you consult your attorney for the best solution to avoid the pitfalls of a potentially problematic situation.
UPDATE ON THE ACQUISITON OF TD AMERITRADE BY CHARLES SCHWAB
It is now more than four months since the merger of TD Ameritrade into Schwab was finalized. We are still working through the many changes in terms of administrative policies, forms, and procedures. Schwab, too, is working to make improvements that will enhance the advisor's experience. In the meantime, we thank you for your patience when processing transactions on your behalf.
As a reminder, those who have received a Form 1099 in the past (for earnings and/or distributions) will receive two separate 1099s for 2023 per applicable account - one from TD Ameritrade (for January through August transactions) and one from Schwab (for September through December transactions).
Lastly, we have noticed that many clients have not yet signed up for online access on the Schwab client website. If you are set up to receive your Form 1099 and/or monthly statements electronically, it will require online access. Should you require assistance in getting set up, don't hesitate to call our office for help.
TAXATION UPDATE
The following are CURRENT tax rules and limits for the 2024 tax year. This information can be used to help you plan for the new year.
The tax rates for 2024 are the same as last year, but the income ranges have increased slightly. They are:
The standard deduction for 2024 rises to $29,200 for married filers (plus $1,550 for each spouse age 65 or older), $14,600 for single filers (plus $1,950 if age 65), and $21,900 for heads of household (plus $1,950 if age 65).
The limit for contributions into a 401(k), 403(b) and 457 INCREASES another $500 to $23,000 (plus a $7,500 "catch-up" for those age 50 or older). The limit for contributions to a SIMPLE IRA also INCREASES another $500 to $16,000 (plus a $3,500 "catch-up" for those 50 or older).
The limit for contributions into a Traditional or Roth IRA also INCREASES another $500. The limit is $7,000 for those under age 50 and $8,000 for those age 50 or older. Also, there is no longer an age limit to contribute. You can contribute at any age as long as you have EARNED income.
Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $123,000 -$143,000 for marrieds, $77,000-$87,000 for singles, and $0-$10,000 for married filing separately. Where only one spouse is active in a plan, the phase-out increases to $230,000- $240,000 but remains $0- $10,000 for married filing separately.
The income limit for making Roth IRA contributions also increases with the phase-out at $230,000-$240,000 for married filers, $146,000-$161,000 for single filers, but $0-$10,000 for married filing separately.
The 0% tax rate on capital gains and qualified dividends still exists. It applies to married filers with income less $94,050 and to single filers with income less than $47,025. After that, the 15% capital gains tax rate applies until income exceeds $583,750 for married filers and exceeds $518,900 for single filers at which time the 20% rate applies.
Social Security recipients are receiving a 3.2% cost-of-living increase in their monthly benefit for 2024. Medicare Part B premiums increase in 2024 to $174.70 per month. However, premiums will be higher if 2022 adjusted gross income was in excess of $103,000 for individual filers or $206,000 for married filers.
The Social Security wage base for this payroll tax also INCREASES to $168,600 for 2024.
Those collecting Social Security before full retirement age can earn $22,320 in 2024 without losing benefits. But individuals who reach their Full Retirement Age during 2023 can earn up to $59,520 IN THE MONTHS BEFORE reaching FRA without losing benefits.
For individuals who pass away in 2023, the Federal estate and gift tax exemption increases to $13,610,000.
The annual gift tax exclusion INCREASES to $18,000 per recipient.
The lifetime estate and gift tax exemption for 2024 jumps to $13,610,000. After 2025, the exemption will fall back to $5 million, adjusted for inflation, unless Congress agrees to extend the higher amount.
The child tax credit is $1,700 per child UNDER the age of 17 at the end of the year. To qualify for the full amount of the credit, you must meet all eligibility factors and your annual income cannot be more than $400,000 for married filers and $200,000 for all other filers.
The American Opportunity Education tax credit holds at $2,500 PER STUDENT for qualifying expenses made within the first four years of post-secondary education. The credit phases out for married filers with income between $160,000-$180,000 and single filers with income between $80,000-$90,000. For those not eligible for the American Opportunity Credit, the Lifetime Learning Education tax credit offers a maximum credit of $2,000 PER RETURN. Income limitations are the same as the American Opportunity credit.
The contribution limit to Health Savings Accounts ("HSAs") jumps to $4,150 for single coverage and $8,300 for family coverage, plus an additional $1,000 for HSA owners age 55 or older. Why is this important information? Because contributions are tax-deductible as long as you have a high-deductible health plan ("HDHP"). An HDHP is defined as having an annual deductible of at least $1,600 on single coverage and $3,200 on family coverage and an out-of-pocket maximum threshold of $8,050 on single coverage and $16,100 on family coverage. Distributions made for qualified expenses are considered tax-free. But once your health insurance is through Medicare/Medicare Advantage, you can no longer contribute to a health savings account.
As a reminder, those who inherited IRAs in 2020 and later from someone who was not a spouse must have the IRA paid out within 10 years of the decedent's death. In the meantime, the IRS has NOT required distributions be made on an annual basis . This part of the rule, however, is currently under review. Information on any changes to the rule that might occur will be passed along to those clients when available.
Tax Rate | SINGLE FILERS Taxable Income Between | MARRIED FILING JOINTLY Taxable Income Between |
10% | $0-$11,600 | $0-$23,200 |
12% | $11,601-$47,150 | $23,201-$94,300 |
22% | $47,151 -$100,525 | $94,301--$201,050 |
24% | $100,526-$191,950 | $201,051-$383,900 |
32% | $191,951-$243,725 | $383,901-$487,450 |
35% | $243,726-$609,350 | $487,451-$731,200 |
37% | Over $609,350 | Over $731,200 |
All Sources: Internal Revenue Service, Social Security Administration, Centers for Medicare and Medicaid Services, National Association of Tax Professionals, Vanguard, Kiplinger, Marketwatch, Capital Group/American Funds.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Last- ly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities. Past performance is not a guarantee of future results. Dollar cost averaging does not assure a profit or protect against a loss. Diversification can help an investor manage and reduce the volatility of an asset's price movements; however, no matter how diversified a portfolio is, risk can never be eliminated completely.