June 2019

Market Update

Q4 of 2018 made headlines for all the wrong reasons. Then, the calendar flipped to 2019, with investors turning on a dime and through Q1 of 2019, equity markets were able to recoup virtually all that was lost. The S&P 500 followed a 14.0% quarterly loss with a gain of 13.0%, the Nasdaq dropped 17.5% in Q4 only to rebound with a 16.5% rally, and the Russell 2000 fell 20.5% before bouncing 14.2%. International equities as measured by the FTSE All-World Index held up better than their US brethren in Q4 with a loss of “only” 11.4, but their ensuing bounce wasn’t quite as strong either, picking up 10.2% in Q1.

Fixed income assets had a strong start to the year as well, with the Barclays Aggregate Index producing a healthy gain of 2.9%—its best quarterly return in three years. This was spurred on by a sudden shift in the forecast for interest rates. In their December meeting, the Federal Reserve called for two hikes in 2019. Then, in early January, Fed President Jerome Powell stated, “the case for raising rates has weakened somewhat,” while the committee also vowed to take a “patient” approach toward future hikes.

In our opinion, the Fed commentary has had an impact on the outsized equity market moves that we’ve seen the last two quarters. It was only October 3, 2018 that Powell stated we’re “a long way” from neutral on interest rates and indicated more hikes to come. This caught market participants off guard, and so began the cascade of falling prices. The S&P 500 dropped six consecutive sessions following these remarks for a total loss of 6.8%. On the flip side, Powell’s January 4 remarks spurred a five-day, 5.7% rally.

Q1 strength has continued into Q2 with the S&P 500 tacking on a healthy 3.8% gain in April. At that point, though, a pause in the rally seemed likely as equity prices had risen in a virtual straight line upward all year to retest the all-time highs set in October of 2018.

Conveniently enough, a new round of tariff headlines began to hit the tape in early May, and this was all the cover investors needed to click the sell button. This is visually represented in the chart above. Notice the blue line highlighting the all-time highs set last October, and the unsuccessful attempt to breach that resistance in May. The S&P 500 pulled back a quick 5.2% during the first two weeks of May before finding support.

Some investors see this rejection at previous highs coupled with new tariff fears and think that now is the time to run for the doors. We caution against this kind of thinking, as we maintain a bullish long-term stance on the market. Contrary to what many may think, we believe strength in the market begets strength. For example, in the past, a strong first quarter performance has historically continued higher for the rest of the year.

Finally, let’s not forget about the Fed; markets are paying close attention to what they’re doing. Gone are the expectations for two rate hikes this year. According to the Chicago Mercantile Exchange (CME) Fed Watch Tool, there is currently a 0% chance we’ll see another rate hike this year. In fact, the Fed Watch Tool is forecasting a 65% chance that we actually see a rate cut in 2019. We believe this dovish stance is likely to help equity prices. We may still experience further drawdowns, but with these bullish tailwinds we still believe that the long-term trend is intact and that, moving forward, the most likely direction is higher.

As we state in every market commentary, we of course don’t hold a crystal ball as to what is in store for the markets. Asset allocation and planning for your individual time horizon and needs are the key to successful long-term investing. This commentary is not to be interpreted as any specific personal recommendation.

If you have any questions about our analysis or want to speak in further detail about the market, please don’t hesitate to call or email us.

Best,
Nathan
President, Kuhn Wealth Management

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How to Distribute Retirement Accounts

When it comes to retirement planning, investors—and many financial advisors, for that matter—spend their time watching CNBC and spend days debating if they should be buying or selling in front of a Fed announcement. Others are up at night, poring over charts and fundamental data, debating whether to buy Apple or Amazon.

While these are important factors to consider, they’re also questions that frustrate even the most successful money manager. And you’ll only know if you’re right or wrong with the benefit of hindsight. On the other hand, putting together an effective tax plan focused on asset location and asset distribution may actually be more beneficial. It certainly will be more measurable.

It’s true that every investor’s situation is unique, and we are happy to discuss your individual investments with you. However, we believe there are some general guidelines that could be beneficial for a majority of investors to consider.

The Kuhn Wealth Approach

Our advisors start with taxes, and how to invest our assets in the most tax-efficient way. 401k’s, IRAs, taxable accounts… which accounts should we fund first, and which accounts should we draw from last? What assets benefit most from being in these different kinds of accounts? Properly answering these questions is crucial to helping you hold onto more of your hard-earned income and, unlike the debate on which stock to buy and when, there are more definitive answers to these questions.

The tax drag of investments can vary greatly, from a very tax-efficient, growth-oriented equity ETF to a high-turnover corporate bond mutual fund with a huge tax burden. The tax implication of an investment doesn’t make an investment good or bad—and before considering tax planning, proper asset allocation should be consideration number one. Having insight into the tax implication of an investment can help to plan where that investment is best held.

Generally, investments with a big tax drag might be best suited for accounts that shelter investors from these tax consequences, such as 401Ks and IRAs. Investments that have a low tax burden may be best suited for taxable accounts. These investments might be equity ETFs or municipal bonds, to name a couple. As an important aside, since the gains from Roth assets are generally tax free, when suitable it makes sense to allocate any growth portion of an individual’s portfolio to the Roth accounts. There are many moving parts when putting together an “asset location” strategy. We consider factors such as the overall allocation, the investor’s age, and the investor’s portfolio of various account types. While the process is complicated and there are many variables to consider, we are here to help and advise you as we work together toward a more tax efficient portfolio.

Distribution planning is another important process to be as tax efficient as possible. We believe Roth accounts (401K and IRA) are the most tax efficient and generally are the last accounts we suggest taking distributions from in retirement. Assuming the proper rules are followed, Roth accounts grow tax free and earnings on the account come out tax free. Additionally, Roth accounts are not subject to RMDs (Required Minimum Distributions). Distributions from traditional retirement assets (IRAs, 401Ks, 403Bs, etc.) are all taxed as income when distributions are made. It’s also important to note that distributions in the form of RMDs generally must begin at age 70 ½.

When taxable (non-retirement accounts) are used to fund retirement, gains are taxed at capital gains rates rather than income tax rates. Typically, distribution planning leans more heavily on taxable accounts in the early years of retirement and more on traditional retirement account distributions as investors move into the RMD phase (after age 70 ½). As with the asset location strategy there are many factors involved in distribution planning. Factors such as an investor’s tax rate, distribution needs, and estate planning goals will all factor into a comprehensive distribution planning strategy.

Review Your Retirement Strategy

We’re here to help you evaluate your investments and goals, and to work with you toward a more tax efficient strategy. Please don’t hesitate to reach out and call us.

Should You Convert Your Traditional IRA to a Roth IRA?

The Tax Cuts and Jobs Act has prompted discussion that now may be a good time to convert your traditional IRA into a Roth account. But is it the right choice for you?

Before you decide, it’s important to understand how the taxes on each account type works. With a traditional IRA, you won’t pay taxes on money deposited; however, withdrawals are taxed as ordinary income. With a Roth IRA you deposit money that you’ve already paid taxes on, so money withdrawn is not taxable. That’s why, with today’s historically low tax rates, converting to a Roth account now may prevent you from getting hit with higher taxes when you take those distributions in retirement.

Work Towards a Tax-Free or Low-Tax Future

Recent tax cuts have people paying a lower tax rate in relation to the rates in recent years. With rates expected to rise again in 2026, you may want to take advantage of the significant reductions while you can. You’ll pay taxes the year you move money from a traditional account to a Roth account but when you’re ready, Roth distributions will eventually serve as a tax-free source of retirement income.

Why One Size Doesn’t Fit All

Withdrawals from traditional IRAs will increase your taxable income for the year. Before you make a switch, though, it’s important to examine how converting to a Roth IRA will impact your other retirement benefits. To avoid being pushed into a higher tax bracket and increases in Medicare and Social Security premiums, let’s talk. Using our financial software, we can run scenarios and outcomes specific to you and your unique situation. That way you can make an educated, informed decision.

Gradual Conversion is Key

If you decide to make a change to your IRA account, the conversion process, in most cases, should be done gradually. Convert retirement savings over a period of several years to avoid a massive tax bill in a single year. You may also consider a partial conversion that will bump you to the top of your tax bracket, but not so much that it lands you in a higher one. Even a partial conversion will reduce your traditional IRA balance and your taxable required minimum distributions in retirement. We can help you create a plan that makes sense for you.

If you want to talk about your IRA accounts or other financial planning, please reach out. We look forward to helping you create and maintain a solid retirement plan.

Opportunity Zones: A New Investment Strategy

In 2017, the new federal tax law created Opportunity Zones with the goal of directing investment, development, and improvement in distressed communities around the United States. An Opportunity Zone is defined by the IRS as an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. As you may expect, Opportunity Zones are now, rightfully, getting a lot of attention.

Benefits of an Opportunity Zone Investment

Investing in a qualified Opportunity Zone allows for a tax shelter of capital gains realized from any source—not just real estate—as long as the gains are invested within 180 days from when the gain is incurred. By investing gains into an Opportunity Zone, which typically occurs through an Opportunity Zone Fund, an investor may realize three tax benefits:

1. The capital gains tax due that is attributable to the amount of gains invested in the fund is deferred until the year 2027.
2. A portion of capital gains tax that would be due could be forgiven, as gains invested for 5 years receive a 10% step-up in basis, and gains invested for 7 years receive a 15% step-up in basis.
3. Any gains resulting from the investment are not subject to capital gains tax, provided the investment is held for at least 10 years.

Illustrate Opportunity Zone Benefits: An Example
An investor sells stock for $1 million. The gains attributable to the sale are $100K. Normally, the investor would have a tax payment due in the year the $100K of gains was realized. For this example, let’s assume the tax due would be $25,000. Instead of paying the tax, the investor decides to invest the $100K in gains into an Opportunity Zone Fund, in 2020.

By structuring the investment this way, the investor delays their tax payment until 2027. Then, in 2027, the investor will receive a 15% basis step-up, assuming the investor is still in the same tax bracket and that tax rates have not changed. At that time, the investor would owe $21,250 in tax. In this example, the investor reduced their tax by $3,750 and delayed paying the tax for seven years. Additionally, if the $100K investment grew to any amount, all of those gains would be tax free.

Interested in Learning More?
There are many tax incentives to investing gains into an Opportunity Zone. However, for the investment to benefit an investor, tax incentives alone are not enough. It is crucial to evaluate the underlying investment itself, and we can help you do that.

Currently, the Opportunity Zone Funds we have access to and all of the ones we have reviewed are available to accredited investors only (annual income of $200K (single) or $300K (joint), or a net worth of at least 1 million, excluding primary residence). If you would like to know more about Opportunity Zones and the Opportunity Zone Funds we have available, please don’t hesitate to call us.

Welcome Danny Levy to the Team

We’re happy to share the Kuhn Wealth team has grown! Early this year, Daniel (Danny) Levy joined Kuhn Wealth as an Associate Advisor.

Danny has 15 years of experience handling the daily whims of the stock market. He spent 10 years as a trader and market maker at the Chicago Board of Options Exchange before transitioning into a role as an options trading advisor. In 2019, he joined Kuhn Wealth Management to help clients achieve their wealth management and retirement goals.

Danny lives in Chicago with his wife Lauren, a clinical health psychologist in the Cook County Hospital System, and their dog Three. Danny spends his free time traveling, relaxing with his family, as well as playing and watching sports.

Danny graduated from the University of Illinois Urbana-Champaign in 2003 where he received his Bachelor’s Degree in Economics.

Please join us in welcoming Danny to the team!

As of 5/30/2019. This is for informational purposes only and does not constitute an offer to buy or sell any investment product. The opinions expressed are those of the writer and does not necessarily represent the views of the presenting party, nor their affiliates. Past performance and predictions are not a guarantee of future results. The material contained hearin is obtained from sources believed to be reliable, but its authenticity, accuracy or completeness is not guaranteed. Projections are inherently limited and should not be relied upon as an indicator of future results. Investments in securities involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. The Barclays U.S. Aggregate Bond Index measure the performance of the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable rate mortgage (ARM) pass-throughs) asset-backed securities and commercial mortgage-backed securities. The S&P® 500 Index is a widely recognized capitalization-weighted index that measures the performance of the large-capitalization sector of the U.S. stock market. The NASDAQ Composite Index is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. The Russell 1000® Index is a capitalization-weighted index that measures the performance of the 1,000 largest stocks by market capitalization in the Russell 3000® Index, an index of the top 3,000 U.S. stocks by market capitalization covering 98% of the U.S. equity investable universe. The FTSE All World Index is the Large/Mid Cap aggregate of 2700 stocks from the FTSE Global Equity Index Series covering 90-95 percent of the investable market capitalization. Direct investment in an index is not possible. Because investor’s situations and objectives vary, this information is not intended to indicate direct investment advice and suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), Member FINRA/SIPC. Advisory services offered through Kuhn Wealth Management, Inc., a state registered investment advisor. Kuhn Wealth Management, Inc. is independent of CIS and Concorde Asset Management, LLC, all of whom are unaffiliated with third party sites, and cannot verify the accuracy of nor assume responsibility for any content of linked third party sites. Information available on third-party sites is for informational purposes only.