2020 Annual Financial To-Do List
Quote of the Week “It is certain, in any case, that ignorance, allied with power, is the most ferocious enemy justice can have.” – James Baldwin, American Novelist Technical Corner I am writing this as of the market close on Monday. The equity markets started off hot this year, continuing the trend at the end of 2019. As you know, we have been in a conservative allocation and just recently we extended the duration on our bond portion of the portfolio. Last Friday and today (Monday), the equity markets have experienced a big sell-off. We recently re-positioned ourselves with a longer duration on the bond portion of the portfolio (approximately 50%) because of the slowing of the economy and disappointing S&P 500 corporate earnings so far. This change in duration has paid off handsomely so far. Just today, something I read really caught my eye. I’m sure all of you are aware of the Coronavirus or the Wuhan virus that started in Wuhan China and is spreading rapidity throughout China. It is a highly contagious respiratory virus that has killed people at a relatively high rate. It has spread to the rest of the world, including the United States. It is especially deadly to the elderly and those with compromised immune systems. I certainly hope that it is contained soon. It is estimated by a person whose opinion I respect to cost over $40 billion at this point in economic damage. If it is not contained who knows what the cost could be. I have two charts to show you. The chart below shows the rapid decline in the 10yr U.S. Treasury rate since January 21st. As of the market close today, the yield dropped another tenth of a percent. This is a big move downward in such a short period of time. Unfortunately, or fortunately, depending on where you stand, this drop has been very good for our long duration bond portions in the portfolio. As I stated above, we lengthened the duration because of a slowing economy and disappointing corporate earnings not even considering the effect of the virus. The next chart shows what happened to U.S. 10yr Treasury rates during the Ebola outbreak in 2014. Interest went from 3.00% down to 1.40%. This created a huge appreciation in the value of the 10yr Treasury bond during that period. Remember, when interest rates decline, bond prices go up. I certainly hope for everyone’s benefit that the spread of the virus is contained. Fortunately, the Ebola virus was contained successfully to small parts of Africa. The Wuhan virus has already spread to the whole world. This will have an economic effect on the world’s economy. The big news for the U.S. economy is coming out on January 30th when the fourth quarter GDP (Gross Domestic Product) comes out. I am expecting a very disappointing growth number. If that happens our positions in U.S. Treasuries, REITs, Utilities, and gold should benefit. Tom’s Thoughts Annual Financial To-Do List Things you can do for your future as the year unfolds. What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider: Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.1 Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.2 Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.3 These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy. See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.4 Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.5 If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not
