Quote of the Week

“I’m not telling you it is going to be easy. I’m telling you it’s going to be worth it.” – Art Williams

Tech Corner

The market was a downer last week. The Dow was down 1.8%, the S&P 500 was down 2.4%, while the Nasdaq slumped 4.9%. Last Thursday was especially bad due to a sudden spike in interest rates.

Yesterday (Monday), the markets had the best rally in months to make up for last week. We are still very bullish on the markets.

The reason for the big drop on Thursday was a big spike in interest rates. The 10-year Treasury yield ended the previous week at 1.344%. It surged as high as 1.61% on Thursday, causing a big drop in the markets that day. It wasn’t the first surge in yields in recent months, but this time the breadth and scope of the surge were so large that on Thursday that the markets substantially sold off.

As interest rates rise, it is considered bad for the stock market. The 10-year Treasury Note is considered the benchmark for interest rates. It is closely tied to mortgage rates, credit card interest rates, and other interest-rate-sensitive vehicles. When interest rates rise, those who borrow will have to pay higher carrying costs for their loans. In theory, those carrying costs take away dollars that could be spent elsewhere on other purchases, thus slowing the economy.

We expect interest rates to continue to rise in the next few months, and that’s why we are not in bonds. But the real question is, will the rise in interest rates adversely affect the stock market? We don’t think it will. With the “probable” passage of the Covid-19 Relief Act pushing $1.9 trillion into the economy and the $1.55 trillion sitting in consumers’ savings account just waiting to be spent, demand should overpower the negative effect of a rise in interest rates.

At some point in the future, if interest rates continue to rise and the money from the Relief Act and the savings accounts is spent, demand may start to slow its torrid pace. Plus, if you factor in the stock market then possibly being higher than it is now, markets may start to retrench. We, of course, will be paying attention and adjust the portfolios accordingly. We may even move back into bonds.

Lisa’s Thoughts

There’s Still Time to Contribute to an IRA for 2020

Even though tax filing season is well underway, there’s still time to make a regular IRA contribution for 2020. You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2020 ($7,000 if you were age 50 or older on or before December 31, 2020). For most taxpayers, the contribution deadline for 2020 is April 15, 2021.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2020, even if your spouse didn’t have any 2020 income.

Traditional IRA

You can contribute to a traditional IRA for 2020 if you had taxable compensation.   However, if you or your spouse was covered by an employer-sponsored retirement plan in 2020, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and  modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a  traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

2020 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as: Your IRA deduction is reduced if your MAGI is: Your IRA deduction is eliminated if your MAGI is:
Single/Head of household $65,000 to $75,000 $75,000 or more
Married filing jointly $104,000 to $124,000 $124,000 or more
Married filing separately $0 to $10,000 $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan $196,000 to $206,000 $206,000 or more

Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain limits. For 2020, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is less than $124,000. Your maximum contribution is phased out if your income is between $124,000 and $139,000, and you can’t contribute at all if your income is $139,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is less than $196,000. Your contribution is phased out if your income is between $196,000 and $206,000, and you can’t contribute at all if your income is $206,000 or more. If you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

2020 income phaseout ranges for determining eligibility to contribute to a Roth IRA:
Your ability to contribute to a Roth IRA is reduced if your MAGI is: Your ability to contribute to a Roth IRA is eliminated if your MAGI is:
Single/Head of household $124,000 to $139,000 $139,000 or more
Married filing jointly $196,000 to $206,000 $206,000 or more
Married filing separately $0 to $10,000 $10,000 or more

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)

If you make a contribution — no matter how small — to a Roth IRA for 2020 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for taking qualified tax-free distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2020.

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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the US economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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