The Health IRA

Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside savings for future health care expenses. HSAs were introduced in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which was signed into law by President George W. Bush. Since their creation, advancements in technology and popularity have allowed investors to not only access their HSAs more efficiently but also grow their accounts considerably.

While HSAs are primarily known as a tax-advantage plan for paying medical expenses, they can also help you save for retirement. Although it has become common practice that we income earners should contribute to our respective company-sponsored retirement plans or similar workplace defined contribution plans and other IRAs as the best way to save or invest our way towards retirement, recent developments in HSAs have created new strategies to help work towards financial independence and retirement expenses.

Before getting into potential strategies for Health Savings Accounts, let’s first look at who is eligible to open a Health Savings Account:

  • Must be 18 years of age or older
  • Must be covered under a qualified high-deductible health plan (HDHP). For 2020, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.
  • May not be covered under any health plan that is not a qualified HDHP
  • May not be claimed as a dependent on another individual’s tax return
  • Cannot be over the age of 65

Now, if you meet the criteria listed above, you are eligible to set up a Health Savings Account. Here is where the fun begins. HSA holders in 2020 can choose to contribute up to $3,500 for an individual and $7,000 for a family (HSA holders 55 and older get to save an extra $1,000). HSAs are considered ‘triple tax-free’ assets. 1) All contributions to your HSA account are tax-deductible. 2) All funds in your account grow tax-free. 3) Withdrawals to pay for qualified medical expenses are tax-free. Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a certain age. However, funds taken out for non-qualified expenses are both taxed and incur a 20% penalty if made before age 65. After age 65, non-qualified withdrawals are still taxed but have no penalty.

As the popularity of these accounts has increased over the years, we have seen more and more HSA providers include investment options as an added benefit to their services, which gives investors all the more reason to take advantage of the benefits of HSAs. What we suggest as a long-term strategy to turn your HSA from a healthcare plan to a retirement strategy is:

  1. To max out your contribution every year.
  2. Don’t spend it! This may sound counterintuitive, but we’re looking at an HSA primarily as an investment tool and tax-exempt future bucket of money. Let it grow!
  3. Keep all of your medical receipts. That $900 invoice for physical therapy in 2019 can be used anytime in the future; for example, you can pull that $900 out in 2059 tax-free!
  4. The key to maximizing your unspent contributions, of course, is to invest them wisely. Don’t leave your HSA account in cash!
  5. It may be wise to set up a separate savings account for unplanned future medical expenses so that you aren’t scrambling to find funds to pay for these expenses out of pocket.

In golf, we are all familiar with the main clubs in our bag. Our woods, irons, and (eventually) the putter. However, every once in a while we need a little extra help getting our ball to the green. That’s where the rescue club comes into play. If your woods and irons are your 401(k) and IRAs, then the HSA is kind of like your rescue club to give you that extra push towards the green. The HSA can be a great addition to your long-term planning.

Do you still have questions about HSAs and how they fit into your overall plan? Please do not hesitate to reach out to your dedicated DWM team members to learn about new developments in this area, and how an HSA may fit into your overall planning.

https://dwmgmt.com/

The Coronavirus Hits Home-Now is the Perfect Time to Review Your Estate Planning

The Coronavirus health emergency is a huge reminder that life is fragile, precious and unpredictable. The daily increasing numbers of COVID-19 cases and deaths remind us that we are all mortal and we all need to be prepared. We continue to hope that you, your family and your loved ones are doing well through this pandemic that has turned the world upside down and changed our daily routines.  What better time than now to create or review your estate plan?

Here are some questions for you (and your spouse if you are married) to review:

  • Does your will or trust reflect your current wishes?
  • Are your digital assets covered in your estate plan?
  • Are your powers of attorney for property and health care up to date?
  • Who gets your money, when and how?
  • Who are the fiduciaries (executrix, trustee, other) who would handle your estate?
  • If you have minor children, who are your guardians?
  • Who are the beneficiaries of your retirement assets and life insurance contracts?
  • Is the titling of your assets up to date?
  • Will your estate avoid or minimize probate?
  • Are taxes minimized or eliminated?

Let’s spend some time on taxes.  Two keys points.  First, the current lifetime gift and estate tax exemption for federal purposes is $11,580,000 per person.  However, with the National debt already high and ballooning due to the economic stimulus, the government might look to estate taxes for much-needed revenue. Changes in your plan might be made now before the exemption changes.

The second point is state estate taxes, particularly for our clients and friends who reside or own property in Illinois.  In 2011, when the federal lifetime estate exemption rose to $5 million per person, Illinois “de-coupled” its state estate tax exemption from the federal exemption.  Since, 2013, a lower exemption of $4 million per person applies to Illinois residents.  Those with Illinois assets who haven’t updated their estate planning documents since 2011 could be subject to a potentially avoidable and unnecessary payment of Illinois estate tax.

Here’s an example from our estate planning attorney friends at Bischoff Partners, LLC in Chicago.  “If an Illinois couple passes with combined estates of $5 million with no trusts planning, the surviving spouse’s estate could owe an Illinois estate tax payment of $285,714.  If the couple had used trusts to plan for each of their $4 million exemptions, which essentially doubles their applicable Illinois tax exemption to $8 million, the couple’s tax of $285,714 could have been avoided entirely.”  Planning and continual review is so important.  The “bad result” above of owing Illinois $285,714 would be the result from no planning or planning that was done pre-2011 and not updated.

The Illinois estate tax rate is advertised as a graduated rate between 8% to 16% of assets over $4 million.  So, you would guess that the tax on a $ 5 million IL estate might be $120,000.  However, the fine print doesn’t work that way.  It’s 28% on the first $1 million taxable in Illinois.

Depending on the size of the estate, Illinois clients may want their attorney to review the advisability of an “Illinois QTIP Election” which can defer payment of the possible Illinois estate tax to the death of the surviving spouse.  In addition, it is our understanding the Illinois QTIP election allows couples to double the $4 million Illinois exemption to $8 million and still plan for using each individual’s Federal Estate Tax Applicable Exclusion as much as possible.

Lots to review and lots to think about.  Again, we say: “What better time than now?”

At DWM, clients know that we are not attorneys and don’t give legal advice. However, we have collaborated with estate attorneys on hundreds of estates in Illinois, South Carolina and elsewhere.  Part of our “Boot Camp” process for new clients is working with them and their attorneys to create or update their estate plan. This includes our review of the documents, preparation of an “Estate Flow”, a review of their titling and beneficiary designations and providing recommendations.  As a follow-up to this blog, we’ll be sending out existing “Estate Flows” to all clients to help kickstart their review process.  If you are not a client, please contact us and we’ll be happy to discuss how we can help you get started.

Conclusion:  Life is fragile, precious and unpredictable.  Yet, working with your attorneys and your wealth managers you can plan, implement, monitor, and revise your estate plan to prepare you and your family for the future. No time like the present to get it done!

https://dwmgmt.com/

Zoom – A Saving Grace During the Covid-19 Crisis

When Social-Distancing was first announced, a lot of people did not take it seriously. As the weeks went on, and we headed into March, we realized this Covid Crisis was not letting up anytime soon. Businesses were panicking, schools were moving to online classes, vacations were cancelled, and families were not recommended to go visit each other. Here at DWM, we were devastated by the news that it would be safer for our clients not to walk through our doors, as we love having face-to-face relationships. We are quite familiar with webcam applications that let you video conference with people, as we have used one for years with our clients around the US, but Zoom came into our horizon at DWM at just the right moment!

Zoom is a leading application software that specializes in online meetings, video webinars, virtual conference rooms, phone systems, and cross-platform messaging with file sharing abilities. Their online meetings are quick and easy to access from any type of device; phone, ipad, computer, with simple applications for each that enable quick use. Their video webinar tool allows you to host up to 100 video participants with interactive capabilities with emojis and chat options. Zoom’s chat feature is available in any package. This makes collaboration easier during meetings by having a chat box where people can silently communicate and even ask questions to the host without interrupting. The chat feature is great for team communication and saves time by having all messages related to the topic in one place. For more information, please visit the Zoom website!

We are grateful to have already experienced great Zoom meetings with some clients here. The video quality is very clear and the voice quality is exceptional. When in a Zoom meeting, there is a section where a participant can share their screen, showing other members what is on their computer. This is really neat and helps when discussing documents all together, like we do here at DWM! We have pulled up investment documents on one screen, shared it to the meeting, and everyone is looking at the exact same picture, every scroll and every mouse change! In the chat box, you can also share files there to where everyone in the meeting has access of opening it up individually and personally looking at it, with the option of saving it straight to someone’s personal computer. This is an easy tool that saves time by not having to email documents to people, just drop them in the chat box! These feature have really made a difference in the efficiency of our tele-meetings here at DWM.

Here are the steps to having an amazing Zoom meeting…

  1. Be on the lookout for an email from us at DWM with the Zoom information. It will look something like this…

Join Zoom Meeting
https://zoom.us/j/756525649?pwd=ZlpYV29qWWVxVk1Wdk4zc2F2REZqZz0

Meeting ID: 756 525 649
Password: 274689
 

  1. From there you will click on the ‘https//Zoom.us’ and it will ask you to download and run the Zoom application.
  2. Once you have the application open, it should direct you straight to our Meeting, if not, enter in the ‘Meeting ID’ shown in the email.
  3. Enter in the password we provided
  4. Enable your microphone and video camera to utilize our Zoom meeting to the fullest.
  5. Enjoy face-to-face conversation!

We are aware of some articles released recently exposing Zoom for issues regarding customer service, data-mining strategies and intruders in meetings. Zoom’s customer service has been deemed almost useless as Zoom has grown over 1000% since mid-February. They are trying as hard as they can to post resources and FAQ’s on their website to tackle their booming clientele with limited employees, when hiring is on the backburner during COVID-19. Their data-mining strategies with Linkedin and Facebook put them underfire. Zoom was linking user’s names and emails so they were able to be found on Linkedin if you had the Sales Navigator premium Linkedin package (mostly used for sales prospecting) and also sent that information to Facebook. Zoom has disabled these features. Lastly, Zoom had a huge issue with hackers joining public Zoom meetings and posting inappropriate content on the screens and chat, also known as ‘Zoom-Bombing.’ Zoom created password protection on meetings and a ‘waiting room,’ where every user has to be admitted in by the host, to prevent that, after the FBI started investigating the issues. These are only some of the issues that Zoom has claimed and reacted to, click here to read a full statement by CEO Eric Yuan.

Here are some tips of what DWM does, and what you can do to help make your Zoom meeting as efficient and safe as possible…

  • Operate Zoom on trusted Wifi
  • Password Protect Zoom Meetings
  • Keep an eye out for unrecognizable people in the ‘Waiting Room’ area asking to join
  • Closely watch for new articles and news regarding tips, safety and even flaws
  • Limit confidential information in the chat section of a meeting

Millions of people have downloaded Zoom as Covid-19 has unfolded, for different uses. Local dance studios are teaching interactive classes over Zoom, colleges are maintaining that face-to-face interaction between student and teacher on Zoom, bands are hosting live concerts and people are doing home workouts and yoga classes with the guidance of their instructor. One of the best reasons for Zoom during social-distancing is being able to talk to multiple family members at once and all feeling connected regardless of being in separate spaces.

Here at DWM, we believe that Zoom is going to be a ‘Saving Grace’ for us to meet with clients during this crazy time. While we are aware of some of some of the security issues Zoom is currently working through, we are comfortable and excited to use it with our clients with the safety precautions mentioned above. If you are not comfortable with Zoom, a speaker phone meeting will also do the trick, but face-to-face meetings help keep that personal relationship we all desire and strive for, successful. We are looking forward to seeing our favorite, familiar faces over Zoom in the upcoming weeks. Stay safe, and stay healthy!

https://dwmgmt.com/

DWM 1Q20 Market Commentary

Obviously, our market commentary’s purpose is to address the state of the markets, economy, and all things financial; but it goes without saying that our first and foremost concern is that of your health. One’s wealth takes a back seat to health. As of this writing, there are over 1.380 million world-wide infections and over 76,000 deaths. This is a public health crisis and it’s traumatic.

Amazingly, this wasn’t even on the radar when we wrote our last commentary and frankly blindsided pretty much all of us. It was only a little over a month ago when stocks were setting all-time record highs. The economy was actually accelerating in the early weeks of the quarter, with unemployment still at all-time lows and consumer confidence near all-time highs. After an 11 year bull market run, it only took a record-setting 16 days for the S&P500 to fall into bear market territory, meaning a fall of 20%+ from the peak. And it got worse from there before bottoming out on March 23 and the market rallying 9% the next day. This quarter brought us unprecedented volatility, with the last month experiencing trading days with moves of 3%+, creating further anxiety amongst participants and usually passive onlookers.

As normal, we will showcase how the different asset classes did, with the theme being “trying to run to safety” during this unprecedented period.

Equities: Pretty much the worse quarter on record since 1987. Equities, as evidenced by the MSCI AC World Index, fell 22.5%. Small cap fared ridiculously worse than large cap as evidenced by the Russell 2000 dropping over 30% and the S&P500 “only” down 20%. In a flight to safety, the biggest companies with the most solid balance sheets performed relatively better. The style box graph below tells a tale of which we’ve never seen before with the relative performance amongst those boxes at extreme levels. For what it’s worth, international equity* and emerging markets** were down over 23% for the quarter.

Equity QTD Percentages

Fixed Income: Again, only the perceived safest havens did relatively well. The Barclays US Aggregate Bond Index was up 3.15% thanks to its significant exposure to Treasuries which was one of the only bright spots in bond land. The stand-out area within fixed income per the graph below was that part of the style box which focuses on higher quality and higher duration. Those with low quality experienced double-digit declines. For the record, the Barclays Global Aggregate Bond Index was down 0.33%, and the Markit iBoxx USD Liquid High Yield Index down 12%.

Fixed QTD Percentages

Alternatives: In a “baby being thrown out with the bath water” theme, alts still felt the pain as evidenced by the Morningstar Diversified Alternatives Index, off 13.82%. Much better relatively to equities but still in the red. Oil***, typically listed as an alternative, was the biggest story, falling over 65% amid a price war breakout between Saudi Arabia and Russia. Gold*** was a bright spot, +3.15%, in the rush to safety.

Cash: those that didn’t stay the course and tried to time the market by going to cash have lost out on double-digit moves up by the major stock indices since the 3/23/20 bottom.

So, yeah, it was a brutal quarter for portfolios with many investors suffering significant paper loses. A multi-asset class portfolio like the ones at DWM helped soften the blow, but values are considerably lower than last quarter’s statements. And the virus and its negative headlines aren’t going away any time soon. Most of this country has yet to experience their “New York moment”. It’s stressful for all. Further, damage on the economic front is going to be significant. It’s not a matter of if this is a recession but how deep? With millions out of jobs and still maybe a couple weeks away from receiving stimulus relief, this is a dire time.

Fortunately, governments, skilled professionals, caregivers, and many others around the world are stepping up in many ways to battle the virus. In the US, the Fed has done an amazing job with monetary policy to keep our markets liquid. And the government is providing unprecedented fiscal stimulus, including last week’s CARES Relief Act, in an attempt to keep this economy from cardiac arrest. A “Phase Four” and probably “Phase 5” Act are already being discussed to keep the heartbeat going. Further, there’s been some recent optimism driven by encouraging signs that things are starting to return to normal in China, fewer deaths per day compared to a week ago in Italy and Spain, and hospitalization rates in New York showing signs of slowdown.

No one alive will ever forget this pandemic – that’s for sure. But we’ve recovered from multiple shocks before this, each time with the market going higher. Long-term investors will see similar new highs in the not-so-far out future. It won’t be a smooth ride with most likely lots of suffering and changes to normal lifestyle along the way, but we’ll all get through this collectively. As our recent blog on what not to do now explained, try to remain disciplined and refrain from drastic knee-jerk reactions. Let us know if you need assistance – we’re always here to help, particularly in such challenging times like these.

As always, don’t hesitate to contact us with any questions or comments.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the MSCI AC World Index Ex USA

**represented by the MSCI Emerging Markets

***represented by Crude Oil WTI Front Month

***&represented by the iShares Gold Trust

Perhaps a Silver Lining – Time to Refinance?

The coronavirus has been brutal. There are now over 1 million cases and 54,000 deaths worldwide.  Left to itself, the covid-19 pandemic doubles every few days. Millions have lost their jobs. Most of America is on lockdown. We’re certainly in a recession right now. Worse yet- there continues to be a huge uncertainty as to when the coronavirus will stop its path of destruction and when we can all start to return to some form of normalcy.

We sincerely hope you and your family are safe and healthy. And, we hope all the other Americans and fellow citizens of Planet Earth that have been impacted will get through this crisis quickly and successfully.

At the same time, the equity markets have crashed since February 19th, ending an 11 year bull run. We were probably due for a pullback or correction after the huge run-up in 2019. The coronavirus seemed to provide the tipping point.  Economic growth in 2020 will certainly be less than 2019, though we don’t know how much less.

With all of this gloom, here is one possible “Silver Lining.”

With many investors running for safety into bonds and the Fed dropping rates, the fixed income markets are showing huge drops in interest rates.  10 year treasuries are near .6%.  30 year U.S. treasuries are at 1.25% interest.  These rates foretell less economic growth and lower inflation in the future.

The Mortgage Bankers Association is forecasting lots of business this year for new purchases and refinancings.  They expect $2.6 trillion in new mortgages this year, a 20% gain over 2019. Refinancings are the key drivers of the change and are expected to be up 37% in 2020.  Bloomberg reported yesterday that the average rate for a 30-year mortgage loan was 3.33%, down from 3.5% last week.

Because there are typically costs to refinancing, doing so makes the most sense for people who plan to stay in their house for some time and where the cost to refinance is less than the interest expense that can be saved.  In addition, if inflation will be lower in the future, then nominal investment returns should be lower as well.  For example, if your nominal investment return is 6% and inflation is 3%, then your “real” return is 3% (the amount above inflation).  If inflation is 1.5%, then a 4.5% nominal return produces the same 3% real return.

If you have a mortgage with an interest rate of 4% or more, you likely should be looking at refinancing it or paying it off.  Because of the increase in the standard deduction and the limitations on state and local income taxes, 90% of households no longer itemize deductions. If you are in that 90%, you get no tax benefit from your mortgage interest.

So, if it is time to look into refinancing, check around and keep your eyes open for low mortgage rates.  At this point, there is no reason to believe that rates will be going up anytime soon.  And, if you would like a second set eyes to help you determine if it is time to refinance, give us at DWM a call.  We are always happy to talk.  Stay well.

Stay safe and stay healthy during this pandemic. And, if appropriate, take advantage of one of the few silver linings of the pandemic by refinancing at a new low rate.

https://dwmgmt.com/