Navigating Stock Market Turbulence

By David Munn, CFP

Investing in the stock market, much like air travel, can sometimes be viewed as a necessary inconvenience to reach your desired destination. For a time it might feel exciting as your portfolio takes off and you see the progress being made toward the goal. Inevitably though, there are periods of choppiness that may cause investors to question–or altogether abandon–the plan.

The Analogy of Air Travel

When an airplane encounters turbulence, it's natural to feel a surge of anxiety and question your decision to fly. However, experienced travelers know these bumpy periods are temporary and rarely pose a serious threat. The aircraft, despite the shaking, is still on course to its destination. 

Similarly, the stock market may experience periods of intense volatility, but throughout history it has repeatedly recovered and continued upwards. While it's tempting to panic and make hasty decisions during market downturns, remember these fluctuations are a normal part of the investment experience. Just as a passenger would not be wise to jump out of a plane during turbulence, investors should resist the urge to make emotion-based decisions to their portfolio.

Travel Alternatives

Now for those who have had bad experiences and decided never again to step foot on an airplane, there are, of course, travel alternatives: trains, automobiles, boats, etc. But every alternative has its own tradeoffs.

Automobile travel, for example, will not have turbulence, but it is typically significantly slower and statistically more dangerous than air travel. Consequently, it is generally not the best for very long-distance trips.

Similarly, alternative investment vehicles, such as bonds, money market funds, annuities or commodities may seem attractive as they react and move differently than stocks, but they each have their own set of risks and may not be effective in achieving long-term investment objectives. 

The Importance of Staying the Course

Successful investing is a long-term endeavor. Even those approaching normal retirement age should be planning for a 20-30 year time horizon, and even longer in some cases. Market fluctuations are inevitable, and trying to time the market is often a losing proposition. Investors who maintain a disciplined approach and stick to their investment strategy are more likely to weather the storm and attain their desired objectives. 

While it's understandable to feel concerned about market volatility, it's important to keep perspective. Just as air travel has a proven safety record, the stock market has a history of delivering long-term returns. By staying calm, sticking to your plan, and maintaining a diversified portfolio, you can increase your chances of achieving your financial goals.

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 This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GRA

Should You Consider a Roth Conversion for Retirement?

By David Munn, CFP

Have you ever wondered if there's a way to reduce your annual income tax bill in retirement? A Roth conversion might be the answer. It's a strategy that involves moving money from a 401(k) or Traditional IRA (where contributions are typically pre-tax) to a Roth IRA (funded with after-tax dollars). The key benefit? Tax-free growth and withdrawals in retirement.

Understanding the Tax Trade-Off

There's a catch, of course. You'll likely owe income tax on the converted amount in the year of the conversion. So it's like paying taxes upfront in exchange for tax-free benefits later. This might seem counterintuitive, but it may be a smart move depending on your situation.

Why a Roth Conversion Could Be Right for You

Here are some scenarios where a Roth conversion might be advantageous:

• Lower Tax Bracket Now, Higher Later: Think you'll be in a higher tax bracket through your retirement years? Locking in today's potentially lower rate by paying taxes now on the conversion can save you money in the long run. This is especially true for young earners who expect their income (and tax bracket) to rise in the future, but could also apply to those who are temporarily unemployed or recently retired.

• Maximizing Heirs' Benefits: Roth IRAs don't have Required Minimum Distributions (RMDs) – mandatory withdrawals that begin at age 73. This means your money can continue to grow tax-free and potentially leave a larger inheritance for your heirs. They'll also enjoy tax-free withdrawals if they follow IRS distribution rules.

• Tax Diversification: Most retirement savings are in pre-tax accounts. A Roth conversion can diversify your holdings by adding a tax-free bucket, potentially lowering your overall tax burden in retirement, especially in years with higher expenses like vehicle purchases, expensive vacations, or home projects.

Things to Consider Before You Convert

While Roth conversions offer potential benefits, they're not a one-size-fits-all solution. Here's what to weigh before diving in:

• Your Current Tax Bracket: If you're already in a high tax bracket, the upfront tax hit of a conversion might outweigh the long-term benefits. Depending on your age and situation, you may also need to consider the impact on Medicare premiums, FAFSA benefits, taxation of Social Security benefits, health insurance subsidies, etc. 

• Retirement Income Needs: The amount of retirement income you will need to draw from savings, the role Qualified Charitable Distributions, and potential medical or long-term care costs might play in your retirement plan may impact the benefits of a Roth Conversion, as there may be alternative strategies to avoid paying taxes on IRA distributions.

• Short-Term Needs: The money used for the conversion tax bill needs to come from outside your retirement savings if you are under age 59.5. Make sure you won't need those funds for short-term goals.

Consulting an Advisor

A Roth conversion can be a complex financial decision. It's wise to consult with a financial advisor to determine if it aligns with your overall retirement strategy. They can help you assess your tax bracket situation, project future income, and ensure the conversion makes sense for your unique financial picture.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  This material is not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQZ

Helping Your Young Adult Children Avoid Common Financial Mistakes

By David Munn, CFP

Every parent wants to see their children be successful as they move into adulthood–to steward well the abilities, resources and opportunities they have been given. Yet all too often the transition from dependence to independence leads to mistakes that have long-lasting consequences and inhibit success, especially in the area of finances.

Understanding these common blunders can help parents prepare their loved ones and empower emerging adults to sidestep financial missteps and build a strong foundation for their future.

The first major financial mistake is being financially illiterate. An AICPA survey revealed that only 24% of young adult respondents demonstrate basic financial literacy. Lack of understanding around concepts such as credit, loans, and retirement planning often leads to uninformed decisions that could prove detrimental in the long run. 

Secondly, many young people succumb to the lure of instant gratification—prioritizing immediate pleasures over long-term financial stability. This tendency often manifests in impulse buying or accumulating unnecessary debts. The 'buy now, pay later' culture encourages each of us to live beyond our means, which results in a continuous cycle of debt repayment via credit cards, vehicle loans, cell phones, and other high interest loans that not only create stress and continual crises, but also inhibit the ability to build savings and wealth.  

Habits such as budgeting and investing are often neglected during early adulthood—a third notable financial mistake. Consistently tracking income and expenses fosters financial discipline and allows young adults to prioritize what is most important to them, both in the short and long-term. Similarly, beginning to invest at a young age taps into the power of compound interest, optimizing the growth of wealth over time that will pay major future dividends (pun intended).

Carrying inadequate or no life insurance when starting a family is a fourth major financial mistake. Many view insurance as an unnecessary expense instead of a safety net against unforeseen tragedy. In most cases, sufficient insurance can be obtained very inexpensively, and can provide the peace of mind that financial needs will be met if a parent dies prematurely.

Finally, many young adults fail to save for emergencies or irregular expenses. Vehicle repairs and  medical expenses may not be predictable, but they should be expected. Building the discipline to prioritize saving will not only help avoid financial disasters, but also develop habits that will lead to financial success as income and resources increase.

Parents and/or grandparents have an important role in preparing young adults for success and helping them get started on the right foot. In some cases, the parents themselves may recognize they have their own knowledge gaps that should be addressed so they can set a good example and be better equipped to mentor the younger generations.

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQV

Simplifying Giving with a Donor Advised Fund

By David Munn, CFP

Managing your finances can be complex, especially when it involves giving to multiple charitable organizations. In cases where donors are seeking to simplify their giving and maximize tax benefits, we frequently recommend utilizing a Donor Advised Fund (DAF).

A DAF is essentially a charitable investment account that allows you to contribute cash or other assets, receive an immediate tax deduction, and recommend grants from the fund over time. This process can simplify giving and mitigate taxes significantly, making it an attractive choice for individuals, families, or businesses that wish to make a substantial societal impact.

In essence, a DAF allows you to separate the act of claiming a tax deduction from the decision about which charities to support, providing both convenience and strategic advantages.

Donating to a DAF is relatively simple. An individual or entity makes an irrevocable contribution to the fund, which is then invested based on the donor's preferences. The assets within the fund have the potential to grow tax-free. Although the donor relinquishes ownership of the donated assets, they retain advisory privileges to direct how the contributions are distributed to charities.

DAFs offer several significant tax advantages. First, donors receive an immediate tax deduction in the year they contribute to their DAF. This feature can be especially useful in years when donors have higher-than-normal income, such as from selling a business or receiving a large bonus. They can offset this income by making a sizable contribution to their DAF, thus reducing their taxable income.

Secondly, DAFs can accept donations of various types of assets, including cash, stocks, bonds, real estate, and private business interests. If you donate appreciated assets held for more than one year – particularly stocks or real estate - to a DAF, you can avoid capital gains tax. This arrangement is usually more tax-efficient than selling the assets and donating the after-tax proceeds.

Finally, by bunching or front-loading charitable donations into one year, donors can exceed the standard deduction limit and itemize their deductions, potentially reducing their tax liability further. In subsequent years, they could take the standard deduction, all while recommending grants from their DAF.

Donors also appreciate the simplicity of DAFs. They make one large contribution and then recommend grants to their chosen charities over time without worrying about record-keeping for tax purposes. The administrative tasks are managed by the sponsoring organization that oversees the DAF. Moreover, donors have the freedom to be as involved as they want in their grantmaking decisions, and can involve their family in the process as well.

A Donor Advised Fund represents a simple yet effective strategy for charitable giving with significant tax benefits. By consolidating charitable donations into a DAF, donors can simplify the giving process, optimize their tax deductions, and create a lasting impact. 

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This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training.  1323GQS

What the Recent Bank Failures Mean For Investors

By David Munn, CFP

Over the past couple weeks, the Federal government intervened to take operational control of two banks, Silicon Valley Bank (SVB) and Signature Bank, NY (SBNY). SVB represents the second largest bank failure in US history and the largest since the 2008 financial crisis. 

What happened?

When banks receive deposits from customers, they pursue opportunities to earn a return on those funds. This can be done through giving out loans or a portfolio of investments. While Federal regulations restrict the types of investments banks can utilize and the amount of risk that can be taken, there is still risk. 

In the case of SVB, their portfolio of long-term government Treasuries–which are risk-free if held to maturity–experienced significant drops in market value over the last 18 months as the Federal Reserve aggressively raised interest rates.  

As new deposits slowed and customers withdrew funds recently, the bank was forced to liquidate these bonds at steep losses, which not only necessitated the bank raise more capital to sustain operations, but also scared customers who panicked and created a bank run.  As the bank did not have sufficient cash on hand to meet the massive withdrawal requests, the FDIC was forced to take over and has since insured that all customers will be made whole, including accounts that exceed the $250,000 FDIC limits.

Will there be more bank failures?

We do expect more banks to fail in the coming months, but believe the vast majority of banks are not exposed to the same level of portfolio mis-management. The government’s intervention and guarantee of all deposits will likely alleviate a panic that could have rapidly spread to other banks with weak balance sheets, and allow for a more controlled unwinding–or acquisition– of the failing banks’ operations, as we observed over this past weekend with Credit Suisse. 

Is my money in the bank safe?

While it is generally advisable to stay within FDIC limitations on bank deposits, there is no need to panic regarding the security of most banks. 

What is the impact on investment portfolios?

Clients of Munn Wealth Management have not had direct exposure to SVB, SBNY, or any of the regional banks which have experienced a sharp sell-off. The overall reaction of the stock and bond markets to the bank failures has been positive as investors are expecting the Federal Reserve to adjust their plans for continued interest rate increases in light of the recent events. 

Are my investments at risk if the custodian fails?

Client accounts are always held with a third-party custodian. While banks invest client deposits, custodians are prohibited from doing so with client assets, which is why custodians have other means of generating revenue. If a custodian were to experience a business “failure”, client assets would be preserved and unimpacted.

Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  1323GQH

Outpacing Inflation on Your Cash Savings

By Robert Lange

An important constant in any financial plan is a stable allocation of cash, easily accessible and free from market fluctuations. Whether that’s an emergency fund, designated savings (vacations, vehicle purchase, home renovations, etc.), or just a cushion to help weather market volatility, there are alternatives to leaving it in a standard savings account at your local bank. While interest rates on savings accounts in the 80’s and 90’s reached upwards of 5%, now they’re lucky to breach 1%, hardly making a dent against currently elevated rates of inflation. 

However the recent rapid rise in interest rates has created better opportunities to generate yield with extremely low levels of risk, including options that may exceed what is being offered by your local bank. Many FDIC-protected, online-only money market and high-yield savings accounts are offering interest rates as high as 4-5% per year. These rates tend to outpace those offered by brick-and-mortar banks due to lower expenses of not having physical branches.

• Popular Direct, for example, is offering 4.4% in an online high-yield savings account, requiring a $5000 minimum opening deposit. 

• Bask Bank has no such minimum balance, but comes with a lower 4.25% APY. 

• Sallie Mae’s money market is at 3.6%, but offers check writing, if that is something of value. 

One important consideration to note is that interest rates for high-yield savings and money markets are not locked in for any period of time. They fluctuate due to any number of factors, and as such, can go both rise and fall in the future, though the principal of your investment is protected. 

Another option that does have fixed interest rates is Certificates of Deposit (CDs). CDs are less liquid, however, as the investment principal is essentially locked away and subject to early withdrawal penalties until the end of the term, which can range from a few months to several years. This illiquidity can be addressed by creating a ‘ladder’, investing in multiple CDs with staggered maturity rates (ie: 1 year, 2 years, and 3 years), ensuring you’ll have access to some of your funds at regular intervals. Currently, CD rates with various online banks are in the 4-5% range for 12 month terms.

A third option to consider is money market mutual funds. Not to be confused with standard money market accounts offered by banks, these follow the same guidelines as other mutual funds, except at a much lower level of risk. Recently, rates have increased dramatically and in some cases now exceed 4.5%. Money market mutual funds can be purchased in most investment accounts and are completely liquid. 

There’s no telling if these higher interest rates are here to stay — they could fall or rise even higher — but it is a great opportunity for those with available cash to earn greater return without taking on market risk.  

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Robert is our newest service advisor and is available to assist clients with account-related requests and questions. He has a background in logistics and warehouse management, using his history with administration to transition into the financial world. Robert and his wife, Christina, reside in the Old North End of Toledo and in his spare time you’ll find him at Rustbelt Coffee working on his latest novel.

Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  1323GQE

Recent Changes to Student Loans and 529 Plans

By Moe Moubarak, CRPC

Federal student loans have undergone multiple changes in the last few years, with a handful of proposals being discussed and others working their way through the legal system. When was the last time you reviewed your federal student loan account? Last month? Last year? Three years ago at the start of the payment pause? Let’s be honest, managing student loans is a task best described as a thief of joy. If it has been a while since you logged in to check your balance, now is as good a time as any to refamiliarize yourself with your account (and that dreaded number that never seems to get any smaller). 

The last required payment to federal student loans was February 2020. The CARES Act of 2020 was signed into law in March 2020 which paused payments and froze accumulating interest. Borrowers in Income-Driven Repayment (IDR) plans are required to recertify their status annually, but that has not been necessary since the pause began. 

Recertification involves updating your marital status, family size, and using the IRS Retriever tool to automatically upload your tax return. Something to consider if you’re married, do you file your taxes jointly or separately? While filing jointly delivers taxable benefits such as eligibility to several tax deductions and credits, it may be worth comparing a return filed separately if only one spouse has student loans. Consult a tax professional to determine what would be the most optimal filing method for your situation.

President Biden announced the final forbearance extension when he shared the One-Time Student Debt Relief Plan this past August. Under this plan, a one-time credit up to $10,000 was to be issued to all federal student loan borrowers, up to $20,000 for borrowers that received Pell Grants, and student loans were set to resume January 2023.

Challengers blocked the order, bringing the matter up to the Supreme Court which is set to hear arguments on February 28th, 2023. Payments are set to resume 60 days after June 30th (end of August) OR once the Supreme Court has made a final decision, whichever occurs first. If you are on an IDR plan, log in to your account to see if you have been given a recertification date. 

While we wait for the Court’s decision, the passing of the SECURE Act 2.0 brought two noteworthy changes to loans and future college planning:

1. Starting in 2024, qualified student loan payments will count as a salary deferral for qualified work plans (401k, 403b, 457b, Simple IRA, etc.) 

1. Addresses an issue for employees with student loans having to pick between saving for retirement or pay off student loans.

2. Employees can count student loan payments as retirement contributions to receive matching employer contributions to their retirement plan.

3. Check with your retirement plan administrator to determine eligibility.

2. 529 College Savings Accounts can now be rolled over to Roth IRAs for the Beneficiary (Section 126 H.R. 2617)

1. Addresses fear of putting too much money into 529 accounts by creating a tax and penalty-free alternative for unused funds

2. The 529 College Savings Account must have been opened for 15 years.

3. $35,000 lifetime rollover limit.

4. Subject to Roth IRA annual contribution limits ($6,500 for 2023)

If student loans are something that have been stressing you out, take a moment to review your account or reach out to our team for a consultation.

Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  1323GPW